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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