Agency Floaters & Cap Costs
Disclaimer * I work at a direct agency lender and have access to massive amounts of servicing data.
Just a PSA that if anyone here works at a shop that has taken on agency floating rate debt over the last few years, you need to be budgeting for your monthly escrow & reserve costs to increase anywhere from 10 - 15x in the coming months.
Agency floaters require servicers to mark-to-market their borrower'samounts every 6 months. We're now seeing deals that originated in April/May/June of last year have reserve payments that are almost equal to their IO payments.
On one deal in particular:
Prior Month Payment - ~$151k total ($114k interest / $31k tax escrow / $13k reserves (replacement reserves + interest cap escrow)
Current Month Payment - $297k total ($127k interest (Increase in underlyingis still below the strike rate) / $53k tax escrow / $116k reserves (replacement reserves + interest cap escrow).
Just because you purchased your rate cap before the massive price hike & not facing an immediate expiration does not mean you're insulated from this market. Cash-on-cash about to take a hit...