Tuesday, October 7, 2014

Fun with Millennials; Deutsche Bank financing non-QM Lenders


Where does bank settlement money go? Well, if it is up to New York's Governor Andrew Cuomo, it will go toward building bridges in New York. I imagine that there are other places for it to go that relate to the actual settlement... but what do I know?

Turning to demographics for a moment, we're all aging - it is a fact of life. Mark Weber writes: 110 million people over age 50 by 2020. And builders are still building McMansions with steps!" I agree - bring on the Japanese soaking tub option in the master bathroom! As a side note, the Fed reports the combined wealth of Americans (value of homes, stocks and other assets minus debt and liabilities) reached $81.5 trillion, the highest level on record.

In line with popular belief, BofA Merrill Lynch Global Research reported that the millennial generation will be the largest cohort of home buyers in the coming years, with current homeownership rate at 35.9%, if they are able to overcome current economic hardships. BofAML stated that the decline in homeownership rate for the young is due to a decrease in labor participation, hindering their ability to qualify for a loan. The Federal Reserve Bank of Cleveland reported that the labor participation rate may decline 2+ points by 2022, resulting in a homeownership rate of 62.5%. Employment rates for people aged 55 and older has increased 9.3% since 2004, whereas those aged 16 to 19 years old has seen a 23.3% drop in employment since 2004, and the labor participation for the 20-24 year has declined 6%. The older cohort has a homeownership rate of 80.1%, therefore the 35 and under age group will be the largest group of future homebuyers. 

The statistics are obvious; right now the industry is going through a "lull" period and it will take a few years before the industry bounces back. This is because the millennial generation is transitioning from graduating from college and paying off student loans, to starting a career and becoming financially stable and ready to take on the responsibility of buying a home. First time home buyers will drive the market in the coming years. 

Fannie Mae came out with its report on why millennials are not buying homes; their research indicated that if the homeownership rates of 2006 had been constant, there would be 2.4 million more first time home buyers today. The younger generation is also spending 30% of their income on housing, which is less than what was seen in the previous decade. Fannie Mae's report stated that "housing costs, decisions related to marriage and childbearing, student debt, length of educational careers, mortgage credit accessibility and cost and lifestyle preference" is deterring millennials from purchasing a home. These may be reasons as to why the median age for first time home buyers is now 31

But what can our industry do about millennials lackluster desire to buy a home? Educate. Most millennials believe they need a 20% down payment in order to qualify for a loan, but if they knew about programs with minimal or no down payment options, they may rethink that possibility. As Ryan Christensen from the TheREsource.tv pointed out, we need to focus on why millennials should buy a home and how they can benefit from it. 

Considering all the (how shall I put this?) mature faces I see at banking conferences every year, I'll assume people can remember the 1980's; more specifically, the Japanese economy during that time. It was robust, to say the least. The decade to follow, however, was anything but robust, and the 1990's have become known as the "lost decade".  While there are differences in economic qualities between our two nations (capacity being one), the United States economy finds itself mired down in years of inefficiencies. So it was with some interest when I read Clear Capital's The Lost Decade. Here to Stay? The group writes, "Two and a half years of recovery hasn't been enough to bring a close to U.S. housing's 'lost decade'," said Dr. Alex Villacorte, vice president of research and analytics at Clear Capital. "With our revised forecast showing only 1.8% growth through 2015, our lost decade, like Japan's, could extend more than 10 years. Though national home price growth since 2012 of 23.5% has outpaced historical annual averages of 3.5%, home prices are still at 2004 levels-a clear indictment of the housing market's weakness only a few short years ago." The period in question, from 2004-2014, where national home prices have been nominally unchanged. As the research groups illustrates, housing is back to 2004 levels without even accounting for inflation, leaving many homeowners with no more equity than when they bought. "This is unusual in the history of the housing market where prices have risen 55% over each rolling 10 year period since 1985." 

There is always a demand for money to buy or refinance homes, and there is always capital to be lent out. The question is, of course, at what rate and price do the two meet? We have companies "disrupting" the mortgage sector, per a story out of CNBC, asking readers, "Would you bypass a bank for your next mortgage?" Online lender Kabbage began offering personal loans a week or two ago as it seeks to compete with more established online players such as Lending Club and Prosper. Loans will be for 3Ys to 5Ys at rates of 5.73% to almost 25%.

"'During the financial crisis, many borrowers experienced life event hardships from lost businesses, lost jobs, divorces and/or illnesses,' said Art Yeend, Managing Director and Head of Sales and Marketing at MountainView Capital Holdings. 'As time has passed and the economy has improved, many of the affected borrowers have now recovered financially but do not qualify for conforming or jumbo prime loans...These borrowers will be prudently and responsibly underwritten and will meet all ability-to-repay guidelines, but our expanded underwriting criteria allows for multiple risk layering not acceptable to prime lenders.'"


And American Banker reports that Deutsche Bank is planning a return to the U.S. mortgage business by again financing home lenders, and it will do so by focusing on a product that most say they are unwilling to sell - receiving the green light to target lenders making mortgages falling outside of new regulatory guidelines. "Deutsche sees enormous potential in nonqualified mortgages...Deutsche cannot stand by as competitors who stayed in residential lending begin to reap the benefits." The story notes, "The decision to finance makers of non-QM loans is significant for Deutsche Bank, one of the many large banks trying to recover from the subprime mortgage crisis. It is also meaningful to the broader housing market, which seeks reassurances that the new mortgage rules, which took effect in January, will not cut off production for all but ultra-safe home loans. The market has the potential to become a $600 billion a year industry for originations, Deutsche Bank researchers said in a recent report." 

The story goes on to note that "Many traditional lenders are still hesitant, if not afraid, to offer non-QM mortgages. They argue the Consumer Financial Protection Bureau's Qualified Mortgage and Ability-to-Repay rules are overly restrictive in their intent to prevent banks from making loans to borrowers who cannot afford them. Loans that fail to meet that standard will be denied protection from borrower claims and suits, and that is a major deterrent....That attitude may now be slowly changing, as investors communicate a greater willingness to take on lenders' litigation risks. Sprinkles of nonqualified mortgages have begun to make their way into pools of residential mortgage securitizations, testing investors' risk appetite. They include deals issued by mortgage real estate investment trust Redwood Trust. Now, more lenders are arranging for warehouse financing." Companies like Citadel Servicing, Impac Mortgage, Angel Oak, and JMAC are often mentioned, as well as more than a dozen others. (For a better list, go to www.mortgageelements.com, type in a state, and select the non-QM box.)

Turning to the bond markets, with all this going on, rates are almost an afterthought. Things were pretty quiet yesterday, and again over night. For "excitement" we have a $27 billion 3-yr note auction. Monday the 10-yr had a 2.42% close, and this morning is at 2.41% and agency MBS prices are better by a smidge.

Daily Market Analysis:

Interest rates continued to improve in the early going this morning with early trading in the US stock indexes aiming to a lower 9:30 open. European shares ended a two-session climb, as lackluster German industrial production data dealt another blow to the continent’s largest economy and the IMF report out today. US stock indexes also being effected by the IMF lowering its growth outlook once again. The 10-year German bund yields earlier approached an all-time low as data showing industrial production dropped the most since 2009 in August boosted speculation the outlook for Europe’s largest economy is deteriorating.

Once again the IMF has cut its outlook for global growth in 2015 and warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels. IMF saying the global growth will grow 3.8% in 2015, down from 4.0% from what the fund said in July. The reduction due to more weakness in the EU, Russia and Brazil economies slowing. “In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery,” the IMF said in its latest World Economic Outlook. “Emerging markets are adjusting to rates of economic growth lower than those reached in the pre-crisis boom and the post-crisis recovery.” Last week IMF Director Christine Lagarde warned that officials need to act to prevent a prolonged period of sluggish growth, a trend she called the “New Mediocre.” Raising growth in emerging and advanced economies “must remain a priority,” the IMF report stated. According to the report, a sustained period of policy interest rates near zero in advanced economies has raised the risk that some financial markets may be overheating.

The euro area will grow 1.3% next year, slower than the 1.5% pace predicted in July, after a 0.8% gain this year, according to the IMF. The IMF said Japan’s economy will expand 0.8% next year, compared with a 1.1% advance predicted in July. The IMF now sees Brazil growing 1.4% next year, compared with 2% in July. The US is predicted to grow 3.5% in 2015 according to Fund.

At 9:30 the DJIA opened -100, NASDAQ -31, S&P -12. 10 yr note  at 9:30 2.39% -3 bp and 30 yr MBS prices +14 bp from yesterday’s close and +28 bps from 9:30 yesterday.

At 10:00 the JOLTS August job openings was expected at 4.71 mil from 4.673 mil; we hardly give the report any thought whatsoever. As reported 4.835 mil.

At 1:00 Treasury will go after $27B of 3 yr notes at the first of three auctions this week.

As far as I am concerned the report of the day hit at 3:00 pm this afternoon; August consumer credit. Admittedly the report doesn’t get the attention it should but we follow the revolving credit data within the overall report as a more important measurement of confidence by consumers with how they employ their credit cards, so far this year credit card use has been minimal at best.

All of our work points to a continuing decline in long term interest rates. Technicals all bullish. Not willing to project how low rates will fall but from a traders perspective you have to be long the bond market at the moment. There are enough crosswinds in the fundamentals, enough to confuse markets. Once again, we remind that for the near term there is no better way to take advantage of the rate declines unless you follow how the markets are performing (where the money is flowing---the technical measurements.

PRICES @ 10:15 AM

10 yr note: +9/32 (28 bp) 2.39% -3 bp

5 yr note: +5/32 (15 bp) 1.66% -4 bp

2 Yr note: +1/32 (3 bp) 0.52% -1 bp

30 yr bond: +18/32 (56 bp) 3.10% -3 bp

Libor Rates: 1 mo 0.153%; 3 mo 0.232%; 6 mo 0.326%; 1 yr 0.571%

30 yr FNMA 3.5 Oct: @9:30 102.95 +14 bp (+28 bps from 9:30 yesterday)

15 yr FNMA 3.0 Oct: @9:30 103.46 +11 bp (+18 bp from 9:30 yesterday)

30 yr GNMA 3.5 Oct: @9:30 104.09 +17 bp (+23 bps from 9:30 yesterday)

Dollar/Yen: 108.17 -0.61 yen

Dollar/Euro: $1.2646 -$0.0009

Gold: $1210.60 +$3.30

Crude Oil: $89.51 -$0.83

DJIA: 16,892.43 -99.48

NASDAQ: 4428.82 -25.98

S&P 500: 1954.83 -9.99


Monday, October 6, 2014

Subservicing product; More Consent Orders against lenders


Before we jump into the "heavy" stuff, next Monday, October 13, is Columbus Day (with all of its Native American controversy) and Tuesday November 11th is Veterans Day - both Federal holidays. Most lenders are open, however. As a reminder, for disclosures and loan funding purposes, the rule is related to whether mail can be received or not. If the post office is closed and there is no mail delivery, it is a holiday. (The list of federal holidays referred to in Reg. Z are New Year's Day, January 1, Birthday of Martin Luther King, Jr., the third Monday in January, Washington's Birthday, the third Monday in February, Memorial Day, the last Monday in May, Independence Day, July 4, Labor Day, the first Monday in September, Columbus Day, the second Monday in October, Veterans Day, November 11, Thanksgiving Day, the fourth Thursday in November, and Christmas Day, December 25.) Both Columbus Day and Veterans Day are federal holidays meaning we don't count them for the purposes of the initial 7-day Reg Z waiting period, the 3 day re-disclosure waiting period, and right of rescission. For the timeframes on initial disclosures, RESPA requires that the initial disclosures be sent within 3 business days.  Business day means a day on which the offices of the business entity are open to the public for carrying on substantially all of the entity's business functions. 

The CFPB and other regulators share a certain percentage of information, much of it from state-level examiners but also from those at the Federal level. For example, here is a HUD OIG Audit involving Cornerstone Home Lending in Houston, Texas involving MSAs and other issues, along with a corresponding story in RESPANews.  

And Georgia is enforcing its rule about felonies. Many people in lending may not know companies can't employ anyone (anywhere in the company) with a felony for (usually) 7 or more years - some never. Even the janitor must be clean. Late last week word spread: "On October 1, 2014, the Georgia Department of Banking & Finance entered into a Consent Order with Hometown Lenders, LLC, NMLS No. 65084, located at 310 The Bridge Street, 4th Floor, Suite A, Huntsville, Alabama, and its owners, William E. Taylor, Jr., William E. Taylor, Sr. and Byron Heath Quick. The Consent Order was entered to resolve a Notice of Intent to Revoke and Orders to Cease and Desist issued to Hometown Lenders and its owners for employing two felons and transacting business with an unlicensed mortgage processing company. (The Department is the state agency that regulates and examines Georgia state-chartered banks, state-chartered credit unions, and state-chartered trust companies.... mortgage brokers, lenders and processors, mortgage loan originators, check cashers, sale of check companies, money transmitters, international banking organizations, and bank holding companies conducting business in Georgia.) 

In the last few weeks I have been in South Carolina, Colorado, Georgia, California, and Arizona. Many people ask me about sub-prime lending. Yes, I believe there will come a time when sub-prime mortgages will make an historical return to the norm in the marketplace. I also believe there will be a time when man walks on the surface of Jupiter's moon Titan, it's just the "when" portion of those statements I have a problem defining. If you missed the short article in the New York Times about this topic, it's worth three minutes of your time. Zillow on the other hand, attempts to quantify the demand (pent up or real) in its Supply and Demand Dynamics in Subprime Mortgage Markets. Using a unique database of loan requests and responses through its Zillow Mortgages (an online marketplace that connects mortgage borrowers and lenders) they use three sets of metrics to assess the underlying demand and supply dynamics driving sub-prime mortgage markets over the period covering June 2011 through April 2014. What does the data suggest? Zillow writes, "...demand has grown most dramatically among borrowers with higher credit scores (640 or higher), nearly tripling between June 2011 and April 2014. By contrast, demand among borrowers with slightly lower credit scores-those rated between 600 and 639 who are likely to benefit most if lending standards ease-has grown roughly in tandem with borrowers with credit scores below 600 who are largely excluded from mortgage borrowing regardless of the ease of credit."


Let's move on to some upcoming October events of note, in random order...


The MBA will hold a special webinar on October 14, 2014 from 2 PM to 3 PM ET with USDA staff who will discuss the benefits of the Automated Loan Closing Systems and answer your questions. Already using the system? Feel free to participate in the webinar to ask questions and improve your knowledge. Access Info: http://mba.adobeconnect.com/usdaga/, (800) 768-2983, code 5572870.


The Michigan Mortgage Lenders Association presents its "Mortgage Go Round Workshop" in Grand Rapids 10/16, this round table format has plenty of interaction among the attendees discussing today's hottest topics in mortgage lending. By the way, MMLA members can still get the early bird pricing to attend the MBA Convention in Las Vegas October 19 -22. Just click here to use this registration form to get the discount.


Plaza Home Mortgage is offering industry and product trainings. The month of October includes: Ask the Underwriter: Reverse Mortgage Tuesday, October 7 at 11 am Pacific; Loan Prospector®: Interpreting the Feedback Thursday, October 9 at 8 am Pacific or Monday, October 13 at 11 am Pacific; How to Present a Reverse Mortgage Wednesday, October 15 at 11 am Pacific; CFPB Compliance Management System Wednesday, October 22 at 11 am Pacific.


AllRegs has the 7 and 8 hour Federal Safe Act CE courses you need to stay licensed and compliant and your credit banking fees are included with registration. NMLS-approved SAFE CE training is just a click away.


On the day before Halloween, CFPB updates web seminar on October 30th will help you get a better understanding of the impact of the CFPB's new mini-correspondent guidance and provide practical advice as to how lenders of all sizes can adopt renewal processes, modify business relationships and implement internal infrastructure to remain both competitive and compliant. 


Federal Reserve is offering an Outlook Live Invitation on Wednesday, October 22, 2014 at 11:00 a.m. PST (2:00 p.m. EST). Register here as the topics will include a variety of emerging fair lending issues. Speakers at this event will represent the following seven federal agencies.


The National Association of Hispanic Rea Estate Professionals, NAHREP, announced its National Convention and Latin Music Festival will take place in Los Angeles, on October 12-14, 2014.  Registration information includes list of events with approximately 2,500 participants expected to attend the conference, which is focused on education, networking, awards programs and entertainment.


In partnership with Freddie Mac, Stearns Lending is offering Loan Prospector® training webinars available to Stearns approved brokers. Register for October 14th - topics will include Integration of SNAP / Loan Prospector (LP) and an Overview of Loan Prospector: How Loan Prospector works and interpreting the results.


We continue to receive conflicting numbers on the strength (or weakness) of the U.S. economy. It is nearly impossible to argue that we are in a recession as overall things continue to improve, in some cases at least remain stable. On the housing front, I have lost track of what new home sales, existing home sales, pending home sales, the FHFA index, the Case-Shiller Index, etc. have all showed us in the last month. But autumn and winter are rarely times for great appreciation. The impact of rising rates may be minimal as higher rates usually mean a healthier economy, and some experts think that improvements in employment and credit availability will increase the demand and opportunities for first time home borrowers.


For the bond market, which includes MBS, we've been in the same range since MLK Day: the 10-year has stayed between 2.80% and 2.35% - (2.65% and 2.35% since May) and we're on the lower end of that. Decent news out of the United States has been balanced against problems overseas which in turn drive money managers to buy our securities. Don't look for that to change this week as we have very little scheduled market-moving news. There is zip today and tomorrow. Wednesday afternoon we'll have the Fed's releases of the minutes from its Sept. 16-17 FOMC Meeting. Thursday is Initial Jobless Claims, along with some inventory and trade figures, and then on Friday some import price indices. The 10-yr's yield at the close of Friday was 2.45% and in the early going today we're at 2.43% and agency MBS prices are better by a smidge.


Executive Rate Market Report:


Rate markets started unchanged early this morning; the US stock indexes pointed to a strong open at 9:30. No scheduled economic data today, this week’s calendar is thin on data after the stronger than expected Sept employment report last Friday. In the geo-political situations: Honk Kong protestors split on how to continue, with some wanting to move out of blocking commercial streets and consolidating at government buildings; The bombs continued to fall in Iraq and Syria but ISIS so far has foiled the hoped for effect by moving away frm military sites that are the targets, thwarting the bombs’ impact.

More decline in EU economic data; Germany’s factory orders declined to the lowest since 2009. Orders, adjusted for seasonal swings and inflation, fell 5.7% in August, the Economy Ministry in Berlin said today. Economists predicted a 2.5% decline. Export orders dropped 8.4% in August, while domestic demand slid 2%. The World Bank lowered its forecasts for growth in developing East Asia this year. The region is projected to grow 6.9% in 2014 and 2015, down from 7.1% seen in April. That compares with global growth of 2.6% in 2014.

Is the world headed for a currency war? Looks more and more likely that it is; the ECB is on record wanting the euro to decline, Japan also in the mix and now news that China is considering weakening its yuan. Exports in those areas and emerging markets are declining, forcing measures designed to make each country and region more competitive. The US dollar is at a 4 yr high against the euro currency, the stronger the dollar becomes the less competitive for US exports. No one wins in a currency war escalates but economic leaders around the world are without much choice---or so they believe. Economic growth globally is not improving, most economies are slowing. In the US we benefit by being the strongest growth region although we are not setting any records in growth. The US Fed, World Bank, the IMF all continuing to revise growth forecasts lower each time they put out data.

Not much data out this week but what we have is a plethora of Fed officials making speeches. So many speeches from Fedsters that traders are becoming numb to them. Treasury will borrow $61B this week with three auctions. Geo-political issues in the absence of more compelling economic measurements will carry slightly more weight with traders this week.

This morning the DJIA opened at 9:30 +65, NASDAQ +16, S&P +8. 10 yr 2.44% unch; 30 yr MBS price +5 bps frm Friday’s close. US stocks improving on Brazil’s elections that has driven its stock market up 8.0%.

US interest rates little changed so far this morning on lower German rates that fell on weak factory orders; the 10 yr bund rate this morning 0.91%. Last Wednesday the bund yield declined to 0.896%. As long as US interest rates are higher than other key rates in G-7 countries our rates will find support. Still a little safe haven moves but not nearly as strong as a month ago. The technicals still hold minor bullish readings, but since the beginning of Sept the 10 has not been able to break 2.40% or 2.65%, the range in the last month. U.S.-led airstrikes designed to serve notice on Islamist extremists in Iraq and Syria have also delivered a sobering message to Washington and its allies: Breaking the militants’ grip will be every bit as difficult as they feared. At the moment the Hong Kong issue is moderating; the government has been reticent to use force lessening the concerns. Ukraine still smoldering but it too has waned in importance recently.


This Week’s Calendar:


10:00 am August JOLTS job openings (4.71 mil compared to 4.673 mil n July)

1:00 pm $27B 3 yr note auction

3:00 pm August consumer credit (+$20.0B frm +$26B in July)


7:00 am weekly MBA mortgage applications

1:00 pm $21B 10 yr note auction

2:00 pm FOMC minutes frm Sept meeting


8:30 am weekly jobless claims (+6K to 293K)

10:00 am August wholesale inventories (+0.3%, July +0.1%)

1:00 pm $13B 30 yr bond auction


8:30 am Sept import and export prices (imports 0.8% ex ags; export prices -0.1% ex oil)

2:00 pm Sept Treasury budget (+$72B, and the 2014 fiscal total)

Friday, October 3, 2014

USDA and proposed changes to NMLS; Status & updates in FHA program


The USDA's program is going through its usual gyrations, and plenty of lenders are sending out notices like, "As happens at the beginning of each fiscal year, funding for the Single Family Housing Guaranteed Loan Program (SFHGLP) will not be available for a short period of time at the beginning of Fiscal Year 2015 (FY 2015), which starts October 1, 2014.  During the temporary lapse of funding, Rural Development will issue Conditional Commitments "subject to the availability of commitment authority" for purchase and refinance transactions.  An upfront guarantee fee of 2 percent accompanied by an annual fee of 0.5 percent will apply to both purchase and refinance transactions in FY 2015."
For those tracking these things, the New York State Department of Financial Institutions and the Ohio Division of Financial Institutions have begun using the National SAFE mortgage loan originator (MLO) test with Uniform State Content  on the Nationwide Multi-State Licensing System & Registry (NMLS), bringing the total number of state agencies using the test to 43. Also, there is a "Request for Public Comment" on the Mortgage Call Report and Surety Bond Tracking in NMLS. SRR is inviting public comment on two proposals related to functionality in NMLS. Comments for proposed changes to the Mortgage Call Report and new electronic surety bond tracking in NMLS are due October 30, 2014. See Proposed Mortgage Call Report Changes or Electronic Surety Bond Changes.
Licensing and the tedious process are always a hot topic, so it is with some interest I note Maryland. Back and in early spring, Maryland Governor Martin O'Malley signed Senate Bill 1091, also known as the Registered Mortgage Loan Originators - Expedited Licenses, into law. The law, which took effect on October 1st, adds additional articles and requires the Commissioner of Financial Regulation to expedite license applications from Registered Mortgage Loan Originators who meet certain requirements. How does the law expedite the licensing process? Well, it directs the Commissioner to waive the State criminal history records check for Eligible Applicants. According to the Maryland Mortgage Bankers Association, the elimination of this requirement for licensing should provide faster processing of the application, assuming all other requirements are met. How does someone apply for an expedited MLO license? Submit the Maryland MLO license application through NMLS, and complete the checklist. Be sure to include the information for the most recent date of employment as a registered MLO. Forward the checklist and other application materials to the Commissioner at the address noted below. When to apply for the expedited MLO license? Beginning October 1, 2014, expedited MLO license applications may be submitted by Eligible Applicants.
Geez there is a lot going on the FHA sector. The Federal Housing Administration wants lenders to make fewer mistakes when writing mortgages for the government insurance program. The agency also wants to serve more borrowers with low credit scores. FHA lenders have already have felt the tension between these two demands. A hard line on defects means lenders are more likely to be on the hook for losses in the event of default, and lower credit scores make defaults more likely. Many FHA lenders have been pulling back from the market for this reason. The FHA expects 75% of the loans it insures from now on will be made to borrowers with FICO scores of 680 or below, but the housing downturn took many of these borrowers out of the home buying market and the FHA is looking for ways to bring them back. 
The FHA, however, thinks that the defect rate for FHA loans is still too high and defects on FHA loans appear to be on the rise. In June, the FHA provided a breakdown of 6,645 loans it reviewed in the first quarter and found that just 16% were deemed acceptable, meaning they had no mistakes. A whopping 48% were "unacceptable," with material defects, while another 36% were considered "deficient," with errors that could potentially be corrected. Lenders are still trying to get their arms around the FHA's quality assurance plan announced in March. The FHA has said its "blueprint" for evaluating underwriting defects should reduce lenders' fears of having to indemnify the agency for losses on loans to riskier borrowers. FHA's share of mortgage originations has fallen dramatically in the past year. Still, FHA officials have stressed that the agency will not roll back its 1.35% annual mortgage insurance premium or its 1.75% upfront premium, although the industry would view that quite favorably. Though such a change would make loans more affordable, the FHA had to raise premiums to strengthen its insurance fund, which must maintain a 2% surplus. The share of FHA borrowers with credit scores between 640 and 680 "is half the size of what it used to be." Lenders have essentially retreated from lending to that segment of the market, resulting in the loss of a borrower class over the last 10 years. Since 2013, the FHA has intentionally pulled back from insuring loans to borrowers with strong credit scores and ceded that market share to Fannie Mae and Freddie Mac for borrowers with FICO scores of 680 or more.
As recently as 2011, 65% of FHA's volume went to borrowers with FICO scores above 680. Those higher credit scores were something of a departure from the FHA's mission and its history. In 2007, at the beginning of the financial crisis, 55% of FHA-insured loans went to borrowers with FICO scores below 640. Moreover, 30% of those loans were to borrowers with scores 580, which ultimately hit the agency with a massive wave of defaults. The FHA now expects 25% of the loans it insures will be to borrowers with FICO scores of 640 or below. Another 50% will go to those in the middle ground of 640 to 680. The remaining 25% will be to those borrowers with scores above 680. Efforts have been underway to get lenders to remove so-called credit overlays - FICO score requirements of 680 or more that are used to screen out borrowers with a higher probability of default. Some lenders have lowered credit score requirements this year, largely to drum up business. Many others haven't budged from imposing credit overlays out of fear they will ultimately be forced to eat losses for any FHA loans that default.
FHA posted the draft Servicing section of its draft Single Family Housing Policy Handbook. This posting is a continuation of FHA's progress toward a single, consolidated SF Handbook that will make it easier for stakeholders to do business with FHA. Visit the Servicing page link on the SF Drafting Table to access the draft section content and supporting documentation. Feedback from stakeholders will be accepted from September 11 through October 17, 2014. U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML) 2014-19 introducing its new loan servicing contractor, NOVAD Management Consulting. The new contract became effective September 29.
And The Federal Housing Administration's (FHA) Single Family Office of Lender Activities and Program Compliance (OLAPC) announced the publication of the 6th issue of its Lender Insight newsletter.
Suddenly there is a lot going on in the markets. After a nice rally on Wednesday, Thursday we took a little breather ahead of this morning's employment data. In recent months attention has shifted from Ukraine to Syria to Hong Kong and now to Ebola. (Yes - epidemics like SARS do have a negative impact on GDP, which in turn serves to keep rates lower.) For mortgages, the demand continues to be good for MBS, and the supply seems to be slowing - leading to higher prices and lower rates. (Of course, rates can't go down too much given gfees and loan level price adjustments.)
This morning, however, the September payrolls and unemployment results were announced. Nonfarm Payrolls were expected at +215k (after only being up 142k last month) and came out at +248k with a back-month revision to +180k. The Unemployment Rate, expected to be unchanged at 6.1%, came in at 5.9% (the lowest since July 2008), and Hourly Earnings were roughly unchanged. The strong numbers have pushed rates higher in the early going: 10-year up to 2.48% and agency MBS prices worse about .250.

Thursday, October 2, 2014

Mortgage jobs & layoffs;Bank M&A - Mutual of Omaha & Guild align;Correspondent investor update


"i before e except after c" except when you run a feisty heist on a weird beige foreign neighbor. Pretty clever. Is there anything new and "clever" going on in lending out there? Yes there is - here's an interesting story on a company in San Francisco that is doing its best to refinance student debt, which in turn lowers the debt level of younger people and as a result eventually helps the first time home buyer market! And as we know, first time home buyers lead to move up buyers. (The article notes that SoFi is "moving into moving into the mortgage and consumer loans business.)

Three thousand miles away, a rapidly-expanding mortgage lender is looking for loan officers to work out of its newly-opened East Coast headquarters in New York City. The company is launching a next-generation online platform that will enable you to close qualified leads (from both your personal network and our lead engine) with unparalleled speed and ease. Competitive pricing and a veteran processing staff will support you in delivering a superb borrower experience, with many of our borrowers returning for subsequent home financing needs. The company is seeking LOs licensed in select Northeastern states (NJ, CT, PA, DC), with special consideration being given to LOs holding additional licenses in other Northeastern states. If interested, please send your confidential resume to me at rchrisman@robchrisman.com and I will forward them on. 

And in the middle of the country, Jordan Capital Finance (JCF) is hiring in its Northbrook IL office a Chief Financial Officer, to lead all financial, accounting, banking, and reporting systems for the Company. JCF provides private money financing for real estate investors who buy, renovate, or rent residential real estate. We operate in 12 states. JCF is growing aggressively and is extremely well capitalized (by a leading private equity firm). The CFO will work closely with the CEO (Mark Filler) on all aspects of the business. The candidate will have ten years accounting experience (CPA required). Please send inquiries and resumes to Ms. Aeron Berg.


On the flip side of new jobs, about 60 percent of the workforce at Milwaukee's Shelter Mortgage Co. will be laid off in November, following the company's acquisition earlier this month by New Penn, according to a letter filed with the Wisconsin Department of Workforce Development.

Mergers and acquisitions continue to be rampant. The latest FDIC data on bank branches finds the number of US bank branches slipped to the lowest annual level in 9 years in Q2 2014. The number came in at 94,725 vs. 96,339 1Y ago (-1.7%) and 99,550 from the peak in 2009 (-4.8%). Let me know when the consumer starts being better off... 

On the mortgage side, a few weeks ago this commentary mentioned rumblings of Mutual of Omaha and Guild. Sure enough, "Mutual of Omaha Bank is expanding its correspondent lending relationship with Guild Mortgage Co." - read that however you see fit, but here is the release. The Lincoln Journal Star noted, "Mutual of Omaha Bank is outsourcing its mortgage origination business."

On the banking side during the last week, the boards of FHLB Des Moines and FHLB Seattle have agreed to merge, moving the first-ever merger of this sort into the hands of the FHFA for approval and then to the members of each for ratification. The combined FHLB would have $119 billion in assets, be headquartered in Des Moines and have 1,500 members in 13 states. On a smaller scale, Metcalf Bank ($1.2B, MO) will acquire Douglas County Bank ($295mm, KS). In New York Putnam County Savings Bank ($976mm) will acquire CMS Bank ($273mm) for about $25mm in cash. In John F. Kennedy's home state East Cambridge Savings Bank ($882mm) will acquire Chelsea Bank ($58mm). In Barack Obama's political home state, Busey Bank ($3.4B) will acquire Herget Bank ($273mm).

 Speaking of mergers,"Over the last 15 months, the mortgage industry has been predicting an inevitable movement towards consolidation, especially among the independent mortgage banks.  Last week, we received news that affirms this trend with announced acquisition of Cobalt Mortgage (Seattle) by Caliber Home Loans (Dallas). In representing Cobalt, the STRATMOR Group has some insight into the motivations of both buyer and seller.  Although Cobalt will originate almost $4 billion in 2014, ownership recognized that greater production 'critical mass' is rapidly becoming a requirement to compete in a marketplace where compliance, technology infrastructure and scale economies are key success factors.  Capital strength will be essential to developing and funding non-agency product menus and the retention of loan servicing.  At the same time, Caliber Home Loans determined that acquiring a high performing platform with an outstanding Regional reputation was the most expedient strategy to accomplish its ambitious growth objectives. This transaction may prove to be the largest deal of year among the independent mortgage banking sector. The confluence of shared objectives between buyer and seller made this a natural marriage of highly respected powerhouse organizations. As always, STRATMOR would welcome conversations with mortgage banks who are considering their sell-side strategic objectives. (Certain principals of STRAT MOR are licensed investment banking agents of M&A Securities Group, Inc., an unaffiliated company).

Are there any new correspondent lenders out there gaining market share?.... There aren't really any new lenders, exactly. What we're seeing, however, is a business shift. As has been mentioned numerous times in the commentary, Freddie and Fannie have done a masterful job going around the aggregators and picking up business directly from small and mid-sized lenders. I won't engage in a discussion of the pros and cons of that strategy, but suffice it to say that well-known investors are not only dealing with a dwindling overall market, but due to Fannie & Freddie's efforts a smaller piece of that smaller market. Not only that, but there has been a reshuffling of the usual suspects. Wells Fargo & Chase are still on top, but Citi was not even in the top 10 in the 2nd quarter (it was #13), per National Mortgage News. The top five were rounded out by PennyMac, U.S. Bank Home Mortgage, and Flagstar Bank.

Coming up fast are Franklin American Mortgage, Freedom Mortgage, BB&T, and Stonegate. And sneaking into the top 10 is Walter Investment Management - not exactly a household name. We then go on to SunTrust, Redwood Trust, Citi, Nationstar Mortgage, and Caliber Home Loans. All have different stories, demands for servicing, geographic and product specialties, and so on. But you can see the shuffling when one compares it to, say, the 1st quarter of 2013 when the top 10 were Wells, Chase, U.S. Bank, PennyMac, Flagstar, BB&T, Franklin American, Ally, Citi, and SunTrust. 

And if anyone is thinking about entering the correspondent channel, there is even a book telling you how to do it. And no, this is not a paid announcement. "Correspondent Lending Best Practices" is the subject of a new "eBook" from OpenClose. "Unsure about the correspondent market? Don't have the proper tools or fail safes in place? Now there's a free eBook that give you best practices on how to proceed as well as help you avoid some common mistakes. 'Not So Fast, Correspondent Lenders' will help correspondent lenders through the precarious, road and suggest checks and balances that are needed to do it successfully. The eBook provides insight on what to ask, how to avoid common pitfalls, and help on choosing the right tools and staff." And heck, "free" is a good price, right? 

One hears about the big names involved in lawsuits. But I am often asked who the small guys are? Who are the entities behind class action lawsuits? News this week helps shed some light on "the small guys" involved. "The Triaxx entities withdrew their objections to the proposed Countrywide $8.5 billion settlement." As the resolution of modification repurchase claims raised by Triaxx was the largest impediment to approving the settlement in its entirety, this event is a very positive sign for RMBS bondholders. However, other objectors also mentioned mod repurchase claims in their appeal, so it is not obvious that Triaxx's withdrawal completely resolves this issue. The remaining objectors to the settlement include the Chicago Policemen Funds, US Debt Recovery Entities, American Fidelity Assurance Company, among others. Given that the Chicago Policeman Funds requested that the case be reargued in its entirety, and other objectors appealed the settlement for different reasons, there is still some uncertainty as to how the legal process would work going forward for this case, or whether remaining objections would be resolved/settled before court hearings are scheduled.  

The Federal Home Loan Bank of San Francisco announced that the Cost of Funds Index for August 2014 was 0.667%, a slight decline from a month earlier when the index was 0.676%. The August COFI index is based upon the average interest expenses incurred by 12 financial institutions; this data is then used to calculate variable rate loans. As a discretion, The FHL Bank of San Francisco states that they do not guarantee the accuracy of the data that they receive from participating institutions. Furthermore, if the bank reported information in error, they will not revise the data. So after two consecutive months of increases, the COFI relented and returned to its all-time low. In May, COFI fell to 0.667 percent -- the lowest it's ever been based on the oldest available data going back to July 1981. ARMs accounted for 11.9 percent of all pricing inquiries in the U.S. Mortgage Market Index report from LoanSifter/Optimal Blue and Mortgage Daily for the week ended Sept. 26. 

This leads us to the markets. Anyone truly wishing for lower rates - be careful what you wish for as we'd rather not have the U.S. economy go back into a recession. The 10-year's yield closed Wednesday at 2.40%, and although agency MBS prices did not fully participate in the rally, it is only a matter of time. They still improved about a half a point, with many lenders leaving rate sheets alone to see how things settle out. This time rates were pushed down due to rampant rumors of Ebola incidents sparked another "flight to quality". Thomson Reuters reports that, "Overall, yield based buyers are again sidelined until they throw in the towel on return or are otherwise convinced these rates will hold. Hedge funds are better sellers from the recent wides, supply is average at just above $1 billion today, with many likely digging in a drawing a line in the sand ahead of Friday's payrolls."  

The only news out today is the usual Initial Jobless Claims (+293k last). Also out is 10AM EST's August Factor Orders which are expected lower from the +10.5% print last time around. In the early going there isn't much changes in pricing with the 10-yr sitting at 2.41% and agency MBS worse about .125.