Just like the industry counted
down to QM, now we can count down to Girl Scout Cookie Season! We have
about 16 days - but there is a lot about these treats the public doesn't
realize. As was noted in this mortgage commentary last year, two
commercial bakers are licensed by Girl Scouts of the USA to produce Girl Scout
Cookies: ABC Bakers and Little
Brownie Bakers - based on geography. Thin Mints
make up 25% of the total sales, followed by 19% from Caramel deLites (from
ABC)/Somoas (from LBB) - so the name for the same cookie depends on the bakery.
And the number of cookies per box, which has not only dropped over the years to
save money, varies based on where you are in the country! The dark underbelly
of the industry...where is the protection for the consumer from the CFPB??
Yesterday I mentioned the
Flagstar layoffs, and mortgage banking results. "Flagstar, which laid off
600 last week.
I received a few comments that should be noted as they are
justified. Flagstar
also showed a profit of $160.5 million for the 4th quarter?"
And also, "Flagstar did not lay off 600 people last week. The bank
laid-off somewhere south of 350; approximately 200 were laid off in September
of last year and approximately 65 employees retired or left on their own during
Q4 2013."
A daily commentary on the
mortgage industry tends to encompass a lot of subjects, most of which have
their own special newsletters, periodicals, and so on. But one trend that is
hard to ignore is the huge wave of servicing pieces moving back and forth
between companies. Citigroup will lay off 950 people in its mortgage
servicing unit after it sold the rights on 64,000 loans to FNMA. The latest
big block was Wells Fargo selling its mortgage servicing rights on 184,000
loans (UPB of $39 billion) to Ocwen Financial for an undisclosed sum. The
sale will be finalized as servicing is transferred over the course of 2014.
Plenty of analysts think Ocwen (New Co. spelled backwards) will be
buying/obtaining about $100 billion during 2014, so this is no surprise. The
loans underlying the MSRs are primarily in private label securities - in the
past this has been the highest margin business for Ocwen because of the high
delinquency rates on private label portfolios. It is viewed as a positive for
Home Loan Servicing Solutions (HLSS) because these MSRs should good assets for
HLSS to invest in. Assume a purchase price of 40 basis points for the MSRs, the
cost of the MSRs would be $156 million. Throw in some ducats for the company's
investment in servicing advance equity (assuming a 5% delinquency rate and an
11% advance rate) and we're talking about $350 million of capital when this
portfolio is moved to HLSS.
I have been saying for quite
some time that companies are going to be needing cash, and that servicing
loans is not for amateurs - hence the rise of subservicers. GOS (gain on
sale) margin compression, on top of drastically smaller pipelines, is the
driver for companies selling blocks and flow servicing. Long term thinking
would conclude the asset will appreciate nicely with rising rates, if we find
ourselves in that environment (which would lead to the next industry trend:
even deeper cuts to expenses). Like I said - not for amateurs.
So what are the servicing
buyers thinking?
Housing values are doing well,
and rates are expected to creep higher over the long run, so adding servicing
is good - right? But a company just doesn't go out and start it up next week
like the old days: buying, boarding, collecting the payments, remitting to
investors, charging fees, and handling delinquencies. Refis are only a
pen-stroke away in this era of government-sponsored assistance programs. Just
like the cost of originating a compliant loan is only going to increase, the
cost of servicing is only going up. Loss mitigation is not cheap. And the
owner of servicing had better be prepared to defend that servicing against the
barbarians at the gate - putting the photo of the LO on the monthly statement
is so...2008
Speaking
of costs, per the Credit Union National Association, Target's holiday shopping
season data breach is costing the nation's credit unions an estimated $25
million to $30 million. The hack cost about $5.10 per new credit card issued.
Added up, that comes to tens of millions of dollars for the financial
institutions. Credit unions and banks have criticized Target over the data
breach. Even though the financial institutions had no involvement with the
incident, they have to finance the cost of reissuing new cards for shoppers
affected by the hack. Banks are not reimbursed either, and we can certainly
expect some class-action Target lawsuits. In fact, many banks and credit unions
are incurring the expense of helping their depositors and card holders deal
with this event.
The dust has settled on
thousands of disappointed loan officers, or, for that matter, any company
pinning its survival on another HARP-related refi boom. Michael
Stegman, the advisor at the Treasury Dept. said that the Treasury Department believed there should be no change
in the HARP eligibility date. He added, "Very few homeowners whose loans
were originated after the cut-off date are underwater and advancing the date
would do more harm than good by prolonging market and investor uncertainties. A
change in the HARP eligibility date would allow borrowers who have previously
refinanced through the HARP to refinance through the program for a second time
("re-HARP"). Currently, only loans which were sold to the GSEs prior
to May 2009 are eligible to refinance through HARP. If that cutoff date was
moved to May 2010, then borrowers who refinanced through HARP between May 2009
and May 2010 would be able to refinance through the program for a second time.
There have been numerous pushes to either extend the eligibility date by 1 year
or remove it completely."
How 'bout these rates!? Sure,
we had some news here in the U.S. But
the big news came from China, which showed a weak manufacturing report
(PMI). If China's economy is weak, that means that the world is not ordering as
many goods from China - so maybe the world economy is a shade weaker than
thought? China's PMI manufacturing index dropped to 49.6, below the consensus
of 50.3. Readings below 50.0 indicate a contraction in the sector. China has
been an important engine of growth for the world economy, so a slowdown would
have significant implications for global markets.
Regardless of the reason, LOs
and borrowers will take it. But Capital Markets personnel are nervous - no one
wants too much improvement during a rate lock period - no one wants
renegotiations on loans - Wall Street certainly doesn't renegotiate on the
hedges which allow lenders to sell loans at a better price!
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