I've been hearing it for a while, "the market is slow, and home appreciation is stagnant." But in South Carolina, for example, many markets are on fire. As Zillow points out in Despite Rising Home Values, Affordability Remains Largely Intact for Buyers, many markets are still experiencing above-normal rates of home value growth, a general slowdown in appreciation is evident. "Among the nation's 35 largest metros, all but Indianapolis experienced year-over-year home value increases in July. Those with the most notable annual increases include Las Vegas (17.4 percent), Riverside (16.5 percent), Miami-Fort Lauderdale (15.8 percent) and Atlanta (14.9 percent)." It's Zillow, so be forewarned, if you click the link expect graphs with multiple colors and plenty of index numbers with strange nomenclatures.
Back in April the commentary mentioned explosive growth at LoanStar Home Lending. Where are they now? After launching last November the Portland, Oregon based mortgage bank now has nearly 170 employees from Seattle to Dallas and most points in between. As President & CEO Mike Baldwin explained in a recently produced Mission Statement video, "we're growing, and we are busy!" LoanStar has been busy, with new branches opened in Dallas/Fort Worth, Albuquerque, Phoenix, Clackamas, OR, and Everett, WA since the commentary last reported in April. LoanStar also has a new facility under construction in Vancouver, WA and Orange County, CA slated to open in October. "We continue to attract talent based on our ability to close loans efficiently, a broad offering of correspondent lender relationships, and a top-flight concierge marketing system. Our system is designed to allow originators freedom to originate new loans and relationships and not process loans, conduct damage control, or spend time trying to figure out how to market themselves. That is what the loan officers say they want, and that's what we deliver," says Baldwin. To learn more, visit www.GoLoanStar.com and contact the regional manager closest to you, or contact Kenn Bartley, SVP Business Development.
A quick note about Friday's commentary: I noted an example of dumping loan files (with borrower information) in a dumpster. It was really late when I wrote that, or really early, but "Centennial Mortgage" was not involved - Centennial was the municipality - and the company was Colorado First Financial Mortgage. My apologies to any Centennial Mortgage people, living or dead, real or imaginary.
Changes are taking place out there in residential lending - players are changing teams, and teams are changing divisions and conferences. I say that not only because I am receiving a lot of LinkedIn notes and change of e-mail requests (although both are a leading indicator). As this commentary has mentioned for quite some time, the lending industry is either evolving or devolving - I don't know which. Big companies are reevaluating their channels (like Affiliated leaving correspondent), small companies are tired of compliance costs and hurdles, big companies are looking for acquisition targets (Caliber and Cobalt). Rumors are swirling that Mutual of Omaha is exiting residential lending and partnering up with Guild, mentioned below. Lots of small lenders & branches are looking for new homes: shoot me a confidential e-mail if you're "exploring options" - happy to provide free introductions for small branches or LOs sniffing around.
A KPMG banking industry outlook survey of 100 bank executives in the US finds the primary areas these executives say are the biggest barriers to growth for their bank over the next year are: regulatory and legislative pressures (41%); lack of customer demand (25%); pricing pressures (20%); risk management issues (19%); increased taxation (18%); US dollar strength (17%); staying on top of emerging technologies (14%); inflation (12%); labor costs (12%) and a lack of qualified workforce (11%). And any mortgage bank can use those same factors in the decision to scale back or find a larger partner.
But what does a company buy when they purchase another mortgage company? They aren't all walks on the beach and Boone's Farm Chablis in the hotel room. Something is worth what someone else is willing to pay for it, right? Every deal is a little different, of course, and it depends on the sizes involved. The purchases hopes that what they have after the deal closes is something more than leases, cheap vacant office furniture, and vendor contracts that must be phased out. Often a buyout is involved with the owners, cash is "taken off the table" by the seller, and perhaps employment agreements are put in place for key originators. If the seller is large enough to have servicing, that is a big plus. Negotiating deals, of course, is very dependent on the motivation of the buyer and sellers - and there is plenty of motivation right now.
Jeff Babcock with STRATMOR scribes, "After the dismal 1st Quarter results, most mortgage executives have expressed renewed optimism based the robust 2nd and 3rd Quarter production volume recovery. But we at STRATMOR sense that their mood is darkening as the reality of seasonal downturns looms just around the corner. If the 4th Quarter of 2014 and 1st Quarter of 2015 origination experience proves to be a repeat of last year, management will be severely challenged to sustain profitability. The specter of layoffs, margin compression and compensation pressure is disdainful to most mortgage entrepreneurs. Throughout 2014, the mortgage business is experiencing a level of M&A activity not seen for many years. And it's been a true sellers' market for well-managed independent retail mortgage banks. Investor demand remains very strong, so sellers have been successful in negotiating healthy valuation premiums. Every transaction in STRATMOR's deal pipeline reflects this robust marketplace environment."
His note continued. "But what happens to the M&A investor attitude if our industry experiences two consecutive years of semi-annual origination cyclicality and earnings volatility? The resulting uncertainty will certainly have an adverse impact on deal terms, thereby reducing the premiums paid at closing and deferring more value to a contingent arrangement (aka earn outs). In response to this marketplace stress, STRATMOR anticipates more midsize lenders will be compelled to consider their 'strategic options,' thereby increasing the supply of available acquisition opportunities. STRATMOR's timing advice for prospective sellers: don't wait until next spring to explore your options. It's still a sellers' market and your negotiating position remains favorable." (If larger firms would like some objective feedback and a fresh market perspective, reach out to Jim Cameron or Jeff Babcock if you are interested in discussing M&A opportunities.)
Last week there were a few other deals announced besides the Caliber-Cobalt marriage. News broke that New Hampshire's Regency Mortgage Corp. will be acquired by California's RPM Mortgage. "Regency Mortgage Corp. remains fully intact, charged with growing RPM's New England business. Regency will still operate under the Regency brand and will have all ops remain local...much improved jumbo pricing...a suite on non-QM products that RPM created...an eventual move from NYLX to Optimal Blue... (originators) able to select an RPM-serviced price each day which will allow your contact information to go out monthly with the mortgage statement to your serviced borrowers."
Things have changed with commercial banks and savings institutions insured by the FDIC; these institutions have reported aggregate net income of $40.2 billion in the second quarter of 2014, which is up $2 billion (5.3%) from earnings of $38.2 billion the industry reported a year earlier. The increase in earnings was mainly attributable to a $1.9 billion (22.4%) decline in loan-loss provisions and a $1.5 billion (1.4%) decline in non-interest expenses. Also, strong loan growth contributed to an increase in net interest income compared to a year ago. Lower income from reduced mortgage activity and a drop in trading revenue, however, contributed to a year-over-year decline in non-interest income.
In security news, Freddie Mac priced a new Structured Agency Credit Risk (STACR) transaction totaling $770 million. This STACR series represents the fifth offering this year that Freddie Mac is transferring a portion of its credit risk on certain groups of loans to private investors. The first HQ Series transaction took place last month on loans between 80 and 95 percent LTVs.
Turning to the bond markets, we continue to be lulled to sleep with low volatility in bond prices and no inflation. Friday we had a smidgeon of economic news with the Leading Economic Indicators: "The LEI's six-month growth trend has been held back slightly by lackluster contributions from housing permits and new orders for nondefense capital orders. Despite concerns about investment picking up, the economy should continue expanding at a moderate pace for the remainder of the year." Rating agency Fitch confirmed its U.S. ratings of AAA - thanks!
But the big news of the week was expected: the Fed further reduced its asset purchases by another $10 billion and kept rates steady. It also decided to keep the language "considerable time" to refer to the period between ending its asset purchases and raising the fed funds rate. And lenders should remember that the Fed sets overnight rates, whereas supply and demand set mortgage rates. Most see rates staying put through the end of the year, and perhaps overnight Fed Funds closer to 1% by the end of 2015.
I don't know how we're here at the last full week in September already, but we are. And we have a whole bunch of economic news, so let's take a look at the menu .Today we have the tasty Existing Home Sales. Tomorrow is the piping hot FHFA House Price Index. Wednesday is MBA applications and New Home Sales. Thursday are Jobless Claims and the always volatile Durable Goods (one aircraft order from a domestic manufacturer can really throw things off). Friday we'll dine on GDP, Personal Income and Consumption, some PCE chatter, and finish off with mints and the University of Michigan Consumer Confidence. For those quantitatively inclined, the 10-yr closed Friday at 2.59% and this morning we're at 2.57% with agency MBS prices a shade better.
Executive Rate Market Report is Here!
Treasuries and MBSs started a little better this morning, just some squaring ahead of Wednesday when the FOMC releases its policy statement. US stock indexes were also slightly better at 9:00. At 8:30 the Fed’s New York Empire State manufacturing index jumped to 27.54 frm 14.69 in August. No direct reaction to it though; the index has been very volatile in the last three months; July index at 25.60, August 14.7 and now 27.54. New orders were up only slightly to 16.86 vs August's 14.14 while employment growth slowed sharply to 3.26 vs 13.64. Shipments, however, do show plenty of strength, at 27.08 vs 24.59. A report best forgotten given the recent volatility and the interior components.
Slightly better open this morning in the bond and MBS markets while the US and Europe’s stock markets weaker. The 10 at 9:00 2.56% down 2 bps frm Friday, 30 yr MBS price +9 bps. At 9:30 the DJIA opened -17, NASDAQ -14, S&P -4; 10 yr note 2.57% -1 bp and 30 yr MBS price +14 bp frm Friday’s close and +33 bps frm 9:30 Friday. Europe and US stock markets soft this morning on reports out of China that there won’t be much stimulus coming. Overnight tonight there will be a report on Chinese manufacturing, given the comments frm China’s finance minister that there isn’t more stimulus coming traders are paying attention to all Chinese economic data.
The August Chicago Fed National Activity index, usually not a report that gets much attention, showed a drop on the index to -0.21 against estimates of +0.35 and +0.26 in July. Consumption and housing pulled down the main index, at minus 0.12 from July's minus 0.13. The employment component fell to zero from July's plus 0.10 reflecting weak nonfarm payroll growth of 142,000. The component that had the best showing in August was sales/orders/inventories, at plus 0.08 vs plus 0.04 in July. The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to better gauge overall economic activity and inflationary pressure, and mirrors other regional Fed indexes.
The main data today, August existing home sales; expected up 0.6% to 5.18 mil annualized units, as reported sales declined 1.8% to 5.05 mil units (annualized); yr/yr sales down 5.3%. Based on the sale pace there is a 5.5 month supply, but supply will likely decline as the winter months close in.
Treasury auctions this week have little more interest to those of us that mainly focus on long term treasuries. With the clock ticking on when the Fed will begin tightening next year (no consensus on when, but it is coming), how the 2 and 5 yr auctions go will be interesting. Recent activity in treasuries has seen a lot more selling at the middle and short end of the curve than the 10 or 30 issues. We would like to see strong demand, especially on the 5 yr but that isn’t likely.
Beside the economic data, which really isn’t much this week, and Treasury auctions; there is a parade of Fed officials taking to the rubber chicken circuit. Today NY Fed’s Dudley just starting his comments. Minneapolis’s Kocherlakota tonight. Every day this week except Friday.
This week’s Economic Calendar:
10:00 am August existing home sales (as reported
9:00 am July FHFA housing price index (+0.4%)
1:00 am $29B 2 yr note auction
7:00 am weekly MBA mortgage applications
10:00 am August new home sales (+4.2% 430K annualized units)
1:00 $35B 5 yr note auction
8:30 am weekly jobless claims (+20K to 300K)
August durable goods orders -17.1%, ex transportation orders +0.8%)
1:00 pm $29B 7 yr note auction
8:30 am final Q2 GDP (+4.6% frm +4.2%; deflator 2.1% unch frm prelim report last month)
9:55 am U. of Michigan final Sept consumer sentiment index (84.6, unch frm mid-month)
A better start this morning as the rate markets continue to work off the oversold conditions that built after the recent increase in rates. The wider condition is still bearish and with the recent slight improvement the markets are no longer in oversold levels based on the momentum oscillators. We have very solid resistance on the 10 yr note at 2.52% and support at 2.64%; we call that no-man’s land now. Short term somewhat better but the wider perspective is bearish. You could look at it as a neutral pattern as long as the 10 sticks within that range.
PRICES @ 10:15 AM
10 yr note: +3/32 (9 bp) 2.57% -1 bp
5 yr note: +2/32 (6 bp) 1.80% -1 bp
2 Yr note: unch 0.56% unch
30 yr bond: +1/32 (3 bp) 3.28% unch
Libor Rates: 1 mo 0.154%; 3 mo 0.233%; 6 mo 0.330%; 1 yr 0.584%
30 yr FNMA 3.5 Oct: @9:30 101.98 +14 bp (+32 bp frm 9:30 Friday)
15 yr FNMA 3.0 Oct: @9:30 102.88 +2 bp (+4 bp frm 9:30 Friday)
30 yr GNMA 3.5 Oct: @9:30 103.15 +8 bp (+29 bp[ frm 9:30 Friday)
Dollar/Yen: 109.13 +0.09 yen
Dollar/Euro: $1.2838 +$0.0009
Gold: $1213.50 -$3.10
Crude Oil: $92.09 -$0.32
DJIA: 17,242.41 -37.33
NASDAQ: 4542.74 -37.05
S&P 500: 2000.58 -9.82