Servicing
loans is not a cakewalk, as this commentary has mentioned several times,
especially when you are servicing loans in several states and/or time zones.
And the larger servicers are under intense scrutiny, even after multi-billion
dollar settlements - so is it the smaller player's turn? Seeking Alpha suggests
that indeed it is! "The nation's largest lenders nearly sucked dry from
mortgage settlements, housing regulators have turned their attention to a
number of smaller players, with Fifth Third Bancorp (FITB),
SunTrust (STI),
and Regions Financial (RF)
all recently disclosing investigations into the origination and servicing of
home loans. U.S. Bancorp (USB)
and Capital One (COF) have also disclosed probes into various
mortgage practices. Any money recouped from the regional lenders would go a
long way towards stabilizing the finances of the FHA which required a $1.7B
taxpayer infusion last year. "Settling with the large guys gave [the
government] a template," says Eric Wasserstrom from Robinson Humphrey.
"The agencies involved in the national mortgage settlement had planned to
focus on the largest mortgage servicers first," says the Iowa assistant
AG. "Then you move on to other entities." Smaller banks next in line over
mortgages.
Adam
Quinones of Thomson Reuters has been sending out quotes from three of the
servicing valuation and brokering firms. Steve Fleming from Phoenix Capital
observes, "Bulk portfolio valuations have seen a slide (magnitude varies
by WALA) over the past couple of months due to the commensurate interest rate
drop, but we're also tracking how this plays out in the flow MSR arena. The
flow (i.e. Agency concurrent or Ginnie PIIT) side has shown a degree of
maturation in late-Q1/Q2-to-date, where the exponential flow SRP growth of
Q4/early-Q1 has somewhat leveled off nicely into the mid-to-high 4x's for conventionals
on average and mid 3x's to mid 4x's for Govies on average (by base servicing
fee), with continued buy-side support. The FNCL's ~30+ bps yield dip since
early April has had a more dramatic impact on bulk vs. flow values - it will be
interesting to see how flow MSR pricing further matures if new production
remains at these relatively lower pars for a substantial period of time."
And
Matt Maurer from Mountain View states, "In April, the majority of our
clients MSR portfolios went down in price 2 to 3 basis points and so far in
May, majority of clients are seeing another 2 to 3 basis point drop in
value. It will be interesting to track speeds on early 2014 production
which are now in the money. With another 12.5 to 25 basis point drop in
rates should start to see a larger pick up in prepayments given the large share
of 4.125 to 4.375 note rate servicing held in seasoned MSR portfolios."
Dan
Thomas from MIAC chimes in. "Although the rate environment has bounced
around a bit and hurt some recent MSR values, we still expect the supply
and demand dynamics to be robust for the remainder of the quarter and keep
prices firm. GSE approvals and subservicer backlogs are becoming a significant
disruption to the normal, tried and true servicing transaction marketplace.
Additionally, over-reaching regulation on high quality servicing transfers
amongst well capitalized, quality servicers should be addressed in the
near term before it significantly affects normal market liquidity for
MSRs."
Often
times it's difficult to provide content, disseminated from multiple sources,
without violating email disclaimers...which I actually take seriously, as I
also do with mattress tag warnings. But I can't ignore a number of emails, and
reports, I have received over the last few weeks indicating that banks and
REITs have started holding onto agency bonds. The total agency MBS holdings of
mortgage REITs has increased by $7.3B in Q1; this is the first increase
following three consecutive quarters of sharp declines in agency MBS holdings
(which totaled $102.8B from April to December of 2013). Banks on the other hand
have increased their agency MBS portfolios by $11.5B, after five consecutive
quarters of decreases. Bank holdings of GNMA increased by $1.9B following a
pickup of $9.7B increase the previous quarter. GNMA holdings have increased for
three straight quarters, totaling $13.4B. Non-Agency holdings dropped by $8.9B,
according to one report, which follows a $6.4B decrease the previous quarter.
Non-agency holdings have decline for six consecutive quarters.
Are we heading for another
multi-trillion dollar refi boom? Yes, rates are down, but the back-office and
compliance cost of doing a loan is significantly higher than in the past - and
no one is expecting those to come down soon. But Treasury prices surged Wednesday
with the 10-year note improving by .75 and its yield back to its lowest in
nearly a year at 2.44%. (Agency MBS prices did the same, and are also back to
price levels from a year ago.) The catalyst for the rally was increased odds
that the ECB will announce further accommodation as soon as next week following
weak data in the euro zone. With the rally came more locks, and with the locks
more selling of agency MBS to hedge them. Today we will have the 1st
quarter GDP number (expected at -.5% versus the initial +.1%) along with
Initial Jobless Claims (expected -11k) and Pending Home Sales.
Rate Market Report:
AM Tracking Quote
FNMA 4.0% 106.09 now +7 bps
09:33 +7
Open 106.02
FNMA 4.0% 106.09 now +7 bps
09:33 +7
Open 106.02
A kind of landmark day yesterday when the 10 yr note
fell to its lowest level in a year at 2.44%. MBS prices increased 36 bps following treasury
prices higher. For weeks now we have been talking about our rather soft view on
the near future of the US and global economies; with the technical break in
rates yesterday to new year long lows and based on what is reported in today’s
WSJ it appears more investors are now becoming concerned. Although so far there
has been strong support for equities, investors are increasingly backing off
somewhat and balancing portfolios with more treasuries and fixed income
investments. Investors are not only moving to safe havens but rushing madly
into high rate corporate bonds, many of them considered junk bonds.
This morning
at 8:30 the awaited preliminary Q1 GDP, widely believed to have declined to
0.4% (revised from +0.1% on the advance report a month ago), fell 1.0%. The US
economy contracted more than thought, the final reading for Q1 will hit a month
from now (June 25th). There was little reaction to the report after the
preparatory rally yesterday in the bond and mortgage markets. The decline in
the economy was the first Q1 2011. Q1 was negatively impacted because of the
severe winter weather across most of the US. The Fed, at its April meeting,
appeared not to be too concerned; saying a pickup in receipts at retailers,
stronger manufacturing and faster job growth indicate the first-quarter setback
will prove temporary as pent-up demand is unleashed. Likely that is true but
the longer outlook by most economists had called for 2014 to grow at a 3.0%
rate; we don’t believe that target will be met. Q2 growth isn’t likely to be
more than +2.0% at best, however the economists are expecting a 3.5% growth in
the quarter.
On a more
positive report;
weekly jobless claims were down 27K to 300K, estimates were for 317K. Claims
continue to fall but holding at the 300K area. Jobs increasing but the quality
of the jobs is so anemic that wages generated hardly buy food to eat and
currently don’t fuel a sizeable increase in consumer spending. Too much focus on
the headlines with not enough attention to the kind of jobs. That said, it
isn’t going unnoticed by Wall Street and within the Fed, it is an issue being
somewhat swept aside for now.
Europe is center stage now; next week the ECB is widely expected to lower rates
and begin another round of bond buying. Ukraine is still a factor that feeds
the run to safety; not quite as much as we saw a month ago but it remains a
major concern. What will be Russia’s response over the presidential election
last Sunday and how will the new candy-man president eventually deal with
Russian separatists in east Ukraine? Pro-Russian rebels downed a military
helicopter in eastern Ukraine, killing 13 troops and a general, as an aide to
President Vladimir Putin accused the U.S. of pushing the world toward war
through proxies in Kiev.
Yesterday Treasury sold $35B of 5 yr notes, it was an in line auction. The rate 1.51%, the cover
2.73, indirect bidders took 50.4% while direct bidders got 10.5% of the amount.
Last month’s auction drew 1.732%, 2.79x bid/cover, 44.9% indirect bidders,
18.5% direct bidders; the last12-auction averages: 1.482%, 2.65x bid/cover,
45.7% indirect bidders, 13.0% direct bidders. This afternoon Treasury will
auction $29B of 7 yr notes, a more significant auction for the long end of the
curve even though it is more in the middle.
Not much
change in the bond and mortgage markets so far today after the very strong
short-covering rally yesterday and a technical break out from the seven day
very tight ranges. At 9:30 the DJIA opened +28, NASDAQ +16, S&P +5; 10 yr
note 2.43% -1 bp, 30 yr MBS price +2 bps from yesterday’s 36 bp increase.
At 10:00, the last of the scheduled reports today;
NAR’s April pending home sales;
contracts signed but not yet closed, the forecast was for an increase of 2.0%
from March; another soft housing report, pending home sales increased just 0.4%
and are down 9.2% yr/yr.
The 10 yield down 12 bps since Tuesday, breaking out
of the narrow range that keep it quiet for a week and a half. The break is technically significant but the result
has pushed the 14 day RSI to overbought level, the last time the 10 had an RSI
read at 30 was last Feb. With the ECB meeting coming next week and the strong
decline in rates over the last couple of days, and looking at all of tour
various momentum oscillators, the action today may be relative flat. We like
the bond market, as we have been since early this month.
