Let's see...10-year rates are
close to 6-month lows, Fannie 3.5% MBS prices are at a 6-month high, yet the
refinancing index is at a 6-year low. Has nearly everyone who could refinance
done so already? You'd think that with those "great" unemployment
numbers on Friday, rates would have moved higher. But it doesn't help that
hundreds of thousands of jobless workers give up looking for work every month -
more on this, and its impact on the markets, several paragraphs down.
How many days do we have to
cure a GFE tolerance violation? The Mortgage Bankers
Association of the Carolinas wrote, "Regulation X provides: 'If any
charges at settlement exceed the charges listed on the GFE by more than the
permitted tolerances, the loan originator may cure the tolerance violation by
reimbursing to the borrower the amount by which the tolerance was exceeded, at
settlement or within 30 calendar days after settlement.' -12 CFR
1024.7(i)."
One
important event scheduled for next week (May 13th) is a live webcast hosted by the
Brookings Institution in which they will have a conversation with Federal
Housing Finance Agency Director Mel Watt about the future of Fannie Mae and
Freddie Mac. Ya'll remember Director Watt, right? He took over from Ed
DeMarco, and this is the first time in 5 months that Mr. Watt will be making
public statements. At this point, it is unclear if he will make any major
policy announcements, but it is likely that the recent slowdown in housing
activity has caught his attention. Will the FHFA direct Fannie & Freddie to
loosen up the GSE credit box so that they become more willing to make loans to
first-time home buyers with lower credit scores (700-740)? Perhaps - the
smartest guys in the room point to lending standards in other consumer products
(credit cards, auto loans, water heaters, whatever) easing. Credit standards
remain very tight and are not reflective of where we are in terms of the credit
cycle.
Continuing on with this macro
look at lending, most lenders have seen a significant drop in mortgage, and therefore
MBS, issuance during the first quarter. Lenders are already moving down the
credit curve. (Don't confuse accepting different credit standards as
accepting lower documentation or income standards - investors don't much
care for that right now, so put those IndyMac guidelines away.) Wells Fargo
retail lowered the minimum FICO for conventional mortgages from 660 to 620, but
one has to keep these announcements in perspective as average FICO for purchase
originations is still around 750. And it apparent that the large
correspondents view their competitors not as other correspondents, but Fannie
& Freddie, as well as the non-banks buying servicing.
Regardless of the players, I
continue to hear analysts scale back their estimates for 2014 production volume.
Granted, much of this decline will occur in the big banks, but as an industry
it is a concern. It is also important to keep in mind that even in the years
(2004-2006) when gross issuance levels were closer to what we expect for this
year, the issuance in the non-agency market was much stronger. It is
practically non-existent right now as banks are holding on to portfolio product
to earn income.
From time-to-time we get mired
down in the tall weeds; the drudgery of the mortgage industry, sometimes we
forget other analysts are looking at our little world from a different
perspective, with different expectations. It's good now-and-then to step
back and look to see how mortgage banking as a whole is performing, by looking
at how publicly traded banks are performing. I think this is where I'm
supposed to insert some disclaimer that I'm not recommending the purchase, or
sale of, yada yada yada. Here we go....
Flagstar
Bancorp, Inc.: Flagstar reported an operating miss driven by a sharply higher
loan loss provision and a fair value loss on repurchased loans. Analysts have
cut their 2014 and 2015 estimates primarily driven by lower assumed loan
growth. According to reports, weaker-than-expected operating results were
driven by a sharply higher loan loss provision ($112.3 million from $14.1
million in 4Q) and a fair value loss on repurchased loans ($21.1 million).
Gain-on-sale income rose modestly to $45.3 million from $44.8 million in 4Q,
and the GOS margin rose to 101 bps from 66 bps. Total origination volume was
down 22.5% Q/Q to $5.0 billion from $6.5 billion. Analysts have a stock price
target set at $22.
PNC Financial Services Group: PNC
reported strong quarterlies that demonstrated the strength of its business
model and the significant capacity it has to cut expenses in what is widely
considered a difficult operating environment for a bank. Analyst's reports
which I have read state that lower asset yields, the run-off of acceptable
yield, and poor mortgage banking results were more than offset by a significant
drop in the expense base. Considering the mortgage bank lost money this quarter
(even though gain on sale margins benefited from a big hedging gain), analysts
believe there remains significant room for the company to cut expenses and
improve the efficiency of the overall business. PNC reported period-end loan
balances of $198B, representing a 1.3% increase compared to 4Q13. As evidenced
in the prior quarter, CRE and C&I lending were the primary drivers behind
the growth as both categories rose by 4.5% and 3.1%, respectively.
First Horizon National
Corp.: FHN reported an operating earnings number in-line with analyst
estimates, a penny better than the street estimate of $0.15/share, but the
stock still traded down. Analysts believe the pressure on the stock was
primarily due to a 10 bps drop in net interest margin (which is performance
metric that examines how successful a firm's investment decisions are compared
to its debt situations), combined with the continued deterioration of profits
from the Capital Markets segment and toned down comments from large regional
banks regarding M&A activity. This quarter FHN's stock still trades a
little cheap on both tangible book value and earnings compared to mid-cap bank
and asset sensitive peers.
Fifth Third Bancorp: FITB
traded off about 4% following the most recent earnings release, primarily
because the company reported its second consecutive quarter of higher
charge-offs and guided to a higher charge-off rate for 2014. This was the first
time the company reported two consecutive quarters of higher charge-offs since
2009. This may be slightly disconcerting to investors, as the emergence of
higher charge-offs in an environment where credit quality has been improving
the last few years will obviously cause the market to re-assess the blind-faith
assigned to improving credit trends. Broader credit trends for the company
remain positive, and analysts have little reason to believe the recent tick-up
in charge-offs will reveal a broader long-term change in credit trends for
FITB. While mortgage income was down roughly 13% sequentially due to a
significant decline in origination volume, FITB reported $109M in mortgage
revenues compared to a $99M estimate. The stronger than expected mortgage
banking number was primarily driven by better than expected hedging results and
gain on sale margins (up to 241 bps from 227 bps in 4Q13). The improving margin
was likely due to the bank's recent exit from the wholesale lending channel in
March. Going forward, management expects mortgage banking revenues to decline
to $425M in FY14 from the $700M seen in FY13.
Turning
to the markets, last week was a very interesting week for U.S. economic data.
For employment it was the best of times - or so we thought. Nonfarm payrolls
bid adios to the sluggish pace of employment growth during the winter months
and shot up by 288,000 jobs in April with upward revisions to February and
March. The unemployment fell to 6.3 percent. The drop in the unemployment
rate, however, was due to a significant decline in the labor force. And if
more people give up on looking for work, well then, the economy is not as hot
as the headlines suggest. But GDP, earlier in the week, was poor: the first
estimate of 2014Q1 real GDP growth was a sad +0.1% - much less than the 2-3%
everyone is hoping for.
But
neither a weak GDP report nor a strong payroll report had any significant
effect: Treasury rates continued range-bound as the Fed predictably stayed on
course in last week's policy statement. That being said, the 2.59% Friday
close on the 10-yr attracted some attention since the last time we were down
here was February 1.
Speaking of overseas...
Most
people don't know that in 1912, Hellmann's mayonnaise was manufactured in
England. In fact, the Titanic was carrying 12,000 jars of the condiment
scheduled for delivery in Vera Cruz, Mexico, which was to have been the next
port of call for the great ship after its stop in New York.
This
would have been the largest single shipment of mayonnaise ever delivered to
Mexico. But as we know, the great ship did not make it to New York. The ship
hit an iceberg and sank, and the cargo was lost forever.
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