Wholesale & correspondent products; Trends in housing & rents

http://globalhomefinance.com

 

This is the season that CEOs are asking underlings for 2015 projections, and of course no one wants to tell the boss that volume is going to go down. The MBA is here to help! It is forecasting that mortgage volume will increase 7.4% in 2015. (Given most people are thinking that home prices will increase by mid-single digits, that is not a lot of unit growth.) Some portion of that will come from refinancing, but no one can argue that as a share of total volume refinances have dropped significantly. Yes, rates dropping a couple weeks ago pushed some loans into the pipeline which will help the 4^th quarter for many lenders - but then what? Refinances have declined as a share of overall lending from 69% of mortgage originations in Q2 of 2013 to 45% in Q2 of 2014. Mike Fratantoni (rumored to have the longest title in mortgage banking with "MBA's Chief Economist and Senior Vice President for Research and Industry Technology") stated, "We are forecasting that strong job growth, coupled with still low mortgage rates, should translate to an increase in home sales and purchase originations. "We expect that the 10-Year Treasury rate will stay below three percent through the first half of next year as concerns about broader global issues have caused a flight to quality, with investors seeking safety in US Treasury securities. However, if the global turmoil diminishes and US economic growth continues, we anticipate the rate will exceed three percent in the second half of 2015, continuing to increase through 2016." 

And companies are expanding. Endeavor America continues its mission to be the number one government wholesale lender in America. "Based on annualized FHA endorsements, EA Wholesale is the second largest wholesale FHA lender in the U.S. with a record 431 endorsements in the month of September (per HUD Neighborhood Watch). Not too shabby considering they just opened their doors for business in August 2013. By focusing on its culture and customer service and allowing brokers to work directly with underwriters, management continues to build its raving broker fan base and recently earned a 5 star lender rating for turn times, compliance support, and training by Mortgage Professional America Magazine.  Endeavor's guidelines mirror HUD with no overlays. 580+ FICO, Manufactured homes allowed, 203k streamline or full. 

And on the correspondent side, First Mortgage continues its growth. "Mel Watt's speech at the MBA conference is encouraging lenders to revisit their strict standards of credit overlays. At the conference, he said he can see 'mortgage finance moving back to a responsible state of normalcy, one that encourages responsible lending to creditworthy borrowers...' First Mortgage Corporation celebrates 40 years of business in 2015 and has always been committed to expanding homeownership to the credit worthy; in particular the low-to-moderate income borrowers. FMC believes, as mortgage lenders, it has a duty to offer homeownership opportunities to all credit worthy borrowers through responsible lending. In addition to not overlaying its originations with FICO score limitations, FMC also offers a unique down payment assistance program, available in six western states, which allows maximum financing to qualified borrowers with FICOS scores as low as 580, in addition to those with non-traditional credit. You can substantially increase your originations while providing the American Dream to deserving families. FMC is very proud of its extremely low seriously delinquent rate of just 3.19%.  Partner with the time-tested experts.  To learn more about becoming a Correspondent with First Mortgage Corporation, contact Sharon Magnuson. 

Speaking of government programs, "VA lending: catch the wave." One offshoot of our nation being "at war" (although we haven't declared war since 1941) is that the active military and veteran population has grown enormously and as a result VA loan originations have shown a huge percentage growth curve. Even the mainstream press has noticed (Washington Post article): since 2011, when VA-backed mortgages represented about 3% of total home-purchase mortgage activity, they've soared to roughly a 7% share.

And Zelman & Associates published its Single Family Rental Survey: "Rental Inflation Defies Typical Seasonal Headwind." Zelman Associates reported that rent inflation increased 3.1% in the third quarter of 2014, which is an anomaly from the 50 basis point average decline over the last two years.  Renter demand has declined over the past three months to 67 on a 0-100 scale, vacant rental supply increased 46.1% in September and the rent growth outlook was 3.8% in Q3 of 2014, indicating deceleration based on current new move-in inflation. Distressed pricing declines to 62.5 in September from 64 in August and new move-in growth declines 20 basis points to 4.2%, which is up 40 basis points from last year. 

Rapid home value growth has been evident over the past two years but beginning in May of 2014 home value appreciation has been slower in each month than the month prior. According to Zillow Home Value Index, home values grew at an annual rate of 6.5% in September, with a median home value estimated at $176,500. Although many people may have benefited from accelerated home value appreciation, the market has shifted to a more sustainable and normal level. Some of the causes of rapid housing appreciation were due to low interest rates, low home values and minimal inventory. 

On the renting side the Zillow Rent Index encompasses 857 metropolitan and "micropolitan" areas. National rents are up 3.5% YOY, with the greatest annual rent appreciation in San Jose (16.1%), San Francisco (15.5%), Pittsburg (12.1%) and Denver (10.1%). As rent prices increase, more people may turn towards the purchase market. 

The latest Origination Insight Report published by Ellie Mae, reported that refinances accounted for 36% of closed loans in September and the closing rate on mortgage refinances fell about 6% to 48.3%, the lowest since February.  The COO of Ellie Mae, Jonathan Corr said there may be life left in the refinance market, as consumers are taking advantage of the low interest rates and recovering equity in their homes. The increase in refinance activity was the first monthly increase in 2014, the report also highlighted that the average number of days to close a loan shot up to above 40 days and the average 30-year interest rate for all loans dropped for the 5^th straight month to 4.381%, the lowest rate since July 2013. Ellie Mae also published profiles of closed and denied loans for September 2014: the average FICO score for closed first-lien loans for all loan types was 726, whereas the FICO score for denied loans for all loan types was 694. The LTV for closed first-lien loans for all types was 82 and the DTI was 24/37 while the LTV for denied loans for all loan types was 81 and the DTI was 28/45.  

The NMLS is launching "Your License is Your Business" campaign to encourage businesses and individuals licensed through the System to submit their annual renewal requests in November. By doing so, there will be a significant reduction in the likelihood of a lapse in licensing, since 94% of all renewal applications submitted in November are approved by December 31^st.  To renew your license, you can log in to the System, select the state agency and the license type, pay the fees and submit a renewal request, you must also complete the required hours of continuing education prior to submission. As only two-thirds of license renewal requests are submitted in November The NMLS is encouraging licensees to submit a renewal request by November 15^th.  More information about renewing your license can be found here. 

What is new with the debate about the mini-correspondent model? Time flies, and it has been four months since the CFPB released its "guidance" on the mini-correspondent model. (I have guidance in quotes since any lender that ignores it does so at its own peril. There is plenty of conversation about the fuzzy lines between being a broker, a mini-correspondent, and a correspondent, and examples of smaller lenders flipping between the three categories based on product, intent, or avoidance. The criteria that determine the differences are blatant, and include who draws the docs, who does the underwriting, who does the HMDA reporting, and who has the ultimate fiduciary responsibility.

 A broker's value proposition to a borrower is relatively clear ("We can shop your loan around to many investors to find the best rate") but as a broker moves into a mini-corr relationship the objectivity and unbiased alliances become less straightforward. Is the broker doing so to avoid the 3% cap on points and fees? What is being reported to the borrower? What are the branches being allowed to do? Certainly the "manufacturing quality" of the loan is important and lenders must be transparent with their borrowers. The National Association of Realtors (yes, the one with the powerful lobbying effort) is urging the Consumer Financial Protection Bureau not to disrupt the imperative role mini-correspondent lenders play in the home-buying process for Realtors. 

There is a paid web seminar on the topic coming up on Thursday from The American Banker titled "Mortgage Broker or Mini-Correspondent: Guidance and Perspectives to Staying Compliant." The cost is $99 and goes from 2-3:15PM EDT on Thursday. "Hear mortgage compliance experts share insights on the impact of the CFPB's new mini-correspondent guidance. Gain practical advice on how lenders of all sizes can adopt renewal processes, modify business relationships and implement internal infrastructure to remain both competitive and compliant. In this session we will discuss the intent and application of the new guidance, share roles, responsibilities, and risks for different lenders/originators, provide recommendations for implementing proper renewal policies and processes, and discuss the relationships and responsibilities between investors/warehouse lenders and mini-correspondents." 

Trundling over to the markets, what if no inflation is the "new normal"? Good question: Reuters says the price development outlook is evolving and the Fed thus faces a fresh set of problems. While labor has dominated the Fed for years, a new challenge is emerging - "the possibility that weak inflation may be so firmly entrenched it upends the return to normal monetary policy". To respond the Fed could strengthen its commitment to ZIRP (zero interest rate policy) and may even contemplate fresh asset purchases. 

Monday we learned that Pending Home Sales rose slightly in September and are now above year-over-year levels for the first time in 11 months, according to the National Association of Realtors. The index is above 100 for the fifth consecutive month and is at the second-highest level since last September. Of the reasons for not closing a sale, about 15 percent of Realtors in September reported having clients who could not obtain financing as the reason for not closing. 

As far as the actual bond market is concerned, supply and demand, as always, move markets, and traders reported Monday that they saw a dip in supply. This pushed prices higher and rates lower for agency MBS relative to Treasury securities. For titillating news today we'll have September Durable Goods Orders, which are seen higher from last month's lower to negative prints (headline -18.4%). We will also have the August S&P/Case-Shiller house price index (-0.5% last), and October Consumer Confidence (86.0 prior) and Richmond Fed PMI (+14 previously). The Treasury auctions $29 billion 2yr notes at 1PM while the start of the FOMC two-day meeting begins today (the statement tomorrow at 2PM EST). Rates are a shade higher with the 10-yr at 2.28% and agency MBS prices down slightly. 

 

Executive Rate Market Report:

Prior to 8:30 treasuries were slightly weaker with US stock indexes on another roll, the DJIA at 7:30 +80. Sept durable goods orders released at 8:30 were well weaker than +0.8% expected, as reported -1.3% after August orders dropped 18.2%. Excluding the transportation orders down 0.2% against forecast of +0.5%, ex defense orders down 1.5%. Durables are a volatile series but today’s numbers linked with the huge decline in August should be taken more seriously; however the initial reaction in the markets wasn’t much, the DJIA indicating an open of 60 points and the 10 yr note yield which was at 2.29% prior to the report slipped back to 2.27%, MBS price at 8:40 +2 bps. Waning demand for machinery and computers that signals companies are reluctant to invest in updating equipment. Markets in Europe and emerging nations slow, fewer exports will probably also damp orders in coming months, indicating American manufacturing will cool. The initial reaction to the very soft report was about the usual these days, any less than expected measurement on the economy is pushed off with optimistic reasoning that excuses bad or weak data.

From China; increasing speculation that the Chinese central bank is considering lowering rates to inject liquidity in the slowing economy. The speculation raised stock prices across the emerging market complex. The MSCI Emerging Markets Index climbed 1.1%. In Ukraine movement to form a coalition with more ties to European countries while Russia is said to be sending another caravan to the eastern Ukraine region that is dominated by Russian separatists. Markets not concerned about it.

The August Case/Shiller 20 city home price index was slightly weaker than expectations, the estimates were an increase of 5.8% yr/yr, as reported +5.6%. The increase was the smallest since Nov 2012 and is another indication that lending standards need to be loosened. On a national basis prices rose 5.1% year-to-year after a 5.6% gain in July. The less investor buying has slowed price gains while Dodd/Frank legislation six years ago continues to eliminate first time buyers. Prices in the 20-city index adjusted for seasonal variations decreased 0.1% in August from July.

Moving on through the session; at 9:30 the DJIA opened +72, NASDAQ +21, S&P +8; the 10 at 2.28% +2 bps and 30 yr MBS price -3 bps from yesterday’s close and +1 bp from 9:30 yesterday. Lenders should have priced about unchanged this morning.

The last of the data today; at 10:00 October consumer confidence index was expected at 86.8 from 86.0 in Sept. The confidence jumped to the best level since 2007 to 94.5. A huge change from Sept that is another hurdle for the interest rate markets. There has been no momentary reaction in the equity markets to the 10:00 report so far, not so in the MBS price that at 10:05 is -14 bp on the day and -11 bps from 9:30.

This afternoon at 1:00 Treasury will begin this week’s auctions with $35B of 2 yr notes.

US stocks doing better this morning on better emerging markets over night. Almost 80% S&P 500 companies that have reported so far have beaten earnings estimates, while 61% have surpassed revenue projections, according to data compiled by Bloomberg. Profit for S&P 500 companies rose 6.3% in the third quarter and sales increased 4.1%, analysts predicted. The weak durables orders this morning has been swept away by traders. Better news from emerging markets where global weakness is a headline appears to be trumping the soft data this morning and ahead of tomorrow’s FOMC meeting. Lots of talk about whether or not the Fed will end the QE; some say no, others yes---we say yes. There is no reason now for the Fed to continue it, $15B a month is not much and would have little to no impact on markets. Keeping it alive could be interpreted as the Fed more concerned about the economic outlook. There is no thinking that the Fed has any thoughts now about increasing the FF rate.

The 10 still is holding its support at 2.30% but it isn’t gaining any ground. Two weeks ago tomorrow the capitulation of all shorts happened but in the ensuing sessions there has been no follow-through. Becoming a little more concerning that the bond market hasn’t found buyers, but also no sellers of consequence either.

PRICES @ 10:10 AM

10 yr note: -9/32 (28 bp) 2.30% +4 bp

5 yr note: -4/32 (12 bp) 1.51% +3 bp

2 Yr note: unch 0.39% unch

30 yr bond: -20/32 (63 bp) 3.07% +3 bp

Libor Rates: 1 mo 0.152%; 3 mo 0.233%; 6 mo 0.322%; 1 yr 0.542%

30 yr FNMA 3.5 Nov: @9:30 103.58 -3 bp (+1 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Nov: @9:30 103.95 -1 bp (+7 bp frm 9:30 yesterday)

30 yr GNMA 3.5 Nov: @9:30 104.63 -3 bp (+7 bp frm 9:30 yesterday)

Dollar/Yen: 107.92 +0.10 yen

Dollar/Euro: $1.2751 +$0.0053

Gold: $1234.00 +$4.70

Crude Oil: $81.19 +$0.19

DJIA: 16,870.79 +52.85

NASDAQ: 4526.27 +40.34

S&P 500: 1971.24 +9.61

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