Wednesday, March 4, 2015

ALTA offers advice to CFPB & points out major problem with disclosure forms


Nothing ruins your Friday like realizing it is only Wednesday! I lose track of what we're celebrating this month: I was all geared up for the Irish, but the Census Bureau reminds us that it is Women's History Month. A good thing, too, as there are 161 million women living in the U.S. (compared to 156 million men) and by age 85 women outnumber men 2 to 1 (4 million to 2 million). The median annual earning for women 15 or older who worked full-time in 2013 was $39,157 compared to $50,033 for men and female workers earned 78 cents for every dollar their male counterparts earned. More women are graduating from college than men, with women accounting for 56% of all college students. In 2014, there were 5.2 million stay-at-home mothers compared to 211,000 stay-at-home fathers.

What is going on around the nation? You can't go to a conference without someone discussing urban price appreciation, rents skyrocketing, and every Realtor licking their chops waiting for a bunch of 24 year olds to buy a house.

The U.S. Census Bureau published 2014 fourth quarter residential vacancy and homeownership rates, with the national vacancy rate at 7 percent for rental housing and 1.9 percent for homeowner housing. The national homeownership rate of 64 percent was 1.2 percentage points lower than a year before. The rental vacancy rate was highest in the South at 9%, then the Midwest at 7.5%, followed by the Northeast at 5.8% and the West at 4.8%. The homeowner vacancy rate in the South was 2.2%, the Northeast was 2%, the Midwest was 1.7% and the West was 1.4%. Approximately 87% of housing units were occupied in the Q4 of 2014, with owner-occupied housing units making up 56% of total housing units and renter-occupied units making up 32% of the inventory in the fourth quarter of 2014. Homeownership rates were highest in the Midwest at 68.3 percent and lowest in the West at 58.5 percent. In regards to homeownership demographics, homeownership rates were highest among householders 65 years old and older (79.5 percent) and lowest for those under 35 years old (35.3 percent). Homeownership rates among non-Hispanic White householders was 73.2 percent, All Other Races householders was 55.4 percent and African American householders was 42.1 percent. For a more in depth look at the U.S. Census Bureau's report, click here.


For those who have given up on the dating life, a recent article published by the Collingwood Group suggests that half of U.S. adults are single. The share of singles have also impacted the homeownership rate, which declined in Q4 of 2014 to 63.9%, the lowest level over the past two decades and is expected to drop even further this year. The percentage of renters who want to become homeowners has also declined to 75%, which is lower than the 80% confidence rate seen five years ago. In order to attract this sector of potential homeowners, it's necessary to market to single adults, explaining how owning a home is more beneficial and often more affordable than renting.


Respondents say it is important to have sufficient reserve capital and/or private mortgage insurance in place to protect taxpayers from the next business cycle downturn. Some suggested combining Fannie Mae and Freddie Mac into a single entity or moving to a single security. The vast majority (85%) of survey respondents agree that Fannie Mae and Freddie Mac should be doing more risk sharing transactions. These transactions allow private market participants to invest in the credit performance of Fannie Mae and Freddie Mac's single-family book of business. Most survey respondents indicated that they support these transactions because they help fuel the private securitization market and limit taxpayer risk while the GSEs are in conservatorship.

I often remind folks that while the huge majority of banks in this country are exempt from direct examination by the CFPB, they are subject to the rules and regulations of the CFPB. And regarding decisions and enforcement actions, attorneys have always looked to agency decisions (to the extent they are available) to discern what possible enforcement posture would be taken by regulators. Attorney J. Steven Lovejoy reminded me that, for example, HUD used to publish Consent Orders on its RESPA page. Those were very helpful in interpreting a rather opaque statute and regulations. It's the same as looking up cases with precedential value. But there is less predictability with a new agency like CFPB and its approach to enforcement is a bit different.  Acknowledging that they are both prosecutor and judge, for purposes of settlement, there is precious little negotiation. Instead they ask "tell us what you want us to know about the violation and the violator and we will determine an appropriate penalty.


Last month many in the industry began to believe that reverse mortgages will be the next target on the CFPB's list, as the bureau has recently released a report that is a snapshot of reverse mortgage complaints from December 2011 to December 2014, which encompasses 1200 reverse mortgage complaints that the agency received during that time period. The top reverse mortgage complaints include problems when unable to pay (38%), making payments (32%), applying for the loan (18%), signing the agreement (10%) and receiving a credit offer (3%). The CFPB cited that many consumers were frustrated over the requirements of reverse mortgages and did not fully comprehend the loan product or how the amount of available equity will decrease due to accrued interest on the loan. Other complaints include challenges paying off the loan once it became due, difficulty obtaining information from servicers and unresponsiveness from servicers when trying to avoid a foreclosure. These findings will more than likely lead the CFPB to enact new requirements for reverse mortgages and the bureau has already posted a consumer advisory on their website to address concerns that arose from the complaints.


I know I am playing some catch up, but the American Bankers Association (ABA) released a response to the CFPB's proposal regarding mortgage relief for some community banks. Bob Davis, the executive vice president of mortgage markets for the ABA, praises the CFPB for listening to community bankers and taking the ABA's recommendations into consideration to expand the definitions of 'rural area'. The proposed changes would ensure certain bankers meet the mortgage credit needs within their communities and the changes could allow many communities to enjoy more choice and expanded competition for mortgage credit. To read the ABA statement regarding the CFPB proposal, click here.


And the American Land Title Association (ALTA), the national trade association of the land title insurance industry, released the following statement in response to CFPB Director Richard Cordray's testimony before the House of Representatives Financial Services Committee. "'In 150 days, new disclosure forms for real estate transactions will completely change the home buying process as it's known today,' said Michelle Korsmo, ALTA's chief executive officer. 'As our member companies work to implement these new forms on Aug. 1, we strongly urge Director Cordray to announce a five-month restrained enforcement period so that new business processes can be adjusted to comply with these regulations. As with previous regulatory reform, only when the new forms are in practice will many issues and defects be discovered. A restrained enforcement period helps our members, and the broader real estate industry, make the changes needed to their business processes and collaborate with industry and regulators to ensure the consumer has a positive experience at the closing table.'


"'Unfortunately, we're already aware of one major problem with the new CFPB forms,' Korsmo stated. 'The Bureau's Closing Disclosure, which replaces the current HUD-1 Settlement Statement, inaccurately discloses the fees associated with title insurance premiums for consumers. State law and regulation in half of the United States dictates that consumers must pay title insurance rates that are different than how the CFPB requires industry to inaccurately disclose these fees to the consumer. Every homebuyer should be well-informed about the accurate costs of homeownership-including what they pay for each service during the real estate closing process. For many consumers, buying a home is the single largest investment they will make in their lifetime. It's critical that Director Cordray and the CFPB staff adjust the disclosure forms prior to Aug. 1 to ensure consumers receive accurate information about their mortgage costs. ALTA and our member companies stand ready to help the Bureau ensure consumers are neither confused nor misled at the closing table.'"


Turning briefly to the markets, since "brief" is all they deserve, as the commentary noted yesterday, if there is peace and quiet overseas then, everything else being equal, rates may be inclined to go up because our economy is doing pretty well. ThomsonReuters noted that, "Supply appeared to have been a bit elevated again, and based on earlier indications was on track to reach $2 billion; the same as Monday and up from an average of $1.7 billion last week. Overall, however, supply is generally trending lower at current mortgage rate levels that are over 3.90%."


This morning, care of the MBA, we've seen what 75% of the retail lenders did last week for application numbers: apps +.1%, refis +.5% and were 62% of apps, and purchases were -.2%. We've also had the February ADP Employment Report. Expected +225k it was +212 - close enough.


Later we will have some non-market moving figures like the Markit Services PMI and February ISM Non-Manufacturing PMI, but also the Fed's Beige Book at 2PM EST. Tuesday we had a 2.12% close on the good ol' 10-yr with agency MBS prices finishing worse by nearly .250 versus Monday afternoon) and in the early going we're at 2.12% and agency MBS prices are roughly unchanged from Tuesday's close. 


Tuesday, February 24, 2015

Banks Confront Regulation Overload; LO survey results; Risk Sharing Securities

Zelman and Associates published its January Homebuilding Survey, indicating that 2015 is off to a strong start. Order growth increased 32% year-over-year, bumping 2015 first quarter order growth to 21%. The homebuilding survey increased to 60.5 from 58.4 in December, reaching its highest level since June of 2014. Traffic metrics have shown the strongest improvement in three years, and improved YoY surpassing builder expectations. About 45% of respondents said they reported better than expected traffic in January, and website traffic was up 19% YoY. Prices have also increased 4% YoY and a 4.3% increase is expected over the next year.

Banks certainly know a thing or two about operations. And banks are beginning to say "no mas" to the overload of regulations. "The federal bank regulatory agencies requested comment on a second set of regulatory categories as part of their review to identify outdated or unnecessary regulations applied to insured depository institutions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the Federal Financial Institutions Examination Council, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Board of Governors of the Federal Reserve System to review their regulations at least every 10 years. The agencies also are required to categorize and publish the regulations for comment, and submit a report to Congress that summarizes any significant issues raised by the comments and the relative merits of such issues. Comments will be accepted until May 14."

But regulations aren't only weighing down banks. From Jim in Pennsylvania comes "Why would anyone want to come into this business when they keep lowering the amount you can make. We now can barely pay are bills to make ends meet. Licensing is a small fortune for each state. We have to also pay for the audits the banking department sends down. 'The Man' was here for 3 days for 22 loans and it cost $1,500 - a ridiculous for a small mom & pop shop business. I had 5 loan officers now it is just me. No one has yet to address the small businessman who has 800 scores but needs to write everything off, because that is the way the tax system is set up, so he can't qualify for a mortgage. I had to get audited financial just to get licensed in New Jersey that cost $3-5 thousand. Licensing at $1,300 plus $530 for an individual license (because you need both), $1,000 for a bond although we don't handle money, finger printing costs. It costs about $8k just to obtain a Jersey license so what young kid is going to be able to do that? If you want to be a loan officer with a bank even somebody with my experience they want to make you a subcontractor on commission and expect you to bring in your own deals. Walmart is paying better; at least it provides health benefits. Oh, and by the way, for 2 people 59 years old the health insurance cost around $20k this year and the out of pocket is $6,400."


Speaking of the lifestyles of LOs, Hammerhouse released the results of itsFifth Annual Survey of Originators' Opinions. The annual survey asked originators for their opinions on critical issues facing the mortgage industry and impacting their performance of their jobs.  Of the significant sample of more than 800 active mortgage loan originators that responded, 52% have annual production between $9 million-$24 million. "This year's Survey found that a majority of mortgage loan originators (56%) are finding their career less rewarding than in the past and another 8% no longer find their career sufficiently rewarding. However, the results illustrate that originators are anticipating an improved future coming and are raising expectations.  87% of originators expect 2015 origination volume to equal or exceed 2014 levels, compared to last year when 56% of originators expected a drop in origination volume, and 73% expect their personal volume to increase in 2015, versus 53% who held that opinion last year."

In order to address the heart of the vacant and abandoned property dilemma, MBA formed a working group in Fall 2014, which included representatives from numerous large and independent lenders and servicers, along with leading industry attorneys, property preservation/foreclosure experts, and state MBA leaders. The working group produced a comprehensive resource for state legislators around the country who seek to introduce vacant and abandoned property legislation in the 2015 state legislative sessions. This resource consists of a series of "Principles" that - if implemented - would responsibly expedite the foreclosure process for vacant and abandoned properties in both judicial and non-judicial foreclosure settings.

Fannie & Freddie announced earnings recently. Declines in the value of derivatives for hedging interest rates led to lower fourth-quarter and 2014 profit at Freddie Mac: it made $7.7 billion last year, down from $47.8 billion in 2013, according to a regulatory filing. Freddie's lower profit shows the vulnerabilities of F&F. In addition, capital reserve required by its 2012 rescue plan is shrinking, narrowing the margin between profit and loss.


And Fannie Mae reported net income of $1.3 billion for the fourth quarter. That's down sharply from $6.5 billion a year earlier due largely to losses on investments used to hedge against swings in interest rates. Still, it was the 12th straight profitable quarter for Fannie - and what senator or Congressman wants to do away with that? Especially when Fannie also said that it will pay a dividend of $1.9 billion to the U.S. Treasury next month. Fannie will have paid $136.4 billion in dividends, exceeding the $116 billion it received from taxpayers during the financial crisis. Freddie also said it will pay a dividend of $900 million to the government in March.

Looking at the markets, not a whole heckuva lot happened Monday although rates improved somewhat as did agency MBS prices. And frankly, aside from the usual volatility in Greece not much happened overnight. But today Fed President Janet Yellen begins the first of two days of testimony on monetary policy before Congress, beginning with the Senate Banking Committee. We will also have some non-market moving S&P/Case-Shiller house price numbers and February readings on Consumer Confidence (102.9 prior), as well as Richmond Fed PMI (+6 last). For numbers we had a 2.06% close on the 10-year and this morning we're back to 2.08% with agency MBS prices a shade worse.


Executive Rate Market Report:

US markets opened quietly this morning, early trade had nothing to focus on and markets waiting for Janet Yellen’s testimony that will begin about 10:00. Yesterday treasuries and mortgages had a decent day, the 10 yield dropped 6 bps to 2.06% and 30 yr MBS prices up 25 bps. Both markets trading in tighter ranges over the last week.

At 9:00 the Dec Case/Shiller home price index was thought to be up 4.2% from Nov, as reported the price from the 20 cities increased 4.5% yr/yr. Home prices edging higher in those 20 cities, some believe that increased prices are pushing first time buyers out of the markets. Not too sure we buy that in its entirety as why there are few first time buyers, other factors like too much debt to qualify and millennials less interested in forming households also are key elements. The S&P/Case-Shiller index is based on a three-month average, which means the December figure also was influenced by transactions in October and November. “The regional patters and the weakness in new construction and new sales may reflect decreasing mobility -- fewer people moving to different parts of the country or seeking jobs in different regions,” David Blitzer, chairman of the S&P index committee, said in a statement.

Nothing new or market-moving out of Europe over the Greek debt or the Ukraine situation. Both still there but investors are essentially ignoring them presently. Greece will get a debt relief from the ECB and EU, just pushing the problem down the road but not resolving the larger picture that Greece is broke and likely to be that way for a very long time. Like a pain that won’t go away so markets just getting used to it. Eurozone finance ministers approved a four-month extension to the Greek bailout.

Yellen will be pushed for when the Fed will begin increasing rates, however we doubt she will be forced to give a direct answer. Questions about the lack of ability to increase the inflation rate with, as the Fed states, the employment sector is much better and the economy is gaining momentum; so why is inflation remaining a drag? Her opening statement is somewhat a waste in terms of traders’ thinking; it is the Q&A where we will put or attention. Probably the most disturbing issue in touting the growing economy is that there is no pricing power in the US or around the world; Europe still teetering on deflation.

At 9:30 the DJIA opened +13, NASDAQ -9, S&P -1. 10 yr at 9:30 2.08% +2 bps and 30 yr MBS price -9 bp from yesterday’s close and -6 bps from 9:30 yesterday. About what we expected with Yellen’s testimony the main event today.

The only key data point today, the Feb consumer confidence index from the Conference Board, the index was expected to have declined from the very strong 102.9 read in Jan to 99.1. As reported the index dropped more than expected to 96.4; Jan index revised from the original 102.9 to 103.08. Lower fuel costs haven’t flowed to consumer confidence based on this report.

This afternoon Treasury will auction $26B of 2 yr notes.

Look for quiet this morning to start; as the Yellen testimony unfolds, pending how she frames things, traders will react to anything that is out of bounds from what she is expected to say. With Republicans now chairing both committees she might have to dig deep to provide enough Fedspeak that says a lot but means less. Technicals still bearish, our longer term outlook remains that rates may have another run lower; if we are correct any rallies are not likely to be strong. We continue to believe interest rates will edge higher but we are not expecting much more increase. All that said, don’t look too far ahead in your planning, presently we would be sellers of MBSs and treasuries.

PRICES @ 10:10 AM

10 yr note: -5/32 (15 bp) 2.08% +2 bp

5 yr note: -5/32 (15 bp) 1.58% +4 bp

2 Yr note: -1/32 (3 bp) 0.64% +2 bp

30 yr bond: -4/32 (12 bp) 2.67% +1 bp

Libor Rates: 1 mo 0.171%; 3 mo 0.262%; 6 mo 0.385%; 1 yr 0.674%

30 yr FNMA 3.0 Mar: @9:30 101.33 -9 bp (-6 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Mar: @9:30 104.32 -5 bp (-8 bp frm 9:30 yesterday)

30 yr GNMA 3.0 Mar: @9:30 102.08 -3 bp (-8 bp frm 9:30 yesterday)

Dollar/Yen: 119.55 +0.74 yen

Dollar/Euro: $1.1327 +$0.0008

Gold: $1195.60 -$5.20

Crude Oil: $49.95 +$0.50 Trading remains close to the $50.00 pivot level

DJIA: 18,155.72 +38.88

NASDAQ: 4955.65 -5.32

S&P 500: 2110.51 +0.85


Friday, February 20, 2015

Sampling of Changes in the Primary and Secondary Markets; Rate Market Report

I have been speaking with plenty of mortgage bankers in recent weeks - what are they saying? The refi biz is alive and well but slowing markedly - the volumes are much to the concern of investors who paid up for loans with higher rates only to see them prepay. And so lenders are girding their loans, uh, I meant loins, for premium recapture. Obviously the huge lock days in January will result in good February and March volumes (but don't forget margins and gain per loan!) that will come at the expense of servicers and owners of the loan assets: faster factors ahead. And management will once again grapple with whether or not to pass early payoff penalties or premium recaptures on to originators. And staffing in these types of accordion-style volume moves is difficult at best.

Yesterday this commentary mentioned some mortgage shopping sites. Rich Rizzuti sent along a calculator that tells one where they stand in terms of income and tax brackets. "This calculator tells you, based on how much you make, where you rank in overall income: are you in the top 1%, 10%, and so on. It also tells you how much you and your (mostly) same tax bracket buddies paid as a percent of the total tax collected. I thought it interesting (after playing with the numbers for a little while) that the top 1% pays 38.1% of total income taxes. That means that the other 99% pay 61.9% of the tax burden. Heck the top 25% pays 86.4% of total taxes. And they say the top 1% doesn't pull their weight. I'm not saying I don't want my taxes to be lower, but I certainly have no issues with the top 1% who mostly worked extremely hard to get where they are (or had a relative who did).

Peer-to-peer lending is on the rise, with no better example of this than San Francisco based Social Finance Inc.'s largest bond issue to date of $313.8m. The issue balance is backed by $348.6 million of borrowings that former graduate students mainly used to refinance existing federal loans, according to the presale report. In a similar business model, LendingClub Corp. raised $870 million in an initial public offering last year and is now valued at $7.5 billion, while SoFi Chief Executive Officer Mike Cagney told The Wall Street Journal in October that it expected to file for an IPO this year. SoFi, which has originated more than $1.5 billion of loans since being founded in 2011 by focusing on refinancing the debt of former students, announced in October it would also deal in home mortgages. Borrowers are changing, and access to credit appears to be evolving.

The market is taking direction from the Federal Reserve whose Governors said the recovery of the U.S. economy is too fragile to risk by raising interest rates. According to minutes of their January policy meeting, officials fear that a premature increase could dampen economic growth so much that the central bank would have to reverse course and return stimulus programs. So analysts are shifting back their "short term rates are going up this summer" to possibly the autumn. Either way, overnight rates don't determine 30-year mortgage rates.


Nothing out of the ordinary happened in the bond markets Thursday. How do you like that for technical analysis? Sure we had some movement in different coupons (rates), and a little movement based on type of security or maturity, and there was more talk of Greece. But really it seems folks are more focused on the weather and enjoying the holiday week than on rate volatility. And don't look for any news out of the United States today as we wrap up the end of ski week in many locales. As a proxy for the rates we had a 2.11% close Thursday (after a 2.07% Wednesday, and 2.14% Tuesday) on the 10-yr.; agency MBS prices are better by .250 as the 10-yr is down to 2.07%.


Executive Rate Market Report:

A better opening this morning with the 10 yr note yield down 3 bps to 2.08%, reversing yesterday’s decline of 3 bps. 30 yr MBS prices fell 24 bps yesterday, started this morning up 27 bps. Marking time ahead of next week’s testimony of Janet Yellen to the Senate and House. There are no economic reports to think about today. In early trading prior to the pen at 9:30 the key stock indexes were slightly lower.

Looking over the news wires there isn’t much to concern markets. The Greek tragedy continues; Germany continues to resist any proposal from Greece to extend its debt payments. Germany’s stance is increasingly looking like Germany doesn’t care whether Greece leaves the EU or not; siting Greece's radical leftist government is trying to weasel out of the bailout program by asking for an extension of just one of the legal documents that frame it, instead of the whole package. Traders and investors remain concerned; the details are confusing for most investors and even those that are directly involved. The take away for us, the crisis is sending the euro currency down and increasing the strength of the dollar. The stronger dollar is beginning to drag on the US in terms of competitiveness in global trade. The stronger dollar is a support for the bond and mortgage markets; foreign investors continue buying treasuries and in turn keeping rates from increasing much.

Keep focused on crude oil; a key reason that interest rates dropped in January was the sharp and swift decline in price. Lower oil meant lower commodity prices across the board and less concern about inflation; as long as investors don’t worry that inflation is increasing it keeps markets guessing about when the Fed will begin the lift-off. Presently, it’s a toss-up regardless of what you might read or hear frm those that believe the Fed will make its first move in June. The proof can be seen in market movements; interest rates have increased slightly but overall remain very low. The price of crude is a major factor for where interest rates will trade; currently looks like supply isn’t being reduced. The U.S. Energy Information Administration said oil inventories grew by 7.7 million barrels in the week ended Feb. 13. Analysts said swelling stockpiles are a sign that producers aren’t cutting back on output despite a more than 50% collapse in prices since last summer. In its report, the EIA said U.S. oil production was on track to reach a 42-year high this month.

At 9:30 the DJIA opened -22, NASDAQ +1, S&P -2, not much change. The 10 down to 2.07% frm 2.11% yesterday. 30 yr MBS price +17 bps after declining 24 bps yesterday. Within 15 minutes after the pen the DJIA declined over 100 points; crude opened higher but has begun to decline.

Call your attention to the 10 yr note chart above. The long trend line going back to last Sept is holding any additional selling in the bond market this week. The last vestige of technical support, a close over the trend line will trigger a move to 2.30% and pull MBS prices down 100 basis point frm current levels. Don’t buy the view that some espouse that MBS markets are independent of treasuries in terms of direction; treasuries always set the direction for mortgages. Our work remains bearish and won’t turn around unless the 10 yr note rate declines below 2.00%. Floating in this environment is dangerous, especially if you can profit or lose on small movements. Home buyers should not speculate now that rates will decline enough to risk the potential of higher rates.

Expecting a narrow range today with no news and Yellen’s testimony next week. Still a near term bearish outlook. Overall as we have noted previously, we do not expect US interest rates to increase much frm present levels, although we can’t act on it because our technical indicators remain negative.

PRICES @ 10:10 AM

10 yr note: +17/32 (53 bp) 2.06% -5 bp

5 yr note: +10/32 (31 bp) 1.52% +6 bp

2 Yr note: +3/32 (9 bp) 0.58% -5 bp

30 yr bond: +34/32 (106 bp) 2.68% -5 bp

Libor Rates: 1 mo 0.173%; 3 mo 0.260%; 6 mo 0.385%; 1 yr 0.684%

30 yr FNMA 3.0 Mar: @9:30 101.38 +17 bp (+2 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Mar: @9:30 104.37 unch (+4 bp frm 9:30 yesterday)

30 yr GNMA 3.0 Mar: @9:30 102.16 +16 bp (+8 bp frm 9:30 yesterday)

Dollar/Yen: 118.40 -0.55 yen

Dollar/Euro: $1.1298 -$0.0070

Gold: $1208.90 +$1.30

Crude Oil: $50.99 -$0.17

DJIA: 17,907.74 -78.03

NASDAQ: 4910.98 -13.72

S&P 500: 2088.06 -9.39

Wednesday, February 18, 2015

Studies on Professions & Homeownership, LTV & Default Rates, Increasing Student Debt


The American Bankers Association is holding its annual Real Estate Lending Conference on April 8-10 in Baltimore, MD. There are dual tracks for CRE and residential lending, with multiple sessions addressing business challenges and building market share and profitability.

Freddie Mac produced a column from one of its economists where he married Census data showing homeownership rates by profession with BLS statistics projecting which profession will see the most growthThe fastest growing jobs, by and large, have subpar homeownership rates.

And a recent article published by Urban Institute draws from Freddie Mac's newest data that identifies two indicators of credit risk: probability of default and loss severity given default. Freddie's new analysis calculates loan severity by various credit event types and breaks down loss severity into numerous categories. According to Freddie's analysis, of the loans originated between 1999 and 2004, 2.3% experienced a credit event whereas in 2007, 12.6% of originated loans experienced a credit event. In 1999 to 2013, 22% of loans that experienced a credit event have been rehabilitated, with 11% of these loans having been modified and are now current. The remaining 78% of these loans are likely to experience a loss, and of these loans 54% have already been liquidated or have been foreclosed.

Loans liquidated from 1999 to 2004 experienced a loss of 23.2 cents for every dollar remaining at default, compared to a loss of 36-40 cents for every dollar remaining at default for loans liquidated between 2005 to 2008. Loans with higher LTVs have a greater chance of liquidating, with 63% of loans with an LTV of 60 or under are expected to liquidate compared to 81% of loans with LTVs over 80. Ironically, loss severity for loans with LTVs over 80 is much lower than for loans with LTVs between 60 and 80; because loans with LTVs over 80 require MI. Loans also originated between 1999 and 2004 experienced greater home price appreciation and loans with LTVs below 60 had more equity leading to lower loss severities among these loans. The smallest loan amounts also had the highest severity. For example, from 1999 to 2004, loans with a balance of $60,000 or less had a loss severity of 47%, compared to 31.3% for loans with a balance of $60,000-100,000 and an 18% severity for loans greater than $100,000.

A New York Fed report tells us that mortgage balances, the largest component of household debt, increased by 0.5%. Mortgage balances shown on consumer credit reports stand at $8.17 trillion, up by $39 billion from their level in the third quarter. Balances on home equity lines of credit (HELOC) dropped by $2 billion (0.4%) in the third quarter and now stand at $510 billion. Non-housing debt balances increased by 2.6%. What caught the media's attention, however, were the delinquency rates (loans that are 90 days or more past due). Overall they were unchanged at 4.3%. Delinquent mortgage and credit card debt fell, but auto loan delinquencies rose to 3.5% from 3.1%. The biggest trouble spot remained student loans, which saw delinquencies reach an alarming 11.3%, up from 11.1% in the third quarter. By contrast, only 3.1% of mortgage loans were delinquent, though that level is far higher than before the Great Recession, when mortgage delinquencies were consistently around 1% to 1.5%.

Once again the topic of Millennials and their debt is in the news. Student loans are not dischargeable in bankruptcy, and as a result linger on borrowers' credit reports longer, creating increasing pools of delinquent debt. But the New York Fed said the survey also reflected "high inflows" of new delinquency. Student debt totals rose $31 billion in the quarter to nearly $1.2 trillion.

Sure enough, Millennials have the lowest net worth of all generations, significantly lagging behind all other age cohorts, with a median net worth of $10,400 compared to the second lowest median net worth of $46,700 for 35-44 years old. Those aged between 65-74 years old had the largest median net worth of $232,100. With low employment opportunities and little room for advancements in income, Millennials' net worth is near historic lows and has not recovered since the recession. Likewise, assets have also decreased at a faster rate, resulting in the overall decline in net worth. Since 2010, the median amount of debt among Millennials has reduced to $31,100 and the number of Millennials with mortgage related debt has also declined, which has been evident during the housing bust. This may be due to limited access to credit and other debt obligations taking the place of mortgage debt. Installment debt is highest among Millennials, partly due to student loans. The median value of student debt for Millennials is $17,200, with the amount of young adults with this type of debt increasing to 41.7%. Car loans are also included in installment debt, as 35.3% of Millennials have monthly car payments, whereas the prevalence of credit card debt has fallen among Millennials. Overall, Millennials' liabilities have declined since the recession, but so has their net worth.

Once again our bond (and stock) markets are being determined by what happens overseas. Remember that the U.S. economy is doing pretty well, and would suggest higher rates are on the way. But yesterday's bond selloff was attributed to market speculation that Greece may request a 6-month extension to its current loan agreement which could ease tensions a bit in the short term. The Empire Manufacturing Index fell in February and came in slightly light - probably due to weather. But the NAHB Housing Market Index fell to 55 in February from 57 in January - mostly due to a fall in the Midwest. By the time the dust settled Tuesday the 10-yr T-note was worse over .75 in price, closing at 2.14%, and Agency MBS prices worsened over .5

This morning we've had the MBA's application numbers (a drop of over 13% with refis down 16% and purchases down 7%). We've also had Housing Starts and Building Permits (-2% and -.7% respectively) along with the Producer Price Index - PPI - (-.8%), and will also see the Industrial Production and Capacity Utilization twins. Later is the U.S. Fed releasing the Minutes from Jan. 27-28 FOMC Meeting. After the early news the yield on the 10-yr, which closed Tuesday at 2.14%, is down to 2.12% and agency MBS prices are better about .125.


Executive Rate Market Report:

January housing starts declined 2.0%, slightly weaker than -1.7% expected; the number of units on an annualized basis 1065K. Jan building permits declined 0.7% against estimates of an increase of 3.6%, to 1053K. Dec starts 1089K, Dec permits 1032K. Construction of single-family homes dropped 6.7% to a 678,000 rate in January from 727,000 the previous month that was the strongest since March 2008. Work on multi-family homes, such as townhouses and apartment buildings, climbed 7.5% to an annual rate of 387,000, the most since July. Yesterday the Feb NAHB housing market index was expected at 58 from 57 in Jan; the index dropped to 55. Not looking good for single family currently but the swings from month to month have been quite wide; one month isn’t a trend. Some thinking the weather didn’t have much impact on the data; we disagree, three out of the four regions showed declines while the South had gains. The regions with declines all in cold weather climates that usually see declines in the winter months. The Feb data a month from now will be more weather affected.

Wholesale prices were expected down 0.5%, as reported down 0.8%. The core (ex food and energy) expected up 0.1% declined 0.1% (yr/yr +1.6%). Inflation measured by this PPI data is not a factor for concern even with the Fed poised to begin increasing interest rates by mid-year, at east that is the consensus now. Prices for energy goods tumbled 10.3% in January from the prior month, and the gasoline index sank 24%from December, according to Wednesday’s report. But prices were broadly weak even outside energy. Food prices fell 1.1% from December, and prices for services declined 0.2%. Janet Yellen insists the declining prices due to energy are “transitory effects” but will fade. The Fed has been trying to talk up inflation now for over three years, to no avail.

Jan industrial production was expected to be up 0.4%, as reported up 0.2%. Factory usage expected at 79.9% was 79.4%; Dec use was revised from 79.7% to 79.4%. The Institute for Supply Management’s manufacturing index showed similar results in January. The gauge declined to a one-year low of 53.5 from December’s 55.1. Manufacturing output, which accounts for about 12% of the economy, was previously reported as rising 0.3% in December but revised to unchanged in today’s report.

At 9:30 the DJIA opened -47, NASDAQ -6, S%P -5. The 10 at 9:30 2.12% down 2 bps, 30 yr MBS price +9 bps from yesterday’s close but down 53 bps from 9:30 yesterday. Yesterday was a huge selling binge in the rate markets as the Fed approaches its FOMC meeting in March. The current consensus is a rate increase of 0.25% in June. Feb so far has been good for the DJIA and other indexes; only two times in history has the DJIA recorded a 1000 point gain in a month, the DJIA 180 points away. Not as much of a factor though; at these levels a move like that is a lot less significant than a 1000 point gain at lower absolute levels as was the case in history. CNBC has to have something to tout.

This afternoon at 2:00 the minutes from the Jan FOMC will be released. Should be a lot to chew on with the rate increase the topic. Prior to the next FOMC meeting Yellen will testify to Congress next week at both the Senate and the House. Markets will be looking for clues and focused on Yellen’s present economic outlook that the fed has consistently over-stated for over 18 months now.

Markets so far quiet and should remain that way until 2:00 this afternoon when the FOMC minutes are released. Technicals bearish but approaching near term oversold on the 10 yr note, possibly a little improvement but will not change the trend. Greece still there but only getting passing attention now, markets watching but not reacting to the daily ping pong news of will they or won’t they escape defaulting. Most current beliefs, at the end of the day Greece will get a deal worked out. Ukraine, a train wreck but no direct interest in it from markets.

PRICES @ 10:10 AM

10 yr note: +4/32 (12 bp) 2.13% -1 bp

5 yr note: unch 1.61% unch

2 Yr note: +1/32 (3 bp) 0.61% unch

30 yr bond: +11/32 (34 bp) 2.72% -1 bp

Libor Rates: 1 mo; 0.173%; 3 mo 0.256%; 6 mo 0.380%; 1 yr 0.672%

30 yr FNMA 3.0 Mar: @9:30 101.06 +9 bp (-53 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Mar: @9:30 104.20 -3 bp (-36 bp frm 9:30 yesterday)

30 yr GNMA 3.0 Mar: @9:30 101.77 -2 bp (-34 bp frm 9:30 yesterday)

Dollar/Yen: 119.29 +0.04 yen

Dollar/Euro: $1.1362 -$0.0049

Gold: $1209.00 +$0.40

Crude Oil: $52.67 -$0.86 (crude consolidating at the $50.00 area)

DJIA: 18,016.05 -39.50

NASDAQ: 4893.16 -6.11

S&P 500: 2094.96 -5.38

Friday, February 13, 2015

HELOCs for sale; CashCall fined;CFPB & FTC team up for discipline;Texas Tea's impact on mortgages

Friday the 13th comes three times this year, and this is one of them.

I can think of three more companies that won't be sending chocolate to the CFPB or Federal Trade Commission tomorrow. None of the companies admitted wrongdoing, but were accused by the FTC and fined by the CFPB for falsely implied affiliation with the U.S. government. The CFPB filed a lawsuit against reverse mortgage lender All Financial Services and issued consent orders against Flagship Financial Group and American Preferred Lending. The allegations stem from a joint review by the FTC & CFPB. The agencies surveyed consumer complaints and 800 randomly selected mortgage ads to catch potential wrongdoing. The CFPB said the three companies "imitated U.S. government notices" in mailings to consumers such as an eagle resembling the Great Seal of the United States. Headers on the notices read, "GOVERNMENT LENDING DIVISION" and "Housing and Recovery Act of 2008 Eligibility Notice."

Utah's Flagship has agreed to pay a civil penalty of $225,000 while California's American Preferred will pay $85,000 - probably enough to really hurt but not put them out of business.

Reverse mortgage lenders are particularly interested in All Financial. It is also accused of claiming reverse mortgage borrowers had no monthly payments without informing them they still had to pay taxes and insurance, and supposedly failed to disclose that payments could come due if the borrower dies and the spouse, who did not sign the mortgage, remains in the home.


The CA Department of Business Oversight has fined online loan servicer CashCall $1 million to settle allegations the company deceived consumers, exceeded interest rate caps for nonbank lenders and lied to regulators about how much they would charge for personal loans.


"Well a great black river a man had found

So he put all his money in a hole in the ground

And sent a big steel arm drivin' down down down

Man now I live on the streets of Houston town.


Packed up my wife and kids when winter came along

And we headed down south with just spit and a song

But they said 'Sorry son it's gone gone gone'."


So sang Bruce in "Seeds". Will the decline in oil prices have the same impact on the Texas economy, and other states like North Dakota, Alaska, and Alabama? Remember when a pipeline shut down in Nigeria would cause a spike in oil prices? Now none of our oil comes from Nigeria. Citibank says the US gets about 25% of its oil from overseas sources, and the drop in oil prices is projected to put $1,400 into the pockets of every household in the US. That certainly helps consumer confidence in general, but not if your livelihood is oil. And the New York Times reports lower oil prices could hurt large bank lending to the energy sector and reduce fees. Meanwhile, it could also hit banks in energy producing states with more defaults and also extend to companies that service oil producers in other states.


Jeff B. sent me a note recently saying, "I was amused to learn the price of gas may enable first time homebuyers to save more for a down payment.  In most areas they can buy without any money - the underlying challenge remains- lack of wage growth.  Middle America is still not enjoying a real recovery."


With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact, and thus an impact on mortgage rates. The two primary factors that impact the price of oil are supply/demand and market sentiment. As demand increases (or supply decreases) the price should go up and vice versa. The price of oil as we know it is actually set in the oil futures market. (Remember that an oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller - either a trader, hedger, or speculator - are obligated to fulfill their side of the transaction on the specified date.)


But speaking of price, analysts are quick to point out that oil prices aren't actually that low on a historical basis. Sure it has gone from more than $100 per barrel to less than $50 in a few months, helping all of us every time we put gas in our car or turn on our thermostats. But $50 a barrel for oil is still kind of high, compared to what it has cost in the past, especially when you adjust for inflation. The average price for imported oil from 1986 to 2004 was $33 per barrel. And there have only been two times in the past 40 years when oil prices jumped to an inflation-adjusted $100 a barrel: in the 1970s and starting in 2008.


While all oil-producing nations are suffering as oil prices collapse, the hardest hit nation is Venezuela. It's getting crushed as oil prices collapse since oil accounts for 95% of export earnings, 45% of budget revenues and 12% of GDP. If oil prices don't rebound soon, Venezuela will default on its $35 billion in foreign debt, unless Beijing continues lending Venezuela more money on top of the $50 billion already lent. And no, I don't know what mortgage rates have down there.


While oil prices here are down 56% since 7/1/14, the picture is vastly different elsewhere because oil is quoted in US dollars. Because the Canadian dollar has fallen vs. the US dollar, when converted into Canadian currency the decline has been less severe at just 49%, while in Russia, oil prices in Rubles are unchanged. Thus, all else equal, oil exploration and production will fall less there than here.


Although lower oil prices are generally good for most Americans, the decline presents another side for states and countries that produce oil, and thus the mortgage banks and banks in those states. Vox Media reports that low oil prices will boost economic activity in 42 US states but will cause economic contraction in 8 others (the largest effect will be felt in AL, ND and TX). Those states whose economic miracles have been based on shale drilling, fracking and more expensive extraction techniques will particularly be at risk. Given their size, community banks are most likely to be involved in lending to smaller companies that support the activities of large oil and gas (O&G) companies or the exploration and production segment (E&P).


Among the unique aspects to E&P is that certain extraction techniques like fracking and oil shale drilling are only profitable and sustainable if oil prices remain reasonably high. A report by Goldman Sachs finds that at $90 a barrel or less, many hydraulic fracturing projects become uneconomic and fracking producers often need a price of $80 or $85 in order to break even.


Underwriters and bankers know that any lending based on commodity pricing carries increased risk and oil & gas companies also typically cannot lower expenses if revenue declines, leaving them in a tough spot if the current environment persists. Banks that have been active O&G lenders should take another close look at their portfolios and consider the ability of borrowers to maintain their cash flows and debt service if the price drop is long term. For banks proactively addressing the riskiest loans and developing damage control strategies at this point is critical.


So yes, the drop in prices generally equates to more money in most people's pockets. There are, however, drawbacks for lenders who have commercial loans with those companies, individuals who have investments tied to them, and borrowers employed in that industry. Caution is advised.


Oil price changes certainly change the economic picture. Economic forecasters are always looking ahead and as the refinance business has heightened analysts are not afraid to opine the implications this may cause. Mortgage-backed securities are sensitive to sudden shifts in rates, resulting in potential negative effects on returns, as borrowing costs impact the rate at which homeowners refinance, resulting in securities being paid off sooner than expected. When securities are paid off more quickly, returns can suffer, which was evident last month. For example, according to Bank of America index data, the mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae last month returned 0.95 percentage points less than other comparable government debt. This was the largest underperformance since November 2008.


Within the past seven years, oil fell to the lowest level last month; similarly, the interest rate for a 30-year fixed rate mortgage fell to 3.59 percent at the beginning of February. The refinance share has boomed among the low interest rate environment, as refinance applications grew 84 percent in the last three weeks of January. This can negatively impact the return on mortgage bonds as more homeowners repay at par loans that are bundled within securities that trade for a higher value. Yet, as oil prices begin to stabilize, bond yields are expected to rise, which should move interest rates above 4 percent, downsizing the refinance market share.


Turning to the markets ahead of this three-day weekend, yesterday we learned that Retail Sales fell 0.8% in January following a 0.9% decrease in December.  Initial jobless claims increased 25,000 to 304,000. The 4-week moving average (a better measure) was 289,750, a decrease of 3,250 from the previous week's revised average. With no news of substance this morning the 10-yr closed Thursday at 1.99% and this morning we're at 2.02% with agency MBS prices worse about .125.