FHA's loan limits; MBS & non-performing Supply & Demand

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Folks who have all their retirement money tied up in Ocwen shares hope that they don't go the way of Lehman Brothers, PNC, Countrywide, WAMU, and so on. But the shares did take a big hit after New York squashed the deal between Ocwen and Wells Fargo. And what will happen to Ocwen and other similar servicing buyers if the big banks stop selling? Well, here's an easy-to-read primer.

Government originators took note over the weekend that FHA's Office of Single Family Housing published Mortgagee Letter 2014-25, which provides FHA's single family housing loan limits for Title II Forward Mortgages and Home Equity Conversion Mortgages (HECMs), and provides loan limit instructions for streamline refinance transactions without an appraisal. "The loan limits published in this Mortgagee Letter are effective for case numbers assigned on or after January 1, 2015, and remain in effect through December 31, 2015. The maximum FHA loan limit "ceiling" for most areas remains at the 2014 level of $625,500 for a one-unit property.  The minimum FHA loan limit "floor" for all areas remains at the 2014 level of $271,050 for a one-unit property. There are no jurisdictions with a decrease in loan limits from the 2014 levels.  To enable Mortgagees to easily identify areas with loan limit increases, FHA has published a separate list of counties with loan limit increases. Mortgagees may view this list on the Maximum Mortgage Limits web page."

Various organizations around the nation are weighing in proposals all the time. For example, recently the Wisconsin MBA wrote a letter of support to the CFPB agreeing with the MBA position on HMDA revisions.  The WMBA cited their support regarding the strong concerns regarding the data security and privacy implications of the proposed HMDA revisions.  The WMBA further supported the MBA regarding the limiting of the proposed HMDA rule to the statutorily mandated additional fields. "Adding new fields is a cost concern, along with the possibility of errors which would be costly. WMBA supported the MBA in requesting "clear definitions and to allow for like comparisons, along with an increased tolerance for good-faith errors with the increased reporting burden. The WMBA also supported the reconsideration of the proposed institutional and transactional coverage lowered to a HMDA reporting threshold to those that make 25 loans a year. These smaller lenders do not constitute a large percentage of the market, and it is hard to see how lowering the threshold will improve the CFPB's insights into the mortgage market as a whole in any meaningful way.  Such lenders would report such a small amount of loans that it likely would not constitute a meaningful data set to measure fair lending risk, the original purpose of the statute.  Requiring these entities to report will force them to make expensive technology upgrades or personnel changes as well as possibly hire outside vendors. MBA would urge CFPB to review its decisions about the appropriate reporting threshold considering these concerns."

Turning to the markets, my assumption is we as an industry will be talking about MBS demand well into the beginning of 2015. Certainly this commentary has discussed it. It's a good conversation to start considering credit conversations have been leaning towards the eventual easing of guidelines. The Federal Reserve Bank of New York, in a recent article, touches on demand and the credit markets in TheSensitivity of Housing Demand to Financing Conditions: Evidence from a Survey. . Economists Andreas Fuster and Basit Zafar employ an alternative survey-based approach to gauge the sensitivity of housing demand to mortgage rates, down payment constraints, and an exogenous shock in nonhousing wealth. "By designing a survey in which respondents are asked for their maximum willingness to pay (WTP) for a home comparable to their current one, under different financing scenarios. We vary down payment constraints, mortgage rates, and non-housing wealth. We find that a relaxation of down payment constraints, or an exogenous increase in non-housing wealth, has large effects on WTP, especially for relatively poorer and more credit-constrained borrowers." Albeit a very technical paper, written by very technical economists (I think I saw a formula with all the major Greek symbols in it), it is worth a general peruse.

I know, credit is tight. I know, "make sense" loans have all but removed performance issues seen over the past few years. But sales of non-performing assets have always been, and always will be, the key-stone to the credit markets....when Egypt financed the pyramids there must have been an investor who said, "But what if they default, then what?" Earlier this month, BofA and Citi showed us 'then what', as they sold pools of non-performing assets. Bloomberg writes, "Bank of America put about $1 billion of troubled debt on the market last week, consisting of nonperforming loans and some where payments have resumed, said the people, who asked not to be identified because the offerings are private. The Charlotte, North Carolina-based lender also is marketing about $1 billion of soured home loans with Wells Fargo & Co., according to one of the people. Citigroup is separately selling about $1 billion of nonperforming and re-performing mortgages, the people said." So who's buying this stuff, you ask? Hang on to your seats, the news is shocking: hedge funds. "More firms are seeking to acquire the soured debt, including hedge funds such as Metacapital Management LP and One William Street Capital Management LP. Wall Street-backed companies that have built home-rental businesses, such as American Homes 4 Rent, Starwood Waypoint Residential Trust, Altisource Residential Corp. and Axonic Capital LLC, are also buying nonperforming loans to expand their property holdings."

It is becoming harder and harder to argue that the economy is merely bumping along. Looking at last week, whether it was the employment data, car sales, trade balances, or construction spending, these reports show ongoing momentum in the U.S. economy at year end. The Federal Reserve's Federal Open Market Committee will meet next week 17 to discuss and set monetary policy, and given the tone of recent news it is not a stretch to think we may see short-term rates ticking higher in the middle of 2015 rather than later. As David Zervos from Jefferies noted Friday, "The US employment data were VERY strong. QE has worked its magic and the FOMC will be looking to remove accommodation sooner than the market thinks. As we have discussed before, the communications surrounding this accommodation removal will be complicated, and policy mishaps will become more frequent."

Executive Rate Market Report:

Overnight the 10 yr note yield edged a little higher but as the sun came up over Wall Street US stock indexes started under a little pressure resulting in the 10 moving back to unchanged from Friday at 9:00 this morning. There are no economic reports out today, and this week is slim on key data points; retail sales, weekly jobless claims, Dec PPI (no reason to worry about inflation), and the U. of Michigan consumer sentiment index---that is it, and all of the data is on Thursday and Friday. This week Treasury will auction $59B of notes and bonds.

The WSJ saying this morning that the outlook for better global growth is improving by the IMF, the Fed, the ECB---all poo-pooing the idea that the rapid decline in crude oil is not a vote on more economic declines in the world. Stanley Fischer vice chairman of the U.S. Federal Reserve, called it a “supply shock” that will help the U.S. “It’s more likely to increase GDP than reduce it,” he said. “The effect is unambiguously positive,” European Central Bank President Mario Draghi declared after the bank’s monthly meeting last week. These are some of the same groups that continue to revise the economic outlook lower each quarter for the last year. The Fed, the IMF issue quarterly forecasts, for over a year now each forecast has been weaker than the last one. The reality of this decline in oil prices has yet to work through economies. Chinese overseas shipments rose 4.7% from a year earlier in November; that missed the 8% estimate. Imports fell 6.7%, compared with projections of a 3.8% increase. The US dollar is getting stronger while the yen and euro currency fall quickly; not good for US exporting companies but good for importing. Not sure that I can spin that into a bullish forecast for US growth.

Lower energy prices have added more bullishness to the equity markets, as gasoline prices decline the consensus is growing that consumers will have more discretionary spending power that will lead to an increase in US growth. In normal circumstances a decline in energy prices is a leading indicator the economy will slow as demand weakens; but these are not normal circumstances with the 40% decline in oil prices. (Side bar; we have not had normal since 2008). The swift fall in oil prices is driven by huge increases in supply; shale oil production from advanced drilling techniques to an increase in Libyan oil supply and a bid by some Middle Eastern producers to price competitors out of the market.

The DJIA opened -58, NASDAQ -16, S&P -6. The 10 at 9:30 2.30% unchanged and 30 yr MBS price unchanged from Friday’s 32 bps decline, and 10 bps lower than at 9:30 Friday morning.

There are no economic reports on the calendar today. The bond and mortgage markets will traded on how the stock indexes move and in anticipation of Treasury auctions beginning tomorrow. On Wednesday Treasury will sell $21B of 10 yr notes, on Thursday $13B of 30 yr bonds. We will keep our focus on any reports about consumer spending as the Christmas holiday season progresses. So far spending hasn’t blown the doors off; ok but not what optimists were expecting with the decline in gasoline prices.

This Week’s Calendar:

Tuesday,
10:00 am Oct wholesale inventories (+0.2%)
Oct JOLTS job openings (4.79 mil from 4.735 mil in Sept)
1:00 pm $25B 3 yr note auction

Wednesday,
7:00 am weekly MBA mortgage applications
1:00 pm $21B 10 yr note auction
2:00 pm Nov Treasury budget (-$63B)

Thursday,
8:30 am weekly claims (-2K to 295K)
Nov retail sales (_04%; ex autos and trucks +0.1%)
Nov export and import prices (exports -0.2%, imports, ex oil -1.7%)
10:00 am Oct business inventories (+0.3%)
1:00 pm $13B 30 yr bond auction)

Friday,
8:30 am Nov PPI (-0.1%, ex food and energy +0.1%)
9:55 am Dec U. of Michigan consumer sentiment index (89.5 from 88.6 at the end of Nov)

With little direct news today and Treasury auctions beginning tomorrow; we are not expecting much in the way of changes in the rate markets. Treasuries and MBSs are now technically neutral, not bearish or bullish in the near term. The wider picture though remains slightly bullish, however as we have previously noted, there is not much we expect in the bullish outlook for rates. Interest rates are already very low, any drive lower may be only a brief move. In mid-October the 10 yield declined to under 2.00%, it last less than 24 hours; at the end of Nov the 10 yield fell from 2.35% to 2.16%, within 24 hours it shot back to 2.30%.

PRICES @ 10:10 AM

• 10 yr note: +2/32 (6 bp) 2.30% unch
• 5 yr note: -1/32 (3 bp) 1.69% +1 bp
• 2 Yr note: unch 0.64% unch
• 30 yr bond: +15/32 (47 bp) 2.94% -3 bp
• Libor Rates: 1 mo 0.157%; 3 mo 0.235%; 6 mo 0.329%; 1 yr 0.575%
• 30 yr FNMA 3.5 Dec: @9:30 103.73 unch (-10 bps from 9:30 Friday)
• 15 yr FNMA 3.0 Dec: @9:30 103.69 +3 bp (+8 bp from 9:30 Friday)
• 30 yr GNMA 3.5 Dec: @9:30 104.47 -3 bp (-12 bp from 9:30 Friday)
• Dollar/Yen: 121.00 -0.46 yen
• Dollar/Euro: $1.2277 -$0.0007
• Gold: $1195.90 +$5.50
• Crude Oil: $64.37 -$1.47
• DJIA: 17,953.25 -5.54
• NASDAQ: 4785.58 +4.82
• S&P 500: 2074.36 -1.01

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