JD Powers report on servicing; Non-vanilla securitization market heating up

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The Office of the Comptroller of the Currency tells us that 13 out of every 14 mortgages (93.1%) in the United States were "current and performing" at the end of the 1st quarter 2014 compared with 9 out of 10 (90.2%) at the end of the 1st quarter 2013. Why doesn't the press ever pick up on stats like that? Or remind the industry of the product mix of well-known lenders? For example, Mark Mozilo writes, "Although Countrywide was a leader in the subprime business, subprime only accounted for 10% of its overall production. 90% of Countrywide's production was prime loans with an average FICO of 700+. Countrywide began its business in 1969 as a FHA/VA & Conventional lender, later moving into jumbo loans, and the last business it moved into was subprime. Since it had such an efficient machine, any product that you 'fed' the machine would immediately produce enormous volumes quickly! Subprime makes headlines, 'boring' prime loans don't!" And yesterday the lender was in the news regarding the latest settlement north of a billion dollars.

Why are banks and lenders merging? Leave it to the ABA to give us a graphic reminder. By the way, the FDIC reports that over the past 10 years about 67% of the time a community bank is acquired, the acquiring bank is another community bank. In the last week we learned that Peoples Bank ($1.2B, NY) will acquire Madison Square Federal Savings Bank ($144mm, MD) for approximately $14.4mm in cash. Columbia State Bank ($7.2B, WA) will acquire Panhandle State Bank ($908mm, ID) for approximately $121.5mm in cash and in stock. Business First Bank ($690mm, LA) will acquire American Gateway Bank ($377mm, LA) for an undisclosed sum. In Minnesota (home of a state fair where people make realistic sculptures entirely out of butter) Bremer Financial ($8.9B) will acquire Eastwood Bank ($670mm) and Grand Rapids State Bank ($230mm) will acquire Crow River State Bank ($84mm). But last Friday, in Illinois (home of "Honest Abe" who is so deeply revered he was elected Lieutenant Governor in 1998), regulators closed Green Choice Bank and sold it to Providence Bank under a purchase and assumption agreement.

For you servicers out there, J.D. Power released the results of the 2014 Primary Mortgage Servicer Study. (Yes, they do more than cars.) Here's a link to last year's release and rankings. But why settle for last year's when this year's is out? Congrats to Quicken!

 "The study measures satisfaction in four factors of the mortgage servicing experience: billing and payment process; escrow account administration; website; and phone contact. Mortgage servicers are making substantial progress in improving the overall customer borrowing experience-specifically for "at-risk" customers-with technology helping to simplify and streamline the experience... Overall satisfaction averages 754 (on a 1,000-point scale) in 2014, up from 733 in 2013. Improvements in satisfaction are even more pronounced among at-risk customers-those who are currently behind with mortgage payments or concerned about keeping current with their payments during the next year-increasing by 42 points year over year to 703 in 2014.

Traditionally most lenders' monthly production is more than 5-10% of jumbo loans. But that doesn't stop the constant chatter about non-agency MBS, and the fabled private money coming back into the market. So it was of great interest that the Wall Street Journal had a piece titled, "Is the Private Mortgage Bond Market Dead or Dormant?"  But let's face it: plenty of jumbo loans are being originated, and plenty of them are heading into bank portfolios. 

But the non-agency MBS market is truly heating up, and I have had trouble over the last week or two keeping up on the news. We continue to hear the names that have become popular over the last year or so, with some of them branching out into pooling different types of loans. And once again people in the industry are bickering about the benefits of securitization (adding liquidity, the transfer of capital, satisfying investor appetites) versus the drawbacks (confusing pools of mortgages, reliance on rating agencies, dubious transfer of risk). 

For example, last week Heather Perlberg and John Gittelsohn of Bloomberg wrote, "Blackstone Group LP, the largest U.S. landlord of single-family homes, is working with Deutsche Bank AG to sell about $700 million of securities tied to mortgages on rental properties, its third such deal...The offering would be the sixth of bonds backed by rental homes, the largest of which was a $993 million sale in May, also by New York-based Blackstone. Wall Street has issued $3 billion of securities backed by houses owned by Blackstone, Colony American Homes Inc. and American Homes 4 Rent since last year. Blackstone, which has amassed 45,000 houses since early 2012 through its Invitation Homes LP unit, became the first to tap the securitization market in November by selling $479.1 million of debt." Colony American Homes is no slouch: it owns more than 17,000 houses. 

What kind of loans are in the pool? "Loan to BPO values" of 79% are in the offering, vs. 65% for Silver Bay deal in market (noted below), 70% for second Colony American Homes issuance, or 75% for first 2014 deal by Blackstone's Invitation Homes deal, according to ratings-firm presale reports. We have a new buzzword: Class G. Kroll notes that the issuer indicated principal-only Class G is included in structure to comply with European Banking Authority risk-retention regulations, according to Kroll, and Moody's said the sponsor agreed to hold the Class G certificates (about 5% of the loan amount) for the life of transaction. "While risk retention can be viewed as a credit positive," Kroll opined, "it does not believe it mitigates the impact of increased leverage, as the entire loan proceeds will need to be refinanced at maturity." 

But there are twists! In one deal Deutsche Bank, the lender, isn't responsible for remedying material document defects in latest deal backed by single-family rental properties managed by Invitation Homes, a switch from last offering by Blackstone affiliate, according to Moody's presale report. The report notes that, "Instead, the responsibility falls on the sponsor, Invitation Homes, and its affiliated depositor, neither of which is as financially strong as Deutsche Bank and may not have as strong an incentive to find and cure errors." [Danger Will Robinson!] The write up went on: with last deal, "the put-back risk provided a strong incentive to the lender to make sure all documents were in order and, if necessary, to get the borrower to correct defects." The latest Blackstone deal includes the highest LTVs yet due to inclusion of Class G certificates to meet risk-retention regulations, according to Kroll. 

There has been news of Two Harbors marketing a $255m jumbo RMBS. And this month Silver Bay Realty Trust and the Blackstone Group were in the market with single-family rental (SFR) bonds, the first offering juicier yields than its predecessors and the latter inching up leverage from its prior issues. Silver Bay's US$312.667m debut was titled "SBY 2014-1". But the pricing was initially viewed as worse (therefore the market demanded higher yields) than the last deal that priced in June for Colony American Homes since it was smaller and in fewer markets versus the last deal. 

Jody Shenn with Bloomberg wrote, "Though Silver Bay was the first public REIT set up in the wake of the financial crisis to buy distressed homes to fix up as rentals, it has been slower coming to market as it acquired fewer homes and at a slower pace than other big institutional buyers. The deal is backed by rentals from nearly half of the 5,800 homes the REIT owns in eight states as of April 30...Its maiden SFR deal is also the smallest of the seven bonds that have emerged in the sector since Blackstone priced the first deal of its kind in November last year. (The latest US$720m deal from Blackstone, the biggest issuer in the sector, is backed by 3,750 homes out of its much larger 44,000 property portfolio.) Analysts also focused on other differences between the two Silver Bay and Blackstone trades. Silver Bay has no employees of its own, unlike Blackstone, Colony and American Homes 4 Rent. Instead, the REIT is externally managed by affiliates Pine River Capital Management and Provident Real Estate Partners, which handle day-to-day operations, investment criteria, acquisitions and asset management of the properties, according to Kroll." 

But the good times keep rolling, and Bloomberg's Jody Shenn and Christopher DeReza scribe regarding a deal backed by 526 prime residential mortgage loans: "CSMC Trust 2014-IVR3." It has a total principal balance $363 million of loans acquired by DLJ Mortgage Capital. [What? DLJ is still around?] The originators are Quicken Loans (33%), Fifth Third (13%), First Republic Bank (11%), Caliber (6%), Sierra Pacific (5%), and several others, and the loans will be serviced by Select Portfolio Servicing (69%), Fifth Third (13%), FRB (11%), PHH (5%), New Penn doing business as Shellpoint Mortgage Servicing (2%).   

How about the news yesterday!? The big surprise over the past week was the GDP report at +4.0%: good news for the economy but bad news for rates. (In theory an improving economy leads to a higher demand for credit, and possible inflation.) The stronger-than-expected growth revealed in the GDP data was good news for the economy, but it caused mortgage rates to shoot higher and the 10-yr T-note closed at 2.55%. 

But arguable of equal importance was the Fed's announcement. "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions" the FOMC has announced a further $5 billion per month reduction in MBS purchases. This brings the monthly MBS purchase rate to $10 billion, or about $500 million per business day. It also reduced Treasury purchases by $5 billion/month. And lenders found themselves selling (hedging) pipelines - will locked loan pull through go above 80%? Take your pick of the coupons being sold, but overall 30-yr agency MBS ended the day worse between .375 and .625 - back to where we were a month ago.

 

Today we had Argentina's default (does anyone care?), Jobless Claims (+279k last, were +302k this week) and the second quarter's Employment Cost Index (+0.3% previous, this time +.7% - much higher than forecast). As of this writing we can look forward to the non-market moving July Chicago PMI which left off at 62.6 last time around. But more emphasis will be put on tomorrow's employment report. (The consensus forecast is that the economy added 220K jobs in July.) After the Jobless Claims & ECI numbers we're up to 2.59% and agency MBS prices are worse .250.

 

 Executive Rate Market Report:

 

The bond and mortgage markets started this morning where they left off yesterday, interest rates are increasing and mortgage rates going higher. Yesterday’s surprise 4.0% Q2 GDP, Q1 revised from -2.9% to -2.1% and the Q2 deflator at 2.0% took all of the bullishness out of the rate markets. Geopolitical situations are also being pushed back as increasing belief that Ukraine/Russia and Israel/Hamas are more regional and won’t escalate to wider perspectives. The US stock market, the European stock markets are under pressure and likely will sell off more as economic reports increase the outlook that the Fed will increase interest rates sooner than expected. In the policy statement yesterday the Fed said it will keep the FF rate at current levels for an extended period. The Fed concerns that the employment gains show significant underutilization in the labor markets (low paying and part time jobs) went nowhere in the minds of traders in stocks and bonds. Under the headlines there is more dissention within the FOMC on when to increase the FF rate; we get the sense that more members are leaning toward an earlier increase than what was stated in the policy statement. That is what markets are also thinking.

 

Weekly jobless claims were in line with estimates; claims increased 23K back above 300K to 302K, we were looking for an increase of 21K. As noted yesterday this time of year the claims data is volatile because of the auto industry model year change over with workers being laid off for re-tooling. The four-week average of jobless claims, considered a less volatile measure than the weekly figure, dropped to 297,250, the lowest since April 2006, from 300,750 the prior week.

Q2 employment cost index was expected up 0.4%, as reported costs ncreased 0.7% the highest level since Q3 2007; more fuel for the sooner than later increase in the FF rate.

 

At 9:30 the DJIA opened -102, NASDAQ -43, S&P -15. 10 yr note 2.59% +3 bps and 30 yr MBS prices -13 to -17 bps. Earlier this morning the 10 traded at 2.61% at its 100 day average, MBS prices at 9:00 -24 bps.

 

9:45 July Chicago purchasing mgrs. index, expected at 63.2 from 62.6 in June, declined to 52.6, the lowest level since June 2013. Tomorrow the national ISM manufacturing index will be reported.

 

With all of the activity yesterday morning on the Q2 GDP report the weekly MBA mortgage applications slipped through our minds. The composite index declined 2.2%; the purchase component increased 0.2%, the refinance component fell 4.0%. 53% of the apps were for re-finance down from 54% the previous week.

 

Stocks are being tagged hard this morning, beside the changing sentiment about when the Fed will begin increasing rates, Argentina defaulted on its debt and the Ukraine/Russia sanctions are seen as a drag on Europe’s economy. Although there isn’t any new news in the region, Russia continues to fuel the separatists with weapons and Putin has shown he doesn’t care about sanctions and what they will do to the Russian economy.

 

Tomorrow the July BLS employment report, the July ISM manufacturing index, June construction spending and the month end U. of Michigan consumer index are all out. The employment report of course is the elephant. Non-farm jobs expected up 230K, private jobs +233K, the unemployment rate unchanged at 6.1%. The labor participation rate will garner a lot of attention as will where the job growth is coming from; most of the gains in employment are in the service sector.

 

Early this morning the 10 tested its 100 day average at 2.61%, since then the rate has declined back to 2.59% +3 bps from yesterday’s 10 basis point increase in the rate. All technicals are bearish; possibly a new wider trading range is unfolding, between 2.44% the resistance that was tested six times and now 2.66%. Today will not likely see any improvements but equally we don’t expect rate will increase much with employment tomorrow.

 

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RESPA-TILA update; HMDA changes in the wind; New IM system for Banks?

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How is it that this is the last week of July already? Lots of lenders seem to have seen decent Julys - but perhaps not as strong as some of their Junes - and certainly for many the upward sloping trend of lending activity and profits seen from March through June has tended to level off - it is a tough job for most to keep that kind of increase going. HR folks' jobs are sometimes pretty tough - and can  be the opposite of boring - and in a note that will make HR folks take notes, are laws & restrictions on running criminal background checks in the near future? "The law prevents criminal background checks in the private sector until after employers and hiring managers pursue the interview process with potential applicants."

Let's take a quick look at the overall market. Who says that the housing market is not doing well? We can't pick up a newspaper or see the news without seeing some study about prices, foreclosures dropping, or recovering markets, or some combination thereof. It seems to have become a national hobby...

Compass Point Research and Trading LLC reports on the banks' mortgage origination and servicing numbers for the second quarter. "Origination volumes are up roughly 25%, in-line with prevailing estimates from Fannie Mae and MBA. Gain on sale margins were up 7% on average, while correspondent lenders saw slightly more pressure than retail-heavy originators. Mortgage servicing rights (MSR) marked down 2% on average. This would indicate the non-bank mortgage originators likely will see slight pressure on margin due to the material amount of originations from the correspondent channel, while fair value marks will hit GAAP earnings. On a positive note, we have seen gain on sale margins move meaningful higher through the first few weeks of the third quarter as stable mortgage rates combined with lower agency MBS have caused spreads to widen. If this continues, the third quarter could be setting up to be a decent quarter. 

Compass Point's excellent piece went into more detail. "The spike in margins through the first weeks of the quarter...is due to a quick move down in agency MBS yields while mortgage rates have not fallen as the same pace. Typically, this is a temporary phenomenon until we see some stabilization in MBS yields. Mortgage origination volumes are up 25%, while margins are up 7% on average. Mortgage servicing income was a mixed bag. MSR amortization was more elevated than expected and we generally saw 2-5% markdowns for most servicers. We did see some hedging gains support servicing margins, but this likely won't translate for the non-banks that are reporting in the next couple of weeks." 

Lastly is an opinion on affordability. "Over the past several quarters, we have made the argument that the mortgage and housing markets have the capacity to handle higher rates given affordability index has been well above the long-term average. However, with the most recent move higher in prices during the spring selling season, the affordability index is approaching its long-term average. Meanwhile, the price-to-income ratio has pushed above the long-term average, indicating it will be difficult for the housing market to handle a significant move higher in rates without income levels going along with it. We continue to believe housing remains affordable for well-qualified borrowers, but are increasingly concerned the market can handle an increase in rates." 

Compliance is about a year away, but a mention of RESPA-TILA reform bears repeating, since it impacts every loan application. "RESPA-TILA is a huge rule and will impact your business from the time a borrower walks through the door to closing, and your business is going to need to make deep operational changes to comply. To help the mortgage industry get ready, MBA is on the road this summer with top-level legal, compliance and technology experts - including a CFPB representative. So far they have brought together hundreds of industry professionals in two states. There are just two workshops remaining - Atlanta on July 31st and Washington, D.C. on August 7th. The cost for this one-day intensive workshop is low, but space is limited." 

Yup, accurate HMDA reporting is an executive level oversight these days; the downside is too great for it not to be a concern. "With heightened regulatory and media focus on HMDA data, more lenders will find themselves the subject of fair lending exams," according to Mortgage TrueView, a provider of data-driven business intelligence services. With their new independent study, the company concluded that many lenders are leaving themselves vulnerable to fair lending exams and significant penalties by not properly monitoring and managing HMDA reporting. "Mortgage companies and banks are not taking full advantage of the insights offered in HMDA data," said Mortgage TrueView President and CEO David Moffat. Additionally, Moffat said their 2013 HMDA survey showed that many lenders are submitting their data with formatting errors, which could lead to non-compliance issues with regulators.Among the findings, include: 2013 regulatory risk indicators show a 13% year-over-year increase in loan denial rates, denial rates for white applicants increased from 17% to 21%, while denial rates for non-white applicants increased from 23% to 28%, denial rates for Hispanics increased from 25% to 30%, denial rates for non-Hispanics increased from 18% to 21%, and denial rates for female applicants increased from 21% to 26%, as opposed to males where it increased from 17% to 21%. 

And CliftonLarsonAllen's Anna DeSimone reports on the CFPB's latest thoughts on simplifying the HMDA reporting for financial institutions. (Under the proposal, financial institutions that make 25 or more closed-end loans or reverse mortgages in a year would be required to report HMDA data.) Even in this era of computers we still don't have the 2013 numbers yet, but "in 2012, 7,400 financial institutions reported information about approximately 18.7 million mortgage applications and loans. While the HMDA dataset is the leading source of information about the mortgage market, it has not kept pace with the market's evolution. For example, the HMDA data do not provide adequate information about certain loan features that helped contribute to the mortgage crisis, such as adjustable-rate mortgages and non-amortizing loans.  

"The July 24 announcement... is proposing to improve the quality and type of HMDA data as required by the Dodd-Frank Act. The Bureau is also looking at ways to make submission of data easier for lenders and to improve the user experience in accessing the public data. The proposed changes include improving market information. In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace. This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant's or borrower's age and credit score. The CFPB is proposing that financial institutions provide more information about underwriting and pricing, such as an applicant's debt-to-income ratio, the interest rate of the loan, and the total discount points charged for the loan, which all fall under monitoring access to credit. This information would help regulators determine how the Ability-to-Repay rule is impacting the market, and would also help the Bureau monitor developments in specific markets such as multi-family housing, affordable housing, and manufactured housing. The proposed rule would also require that covered lenders report, with some exceptions, all loans related to dwellings, including reverse mortgages and open-end lines of credit. 

It is quite an undertaking, and to see all the information and form your own opinion in order to comment by October 22, see the CFPB's press release on HMDA.

Freedom Mortgage Corporation, a privately held, full-service mortgage lender licensed in all 50 states, let everyone know that it funded over $2 billion in residential mortgages in the month of June 2014...Two years ago, in July 2012, the company achieved monthly volume of $1 billion in funded loans for the first time. This dramatic increase in volume over the past two years is the result of leadership's vision and strategic growth plans. Roughly half of the $2 billion volume was funded by its Structured Products Group, the company's correspondent lending division."

In Northern California comes news that Mechanics Bank and RPM Mortgage, Inc. have announced an agreement for RPM to originate mortgage loans for Mechanics Bank customers. 

Within the last month Mountain West Financial Wholesale announced that, per the California Housing Finance Agency changes to the term of the CHDAP reservation, MWF will lock the CHDAP reservation for only 30 days. It is recommended that you not request a CHDAP reservation until the loan is ready for underwriting submission. As a reminder, CalHFA' s Bulletin 2014-08 stated that for all new CHDAP reservations subordinate to any first mortgage made on or after June 2, 2014, the first mortgage maximum allowable fees charged by a lender may not exceed the greater of 2% of the first mortgage loan amount, or $3,000.

Darned we have a lot of scheduled economic news this week here in the U.S.! Today is Pending Home Sales, tomorrow is the S&P/Case-Shiller house price numbers with their two-month lag, along with Consumer Confidence. Wednesday we have the MBA application numbers, along with the ADP employment change numbers, GDP, and an FOMC rate decision. On Thursday the 31^st we'll have the Employment Cost Index, Initial Jobless Claims, and the Chicago Purchasing Manager's Survey. And then on Friday, drum roll please, we can look forward to all the unemployment data, along with Personal Income and Consumption, the University of Michigan Consumer Confidence survey and Construction Spending. 

Looking at the traditional benchmark 10-yr T-note yield, it has been in the 2.44%-2.80% range since January. We're at the lower end of that now due to unrest overseas and the fact that the U.S. economy is not expanding very rapidly. Friday it closed at 2.47%, and this morning we're sitting at roughly the same level, and agency MBS prices are also unchanged.

Executive Rate Market Report:

Last Friday the MBS prices were +18 bps and the 10 yr note rate declined 4 bps to 2.47%. For the week there was no change in MBS prices and the 10 yr slipped just one basis point, from 2.48% to 2.47%. Early this morning ahead of a big week for markets the 10 at 2.48% +1 bp and MBS prices started down 10 basis points. The only report out today in a very significant week; NAR released June pending home sales at 10:00, expected to have increased 0.3% after increasing 6.1% in May, as reported sales declined 1.1%, more nasty data on the housing sector; yr/yr though the expectation was a decline of 5.0%, as reported -4.5%.

The US stock indexes opened slightly weaker taking the 10 yr and MBS prices off their early morning lows. The DJIA started -11, NASDAQ +1, S&P -1; 10 yr unchanged at 2.47% and 30 yr MBS prices +11 bps from 9:30 Friday morning and generally unchanged from Friday’s close.

This week has a plethora of releases and events; Treasury will auction $93B of notes beginning tomorrow with $29B of 2s, usually our end of the yield curve doesn’t pay a lot of attention to the 2 yr; Wednesday $35B of 5s, a little more interesting, then Thursday $29B of 7 yr notes that will get attention from bond and MBS investors. The 7 yr will take place one day after the FOMC policy statement adding additional focus on the demand. The FOMC meeting begins tomorrow and concludes on Wednesday afternoon with the policy statement (there will be no Yellen press conference after this meeting)

Wednesday the advance Q2 GDP will be reported, the current expectations are for GDP to have increased 3.1% in the quarter after declining 2.9% in Q1. The advance report is usually revised from the advance to the preliminary that will be reported one month from now, some of the third month of the quarter data isn’t complete on the advance report. Also Wednesday the July ADP private jobs report is expected to show an increase of 235K jobs; in June ADP said 281K private jobs were created and its data was the same from the BLS official employment data. Friday the BLS will report that unemployment was unchanged from June at 6.1%; non-farm jobs 233K,  private jobs are also expected at 233K. Also this week two reports on consumer attitudes, the Chicago PM July index, the national ISM manufacturing index, June personal income and spending, construction spending. The calendar is loaded (see below).

Ukraine/Russia and Israel/Hamas; both situations are status quo this morning. Israel and Hamas tried a few hours of cease fire then went back to the rocket lobbing’s back and forth. Ukraine tensions haven’t changed; the US claims Russia is supplying heavy weapons to the separatists, Russia denies it. Overall at the moment the two situations have been pushed back off the table and buying of treasuries as a safety move has waned in the last week. Both still are being monitored closely but with the US not adding sanctions after a lot of strong talk and Europe with little interest in doing much, presently we can say the Ukraine/Russia and Israel/Hamas issues are considered regional with little geopolitical consequences. Stay tuned though.

Richard Fisher, Dallas Fed, saying he is becoming increasingly concerned that the Fed is slipping behind the curve in delaying increasing rates. He said the economy is much better than the Fed is thinking and is concerned that the present lower rates are forcing increasing risk-taking in the stock market. Fisher at one point was a regular banker and has managed hedge funds in the past, maybe a little credibility there in his remarks.

This Week’s Calendar:
          Monday,
             10:00 am June pending home sales (+0.3% from +1.6% in May; as reported
         Tuesday,
             9:00 am May Case/Shiller 20 city index (+9.9% annual)
            10:00 am July consumer confidence (85.5 from 85.2 in June)
                          FOMC meeting begins
             1:00 pm $29B 2 yr note auction
        Wednesday,
            7:00 am weekly MBA mortgage applications
            8:15 am July ADP private jobs report (+235K from 281K in June)
            8:30 am Q2 advance GDP (+3.1%, Q1 -2.9%, deflator +2.0%)
            1:00 pm $35B 5 yr note auction
            2:00 pm FOMC policy statement
       Thursday,
           8:30 am weekly jobless claims (+21K to 305K)
                        Q2 employment cost index (+0.5%)
          9:45 am July Chicago PM index (63.2 from 62.6 in June)
          1:00 pm $29B 7 yr note auction
      Friday,
         8:30 am July employment data (unemployed 6.1% inch, non-farm jobs +233K, private jobs +233K, hourly earnings +0.2%)
                      June personal income and spending (income +0.4%, spending +0.4%; PCE core +0.1%)
        9:55 am U. of Michigan consumer sentiment index (81.5 from 81.3)
       10:00 am July ISM manufacturing index (56.0 from 55.3 in June)
                     June construction spending (+0.5%, +0.1% in May)\
       2:00 pm July auto and truck sales (16.7 mil from 13.4 mil in June)

AM Tracking Quote:

FNMA 4.0% 105.52 now -5 bps: 09:31 -5  Open 105.57

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

Have a great day!

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Banks & Lenders Buying Each Other & Financial Services Companies-Does it make sense?

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The FDIC tells us that of the 6,730 FDIC-insured banks nationwide, the 22 largest hold 62% of the $12.75 trillion of assets controlled by all domestic commercial banks and savings institutions as of 3/31/14.  Each of the 22 banks has at least $100 billion of assets. And the big are becoming bigger: every week there are fewer banks as they seek to increase efficiencies, lower costs, and expand geographically through joining forces with others. Announcements during the last week include (in Texas) First Bank & Trust Co. ($624mm) acquiring Texas Savings Bank ($78mm) and Vantage Bank Texas ($328mm) will acquire D'Hanis State Bank ($47mm). Yesterday Columbia Banking System, Inc. and Intermountain Community Bancorp jointly announced a merger - the combined company will have approximately $8.2 billion in assets with over 150 branches throughout Washington, Oregon and Idaho. 

In Indiana First Merchants Bank ($5.4 billion) will acquire Community Bank ($272mm) for $46mm in cash and stock. Nearby in Iowa First Security Bank and Trust Co. ($464mm) will acquire Hampton State Bank ($74mm). Michigan's mBank ($579mm) will acquire The Peninsula Bank of Ishpeming ($131mm) for $13.3mm in cash and stock. Up in Massachusetts Cape Ann Savings Bank (468mm) will acquire Granite Savings Bank ($70mm).  

Going to Ohio (home of Akron, rubber capital of the world), the Vinton County National Bank ($766mm) will acquire The Citizens Bank of Ashville ($105mm) for about $12.2mm in cash or 1.4x tangible book. Farmers Bank & Trust Co. ($840mm, AR) will acquire 1^st Bank ($309mm, TX). In nearby Louisiana Catahoula - LaSalle Bank ($121mm) will acquire Bank of Jena ($72mm). Last but not least, out in California Bank of the Sierra ($1.5B) will acquire Santa Clara Valley Bank ($127mm) for $15.3mm in cash.  

But First Mountain Bank ($137mm, CA) and First National Bank of Southern California ($177mm, CA) have terminated their previously announced merger after the OCC would not approve the sale under the agreement's legal terms and conditions. First Interstate Bank ($7.6B, MT) will close eight branches following its acquisition of Mountain West Bank ($634mm, MT) due to close proximity to existing branches. And Florida's Landmark Bank ($279mm) will close one branch it recently acquired from its takeover of failed Valley Bank (there are valleys in Florida?). And last Friday Eastside Commercial Bank, Conyers, Georgia, was closed and business transferred to Community & Southern Bank of Atlanta, Georgia. 

As an owner of a midsize independent mortgage banking company, what is the feasibility of negotiating an economically attractive sale of your enterprise under current market conditions?  Jeff Babcock (STRATMOR Group) addressed this topic at the recent Western States Secondary Marketing Conference. (STRATMOR is an active player in the M&A space, specializing in transactions within the midsize market sector.) Citing the current STRATMOR transaction pipeline as the source of his observations, Babcock reported that, "There is very strong investor demand for well-managed retail origination platforms. These buyers are motivated to acquire (rather than to build through recruiting which can be slow, expensive and risky) to achieve their ambitious scale objectives. Today's mortgage company buyers are generally larger independents and regional  bank-owned lenders who offer a qualified seller strategically attractive and impactful acquisition synergies. While there remain some private equity investors exploring for opportunities, STRATMOR has found that existing lenders can justify better values, bring cultural compatibility and offer more synergies." 

Jeff's note continued. "By 'qualified sellers,' we mean retail lenders with a high purchase share for 2014 YTD, sustainable earnings track record in 2012-2014 YTD span and a solid reputation with counterparties and competitors.  Such prospective sellers may find that they have greater enterprise value by merging than continuing to struggle for market share as an independent. Every deal in the STRATMOR transaction pipeline involves a substantial premium value to be paid to the seller. STRATMOR's marketplace experience confirms that it's a misconception that all deals today involve necessitous mortgage company sellers who command no premium value." (For a confidential discussion regarding your specific situation, feel free to reach out to Jeff.)

 

What have the states been up to lately?

 

Florida recently enacted provisions regarding consumer collection practices in House Bill 413. Under HB 413, "a person may not engage in business in Florida as a consumer collection agency without first registering in accordance with the law, and thereafter maintaining a valid registration." Further, the Financial Services Commission may adopt rules requiring electronic submission of forms, documents and required fees as well as establish time periods during which a consumer collection agency is barred from registration due to prior criminal convictions of, or guilty or no contest pleas by, an applicant's control persons, regardless of adjudication. 

Hawaii recently amended several provisions of the Secure and Fair Enforcement for Mortgage Licensing Act in Senate Bill No. 2817. The bill clarified definitions such as "elder," "sole proprietorship", and became effective on July 1, 2014. 

What is going on in Utah? Recently FINCEN, that would be the Financial Crimes Enforcement Network by the way, published the first issue of SAR Stats(SAR = Suspicious Activity Report). The release examines only data contained on the more than 1 million unique FinCEN SAR's with filing dates between March 1, 2012 and December 31, 2013. The adoption of the new unified SAR form and the implementation of e-Filing enable the financial industry to report suspicious activity more swiftly and with more specificity. The changes also mean the data presented in this issue are a new baseline for financial sector reporting on suspicious activity. The overall 1.4 million data points retrieved for this report are organized and presented by industry. So what exactly is going on in Utah? Well according to SAR Stats, the state ranks first in 'Filings Ranked by U.S. States for "Other" Financial Institutions' (between May 2012 and December 2013) with 7,256 overall filings, constituting 25.3% overall....California is a distant second with 3,450 filings.

A correction! Yesterday I mentioned an underwriting clause that addressed VA loans, moving, and equity. (I wish I could say that I put that in just to see who was reading the commentary, but I can't.) It turns out that the VA requires no equity to offset the rent payment. In other words, the VA does not require equity in a departing residence to offset the mortgage payment with new rental income.  Many lenders have that overlay, but it is not a VA requirement. And here is a note from a lender: "We are mini-corr lenders and sell most of our VA loans to Flagstar. Here is what Flagstar's VA guides say regarding the departure of a current residence: 'Rental income from the property the borrower is vacating may be used to offset the current mortgage payment, provided there is no evidence the property will be difficult to rent; Document the rental income with a current lease agreement; Under no circumstances, may rental income be included in the borrower's income; If there is no current lease agreement, the underwriter may offset the payment with prospective rental income, provided there is evidence the local rental market is very strong. To demonstrate the amount of the prospective rent and the local rental market is strong, obtain one of the following in writing: appraiser's analysis or analysis from a real estate agent having no interest in the transaction. The analysis may not come from the listing or selling realtor or any realtor who is employed with either realtor.'" Thanks everyone! 

Keeping in line with government loans, the Collingwood Group's Managing Director Karen Garner published a blog titled "FHA Enforcement: The Real Cost of Non-Compliance."  The post outlines the issues lenders and servicers may face if they fail to perform certain tasks required by FHA as well as the potential penalties that could be sanctioned if a violation is found.  Lenders and servicers have recently come under increased scrutiny from the U.S. Department of Housing and Urban Development (HUD) to ensure they are complying adequately with FHA requirements. 

"Is volatility going to pick up in October?" Plenty of smart people think that it will. We've had a long spate of the markets not doing much of anything, regardless of economic news, overseas buyers, religious turmoil, geopolitical conflicts. Volatility has been so low - like rates, it has nowhere to go but up, right? With QE 3 ending, and the gentle hand of the Fed being lifted out of the demand equation, things will go back to pre-QE. And yes, capital markets staffs are dreading dusting off the extension and renegotiation polices. Experts think that banks will absorb most of the excess net supply the Fed doesn't - we'll see. 

But for now, steady as she goes: sure, we have some intra-day buying and selling induced rate movements, but I can't remember the last time I saw a gaggle of investors change prices intra-day. The Fed continues to buy about $2 billion of agency paper a day, and selling by originators is thought to be less than that. Agency MBS prices closed down/worse about .125. The National Association of Realtors (NAR) reported a 2.6 percent month-over-month rise in existing-home sales last month to a seasonally adjusted annual rate of 5.04 million. May sales were revised slightly upward to a rate of 4.91 million. 

For news today we'll have Initial Jobless Claims (expected slightly higher) and New Home Sales (expected down about 5%). At 11AM EST the Treasury announces details of next week's auctions of 2-, 5- and 7-year notes (e: $93 billion). For numbers the 10-yr closed at 2.46% and today is sitting at 2.48% with agency MBS prices worse about .125.

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Upcoming Events & Training; Risk? What risk? We don't have no stinkin' risk!

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The Agencies are "happy" to deal with credit risk. After all, that is what guarantee fees are for, right? But when someone like Fannie is dealing with approximately 1,400 lenders, operational risk is not something they want to assume. The Agencies, and other investors, are carefully watching the migration away from the pristine risk profile that the industry has developed over the last several years. They want viable counterparties with plenty of net worth, and lenders exiting or merging cause some instability. And any investor walks a fine line between offering more and more to their clients versus protecting themselves. Given the recent announcement from the FHFA about the Agencies needing to focus on non-regulated servicers, the premise that the Agencies aren't interested in operational risk oversight may be shifting. 

The interesting thing is that everyone I have asked has told me that not every loan should be done - so logically not every borrower will qualify for a loan. Fred Jackson wrote to me saying, "Regarding the comments on mini-correspondents, after all this time, does it not amaze you that many (still) believe that Fannie and Freddie underwrite the loans they buy. No matter how many times it's explained that it's the responsibility of the seller to qualify and underwrite the loans, with DU or LP or manually, and how obvious it is that, to underwrite every loan bought , F&F would need to have as many underwriters as all their sellers put together, why don't people get it? The same applies to large correspondents who are seller/servicers. Do the math, folks." 

Risk management in mortgage lending is a burgeoning field. How does one measure, track, and reduce loan defects? What will the upcoming RESPA/TILA changes mean to risk? Are you preventing all fraud in your originations? And if not, why not? How are you handling your underwriting, repurchase, indemnification, and rescission risks? The CFPB appears to be focused on counterparty risk - how are you monitoring your vendors? What about cybersecurity, or the risk of the janitor throwing a bunch of loan files in the dumpster (I saw that one happen several years ago)? Is the company monitoring appraisal and review appraisal risks? Collateral valuation is critical to investors. How about for third party originators - how are they watching their broker clients?  

But wait - there's more! Are you hedging your secondary marketing risk correctly? Will your warehouse lender be around next month? Conversely, will the warehouse bank's clients be around next month? Are you adequately training your staff on risk metrics and avoidance? Are you at risk of your LOs running amok in social media, saying they have the best rates in town? And the CFPB wants to make sure that a lender's LOs are not being compensated to steer borrowers in one direction - the risk of a lender not doing that are pretty darned steep. 

And when a lender has their eyes on all of that, is there any time or resources to actually originate a loan profitably? Is it easier doing all of that when you're a big bank than when you're a lender doing $30 million a month? Not only are lenders measuring, tracking, and reducing loan defect rates, but they are also mitigating repurchase, re-default, and rescission risk. And all of this is for QM and non-QM loans, vanilla product or expanded - that should have little bearing on a company monitoring and minimizing risk. Indeed, managing risk is critical, and expensive, for lenders. 

Not coincidentally, the MBA's Risk Management and Quality Assurance Forum is scheduled on September 7^th-9^th in Miami Florida. "Hear from a distinguished panel of key industry leaders and GSE staff as they discuss updates and challenges to current business processes in two general sessions. Register before August 4^th, member price $840 and non-member price $1040. For complete details and registration information: MBA.

 

 While we're talking about training and happenings, let's play some catch-up with other upcoming events. In no particular order...

 

I know that this is late notice, but the MBA/MW if offering a Fundamentals of Mortgage Banking course starting today in Herndon, VA. "A comprehensive two-day course that every Loan Officer Assistant, Loan Officer or new Processor should attend. Taught by industry renowned instructor Mary Kay Scully of Genworth Mortgage Insurance.   

The CMLA and AMLG are hosting a complimentary comprehensive 90 Minute Repurchase/Make-Whole Defense Webinar: "The Latest Patterns, Trends and Solutions to Resolving Repurchase/Make Whole Claims in 2014 and Beyond" on Tuesday, July 29, from 11-2:30PM PST. Topics include various trends with the major secondary market investors both in and out of court, insights into the latest case law from around the country and how such may affect forward-moving repurchase/make-whole defense and resolution strategies, updates to legal defenses that lenders can use to push back a repurchase demand; common allegations asserted in support of repurchase/make-whole demands and a number of the strategies that should be considered to rebut such demands, etc.

NAMB National will have its 40th Annual Conference in Vegas baby! The Nation's Largest Conference & Tradeshow for Mortgage Professionals is scheduled for September 13-15 at the Luxor Hotel. Attendee registration price is $295 increasing to $345 after Thursday July 31st. For complete conference details, visit the website: NAMB. As an added bonus, you can fulfill your complete 8 hour continuing education requirements for your NMLS license renewal. "This is a separately-ticketed bonus offering. Make the most of your time in Vegas by getting your federally-required CE in addition to a conference full of networking, education, opportunities and prizes. Continuing Education course is provided by Mortgage Educators & Compliance. Important Note: You must take the entire 8 hour class to qualify for credit.

The Community Home Lenders Association (CHLA) has announced plans for its second annual fall conference to be held September 8-9 at in Washington DC at the Liaison Hotel on Capitol Hill.  The conference will once again feature attendance by key federal policy makers that affect the future of the mortgage banking industry and housing finance reform. The Conference also includes a Lobby Day with key members of Congress. "CHLA has taken the lead on important issues affecting independent non-bank mortgage bankers, including being the first national trade association to call on FHA to reduce annual premiums and calling for bank mortgage originators to have testing and training requirements commensurate with those that apply to non-bank mortgage lenders." 

If you find yourself in the Northwest in early September, you may want to check out the Pacific Northwest Mortgage Lenders Conference, September 7-9. This year's event will be held at The Benson Hotel, a historic landmark in the heart of downtown Portland, Oregon.  The Oregon Mortgage Bankers Association (OMBA) is pleased to host this year's tri-state event for Oregon, Washington and Idaho. "The guest speakers will cover topics that include regional and national economic forecasts, GSE reform, CFPB updates, Private MI changes, and QM updates. The MBA will provide critical and timely updates on legislative issues that affect our business."

The TMBA's 13th Annual Reverse Mortgage Day will be held at the Westin Galleria Dallas in Dallas, Texas on Thursday, September 11 with a Welcome Reception on Wednesday September 10. This event will bring industry professionals from all over the country to the Lone Star State seeking strategic options and information about the business of reverse mortgage lending. Attendees include upper management from the nation's leading reverse mortgage lenders, loan officers, real estate attorneys and title companies. Individual registration fee, before August 8th, $159.00, after August 8th, fee is $209.

What happens in Vegas shouldn't stay in Vegas... The CMBA's 19th Annual Western States Loan Servicing Conference is taking place August 3rd - 5th at the Encore in Las Vegas. This year includes an added a golf tournament to kick off our conference which will happen on Sunday, August 3rd at Spanish Trail Golf Course, just a few minutes from the conference hotel. 

The markets: Ukraine, Gaza Strip, and Malaysian Airline disaster, take your pick. Overall prices and rates ended Monday about where they ended Friday, despite turmoil and lack of U.S. news. Today we'll have the Consumer Price Index numbers for June, seen just below the prior read of +0.4%, the FHFA house price index for May (expected slightly higher) and the June's Existing Home Sales (also expected higher). In the early going the 10-yr is still at 2.48% and agency MBS prices roughly unchanged from Monday's close.

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