Mergers
continue - and every one of them hopes it works out (and not like the cover of The Economist
titled "The Trouble with Mergers"). New York City-based credit union
Education Affiliates Federal Credit Union voted to merge its members and assets
with McGraw-Hill Federal Credit Union. The credit union brings 3,779 members
and more than $50 million in assets to McGraw-Hill. The East Windsor-based
credit union will have 24,000 members and more than $353 million in total
assets as a result of the merger.
But
specific to the mortgage biz, Ellie Mae announced plans to acquire AllRegs
for $30 million in cash. "The acquisition of AllRegs expands Ellie Mae's
position as the industry's market leader of mortgage technology, content and
services. AllRegs information management solutions are used by more than 3,000
companies representing every facet of mortgage banking: major lenders and
investors, regulators, Federal and State agencies, brokers, mortgage services
vendors and law firms. AllRegs product offerings include education and
training, loan product and guideline data and analytics, and the AllRegs online
reference library that includes investor underwriting and insuring guidelines,
federal and state statutes and regulations, Mortgage Mentor 'how to' guides and
plain language interpretation and analysis."
Although
Wells Fargo & Chase tend to lead off the bank earning season, we have
continued to have a plethora of 2nd quarter earnings. Here is a
random collection of mortgage company-related earnings, certainly highlighted
by the continued success of the agencies, which can give us a clue as to the
trends in mortgage company revenues.
Stonegate had operating EPS
which excludes a $10.7 million negative MSR valuation adjustment and a small
amount of stock comp expense. 2Q origination volume came in at $3.31 billion,
up from $2.42 billion in 1Q and gain-on-sale margins increased QoQ to 141 basis
points: the higher volumes and a higher gain-on-sale margin beat estimates.
(Rate locks per day averaged $72.8 million in 2Q versus $55.0 million in 1Q14.)
The period-end servicing portfolio was $16.7 billion of UPB, up from $14.1
billion in 1Q.
D.R.
Horton
reported earnings where orders increased 32% in value and 25% in units. The
cancellation rate was 24%, though. Interestingly, gross margins fell: many
builders have been able to increase prices faster than input costs have gone
up. There were some special items in that number so the year-over-year decrease
could be misleading.
Nationstar
Mortgage Holdings, Inc. had earnings per share of $0.74. The servicing pipeline
was flat at $300 billion but the servicing portfolio decreased during the
quarter. Servicing operating earnings excludes $25.7 million of one-time
expenses related to the sale of servicing advances and fair value mark on the
MSR. The quarter-end servicing portfolio was $378 billion (UPB), down from $384
billion last quarter. Origination volume of $4.4 billion was down from $4.7
billion. Gain-on-sale income increased to $151.2 million from $116.2 million
Q/Q. Based on total closings, the GOS margin came in at 3.93% from 2.72%, and
the total application pipeline increased to $5 billion from $3.5 billion in 1Q,
while the recapture rate during the quarter decreased to 32% from 49%
sequentially.
PennyMac
Mortgage Investment Trust earnings came in better than expected, possibly due to
higher valuation gains on non-performing loans. PennyMac reported GAAP and
operating EPS of $0.91, up from $0.50 in 1Q, due in large part to +$0.40 per
share of valuation changes and payoffs of mortgage loans. Book value increased
to $21.27 from $20.88. The company also carries some of its MSRs at lower of
cost or market (LOCOM) and noted that fair value of MSRs is $20.5 million
($0.28 a share) above carrying value. Net gains on investments totaled $73.1
million, up from $42.6 million QOQ and driven by rising prices on NPLs and RPLs
in the market place and home price appreciation. On the mortgage banking side,
the gain-on-sale margin decreased to 34 bps vs. 52 bps last quarter (as a
percentage of closings). Mortgage volume rose to $7.0 billion from $4.8 billion
Q/Q.
Radian's second quarter 2014
financial results were good with "Net income of $175 million, or $0.78 per
diluted share. It executed its growth and diversification strategy through the
acquisition of Clayton - a leading provider of outsourced mortgage and real
estate solutions. Radian is the largest MI company with $165 billion in
insurance in force. Shrinking legacy FG book - 82% decline since the company
stopped writing new business in 2008."
Bloomberg
writes that "Radian Group Inc. bought $100 million of default protection
on an MBIA Inc. unit to help hedge against losses on a collateralized loan
obligation backed by the two insurers. Radian is the second insurer, behind
MBIA Insurance Corp., on a guarantee of about $377 million on a CLO called
Zohar that's backed by loans to smaller companies. Radian purchased half of the
protection in August 2013 and the rest in June. Radian's CFO noted, 'We think
there's certainly a risk of them defaulting, given their structured-finance
portfolio, and also quite frankly their exposure to the transaction.'")
Richmond
American Homes (M.D.C. Holdings) saw net income of $21.5 million, or $0.44
per diluted share vs. net income of $224.9 million, or $4.55 per diluted share
and pretax income of $34.0 million vs. $38.0 million. Net new orders were up 5%
to 1,419 homes with the dollar value of net new orders of $544.8 million, up
12%. Home sale revenues were $430.7 million, up 8% vs. $400.3 million and
average sales price increase of $33,600 per home, or 10%, to $372,000. Homes
delivered totaled 1,158 down slightly from 1,183. "For the homebuilding
industry as a whole, the spring selling season was modestly slower than a year
ago, highlighting volatile conditions in the short-term as the industry
continues down a broader path of long-term growth. We saw hesitation from some
potential buyers, especially in the first-time buyer segment, following a
significant run-up in home prices in 2013 and tepid economic trends that have
persisted for much of the past year."
PulteGroup announced average
selling prices rose 12% to $328,000, and gross margins came in at 23.6%, up 480
basis points year over year. Closings dropped 9% in units, however, so Pulte
looks to be following the typical builder pattern of higher prices / lower
units.
(The
WSJ has a good piece on
the weakness of housing, particularly housing construction. As we know, housing
starts have been mired below 1 million units for what seems like forever.
Normalcy is around 1.5 million units historically. When you look at residential
construction's contribution to GDP, it is been about 2.5% - 3%, much lower than
its pre-bubble level of 4% to 5%. Not only that, but residential construction
usually leads an economy out of recession.)
Freddie
Mac and Fannie Mae
each reported out another successful financial quarter as each continued to
reduce their respective distressed loan portfolios, replacing them with later
vintage performing loans. Neither, however, reported profits at the record
levels seen earlier as their portfolios shrink and legal settlements taper off.
"The increase in credit-related income was due primarily to an increase in
home prices," Fannie Mae said in a statement. Fannie Mae reported net
income and comprehensive income of $3.7 billion for the second quarter of 2014
while Freddie Mac's net income was $1.4 billion. Fannie Mae will pay $3.7
billion in dividends to the U.S. Treasury in September and Freddie Mac will pay
$1.9 billion. Once Fannie has made the latest payment in September, it
will have returned $130.5 billion to taxpayers in return for the $116.1 billion
in taxpayer aid it received. The GSEs in aggregate will have sent the Treasury
Department nearly $219 billion in cash payments on its $189.4 billion in senior
preferred stock by the end of Q2 2014.
Two
Harbors Investment,
a big buyer of servicing, reported GAAP and operating EPS of $0.11 and $0.24,
respectively. The difference between GAAP and core earnings reflected realized
and unrealized gains on assets and derivatives. Operating EPS of $0.24 was flat
with $0.24 in the prior quarter and up from $0.21 Y/Y. The net interest spread
decreased to 3.38% from 3.44% in the prior quarter. The yield on Agency RMBS,
derivatives and MSRs (the rate portfolio) decreased to 3.7% from 3.8%, while
the rate on non-agency MBS decreased to 9% from 9.2%. At quarter end the
company's MSR stood at $500.5 million from $476.7 million Q/Q and represented
loans with a UPB of $45.6 billion (from $41.6 billion Q/Q). The company added a
previously announced $4.6 billion bulk MSR acquisition during the quarter as
well as flow amounts.
Redwood
Trust, Inc.
had lower mortgage banking gains, although core earnings was negatively
impacted by timing differences on jumbo pipeline hedges. Book value decreased
to $15.03 from $15.14 on the dividend in excess of earnings, as well as a
higher share count. Redwood had lower mortgage banking income, along with
slightly higher expenses. (Redwood reported income of $6.3 million from
mortgage banking activities in 2Q, up from a $0.7 million loss in 1Q.)
Residential loan acquisitions totaled $1.8 billion during the quarter:
conforming loan acquisitions of $868 million was up 190% from 1Q and management
is shooting for $1 billion a month by year-end. Redwood completed only one
residential securitization during the quarter, consisting of $351 million of
jumbo loans. The company also completed a second securitization of $306 million
that closed in July. Management noted that jumbo gain-on-sale margins came in
above the high end of its targeted 25 bps to 50 bps range but that conforming
margins were around break-even. This reflects both the more competitive nature
of the conforming market and the fact that the company is building out its
conforming business and rapidly taking market share. The residential pipeline
looked good at $2.0 billion, which includes $1.6 billion of jumbo volume and $400
million of conforming loans.
Overall,
second-quarter earnings at the country's largest mortgage banks met analyst
expectations, according to a recent report from Keefe, Bruyette & Woods.
Mortgage activity increased from the previous quarter, but remained well
below last year's results, the report showed. "A rise in originations
boosted second-quarter profits at the ten largest banks, including Wells Fargo,
JPMorgan and Bank of America. Origination volumes climbed 22% from the previous
quarter, to $108.4 billion. Originations were 60% lower, however, than the same
time last year. Gain-on-sale margins were generally flat, due to strong
industrywide competition. The average margin was 202 basis points, or one basis
point higher than the previous quarter."
Yes,
rates are better this morning - because of turmoil overseas and possible air
strikes in Iraq. We saw a 2.42% close on the 10-yr., and in the early going
rates are down nicely with the 10-yr yield at 2.40% and agency MBS prices
lagging but better by a shade. This is the lowest yields have been all
year, and is certainly lower than the 3.00% where we began 2014 - so far
proving all the "experts" wrong about higher rates. 2nd
quarter productivity - the only news - came in at +2.5% and labor costs were
+.6%.
Executive Rate Market Report:
Last night the President authorized air drops of supplies to
support fleeing people frm the Islamic State,
he also authorized controlled air strikes to assist the refugees, mostly
Yazidis, a religious group in northern Iraq. The Yazidis are an ethnically
Kurdish group that follows an ancient pre-Islamic religion with links to
Zoroastrianism (sure you know what that is). Some 500,000 Yazidis reside in
northern Iraq, the Islamic State have targeted the group and other religious
minorities, displacing an estimated 200,000 civilians, mostly Yazidis,
according to the United Nations. The reaction overnight sent the 10 yr note to
2.35%, the German bund to 1.02%. By 8:00 this morning markets have settled
down; the US stock indexes pointing to a better open after selling off 100
points overnight the futures markets, the rate markets coming off the lowest
levels. No ground military personnel is likely according to the President last
night in his announcement. Just out; the US has started air strikes on the
Islamic State militants.
Ukraine/Russia:
Germans increased their support of increased sanctions; 82% of Germans in a new
survey say Russia can’t be trusted. The poll marks a sharp shift in public
opinion. A survey by the same pollster published on March 7 showed only 38% of
Germans supporting economic sanctions. Ukraine is considering halting the
supplies of gas through Ukraine to Europe. Reports that in Russia there are
recruiters looking for more Russians to go to Ukraine. In a news report Russia
wants to de-escalate the crisis in eastern Ukraine, easing the Iraq concerns in
markets. Not really possible to anticipate anything now in all the global
fears; it ebbs back and forth daily. The latest reports have Angela Merkel and
Putin are talking.
US and global markets are completely focused on what is
happening (and what may happen) in Ukraine and the mid-east; on Wednesday we reported the situation(s) in the mid-east
are escalating and likely will continue to do so. How? Not an answer even our
government can anticipate. Look for the mid-east turmoil to gather momentum
now; Syria, Jordan, Lebanon, Iraq, Iran, and Israel beginning to heat up again.
Economic outlooks and data will not carry as much importance as usual as long
as all these situations continue to boil.
This morning Q2 productivity was expected to have increased 1.4%, as reported +2.5%; Q2
unit labor costs were expected +1.6%, as reported +0.6%. Q1 productivity
was revised frm -3.2.% to -4.7%; unit labor costs revised frm +5.7% to +11.8%.
June wholesale inventories were expected to have grown 0.7%, as reported
inventories grew just 0.3%, sales were up 0.2%, May sales +0.7%. May
inventories revised to +0.3% frm +0.5%. A negative for Q2 GDP.
Good news for the mortgage markets; Fair Isaac announced it is changing how credit scores are
calculated. It will stop including any record of a consumer failing to pay a
bill if it has been paid or settled with a collection agency, and adding less
weight to unpaid medical bills that are in collection.
At 9:30 the DJIA opened
+26 after being down 100 points last night in the futures trading; NASDAQ +5,
S&P +4; 10 yr note rate 2.39% -2 bp, the low early this morning 2.35%. 30
yr MBS prices +8 bps frm yesterdays close.
Rate markets continue to decline (rate); no matter the
comments or news these days investors and traders are buying insurance in US
treasuries and pulling mortgage rates lower with it. The US stock market is technically bearish, the bond market
technically bullish. Trying to anticipate all of the fundamental issues
globally and domestically is difficult; go with how markets are acting instead
of focusing on the fundamentals and trying to understand all the details.
Fundamentals drive markets, but how they influence price action is best measured
by technical factors because market action encompasses everything driving
markets---some well-known, some not well-known yet it is all imbedded in the
price movements.
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