Non-Owner Trends Not Helping Small Lenders and Impacting Secondary Markets

By rchrisman@robchrisman.com

Bob Hill and his new wife Betty were vacationing in Europe - as it happens, near Transylvania. They were driving in a rental car along a rather deserted highway. It was late and raining very hard. Bob could barely see the road in front of the car. Suddenly, the car skids out of control! Bob attempts to control the car, but to no avail! The car swerves and smashes into a tree.
Moments later, Bob shakes his head to clear the fog. Dazed, he looks over at the passenger seat and sees his wife unconscious, with her head bleeding! Despite the rain and unfamiliar countryside, Bob knows he has to get her medical assistance.
Bob carefully picks his wife up and begins trudging down the road. After a short while, he sees a light. He heads towards the light, which is coming from a large, old house. He approaches the door and knocks.
A minute passes. A small, hunched man opens the door. Bob, badly wounded, mumbles, "My name is Bob Hill, and this is my wife Betty. We've been in a terrible accident, and my wife has been seriously hurt. Can I please use your phone?"
"I'm sorry," replied the hunchback, "but we don't have a phone. My master is a doctor; come in, and I will get him!"
Bob brings his wife in.
An older man comes down the stairs.
"I'm afraid my assistant may have misled you. I am not a medical doctor; I am a scientist. It is many miles to the nearest clinic, however, and I have had a basic medical training. I will see what I can do. Igor, bring them down to the laboratory."
With that, Igor picks up Betty and carries her downstairs, with Bob staggering after them.
Igor places Betty on a table in the lab.
Bob collapses from exhaustion and his own injuries, so Igor places Bob on an adjoining table.
After a brief examination, Igor's master looks worried.
"Things are serious, Igor. Prepare a transfusion."
Igor and his master work feverishly, but to no avail.
Bob and Betty Hill are no more.
The Hills' deaths upset Igor's master greatly. Wearily, he climbs the steps to his conservatory, which houses his grand piano. For it is here that he has always found solace.
He begins to play, and a stirring, almost haunting melody fills the house.
Meanwhile, Igor is still in the lab tidying up.
His eyes catch movement, and he notices the fingers on Betty's hand twitch, keeping time to the haunting piano music.
Stunned, he watches as Bob's arm begins to rise, marking the beat!
He is further amazed as Betty and Bob both sit up straight!
Unable to contain himself, he dashes up the stairs to the conservatory.
He bursts in and shouts to his master:
"Master, Master! The Hills are alive with the sound of music!"

(Yes, a timeless classic to end the week.)

We'll be following the big bank earnings today and next week, and those banks know a thing or two about personnel changes. Research by the Society for HR Management finds the primary reasons employees leave their current organization are: compensation/pay (62%), benefits (30%), career advancement opportunities (27%), job security (24%), meaningful work (17%) and flexibility to balance work and life issues (16%).

The rescheduled dates for the MBAC 61^st Annual Convention "Right Place, Right Time" are December 7,8 and 9^th at the Hilton Head Marriott Resort and Spa. Those who are already registered for the convention will need to contact the hotel to make room reservations. A reservation link will be on the MBAC website on the Event Page as soon as it is provided to MBAC. Only new registrations need to contact MBAC or register  through the web site. Contact Rhonda Marcum (843.303.5705) with any questions.

 

Yesterday the commentary wrote extensively about the appraisal process. If you'd like to learn more at the MBA's conference in Boston, AXIS AMC, D&H, Mercury Network, and Platinum Data Solutions are hosting a party at the original Cheers bar in Boston (84 Beacon St.) Sunday night the 23^rd at 8PM. RSVP here; space is limited.

 

California Mortgage Bankers Association's MQAC is offering an October 27^th free webinar on New HMDA Requirements.

 

Friday, November 4^th is the date for CMLA's Leadership Development Forum. The 7 Habits of Highly Effective People by Stephen Covey is a definite don't want to miss. For forum membership information, please contact Deb Meogrossi,the CMLA Forums Facilitator.

 

Looking at industry trends, soon after the crash that began in 2008, and delinquencies & foreclosures increased, large companies were making the headlines buying large blocks of residential real estate and turning them into rentals. Some companies, like Blackstone, have been selling homes to tenants at attractive terms. In July the news came out about how, "U.S. landlords who built rental businesses by buying homes en masse are now consolidating and streamlining their operations, in part by selling (for a profit) properties that have soared in value or no longer fit their business models. Invitation Homes is the first of the large rental companies to give residents a shot at owning their houses, seeking to benefit from having its own pool of ready buyers who are constrained by a market starved for affordable homes." Blackstone has amassed about 50,000 rental houses in the past four years, including a reported 10,000 in Sacramento.

 

Don't forget that recently we learned that the seasonally-adjusted homeownership rate declined to 63.1%, the lowest level since 1965, yes 1965, and a steep fall from the peak of 69.4% in 04Q2. Since the start of the recession in 01/08, there's been no meaningful change in the number of owner-occupied houses versus a 21% rise in renter-occupied units. The homeownership rate is at or near bottom. Hello Gen-Y! 

 

But other institutions continue to buy, and of course don't use mainstream lenders to buy units. For example, Pretium Partners, led by one of The Big Short players, is raising $1 billion to buy tens of thousands of foreclosed single-family homes and rent them out to tenants. (Pretium rents and manages their homes under the name "Progress Residential.")

 

And earlier in October Altisource Residential Corporation (RESI) announced the purchase of 4,262 rental homes from Amherst for $652 million, or about $153k per home. The company previously announced that it had signed a letter of intent to purchase a portfolio of 4,000 to 4,500 rentals when it reported 2Q16 earnings. As of 2Q16, leased SFR assets totaled 3,010, so the purchase more than doubles the size of RESI's rental operations. RESI received seller financing on transaction, representing 75% of the purchase price. RESI said it would retain the current property manager (Main Street Renewal) to manage the rental assets acquired from Amherst. Altisource Portfolio Solutions (ASPS) "will continue to be Residential's property manager with respect to all of the Company's other REO and single family rental properties."

 

Separately, Amherst filed preliminary documents for its first SFR securitization (Amherst 2016-SFR1). ted to the sale of assets to RESI.

 

Bloomberg's Matt Scully reports that, "Wall Street's booming business of selling bonds tied to rental-homes is taking a new twist: they're adding government-subsidized rent checks to the mix. A unit of Tricon Capital Group Inc. is planning its second bond offering that's partially backed by rental payments from tenants who receive assistance under the federal Section 8 program, according to Kroll Bond Rating Agency. The $363 million note offering for Tricon American Homes is being arranged by Deutsche Bank AG and is tied to 3,444 single-family rental properties, a person familiar with the deal said. Tricon sold its first bonds last year tied to the vouchers. A Section 8 home comes with a federal subsidy provided by the U.S. government's housing-assistance program, but with the added risk that the tenant could leave at almost a moment's notice.

 

Still others are entering the market, and offering management services to remote landlords. And why not, if you're a Millennial who wants to participate in the housing market but is mobile job-wise and doesn't want to own a home? Companies like HomeUnion, Investability, and Roofstock (and other companies that capitalize letters in the middle of their names) offer ways to buy, renovate and then manage properties in markets that command relatively strong rents compared to their low home prices. Fees typically run from 7 percent to 10 percent for property management and 3 percent for acquisition

 

Turning to interest rates...Knock, knock. Who's there? Not the interest rate hike. It was widely expected that the Federal Reserve wasn't going to have any action at the September FOMC meeting, however, Janet Yellen says that she expects that interest rates will increase in the future. Most people believe that this will happen at the December meeting as the Fed will no risk getting pulled into the turbulent political pool at the November 2nd meeting with the election on November 8th. Many economists think that we'll see a 25 basis point increase in the fed funds target range in December. Also a part of the September meeting was a Fed's new dot plot. It shows that the expected trajectory of the fed funds rate over the next few years has become even shallower. And housing is good, but not great. Housing Starts for August fell by 5.8 percent to a 1.142-million-unit annual rate, and Existing home sales for August eased by 0.9 percent, to a 5.33-million-unit annual rate.

 

We had a small improvement in agency MBS prices yesterday - nice to see. With applications down, and investors like PIMCO buying mortgage-backed securities, the supply and demand equation favors decent MBS prices. And on the demand side of things, the Fed is expected to purchase about $2 billion a day (using money from early payoffs) of various coupons and various securities. Treasury prices also improved: the 10-year T-Note improved almost .375 to close with a yield of 1.74% while agency MBS prices improved about .125.

 

What's nudging rates this morning? We've had the September releases for the Producer Price Index and Retail Sales (+.3% and +.6% respectively). Later this morning are a couple second tier numbers: August business inventories, and Michigan Sentiment. And we'll also have some Fed Presidents speaking. The 10-year is currently at 1.77% with agency MBS prices worse .125 versus yesterday's close.