Executive Rate Market Report; Lawsuit update on PHH, Lawsky, Castle & Cooke

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As mortgage bankers gear up to see what the Shipping Department dresses up as tomorrow, let's take a quick look at some demographics. There is now a larger cohort of unmarried young adults who are driving the overall homeownership rate down as they are less likely to own a home. The creation of household formations plays an important role in homeownership rates among young adults and is one of the main reasons the average age of first time home buyers is now 31 years old.

And just because you settled with the CFPB, or Fannie, or HUD, or whoever, doesn't mean that you're not going to be on the receiving end of a lawsuit (or a complaint) from a borrower. Just ask Castle & Cooke. The "fun" never ends! As a reminder even though the CFPB got its pound of flesh out of Castle and Cooke the issue has now gone to the consumers who have filed a class action lawsuit in July.  C&C is in the "response" period, but the clock is ticking. There is speculation that this case, if successful, could actually establish a legal precedent for repayment of three times MLO commissions from the MLOS, along with fees, interest, and resetting the interest rate to what the borrower could have received. 

Along those lines, congrats to PHH and the industry in general. You remember PHH, right? The PHH that was facing a $16.2 million legal battle over a mortgage modification? The lower court's ruling on damages was mostly tossed out. Reminiscent of the case where the woman sued McDonalds because of hot coffee, if the damages had stuck this PHH case would have made anyone question why any of us write and service loans. Or want hot beverages. 

And many in the industry are waiting for the rating agencies to bear some of the brunt for their mistakes in rating mortgage-related securities. Their wait may be ending as this story describes moves that S&P is making toward a settlement. 

Lastly, "The defendants in the lawsuit brought by Benjamin Lawsky, the Superintendent of the New York Department of Financial Services, using his Dodd-Frank enforcement authority have filed an appeal with the U.S. Court of Appeals for the Second Circuit.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action for a violation of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices. The defendants, a large subprime auto lender and its individual owner, are seeking to overturn the district court's order denying their motion to modify a preliminary injunction entered by the court freezing the defendants' assets and enjoining them from engaging in new loan business.  In their motion, the defendants also sought to reduce the fees of the receiver appointed by the district court.  The defendants must file their brief by December 8. In addition to Mr. Lawsky's lawsuit, we have also been following lawsuits filed by the AGs of Illinois and Mississippi using their Dodd-Frank enforcement authority." 

I don't foresee any argument when I claim that most folks have set foot in a bank during their lifetime. Analysis of the 10 largest US banks at the end of the 2^nd quarter finds that there were 94,725 bank branches in the country and this group controlled 33% of them (30,858). Of note, the top 5 banks have 24% of all branches nationwide or about 300% more on average than the next 5 largest. Drumroll please... Wells Fargo (6,314), JPMorgan (5,682), Bank of America (5,096), U.S. Bank (3,238), PNC (2,821), BB&T (1,843), Regions (1,673), SunTrust (1,514), Fifth Third (1,348), and Toronto Dominion (1,329). That is a lot of overhead! 

Bank M&A, and one closure, continued to be announced in the last week. Last Friday the National Republic Bank of Chicago, Chicago, Illinois, was closed by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver who in turn entered into a purchase and assumption agreement with State Bank of Texas, Dallas, Texas, to assume all of the deposits. San Diego Private Bank ($340mm, CA) will acquire First Security Business Bank's loans and deposits ($74mm, CA). And Heartland Financial USA ($6B, IA) will acquire Community Bank & Trust ($520mm, WI) for about $52mm in stock or roughly 1.55x tangible equity. 

Plenty of independent mortgage banks would like to see a more level playing field when it comes to bank & mortgage bank originators. So let's talk about the NMLS. "The Greater Midwest Lenders Association 'GMLA' has submitted our comments letter about the proposed changes to the Mortgage Call Report. The GMLA represents 12 Midwestern states that comprise over 5000 state registered company licensees and over 55,000 MLOs. GMLA is calling on the State Regulatory Registry/Conference of State Bank Supervisors "SRR/CSBS" that run the NMLS to establish clear bright lines regarding the definition for mortgage loan applications. The SRR/CSBS proposal also asks for comments regarding multiple new data fields to be included in the proposed Mortgage Call Report. Some of the new fields to be included are tracking of loan amount changes during the application process and the creation of new QM and Non-QM loan data fields on the MCR Standard Report that mortgage brokers typically use for MCR reporting. We urge everyone to submit comments by October 30, 2014.  Click here to download our letter to SRR/CSBS.  For more information on how to comment visit the NMLS web site: NMLS Resource Center." 

For thrills today we had Jobless Claims (283k prior, it came out +4k at 287k), and advanced Q314 Real GDP (+4.6% previously, it was 3.5% annual growth). The Treasury auctions its final fixed rate note of the week with $29 billion 7-yr notes going off later today. The 10-yr is at 2.31% and agency MBS prices are better by a few "ticks" (32nds).

Q3 advance GDP at 8:30 was headline better than expected; the estimate was for 3.0%, as reported 3.5%. The report is the first of three and will likely be revised next month when the preliminary report is released, the advance report misses some of the latest Q3 data that isn’t included in this report; the direction of the revision is not in our wheel house yet. The increase added to 4.6% in Q2 is the largest back to back GDP readings since Q3 and Q4 in 2003. Household purchases fell but increased government spending and a lower trade deficit offset. Government spending climbed at a 4.6% pace, the most since the second quarter of 2009. The pickup reflected a rebound in defense outlays. Consumer spending in Q3 at 1.8% was down from 2.5% in Q2, 70% of the economy is consumer spending and accounted for 1.2% of the 3.5% growth reported. Inventories grew at a slower pace, subtracting almost 0.6% points from growth. Excluding stockpiles, so-called final sales, climbed at a 4.2% pace last quarter, the most since 2010. The trade gap and inventories are two of the most volatile components in GDP calculations, and can show significant revisions in subsequent reports.

Weekly jobless claims increased 3K to 287K, estimated were for a decline of 3K; close enough to call the claims in line with estimates. The 4 wk average fell to 281K from 281,259, the lowest 4 wk average since May 2000. Job growth continues but there remains a huge gap between good decent paying jobs and most of the new jobs coming on line. The Fed is outwardly worried about the underutilization in the labor force; recent employment statistics confirm most of new jobs are at the low end of the pay scale.

At 9:00 the 10 yr note traded at 2.29% -3 bps, 30 yr MBS price +13 bps from yesterday’s close but just 2 bps from 9:30 yesterday. Yesterday prices fell off in the afternoon after the FOMC policy statement. At 9:30 the DJIA opened +47, NASDAQ -16, S&P -5; 109 yr 2.30% -2 bps, 30 yr MBS price +9 bps from yesterday’s close and -2 bps from 9:30 yesterday.

Not so good news out of Europe; six countries in the EU reported consumer prices declined. Deflation in the EU is getting worse according the data. Benchmark German 10-year yields fell four basis points, or 0.04 percentage point, to 0.86% today. Overall German inflation, calculated using a harmonized European Union method, declined 0.1% on the month, according to the median forecast in a Bloomberg News survey of economists.

The Fed ended QE3 yesterday; it was widely expected and with only $15B a month left on the monthly purchases from $85B a month when the QE began it isn’t a huge deal but is getting ink is secular media. In case you missed it yesterday, here is a synopsis of the policy statement:

• Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate
• Indicators suggests that underutilization of labor resources is gradually diminishing.
• Household spending is rising moderately and business fixed investment is advancing
• Recovery in the housing sector remains slow
• With appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate
• The Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year
• A substantial improvement in the outlook for the labor market since the inception of its current asset purchase program
• Continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment
• The Committee decided to conclude its asset purchase program this month
• The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program

A slightly better start this morning but not much and the stock market is likely to improve through the day n the better GDP. The fly in the pudding in the GDP data, the decline in consumer spending from Q2. Technically we are stepping on eggshells now; the 10 is barely holding its support at 2.30%, yesterday on the reaction to the FOMC the 10 jumped to 2.36% (40 day average) but closed at 2.32%. The 14 day RSI at neutral 50 still holding. The rate markets hanging on but after the beatdown in rates two weeks ago is having a lasting effect that there was no follow-through in the ensuing sessions, since the capitulation the 10 yield immediately climbed from the intraday low at 1.85% to the intraday high yesterday at 2.36%. The way rates easily bounced higher is somewhat of a concern now. Volatility!

PRICES @ 10:00 AM

10 yr note: +10/32 (31 bp) 2.28% -4 bp

5 yr note: +5/32 (15 bp) 1.57% -3 bp

2 Yr note: unch 0.48% unch

30 yr bond: +25/32 (78 bp) 3.01% -5 bp

Libor Rates: 1 mo 0.153%; 3 mo 0.232%; 6 mo 0.323%; 1 yr 0.541%

30 yr FNMA 3.5 Nov: @9:30 103.41 +9 bp (-2 bp from 9:30 yesterday)

15 yr FNMA 3.0 Nov: @9:30 103.68 unch (-17 bp from 9:30 yesterday)

30 yr GNMA 3.5 Nov: @9:30 104.46 +8 bp (+4 bp from 9:30 yesterday)

Dollar/Yen: 109.02 +0.13 yen

Dollar/Euro: $1.2604 -$0.0028

Gold: $1205.80 -$19.10

Crude Oil: $81.60 -$0.60

DJIA: 17,022.63 +48.32

NASDAQ: 4524.96 -24.27

S&P 500: 1975.73 -6.57

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