The industry
is changing. The first half of 2013 is a distant, fond memory for residential
lenders. Subprime, non-prime - what's the diff? Business Week reports on it.
And the lender landscape is changing - one East Coast correspondent rep wrote
me, "The Johnny-Come-Latelies who were attracted by the huge margins in
2008-2012 are finding that those margins just aren't there anymore, especially
with the Agencies in the play. Smaller lenders can't afford compliance and
legal staff, and will be exiting. But some of that will be delayed as due to
the large amounts of cash and servicing portfolios that some have accrued. But
even there, many are currently selling their servicing portfolios for cash to
survive, so I expect to see a lot of consolidation in the 2nd half of this year
when that runs out." Those are tough words!
On the lender side, Zelman
& Associates reports, "The purchase mortgage market has become
competitive in recent months as refinance activity has plummeted largely due to
rate volatility. As such, many contacts have reported that in order to
remain competitive, they are sacrificing margins by engaging in aggressive
pricing, which has been to the benefit of consumers, and spending heavily on
marketing. Additionally, contacts have noted that they are exploring new
business channels or considering expanding product offerings to offset
declining overall business. As an indicator of the impact of competition on
mortgage pricing, we monitor the primary-secondary mortgage rate spread, which
measures the difference between the rate lenders offer to consumers (30-year
fixed mortgage rate - the "primary" rate) and the rate secondary
market investors offer to lenders for those mortgages (the current coupon on a
30-year Fannie Mae MBS - the "secondary" rate)... During December,
the primary-secondary mortgage spread tightened approximately four basis points
to roughly 94 basis points, suggesting some price competition. This was down
considerably from 143 basis points at the peak in September 2012 and the
average of 101 basis points during 2013, which benefitted from both elevated
refinance activity as well as higher HARP originations which offer outsized
economics. Despite the recent tightening, the spread remains well above the
historical average of 45-50 basis points, suggesting that borrower financing
costs could improve further as competition intensifies among originators,
although the approximate 25-30 basis point increase in guarantee fees over the
last several years coupled with potential additional increases in fees will
limit the extent of compression this cycle, indicating the spread could
contract 10-15 basis points before reducing lenders' origination revenue to below-average
levels. We would also note that although higher overhead costs for originators
could impact historical comparisons, the significant decline in the refinance
index would suggest spreads are likely to continue compressing."
Speaking
of input, "The House Financial Services Committee wants to hold the
Bureau of Consumer Financial Protection (CFPB) accountable, so it's asking
those who have been impacted by the Bureau's work to come forward and tell
their story. Starting this week, the committee's website offers individuals
a web form to let
committee members know how the CFPB has impacted them as consumers, as business
owners or how the Bureau has affected their customers. 'Holding Washington
accountable to hardworking taxpayers is a never-ending battle. That's
especially true when it comes to the Bureau of Consumer Financial Protection,
the most powerful and least accountable government agency in all of
Washington,' said Chairman Hensarling (R-TX). 'The Financial Services Committee
is committed to true consumer protection. True consumer protection means
you not only protect consumers from 'Wall Street' but from Washington as
well.'"
Zipping over to the markets, we
saw a nice increase in bond prices, and a drop in rates, Wednesday. But few
lenders were seen re-pricing for the better - why not? Adam Quinones with
Thomson Reuters writes, "A number of reasons can be cited to explain this
defiant behavior. It's a chicken or the egg debate. 1) Lenders are protecting
pull-through - no need to adjust the hedge. 2) Fallout is a problem but new
apps are filling fallout holes - originators would basically be swapping
pipelines and migrating down-in-coupon if fallout was an issue, and it is too
soon for that approach. Why swap coverage down-in-coupon when prices are still
rallying? 3) Whole loans are going directly into the servicing portfolio,
likely the case for larger money center banks that originate loans against
deposits - which also helps explain the short squeeze: a general lack of supply
and stack compression. Lastly, 4) maybe desks are protecting newly acquired
MSRs (mortgage servicing rights).
As expected, the Fed cut its
asset purchases by $10 billion. Current buying levels from the Fed continue to
be supportive, with a Deutsche Bank MBS analyst noting that Fed demand is
likely to absorb all net supply well into spring. Through February, buying
outright and through reinvestment of paydowns is estimated to average $2.2
billion per day, against originator supply that is running at around $1
billion.
What was unexpected was the
major stock markets losing over 1 percent as the bid for risk deteriorated
despite efforts from some emerging market central banks (Italy and South
Africa) to shore up their currencies by raising benchmark rates. When the
closing bond bell rang (there is no actual bell, so don't send me an e-mail)
agency MBS prices had improved about .5 and the 10-yr's yield was down to
2.67%.
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