A few
weeks back I posed several "interesting" questions, one of which was
this: "A woodcutter has a chainsaw, which operates at 2700 RPM. The
density of the pine trees in the plot to be harvested is 470 per acre. The plot
is 2.3 acres in size. The average tree diameter is 14 inches. How many
Budweiser's will be drunk before all the trees are cut down?"
I
failed to post an answer from Ron B. at Wells Fargo, who apparently may have
actually studied during English & math class. "That's a lot of trees,
but fairly small in diameter and pine is a quick cutting tree. At a cutting
rate of 1'' per second, an efficient woodcutter can cut about 4 trees per
minute (60 seconds/14 inches- rounded to 15 =4). 470 trees /acre * 2.3 acres =
1081 trees /4 trees per minute = 270 minutes of work time. Stopping every 15
minutes leaves time for 18 beers at a rate of one beer per break. But the
answer is '0' because Budweisers can't get drunk. They are a can of liquid. 1
woodcutter will be drunk because 18 Buds were drank."
"Control
the rules, control the outcome." This old saying will be of particular
interest in upcoming political events... or mortgage company lawsuits &
settlements.
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As
noted in Saturday's commentary, lenders continue to be fined hundreds or
thousands of millions of dollars for lending practices from several years ago.
The latest victim was Freedom Mortgage for $113 million. "...From 2006
through 2008, Quality Control did not share data on early payment defaults -
loans that become 60 days past due within the first six months of the loans -
with management or production or underwriting staff. Later, as lending levels
grew faster than Quality Control staffing, reviews were not always done in a
timely fashion. As early payment default rates topped 30 percent between 2008
and 2010, Freedom Mortgage did not report a single improperly originated loan
to HUD. Further, it said after identifying "hundreds" of loans that
"possibly should have been" reported to HUD, it only reported one,
settlement documents say. As a result, FHA had to pay insurance claims to
mortgage holders on hundreds of ineligible loans Freedom Mortgage approved.
In
response to the recent release from the Department of Justice Freedom
Mortgage provided a statement. "Like many other high volume
FHA-approved lenders, Freedom Mortgage Corporation was reviewed by the
Department of Justice and HUD for loan origination activities that occurred as
long as nine years ago. Without any admission of liability and in order to
avoid the extended distractions and expenses associated with protracted
litigation, Freedom Mortgage made a business decision to resolve this matter.
The settlement in no way affects Freedom's ability to originate FHA insured
loans. The company continues to focus on our most important mission--that
of providing homeownership opportunities to our current and future
customers."
Certainly
the non-bank lenders are under scrutiny. And industry analysts are following
what bank earnings are telling us about the residential lending industry.
Wells reported numbers last week with a decrease in profit
on loan loss provisions. Mortgage loan origination volume and margins both fell
on a quarter-over-quarter and year-over-year basis. Originations fell 6% from
Q4 and 10% YOY. Margins fell 15 bps QOQ and 25 bps YOY. Non-conforming mortgage
growth was up 8% YOY.
Bank
of America also reported weaker-than expected earnings - but primarily from
losses in the energy patch. Its stockholders hope that the big legal fees and
settlements are behind them. Citigroup posted better than expected earnings
based on cost cutting.
While
mortgage volumes at the big banks were generally were in line with or better
than expectations, gain-on-sale margins were generally weaker. The companies
also took meaningful negative MSR marks. As mentioned above Wells' mortgage
origination volume of $44 billion was down 6.4% Q/Q from $47 billion, while
Bank of America's origination volume (retail only) was down 6.8% to $12.6
billion from $13.5 billion. Chase reported flat volumes Q/Q at $22.4 billion
(from $22.5 billion in 4Q15), while PNC's mortgage volume of $1.9 billion was
down 17.4% from $2.3 billion Q/Q.
Gain-on-sale
(GOS) margins were mixed, with most reporting margins flat to down. Wells
reported a decline in its gain-on-sale margin to 1.68% from 1.82% Q/Q with
minimal mix shift. KBW calculated that BofA's GOS margin was flat at 1.09% Q/Q.
PNC was again an outlier, with the GOS margin improving to 3.21% from 2.91%
Q/Q. Interestingly Chase stopped reporting the breakout needed to calculate the
company's gain-on-sale margin, but analysts generally expected an increase in
gain-on-sale margins for most originators given the sharp increase in mortgage applications
during the quarter.
On
the servicing side of things, it will be interesting to see the financial
results for any company that paid up big time for servicing last year -
especially since rates are lower now and refinancing has picked up. For these
big banks Wells' MSR capitalization rate declined to 72 bps from 77 bps last
quarter and the company took a negative $957 million mark (-7.0% of the prior
quarter MSR) related to changes in interest rate assumptions. Bank of America's
MSR capitalization rate declined to 58 bps from 71 bps Q/Q. The company took a
$414 million negative fair value mark (-13.4% of the prior quarter MSR) related
to changes in interest rates. JPM's MSR capitalization rate declined to 87 bps
from 98 bps Q/Q, although the company did not break out its interest rate.
Overall,
lower net interest margins are hurting the banking business in general.
Separately, the US government increased Well's "systemically
important" rating, which means they could be subject to higher capital
requirements - just like JP Morgan, Citi, Morgan Stanley and Goldman.
Those
who dare to forecast the future think that mortgage volumes will be down about
10% for the overall industry during the 1st quarter. KBW sees these
early big bank numbers as slightly negative for the non-bank originators
primarily because gain-on-sale margin trends appear slightly weaker than
anticipated. Further, unlike the big banks, non-bank originators generally do
not meaningfully hedge their MSRs - or at least believe that production numbers
are a natural hedge for whatever loans they keep in their servicing portfolios.
The big
bank lending volumes appear slightly better than expectations from a volume
perspective - "only" down 9%. But gain-on-sale margins have been
about flat. The MBA application index, which includes 75% of retail
originations, was down about 8% for the period from mid-November to mid-February,
which should drive 1st quarter fundings, suggesting that mortgage
volume will be down in 1Q.
What
about title Insurers and mortgage insurance companies? The increase in
purchase volumes should bode well for revenue and earnings growth for title
insurers. For private MI companies, however, pricing and competition continue
to be the norm although they all seem to get along at conferences and events.
While MGIC, Radian, and Essent have recovered somewhat, a look at their stock
prices shows they continue to trade at book value and earnings multiples
materially below where they traded before competition became even more of an
issue.
Warehouse
banks note that non-bank lenders' performance continues to be very
company-specific. It will be interesting to see where companies like PHH,
Redwood Trust, Nationstar, PennyMac, Stonegate, and Walter (Ditech) come in
this year - many have posted disappointing results recently, reflected in their
depressed trading results. Remember that the MBA reported that independent
mortgage bank profitability fell 60% QOQ in 4Q, with higher expenses largely to
blame. Production expenses were at their second highest level per loan since
late 2008 and total production revenue was 3.6 points - about flat to the prior
quarter.
On
the good news front, also remember that Ellie Mae reported that the time to
close fell to 46 days in February from 50 days in January. Argue all you want,
most lenders in the industry appears to be adapting to TRID, which could reduce
at least some of the TRID-related expenses going forward. What choice do
they have?
Fannie
Mae has released its April 2016 Economic & Housing Outlook, which sees
little change for 2016, despite a slow first-quarter scenario. That may sound
good on the surface, but there remains some additional concern over the key
housing component for the economy. The report's tag line is "Economic
Growth Outlook Remains Little Changed Despite First-Quarter Stall." As
noted above Fannie Mae sees mortgage originations declining by about 9% in
2016.
Are
the Agencies' take on mortgages & housing reliable? Looking back to the
autumn, sentiment for home purchases declined slightly in September, according to the Fannie Mae Housing Survey. Back then the
report noted that overall, sentiment about the real estate market was slowly
improving, but it has been a tough slog.
In
January Freddie Mac's Multi-Indicator Market Index (MiMi) has indicated that the U.S. housing market is
continuing to improve. The MiMi index reached 81.9, and on a YoY basis and the
index improved by 6.31 percent over the past year. Since July 2014, the 6.31
annual growth is the most prominent improvement yet. Thirty-two states have
MiMi values in a stable range, compared to a year ago where only twenty-one
states were in a stable range. And going back to the autumn Freddie Mac's MiMi
for October showed continued recovery in the housing market.
Rates:
steady as she goes, and "up a little, down a little" was the norm
last week, and perhaps this week as well. Friday rates dropped a little based
on some weaker-than-expected U.S. economic data releases.
If
you liked that last week was devoid of scheduled market-moving economic news,
you'll love this week! The focus may very well be on overseas news & oil
prices since there isn't much slated for this country. Today we'll have the
April NAHB Housing Market Index at 8AM CDT to see what builders have to say.
Tomorrow is the March Building Permits and Housing Starts duo. Wednesday are
the MBA Mortgage Index and March Existing Home Sales. Thursday includes Initial
Jobless Claims, April Philadelphia Fed, February FHFA Housing Price Index, and
March Leading Indicators. Zip on Friday.
We
closed the 10-year at a yield of 1.75% and this morning it is sitting around
1.76% with agency MBS prices roughly unchanged.
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