Friday, May 16, 2014

What you need to know about Unfair and Deceptive Acts and Practices



 

The Census Bureau tells us that American families formed 423,000 new households during the 12 months ending 3/31/14. 79% of the new households formed (333,000) were renters and 21% of the new households formed (90,000) were homeowners. 

So we're seeing some household formation - a good thing for lenders and Realtors. Some of them are buying houses, and some of those are obtaining loans to do so (although cash purchases account for over 1/3 of home buying!). What is happening on the licensed originator (non-bank) side of the equation? The recent NMLS report sheds some interesting light on the subject - not all of it good for LOs. During 2013, the number of state-licensed mortgage companies remained essentially flat, but the number of mortgage loan originators grew by 8% and the number of licenses held by MLO's grew by 28%. Every state saw net growth in the number of MLOs operating in their state. Mortgage originations by state-licensed MLOs declined significantly during the 2nd and 3rd quarter of 2013 due largely to a decline in refinance transactions. Federally registered institutions and mortgage loan originators remained flat in 2013. 

While most state-licensed companies and individuals work in just one state, the number of entities working in multiple states is growing at a faster rate. The total number of state-licensed MLOs grew 8% over the past year, while the total number of MLO licenses grew 28%. The average number of state licenses held by an MLO in 2013 was 2.54 licenses per MLO, up from 1.8 licenses per MLO in 2011. The total number of state-licensed companies declined, but the number of company licenses held grew over the past year.  

The report has some fascinating state-level stats. Let's take a look at one state, since I was just there yesterday: Washington. Washington saw a 30% increase in licensed originators last year, up to nearly 12,000. There are 9,200 that are "Federally Registered." (The population, by the way, is about 7 million.) Last year Washington saw about 46,000 purchase transactions, and the average loan size was about $248,000. Ladies and gentlemen, I know that I am simplifying things, but if there are 12,000 MLOs in Washington, and purchase transactions remain constant at 46,000, that is about 4 transactions per LO for the year. Don't take my word for it - here is the Industry Report so you can take a look at your own state

GSE reform...I've got good news and bad news. The good news is that Johnson Crapo passed through the Senate Banking Committee. The bad news is that it still has to go through the Senate, the House, and the President - all before the election in six months. Experts think that the odds of that happening are slim at best. And after the election, well, the make-up of Congress changes. 

Suddenly interest rates are attracting some attention. Yes, companies are still focused on lowering costs, improving efficiencies, and eking every basis point out of every loan. But with the U.S. economy seeming to muddle along, rates seem more inclined to drop than to increase. I was recently speaking with a portfolio manager who explained to me that the Federal Reserve has an obligation to keep interest rates low. Maybe, but "obligation" is a strong word. While most believe that it is likely that the Fed will maintain the current target range for the federal funds rate for a considerable time, even after the asset purchase program ends, there is always uncertainty in duration the further out you look. Keynes said it best, "we're all dead in the long run."  But that doesn't stop "yield chasers" or anyone looking for reasonable ROI, which is a good place to be if you manage ETF funds. According to a Bloomberg article earlier this month, investment flowing into exchange-traded funds focused on real estate this year has already eclipsed the 2013 total as concern over rising interest rates subsides and property markets improve. Brian Louis and Alexis Leondis write, "In 2014, 31 percent of money going into U.S. sector-focused exchange-traded funds, or $3 billion through March 6, was for real estate, according to data compiled by Bloomberg. That's 43 percent more than the net deposits the funds attracted in all of 2013, and a greater share of total ETF contributions than any time since at least 2012." 

The Mortgage Bankers Association of the Carolinas sent out a blurb on "What Small Mortgage Lenders Can Learn from Credit Card Settlement." "The Consumer Financial Protection Bureau has once again utilized its broadest and most powerful weapon to levy large fines: the Unfair and Deceptive Acts and Practices. This time, it was Bank of America that received a $727 million dollar fine for 'illegal credit card practices.' These practices included alleged deceptive marketing by inaccurately describing the benefits of certain add-on charges and the billing process for such charges. In particular, it is alleged that telemarketers 'went off script' in describing the benefits and charges of certain credit protection plans to coax consumers into receiving them. Many smaller lenders still utilize telemarketer driven leads for all or part of their business. Even more lenders rely upon loan officers during initial conversations with consumers to accurately communicate the benefits and risks of certain loan products as well as describing the lending process." 

But next we have a warning that keeps banks like Citi, BofA, Chase, and Wells who have thousands of LOs up at night. "To the extent the CFPB can apply the unfair and deceptive acts and practices label to 'off script' communications with consumers, lenders need to give particular attention to being able to prove what is said, by whom, and when. When it involves telemarketing-whether it is done by the lenders or a lead company they hire-lenders need to pay attention to the content of the script and the manner in which the telemarketer ensures it is followed, as well as a telemarketers' compliance history (after all, lenders could be held responsible for independent telemarketers through third-party vendor rules). Addressing communications directly from internal loan officers, lenders need to rely upon training and should increasingly consider occasional monitoring to ensure proper communications are maintained. Better yet, lenders should consider integrating certain communications systems into the origination process that ensure the lender is able to document the accuracy of communications with borrowers. Such processes do not detract from the origination process, but rather add to it by removing loan officers from the compliance process, and allowing them to focus on sales and customer service. The last thing lenders want to consider these days is spending more on compliance. However, there are new options emerging that protect lenders and assist in origination efforts. More than ever, lenders should consider new alternatives to avoid the risks of 'off script' communications." 

How 'bout these rates! Sure, MBS prices are the best they've been since Thanksgiving, but the costs of doing business have increased, and let us not forget the higher gfees and loan level price adjustments - so the advantage of refinancing has dropped for existing borrowers. But hey, if rates keep dropping... Yesterday a combination of weaker than expected Q1 growth in the euro zone (which increased odds the ECB would announce further accommodation at its June meeting) and mixed data and poor earnings news in the U.S. pushed rates lower. But do lenders really want lower rates due to a slow U.S. economy? Probably not. But for now we'll take the rally: yesterday the 10-yr price improved by .375 (closing at a yield of 2.50%) but agency MBS prices barely budged due to supply and demand issues. Investors are keenly aware of whether or not a rate decline will result in more refinancing, pushing up the supply, which may or may not be absorbed by the tapering Fed and other investors. 

Today we've seen the dynamic duo of April Housing Starts and Building Permits (they showed some strength) and will see the preliminary May read on Consumer Sentiment. Housing starts were above expectations, jumping 13.2% to 1.072 million due to a 39.6% surge in multifamily starts. Single family was only up 0.8%. It was the same story for building permits. Headline permits were up 8% to 1.08 million also driven by multifamily permits which were up 19.5%. Single family permits were up 0.3%. The softness in single family build is consistent with the weak message out of the NAHB index and sluggish new home sales. The gain in multifamily construction is consistent with the shift toward renting. In the early going we're sitting at about 2.51% and agency MBS prices are slightly worse on the housing news. 

AM Tracking Quote
FNMA 4.0% 105.35 now -15 bps

09:31 -15
Open 105.50

Should you Lock or Float? Contact me for Lock Advice!
 

Executive Rate Market Report: AM Update 

April housing starts and building permits were better than expected this morning at 8:30. Starts were expected to be up 3.5% at 980K units; as reported starts jumped 13.2% to 1.027 mil units. Building permits were thought to be up 3.0% to 1.020 mil but increased 8.7% to 1.080 mil units. April was the best reading since last November. The headlines are good but when we look solely at single family starts, not so much; the increase in housing starts was dominated by multifamily construction, such as condominiums and apartment buildings, which increased almost 40% to a 423,000 annual rate from 303,000 in March. Work on single-family properties rose 0.8 percent to a 649,000 rate in April from 644,000 the prior month. Consumers are still not stepping up to buy new homes or existing homes; the first time buyer isn’t there and likely to be reticent to purchase with the economy struggling. The initial reaction sent bond prices lower and rates a little higher; stock indexes didn’t react at all to the data.

Tuesday thru yesterday interest rates fell quickly as investors increasingly realize the US, EU, and China’s economies are not growing much. Mix in the Ukraine/Russia situation and belief that the ECB is about to begin a fresh round of buying EU debt similar to the Fed’s monthly purchase of treasuries and MBSs. Then add in that central banks have taken a huge amount of tradable notes and bonds out of the market with the QEs that is leading to a supply shortage. The run-up in prices for MBSs and treasuries has been excessive recently and likely will spend a few days consolidating the increases before another round of buying. We expect interest rates have the potential of further declines in rates, MAYBE the 10 down to 2.30%.

Until May25th when Ukraine holds its presidential election there is little that will occur in the area. In the meantime NATO says Putin, who annexed  Crimea in March, still has 40,000 troops on Ukraine’s border and hasn’t fulfilled a promise last week to pull them back. The U.S. and the U.K. vowed yesterday to punish Russia with industrywide sanctions if the presidential election is undermined as the Kiev government’s forces moved to flush out separatists in the east. UN monitors criticized “repeated acts of violence against peaceful participants of rallies, mainly those in support of Ukraine’s unity” as well as “targeted killings, torture and beatings, abductions, intimidation and some cases of sexual harassment –- mostly carried out by well-organized and well-armed anti-government groups in the east.” In eastern Ukraine, government troops eliminated two rebel bases near the towns of Slovyansk and Kramatorsk, acting President Oleksandr Turchynov said yesterday.

The DJIA opened -5, NASDAQ-1, S&P unchanged; 10 yr 2.52% +2 bp, 30 yr MBS price -13 bps.

The last of this week’s data; at 9:55 the U. of Michigan mid-month consumer sentiment index. Forecasts were for a slight increase from 84.1 to 84.5; the index declined to 81.8; weaker but not likely to have any major impact on markets.

Taking a breather today, the bond and mortgage markets need a rest. Investors and traders usually don’t want to chase a market after rapid and large moves such as we have experienced in the bond and mortgage markets over the last three days. We believe rates will continue to move lower, however prior to another run lower in rates some rebound can be expected. It is Friday, nothing is likely in Ukraine over the weekend; we are not expecting much change in the bond and mortgage markets today.

PRICES @ 10:00 AM

10 yr note:                   -9/32 (28 bp) 2.52% +2 bp

5 yr note:                     -5/32 (15 bp) 1.56% +2 bp

2 Yr note:                     -1/32 (3 bp) 0.37% +1 bp

30 yr bond:                  -17/32 (53 bp) 3.35% +2 bp

Libor Rates:                1 mo 0.151%; 3 mo 0.225%; 6 mo 0.323%; 1 yr 0.534%

30 yr FNMA 4.0 June:  @9:30 105.33 -13 bp (-21 bp frm 9:30 yesterday)

15 yr FNMA 3.0 June:  @9:30 103.70 unch (-10 bp frm 9:30 yesterday)

30 yr GNMA 4.0 June:  @9:30 106.41 -16 bp (-23 bp frm 9:30 yesterday)

Dollar/Yen:                  101.54 -0.04 yen

Dollar/Euro:                 $1.3717 +$0.0007

Gold:                           $1291.20 -$2.40

Crude Oil:                    $101.78 +$0.28

DJIA:                           16,454.20 +7.39

NASDAQ:                    4061.63 -7.66

S&P 500:                      1870.22 -0.63

 
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