I've
been hearing it for a while, "the market is slow, and home appreciation
is stagnant." But in South Carolina, for example, many markets are on
fire. As Zillow points out in Despite Rising Home Values,
Affordability Remains Largely Intact for Buyers, many markets are
still experiencing above-normal rates of home value growth, a general slowdown
in appreciation is evident. "Among the nation's 35 largest metros, all
but Indianapolis experienced year-over-year home value increases in July. Those
with the most notable annual increases include Las Vegas (17.4 percent),
Riverside (16.5 percent), Miami-Fort Lauderdale (15.8 percent) and Atlanta
(14.9 percent)." It's Zillow, so be forewarned, if you click the link
expect graphs with multiple colors and plenty of index numbers with strange
nomenclatures.
Back
in April the commentary mentioned explosive growth at LoanStar Home Lending.
Where are they now? After launching last November the Portland, Oregon
based mortgage bank now has nearly 170 employees from Seattle to Dallas and
most points in between. As President & CEO Mike Baldwin explained in a
recently produced Mission Statement video, "we're growing,
and we are busy!" LoanStar has been busy, with new branches opened in
Dallas/Fort Worth, Albuquerque, Phoenix, Clackamas, OR, and Everett, WA since
the commentary last reported in April. LoanStar also has a new facility under
construction in Vancouver, WA and Orange County, CA slated to open in
October. "We continue to attract talent based on our ability to close
loans efficiently, a broad offering of correspondent lender relationships, and
a top-flight concierge marketing system. Our system is designed to
allow originators freedom to originate new loans and relationships and not
process loans, conduct damage control, or spend time trying to figure out how
to market themselves. That is what the loan officers say they want, and
that's what we deliver," says Baldwin. To learn more, visit www.GoLoanStar.com and
contact the regional manager closest to you, or contact Kenn
Bartley, SVP Business Development.
A quick note about Friday's commentary: I noted an example of dumping loan files (with borrower information) in a dumpster. It was really late when I wrote that, or really early, but "Centennial Mortgage" was not involved - Centennial was the municipality - and the company was Colorado First Financial Mortgage. My apologies to any Centennial Mortgage people, living or dead, real or imaginary.
Changes
are taking place out there in residential lending - players are changing teams,
and teams are changing divisions and conferences. I say that not only
because I am receiving a lot of LinkedIn notes and change of e-mail requests
(although both are a leading indicator). As this commentary has mentioned for
quite some time, the lending industry is either evolving or devolving - I don't
know which. Big companies are reevaluating their channels (like Affiliated
leaving correspondent), small companies are tired of compliance costs and
hurdles, big companies are looking for acquisition targets (Caliber and
Cobalt). Rumors are swirling that Mutual of Omaha is exiting residential
lending and partnering up with Guild, mentioned below. Lots of small lenders
& branches are looking for new homes: shoot me a confidential e-mail if
you're "exploring options" - happy to provide free introductions for
small branches or LOs sniffing around.
A
KPMG banking industry outlook survey of 100 bank executives in the US finds the
primary areas these executives say are the biggest barriers to growth for
their bank over the next year are: regulatory and legislative pressures (41%);
lack of customer demand (25%); pricing pressures (20%); risk management issues
(19%); increased taxation (18%); US dollar strength (17%); staying on top of
emerging technologies (14%); inflation (12%); labor costs (12%) and a lack of
qualified workforce (11%). And any mortgage bank can use those same factors in
the decision to scale back or find a larger partner.
But
what does a company buy when they purchase another mortgage company? They aren't all walks
on the beach and Boone's Farm Chablis in the hotel room. Something is worth
what someone else is willing to pay for it, right? Every deal is a little
different, of course, and it depends on the sizes involved. The purchases hopes
that what they have after the deal closes is something more than leases, cheap
vacant office furniture, and vendor contracts that must be phased out. Often a
buyout is involved with the owners, cash is "taken off the table" by
the seller, and perhaps employment agreements are put in place for key
originators. If the seller is large enough to have servicing, that is a big
plus. Negotiating deals, of course, is very dependent on the motivation of the
buyer and sellers - and there is plenty of motivation right now.
Jeff
Babcock with STRATMOR scribes, "After the dismal 1st Quarter
results, most mortgage executives have expressed renewed optimism based the
robust 2nd and 3rd Quarter production volume
recovery. But we at STRATMOR sense that their mood is darkening as the
reality of seasonal downturns looms just around the corner. If the 4th
Quarter of 2014 and 1st Quarter of 2015 origination experience
proves to be a repeat of last year, management will be severely challenged to
sustain profitability. The specter of layoffs, margin compression and
compensation pressure is disdainful to most mortgage entrepreneurs. Throughout
2014, the mortgage business is experiencing a level of M&A activity not
seen for many years. And it's been a true sellers' market for well-managed
independent retail mortgage banks. Investor demand remains very strong, so
sellers have been successful in negotiating healthy valuation
premiums. Every transaction in STRATMOR's deal pipeline reflects this
robust marketplace environment."
His
note continued. "But what happens to the M&A investor attitude if our
industry experiences two consecutive years of semi-annual origination
cyclicality and earnings volatility? The resulting uncertainty will
certainly have an adverse impact on deal terms, thereby reducing the premiums
paid at closing and deferring more value to a contingent arrangement (aka earn
outs). In response to this marketplace stress, STRATMOR anticipates more
midsize lenders will be compelled to consider their 'strategic options,'
thereby increasing the supply of available acquisition opportunities.
STRATMOR's timing advice for prospective sellers: don't wait until next spring
to explore your options. It's still a sellers' market and your negotiating
position remains favorable." (If larger firms would like some objective
feedback and a fresh market perspective, reach out to Jim Cameron or Jeff Babcock if you are interested in discussing
M&A opportunities.)
Last
week there were a few other deals announced besides the Caliber-Cobalt
marriage. News broke that New Hampshire's Regency Mortgage Corp. will be
acquired by California's RPM Mortgage. "Regency Mortgage Corp. remains
fully intact, charged with growing RPM's New England business. Regency will
still operate under the Regency brand and will have all ops remain local...much
improved jumbo pricing...a suite on non-QM products that RPM created...an
eventual move from NYLX to Optimal Blue... (originators) able to select an
RPM-serviced price each day which will allow your contact information to go out
monthly with the mortgage statement to your serviced borrowers."
Things
have changed with commercial banks and savings institutions insured by the
FDIC; these institutions have reported aggregate net income of $40.2 billion
in the second quarter of 2014, which is up $2 billion (5.3%) from earnings of
$38.2 billion the industry reported a year earlier. The increase in earnings
was mainly attributable to a $1.9 billion (22.4%) decline in loan-loss
provisions and a $1.5 billion (1.4%) decline in non-interest expenses. Also,
strong loan growth contributed to an increase in net interest income compared
to a year ago. Lower income from reduced mortgage activity and a drop in
trading revenue, however, contributed to a year-over-year decline in
non-interest income.
In
security news, Freddie Mac priced a new Structured Agency Credit Risk
(STACR) transaction totaling $770 million. This STACR series
represents the fifth offering this year that Freddie Mac is transferring a
portion of its credit risk on certain groups of loans to private investors. The
first HQ Series transaction took place last month on loans between 80 and 95
percent LTVs.
Turning
to the bond markets, we continue to be lulled to sleep with low volatility in
bond prices and no inflation. Friday we had a smidgeon of economic news with
the Leading Economic Indicators: "The LEI's six-month growth trend has
been held back slightly by lackluster contributions from housing permits and
new orders for nondefense capital orders. Despite concerns about investment
picking up, the economy should continue expanding at a moderate pace for the
remainder of the year." Rating agency Fitch confirmed its U.S. ratings of
AAA - thanks!
But
the big news of the week was expected: the Fed further reduced its asset
purchases by another $10 billion and kept rates steady. It also decided to keep
the language "considerable time" to refer to the period between
ending its asset purchases and raising the fed funds rate. And lenders should
remember that the Fed sets overnight rates, whereas supply and demand set
mortgage rates. Most see rates staying put through the end of the year, and
perhaps overnight Fed Funds closer to 1% by the end of 2015.
I
don't know how we're here at the last full week in September already, but we
are. And we have a whole bunch of economic news, so let's take a look at the
menu .Today we have the tasty Existing Home Sales. Tomorrow is the piping hot
FHFA House Price Index. Wednesday is MBA applications and New Home Sales.
Thursday are Jobless Claims and the always volatile Durable Goods (one aircraft
order from a domestic manufacturer can really throw things off). Friday we'll
dine on GDP, Personal Income and Consumption, some PCE chatter, and finish off
with mints and the University of Michigan Consumer Confidence. For those
quantitatively inclined, the 10-yr closed Friday at 2.59% and this morning
we're at 2.57% with agency MBS prices a shade better.
Executive
Rate Market Report is Here!
Treasuries and MBSs started a little
better this morning, just some squaring ahead of Wednesday when the FOMC
releases its policy statement.
US stock indexes were also slightly better at 9:00. At 8:30 the Fed’s New York
Empire State manufacturing index jumped to 27.54 frm 14.69 in August. No direct
reaction to it though; the index has been very volatile in the last three
months; July index at 25.60, August 14.7 and now 27.54. New orders were up only
slightly to 16.86 vs August's 14.14 while employment growth slowed sharply to
3.26 vs 13.64. Shipments, however, do show plenty of strength, at 27.08 vs
24.59. A report best forgotten given the recent volatility and the interior
components.
Slightly better open this morning in
the bond and MBS markets while the US and Europe’s stock markets weaker. The 10 at 9:00 2.56% down 2 bps frm
Friday, 30 yr MBS price +9 bps. At 9:30 the DJIA opened -17, NASDAQ -14,
S&P -4; 10 yr note 2.57% -1 bp and 30 yr MBS price +14 bp frm Friday’s
close and +33 bps frm 9:30 Friday. Europe and US stock markets soft this
morning on reports out of China that there won’t be much stimulus coming.
Overnight tonight there will be a report on Chinese manufacturing, given the
comments frm China’s finance minister that there isn’t more stimulus coming
traders are paying attention to all Chinese economic data.
The August Chicago Fed National
Activity index,
usually not a report that gets much attention, showed a drop on the index to
-0.21 against estimates of +0.35 and +0.26 in July. Consumption and housing
pulled down the main index, at minus 0.12 from July's minus 0.13. The employment
component fell to zero from July's plus 0.10 reflecting weak nonfarm payroll
growth of 142,000. The component that had the best showing in August was
sales/orders/inventories, at plus 0.08 vs plus 0.04 in July. The Chicago Fed
National Activity Index (CFNAI) is a monthly index designed to better gauge
overall economic activity and inflationary pressure, and mirrors other regional
Fed indexes.
The main data today, August existing
home sales; expected
up 0.6% to 5.18 mil annualized units, as reported sales declined 1.8% to 5.05
mil units (annualized); yr/yr sales down 5.3%. Based on the sale pace there is
a 5.5 month supply, but supply will likely decline as the winter months close
in.
Treasury auctions this week have little more interest to those of
us that mainly focus on long term treasuries. With the clock ticking on when
the Fed will begin tightening next year (no consensus on when, but it is
coming), how the 2 and 5 yr auctions go will be interesting. Recent activity in
treasuries has seen a lot more selling at the middle and short end of the curve
than the 10 or 30 issues. We would like to see strong demand, especially on the
5 yr but that isn’t likely.
Beside the
economic data, which really isn’t much this week, and Treasury auctions; there
is a parade of Fed officials taking to the rubber chicken circuit. Today NY
Fed’s Dudley just starting his comments. Minneapolis’s Kocherlakota tonight.
Every day this week except Friday.
This
week’s Economic Calendar:
Monday,
10:00 am
August existing home sales (as reported
Tuesday,
9:00 am
July FHFA housing price index (+0.4%)
1:00 am
$29B 2 yr note auction
Wednesday,
7:00 am
weekly MBA mortgage applications
10:00 am
August new home sales (+4.2% 430K annualized units)
1:00 $35B
5 yr note auction
Thursday,
8:30 am
weekly jobless claims (+20K to 300K)
August
durable goods orders -17.1%, ex transportation orders +0.8%)
1:00 pm
$29B 7 yr note auction
Friday,
8:30 am
final Q2 GDP (+4.6% frm +4.2%; deflator 2.1% unch frm prelim report last month)
9:55 am U.
of Michigan final Sept consumer sentiment index (84.6, unch frm mid-month)
A better
start this morning as the rate markets continue to work off the oversold conditions
that built after the recent increase in rates. The wider condition is still
bearish and with the recent slight improvement the markets are no longer in
oversold levels based on the momentum oscillators. We have very solid
resistance on the 10 yr note at 2.52% and support at 2.64%; we call that
no-man’s land now. Short term somewhat better but the wider perspective is
bearish. You could look at it as a neutral pattern as long as the 10 sticks
within that range.
PRICES @
10:15 AM
10 yr
note: +3/32 (9 bp) 2.57% -1 bp
5 yr note:
+2/32 (6 bp) 1.80% -1 bp
2 Yr note:
unch 0.56% unch
30 yr
bond: +1/32 (3 bp) 3.28% unch
Libor
Rates: 1 mo 0.154%; 3 mo 0.233%; 6 mo 0.330%; 1 yr 0.584%
30 yr FNMA
3.5 Oct: @9:30 101.98 +14 bp (+32 bp frm 9:30 Friday)
15 yr FNMA
3.0 Oct: @9:30 102.88 +2 bp (+4 bp frm 9:30 Friday)
30 yr GNMA
3.5 Oct: @9:30 103.15 +8 bp (+29 bp[ frm 9:30 Friday)
Dollar/Yen:
109.13 +0.09 yen
Dollar/Euro:
$1.2838 +$0.0009
Gold:
$1213.50 -$3.10
Crude Oil:
$92.09 -$0.32
DJIA:
17,242.41 -37.33
NASDAQ: 4542.74
-37.05
S&P
500: 2000.58 -9.82
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