Independent Banker - May 2017 - 83

pools have little incentive to refinance.
So the recommendation is to consider
a 3.0 or 3.5 percent MBS if your objective
is to limit the downside to your
market value.
Roll with the roll date
Another variation on this theme is
to consider seasoned adjustable rate
mortgage (ARM) pools. These days,
virtually all newly issued ARMs have
an initial fixed-rate period, ranging
from three to 10 years.
After this fixed-rate window
lapses, the remaining balance from
then on will see its rate reset every 12
months. This structure is known as a
" hybrid ARM. "
What we have seen repeatedly
is that the prepayment speeds on a
hybrid ARM will begin to ramp up as
the pool approaches its initial " roll "
date. This demonstrates that most
homeowners really don't like floating
rate debt and are willing to borrow on
that basis only as long as the loan isn't
yet an annual adjuster.
As an example, Ginnie Mae pool
MA0803 was issued in February
2013 as a " 3/1 Hybrid. " It had an
initial coupon rate of 2.00 percent
until April 2016, when it began to
reset annually. For the first two
years, it averaged about 20 percent
principal prepayments each year. As
the roll date has gotten shorter, and
as short-term rates have risen, this
pool has become " speedier " : The
last six months have averaged 30
percent. An astute banker will see
that principal cash flows of this pool
have increased even as the remaining
principal on the pool continues
to decline. And this is precisely the
desired outcome.
Where this all leads is to a suggestion.
If your community bank
is working on alternative funding
sources or improving its liquidity
storehouse, the answer may reside
in your investment portfolio. The
strategic use of high coupon MBSs,
and certain seasoned ARMs, could
pay off through increased, and
predictable, paydowns of mortgage
securities.
Mortgage market
update
ICBA Securities' exclusive broker
Vining Sparks publishes regular
research on the mortgage
securities market. This includes
weekly updates on the fixed
and adjustable sectors and also
monthly prepayment history
commentary. To subscribe to this
publication, contact your Vining
Sparks sales rep.
Webinar series
continues
ICBA Securities will present the
next segment in its popular Community
Bank Matters webinar
series on May 16. Katharine Bray
and Dan Stimpson of Vining
Sparks will present " Capital Market
Solutions for Your Balance
Sheet and Your Customers. " One
hour of CPE credit is available. To
register, visit icbasecurities.com.
15-year Fannie Mae prepayment trends
20
15
10
5
FNCI 2
FNCI 2.5
FNCI 3
FNCI 3.5
independentbanker.org
FNCI 4
FNCI 4.5
Source: Bloomberg
ICBA IndependentBanker 83
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