Ah
yes, it's almost that time of year again when the first "Back to School
Sale" signs start going up; children everywhere get that 'time is running
out' look on their faces...and parents get that 'thank God' look on theirs. It
is August, and summertime will be winding down and vacations will be coming to
an end, signaling that back-to-school time is near. The U. S. Census Bureau has
done some statistical analysis on the issue. Here's a good one: $8.6 billion
is the estimated amount of money spent at family clothing stores in August
2013. Sales at bookstores in August 2013 were estimated at $1.6 billion (if you
remember college bookstores, the same books will be sold back at a considerable
discount...leaving liberal art majors to take over the cafeteria in protest,
and economics majors to think about secondary market opportunities); the number
of children and adults enrolled in school throughout the country in October
2012 was 78 million. $82,720 is the average earnings of full-time,
year-round workers 18 and older with an advanced degree (bachelor's degree or
higher) in 2012. Workers whose highest degree was a bachelor's had mean earnings
of $70,432. Mean earnings for full-time, year-round workers with a high school
diploma (includes GED certificate) was $41,248, while workers with less than a
ninth grade education had $26,679 average earnings.
What's
the week without some mergers and acquisitions? KBW announced that
Independent Bank Corp., parent of Rockland Trust Company, and Peoples Federal Bancshares,
Inc., parent of Peoples Federal Savings Bank, announced they will be merging.
And here's another one: Peoples Bancorp Inc., parent company of Peoples Bank,
National Association, and NB&T Financial Group, Inc., the parent company of
Wilmington, Ohio-based The National Bank and Trust Company
("NB&T"), also plan to join up. Friend Bank ($70mm, AL) will
acquire City Bank of Hartford ($55mm, AL). In Florida First Commerce Credit
Union ($407mm) will acquire First National Bank of Crestview ($89mm). In Kansas
TriCentury Bank ($4mm) will acquire 2 branches from Equity Bank ($1.2B). Bank
of the Ozarks ($5.0B, AR) will acquire Intervest National Bank ($1.6B, NY) for
$228.5mm in stock or about 1.1x tangible book. Alloya Corporate Federal Credit
Union ($2.9B, IL) will acquire System United Corporate Federal Credit Union
($995mm, CO). FHLB Des Moines ($82.2B in assets and 1,500 members) is
reportedly exploring merging with or acquiring FHLB Seattle ($36.5B in assets
and 330 members).
Centennial
Bank ($6.8B, AR) will acquire Broward Bank of Commerce ($172mm, FL) and
Exchange Bank ($518mm, NE) will acquire The First National Bank and Trust
Company of Junction City ($112mm, KS). And Old National Bank ($9.4B, IN) will
acquire Founders Bank & Trust ($466mm, MI).
Why
is it that every week banks and other lenders announce plans to merge? For banks, most seek to
merge to capture more customers, geography, or product lines. This boosts
market share and usually adds assets. After the event, back office functions
are consolidated, redundant staffing is eliminated, and efficiencies are
squeezed out to get more value. In theory this all works to improve
performance. But the reality is that sometimes it does, and sometimes it
doesn't. Why don't mergers work? Reasons vary with each deal, but for
sure mergers "upset the apple cart" for employees and customers
alike. This can diminish a brand and cause the exodus of important employees
and customers. Mergers can also bring about unexpected problems. Who will pay
the legal bills for old problems not discovered during due diligence? As with
some marriages, banks have seen their fair share of horror stories.
Many
of these were related to regulator arranged mergers at the height, and
rapid pace, of the financial crisis. Think back on JPMorgan and WAMU, the BofA
acquisition of Countrywide, and Wells Fargo's acquisition of Wachovia, and
follow the money to the large fines and settlements that ensued as a result of
prior issues with those acquired companies. Once again, all over the media this
morning is the possible settlement between
Bank and America and the Department of Justice. (As I write this, I
don't know if there is an actual settlement to shake hands over, or that
they're only very close.) $17 billion is a lot of doubloons.
We
also have news of a HUD suit with Allied Mortgage, although as best one
can tell none of the Allied executives who were involved in the massive
mortgage fraud and cover-ups have been criminally indicted by the Federal
Government: they have been civilly charged not criminally. The story about HUD, FHA,
the DOJ, Allied, and (now) Allquest Mortgage is the stuff of novels, per
insiders.
Companies
everywhere are faced with the QM versus non-QM decision. Non-QM loans are not
subprime loans, and although I believe that the QM box is small and excludes
plenty of borrowers, the CFPB has gone on record as saying non-QM loans are not
bad loans, just that they don't fit the QM box. And as we know, the growth, of
non-QM lending has grown, much of it funneled into bank balance sheets.
Many
companies are offering expanded programs. Angel Oak, for example, is
offering a jumbo program for borrowers one day out of foreclosure, where short
sales or bankruptcies are okay, mortgage lates are okay, and some programs will
offer loans to borrowers with FICO scores as low as 500.
This
week Northern California's RPM Mortgage rolled out new products for
"Non-Qualified Mortgage Borrowers." (Note to marketing staff: make
sure that this is not read as "mortgages for non-qualified
borrowers.") The RPM Tailored Line of Loan Solutions bills itself as
"Innovative Loan Solutions for Self-Employed and Retired Borrowers Limited
by New Regulatory Guidelines." "RPM's Tailored Line provides
innovative solutions for the self-employed or the recently retired who have
considerable equity, assets and credit but may be challenged by income
verification requirements, which have limited their borrowing options in the
past. In addition, these solutions give options to borrowers with a short
credit history, credit scores that are marginally outside of the guidelines, or
a loan to value outside of QM's established 43% ratio." It includes,
alternative income verification for the self-employed, requiring only one year
of tax returns, 50% LTV for up to $4 million in borrowing for those with
substantial assets, considerable equity and excellent credit, and 65-80%
funding on loans from $250,000-$4 million for borrowers with a robust
investment portfolio."
Plaza
Home Mortgage and CastleLine announced news addressing the perceived repurchase
risk that every lender lives in fear of. "In order to help mitigate the
financial risk and operational burden caused by repurchase demands, the Plaza
Home Mortgage Correspondent Lending Division has launched CastleLine's
Certified Loan Program. Using CastleLine's program, Plaza Home Mortgage will
protect its correspondent lenders at no additional cost to them, thus
substantially mitigating correspondent repurchase risk. The program protects
Plaza Home Mortgage, its correspondent partners and investors from loan
manufacturing defects such as underwriting errors, fraud and
misrepresentations, including defects from compliance, miscalculation of
income, occupancy, undisclosed debts and appraisal issues." (Contact Justin
Vedder for information on CastleLine's product.)
And
for some other relatively recent lender updates...
Flagstar
Wholesale Lending has a new Conforming One-Close Construction Program effective
as of July 8th.
First
Community Mortgage Wholesale is raising the minimum credit score requirement for RD loans to
640: fcmkc bulletin 2014-07a.
Wells
Fargo Funding restructured and simplified Non-Conforming pricing to reflect
purchase pricing effective August 1st.
U.S.
Bank Home Mortgage now requires lenders to provide the Index Rate Percentage by
writing it in the upper right hand corner of either the Closed Mortgage Loan
Transmittal or the Closed Loan Stacking Order effective August 1st.
additionally; effective July 28th, Final Verbal VOE for non-self-employed
borrowers will be required.
Weslend
Financial Wholesale has expanded its USDA product guidelines; enhancements include
600 minimum FICO and transferred appraisals allowed.
M&T
Bank is
following Freddie's lead on the Freddie Mac Open Access program the amount of
proceeds permitted to use to pay closing costs and prepaids to a maximum of
5000. Additionally, VA Appraisal fees are changing as of August 1st
per VA revised information letter 26-14-01.
US
Bank
posted large deposit requirements effective immediately for conventional agency
loans Requirements.
The
U.S. mortgage-bond industry, through the Structured Finance Industry Group, is
taking steps toward creating standards meant to help kick-start sales as the
government seeks to wean the housing market from its support. It released the first in a series of papers
mapping out its effort to create recommended contract language for new
securities. About 200 individuals from 50 companies are working on the project,
called RMBS 3.0.
Looking
at rates, volatility has hit the US asset-backed securities market this week.
Investors are looking at car, country club, mortgage, commercial, lease, etc.
deals, and monitoring their price & yield spread compared to Treasury
securities. (Obviously the higher the perceived risk, the larger the yield
spread.) There was very little in the way of scheduled economic news yesterday
in the United States, and it has been relatively quiet in Israel and the
Ukraine. We've had the only news slated for today: Initial Jobless Claims came
in at 289k, down 14k. The 10-yr. T-Note is pretty much unchanged from
Wednesday's close (2.47%) and agency MBS prices are also roughly unchanged.
Executive Rate Market Report:
Very early this morning the 10 yr yield fell to 2.445% (again)
and since then has held the resistance that has stopped any rate declines for a
month now. Weekly jobless claims were out at 8:30. Expected to be up 3K but
fell 14K to 289K. The four-week average, a less-volatile measure than the
weekly figure, dropped to 293,500, the lowest since February 2006, from 297,500
the week before. Jobs are increasing each month based on BLS monthly employment
data as employers are not firing much anymore as the economy improves, slowly,
but it is improving. We won’t go there about the quality of the jobs being
created, most of our readers know that the quality isn’t very good in terms of
hours worked and income earned.
Ukraine/Russia still a serious issue and as it continues
large investors and traders continue to hedge against further developments that
could escalate and involve other East European countries. Doesn’t seem likely
now but situations like this can change rapidly. Yesterday Russia moved another
20K troops to the Ukraine border driving Europe’s stock market down hard and
initially dragged the US equity market lower before recovering to essentially
unchanged by the end of the day yesterday. Russia banned U.S. and European food
imports including cheese, fish, beef, pork, fruit, vegetables and dairy
products today. Putin’s government also restricted such imports from Canada,
Australia and Norway as it sought to retaliate against nations that have
imposed or supported sanctions against Russia. Tit for tat, Russia’s sanctions
won’t cause much of a problem but adding more troops does have a worrisome
influence.
This morning the geo-political issues, while still there,
are being pushed aside since nothing new developed today. Today, at least at
the beginning, traders looking more at some better earnings reports and pushing
stock indexes higher at the 9:30 open. The ECB meeting didn’t have any new
initiatives to stop the decline in Europe’s economies and left its base
interest rate unchanged. Yesterday Italy reported its quarterly GDP declined
for the second quarter, that qualifies as a recession in the country; Portugal,
Spain and all EU economies are suffering frm the sanctions levied on Russia.
Mario Draghi saying he doesn’t know what to do (my interpretation). He said the
obvious; heightened geopolitical risks could hurt growth. Stock markets in
Europe are declining; even Germany’s stock market is down 10%, the best in the
region.
The DJIA opened +36, NASDAQ +18, S&P +7; 10 yr note
unchanged at 2.47% after 2.44% earlier today; 30 yr MBS prices unchanged frm
yesterday.
Interest rate markets, primarily treasuries, will likely
continue to be well supported with global stock markets weak; the US stock
market after the recent declines is technically bearish. The DJIA is trading
under its 100 day average; S&P futures are slightly better, holding just
above its 100 day average. The momentum oscillators on the DJIA and S&P are
approaching near term oversold levels; a potential for some improvement on a
near term basis. US is better than global economies but can’t be expected to
gain much on just US growth; like Hillary once said, “it takes a village”.
We don’t expect interest rates or prices will change much
today; or in the immediate future. Russia isn’t about to launch an invasion of
Ukraine anytime soon; and likely not at all; but that won’t lessen the concerns
and the move to safe haven in US treasuries. MBSs won’t change much today. The
bullish technical bias remains and is important, never overlook the actual
trading, the best way to judge reaction to any news. The 10 still has a
positive bias; as long as stocks are not improving and Ukraine is in the news
there is little likelihood rates will increase; equally there isn’t any
momentum to push rates lower unless geo-political events worsen. We are not
ignoring the increased tensions in the mid-east; not much news but there are
growing tensions in Iraq, Syria, Jordan, Turkey and Iran that are being
monitored closely.
PRICES @ 10:00 AM
10 yr note: +3/32 (9 bp) 2.46% -1 bp
5 yr note: +1/32 (3 bp) 1.64% -1 bp
2 Yr note: -1/32 (3 bp) 046% -1 bp
30 yr bond: +5/32 (15 bp) 3.26% -1 bp
Libor Rates: 1 mo 0.158%; 3 mo 0.234%; 6 mo 0.328%; 1 yr
0.555%
30 yr FNMA 4.0 Aug: @9:30 105.52 unch (-4 bp frm 9:30
yesterday) 3.5 coupon 102.34 unch (-15 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Aug: @9:30 103.37 -7 bp (-7 bp frm 9:30
yesterday)
30 yr GNMA 4.0 Aug: @9:30 106.20 -2 bp (-7 bp frm 9:30
yesterday) 3.5 coupon 103.44 +3 bp (unch frm 9:30 yesterday)
Dollar/Yen: 102.34 +0.24 yen
Dollar/Euro: $1.3350 -$0.0033
Gold: $1305.60 -$2.60
Crude Oil: $97.08 +$0.16
DJIA: 16,501.88 +58.54
NASDAQ: 4375.93 +20.88
S&P 500: 1925.83 +5.59
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