Trends in Capital Markets

Thanks to Deanna Sabey who sent along the lyrics for a new song ("Closing Got Run Over by TRID") to the tune of "Grandma Got Run Over by a Reindeer" from Citywide Home Loans, in Sandy, Utah.

 

Closing and funding got run over by TRID,

working from Citywide Christmas Eve.

You can say there's no such thing as the CFPB,

but as for us in closing and funding we believe.

The Team had been drinkin' too much egg-nog,

and we'd begged the CFPB not to change.

But the CFPB forgot how to help the borrower

and removed the HUDs to cause us all such pain.

When the Trolls found us that October Morning

after the CFPB's first attack,

we had red marks on our foreheads

and incriminating CFPB marks on our back.

Closing and funding got run over by TRID,

working from Citywide Christmas Eve.

You can say there's no such thing as the CFPB,

but as for us in closing and funding we believe.

Now we are so proud of the Team.

They been taking this so great.

See them sending CDs,

while they're drinkin' wine and working late.

It's not a closing package without HUDs.

All the closers are printing in black.

And we just can't help but wonder

if the borrower is going to e-sign or send them back

(send them back!).

Closing and funding got run over by TRID,

working from Citywide Christmas Eve.

You can say there's no such thing as the CFPB,

but as for us in closing and funding we believe

Now the borrowers at the closing table,

and the closers are doing their best.

And title is learning to let go.

All to accommodate the CFPB's request.

We warned all of our friends and neighbors.

You better watch out for yourselves.

The CFPB should not be able

to change documents when they have never closed a loan themselves.

Closing and funding got run over by TRID,

working from Citywide Christmas Eve.

You can say there's no such thing as the CFPB,

but as for us in closing and funding we believe.

Closing and funding got run over by TRID,

working from Citywide Christmas Eve.

You can say there's no such thing as the CFPB,

but as for us in closing and funding we believe.

 

As much of the nation reels from storms and their damage, and lenders review their disaster policies, there is one thing we don't have to worry about: changes in the status on MI tax deductibility. There were none, but as always borrowers should talk with their tax advisors regarding eligibility. The President signed a bill to renew the tax deductibility of mortgage insurance for those qualified. The deductibility can count towards refinance and purchase transactions that closed after December 31, 2014. MI premiums paid or accrued after December 31, 2014 through December 31, 2016 may qualify for tax deductibility. For borrowers with an adjusted gross income below $100,000 may deduct 100% of their MI premiums, for borrowers with adjusted gross incomes from $100,000.01 to $110,00, deductions are phased out at 10 percent increments for each additional $1,000 of adjusted gross household income.

 Yesterday the commentary discussed trends in rents - in many areas owning has become less expensive than renting - if only buyers could come up with a down payment. Have builders been reacting to changes in the marketplace? Let's go back 3-4 months and the trends in many parts of the country become apparent.

 Remember when housing starts fell to a 1.12 million pace in August, below the 1.16 estimate. July was revised downward from 1.21 million to 1.16 million. Building Permits rose to 1.16 million from an upward-revised 1.13 million. Both single family and multi-family dropped. We were entering the seasonally slow period for the builders, so analysts didn't read too much into these numbers.

 The majority of homes prices in the U.S. are rising, but some markets have experienced a decline in home values. About 30 percent of all homes nationwide (27.9 percent) lost value in August from a year earlier, whereas the median home value rose reaching a 3.3 percent YoY increase. Zillow analyzed 35 of the largest markets and found that Baltimore, Washington D.C and Philadelphia had more than 40 percent of homes lose value YoY in August, while Denver, Dallas-Fort Worth, San Francisco, San Jose, Seattle and Portland all had less than 10 percent of homes lose value within the same time period. Denver also had 1.5 percent of homes lose value over the past year. Almost half (48.1 percent) of homes in the larger Baltimore market are currently losing value, with a range from 24.7 percent to 74.1 percent of homes losing value, depending on the area. In some markets, builders may have also constructed homes within the last decade in areas farther from the city, which is often less desirable to buyers and therefore, have declined in value. Whereas other areas, such as the Bay Area, have seen an increase in home prices due to high demand and low supply, as more people look for affordable homes further from the city. The rise in home values is beginning to flatten though, as within the past 6 months, home values have appreciated less than 4 percent on an annual basis and home values last August were rising twice as fast as they are currently. Home value growth is expected to continue to slow within the next year, growing 2.2 percent from August 2015 to August 2016.

 Zelman & Associates published their August Homebuilding Survey and suggested that the housing market is in the middle of a steady demand environment due to an increase in order growth and pricing power in the 5-6 percent range. Orders are up 16 percent YoY and contacts' orders are up 24 percent YTD. Net order prices increased 5.8 percent YoY in August and 55 percent of respondents reported YoY improvement in gross margin.  The areas with the strong improvement include Phoenix, San Diego and Inland Empire, compared to Las Vegas and Houston that that posted the greatest declines.

 But let's move up a couple months and look at Housing Starts and Building Permits. Residential housing starts fell to a 1,060,000 annualized rate in October, short of expectations. September's reading was 1,191,000. Multi-family housing starts, which tend to be much more volatile than starts on single-family homes, declined 25.1%. Single-family starts fell by 18.6% in the South and 16.2% in the West. New building permits reached 1,150,000 in October, higher than expected.

 Zelman and Associates published its Homebuilding Survey indicating that order growth has accelerated to 20 percent but is expected to slow in October. September's sequential order decline of 11 percent was weaker than the normal 8 percent decline, but YoY growth accelerated 400 basis points to 20 percent. Net order prices increased 6 percent YoY, 20 basis points stronger than August. Roughly 61 percent of survey respondents reported YoY improvement in gross margin, which is the highest level since the survey began asking that question in May. The metro areas that had the strongest improvement include Phoenix (up 16 points), San Diego (up 9 points), and Los Angeles (up 7 points), while Houston declined 10 points. Labor costs have increased at the fastest rate within the past two years and overall cost inflation of 2.9 percent was stable with prior months, partly due to a drop in lumber prices. Housing starts are also expected to increase 19 percent in 2016 and 16 percent in 2017. For more information regarding the Homebuilding Survey, contact Ivy.

 Then the group published its October Homebuilding Survey which suggested steady trends despite a bumpy earnings season. Net order growth increased 16 percent YoY and survey respondents experienced a 1 percent sequential increase in orders.Net order prices grew 6.4 percent YoY, up 40 basis points from September and reached the highest level since May 2014. More than half (59 percent) of survey respondents reported YoY improvement in gross margins and housing start growth reached 22 percent, ahead of order growth at 16 percent. Labor inflation rates have reached the highest level since mid-2013, but inflation overall is a stable level. Sequential improvement in single-family housing starts is also anticipated, as production catches up with demand.

 The MBA's Chart of the Week for October 16^th provides an overview of Single Family Housing Starts and BAS Forecast. During 2015, single family starts have been on an upward path. The Builder Application Survey Index (BAS) predicts that that the raw number of housing starts will slow over the next few months but the level of activity will be higher than normal (more than what has been seen in the past few years).

 Builder KB Home reported better than expected earnings but disappointed on orders. Orders were up 19% to 2,167 units. Backlog increased 36%. Average selling prices rose 9% to $357.2k from $327k.

 The MBA's Chart of the Week for November 6^th highlighted the average loan size of applications in MBA's Builder Application Survey, which grew to a survey high of $325,000. The average loan sizes for new builder applications were larger than corresponding averages from MBA's Weekly Application Survey purchase applications. The rate of increase in loan size is about 6.25 percent per year over the past three years compared to the 6 percent rate of appreciation in FHFA's Purchase Only House Price Index (through August).

 The National Association of Homebuilders sentiment index slipped to 62 in November from 64 in October. 

 Zelman and Associates published its November Homebuilding Survey suggesting that a seasonal slowdown is imminent, but the market has picked up since last year. Survey respondents reported a 13 percent YoY increase in net orders, down from 17 percent a month prior. Net order prices increased 6.5 percent YoY in November, up from October and the majority of contacts (69 percent) reported flat-to-improving margins on a YoY basis. For the sixth consecutive month, housing start growth outpaced order growth. Labor continues to increase but the rate of inflation had dropped for the first time in nine months. As oil prices are in limbo, Houston orders dropped 28 percent YoY but the overall market score improved in Phoenix and San Diego.

 Now we are in the seasonally slow period for home building yet housing starts increased to 1.173 million last month and building permits increased to 1.29 million. The increase in housing starts was in both single-fam and multi-fam, while the increase in permits was mainly in multi-fam. We still continue to under-build which is just creating more pent-up demand.

 

Trends in the capital markets? Sure there are...

 

A spotty 2015 market for non-prime mortgages saw Angel Oak announce its $150 million securitization. Residential-mortgage deals by Residential Credit Opportunities and Angel Oak Capital signal a slow recovery. SIFMA reports $13.1 billion of issuance this year, compared with $500 billion in 2007.

 The FHFA has laid out the plan for Freddie and Fannie in the capital markets, and I will discuss early next week. But the move toward a single security for Fannie & Freddie loans is marching ahead, as is the move toward risk sharing.

 Monday this commentary mentioned that "Jefferies trading revenue fell 36% as fixed-income trading tumbled. There has definitely been a drain of talent and numbers from the investment banks, and the MBS trading staffs. And this may accelerate as we near the midpoint of 2016 given some of the upcoming capital requirements versus the dwindling margins in that business."

 (But there are different forms of compensation. For example, Credit Suisse Group AG announced one of the richest parental-leave packages in financial services, giving U.S. employees 20 paid weeks off after the arrival of a child, up from 12 weeks.)

 It appears that, in short, those making a market in MBS are facing a perfect storm of balance sheet issues. These include various regulations that have been determined to increase the difficulty in trading RMBS, agencies which require balance sheets to have a high enough ROE, lowered liquidity (again partially balance sheet related) causing less trading, Fed uncertainty, the possibility of the Fed eventually extracting itself from the market (QE for payoffs), and other issues.

 The Securities and Exchange Commission plans to discuss its accredited investor definition and continue work on a rule requiring third-party exams for advisers in 2016. The agency will also consider its own uniform fiduciary rule for brokers and advisers in the coming year.

 Fannie Mae is going after lenders using a concurrent servicing sale option by offering its Servicing Execution Tool (SET). Now it's available directly from the whole loan committing application, Pricing & Execution - Whole Loan. Using SET, lenders selling loans to Fannie Mae can access upfront pricing and all-in funding for the sale of the loan and the servicing asset, at the same time on a loan-by-loan basis. Learn more from this Housing Industry Forum article.

 Keeping on with capital markets, don't forget we have an early close today and the markets are closed entirely tomorrow - trading resumes Monday. Wednesday bonds sold off as the yield curve steepened in spite of the economic data releases from the U.S. being disappointing. The reason for the selloff was that oil prices rallied - maybe for no other reason than it was tired of selling off.

 This morning we've had Initial Jobless Claims for the week ending 12/19 (down to 267k from 272k). We closed Wednesday with the 10-year sitting at 2.26% and this morning, as folks plan their exits from work, we're sitting at unchanged.