Bus. Development, CFPB Targets Reverse Lenders, MBA Reports on Lender Profits

By rchrisman@robchrisman.com

"I find it ironic that the colors red, white, and blue stand for freedom, until they're flashing behind you." The OCC doesn't have flashing lights, but the feeling in one's stomach is probably like being pulled over. The OCC is set to downgrade WFC's fair lending scorecard by two notches, a move that would give regulators an even greater say in the bank's day-to-day operations.

If you work for a lender that lost money in the 3^rd quarter, you're "special." And if you've lost money this year, do you really think you're going to improve your bottom line in 2017? The Mortgage Bankers Association reported that its study of independent mortgage banks and mortgage subsidiaries of chartered banks showed companies had a net gain of $1,773 on each loan they originated in the third quarter of 2016, up from a reported gain of $1,686 per loan in the second quarter of 2016.

 Including all business lines, 94 percent of mortgage lenders in our study reported pre-tax net financial profits in the third quarter of 2016, compared to 90 percent in the second quarter of 2016," said Marina Walsh, MBA's Vice President of Industry Analysis. Heck, what about that other 6%??

 Ms. Walsh observed that, "An increase in production volume and slight decrease in expenses in the third quarter kept production profits relatively stable. These profits would have been even higher were it not for a decline in net secondary marketing income, primarily income related to mortgage servicing rights."

 "For the first time since the second quarter of 2015, production expenses were below $7,000 per loan, at $6,969 per loan. These expenses, however, remain elevated by historical standards.  Given the increase in loan count and the higher pull-through rate compared to the second quarter, we would have expected an even larger reduction in production expenses." Average production volume increased, as did loan count.

 The MBA said that, "The average pre-tax production profit was 74 basis points (bps) in the third quarter of 2016, compared to an average net production profit of 73 bps in the second quarter of 2016. Production profits for the third quarter of 2016 are also up from production profits of 55 bps in the third quarter of 2015. Since the inception of the Performance Report in the third quarter of 2008, net production income has averaged 53 bps."

 One key to profitability is not paying large fines. The Consumer Financial Protection Bureau (CFPB) has taken action against three reverse mortgage companies for deceptive advertisements, including claiming that consumers could not lose their homes. The companies sanctioned are American Advisors Group, the largest reverse mortgage lender in the United States, Reverse Mortgage Solutions, and Aegean Financial. They were ordered to cease deceptive advertising practices, implement systems to ensure they are complying with all laws, and pay penalties totaling more than $800,000.

 

The CFPB fined Orange County's American Advisors Group $400,000, the nation's biggest reverse-mortgage lender, for falsely telling customers that they weren't at risk of losing their homes, and that they could live in them for the rest of their lives. Bloomberg reports that Reza Jahangiri, American Advisor's chief executive officer, said in a statement the company has "made a significant investment in our compliance and legal infrastructure to ensure we fully conform to all marketing laws and rules." American Advisors didn't admit to or deny the CFPB's findings.

 Certainly, residential lenders and the court system are tied inexorably together. Recently a federal judge in Las Vegas blocked implementation of a Department of Labor rule that would have taken effect December 1st, increasing the salary level that an employee can earn and still be eligible for an exemption from overtime under the Fair Labor Standards Act (FLSA). The government is expected to appeal the decision.

 We had a little bond rally yesterday, and a big rally in stocks, once again proving they don't always move in opposite directions. WTI (West Texas Intermediate) crude fell 1.94% to $49.94/bbl. In mortgage land, the MBA Mortgage Market Index fell to its lowest level since January while the average 30-year mortgage rate rose to its highest since October of 2014. JOLTS - Job Openings fell to 5.534 million in October from 5.631 million in September, indicating less slack in the labor market - no surprise there. We had a report on consumer credit, the key takeaway from the report being that consumer credit (both revolving and nonrevolving) continues to expand, which is a supportive element for the U.S. economy

 Agency MBS closed the day "tighter vs. both treasuries and swaps" as the treasury market was better bid, curve flatter, ahead of Thursday's ECB decision. For the day, the risk free 10-year T-Note improved .375 in price closing with a yield of 2.35% - not much higher than where we were last December at this time. Agency MBS prices improved about .250.

 That was all so... yesterday. This morning from overseas we've had the ECB decision and Mario Draghi's press conference with markets more comfortable that European QE will be extended well into 2017. In the U.S., we've seen Initial Jobless Claims for the week ending 12/03 (-10k to 258k) - and that about does it for market-moving scheduled news. Without much in the way of news the focus tends to shift on what the NY Fed is doing in terms of buying agency MBS, although it is very, very well forecast and described. Today will see the Desk of the New York Fed conduct two morning FedTrade operations: purchase up to $925mn Class B 2.5% ($450mn) and 3% ($475mn) followed by $1.5bn GNII 3% ($725mn) and 3.5% ($775mn). We find the benchmark 10-year yielding 2.39% this morning with agency MBS prices worse .250 versus last night.