Scrutiny of Ocwen continues; Be Careful with Branch Manager Comp

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Overloading the borrower with "CYA" closing documents is a big concern of lenders and regulators alike. Over the weekend I received this note from Steve Sherwood, president of Alerus Mortgage: "A wise attorney, when asked if the client should read all of the closing documents said, 'If you make all of your payments on time there is nothing in the documents that can hurt you. If you don't make your payments on time, there is nothing in the documents that can help you'." Well said.

Let's face it: lenders who ignore compliance are doomed in the long run. Here's a recent quick note provided by the Mortgage Bankers Association of the Carolinas regarding 1099 compensation to branch managers, written by Ari Karen of Offit Kurman and C 3 C Compliance Solutions. "Many lenders still have relationships with branch managers where, in addition to normal W2 compensation, they pay managers money via 1099 for various expenses.  This is particularly true where the manager owns the building or equipment in question.  Of course, there are also scenarios where managers perform outside tasks for the branch, such as marketing, etc. and receive 1099 compensation related thereto. Lenders should be aware that 1099 payments have become a focus for auditors due to the concern that it could be a vehicle for the payment of compensation that is no longer permissible under Dodd Frank. Indeed, both federal and state regulators are paying close attention to such payments attempting to ascertain their legitimacy and basis. Of course, given the mandate to report improper tax practices to the IRS, such payments are likely to be scrutinized from that perspective as well."

The note continued: "To be clear, all expenses should be paid directly by the lender whenever possible, thus minimizing the need for reimbursements.  In those cases where the manager owns the property, a fair market value for the rent must be ascertained based upon a comparative analysis and the 1099 payment should be limited to the fair market range for the property in question.  Beyond that, generally speaking, no additional services or compensation should be payable outside the manager's responsibility for the company.  In other words, whatever services are performed by the manager should be considered part of their job and the compensation for such services paid as part of their employment related wages. Commonly, managers want to receive money via 1099 for tax reasons and write-offs.  Unfortunately, with the increased regulation and scrutiny, the risks from a banking compliance perspective - both for the lender and the manager - have simply become too great.  As such, lenders should reexamine such practices and discontinue them when necessary." Thanks MBAC!

Servicing continues to be in the news. Last week, of course, the New York Department of Financial Services (DFS) Superintendent Ben Lawsky sent a letter to Ocwen as part of its ongoing examination of the company's relationships with affiliates. Specifically, Lawsky's letter asks for additional information regarding OCN's relationship with Altisource and its subsidiary, Hubzu. As the letter states: "One particularly troubling issue is the relationship between Ocwen and Altisource Portfolio's subsidiary, Hubzu, which Ocwen uses as its principal online auction site for the sale of its borrowers' homes facing foreclosure, as well as investor-owned properties following foreclosure... Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers." The letter requested responses to eight sets of questions by April 28. It has become clear that the DFS' primary concern is regarding OCN's affiliate relationships as opposed to the on-boarding of large MSR transfers. Please see page 3 of this document for Compass Point's cool "map" of OCN and its affiliated companies.

Secure Settlements told clients that it has enhanced its Closing Guard agent vetting program to encompass the verification and certification of agent internal controls.  This new feature helps lenders meet CFPB requirements that vendors have appropriate data privacy and security and consumer protection policies internally. SSI will be releasing on June 1st "QuickCheck Professional", which will provide a detailed and automated background risk assessment report on any third party vendor required by a lender to be screened for risk.  The report will cover appraisers, brokers, 203K consultants, financial planners, credit counselors, real estate agents, property managers, sub-servicers, collection agencies, REO companies and virtually anyone with whom a lender is sharing any business and consumer information. All data is verified and evaluated by risk analysts to provide the highest accuracy.

Fannie Mae has clarified several requirements for lending in small towns and rural areas, including allowing small lenders to be "excepted" under AIR when they are not sufficiently staffed to have a distinct separation between production and quality assurance functions, provided that they can demonstrate documented safeguards and processes to separate their collateral evaluation processes from origination processes.  With regard to appraisals, appraisers of properties in towns with few sales may travel greater distances to appraise comparable properties or use older transactions if they provide a thorough narrative that covers current market conditions and available market data along with the analysis of the subject property.  Adjustments may also exceed the usual 15% net and 25% limits on variations from the comparable sales price.

We can't even have a definitive measure of the whether or not the housing market is doing well or not. Last week the markets were focused on poor home sales, but noticed that the prices had gone sky high. Yesterday we learned from NAR that contracts to purchase previously owned U.S. homes climbed in March by the most in almost three years, showing residential real estate was starting to stabilize entering the spring selling season. Pending Home Sales were up 3.4%, the first gain in nine months.

 

To be frank, there was no earth shattering news Monday to move the markets, and it decided to sell off slightly rather than rally slightly. It happens, right? Today the markets will have a little more to chew on: 8AM CST's February S&P/Case-Shiller Home Price Index, which is expected a bit lower, and 9AM CST's April Consumer Confidence numbers. For numbers, we saw a 2.68% yield on the benchmark 10-yr T-note at close on Monday, and in the early going it is now 2.72% and agency MBS prices are worse about .125

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Banks Contemplate Higher Short term Rates;Kroll Rolls out non-QM Pool Risk Measures

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I know there's a show on TV entitled It's Always Sunny in Philadelphia. While I realize that's never the case, if it was, I assume there wouldn't be a need to "seasonally adjust" anything, let alone the housing market. Wells Fargo Economics Group write, "Without a doubt, this year's harsh winter weather is behind much of the slowdown, with cold and snowy conditions keeping buyers away and limiting the work for building crews. Now that spring has arrived we should begin to see conditions return to normal. Unfortunately, today's housing market is anything but normal. Underlying demand remains exceptionally weak, as traditional buyers are still deferring home purchases." Does anyone remember if Punxsutawney Phil saw his shadow or not? Glass half-full.

Bank and mortgage company mergers and acquisitions continue - there are geographic benefits, and the cost of compliance is just too expensive for many institutions. On Friday we had our first bank closure in quite some time: Allendale County Bank, Fairfax, South Carolina, was closed, and the FDIC entered into a purchase and assumption agreement with Palmetto State Bank, Hampton, South Carolina, to assume all of the deposits of Allendale County Bank.

Another trend that is winding down in the banking industry is the long period of Fed Funds at or near 0%. Whether this happens in 2015 or 2016, keep in mind that it is in the Federal Reserve's best interest to not stifle any economic growth. But we've had 0% short-term rates since 2009 and some bankers and lenders can hardly remember doing business in any other environment. Many bankers are just starting to see commercial loan growth edge higher as the economy recovers. On the deposit side of the equation (remember that loans are assets and deposits are liabilities for banks!), most sit in core such as DDAs, interest checking, savings, MMDAs, or short term CDs. That is more because interest rates on all deposit products are so low, customers don't really seem to care much, and favor safety over anything else.

So what if the Fed starts to move the Fed Funds target rate higher next year, or maybe 2016 depending on employment and economic growth, by 1-3%? The idea that depositors will happily remain in core deposits is less certain and banks are looking for ways to prepare. Should banks should seek to lock in their deposit base and protect their margins by marketing long term CDs to existing customers? Probably not - Pacific Coast Bankers Bank believes that "there are a host of problems with this solution and even the premise upon which it is based. Core deposits are typically relationship-based, so they already have a long duration. Unlike core deposit customers, CD customers are typically the most rate-sensitive. As such, these deposits almost always will be of a shorter duration. Further, if a bank thinks a CD penalty will keep a CD customer in place in the face of a 300bp rise in deposit rates, the math doesn't work."

In an environment where every basis point counts, depository banks enjoy a marked advantage over independent mortgage banks that have a 3 or 4% warehouse line: the bank's cost of funds is much closer to 0%. Banks will have to work diligently on their proper management of deposits in an increasing rate environment. And independent mortgage banks will have to continue negotiating advantageous terms on their warehouse lines. Either way, most are not predicting any kind of short term rate increase for another year or two.

Do lenders "target" certain minorities, or is it "seeing opportunities"? Given fair lending laws, CRA bonuses, and geographic restrictions, that is a touchy question, especially for banks. But when a lender receives a "special exemption" from the CFPB regarding lending to minority groups, or they publicly come out and say they're going to do it, well, that's another issue. In several states (California, Arizona, New Mexico, Texas, and Florida to name five) the Latino population, whether new immigrants or 2^nd generation, definitely is having an impact on the housing numbers.

Banks across the nation are using the advantages of having deposits, and thus being able to offer portfolio products, to help their originators offer various products. These products often include non-QM loans. But are these loans riskier than QM loans? And what is risk? Kroll Bond Rating Agency, which cranked things up after the other rating agencies miss-rated billions of dollars of MBS, released its methodology for assessing non-Qualified Mortgage (non-QM) risk in U.S. residential mortgage-backed securities (RMBS). The report, Assessing Non-QM Risk in U.S. RMBS, provides insight into KBRA's proposed analytic approach for rating RMBS backed by non-QM loans. The methodology relies on KBRA's fundamental analysis of mortgage risk, augmented by stressed assumptions regarding a borrower's propensity to engage in litigation against an originator, and potential losses resulting from a successful borrower claim. Arguably securities made up of non-QM loans (not at all to be confused with subprime loans) will have a different risk profile - especially from a liability perspective - than QM securities. Heck, why not securities blended with the two? Regardless, there is little historical data demonstrating how this risk factor might affect mortgage performance. Certain assumptions made by KBRA have been derived from limited data on litigation-related mortgage loss. The report, Assessing Non-QM Risk in U.S. RMBS, can be found at www.kbra.com.  

"Markup": The process by which congressional committees and subcommittees debate, amend, and rewrite proposed legislation." I mention this because on the policy front, the D.C. financial policy complex has been almost exclusively focused on the Johnson-Crapo GSE reform proposal which will be marked-up on April 29 (probably incorporating aspects of the Maxine Waters & PATH Act proposals). Given that Congress has less than 50 working days left until the election, counting recesses and campaigning, but their staffs have more working days, the work resolving the unstable conservatorship situation with Fannie & Freddie will likely fall in the "behind the scenes" category. Is any plan that will take, according to experts, five or more years really worth it? David Fiderer points out a major deficiency in the proposal: "The key to successful lending and investing is risk diversification, and the key to stable markets is the broad distribution of risk among institutional investors. The Johnson-Crapo system, which relies so heavily on deeply subordinated debt, obviates those goals." 

Obviously the agencies are not too adverse to taking their functions, changing their names, and moving on with life. After all, the Freddie & Fannie systems have worked pretty well for several decades, in both the primary and secondary markets. Will a new system in which private companies could package mortgages into federally insured packages be better? As it stands now, Johnson-Crapo would require successors to F&F to maintain a 10% capital cushion, which, as the WSJ points out, is more than double what the companies would have needed to withstand the credit crisis from which we are emerging. And what about managing a five year transition - are we going to ask the staffs of F&F to stick around? Will the taxpayer foot the bill for the retention bonuses that might be required? Tomorrow the Senate Banking Committee starts considering amendments to the legislation - who knows what might be tacked on just to garner votes? And even if differences are ironed out, a full Senate vote & approval is not guaranteed, and even after that, there is less certainty that the House of Representatives will vote to approve it. And let's not forget the November election... the make-up of the House and Senate may change... and then what? 

We're here at the last few business days of April, and I am hearing mixed things about how the month is turning out for lenders. For many, March was a great improvement over Jan & Feb, and April is coming in close to March for production. My bet is that we continue to see M&A and channel changes (leaving wholesale, or adding correspondent, for example) well into the summer. 

We have quite a bit of economic news this week. Today & tomorrow are some second tier numbers: Pending Home Sales, the S&P/CS 20 city index numbers with their two-month lags, and Consumer Confidence. Wednesday is the ADP Employment Change number, Employment Cost Index, GDP, and the Chicago Purchasing Manager's Survey. Wednesday the 30^th also has the FOMC's interest rate decision - expect no change. May Day - Thursday - is Initial Jobless Claims, Personal Income and Consumption, a series of PCE (Personal Consumption Expenditure - a measure of price changes in consumer goods and services) numbers, a few ISM (Institute of Supply Management) numbers, and Construction Spending. And if all that isn't enough, Friday is the Big Kahuna: changes in Nonfarm Payrolls, the unemployment rate, hourly earnings, and so on. For numbers, we're still stuck in a range: on Friday our buddy the 10-yr T-note closed with a yield of 2.67% and this morning we're at 2.68% with agency MBS prices worse a tad.

 

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Breaking news: CFPB research discovers confused borrowers at loan closings!

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It is "bring your kid to work" day. Some kids are fascinated with how much others make. They grow up to be underwriters. Others are fascinated with the ebb and flow of compensation, and the inherent inequality in government versus private market pay structures. They grow up to be reporters, or CEOs. Here's something that had both groups, and everyone in-between, buzzing yesterday: a story about how regulators make more than banking and mortgage folks: "Guess Who Makes More Than Bankers: Their Regulators." "The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. At the OCC, secretaries make on average $79,182 per annum. Motor vehicle operators (the agency's limo drivers) at the FDIC earn $82,130. Human resources management trainees at the CFPB make $110,759 a year." I need to brush off my resume!

Here's something that is kind of interesting, in a nerdy-mortgage way. Yesterday's MBA applications numbers showed that adjustable rate mortgages, as a percent of total dollars of loans was 18.6%. But as a percent of the total number of applications, ARMs were 8.5%. The MBA states that its numbers capture 75% of the retail originations out there, and putting aside the usual questions about how much of that 75% Wells, Citi, Chase, and BofA constitute, I suppose more higher balance loan applications are being received for ARMs than for lower balance loans. And as we know, plenty of those loans are going into the portfolios of those banks. After all, generally most lenders would rather do one loan for $800,000 than four loans for $200,000 since doing the one loan uses less overhead, and may price accordingly.

If I had a sense of humor, I would find this hysterical: let's create a problem by overregulating and creating an environment where lenders are terrified to make a mistake, and then "discover" the problem that said regulation created! The CFPB published a report which finds that many consumers are frustrated by the short amount of time they have to review a large stack of complex closing documents when finalizing a mortgage. The Bureau also released guidelines for an upcoming eClosing pilot project to assess how electronic closings can benefit consumers as they navigate the mortgage closing process. "Mortgage closings are often fraught with anxiety," said CFPB Director Richard Cordray. "We have taken action to address some of the problems consumers face, but more needs to be done. Our eClosing pilot project will provide valuable insight into how to improve the closing experience for consumers. "

The Bureau is now in the process of preparing for this rule to be implemented in August 2015. The report is the culmination of research conducted over the past year. As part of that research, in January 2014, the Bureau published a Request for Information about the challenges consumers face when closing on a home. The request asked for input from market participants, consumers, and other stakeholders on ways to encourage the development of a more streamlined, efficient, and educational closing process that would be beneficial to consumers.

The Bureau heard about three major pain points for consumers during the closing process: Not enough time to review, overwhelming stack of paperwork, and the complexity of documents and errors. Gosh, any single borrower, Realtor, or lender could have told the CFPB that in about 10 minutes.

The CFPB identified electronic closings, also known as eClosings, as one solution to address the problems. "eClosings are already happening in the market today, but adoption is low. There is a lot of misinformation about the legality and feasibility of eClosings. Today, the Bureau is releasing its guidelines for a pilot project to study eClosings. The pilot project, which will launch later this year, is designed to enable the CFPB to better understand the role that eClosings can play in addressing consumers' pain points."

It was recently brought to my attention, although I was looking for the break room at the time and didn't necessarily want to talk about home equity rescissions, that some LOS systems may claim that they provide all the "material disclosures" for the right of rescission but fail to outline what disclosures are supposed to be given to the borrowers. For purposes of the right of rescission in home equity plans, the five following disclosures are considered "material disclosure" requirements: the method of determining the finance charge and balance upon which the finance charge will be imposed, Annual Percentage Rate (APR), the amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan, the length of the draw period and repayment period, and, for both the draw period and repayment period, an explanation of how the minimum periodic payment will be determined and the timing of the payments, including the required disclosures if paying the minimum payment may or will result in a balloon payment.

Recently the Mortgage Bankers Association of the Carolinas addressed the "Dangers of a QM Loan Gone Non-QM". I quote, "Many lenders think repurchase or nonsalable, when they think of the possibility of a mistake on a QM loan that actually causes the loan to fall into Non-QM status.  While this is certainly a significant problem, the issues with the sale or possible repurchase of the loan only represent the beginning of a lender's troubles.  Indeed, the lender -- who has just essentially admitted to having botched the origination and/or underwriting of the loan by identifying it as something it is not -- is extremely vulnerable to a lawsuit under the ability to repay rules.  Remember, the ATR rules require a lender to have a good faith belief the borrower can repay the loan.  Yet, the existence of that good faith belief can be easily challenged where the lender's internal errors caused it to improperly classify the loan as QM when it really was a Non-Qm loan.  Making the jump from a "mistake" to lacking a "good faith belief" will likely not be too difficult for a jury, unless the error is the result of some improper action by the borrower.  Where the lender's internal processes fail, the finding of an ATR violation is extremely possible. For this reason, lenders must be especially careful when dealing with loans that have a higher propensity for QM determinative error.  If those loans (e.g. at 42.9 Debt to Income Ratio) ultimately cross into non-QM territory, not only does the lender lose the safe-harbor and experience multiple problems relating to salability, the lender is likely stuck in an extremely vulnerable position if the loan ultimately defaults.  As such, it would be wise to place extra scrutiny on those loans having the greatest risks of error.  This is especially true when mistakes could be material to QM status."

Besides all this news, something else that caught everyone's attention was the New Home Sales numbers yesterday. New Home Sales dropped 14.5% in March to a 384,000 annualized pace, lower than any forecast of economists and the weakest since July and were down 13.3% from a year earlier. (It follows Tuesday's drop in Existing Home Sales.) But the median price of a new home reached its highest level ever in March at $290,000, the report said, up 11.2% from February. (And remember that sales of new homes represent a small portion of houses purchased in the U.S. and can be subject to large revisions.) Quicken Loans Vice President Bill Banfield offered, "The sharp decline in March's new home sales is further evidence that winter weather is not the catalyst for the sluggish housing data the past few months. The rise in interest rates and prices of new homes is leaving some potential buyers with sticker shock and ultimately prolonging their home search process." Bill - let's not forget loan level price adjustments, no inventory, the narrow QM box, and the fact that many don't want to leave their cozy 3.5% 30-yr fixed rate financed homes! 

But the fixed-income markets took it as a sign of weakness in the economy, pushing prices higher and rates lower. Plus, fewer homes means fewer mortgages, which means less supply of MBS. So agency MBS prices improved about .250, and the 10-yr closed at 2.69%. But that was yesterday. Today we've had March Durable Goods (+2.0 expected, actually +2.6%) and Initial Claims (expected +310k, it was +329k up from 305k). Later is a $29 billion 7-year note auction and the NYFRB release of its weekly report on MBS purchases for the week ending April 23. After these early numbers rates are slightly higher with the 10-yr at 2.72% and agency MBS prices worse about .125.

 

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The Number of Banks is Declining; Existing Home Sales Numbers Dissected

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A few weeks ago I wrote about the "over 65ers", the age demographic which is very much a part of the baby-boom generation. Recently the U.S. Census Bureau released "The Centenarian Population: 2007-2011," which focuses on those who have reached a milestone many of us won't get to in life: 100 years of age. It's an interesting demographic, maybe one which gets overlooked considering only 55,000 Americans fall into this group (versus, say, 90 million Millennials aged 18-34).

The number of banks available to consumers is decreasing - but it is not because of failures. In fact, there has not been a bank failure in the USA since 2/28/14, a stretch of 54 days, and only 5 banks have failed YTD. (To put that in perspective, on 7/20/12, 5 US banks failed in a single day.) And there has not been a new bank formed in several years. (The FDIC believes it addressed this concern in this recent ABA entry.) No, the number of banks has been declining due to mergers and acquisitions.

And the trend of financial sector companies merging continues, big and small. Just in the last week or so... Hilltop Holdings Inc. (NYSE: HTH) and SWS Group, Inc. (NYSE: SWS) announced that they have entered into a definitive merger agreement. Bankwell Financial Group, Inc. (OTC Bulletin Board: BWFG) and Quinnipiac Bank & Trust Company announced the execution of a definitive merger agreement pursuant to which Bankwell will acquire Quinnipiac through the merger of Quinnipiac into Bankwell Bank. The acquisition will add approximately $100 million in assets to Bankwell, bringing total assets to $880 million as of the most recent reporting period. In Massachusetts Institution for Savings in Newburyport and Its Vicinity ($1.7B) will acquire Rockport National Bank ($200mm) for $28.3mm in cash or about 1.9x tangible book. In Iowa First State Bank ($106mm) will acquire Patriot Bank ($56mm) for an undisclosed sum. In Pennsylvania Community Bank ($546mm) will acquire First Federal Savings Bank ($319mm) for about $54.5mm in cash (35%) and stock (65%). U.S. Bank National Association ($360B, OH) will acquire the document custodian business of Ally Bank ($99B, UT) for an undisclosed sum. The move increases documents under custody at U.S., such as collateral loan files, equipment leases, home equity, improvement, vehicle loans and leases. In Texas Heritage Bank ($107mm) will acquire Nixon State Bank ($76mm) for an undisclosed sum. In next-door New Mexico Grants State Bank ($120mm) will acquire Sunrise Bank of Albuquerque ($41mm). And Centennial Bank ($6.8B, AR) will acquire Florida Traditions Bank ($296mm, FL) for $43mm in stock.

Thousands of LP users received this note from Freddie yesterday: "Loan Prospector is currently unable to process any new submissions. This issue impacts all Loan Prospector access methods. We're applying all available resources to resolve this issue and apologize for any inconvenience.  We'll inform you when this issue has been resolved." Uh oh - another case of DDoS, similar to what Ellie Mae went through a few weeks ago?  And millions of readers read with concern about what FHA Commissioner Carol Galante told The Washington Post about her agency's position on not lowering the cost of FHA mortgages in spite of the MBA and the NAR giving it a shot

Existing Home sales were essentially flat in March, while the growth in home prices moderated. Jonathan Smoke opined, "We can almost hit replay on our March analysis, but it is worth repeating with updated data so the point we originally made can really sink in: the existing home market is indeed getting stronger but you need to get used to 'stronger' equating to 'fewer but better' sales. A stronger resale market is one where we see increasing levels of good ole fashioned, non-distressed sales consummated between normal consumers amidst price appreciation and limited supply.  We want to see fewer foreclosures, fewer REO sales, and fewer investors.  And indeed we are seeing less of what we don't want to see and more of what we do want to see-it's just netting out that the totals are slightly lower.  And that's fine because the current rate of single family existing home sales is still almost 15 percent above the 45-year monthly annualized rate."

His note continued, "Once again we can look at pricing as a key indicator that conditions are improving and not deteriorating. According to the NAR release, the median existing home price in March was $198,500, 7.9 percent up over this time last year.  Supporting continued price appreciation is the low level of supply, which remains below normal at 5.2 months of supply. Despite continued rhetoric about higher mortgage rates hurting the recovery, the facts don't support that concern.  The average interest rate on purchase mortgages on regular resales in the first quarter of 2014 actually declined 7 basis points from the fourth quarter of 2013 due in part to an increasing share of adjustable rate mortgages.  The average mortgage rate is up 12 basis points over the first quarter of last year, but as we enter the second half of the year, the year-over-year comparison will start looking better."

Michelle Meyer wrote, "Existing home sales continue to fall, declining 0.2% in March to 4.59 million. Part of the reason home sales continue to decline is due to fewer distressed properties - the share of sales that are distressed declined to 14% from 21% last March. The share of investors slipped to 17% (Feb: 21%) while the share of first-time homebuyers ticked up to 30% (Feb: 28%) - part of that is seasonal as we approach the spring selling season first time homebuyers naturally pick up as share of activity. But nonetheless, this is a trend we think will persist as the market gradually normalizes."

Lawrence Yun, NAR chief economist, said that current sales activity is underperforming by historical standards. "There really should be stronger levels of home sales given our population growth...In contrast, price growth is rising faster than historical norms because of inventory shortages...With ongoing job creation and some weather delayed shopping activity, home sales should pick up, especially if inventory continues to improve and mortgage interest rates rise only modestly...With rising home equity, we expect distressed homes to decline to a single-digit market share later this year."

And as if to echo these trends, the FHFA House Price Index was up 0.6 Percent in February. The purchase-only index for the U.S. has shown increases for the last three months despite a harsh winter season. The 0.1% decrease in November 2013 ended a 21-month trend of price increases that had begun in February 2012. The previously reported 0.5% January increase was revised downward to 0.4%. Annually, US home prices rose just 6.9% in the 12 months through February, the smallest gain in a year, in a sign that the housing market's recovery is cooling. But hey, nothing goes up forever, right? And this morning the MBA reported that apps last week were down 3.3%, with refis falling 3.7% and purchases dropping 2.6%.

Looking at the bond markets, volatility has been absent for several weeks now, much to the relief of lock desks everywhere. Yesterday Thomson Reuters observed buying from REITs, money managers, and banks, as well as, the Fed which was focused primarily in 4% securities (containing 4.25% and higher mortgages). But prices were basically unchanged from Monday, which were pretty much unchanged from late last week. Today we'll see March New Home Sales (expected to rise slightly) and the Treasury auction off $35 billion in 5-year notes at noon CST. For numbers, the yield on the 10-yr Tuesday afternoon was 2.73% and in the early going is down to 2.70% so we can expect a slight improvement in agency MBS prices.

 

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Weekly Market Preview

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What's on the agenda for this week? 

Last Friday ahead of the long Easter weekend, some glimmer of progress with the Russia/Ukraine situation and a very firm Philly Fed business index sent interest rates spiking higher with the 10 yr jumping to 2.72% up 8 bps in yield. 30 yr MBS prices tumbled 51 bps. This morning the 10 is better and MBS prices getting a little reprieve; at 9:00 the 10 at 2.70% with 30 yr MBS price +17 bps. Over the weekend there was some gun fire in Ukraine with separatists being shot by “unknown” gunmen; nothing serious however in terms of markets. Markets remain subject to swings in sentiment about the Ukraine news; last week for a moment when Russia, Ukraine, the US and EU met in Geneva there was brief optimism that some progress might be in the offing; four days later there has been gun fire, escalating renewed concerns. Rate markets were hit very hard on Friday, this morning with less enthusiasm some small improvements in the bond market. The US 10 yr note on a global comparison is yielding more than G-7 country averages. Treasury 10-year notes yielded 67 basis points more than their counterparts last week, the most in four years; as the Fed unwinds its bond-buying program while Japan and Europe consider additional purchases. The Bloomberg Global Developed Sovereign Bond Index (BGSV) has gained 3.4% this year, versus a 4.6% decline in 2013. Where are those higher interest rates that most everyone was forecasting this year? So far bets that rates would increase have come up losers as the Fed is relentless in talking and doing things that have kept rates down; good for mortgages and potential home buyers, but not many are buying into the reality that higher interest rates are inevitable. How long the Fed can enjoy the success of keeping rates at the present levels is a question that big investors have gotten wrong so far this year. Differing comments from Janet Yellen have kept interest rates tied in very narrow ranges now for the last three months. At the March 19th FOMC meeting Yellen stirred the pot with her remarks that after the end of tapering (expected in Oct) six months later the Fed would begin increasing the FF rate; last week she back-peddled saying the Fed was in no hurry to increase rates. The Fed’s new strategy? Keep them guessing, keeping rates stabilized? At 9:30 the DJIA opened quietly, +3, NASDAQ +7, S&P +1; 10 yr note 2.70% -2 bp and 30 yr MBS price +14 although FHA price -16 bps. Not much in the way of market-moving news other than at 10:00 March leading economic indicators that was expected up 0.7%; as reported up 0.8%; a very good number but given the recent data not a surprise. This week Treasury will auction $96B of 2s, 5s, and 7 yr notes (see calendar). This week existing and new home sales along with the FHFA housing price index are key data points, also March durable goods orders another significant report. The Fed and ECB are increasingly worried that inflation is not occurring as the banks’ expected by this time in the recovery. Mario Draghi and Janet Yellen have increased outward concerns that the economies still are soft enough to keep pricing pressures at bay. When will interest rates begin to increase? So far those that have bet by now rates would be 25 bps higher than they are have taken sizeable losses on that investment. Nevertheless, interest rates will increase of that there shouldn’t be any doubt; when they will break out of the present long narrow range is keeping traders on edge. We continue to expect the US stock market will experience a significant decline, so far it hasn’t happened. If our outlook is wrong rates are going to increase; if we are correct rates will hold here and likely fall a little. That said, our primary focus is on the near term outlook; rates for the present are not likely to change much in the next few weeks. This Week’s Economic Calendar:             Monday,                 10:00 am March leading economic indicators (as reported +0.8%)             Tuesday,                 9:00 am FHFA Feb housing price index (+0.3%)                10:00 am March existing home sales (4.56 million units -0.7%)                1:00 pm $32B 2 yr note auction             Wednesday,                7:00 am weekly MBA mortgage applications                10:00 am March new home slews (455K units +3.3%)                1:00 pm $35B 5 yr note auction             Thursday,                8:30 am weekly jobless claims (+8K to 312K)                             March durable goods orders (+2.0%, ex transportation orders +0.9%)                1:00 pm $29B 7 yr note auction             Friday,                9:55 am U. of Michigan consumer sentiment index (82.6 from 82.6)

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Texas job market; Millenials and first time home buyers; The Make a Difference Program

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Home affordability is not a modern problem. In Zillow's In Search of Affordability, Krishna Rao writes, "Across the United States, strong home price affordability has been recently eroded by a combination of rising home prices and mortgage rates. Some areas, particularly on the West Coast, have begun to look unaffordable compared to their historic norms, forcing some household to look to the periphery of urban areas in search of affordable homes." Zillow measures affordability by looking at how much of a person's monthly income is spent on a mortgage payment. Historically in the United States, the median household would need to spend 22.1 percent of their income to afford the mortgage payments on the median home. This number fell dramatically during the housing recession, hitting a low of under 13 percent by the end of 2012.

Speaking of economy: Texas, not only did a recent ABC poll put Austin at #4 for recent college grads, but the Dallas Fed issued a report titled, "Texas to Remain a Top State for Job Growth in 2014" and reminding us that "Texas was the third-fastest-growing state in terms of job growth in 2013, trailing only North Dakota and Florida. The Texas economy will likely continue growing faster than the national average in 2014, and nonfarm employment should increase by 2.5 to 3.5 percent." In addition, "Texas Leads Nation in Creation of Jobs at All Pay Levels". "Texas experienced stronger job growth than the rest of the U.S. in each of four wage groups--lowest, lower-middle, upper-middle and highest paid-from 2000 to 2013. Texas has also created more higher-paying than lower-paying jobs." 

The home ownership rate has been dropping steadily since its high of 69.2 percent in 2004 to now just 65 percent. Millions lost their homes to foreclosure and millions more never entered the market, fearing falling home prices. Now, 10 percent of U.S. renters say they would like to buy a home in the next year, according to a new report from Zillow, which surveyed renters in the nation's 20 largest housing markets. If all the renters who said they wanted to buy a home in the next year actually did, that would represent more than 4.2 million first-time home buyer sales, about twice the number of first-timers in 2013.

First-time home buying has actually fallen to the lowest level ever recorded by the National Association of Realtors, at just 26 percent of sales in January. These buyers usually make up roughly 40 percent of the market. Interestingly, the majority of the renters who said they wanted to buy felt they could afford home ownership, despite rising home prices and rising mortgage rates. The trouble is there is just not that much out there to buy. Home construction is still recovering at a slow pace, and prices for newly built homes are far higher on average than for existing homes. The number of homes for sale is rising slightly but is still well below historical norms across most markets.  

"Even after a wrenching housing recession, this data shows that the dream of homeownership remains very much alive and well, even in those areas that were hardest hit," Zillow's chief economist Stan Humphries said in the report. "But these aspirations must also contend with the current reality, and in many areas, conditions remain difficult for buyers. The market is moving toward more balance between buyers and sellers, but it is a slow and uneven process."

Homeownership aspirations among renters were actually highest in some of the hardest hit markets of the housing crash, such as Miami, Atlanta and Las Vegas, according to Zillow. That may be because so many renters there are former homeowners who lost their homes to foreclosure. They are now seeing these markets recover, as investors bought up the distressed properties, pushing prices higher far faster than anyone expected. These renters are seeing market resilience, and likely want back in. 

Foreclosure activity, in fact, fell 10 percent in February from January and is down 27 percent from a year ago to the lowest total since December 2006, according to a new report from RealtyTrac. But there have been some great buys through the foreclosure process, as morbid as that sounds. 

Ironically, these bargains might be perfect for first-time buyers looking for a good deal, but they remain stuck in limbo land. Meanwhile, tight credit and higher prices are keeping many of these same potential buyers away from new construction. The level of student debt, not able to be discharged through bankruptcy, is climbing. (Auto loan debt is also increasing, and after several months of declining, it appears that mortgage debt is beginning to creep higher. Unfortunately for today's youth, tuition has gone up at 3x the inflation rate for decades. Not only that, but their overall wealth has not benefitted from the rally in equity prices, nor from the housing market appreciation (which has benefitted Millennial's parents - and in fact worked against first time home buyers).

This is a big topic "out there" in the industry, with the thinking that, since there are more Millennials (age 18-34) kicking around than baby boomers, they will step in and become first time home buyers, and help to boost the housing market. The numbers support the argument. But they have to be financially savvy, and many of them are not. A few weeks ago at the Wisconsin MBA event I had the opportunity to spend some time with Brenda Campbell, the Executive Director of the "Make a Difference Wisconsin" program. It is a non-profit organization dedicated to providing youth with the financial management tools needed for success. Funds go to mobilizing a 500 member volunteer group that provides in-school financial education to thousands of Wisconsin high school students. "Committed to empowering teens to make sound financial decisions by increasing their personal financial knowledge and skills." Heck, who wouldn't want kids to learn about bank accounts, interest, budgets, and credit? After all, many of them will be future home owners.

Yes, programs are growing in popularity, but parents should be training their kids to be financially literate and establish credit. Tracey Sanderson, VP at Washington's Banner Bank, contributed, "Credit is a game that is to be played wisely and there are few ways to learn the rules. Parents are the best teachers... but many of them have never been taught to play the game either. Parents - Teach your children to save and to make regular monthly payments.  Habits that are established when we're young tend to stay with us a lifetime.

Back to the markets! The foundation of a recovering economy are built on jobs and housing. Yesterday we learned that the pace of U.S. home construction rebounded less than forecast in March: housing starts climbed 2.8 percent to a 946,000 annualized rate following February's 920,000 pace. Building permits declined 2.4 percent to a 990,000 annualized pace versus forecasts of "unchanged." Fed Chair Janet Yellen gave a speech, although it "offered nothing particularly market moving." And thus we found the markets nearly unchanged.

Today is an early close for the bond market, and it is closed tomorrow for Good Friday. For news we'll have Initial Claims (+11k to 311k) at 8:30AM EST and April Philly Fed (+1.0 to +10) at 10AM EST. The Treasury Department will announce details of next week's auctions of 2-, 5- and 7-year notes. For numbers in the early going, the yield on the 10-yr. at the close Wednesday was 2.63%, and we're unchanged in the very early going this morning. 

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More on "business" versus "consumer" purpose; New investor for borrowers with multiple properties

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People who study mortgage lending and trends continue to ruminate on the Wells Fargo and Chase numbers from Friday. JPM's mortgage origination volume was down 27% QOQ and 68% YOY and mortgage application volume was down 17% QOQ and 57% YOY. Both closings and application volume came in somewhat weaker than expected. One positive point of note is that retail applications were down 7.6% but correspondent was down 26%, so it looks like the company was giving up some share in the correspondent channel. Wells Fargo's QOQ mortgage volume was down 28% but applications were down 7.7%. 

JPM's gain-on-sale margin came in at 172 basis points, down from 212 bp last quarter. Wells Fargo's gain-on-sale margin was down somewhat more modestly to 1.61% from 1.77%, a 9% decline - probably closer to the overall industry. The value of the JPM's MSR (mortgage servicing rights) declined to 106 bp which was 2.86x the servicing fee from 118 bp which was 3.11x the servicing fee at the end of 4Q. The equivalent numbers for WFC were 85 bp of 3.15x the servicing fee compared to 88 bp or 3.26x in 4Q. What does it all tell us? Nothing that the smallest lender isn't seeing: residential lending volume is down, margins are slimmer, it is tougher to make a loan, and lenders may not be able to count on servicing to beef up their balance sheets. Are we having fun yet? 

Yesterday the commentary contained some information on the differences between "business purpose" and "consumer purpose". ("...There are roughly five primary factors that must be considered in order to determine business purpose from consumer purpose...") I received a well-thought out not from Julia Wei, an attorney with Peter N. Brewer. "We have litigated this issue frequently on behalf of private lenders in defending against borrower claims that the loan was a 'consumer' loan and they should have received a TIL disclosure, along with other alleged violations of consumer statutes. As defined by Title15 of the United States Code Section 1602(h), "consumer" refers to transactions where the loan proceeds are used primarily for personal, family or household purposes. The code section further goes on to state in Section 1603(1) that extensions of credit for primarily business, commercial or agricultural purposes are exempt from TILA. [See also Regulation Z § 226.3 (a)(1).] The Ninth Circuit had applied a multi-factor test, which was derived from Federal Reserve Board interpretation of 12.C.F.R. Section 226.3(a)(1)(1983). [Thorns v. Sundance Properties (9th Cir. 1984) 726 F.2d 1417.]  The Ninth Circuit considered all five of the factors you noted in your column."

Ms. Wei's note continued. "The most on point case in California applying the Thorns factors is that of Weber v. Langholz.  In this 1995 case, the borrower, Ms. Weber, was a 89 year old widow living on Social Security and investments.  She borrowed $160,000 and secured the loan with her primary residence.  She then used the proceeds to buy coins.  When she defaulted on the loan, she sued her lender claiming that the lender had violated TILA and failed to give her the notice of the right to rescind. The lender argued that TILA did not apply because the investment of the loan proceeds in coins was not 'primarily for personal, family, or household purposes.' The Weber Court evaluated the factors enumerated in Thorns and noted that the borrower had invested nearly $600k in coins, that the loan amount of $160,000 was very large and she personally managed her investment funds. The Weber Count held the Truth in Lending Act did not apply because the loan was for a business purpose and exempt. [Weber v. Langholz (1995) 39 Cal. App. 4th 1578, 1583-1584.]"

At the Tri-State mortgage conference last week I had the opportunity to spend some time with Jennifer Squillante, a client manager with B2R Finance L.P. out of Manhattan. It turns out that B2R, besides being hard to type, will offer loans to individuals who have dozens, or hundreds, of properties. "We lend primarily upon the value and cash flow of the underlying collateral.  We do not review the personal debt to income ratios of our applicants." I am not going in to all the details - you should go to B2R or contact Jennifer directly at jsquillante@b2rfinance.com - but once again we are seeing capital in search of yield going around or outside the QM box for loans and borrowers that make sense.

Here are some stats proving that markets sometimes tend to move more on surprises versus expectations than on economic trends. The Fed announced the 1st reduction to its asset-buying program (i.e., quantitative easing - QE) on 12/18/13. The $10 billion reduction in monthly purchases (from $85 billion to $75 billion) was widely expected to result in higher interest rates.  The yield on the 10-year Treasury note closed at 2.83% on 12/17/13.  The yield on the 10-year Treasury note closed at 2.62% last Friday on 4/11/14. Rates have actually dropped this year in spite of QE being gradually curtailed. 

The National Association of Home Builders Housing Market Index was below expectations at 47 in April versus a projected 50. While builders were "expecting sales prospects to improve in the months ahead" said NAHB Chairman Kevin Kelly, Chief Economist David Crowe observed there were headwinds facing both potential buyers and home builders: ongoing tight credit conditions and limited availability of lots and labor. 

The market didn't do much Tuesday, so I won't waste your time discussing small moves in MBS prices or the 10-yr. yield (which closed at 2.63%). We should keep in mind, however, that global events overseas certainly trump any kind of minor economic news that is scheduled for the U.S. But there is some news out today: mortgage applications (noted above, up about 4%), March Housing Starts and Building Permits, March Industrial Production and Capacity Utilization, and the 2PM EST release of the Fed's Beige Book (with riveting economic anecdotes from the 12 Districts in preparation for the April 29-30 meeting). In the early going today the 10-yr is sitting around 2.65%, and agency MBS prices are worse a shade. 

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Today’s Executive Rate Market Report

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Don't forget: the bond markets close early on Thursday, and are closed entirely Friday. LOs know that any lender taking locks will price conservatively. But today it is business as usual, although being April 15^th retailers are "giving away" deals. I was recently asked about the differences between "business purpose" and "consumer purpose" loans, and how to distinguish between the two.  There are roughly five primary factors that must be considered in order to determine business purpose from consumer purpose. The first is the relationship of the borrower's primary occupation to the acquisition, which in all probability, the more closely related, the more likely it is to be business purpose. The second is the degree to which the borrower will personally manage the acquisition, once again, the more personal involvement there is, the more likely it is to be business purpose. The third factor is the ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose. The fourth is the transactional size; the bigger the transaction the more likely it is a for business purposes. Lastly, and maybe more importantly, is the loan purpose as stated by the borrower on the application. 

"There are 'business days', and then there are business days". This is how I responded to an email from someone inquiring as to the application, and use, of the term. 'Business Day' traditionally refers to a day on which a lender's office is open to the public for carrying on virtually all of its business operations. However, when applied for purposes of rescission, the term means all calendar days except Sundays and the legal public holidays (Christmas Day, Thanksgiving, Memorial Day, etc.). When a legal public holiday falls on a Saturday, federal offices observe them on the preceding Friday; this means that the preceding Friday is a "business day" and the Saturday is not a "business day."

 

Let’s Look at Executive Rate Market Report;

Interest rate markets opened a little weaker this morning but still the 10 yr is holding well under 2.70% (2.65% at 9:00). MBS prices in early trading generally unchanged in early activity. The Russia/Ukraine situation is roiling a little but still has not set markets into any kind of major selling or buying treasuries. There is a big meeting coming later this week between all the parties and NATO members; Ukraine is calling for UN peace keeping troops but that will not happen because Russia has ultimate veto power. Russia’s holdings of U.S. government securities fell in February to $126.2B, the lowest level since 2011, from $131.8B the previous month, Treasury Department data released in Washington showed. It was the fourth straight month of declines in Russia’s holdings.

March CPI data was stronger than estimates; the overall CPI was expected up 01% with the core also up 0.1%, as reported both were up 0.2%. Yr/yr overall CPI +1.5% while the core yr/yr +1.7%. The April NY Empire State manufacturing index was thought to be up to 7.5 from 5.61 in March, as reported the index actually declined to 1.29; the new orders component fell below zero to -2.77, the employment component at 8.16 from 5.88 in March; no noticeable reaction to the two 8:30 releases.

Janet Yellen speaking in Stone Mountain Georgia (Atlanta) said our big banks may need more capital, implying that banks’ source of funding may be at risk during a financial crisis. The Basil Committee on bank regs is suggesting more capital for banks is needed. Central bankers continue to sweat more capital for banks, we wonder why after the recent increases in capital that have pushed banks to avoid proprietary trading and about every other risk that might be conceived of. Are central banks beginning to worry they have no more real effective bullets to use if the global economy slips? Yellen said staff members at the Fed “are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets.”  Yellen said she was particularly concerned that reforms to bank regulation not just bolster capital but that they also ensure liquidity because “in 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns, and Lehman Brothers, and from money market mutual funds and asset-backed commercial paper programs.” “Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover,” she said. After all of the reforms and Dodd/Frank the concern is rather interesting.

The DJIA opened +42, NASDAQ +12, S&P +6; 10 yr 2.65% +1 bp and 30 yr MBS price -2 bps from yesterday’s close.

Stocks doing better this morning as earnings from Johnson & Johnson and Coca-Cola Co. offset data showing a decline in a gauge of New York-area manufacturing. Chinese money-supply data signaled growth in the world’s second-biggest economy is faltering, the housing sector in China also slowing dramatically in most of the cities in the country. Data today showed China’s broadest measure of new credit fell 19% from a year earlier and money supply grew at the slowest pace on record, highlighting risks of a deeper slowdown as the government tries to curb financial dangers. China is due to report its GDP data tomorrow; estimates are for growth at 1.5% from 1.8% in the previous quarter.

At 10:00 the April NAHB housing market index was thought to be at 49 from 47 originally reported for March. The April index hit at 47 but March revised to 46. The highest the index has registered in the last couple of years occurred last August at 58, since then the housing sector has slipped.

Interest rate market are holding positive technicals but the bellwether 10 yr has very hard resistance at 2.60%; it functions as a brick wall when the yield falls. MBS markets also still hold positive technical readings but won’t have the impetus to improve much unless the 10 can somehow crack 2.60%. To do so in  the present environment it will take more selling in the equity markets. We remain very skeptical that the stock market can hold at these near record highs, however with nowhere to turn to make any kind of return the stock market does have solid support engineered by the Federal Reserve and other major central banks.

Presently the MBS and treasury markets are in what we can call limbo; not heaven and not hell. Since last February there has been little change in rates; the 10 in a 20 basis point yield range, MBSs in a 15 bp rate range. Longer term there is almost 100% belief interest rates will increase; the Fed will end its monthly purchases in Oct at the present pace, economists and analysts hold that the US economy will continue to grow, and inflation may be inching higher as the Fed wants---today’s yr/yr CPI data may be a warning sign for increase to come later this year. All of those issues are strong headwinds for lower rates. As noted, we believe the stock market will decline in the next two months in a huge shake out of the bullish sentiment; if correct we will see better rates.

 

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