Those
who forget the past are doomed to repeat it. The savings and loan crisis of the 1980s
and 1990s was the failure of 1,043 out of the 3,234 savings and loan
associations in the United States from 1986 to 1995. By 1995, the RTC had
closed 747 failed institutions, worth a book value of between $402 and $407
billion, with an estimated cost to taxpayers of $160 billion per the GAO. What
happened? Well, most attribute it to Paul Volcker (Chairman of the Federal
Reserve), who helped set the stage for the S&L Crisis in 1979 by doubling
the interest rate to reduce inflation. But S&Ls had made long-term loans
at fixed interest rates using short-term money. When the interest rate
increased, the S&Ls could not attract adequate capital and became insolvent.
We all know that QE is going to end around Halloween, and now investors spend a
great deal of time discussing when the Federal Reserve will begin raising
short-term interest rates. But how about when it will stop raising them? A
Federal Reserve Bank of New York survey of bond dealers shows Wall Street firms
see the Fed beginning a cycle of interest rate increases in the third quarter
of 2015 and ending it by the second half of 2017 when the Fed's benchmark
short-term interest rate has reached 3.5%. No one has a crystal ball, but a
survey of 22 bond dealers that trade securities with the Fed saw the Fed
continuing to push rates up to 3.75% by the first half of 2018 and on to 4% in
the long-run. How will that sit with any bank that owns millions/billions of
30-year fixed rate MBS at 3.50%?
Do
you think that rates are going to go up? I am sure that they eventually will.
Certainly the groundwork is being prepared for it, and along those lines Mortgage
Capital Management has an interesting White Paper titled "Float-down locks as a hedging
tool in rising interest rate environment".
While
our cat Myrtle is already calling for the resignation of Janet Yellen
(something about milk prices being the true indicator of inflation now, I tune
her out most of the time), I am more willing to give the new Chairwoman a
fairly wide intellectual berth. So it was with some interest that I read Wells
Fargo's Economics Group Interest Rate Weekly: Is the Fed Behind the Curve?
The group writes, "Yellen Shrugs Off the Recent Uptick in the CPI: Fed
Chair Janet Yellen appeared to go out of her way to dismiss any concerns
about the recent uptick in the Consumer Price Index. The overall CPI rose 0.4
percentage points in May, while the core CPI rose 0.3 percent. The increases
were fairly broad based and followed outsized gains the prior month. With May's
gains, the overall CPI is now up 2.1 percent year-to-year, while the core is up
2.0 percent." While many Fed-Watchers continue to estimate a 2015 Fed
Funds move, much to Myrtles credit, food prices have risen 18-22%
by most estimates.
While
we're talking about rates, pipeline flow and management, STRATMOR Group
Managing Director Dr. Matt Lind reported the results of a
statistical analysis of 2013 Retail channel pull-through percentages covering
69 bank and non-bank lenders. In this analysis, pull-through is defined as
the ratio of closed loans to applications. Matt points out that this
ratio can be very different from the ratio of closed-to-locked loans as is
often reported by secondary hedging firms.
Key
high-level findings are that: For the 25 mid-size to large banks in the
sample, pull-through for Agency loans was a startlingly high 91.54%.
"This reflects both the high-mix and pull-through of HARP loans for this
segment of lenders" said Dr. Lind. "But pull-through this high also
implies high pull-through for non-HARP Agency loans." Matt noted that the
Agency loan pull-through estimated for non-Bank lenders was almost 80%; and the
Banks have a significantly higher percentage of refinance loans which recently
have had higher pull-through than purchase loans. Matt suggested that, along
with other factors, "lower-than-expected property valuations were more
likely to cause fall-out among purchase loans than refinances."
Pull-through
for Government loans --- at around 60% for both banks and non-banks --- was
surprisingly low relative to Agency loans. Several factors may account
for this: first, the absence of HARP loans; second, the fact that Government
loans are comprised of a higher proportion of lower pull-through purchase
loans; third, that Government purchase borrowers have less ability than
non-Government borrowers to adjust to lower than expected appraisal valuations;
and finally, that Government borrowers may be more susceptible to changing
circumstances than Agency or Jumbo borrowers.
Pull-through
of non-Agency Jumbo loans at Banks (60.01%) is almost 24% lower than Jumbo
pull-through for non-Banks (78.92%). This result is a little surprising, says
Matt, since so many larger Banks originate Jumbo loans for their wealth
management and private banking clients, arguably with low fall-out. But whereas
LOs at Banks typically have access to only the in-house Jumbo offerings, LOs at
non-Banks can typically choose or shop Jumbo loans from among several
investors. And, with non-Agency Jumbo loan balances averaging 3-4 times
that of Agency and Government loans, "we would expect loan officers to
work VERY hard to get these loans closed," said Matt.
Looking
forward, the elephant in the room, according to Matt, is whether or not the
industry will experience a systemic decline in pull-through rates to the 60% to
70% range once Agency pull-through rates are no longer being
"jacked-up" by HARP loans. Ten years ago, pull-through rates
seemed to be running in the 70% to 80% range. So, if pull-through rates
systematically decline, fulfillment costs will rise, thereby putting upward
pressure on rates and fees.
While
many factors in the business environment may be involved, Matt suggests that,
at least through the mid-term, systemically slower long-term industry growth
(and the resulting heightened competition) may be key to causing lower
pull-through rates. Advance lead generation tools --- for example, trigger
leads --- make it possible for lenders, especially a borrower's current lender,
to go after their business even after the borrower may have been approved by
another lender. This is just one manifestation of a competitive environment in
which the watchword is "stealing share."
On
the other hand, if servicers get good at being first on the scene when an
existing borrower needs a new loan --- which will likely make it much more
difficult for other lenders to get an application --- pull-through rates could
significantly increase, thus lowering origination costs. "If I
had to bet," said Matt, "I'd bet on existing servicers eventually
getting much better at being top-of-mind and the first lender to have contact
with their borrowers for a new loan." This also means that lenders that do
not service or carefully track previous borrowers --- lenders who sell loans
servicing released --- will increasingly be competing for "first-time
homebuyers." "What makes this problematic," said Matt, "is
that lenders that service and retain a high proportion of the next loans done
by their borrowers will be able to price very aggressively."
In
Denver, in advance of the release of Richey May's Q2 financial benchmarking
data early next month, it may be useful to remind everyone of a couple
trends from the first quarter. Although production was down and profitability took
a significant hit in Q1, there were some positive signs for independent
lenders heading into Q2. Richey May reported that locked pipelines were up
an average of 41% at the end of the quarter versus the prior quarter,
suggesting a rebound in production volume; margins rebounded to where they were
during the second quarter of 2013; and pre-tax profits were up by 25 bps over
the prior quarter, with lenders that service and direct-to-consumer shops
seeing the biggest increases. Although operating expenses on a per-loan basis
continue to rise, the rate of growth slowed significantly during Q1. All
of this pointed to a much better Q2 after a long, cold winter.
Many
times I may receive the same article over the span of a few days; in some cases
my inbox gets flooded within an hour by people around the industry pointing to
a news article of some interest. This is such a case. Prashant Gopal and John
Gittelsohn writing for Bloomberg news, penned an interesting article "Starter Homes in Demand With
Builder LGI Soaring 60%: Mortgages" examining the continual
strength of LGI. They write, "LGI, an entry-level Texas builder that
has moved into six more states, is demonstrating that the U.S. housing crash
didn't diminish the desire for homeownership. The company's strategy of luring
renters with low-cost houses and assisting them with getting mortgages has
spurred record sales and made LGI the top-rated builder among analysts. It's
also attracting competition as D.R. Horton Inc. (DHI),
the largest in the industry, starts a brand aimed at first-time buyers with
prices starting at $120,000." As most know, rents have been
skyrocketing, with demand being satiated by a continual supply of underemployed
workers battle hardened by debt and continual underemployment over the last six
years. According to SF based Trulia, for those who can qualify for a mortgage,
buying is now 38 percent cheaper than renting.
Are
changes underway in residential lending at Chase? Is JP Morgan is considering getting out of the FHA
business? CEO Jamie Dimon said on the second quarter earnings
conference call that the bank lost "a tremendous sum of money on FHA... So
the real question is, should we be in the FHA business at all? We are
still struggling with that." Consider this a brush-back pitch to the
government, who has been suing the banks left and right (which is one way to
impose a financial surtax). So what does the public see? Here's a Reuters story in the
Chicago press titled, "JPMorgan pulls back from mortgage lending on
foreclosure worries." So... it doesn't take much pulling back from
"the big boys" in lending to make for some great years for scores of
smaller lenders around the nation.
Is
it newsworthy when Janet Yellen says, basically, "If the economy slows
back down we'll leave short term rates alone, but if & when it improves
we'll increase short term rates"? I hope not - but there wasn't much else
going on yesterday although the Fed's Beige Book showed slow expansion in the
nation's economic districts. And homebuilder optimism picked up - a good thing
for housing in inventory-strapped areas. The yield on the 10-yr has been
stagnant all week, sitting in the low 2.50% range. The market will have June's
Housing Starts and Building Permits, expected +1.9% and +3.5% respectively, and
Initial Jobless Claims also expected to increase slightly.
Rates
aren't doing jack. Volatility is gone. In the range we stay.
Executive Rate Market Report:
Treasuries and MBSs
opening strong this morning after price declines had driven the bellwether 10
yr to its key support at 2.57%; at 9:00 this morning the 10 at 2.50% and MBS prices +11 bps
frm yesterday’s close. The support this morning; increasing tensions between
the US and Russia as additional economic sanctions were announced by the
administration and in Europe. Russia continues to deny it is supporting the
separatists in Ukraine; the fighting has increased in the last few weeks
leading to the new sanctions. Putin saying the new sanctions will lead US and Russian
relations to a dead end. Ukraine accused Russia's armed forces of shooting down
one of its fighter jets over Ukrainian territory, marking Kiev's most direct
accusation yet of Moscow's involvement in the separatist conflict in the
country's east.
After three days of
improvements in the stock market, this morning the indexes are lower. Microsoft announced it will cut 18K jobs this
year and next. Not the only reason some weakness in stocks this morning. June
housing starts and permits were worse than expected. Housing starts fell 9.3%
to an 893,000 annualized rate from a 985,000 pace in May that was weaker than
initially estimated; the consensus estimate for starts was an increase of 2.5%
to 1026K, the report is the lowest start level in nine months. Construction of
single-family houses declined 9% to a 575,000 rate, the weakest since November
2012, the report showed. Work on multifamily homes, such as apartment
buildings, fell 9.9% to a 318,000 rate. The drop was influenced by a 20.1%
plunge in the South, the biggest decrease since May 2010. This is the time of
year starts should be increasing; the report goes to the reality that the
housing industry is still struggling. Adding more concern about housing,
building permits in June were expected to be up 4.5%, as reported permits
dropped 4.0% to 963K.
Weekly jobless claims
were expected to have increased last week to 310K frm 310K frm 305K (revised frm 304K), claims dropped 3K
to 302K, still unable to break down below 300K. Not much change in claims over
the past five weeks. Stabilized claims can lead to increases in jobs, but
mainly suggests firings are waning.
The DJIA opened -38,
NASDAQ -12, S&P -6; 10 yr at 9:30 2.50% -3 bp and 30 yr MBS prices +17 bps
frm yesterday’s close.
Another key data point at
10:00; the July Philadelphia Fed business index was expected at 16.9 frm 17.8
in June. The index increased to
23.9 the best since March 2011. The current new orders and shipments indexes
increased notably this month, increasing 17 points and 19 points, respectively.
Both unfilled orders and delivery times indexes were positive for the second
consecutive month, suggesting continued strengthening conditions. The
employment index remained positive, and, although it increased less than 1
point, it has improved for four consecutive months. The percentage of firms
reporting increases in employment (24 percent) exceeded the percentage
reporting decreases (12 percent). The workweek index was positive for the fifth
consecutive month and increased 5 points. The better report has taken a little
away from the bond market improvement. Current data on foreign bond purchases
of US treasuries explains one reason UIS interest rates have stayed low as most
economists have been forecasting higher long term rates by now.
The driver for mortgage
rates, the 10 yr note, spend this week testing its technical support at 2.57%,
it held. This morning the market
is beginning by testing its resistance at 2.50%. As we have noted through the
week, our technical indicators continued to hold bullish biases; that the range
is so narrow in the broader sense there has been little change in rates over the
last week and a half. As long as the equity markets continue to attract buying
there is not much we can expect for declining rates. That said, there are still
geo-political concerns that support treasury buying. The mid-east has been
quiet this week (at least in the news), Ukraine/Russia continues to boil; both
are closely monitored by large investors and central banks.
PRICES @ 10:15 AM:
10 yr note:+4/32 (12 bp) 2.51% -2 bp
5 yr note:+1/32 (3 bp) 1.68% -1 bp
2 Yr note:unch 0.49% unch
30 yr bond:+11/32 (34 bp) 3.32% -2 bp
Libor Rates: 1 mo 0.155%; 3 mo 0.233%; 6 mo 0.326%; 1 yr
0.554%
30 yr FNMA 4.0 Aug: @9:30 105.50 +16 bp (+15 bp frm 9:30
yesterday) 3.5 coupon 102.28 +19 bp (+20 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Aug: @9:30 103.29 +7 bp (-11 bp frm 9:30
yesterday)
30 yr GNMA 4.0 Aug: @9:30 106.50 +14 bp (+11 bp frm 9:30
yesterday) 3.5 coupon 103.44 +15 bp (+20 bp frm 9:30 yesterday)
Dollar/Yen:101.52 -0.15 yen
Dollar/Euro:$1.3527 unch
Gold:$1304.90 +$5.10
Crude Oil:$102.84 +$1.64
DJIA:17,129.98 -8.22
NASDAQ:4415.54 -10.43
S&P 500:1978.83 -2.74
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