What
is the Economic Census? According
to U.S. Secretary of Commerce, Penny Pritzker, "the economic census is one
of the Commerce Department's most valuable data resources," ya, but what
does it show? "By providing a close-up look at millions of U.S. companies
in thousands of industries, the economic census is an important tool that shows
policy at the local, state and national level, and helps businesses make
critical decisions that drive economic growth and job creation." Oh, OK.
One wonders if lenders
underestimated the cost incurred in servicing. It is not cheap, and regulators
like the CFPB are focused on making sure it is done flawlessly - which will
continue to add to the cost. Servicers are required to advance mortgage
payments to investors when a borrower stops paying on some types of loans. The
article in AB goes on to give a little primer about servicing. "Mortgage
servicing rights are an esoteric and volatile niche asset that serves as a
hedge when mortgage rates rise and lending volumes fall. Servicers are paid a
sliver of interest, usually 25 basis points of the loan balance annually, to
collect principal and interest payments from borrowers and remit those funds
monthly to investors. Servicers also collect and remit taxes and insurance for
some borrowers, and deal with delinquencies and foreclosures."
Once again, we are reminded
that a non-depository mortgage lender mostly offers a good income and lifestyle
for its employees, but little in the way of accumulated net worth besides
cash in the bank (that is often used to satisfy investor & warehouse
demands). What is a lender really worth, besides the value of its retained
servicing, if its people can walk out the door? The value of its office
furniture? Its franchise value and goodwill? I'll save that discussion for
another time. But lenders having to sell servicing to pay for overhead, hoping
for a huge increase in volume and fee income, may have challenging times ahead.
As
they say, "money talks and ---- ---- walks." I don't know who the
"they" is in that sentence, but "regulators" are boosting the capital rule
for the eight largest U.S. banks. Regulators plan to subject the eight
largest U.S. banks to a leverage ratio of 5% equity to total assets, which
means that the rule will force the banks to increase capital by about $68
billion total. The rule has prompted complaints that U.S. banks will be at a
competitive disadvantage to foreign counterparts, which are subject to a
less-stringent ratio.
Speaking of banks, we did have
earnings from Wells Fargo and Chase today. JPMorgan Chase & Co. (NYSE: JPM)
today reported net income for the first quarter of 2014 of $5.3 billion,
compared with net income of $6.5 billion in the first quarter of 2013. Chase's
mortgage numbers reflect those of the industry: net income was $114
million, a decrease of $559 million from the prior year, driven by lower net revenue
and lower benefit from the provision for credit losses, partially offset by
lower noninterest expense. Mortgage Production reflected a pretax loss
was $58 million, a decrease of $485 million from the prior year, reflecting
lower revenue partially offset by lower expense and lower repurchase losses.
Mortgage production-related revenue sank due to reflecting lower volumes.
Production expense dropped due to lower headcount-related expense and a drop in
non-MBS related legal expense. Repurchase losses for the current quarter were
down. Chase's mortgage servicing had a pretax loss due to a higher MSR
risk management loss, largely offset by lower expenses. Mortgage application
volumes were $26.1 billion, down 57% from the prior year and 17% from the prior
quarter.
Wells Fargo's numbers came in
ahead of estimates, and analysts continue to talk about its servicing income
balancing the loss of mortgage originations. Wells Fargo reported its home
lending originations amounted to just $36 billion, compared with the $109
billion reported a year earlier and $50 billion in the prior quarter. Wells has
a significant share in funding home purchases, an area that held up better than
refinancing businesses. But mortgage banking noninterest income totaled $1.51
billion, down 46% from a year earlier (versus Chase's drop of 68%) and mortgage
banking profit of $114 million, down by $559 million from the prior year. Wells
Fargo has cut roughly 7,000 jobs since July.
The market is continuing to
ruminate on the Fed's March meeting minutes released Wednesday. Several Federal
Reserve policy makers said a rise in their median projection for the main
interest rate exaggerated the likely speed of tightening, according to minutes
of their March meeting. As we know, Treasury yields rose last month after
policy makers predicted that the benchmark interest rate would rise faster than
previously forecast. Janet Yellen, presiding over her first meeting as chair,
later downplayed the importance of the forecasts, even as she said that rates
might start to rise "around six months" after the Fed ends its
bond-purchase program. The FOMC next meets April 29-30 - so the press and
analysts can jabber about that in a couple weeks.
Ahead of this spring weekend
we've had the Producer Price Index (PPI) for March, showing a "hot"
+.5% which was +.6% without volatile food & energy components. The PPI is
+1.4% year over year, and removing food & energy it was also +1.4%. We'll
also have the preliminary April Consumer Sentiment number around 7AM PST. In
the early going the 10-yr is sitting around 2.62% and agency MBS are roughly
unchanged.
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