Friday, August 29, 2014

HELOCs on the Rise - What about the Old Ones? More on Cash vs. Security Sales



As we head into the last official weekend of the summer (no white shoes to formal events after Monday!), it is good to know that alternatives exist for the simple six-pack. In this exciting new development for beer lovers, we have the 99-pack.

 Fannie Mae plans to sell its headquarters and consolidate employees to a single location in the District, the organization announced Thursday. Here's what's behind the decision and when the move might happen. And no, it does not appear that Fannie and Freddie will be building-mates; I am sure Freddie wouldn't agree to be in the lower floors with no views, limited parking, and soda pop vending machines that only work periodically.

 

I received this note. "Fannie Mae's announcement this week that every mortgage originator and servicer in the United States that are approved by FNMA or FHLMC  must check the FHFA's Suspended Counterparty List, effective immediately, and make sure that none of their own employees are on it, ensure that any TPOs have processes in place to check their employees, and then check every loan transaction as well to be sure no one on the list is involved in any way with a GSE loan, sounds familiar like a lot of other lists lenders have to check. But when you go to the list, it has 1 name on it: Lee Farkus, who as you know is serving 30 years in the federal pension and will older than dirt if and when released. Here's the link to the 'list' and the bulletin. I have to run now as I have policies, procedures, systems, TPO and vendor applications, employment applications, etc., that all need revised to screen out Lee Farkus!    Your tax dollars and mine at work......  You can't make this stuff up!!

 

I am stating the obvious here, but many banks are seeing a renewed interest in home equity lines of credit and home equity loans. And banks are exploiting their ability to ramp up home equity loans versus that of independent mortgage banks. In total, HELOCs underwritten in Q1 this year climbed 8% to $13B from a year earlier. HELOC origination levels are still well below what they were in their heyday, but are on the rise. Also of interest is a recent study from Pepperdine University which found that home equity lines of credit are playing a more significant role in financing lower middle market business M&A deals this year. In fact, HELOCs were used by buyers to finance 17% of small business deals ($2mm to $5mm in size) and also 17% of deals between $5MM and $50MM. For both small business owners and home owners, it is likely HELOCs will continue to grow as a source of funding given a rebounding economy. Done the right way with the right level of controls in place, HELOCs can also represent a growth opportunity for community banks.  

Given the risks, larger banks have taken steps to protect themselves in this lending sector. For example, Wells Fargo recently said it would only offer interest-only HELOCs to customers with at least $1mm in savings and other liquid assets, while other customers would have to pay principal and interest on such loans. In underwriting floating rate loans, whether for HELOCs or in other sectors, it is important to assess whether potential borrowers will be able to meet the obligations of their loan, both rising interest payments and the repayment of principal in a rising interest rate environment. Loans should be structured according to the credit worthiness of borrowers with the future rate environment in mind. Banks may decide that new HELOCs should be extended only to select high-caliber borrowers with good-to-excellent credit scores and low debt. In addition to careful assessment for new underwriting, be sure to consider the risks from HELOCs that are already outstanding and to assess any flow-through impact that could occur from problems within the portfolio. Regulators are well aware that a sizeable chunk of outstanding HELOCs were originated 6-10 years ago and that the reckoning time has come for many borrowers to start paying down principal. Additionally, those loans with a floating rate structure should be assessed for the borrower's ability to withstand an increase in interest payments. 

Along those lines, Equifax sent out a blurb saying, "Between 2004 and 2008, low home prices and loose credit standards led to a significant increase in the amount of HELOCs that were originated. The typical HELOC resets into amortization after 10 years of interest only payments and borrowers who are a decade removed from their originations will have to begin repaying the principal balance. Today, HELOCs opened between 2004-2008 account for 60 percent of outstanding loans and more than $221 billion in HELOC loans will hit the market from 2014-2018. However, the financial circumstances of borrowers and the value of properties against which these lines are held have deteriorated. On July 1, 2014 the FDIC, OCC, Federal Reserve Board and NCUA released a financial institution letter, promulgating risk management principles and expectations that should be adhered to by FDIC-insured banks. Equifax is available immediately to provide insight on the updated guidance and additional considerations for lenders managing HELOC resets, including addressing underwriting precautions for renewals, extensions and rewrites, maintaining compliance with existing agency guidelines, leveraging data to develop well-structured and sustainable modification terms, and analyzing end-of-draw exposure in allowance for loan and lease losses estimation processes (ALLL)

 Edgar Degas stated, "Painting is easy when you don't know how, but very difficult when you do." Helping guide a behemoth like the U.S. economy is difficult to say the least, and it doesn't make it any easier when the press expects you to have a crystal ball. I love it when the press says things like, "'Fed's Yellen Remains Mum on Timing of Rate Change.'  Janet Yellen delivered a cliffhanger in the mountains of Wyoming. The Fed chairwoman left the public guessing about when the central bank will start raising short-term interest rates." Are "the markets" expecting someone to come out and say, "Okay, Tuesday, February 10th, 2015 we'll raise the overnight Fed Funds target to 0.125%. And then we'll raise it again on Thursday, July 9th, 2015to .250. Because we know that on those dates the unemployment rate will be 6.5% and 6.2%, respectively, and the inflation rate will be 2.1% and 2.8%." No one has a crystal ball - certainly no one that nine months ago were predicting noticeably higher rates by this time in 2014.

Matt Graham contributes, "Regarding the comment, 'There is seems to be a disconnect between bonds and stocks,' this comes up so often on MBS Live that I've written a few reference articles to explain the phenomenon.  This one addresses it both generally and specifically (and with a few interesting charts!). And in this one I wrote up a more user-friendly recap of how we got here and what might be important going forward. I'm pretty sure this is 'the answer' to the disconnect question. Of course it's rarely as simple as ONE factor doing all the work, but I think this is the biggest consideration right now, and it appears that larger media outlets are finally starting to talk about it."

The MBA's Dan McPheeters spread the work earlier this week about the Securities and Exchange Commission. "The SEC adopted new asset-backed securities disclosure rules, commonly referred to as Reg AB II. While the SEC has not release the final text of the rule, an official fact sheet can be found here. We are continuing to gather information, and will follow-up when the final text becomes available. Also adopted today were credit rating agency rules governing conflicts of interest, corporate governance, and transparency. A fact sheet of this rule can be found here." 

Continuing on with the markets, housing and jobs drive the economy, and we've sure had a slew of housing numbers. I have lost track of which index has told us what, but yesterday the National Association of Realtors told us that Pending Home Sales picked up in July, increasing by 3.3% following a drop in June. Although down about 2% from a year ago, the index is at its highest level since August 2013.  

LOs need to remember that even though Treasury rates may drop (mostly due to overseas events), MBS prices may lag - and that is what we're seeing now. This mostly takes place in higher coupons as investors think, "If rates drop, these higher loans will refinance and won't be on our books as long as lower rate mortgages - and pools made up of those mortgages." Yesterday the 10-year improved nicely and closed at 2.33%, but agency MBS improved less than .125. The month wraps up today with Personal Income and Consumption (+.2% and +.1%, respectively) as well as 9:45AM EST's Chicago PMI (52.6 last) and the University of Michigan survey of confidence comes by 10 minutes later. We had a close of 2.33% Thursday, and in the early going today we're at 2.34%. Don't look for much change on rate sheets.

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