It's a Free-For-All in the Servicing Market!; Executive Rate Market Report

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Servicing loans is not a cakewalk, as this commentary has mentioned several times, especially when you are servicing loans in several states and/or time zones. And the larger servicers are under intense scrutiny, even after multi-billion dollar settlements - so is it the smaller player's turn? Seeking Alpha suggests that indeed it is! "The nation's largest lenders nearly sucked dry from mortgage settlements, housing regulators have turned their attention to a number of smaller players, with Fifth Third Bancorp (FITB), SunTrust (STI), and Regions Financial (RF) all recently disclosing investigations into the origination and servicing of home loans. U.S. Bancorp (USB) and Capital One (COF) have also disclosed probes into various mortgage practices. Any money recouped from the regional lenders would go a long way towards stabilizing the finances of the FHA which required a $1.7B taxpayer infusion last year. "Settling with the large guys gave [the government] a template," says Eric Wasserstrom from Robinson Humphrey. "The agencies involved in the national mortgage settlement had planned to focus on the largest mortgage servicers first," says the Iowa assistant AG. "Then you move on to other entities." Smaller banks next in line over mortgages. 

Adam Quinones of Thomson Reuters has been sending out quotes from three of the servicing valuation and brokering firms. Steve Fleming from Phoenix Capital observes, "Bulk portfolio valuations have seen a slide (magnitude varies by WALA) over the past couple of months due to the commensurate interest rate drop, but we're also tracking how this plays out in the flow MSR arena. The flow (i.e. Agency concurrent or Ginnie PIIT) side has shown a degree of maturation in late-Q1/Q2-to-date, where the exponential flow SRP growth of Q4/early-Q1 has somewhat leveled off nicely into the mid-to-high 4x's for conventionals on average and mid 3x's to mid 4x's for Govies on average (by base servicing fee), with continued buy-side support. The FNCL's ~30+ bps yield dip since early April has had a more dramatic impact on bulk vs. flow values - it will be interesting to see how flow MSR pricing further matures if new production remains at these relatively lower pars for a substantial period of time." 

And Matt Maurer from Mountain View states, "In April, the majority of our clients MSR portfolios went down in price 2 to 3 basis points and so far in May, majority of clients are seeing another 2 to 3 basis point drop in value. It will be interesting to track speeds on early 2014 production which are now in the money. With another 12.5 to 25 basis point drop in rates should start to see a larger pick up in prepayments given the large share of 4.125 to 4.375 note rate servicing held in seasoned MSR portfolios." 

Dan Thomas from MIAC chimes in. "Although the rate environment has bounced around a bit and hurt some recent MSR values, we still expect the supply and demand dynamics to be robust for the remainder of the quarter and keep prices firm. GSE approvals and subservicer backlogs are becoming a significant disruption to the normal, tried and true servicing transaction marketplace.  Additionally, over-reaching regulation on high quality servicing transfers amongst well capitalized, quality servicers should be addressed in the near term before it significantly affects normal market liquidity for MSRs." 

Often times it's difficult to provide content, disseminated from multiple sources, without violating email disclaimers...which I actually take seriously, as I also do with mattress tag warnings. But I can't ignore a number of emails, and reports, I have received over the last few weeks indicating that banks and REITs have started holding onto agency bonds. The total agency MBS holdings of mortgage REITs has increased by $7.3B in Q1; this is the first increase following three consecutive quarters of sharp declines in agency MBS holdings (which totaled $102.8B from April to December of 2013). Banks on the other hand have increased their agency MBS portfolios by $11.5B, after five consecutive quarters of decreases. Bank holdings of GNMA increased by $1.9B following a pickup of $9.7B increase the previous quarter. GNMA holdings have increased for three straight quarters, totaling $13.4B. Non-Agency holdings dropped by $8.9B, according to one report, which follows a $6.4B decrease the previous quarter. Non-agency holdings have decline for six consecutive quarters.

Are we heading for another multi-trillion dollar refi boom? Yes, rates are down, but the back-office and compliance cost of doing a loan is significantly higher than in the past - and no one is expecting those to come down soon. But Treasury prices surged Wednesday with the 10-year note improving by .75 and its yield back to its lowest in nearly a year at 2.44%. (Agency MBS prices did the same, and are also back to price levels from a year ago.) The catalyst for the rally was increased odds that the ECB will announce further accommodation as soon as next week following weak data in the euro zone. With the rally came more locks, and with the locks more selling of agency MBS to hedge them. Today we will have the 1^st quarter GDP number (expected at -.5% versus the initial +.1%) along with Initial Jobless Claims (expected -11k) and Pending Home Sales. 

 

 Rate Market Report:

 

AM Tracking Quote
FNMA 4.0% 106.09 now +7 bps

09:33 +7
Open 106.02

 

A kind of landmark day yesterday when the 10 yr note fell to its lowest level in a year at 2.44%. MBS prices increased 36 bps following treasury prices higher. For weeks now we have been talking about our rather soft view on the near future of the US and global economies; with the technical break in rates yesterday to new year long lows and based on what is reported in today’s WSJ it appears more investors are now becoming concerned. Although so far there has been strong support for equities, investors are increasingly backing off somewhat and balancing portfolios with more treasuries and fixed income investments. Investors are not only moving to safe havens but rushing madly into high rate corporate bonds, many of them considered junk bonds.

This morning at 8:30 the awaited preliminary Q1 GDP, widely believed to have declined to 0.4% (revised from +0.1% on the advance report a month ago), fell 1.0%. The US economy contracted more than thought, the final reading for Q1 will hit a month from now (June 25th). There was little reaction to the report after the preparatory rally yesterday in the bond and mortgage markets. The decline in the economy was the first Q1 2011. Q1 was negatively impacted because of the severe winter weather across most of the US. The Fed, at its April meeting, appeared not to be too concerned; saying a pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed. Likely that is true but the longer outlook by most economists had called for 2014 to grow at a 3.0% rate; we don’t believe that target will be met. Q2 growth isn’t likely to be more than +2.0% at best, however the economists are expecting a 3.5% growth in the quarter.

On a more positive report; weekly jobless claims were down 27K to 300K, estimates were for 317K. Claims continue to fall but holding at the 300K area. Jobs increasing but the quality of the jobs is so anemic that wages generated hardly buy food to eat and currently don’t fuel a sizeable increase in consumer spending. Too much focus on the headlines with not enough attention to the kind of jobs. That said, it isn’t going unnoticed by Wall Street and within the Fed, it is an issue being somewhat swept aside for now.

Europe is center stage now; next week the ECB is widely expected to lower rates and begin another round of bond buying. Ukraine is still a factor that feeds the run to safety; not quite as much as we saw a month ago but it remains a major concern. What will be Russia’s response over the presidential election last Sunday and how will the new candy-man president eventually deal with Russian separatists in east Ukraine? Pro-Russian rebels downed a military helicopter in eastern Ukraine, killing 13 troops and a general, as an aide to President Vladimir Putin accused the U.S. of pushing the world toward war through proxies in Kiev.

Yesterday Treasury sold $35B of 5 yr notes, it was an in line auction. The rate 1.51%, the cover 2.73, indirect bidders took 50.4% while direct bidders got 10.5% of the amount. Last month’s auction drew 1.732%, 2.79x bid/cover, 44.9% indirect bidders, 18.5% direct bidders; the last12-auction averages: 1.482%, 2.65x bid/cover, 45.7% indirect bidders, 13.0% direct bidders. This afternoon Treasury will auction $29B of 7 yr notes, a more significant auction for the long end of the curve even though it is more in the middle.

Not much change in the bond and mortgage markets so far today after the very strong short-covering rally yesterday and a technical break out from the seven day very tight ranges. At 9:30 the DJIA opened +28, NASDAQ +16, S&P +5; 10 yr note 2.43% -1 bp, 30 yr MBS price +2 bps from yesterday’s 36 bp increase.

At 10:00, the last of the scheduled reports today; NAR’s April pending home sales; contracts signed but not yet closed, the forecast was for an increase of 2.0% from March; another soft housing report, pending home sales increased just 0.4% and are down 9.2% yr/yr.

The 10 yield down 12 bps since Tuesday, breaking out of the narrow range that keep it quiet for a week and a half. The break is technically significant but the result has pushed the 14 day RSI to overbought level, the last time the 10 had an RSI read at 30 was last Feb. With the ECB meeting coming next week and the strong decline in rates over the last couple of days, and looking at all of tour various momentum oscillators, the action today may be relative flat. We like the bond market, as we have been since early this month.

 

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