My brain can't keep track of
all the statistics coming out of lending. But you won't find many people who
will argue that real estate & credit have not rebounded. Zelman and
Associates reported that in Q3 of 2014, the total number of loans in
delinquency and in the foreclosure process was down 20% YoY and 50% lower than
the peak in Q4 of 2009. In November, default notices declined 15% based upon 11
states and were down 9% YoY and the number of homes repossessed by lenders
decreased 9%. REO filings are currently at the lowest level since mid-2007 and
REO listings were down 16% YoY. The total industry owned 275,000 properties in
REO inventory as of 3Q2014 down 21% YoY and 59% below the peak.
Plenty of SoFi's borrowers are recent college graduates, and education
holds the key to economic success according to a report published by Wells
Fargo Securities Economics Group. The report found that in 2012, 32.7% of White
students obtained a four-year college degree, whereas less than half of that
share of Blacks and Hispanics received a college degree. More than 40% of
Blacks and Hispanics had either some college or received an associate's degree
in 2012, which is greater than their White counterparts. Research has also
discovered that the median income for those who hold a bachelor's degree is
$50,360, compared to a median income of $29,423 for those who only have a high
school diploma, whereas an associate's degree leads to a median income of
$38,607. People who have obtained a graduate degree see a median income of
$68,064. College enrollment remains high for all races, but the percentage of
those graduating with a bachelor's degree falls for Blacks and Hispanics. The
study also found that Millennials put more importance on college education than
previous generations, with Black and Hispanic Millennials still needing to
increase college enrollment to improve labor and income prospects.
Asian-Americans between the ages of 18-24 years old, have the highest rate of
college enrollment at 59.8%, followed by Whites (42.1%), then Hispanics (37.5%)
and African Americans (36.4%). Both African-Americans and Hispanics are earning
more bachelor's degrees each year, but associate's degrees are still an
important alternative for both races.
But in general mortgage lenders are worrying more about
lackluster demand impacting margins, according to the latest Fannie
Mae Lender Sentiment Survey.
The biggest headache remains regulatory, of course. Lenders anticipate a modest
housing expansion in 2015. It seems like the homebuilders agree. It is all
going to hinge on the return of the first time homebuyer.
What is holding down stronger growth in the mortgage market? When
people ask me to comment on what I believe is hobbling the mortgage market, I
usually resort to faking an illness and then make a quick exit. As a longtime
friend of mine joked, "It's equivalent to asking the question, 'What's
wrong with Los Angeles? Is it the smog? Is it the freeways? Is it the crime? Is
it the crowded population?" Yes, yes, yes, and yes. Last month Wells Fargo noted, "Mortgage
financing activity remains a central linchpin for the economic and housing
outlook. Recent data indicate that lending standards are easing and supply is
increasing in the mortgage market. Yet, residential mortgage debt has
fallen to historically low levels while the housing recovery remains sluggish.
In addition, mortgage debt continues to decline on a year-over-year basis.
But although growth in mortgage lending is
slow, the holidays are no excuse to stop servicing flow, just ask Mountain
View Servicing which has two deals outstanding; the first a $2.7 billion
FNMA/FHLMC non-recourse servicing portfolio which is 100 percent fixed rate 1st
lien product, 100 percent retail, 80% purchase origination, WaFICO 746, WaLTV
79%, WAC 4.51%, average loan size of $207k, with production in California (17.6
percent), Arizona (16.4 percent), Utah (16.4 percent), and Colorado (9.7
percent); the second a $252 million FNMA non-recourse servicing portfolio which
is 100 percent fixed rate 1st lien product, WaFICO 750, WaLTV 79%,
WAC 4.06%, average loan size of $249k, with an almost all Texas production
(99.3%). Phoenix Capital Inc. has two projects; the first is Project
Nelson a $304 million bulk Fannie Mae, Freddie Mac and Ginnie Mae MSR
package offered by an independent mortgage banker established in 1989. Nelson
is $231MM of conventional/$73MM of Gov't, with 4.345/4.19% WAC, 738/687 WaFICO,
and 87/95% WaLTV; the second is Project Ingram a $800M bulk Fannie Mae
A/A and FHLMC ARC servicing rights package which is 100% fixed rate WaFICO 749,
WaLTV 70%, WAC 4.23%, average loan balance of $243k, 82% CA originations, with
86% of the package originated by correspondent channel.
Growing up and living in California all my
life I can recall seeing the first residential solar array in my neighbor's
yard. It required a substantial portion of their backyard, a crane to move the
panels into position, and if I remember correctly the breakeven date on the
investment was sometime around 2027....needless to say, at that time, solar was
more of a way of life, than any sort of economic arbitrage. Times have changed;
solar is more efficient, is easier to finance, upfront costs are coming down,
and if you believe what you read in Bloomberg, thanks may be due in part to the secondary
markets. Jody Shenn writes, "Renovate America Inc., a closely held
company that works with municipalities to let homeowners use property liens to
borrow cheaply for energy-efficiency improvements, is expecting more sales of a
new type of bond tied to the financing. New York hedge fund 400 Capital Management
LLC, with more than $1 billion of assets under management, helped bring the
first $233 million of securities into the market this year, including $129
million of notes last month that helped finance 6,858 projects that will save
homeowners 6.7 million kilowatt-hours in energy and 4 million gallons of water
annually, according to an e-mailed statement today." Like I've always
said, banking needs more acronyms; the debt is backed by liens called Property
Assessed Clean Energy assessments (PACE with a silent lower-case 'A', I
guess), which are similar to property taxes, created as consumers are given
funds for work such as solar-panel installations, better windows and artificial
turf. Renovate America calls its product the Home Energy Renovation
Opportunity, or Hero, program.
Banks out there know that the Winter
2014 issue of Supervisory Insightswas released this week. It looks at key aspects of
interest rate risk (IRR) management, including the implementation of effective
governance processes, the development of key assumptions for analyzing IRR, the
development of an in-house independent review of IRR management systems, and
what to expect during an IRR review. "Banks need to be prepared for a
period of increasing interest rates," stated Doreen R. Eberley,
Director, Division of Risk Management Supervision for the FDIC. "The
articles in this issue of Supervisory Insights, which were prepared by
FDIC field examiners who specialize in IRR reviews at community banks, can help
banks identify the potential risks and take steps to mitigate the risks where
needed." "Effective Governance Processes for Managing Interest Rate
Risk" discusses supervisory expectations for a community bank's IRR
governance process, identifies potential risks associated with a period of
increasing interest rates, and discusses approaches for mitigating IRR as
needed. "Developing the Key Assumptions for Analysis of Interest Rate
Risk" describes common sense approaches for developing the assumptions
necessary to analyze interest rate sensitivity in the current environment.
"Developing an In-House Independent Review of Interest Rate Risk
Management Systems" describes ways that smaller institutions may be able
to effectively and economically perform an in-house IRR independent review.
Finally, "What to Expect During an Interest Rate Risk Review"
describes what examiners focus on during an IRR review, supervisory
expectations with respect to IRR, and communication with the FDIC during an
examination.
But are rates going up? No one knows for
sure - remember all the smart guys a year ago saying we'd be at 3% on the 10-yr
in 2014? It closed yesterday at 2.20%. We did have a little news yesterday.
Besides a decent Jobless Claims number, the Philadelphia Fed Manufacturing
Business Outlook Survey diffusion index of current activity decreased 16 points
to 24.5 in December from a reading of 40.8 in November. And the
Conference Board's index Leading Indicators Increased 0.6% in November,
increasing for third month in a row. Ken Goldstein, Economist at The Conference
Board, observed, "The biggest challenge has been, and remains, more income
growth. However, with labor market conditions tightening, we are seeing the
first signs of wage growth starting to pick up."
The headlines were grabbed by the stock markets while 30-yr
agency MBS prices sold off - they are down nearly ½ point the past two days
while the 10yr note is off more than 1.5 points and its yield higher by 15
basis points. There is no scheduled news today and the 10-yr, and MBS
prices, are unchanged from Thursday's closing levels.
Executive
Rate Market Report:
Traders,
investors, analysts, and economists are happy these last two weeks are over. The volatility in
equity and bond markets has been extreme over the past 10 sessions, time to
take a breath and let things settle down a little. The Fed stirred the pot on
Wednesday, what it always does at the FOMC meetings, suggesting the bank will
be “patient” about when it decides to increase rates. Traders and investors
world-wide jumped on “patient” as a green light to keep buying US stocks. No
matter that Yellen said the FOMC would not consider increasing rates until the
Next two FOMC meetings. The take away; the Fed will not even consider
increasing rates until 12 weeks from now, investors took that as any lift off
won’t happen until late Summer 2015 at the earliest. The simple truth,
camouflaged by many specific details, there is no place in the world investors
can go to expect a positive investment return except the US; global investors
are all in for US stocks.
The
DJIA yesterday up 421 points, on Wednesday +288, 709 points that returned the
index t where it traded two weeks ago. The bond and mortgage markets have held well
in the face of the current equity market rally, a little separation between the
two markets. Equity markets also separating from crude oil movements; crude
dropped to a new 5 yr low yesterday as stocks exploded. The new view about the
impact of declining oil and commodity prices is that it is good for the
economies of the world with a just a couple of exceptions. A couple of weeks
ago the collapse of oil prices was seen as a deterrent to economic growth. Just
another way to think about the uncertainty (volatility) that has gripped
investors recently.
There
are no economic reports on the calendar today.
US
interest rates still well supported; treasuries may continue to benefit with
yields higher than any other Group of Seven country and contained inflation
supporting demand. Investors sold foreign bonds this year at the fastest rate
ever in a move to repatriate assets as record-low yields in overseas sovereign
debt are substantially lower than US sovereign debt. The betting that the ECB
will begin a major stimulus program early next year has driven EU interest
rates down, the strongest economy in the EU, Germany’s 10 yr bund this morning
trading at 0.60% compared to the US 10 at 2.19%. It isn’t as easy as to simply
pick stocks over bonds; for numerous reasons there is always demand for
sovereign debt no matter how equity markets are doing; as long as the spread
between other G-7 countries favors US rates our treasuries will draw demand no
matter the level of the rate, 160 bps more yield between Germany and the US is
attractive.
At
9:30 the
DJIA opened +20, NASDAQ -7, S&P +2 (see below for 10:00 levels). The 10 at
9:30 2.20% -1 bps; 30 yr MBS price +14 bps from yesterday’s close and +16 bps
from 9:30 yesterday.
Crude
is trading higher this morning after declining $2.00+ yesterday. The US stock market
opened a little better. Too soon to draw any conclusions about how much of an
influence crude has on investors; the new thought that declining oil prices is
a good thing, the reason given for the last two strong performances in the
stock market, or the previous view that lower prices are not a plus hasn’t been
tested yet.
Quadruple
expirations of options today that may cause some unusual movements in
stocks and bonds. A lot of the adjustments however were made yesterday in
equity markets. The 10 yr note and MBSs are still holding slight bullish
technical readings; the 10 has its first support at 2.21%/2.22% the level
tested yesterday and the 20 day average on the 10. This morning so far the rate
markets are holding, we expect the support will hold today.
PRICES
@ 10:10 AM
- 10 yr note: +3/32 (9 bp) 2.20% -1 bp
- 5 yr note: +4/32 (12 bp) 1.64% -3 bp
- 2 Yr note: +1/32 (3 bp) 0.63% -2 bp
- 30 yr bond: -2/32 (6 bp) 2.82% unch
- Libor Rates: 1 mo 0.164%; 3 mo 0.245%; 6 mo 0.343%; 1 yr 0.605%
- 30 yr FNMA 3.5 Jan: @9:30 104.13 +15 bp (+17 bp from 9:30 yesterday)
- 15 yr FNMA 3.0 Jan: @9:30 103.80 +1 bp (+10 bp from 9:30 yesterday)
- 30 yr GNMA 3.5 Jan: @9:30 104. 81 +10 bp (+26 bp from 9:30 yesterday)
- Dollar/Yen: 119.16 +0.32 yen
- Dollar/Euro: $1.2294 +$0.0008
- Gold: $1196.90 +$2.10
- Crude Oil: $55.74 +$1.63
- DJIA: 17,812.76 +34.61
- NASDAQ: 4758.21 +9.81
- S&P 500: 2068.80 +7.57
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