Thursday, April 17, 2014

Texas job market; Millenials and first time home buyers; The Make a Difference Program

Home affordability is not a modern problem. In Zillow's In Search of Affordability, Krishna Rao writes, "Across the United States, strong home price affordability has been recently eroded by a combination of rising home prices and mortgage rates. Some areas, particularly on the West Coast, have begun to look unaffordable compared to their historic norms, forcing some household to look to the periphery of urban areas in search of affordable homes." Zillow measures affordability by looking at how much of a person's monthly income is spent on a mortgage payment. Historically in the United States, the median household would need to spend 22.1 percent of their income to afford the mortgage payments on the median home. This number fell dramatically during the housing recession, hitting a low of under 13 percent by the end of 2012.
Speaking of economy: Texas, not only did a recent ABC poll put Austin at #4 for recent college grads, but the Dallas Fed issued a report titled, "Texas to Remain a Top State for Job Growth in 2014" and reminding us that "Texas was the third-fastest-growing state in terms of job growth in 2013, trailing only North Dakota and Florida. The Texas economy will likely continue growing faster than the national average in 2014, and nonfarm employment should increase by 2.5 to 3.5 percent." In addition, "Texas Leads Nation in Creation of Jobs at All Pay Levels". "Texas experienced stronger job growth than the rest of the U.S. in each of four wage groups--lowest, lower-middle, upper-middle and highest paid-from 2000 to 2013. Texas has also created more higher-paying than lower-paying jobs." 
The home ownership rate has been dropping steadily since its high of 69.2 percent in 2004 to now just 65 percent. Millions lost their homes to foreclosure and millions more never entered the market, fearing falling home prices. Now, 10 percent of U.S. renters say they would like to buy a home in the next year, according to a new report from Zillow, which surveyed renters in the nation's 20 largest housing markets. If all the renters who said they wanted to buy a home in the next year actually did, that would represent more than 4.2 million first-time home buyer sales, about twice the number of first-timers in 2013.
First-time home buying has actually fallen to the lowest level ever recorded by the National Association of Realtors, at just 26 percent of sales in January. These buyers usually make up roughly 40 percent of the market. Interestingly, the majority of the renters who said they wanted to buy felt they could afford home ownership, despite rising home prices and rising mortgage rates. The trouble is there is just not that much out there to buy. Home construction is still recovering at a slow pace, and prices for newly built homes are far higher on average than for existing homes. The number of homes for sale is rising slightly but is still well below historical norms across most markets.  
"Even after a wrenching housing recession, this data shows that the dream of homeownership remains very much alive and well, even in those areas that were hardest hit," Zillow's chief economist Stan Humphries said in the report. "But these aspirations must also contend with the current reality, and in many areas, conditions remain difficult for buyers. The market is moving toward more balance between buyers and sellers, but it is a slow and uneven process."
Homeownership aspirations among renters were actually highest in some of the hardest hit markets of the housing crash, such as Miami, Atlanta and Las Vegas, according to Zillow. That may be because so many renters there are former homeowners who lost their homes to foreclosure. They are now seeing these markets recover, as investors bought up the distressed properties, pushing prices higher far faster than anyone expected. These renters are seeing market resilience, and likely want back in. 
Foreclosure activity, in fact, fell 10 percent in February from January and is down 27 percent from a year ago to the lowest total since December 2006, according to a new report from RealtyTrac. But there have been some great buys through the foreclosure process, as morbid as that sounds. 
Ironically, these bargains might be perfect for first-time buyers looking for a good deal, but they remain stuck in limbo land. Meanwhile, tight credit and higher prices are keeping many of these same potential buyers away from new construction. The level of student debt, not able to be discharged through bankruptcy, is climbing. (Auto loan debt is also increasing, and after several months of declining, it appears that mortgage debt is beginning to creep higher. Unfortunately for today's youth, tuition has gone up at 3x the inflation rate for decades. Not only that, but their overall wealth has not benefitted from the rally in equity prices, nor from the housing market appreciation (which has benefitted Millennial's parents - and in fact worked against first time home buyers).
This is a big topic "out there" in the industry, with the thinking that, since there are more Millennials (age 18-34) kicking around than baby boomers, they will step in and become first time home buyers, and help to boost the housing market. The numbers support the argument. But they have to be financially savvy, and many of them are not. A few weeks ago at the Wisconsin MBA event I had the opportunity to spend some time with Brenda Campbell, the Executive Director of the "Make a Difference Wisconsin" program. It is a non-profit organization dedicated to providing youth with the financial management tools needed for success. Funds go to mobilizing a 500 member volunteer group that provides in-school financial education to thousands of Wisconsin high school students. "Committed to empowering teens to make sound financial decisions by increasing their personal financial knowledge and skills." Heck, who wouldn't want kids to learn about bank accounts, interest, budgets, and credit? After all, many of them will be future home owners.
Yes, programs are growing in popularity, but parents should be training their kids to be financially literate and establish credit. Tracey Sanderson, VP at Washington's Banner Bank, contributed, "Credit is a game that is to be played wisely and there are few ways to learn the rules. Parents are the best teachers... but many of them have never been taught to play the game either. Parents - Teach your children to save and to make regular monthly payments.  Habits that are established when we're young tend to stay with us a lifetime.
Back to the markets! The foundation of a recovering economy are built on jobs and housing. Yesterday we learned that the pace of U.S. home construction rebounded less than forecast in March: housing starts climbed 2.8 percent to a 946,000 annualized rate following February's 920,000 pace. Building permits declined 2.4 percent to a 990,000 annualized pace versus forecasts of "unchanged." Fed Chair Janet Yellen gave a speech, although it "offered nothing particularly market moving." And thus we found the markets nearly unchanged.
Today is an early close for the bond market, and it is closed tomorrow for Good Friday. For news we'll have Initial Claims (+11k to 311k) at 8:30AM EST and April Philly Fed (+1.0 to +10) at 10AM EST. The Treasury Department will announce details of next week's auctions of 2-, 5- and 7-year notes. For numbers in the early going, the yield on the 10-yr. at the close Wednesday was 2.63%, and we're unchanged in the very early going this morning. 

Wednesday, April 16, 2014

More on "business" versus "consumer" purpose; New investor for borrowers with multiple properties


People who study mortgage lending and trends continue to ruminate on the Wells Fargo and Chase numbers from Friday. JPM's mortgage origination volume was down 27% QOQ and 68% YOY and mortgage application volume was down 17% QOQ and 57% YOY. Both closings and application volume came in somewhat weaker than expected. One positive point of note is that retail applications were down 7.6% but correspondent was down 26%, so it looks like the company was giving up some share in the correspondent channel. Wells Fargo's QOQ mortgage volume was down 28% but applications were down 7.7%. 
JPM's gain-on-sale margin came in at 172 basis points, down from 212 bp last quarter. Wells Fargo's gain-on-sale margin was down somewhat more modestly to 1.61% from 1.77%, a 9% decline - probably closer to the overall industry. The value of the JPM's MSR (mortgage servicing rights) declined to 106 bp which was 2.86x the servicing fee from 118 bp which was 3.11x the servicing fee at the end of 4Q. The equivalent numbers for WFC were 85 bp of 3.15x the servicing fee compared to 88 bp or 3.26x in 4Q. What does it all tell us? Nothing that the smallest lender isn't seeing: residential lending volume is down, margins are slimmer, it is tougher to make a loan, and lenders may not be able to count on servicing to beef up their balance sheets. Are we having fun yet? 

Yesterday the commentary contained some information on the differences between "business purpose" and "consumer purpose". ("...There are roughly five primary factors that must be considered in order to determine business purpose from consumer purpose...") I received a well-thought out not from Julia Wei, an attorney with Peter N. Brewer. "We have litigated this issue frequently on behalf of private lenders in defending against borrower claims that the loan was a 'consumer' loan and they should have received a TIL disclosure, along with other alleged violations of consumer statutes. As defined by Title15 of the United States Code Section 1602(h), "consumer" refers to transactions where the loan proceeds are used primarily for personal, family or household purposes. The code section further goes on to state in Section 1603(1) that extensions of credit for primarily business, commercial or agricultural purposes are exempt from TILA. [See also Regulation Z § 226.3 (a)(1).] The Ninth Circuit had applied a multi-factor test, which was derived from Federal Reserve Board interpretation of 12.C.F.R. Section 226.3(a)(1)(1983). [Thorns v. Sundance Properties (9th Cir. 1984) 726 F.2d 1417.]  The Ninth Circuit considered all five of the factors you noted in your column."

Ms. Wei's note continued. "The most on point case in California applying the Thorns factors is that of Weber v. Langholz.  In this 1995 case, the borrower, Ms. Weber, was a 89 year old widow living on Social Security and investments.  She borrowed $160,000 and secured the loan with her primary residence.  She then used the proceeds to buy coins.  When she defaulted on the loan, she sued her lender claiming that the lender had violated TILA and failed to give her the notice of the right to rescind. The lender argued that TILA did not apply because the investment of the loan proceeds in coins was not 'primarily for personal, family, or household purposes.' The Weber Court evaluated the factors enumerated in Thorns and noted that the borrower had invested nearly $600k in coins, that the loan amount of $160,000 was very large and she personally managed her investment funds. The Weber Count held the Truth in Lending Act did not apply because the loan was for a business purpose and exempt. [Weber v. Langholz (1995) 39 Cal. App. 4th 1578, 1583-1584.]"

At the Tri-State mortgage conference last week I had the opportunity to spend some time with Jennifer Squillante, a client manager with B2R Finance L.P. out of Manhattan. It turns out that B2R, besides being hard to type, will offer loans to individuals who have dozens, or hundreds, of properties. "We lend primarily upon the value and cash flow of the underlying collateral.  We do not review the personal debt to income ratios of our applicants." I am not going in to all the details - you should go to B2R or contact Jennifer directly at - but once again we are seeing capital in search of yield going around or outside the QM box for loans and borrowers that make sense.

Here are some stats proving that markets sometimes tend to move more on surprises versus expectations than on economic trends. The Fed announced the 1st reduction to its asset-buying program (i.e., quantitative easing - QE) on 12/18/13. The $10 billion reduction in monthly purchases (from $85 billion to $75 billion) was widely expected to result in higher interest rates.  The yield on the 10-year Treasury note closed at 2.83% on 12/17/13.  The yield on the 10-year Treasury note closed at 2.62% last Friday on 4/11/14. Rates have actually dropped this year in spite of QE being gradually curtailed. 

The National Association of Home Builders Housing Market Index was below expectations at 47 in April versus a projected 50. While builders were "expecting sales prospects to improve in the months ahead" said NAHB Chairman Kevin Kelly, Chief Economist David Crowe observed there were headwinds facing both potential buyers and home builders: ongoing tight credit conditions and limited availability of lots and labor. 

The market didn't do much Tuesday, so I won't waste your time discussing small moves in MBS prices or the 10-yr. yield (which closed at 2.63%). We should keep in mind, however, that global events overseas certainly trump any kind of minor economic news that is scheduled for the U.S. But there is some news out today: mortgage applications (noted above, up about 4%), March Housing Starts and Building Permits, March Industrial Production and Capacity Utilization, and the 2PM EST release of the Fed's Beige Book (with riveting economic anecdotes from the 12 Districts in preparation for the April 29-30 meeting). In the early going today the 10-yr is sitting around 2.65%, and agency MBS prices are worse a shade. 

Tuesday, April 15, 2014

Today’s Executive Rate Market Report


Don't forget: the bond markets close early on Thursday, and are closed entirely Friday. LOs know that any lender taking locks will price conservatively. But today it is business as usual, although being April 15th retailers are "giving away" deals. I was recently asked about the differences between "business purpose" and "consumer purpose" loans, and how to distinguish between the two.  There are roughly five primary factors that must be considered in order to determine business purpose from consumer purpose. The first is the relationship of the borrower's primary occupation to the acquisition, which in all probability, the more closely related, the more likely it is to be business purpose. The second is the degree to which the borrower will personally manage the acquisition, once again, the more personal involvement there is, the more likely it is to be business purpose. The third factor is the ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose. The fourth is the transactional size; the bigger the transaction the more likely it is a for business purposes. Lastly, and maybe more importantly, is the loan purpose as stated by the borrower on the application. 

"There are 'business days', and then there are business days". This is how I responded to an email from someone inquiring as to the application, and use, of the term. 'Business Day' traditionally refers to a day on which a lender's office is open to the public for carrying on virtually all of its business operations. However, when applied for purposes of rescission, the term means all calendar days except Sundays and the legal public holidays (Christmas Day, Thanksgiving, Memorial Day, etc.). When a legal public holiday falls on a Saturday, federal offices observe them on the preceding Friday; this means that the preceding Friday is a "business day" and the Saturday is not a "business day."


Let’s Look at Executive Rate Market Report;

Interest rate markets opened a little weaker this morning but still the 10 yr is holding well under 2.70% (2.65% at 9:00). MBS prices in early trading generally unchanged in early activity. The Russia/Ukraine situation is roiling a little but still has not set markets into any kind of major selling or buying treasuries. There is a big meeting coming later this week between all the parties and NATO members; Ukraine is calling for UN peace keeping troops but that will not happen because Russia has ultimate veto power. Russia’s holdings of U.S. government securities fell in February to $126.2B, the lowest level since 2011, from $131.8B the previous month, Treasury Department data released in Washington showed. It was the fourth straight month of declines in Russia’s holdings.

March CPI data was stronger than estimates; the overall CPI was expected up 01% with the core also up 0.1%, as reported both were up 0.2%. Yr/yr overall CPI +1.5% while the core yr/yr +1.7%. The April NY Empire State manufacturing index was thought to be up to 7.5 from 5.61 in March, as reported the index actually declined to 1.29; the new orders component fell below zero to -2.77, the employment component at 8.16 from 5.88 in March; no noticeable reaction to the two 8:30 releases.

Janet Yellen speaking in Stone Mountain Georgia (Atlanta) said our big banks may need more capital, implying that banks’ source of funding may be at risk during a financial crisis. The Basil Committee on bank regs is suggesting more capital for banks is needed. Central bankers continue to sweat more capital for banks, we wonder why after the recent increases in capital that have pushed banks to avoid proprietary trading and about every other risk that might be conceived of. Are central banks beginning to worry they have no more real effective bullets to use if the global economy slips? Yellen said staff members at the Fed “are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets.”  Yellen said she was particularly concerned that reforms to bank regulation not just bolster capital but that they also ensure liquidity because “in 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns, and Lehman Brothers, and from money market mutual funds and asset-backed commercial paper programs.” “Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover,” she said. After all of the reforms and Dodd/Frank the concern is rather interesting.

The DJIA opened +42, NASDAQ +12, S&P +6; 10 yr 2.65% +1 bp and 30 yr MBS price -2 bps from yesterday’s close.

Stocks doing better this morning as earnings from Johnson & Johnson and Coca-Cola Co. offset data showing a decline in a gauge of New York-area manufacturing. Chinese money-supply data signaled growth in the world’s second-biggest economy is faltering, the housing sector in China also slowing dramatically in most of the cities in the country. Data today showed China’s broadest measure of new credit fell 19% from a year earlier and money supply grew at the slowest pace on record, highlighting risks of a deeper slowdown as the government tries to curb financial dangers. China is due to report its GDP data tomorrow; estimates are for growth at 1.5% from 1.8% in the previous quarter.

At 10:00 the April NAHB housing market index was thought to be at 49 from 47 originally reported for March. The April index hit at 47 but March revised to 46. The highest the index has registered in the last couple of years occurred last August at 58, since then the housing sector has slipped.

Interest rate market are holding positive technicals but the bellwether 10 yr has very hard resistance at 2.60%; it functions as a brick wall when the yield falls. MBS markets also still hold positive technical readings but won’t have the impetus to improve much unless the 10 can somehow crack 2.60%. To do so in  the present environment it will take more selling in the equity markets. We remain very skeptical that the stock market can hold at these near record highs, however with nowhere to turn to make any kind of return the stock market does have solid support engineered by the Federal Reserve and other major central banks.

Presently the MBS and treasury markets are in what we can call limbo; not heaven and not hell. Since last February there has been little change in rates; the 10 in a 20 basis point yield range, MBSs in a 15 bp rate range. Longer term there is almost 100% belief interest rates will increase; the Fed will end its monthly purchases in Oct at the present pace, economists and analysts hold that the US economy will continue to grow, and inflation may be inching higher as the Fed wants---today’s yr/yr CPI data may be a warning sign for increase to come later this year. All of those issues are strong headwinds for lower rates. As noted, we believe the stock market will decline in the next two months in a huge shake out of the bullish sentiment; if correct we will see better rates.


Monday, April 14, 2014

ABA Lending Survey results; Owning stock in the Agencies; Weekly Market Preview


Certainly many statistics are showing us that things continue to pick up. But is the economy doing as well as the Fed thinks it is? If it is, the improvement is certainly not evident in the traditional sense, and the gap between the haves and the have-nots continues to widen. Family Dollar Stores announced that it will close 370 stores. Two weeks ago Brookstone filed for bankruptcy protection. There were similar moves by retailers Dots, Ashley Stewart, Sbarro and Quiznos. And last week Sandpoint Idaho retailer Coldwater Creek, faced with declining sales, annual losses, and mounting debt, filed for Chapter 11 bankruptcy protection. Yet LVMH's stock is trading near its all-time highs. What is LVMH? It is the company that owns Luis Vuitton, Dom Pérignon, Domaine Chandon California, Hennessy, Moët & Chandon, Veuve Clicquot, Dior, Donna Karan, Givenchy, Bulgari, Hublot, TAG Heuer, and so on - luxury goods.

Whether or not you're hiring, of interest to anyone skipping through this newsletter were the Fed's comments on housing. "Housing activity remained slow over the intermeeting period. Although unfavorable weather had contributed to the recent disappointing performance of housing, a few participants suggested that last year's rise in mortgage interest rates might have produced a larger-than-expected reduction in home sales. In addition, it was noted that the return of house prices to more-normal levels could be damping the pace of the housing recovery, and that home affordability has been reduced for some prospective buyers. Slackening demand from institutional investors was cited as another factor behind the decline in home sales. Nonetheless, the underlying fundamentals, including population growth and household formation, were viewed as pointing to a continuing recovery of the housing market.

Does anyone remember Lehman Brothers? I do, they had some of the best conference freebies out there. I think of them fondly every time I head for the store and use my canvass LB tote bag to haul my groceries. Unwinding the positions of Lehman has been a monumental challenge, and it is only now that analysts have started to quantify the total losses. The bankruptcy of Lehman Brothers and its 209 registered subsidiaries was one of the largest and most complex in history, with more than $1 trillion of creditor claims in the United States alone, four bodies of applicable U.S. laws, and insolvency proceedings that involved over eighty international legal jurisdictions. The New York Federal Reserve writes in Liberty Street Economics, "We estimate the payout ratio to Lehman's creditors thus far to be about 28 percent on estimated allowable claims of more than $300 billion, implying a loss to creditors and counterparties of more than $200 billion...We find that the recovery rate for LBHI creditors has been below average so far-about 27 percent versus more than 55 percent historically." The article, written by Michael Fleming and Asani Sarkar, concludes that the difficulties associated with Lehman's resolution under Chapter 11 resulted in part from Lehman's lack of bankruptcy planning and in part from the inherent complexity of Lehman's business and organizational structure.

I was recently doing a little mortgage related research and came across an online article written in early 2007 by an equities analyst who placed a "buy" on FNMA and FHLMC (along with Sears). I wonder if he ever found his true calling in life. It's important to realize that markets, and by extension the people who trade within its perimeters, are almost as wrong, as they are right. I read a recent BAML article, A Mortgage Misunderstanding: GSE Moving Markets, in which they address a common concern; market timers, and people attempting to front run "what may" happen with respect to Fannie and Freddie, are creating volatility. They write, "In our view, the Fannie and Freddie situation, which encompasses not only the agency debt, MBS, equity and preferred markets but also the housing market and the overall economy, is now generating more headline risk and spread volatility as markets oscillate between opposing possible outcomes. Our bottom-line outlook is that the markets have overreacted recently to the possibility of passing a new GSE bill this year."

Keep in mind that the American Bankers Association released its 21st annual Real Estate Lending Survey. "More than 80 percent of banks expect new mortgage regulations to reduce mortgage credit availability - more than one-third of respondents will only make qualified mortgage loans, while another one-third will also make non-qualified mortgage loans but only to targeted markets or products. 'The new mortgage rules are a serious challenge, especially in the near term, for mortgage lending,' said Robert Davis, executive vice president at the American Bankers Association. 'The problem will last at least as long as bankers calibrate their compliance systems, and perhaps much longer.'" (On the commercial side, things are okay: commercial real estate loan demand is trending higher for 26 percent of respondents, but remains stagnant for 51 percent. The delinquency rate for commercial real estate loans remained little changed at 3.3 percent in 2013.) And this will stun you: according to the survey, bankers are most concerned about the increasing regulatory burden and compliance cost. Click here for a complete report: 2014 ABA Real Estate Lending Survey.

Is the FHA going to bring back "spot loans"? Perhaps, much to the joy of many lenders out there. Here is the latest But under the title of "oh well," Commissioner Galante made it clear that the FHA will not be lowering the MIP in the near future, and that they have included a lender paid fee in the 2014 budget that would raise up to $30mm to help offset increased QC fees on FHA loans. She did say they will be rolling out the Homeowners Armed With Knowledge (HAWK) program that will use consumer education to lower a borrower's MIP.

Turning to the markets, as opposed to last week with little scheduled news to move bond prices (and therefore rates), this week we have an abundance of titillating numbers. We start off with today's Retail Sales. On Tuesday, April 15th (why does that date ring a bell?) we'll have Empire Manufacturing, the Consumer Price Index (CPI) to measure the level of change in the average price of a fixed basket of goods and services purchased by consumers, and the NAHB Housing Market Index. On Wednesday we have Housing Starts and Building Permits duo along with the Industrial Production and Capacity Utilization couplet, with the Fed's Beige Book thrown in for good measure. Every Thursday we have Initial Jobless Claims, and this Thursday is no exception. We'll also have the Philadelphia Fed Index. Friday is Leading Economic Indicators.

***We have a holiday-shortened week***
Thursday - the Bond Market will Close early at 2:00EDT
Friday - the Bond Market will be CLOSED all day.

Even though we have a short week, we have a lot of big name economic data to digest like Retail Sales, CPI, Production and the Fed's Beige Book. Plus we have a few "Talking Fed's", most notably Janet Yellen.

It's Ground Hog Day all over again: As we once again start off the trading session with economic news that would normally pummel your pricing. But the "Teflon Bond Market" has shrugged it off. March Retail Sales were much stronger than expected and February's data was revised upward. But this was once again offset due to a flight to safety into anything U.S. due to more news out of the Ukraine. This time, Pro-Russian supporters have taken over at least two Ukrainian Police stations and are refusing to leave. This has traders concerned that Ukraine may respond with force and escalate things further. As a result, MBS are down only -9BPS in early trading. Typically, with this type of strong Retail Sales data, MBS would be down at least -50BPS.

Wednesday's release of the Fed's Beige Book will be key as we learn how the manufacturing, housing, lending, and labor markets are doing in each Fed district.
There are no major U.S. Treasury auctions this week. 

Retail Sales: Potentially, the most important economic release of the week. Headline Retail Sales for March were much stronger than expected (1.1% vs est of 0.8%). Plus, February was revised upward from 0.3% to 0.7%. Excluding Autos, Retail Sales were up 0.7% vs estimates of 0.5%. Retail Sales are the top of the economic pyramid, and these numbers come from a period where weather was an issue. This is certainly positive economic news and that means that this reading is negative for MBS pricing today.
Business Inventories: Generally not a major market mover. The consensus estimates are for a small improvement from 0.4% to 0.5%.


Friday, April 11, 2014

How Chase & Wells mortgage earnings reflect the industry while lenders are selling their only asset: Servicing


What is the Economic Census? According to U.S. Secretary of Commerce, Penny Pritzker, "the economic census is one of the Commerce Department's most valuable data resources," ya, but what does it show? "By providing a close-up look at millions of U.S. companies in thousands of industries, the economic census is an important tool that shows policy at the local, state and national level, and helps businesses make critical decisions that drive economic growth and job creation." Oh, OK.

One wonders if lenders underestimated the cost incurred in servicing. It is not cheap, and regulators like the CFPB are focused on making sure it is done flawlessly - which will continue to add to the cost. Servicers are required to advance mortgage payments to investors when a borrower stops paying on some types of loans. The article in AB goes on to give a little primer about servicing. "Mortgage servicing rights are an esoteric and volatile niche asset that serves as a hedge when mortgage rates rise and lending volumes fall. Servicers are paid a sliver of interest, usually 25 basis points of the loan balance annually, to collect principal and interest payments from borrowers and remit those funds monthly to investors. Servicers also collect and remit taxes and insurance for some borrowers, and deal with delinquencies and foreclosures."

Once again, we are reminded that a non-depository mortgage lender mostly offers a good income and lifestyle for its employees, but little in the way of accumulated net worth besides cash in the bank (that is often used to satisfy investor & warehouse demands). What is a lender really worth, besides the value of its retained servicing, if its people can walk out the door? The value of its office furniture? Its franchise value and goodwill? I'll save that discussion for another time. But lenders having to sell servicing to pay for overhead, hoping for a huge increase in volume and fee income, may have challenging times ahead.

As they say, "money talks and ---- ---- walks." I don't know who the "they" is in that sentence, but "regulators" are boosting the capital rule for the eight largest U.S. banks. Regulators plan to subject the eight largest U.S. banks to a leverage ratio of 5% equity to total assets, which means that the rule will force the banks to increase capital by about $68 billion total. The rule has prompted complaints that U.S. banks will be at a competitive disadvantage to foreign counterparts, which are subject to a less-stringent ratio.

Speaking of banks, we did have earnings from Wells Fargo and Chase today. JPMorgan Chase & Co. (NYSE: JPM) today reported net income for the first quarter of 2014 of $5.3 billion, compared with net income of $6.5 billion in the first quarter of 2013. Chase's mortgage numbers reflect those of the industry: net income was $114 million, a decrease of $559 million from the prior year, driven by lower net revenue and lower benefit from the provision for credit losses, partially offset by lower noninterest expense. Mortgage Production reflected a pretax loss was $58 million, a decrease of $485 million from the prior year, reflecting lower revenue partially offset by lower expense and lower repurchase losses. Mortgage production-related revenue sank due to reflecting lower volumes. Production expense dropped due to lower headcount-related expense and a drop in non-MBS related legal expense. Repurchase losses for the current quarter were down. Chase's mortgage servicing had a pretax loss due to a higher MSR risk management loss, largely offset by lower expenses. Mortgage application volumes were $26.1 billion, down 57% from the prior year and 17% from the prior quarter.

Wells Fargo's numbers came in ahead of estimates, and analysts continue to talk about its servicing income balancing the loss of mortgage originations. Wells Fargo reported its home lending originations amounted to just $36 billion, compared with the $109 billion reported a year earlier and $50 billion in the prior quarter. Wells has a significant share in funding home purchases, an area that held up better than refinancing businesses. But mortgage banking noninterest income totaled $1.51 billion, down 46% from a year earlier (versus Chase's drop of 68%) and mortgage banking profit of $114 million, down by $559 million from the prior year. Wells Fargo has cut roughly 7,000 jobs since July.

The market is continuing to ruminate on the Fed's March meeting minutes released Wednesday. Several Federal Reserve policy makers said a rise in their median projection for the main interest rate exaggerated the likely speed of tightening, according to minutes of their March meeting. As we know, Treasury yields rose last month after policy makers predicted that the benchmark interest rate would rise faster than previously forecast. Janet Yellen, presiding over her first meeting as chair, later downplayed the importance of the forecasts, even as she said that rates might start to rise "around six months" after the Fed ends its bond-purchase program. The FOMC next meets April 29-30 - so the press and analysts can jabber about that in a couple weeks.

Ahead of this spring weekend we've had the Producer Price Index (PPI) for March, showing a "hot" +.5% which was +.6% without volatile food & energy components. The PPI is +1.4% year over year, and removing food & energy it was also +1.4%. We'll also have the preliminary April Consumer Sentiment number around 7AM PST. In the early going the 10-yr is sitting around 2.62% and agency MBS are roughly unchanged. 

Thursday, April 10, 2014

Latest Update on Agency Debate and Market Report

I was in a meeting one time when my secondary marketing guy said to product development, "wake up and smell the profits." No one can deny that banks have been making money, and contrary to financial news reports, banks have been performing in such a manner counter intuitive to the macro economies pace. Depository institutions have been performing for the better part of four years, with 17 out of the last 18 quarters with year-over-year growth. Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $40.3 billion in the fourth quarter of 2013, a $5.8 billion (16.9 percent) increase from the $34.4 billion in earnings that the industry reported a year earlier. According to the FDIC's recent release on bank performance, the improvement in earnings was mainly attributable to an $8.1 billion decline in loan-loss provisions, and litigation expenses. Lower income stemming from reduced mortgage activity and a drop in trading revenue contributed to a year-over-year decline in net operating revenue. More than half of the 6,812 insured institutions reporting (53 percent) had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable fell to 12.2 percent, from 15 percent in the fourth quarter of 2012. We'll see what happens tomorrow with Wells & Chase's earnings.

Wells and Chase are in pretty deep with Freddie and Fannie, and the FHFA, as are mortgage insurance companies. The MI company umbrella sent out, "USMI applauds Senate Banking Committee Chairman Johnson and Ranking Member Crapo for reaching a bipartisan agreement on housing finance reform legislation, drawing largely from the bipartisan Corker/Warner bill. We are pleased that the bill recognizes the important role of private mortgage insurance in ensuring access to housing finance for borrowers while protecting taxpayers and serving lenders of all sizes. We look forward to working constructively with Congress and other policymakers to build a well-functioning housing finance system backed by private capital." 

The recent spate of agency news has been interesting to follow. Arguably F&F should not stay under government conservatorship, but what are the alternatives? And what are the implications for their other roles in housing, such as apartment financing? Sarah Mulholland wrote an article for Bloomberg saying that, "The apartment-lending units of Fannie Mae and Freddie Mac were among their few money makers after the U.S. housing collapse. Now they should help transform the U.S. mortgage industry. Lawmakers...see an the structure of the firms' multifamily operations, which share risks with lenders. Senate Banking Committee Chairman Tim Johnson and Republican Mike Crapo are proposing legislation to create a new government-backed reinsurer of mortgage bonds that would require private investors to bear losses on the first 10 percent of capital. The model for the provision mirrors Fannie Mae and Freddie Mac's multifamily lending operations, requiring lenders to shoulder some of the risk on loans they originate. Unlike the firm's residential units, the divisions that lend to apartment landlords came out of the financial crisis relatively unscathed, partly because of better underwriting. The multifamily lending model works "because the lender, in one way or another, explicitly is on the hook for losses," said Andrew Jakabovics, senior director of policy development at Enterprise Community Partners, a non-profit affordable housing investment company. 'There is a lot more due diligence that goes into those deals.' The Johnson-Crapo bill creates a new lender/regulator, the Federal Mortgage Insurance Corp., which would begin operations within five years.

And of course investors in Freddie and Fannie are trying to figure out which side of the trade to be on: Making$.
Those in the industry know what may happen if Freddie and Fannie fade away and the fabled "private capital" enter into things in the secondary markets. "Fannie, Freddie Overhaul Will Translate Into Higher Mortgage Rates," says the Colton-Carliner paper of The Harvard Joint Center for Housing Studies.  Mortgage rates could rise by as much as 1.5 percentage points for homeowners with weaker credit or smaller down payments under various legislative proposals to overhaul Fannie and Freddie. A separate study published last month by Moody's Analytics estimated that the Johnson-Crapo bill would increase rates by around 0.4 percentage point for borrowers with a 750 credit score and a 20% down payment, bringing the today's mortgage rate of around 4.5% for a 30-year, fixed-rate loan to around 4.9%. On a median priced home, the increase translates into a monthly payment that is around $40 higher.  Such an increase would have a "measurable but very modest impact on the housing market". They estimate that the higher financing costs could reduce home sales by around 250,000 units and housing starts by 100,000 units over three years. 

And let's not forget the belief that removing F&F from the scene will negatively impact those special interests best served by consumer and civil-rights organizations. (Was that politically correct enough?) "Housing Bill Threatened by Rift on Help for Disadvantaged" screamed the headline. A bipartisan bill drafted by Senate Banking Committee leaders Tim Johnson and Mike Crapo relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights organizations are pushing instead for a mandate that those groups must be served. 

Regarding the markets...we really didn't have much news this week until the release of the Fed minutes yesterday afternoon. But when all was said and done, the 10-yr was nearly unchanged at a yield of 2.68% and agency mortgage-backed securities had rallied...back to unchanged! There was a fair amount of shuffling between coupons and maturities, but really, the economy continues to do a little better, housing and employment are still the cornerstones and neither is setting the world on fire, and it comes down to supply (by lenders) and demand (by the Fed and investors). 

Today we'll have Initial Jobless Claims (expected -6k to 320k) and Import Prices (expected at +.2%). Later we will have the primary dealers stepping up to buy a piece of the $13 billion 30-yr bond auction. Ahead of that the 10-yr's yield is down to 2.65% after closing Wednesday at 2.68% which would suggest agency MBS prices are perhaps .125 better in price. 

March import prices increased 0.6%, three times higher than estimates; yr/yr though still down 0.6%. Export prices +0.8% compared to +0.3% expected; yr/yr +0.2%. In China, the customs administration reported that imports slid 11% in March from a year earlier. The median economist estimate had called for a gain of 3.9%. China continues to be a wild card in  the global economic forecasting; to some degree analysts don’t trust comments from leaders in the country but the data is evidence China’s economy is slowing, one of the reasons the 10 yr note was down 4 bps in rate this morning prior to being supported by the very solid weekly jobless claims at 8:30. 

Wednesday, April 9, 2014

Executive Rate Market Report 

Treasuries and mortgages started slightly weaker this morning with US stock indexes trading better in the futures markets and Europe’s key equity markets improving. The 10 yr from a technical perspective still has difficulty holding below 2.70% (yesterday’s close 2.68%), early this morning the note trading at 2.71%. Emerging-market stocks rose to a four-month high as technology shares extended gains and on bets China will take steps to boost growth. Equities in India surged the most among peers, while South Korea’s won strengthened. Sentiment swings in the global equity markets continue to confuse investors; the recent selling in US key indexes is the beginning of more eventual selling that is likely to take the DJIA to 15K over the next two months but as noted previously the move lower in stocks isn’t going to be easy. The underlying bullish sentiment will be difficult to dislodge, most market participants remain bullish on the economic outlook, hard to shake off human optimism. As long as daily improvements in stocks occur the bond and mortgage markets have no reason to decline in yield. Some believe treasuries are supported these days by the Ukraine issues, to some extent that is correct but as we have noted in previous reports, as long as there are no bullets fired the safe haven effect on the bond market is a minor one.

The DJIA opened +47, NASDQ +18, S&P +4; 10 yr note 2.71% +3 bp and 30 yr MBS price -16 bp from yesterday’s close.
So far this week not much to move markets; this afternoon however, there are two events that could add volatility. At 1:00 Treasury will auction $21B of 10 yr notes, recent Treasury auctions have been meeting with very strong demand; yesterday’s 3 yr note was no exception. The 10 this afternoon however is more important, strong bidding will to some extent validate the demand for treasuries and support mortgage rates in the process. If the 10 auction doesn’t meet strong demand and stocks are still doing well more price declines late today may be expected.
Not only the 10 yr auction, the minutes from the Mar 19th FOMC meeting will be released at 2:00. The minutes may provide a better insight about the debates that led to Jane Yellen commenting that the Fed would begin increasing interest rates about six months after ending the Fed’s monthly bond and MBS purchases. Based on the tapering so far and the belief the Fed will continue to cut $10B a month from purchases, the end will occur in Oct; six months later according to her comments at her press conference would be April 2015, much earlier than what markets had been led to believe. One week later Yellen spoke in Chicago and “clarified” her previous remarks, basically retracting the time frame and fell make to ‘data dependent’ the key to increasing interest rates.  
The weekly MBA mortgage applications data: The Market Composite Index, a measure of mortgage loan application volume, decreased 1.6 percent on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 5 percent from the previous week and is at its lowest level since the end of 2013.  The seasonally adjusted Purchase Index increased 3 percent from one week earlier.  The refinance share of mortgage activity decreased to 51 percent of total applications from 53 percent the previous week and is at its lowest level since July 2009. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8 percent of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained constant at 4.56 percent, with points increasing to 0.33 from 0.31 (including the origination fee) for 80 percent loans.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.49 percent from 4.46 percent, with points decreasing to 0.14 from 0.27 (including the origination fee) for 80 percent  loans.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.19 percent from 4.21 percent, with points increasing to 0.16 from 0.15 (including the origination fee) for 80 percent loans.  The average contract interest rate for 15-year fixed-rate mortgages remained constant at 3.62 percent, with points increasing to 0.31 from 0.23 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week. The average contract interest rate for 5/1 ARMs increased to 3.26 percent from 3.25 percent, with points increasing to 0.5 from 0.38 (including the origination fee) for 80 percent  loans.