Why Is M&A Rolling Along?

An old lady offers the bus driver some peanuts... so the driver happily munches them.

Every 5 minutes she gives him a handful of more peanuts.

Driver: "Why don't you eat them yourself?"

Old Lady: "I can't chew. Look, I have no teeth."

Driver: "Then why do you buy them?"

Old Lady: "Oh, I just love the chocolates around them."

Hiring quick-thinking candidates is important, and Martin H. contributed, "There's another great answer to the traditional interview question, 'What is your biggest weakness?' The answer: 'Sometimes I get so wrapped up in my work that I forget to cash my paycheck.'"

Day by day, week by week, the total number of banks continues to lessen. It is not because they are being shut down as in prior years, but they are merging or being acquired by other banks - and rarely are banks with more than $20 billion in assets doing the buying. The RMA reports a survey of community bank members finds respondents cite the the biggest catalysts for M&A activity are new market expansion opportunity, shareholder return, increased regulatory cost, increased regulatory burden, lack of organic growth, and increased competition (11%).

The National Information Center has released consolidated financial statements for bank holding companies for the third quarter of this year. Consolidated financial statements are not as comprehensive as the soon-to-be-released Quarterly Banking Profiles, however they provide a good early estimate of changes in bank assets and liabilities. The report shows that agency MBS holdings increased $30.7 Billion for the top 50 banks by assets in their HTM and AFS portfolios during Q3 15. Demand was strong for both Conventional and GNMA pass throughs. Bank of America Corporation had the largest rise in agency MBS holdings, adding $23.4B, followed by PNC Financial Services group which added $4.3B. JPMorgan Chase further reduced its holdings by $4.5B. Holdings of non-agency MBS of the top 50 banks decreased $6.7B, while CMBS holdings rose $4.8B. Treasury holdings declined $8.2B, while agency debt holdings fell $1.7B quarter-to-quarter.

Fannie Mae's Housing Industry Forum published an article on CFPB's eClosing pilot, which says the pilot puts the industry one step closer to an "eClosing being the norm." CFPB Director Richard Cordray is quoted, saying CFPB strongly believes eClosings will be a "more efficient and accurate process that will save time, cut costs and raise consumer satisfaction." Jennifer Parker, Fannie Mae's product development manager for eClosing/eMortgage, tells us Fannie Mae is supportive of customers looking to adopt eClosing solutions. "We have a specialized team ready to assist lenders with considerations and strategies for eClosing implementations." To learn more, contact Jennifer Parker (202-752-4756). 

While we're on Fannie (the subject, not literally) the Mortgage Bankers Association (MBA) sent a letter to FHFA Director Mel Watt urging action to reduce the continued taxpayer risk exposure posed by the housing GSEs, Fannie Mae and Freddie Mac.  The letter specifically calls on the FHFA to require greater use of up-front risk sharing by the GSEs, particularly with deeper private mortgage insurance (MI) coverage, to de-risk loans before they are acquired by the GSEs.

MBA President and CEO Dave Stevens highlighted the "imperative that the GSEs reduce their retained risk in order to avoid any increase in taxpayers' investment in the enterprises," and stated that "multiple forms of up-front risk sharing should be piloted including deeper cover mortgage insurance (MI)."  Stevens goes on to say that risk sharing "should not advantage certain lenders relative to others" and that "[the MI] approach would be operationally easiest for the vast majority of lenders."  In addition, the MBA letter detailed reasons why the MI industry is such a reliable counterparty and well positioned to bear additional housing finance risk.

The collection of mortgage insurance companies concurred. "USMI could not agree more. The MI industry has covered more than $50 billion in claims to the GSEs since the beginning of the financial crisis, resulting in substantial taxpayer savings.  USMI member companies never stopped paying claims, and never stopped writing new coverage.  MIs are subject to rigorous new capital and operational standards under the Private Mortgage Insurer Eligibility Requirements (PMIERs) issued by the GSEs with oversight by FHFA.  The MI industry has attracted billions in new capital since the crisis, and is well positioned to raise even more.  Further, as of October 2014, MIs operate under new master policy agreements, which provide assurances about the consistent handling and payment of mortgage insurance claims and bring greater transparency and clarity to contractual protections for lenders and investors."

So the ECB disappointed the markets by not increasing the size of the Asset Purchase Program despite dropping the deposit rate further into negative territory and expanding the list of targeted instruments. The smarter guys in the room say that this means the ECB may be closer to the end in terms of accommodation. Is the economy in Europe really doing that well? For action in prices, 10-year T-notes lost about 1.25 (and closed at 2.33%); fortunately mortgage didn't fare as badly but still everyone was changing mortgage pricing Thursday as the day wore on. 

Today for thrills and chills we had the November employment data. Nonfarm payrolls were expected to increase by about 190k, were +211k, the unemployment rate is forecasted to increase 0.1% to 5.1% and came in at 5.0%, with hourly earnings rising 0.2%, and that is where they came in. Almost as an afterthought we've also had the October trade deficit ($43.89 billion). So the numbers came in very close to expectations, and afterward we find the 10-year yield at 2.35% with agency MBS prices worse by .125 versus Thursday's close.