Most expect mortgage banking profitability to trend down in 2014
driven by further declines in mortgage volumes. (The 40% drop was certainly
higher than the 27% forecast by the MBA.) What I am continuing to hear is
smaller lenders increasing market share at the expense of the big banks,
especially on the purchase side. And if anyone's business model banked on the
volumes and margins of 2012 and the first half of 2013 continuing indefinitely,
well, I've got news for them...
More GSE (government
sponsored enterprise, e.g., Fannie & Freddie) are carrying private MI. Although
Fannie Mae and Freddie Mac securitizations dropped significantly in the fourth
quarter of 2013, the share that carried private mortgage insurance continued to
increase, rising to 24% in the most recent quarter (up from 17% in the 2nd
quarter of 2013).
*** Let's continue yesterday's Early Pay Off (EPO) penalty discussion with some notes from trained professionals; this note is from a well-placed source: "In the real world, when FNMA receives an Early Pay Off from a cash window transaction, they simply debit the lender's FNMA trust account. There's of course a bill for accounting purposes, but it isn't a conversation - there is no pleading. It is funny how the whole investment community expects that an asset should last longer than just a couple of months. (Sarcasm font.) I would bet that if there are lenders out there with longer periods, it's to account for the time that it takes the lender to purchase and to complete the loan sale and shipping process (up to 60 days plus FNMA's 120 would make 180 days, although most loans are sold much faster)."
And this from a money manager I know, "Lenders, and their originators, should not think that they can place a loan in an MBS security and have it escape the EPO metric. Wall Street regularly looks at the issuers of a security, and also at the prepayment that the particular issuer's securities have experienced in the past. There is a premium for securities sold by issuers who have good prepayment track records and a market price penalty for issuers whose securities pay off quickly."
There was this note from a servicer. "Talk to the lenders
out there about the huge number of payoffs that they receive in day 12 through
about 160. Brokers and originators know the various policies out there, and
they engineer their closings to avoid the EPO recapture fees. That doesn't make
it any less of a negative economic event for the investor who paid 1.25% SRP,
expecting to get that .25% servicing fee for the next 6-8 years, and instead,
they are only able to capture a whopping .125% for a loan that pays off at
month 6. For every loan that you appeal to the investor at day 117 on the
basis of "come on... it was only 3 days....can't you give us a break
because it was so close to the cutoff", there are probably 10 more that
paid off on day 123. So if you're willing to have the investor come back to you
for loans that pay off at day 123 (on a 120 day EPO period), then maybe an
equitable arrangement could be met for your 117 day payoff."
And Robert Pieklo, SVP Secondary Marketing, contributes,
"Remember that with Fannie and Freddie the LLPAs are not considered
when paying an EPO. So, for example, if you have a loan with 275 bps
of LLPAs, and you sold it to Fannie and the gross price on the commitment was
106, one would have received 103.25 in premium when sold. If it were to
EPO, you would still owe 106."
Rates have done well this week, and this year, so we shouldn't
complain if they want to take a breather. The 10-yr. note and agency MBS
prices all dropped/worsened by about .250-.375, and the 10-yr. closed at a
yield of 2.62%. There is probably more focus on the weather than on the
markets. This morning we've had the ADP employment data for January, always of
questionable validity since it doesn't include government payrolls, that came
in near expectations at +175k.
Friday is
employment day; always a volatile day for financial markets. We normally do not
float into the data as it usually presents a surprise. We suggest keeping
locked on any loans that will close in the next two weeks. Of course if the
employment data is weaker than expected (+185K job growth) the rate markets
will improve and stocks will take another hit, that said as we always remind,
the risk of floating is high into the monthly employment report. The bond and
mortgage markets when viewed in the short term are still overbought based on
momentum oscillators. Given the market set-up into the report, if employment is
better in Jan that expected it will hit the rate markets and rates will
increase and prices fall.
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