The flat earth society has members all around the globe.
While the industry is buzzing about how Wells Fargo has unfortunately killed any chance to reform the CFPB (i.e., cutting back its power or structure), and that whoever supposedly prepped Chairman Stumpf for this testimony should be terminated, recently I spent some time in Milwaukee visiting with the folks from Inlanta Mortgage. It was refreshing to hear them talk about "mortgage banking for grown-ups," and their mood reflected that of the industry: hopeful optimism that doing the right thing will prevail in the long run. Also going on in Wisconsin is evidence that the seasons are changing. Welcome to fall: yesterday, mid-day, was the autumnal equinox. In many parts of the nation leaves are starting to turn color and drop to the ground. And then what? The California Law Offices of Peter Brewer came out with a piece titled, "Real Estate Law Considerations for Fallen Leaves."
Another group of people have been prohibited from working in a segment of the industry. "The operators of an alleged mortgage relief scam that preyed upon distressed homeowners are banned from the mortgage loan modification and debt relief business under a court order obtained by the Federal Trade Commission. The order stems from a case called Operation Mis-Modification. According to the FTC, the defendants, operating under the fictitious names "2Apply" and "UW Solutions," falsely claimed they could lower consumers' mortgage payments and interest rates or prevent foreclosure, pretended to be affiliated with a government agency or consumers' lenders or servicers, and illegally charged advance fees - an initial $495, plus monthly fees that averaged about $399.
There are a few things to note with "the big boys" out there. KB Home announced that the joint venture with Nationstar would be ending and Stearns Lending would be acquiring the JV. KB Home sold just over $1 billion in loans to the JV in 2015 which equated to around 9% of Nationstar's retail production for the year. Assuming a 1% net margin, the earnings hit for Nationstar is less than 5 cents a share. And this once again brings up the topic of joint ventures, MSAs, and the like.
While we're on Nationstar, Moody's Investors Service has assigned provisional ratings to 35 classes of notes issued by New Residential Mortgage Loan Trust 2016-3 ("NRMLT 2016-3"). The NRMLT 2016-3 transaction is a securitization of $301.7 million of first lien, seasoned performing and re-performing mortgage loans with weighted average seasoning of approximately 158 months, weighted average updated LTV ratio of 55.5% and weighted average updated FICO score of 694. 80% of the loans have been always current in the past 24 months, and 23% of the loans in the pool were previously modified. Ocwen Loan Servicing, LLC, Nationstar Mortgage LLC, and Specialized Loan Servicing, LLC, will act as primary servicers and Nationstar Mortgage LLC will act as master and successor servicer.
Remember that in August Ocwen, which is Newco spelled backward, had its servicer rating upgraded by S&P. Ocwen's servicer rating went to Average, from Below Average, giving it the minimum rating levels required under its subservicing agreements. S&P upgraded Ocwen's residential mortgage prime, subprime, special, and subordinate-lien servicer ratings to Average from Below Average, with a stable outlook. This follows S&P's downgrade in June 2015.
And last week Ocwen Financial Corporation announced that, according to the recently released U.S. Department of the Treasury Making Home Affordable Performance Program (MHA Report), Ocwen is the leader in the Home Affordable Modification Program (HAMP). "In the second quarter of 2016, the Streamline HAMP program helped 7,811 families receive a loan modification. Ocwen was responsible for 4,112 or 53% of the total Streamline HAMP Modifications completed industrywide. Since the inception of the Streamlined HAMP modification program earlier this year, Ocwen has helped approximately 19,000 homeowners in need initiate a trail plan under the program."
But there's more! Ocwen has granted a total of 324,939 loan modifications through the HAMP program - 20% of all completed HAMP modifications. It has completed 52% more HAMP modifications than the next best servicer. And it has granted 48% of all HAMP Principal Reduction Modifications completed industrywide.
Ocwen (OCN) shares have rallied +88% quarter-to-date. Why? The positive resolution of several major risks. In June OCN settled a potentially damaging outstanding litigation against the company, and along with its 2Q16 earnings release OCN announced that it was in settlement talks with the California Department of Business Oversight (CADBO) and had reserved $15M toward a potential settlement. And has noted above in August, S&P upgraded OCN's servicer ratings to AVERAGE from BELOW AVERAGE, which substantially eliminated the risk that New Residential Investment Corp (NRZ) would be able to terminate OCN as subservicer on the $130 million of MSRs (mortgage servicing rights) on which the underlying "rights" belong to NRZ (as a result of its HLSS purchase). Importantly, the second leg of the regulatory risk reversal rally could come in the form of OCN achieving a settlement with CADBO and receiving permission from the NYDFS monitor to make a small MSR acquisition.
If you like "dashboards," you may want to check out Moody's "Q2 2016 Originator and Servicer Dashboard." "The report features a spotlight article on how the Consumer Financial Protection Bureau's final amendments to its mortgage servicing regulations are credit positive for RMBS. It further looks at performance trends among both originators and servicers of US mortgage loans, and summarizes Moody's recently completed originator and servicer assessments."
What does it say, or at least remind us of? Well, recent trends among RMBS loan originators include Five Oaks Aggregation Corp. and Two Harbors Investment Corp. announcing plans to discontinue their mortgage conduit aggregation operations, citing unfavorable market conditions. Lots of lenders out there are putting money into technology, improving their regulatory compliance, while more sophisticated data analysis is leading to better credit risk management and quality control. Additionally, some originators are replacing internal post-acquisition quality control loans reviews with feedback from whole loan investors and offering expanded credit products.
"On the servicer front, despite negative financial news from Ocwen Loan Servicing, Ditch Financial and Nationstar Mortgage Holdings last quarter, each firm's overall ability to act as servicers remains unchanged, Moody's says. The 'servicer stability' component of the agency's assessments for all three is however 'below average.'"
Should servicing for all conventional conforming loans be .250%? Perhaps not. The fee-for-service compensation structure, under which the status of a loan determines a servicer's base fee, continues to gain momentum. "The structure better aligns a servicer's costs with the performance of a deal, and facilitates the transfer of loans, should that become necessary. Moody's also notes that the expiration of the Home Affordable Modification Program at the end of this year will have a limited negative impact on RMBS issued in 2008 or earlier, with default rates following HAMP and proprietary modifications now similar after converging in recent years."
While we're talking about residential mortgage-backed securities (RMBS), the industry keeps an eye on prepayments, and mortgage rates' impact on them. Refinancing activity tends to be the most sensitive to shifts in rates, but purchase volume may also increase as rates fall. Forecasting rates is notoriously difficult - no one has a crystal ball, and if LOs pay some service to predict the future for them, well, that's their business.
But mortgage rates & costs may not fall much from here, or may drop below 3.5 percent only briefly. Many borrowers already refinanced when rates were low in prior years, including 2012 and 2013, which could damp the current wave. While refinancings are a positive for borrowers, they threaten to wallop investors managing mortgage bonds, which suffer when rates lurch unexpectedly.
Few money managers have protected themselves for rates heading downward, especially since "experts" have been forecasting higher rates for years. Low rates certainly put owners of MBS at risk of faster prepayments. But the experts say that as long as mortgage rates remain above 3.5 percent, refinancing activity will probably stay muted.
Mortgage prepayments, generally a good indicator of refinance activity, skyrocketed in August. According to Black Knight Financial Services "first look" at its August mortgage data, the Single Month Mortality (SMM) or prepayment rate, fueled by post-Brexit interest rates, rose by 32 percent from July to hit a rate of 1.67 of all outstanding mortgages. It was the highest SMM rate in more than three years. Keep in mind supply and demand determine mortgage rates!
Although the agencies are well versed in "nudging" lenders to sell them whole loans instead of MBS, Fannie's trading desk sent out a note worth a skim. "To help assist you with the operational mechanics involved in trading, delivering and settling MBS securities with Fannie Mae's Capital Markets Pricing and Sales Desk we have created the reference document in the link below. The Capital Markets Operations Guidelines - MBS document provides descriptions of common processes, helpful hints and contact information useful in MBS transactions with the Desk.
Who has time to watch rates these days? Plenty of people, and as hedging software continues to tell lenders to sell about 80% of their locks every day, the Fed continues to buy $1-2 billion a day using money from early pay-offs. U.S. Treasuries finished Thursday mostly higher and agency MBS "tightened" which means they did slightly better than Treasury securities: yesterday the 10-year improved nearly .375 in price, 5-year T-notes better by .125, and MBS better by .250. With the FOMC meeting over with, what's left for the financial press to discuss?
Well, yesterday we learned that U.S. existing home sales slowed slightly. First-time buyers accounted for 31% of sales in August versus 32% in July and a year ago. To no one's surprise despite low mortgage rates, limited inventory & high prices continue to restrict existing home sales activity. We also learned that the Conference Board's index of leading indicators fell 0.2% m/m in August. And the FHFA Housing Price Index rose 0.5% m/m in July after climbing 0.2% in June - stronger than expected.
Today for scheduled economic news there is nothing of consequence. Agency MBS prices are pretty much unchanged from Thursday's close, and the 10-year is at 1.62%.