I was in a meeting one time
when my secondary marketing guy said to product development, "wake up and
smell the profits." No one can deny that banks have been making money, and
contrary to financial news reports, banks have been performing in such a manner
counter intuitive to the macro economies pace. Depository institutions have
been performing for the better part of four years, with 17 out of the last 18
quarters with year-over-year growth. Commercial banks and savings institutions
insured by the FDIC reported aggregate net income of $40.3 billion in the
fourth quarter of 2013, a $5.8 billion (16.9 percent) increase from the $34.4
billion in earnings that the industry reported a year earlier. According to the
FDIC's recent release on bank performance, the improvement in earnings was
mainly attributable to an $8.1 billion decline in loan-loss provisions, and
litigation expenses. Lower income stemming from reduced mortgage activity and a
drop in trading revenue contributed to a year-over-year decline in net
operating revenue. More than half of the 6,812 insured institutions reporting
(53 percent) had year-over-year growth in quarterly earnings. The proportion of
banks that were unprofitable fell to 12.2 percent, from 15 percent in the
fourth quarter of 2012. We'll see what happens tomorrow with Wells & Chase's
earnings.
Wells and Chase are in pretty
deep with Freddie and Fannie, and the FHFA, as are mortgage insurance
companies. The MI company umbrella sent out, "USMI applauds Senate
Banking Committee Chairman Johnson and Ranking Member Crapo for reaching a bipartisan
agreement on housing finance reform legislation, drawing largely from the
bipartisan Corker/Warner bill. We are pleased that the bill recognizes the
important role of private mortgage insurance in ensuring access to housing
finance for borrowers while protecting taxpayers and serving lenders of all
sizes. We look forward to working constructively with Congress and other
policymakers to build a well-functioning housing finance system backed by
private capital."
The
recent spate of agency news has been interesting to follow. Arguably F&F
should not stay under government conservatorship, but what are the
alternatives? And what are the implications for their other roles in
housing, such as apartment financing? Sarah Mulholland wrote an article for Bloomberg
saying that, "The apartment-lending units of Fannie Mae and Freddie Mac
were among their few money makers after the U.S. housing collapse. Now they
should help transform the U.S. mortgage industry. Lawmakers...see an
antidote...in the structure of the firms' multifamily operations, which share
risks with lenders. Senate Banking Committee Chairman Tim Johnson and
Republican Mike Crapo are proposing legislation to create a new
government-backed reinsurer of mortgage bonds that would require private investors
to bear losses on the first 10 percent of capital. The model for the provision
mirrors Fannie Mae and Freddie Mac's multifamily lending operations, requiring
lenders to shoulder some of the risk on loans they originate. Unlike the firm's
residential units, the divisions that lend to apartment landlords came out of
the financial crisis relatively unscathed, partly because of better
underwriting. The multifamily lending model works "because the lender, in
one way or another, explicitly is on the hook for losses," said Andrew
Jakabovics, senior director of policy development at Enterprise Community
Partners, a non-profit affordable housing investment company. 'There is a lot
more due diligence that goes into those deals.' The Johnson-Crapo bill creates
a new lender/regulator, the Federal Mortgage Insurance Corp.,
which would begin operations within five years.
And
of course investors in Freddie and Fannie are trying to figure out which side
of the trade to be on: Making$.
Those
in the industry know what may happen if Freddie and Fannie fade away and the
fabled "private capital" enter into things in the secondary markets.
"Fannie, Freddie Overhaul Will
Translate Into Higher Mortgage Rates," says the
Colton-Carliner paper of The Harvard Joint Center for Housing Studies.
Mortgage rates could rise by as much as 1.5 percentage points for homeowners
with weaker credit or smaller down payments under various legislative proposals
to overhaul Fannie and Freddie. A separate study published last month by Moody's
Analytics estimated that the Johnson-Crapo bill would increase rates by around
0.4 percentage point for borrowers with a 750 credit score and a 20% down
payment, bringing the today's mortgage rate of around 4.5% for a 30-year,
fixed-rate loan to around 4.9%. On a median priced home, the increase
translates into a monthly payment that is around $40 higher. Such an
increase would have a "measurable but very modest impact on the housing
market". They estimate that the higher financing costs could reduce home sales
by around 250,000 units and housing starts by 100,000 units over three years.
And
let's not forget the belief that removing F&F from the scene will
negatively impact those special interests best served by consumer and
civil-rights organizations. (Was that politically correct enough?) "Housing Bill Threatened by Rift on
Help for Disadvantaged" screamed the headline. A bipartisan
bill drafted by Senate Banking Committee leaders Tim Johnson and Mike Crapo
relies on incentives to persuade financiers to lend to groups with higher risk
profiles. Consumer and civil-rights organizations are pushing instead for a
mandate that those groups must be served.
Regarding
the markets...we really didn't have much news this week until the release of
the Fed minutes yesterday afternoon. But when all was said and done, the 10-yr
was nearly unchanged at a yield of 2.68% and agency mortgage-backed securities
had rallied...back to unchanged! There was a fair amount of shuffling between
coupons and maturities, but really, the economy continues to do a little
better, housing and employment are still the cornerstones and neither is
setting the world on fire, and it comes down to supply (by lenders) and demand
(by the Fed and investors).
Today
we'll have Initial Jobless Claims (expected -6k to 320k) and Import Prices
(expected at +.2%). Later we will have the primary dealers stepping up to buy a
piece of the $13 billion 30-yr bond auction. Ahead of that the 10-yr's yield
is down to 2.65% after closing Wednesday at 2.68% which would suggest agency
MBS prices are perhaps .125 better in price.
March
import prices increased 0.6%, three times higher than estimates; yr/yr though
still down 0.6%. Export prices +0.8% compared to +0.3%
expected; yr/yr +0.2%. In China, the customs administration reported that
imports slid 11% in March from a year earlier. The median economist estimate
had called for a gain of 3.9%. China continues to be a wild card in the global economic forecasting; to some
degree analysts don’t trust comments from leaders in the country but the data
is evidence China’s economy is slowing, one of the reasons the 10 yr note was
down 4 bps in rate this morning prior to being supported by the very solid
weekly jobless claims at 8:30.
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