PHH Bails On Correspondent Channel and More Mortgage Earnings

By rchrisman@robchrisman.com

 

An elderly man in Louisiana had owned a large farm for several years.

He had a large pond in the back. It was properly shaped for swimming, so he fixed it up nice with picnic tables, horseshoe courts, and some apple and peach trees.

One evening the old farmer decided to go down to the pond, as he hadn't been there for a while, and look it over.

He grabbed a five-gallon bucket to bring back some fruit.

As he neared the pond, he heard voices shouting and laughing with glee.

As he came closer, he saw it was a bunch of young women skinny-dipping in his pond.

He made the women aware of his presence and they all went to the deep end.

One of the women shouted to him, "We're not coming out until you leave!"

The old man frowned, "I didn't come down here to watch you ladies swim naked or make you get out of the pond naked."

Holding the bucket up he continued, "I'm here to feed the alligator..."

Some old men can still think fast.

 

In residential lending banks, and regulators, fret about non-banks. Do they have enough capital to originate and service loans? And everyone frets about online lenders for a myriad of reasons while those online lenders continue to gain market share. But in an interesting move three of the largest online small business lenders will disclose to borrowers the annual percentage rate on their loans in a bid to improve transparency.

Another Blackstone portfolio company recently turned some heads in residential lending - this time in the secondary markets. Incenter LLC hired a fixed-income and trading group as it works toward registering a wholly owned subsidiary, Incenter Securities Group, as a mortgage-focused broker-dealer. The company - ISG - will also combine efforts with Incenter's servicing broker - Incenter Mortgage Advisors (IMA) to provide a full spectrum of valuation, trading, and advisory services.

 Southwest Stage Funding, LLC, dba Cascade Financial Services, announced that it has "entered into a definitive agreement with an affiliate of Centerbridge Partners, L.P., a private investment firm, whereby funds advised by Centerbridge will acquire Cascade, a leading lender to buyers of manufactured homes.  Upon closing of the transaction, Cascade expects to expand lending in the manufactured housing sector and introduce a new suite of non-government insured portfolio loan products for buyers of homes placed in communities and on private land. The deal is expected to occur in the 3rd quarter of 2016. Todd Kopstein, Senior Managing Director of Centerbridge, said, 'Cascade is well positioned to expand the availability of financing in the manufactured housing industry. We believe that factory built housing provides a compelling option for rural and lower income households.'

 "In connection with the closing of the transaction, Champion Home Builders, Inc., one of the largest manufactured homebuilders in North America, has agreed to make an investment in the Company alongside Centerbridge. Centerbridge, headquartered in New York, NY, is a private investment firm with approximately $25 billion in capital under management.  The firm focuses on private equity and credit investments and is dedicated to partnering with world-class management teams across targeted industry sectors to help companies achieve their operating and financial objectives.

 Instead of 110 correspondent investors out there now we have 109. Or close, according to pricing engines that track correspondent lender prices. PHH Mortgage Corporation has decided to exit the Correspondent Lending business. It isn't the first, and it won't be the last. "PHH will honor all locked loans which have previously been registered with us" but locks ended yesterday, Cinco de Mayo. "No extensions will be permitted. As a reminder, you are required to deliver these loans to PHH under your best-efforts commitment. Our decision to exit the Correspondent Lending business was primarily due to its subpar profitability given the highly competitive Correspondent Lending marketplace. We believe it is in the best interest of the Company to focus our efforts on those areas of the market where PHH has the best opportunity for success."

 Are we going to see a new booth at conferences alongside Arch, Essent, MGIC, Genworth, Radian, and National MI? Perhaps. Reinsurance broker JLT Re has launched a new operation in North America - JLT Re Global Mortgage Solutions - to offer insurance and reinsurance to government-sponsored entities, mortgage insurers, mortgage lenders and builders.

 And Essent had another decent quarter which analysts attributed to a higher premium margin and a lower tax rate. Flow NIW of $5.4 billion was down from $6.0 billion in 4Q and below many estimates. KBW estimated the company's market share was about flat Q/Q at 12%, and that the average premium came in around 57 basis points. The single premium percentage was relatively flat at 24.6% from 24.3% Q/Q. Insurance-in-Force (IIF) increased Q/Q to $67.7 bn from $65.2 bn in 4Q. The provision for losses and LAE came in at $3.7 million, down from $4.2 million in 4Q, and the number of delinquent loans rose to 1,060 from 1,028. Delinquent loans totaled 0.34% of the portfolio, down from 0.35% in 4Q. Of particular interest to the capital markets was information about GSE risk sharing: risk-sharing risk-in-force increased to $189 million from $156 million in 4Q and $64 million a year ago.

 Speaking of earnings, Redwood Trust reported its performance which came in at a decent level primarily due to lower expenses. Book value, however, fell to $14.17 from $14.67. The company incurred restructuring charges which RWT stripped out. The company declared a $0.28 per share dividend for the quarter, unchanged from 4Q, and during 1Q Redwood repurchased 1.6 million shares for $21 million (average price of $12.81/share), leaving $91 million remaining on the authorization. Of great interest was its jumbo segment (which is the only ongoing mortgage banking business for the company). Redwood had $1.0 billion of loans originated versus $1.1 billion last quarter. Management noted that the gain-on-sale margin was 147 bps, much higher than last quarter's 74 bps on higher demand.

 And while we're at it, PennyMac's earnings beat many forecasts due to higher gain on sale and servicing income. Through its correspondent production activities, PMT acquired $9.7 billion. PMT carries some of its MSRs at lower of cost or market (LOCOM) and noted that the fair value of MSRs is $11.6 million ($0.17/share) above carrying value. Servicing income came in at $15.6 million (with MSR marks essentially being offset by hedge gains). Total UPB of the MSR increased to $44.2 billion from $42.3 billion, while the ESS UPB balance at 1Q16 stood at $38.1 billion.

 PennyMac saw net losses on the NPL portfolio which totaled $3.9 million, down from a $2.6 million gain Q/Q:  valuation gains on distressed mortgages were negatively affected by higher advances and increased REO resolution costs. Mortgage banking income was solid on a higher gain-on-sale margin and higher volume. The gain on sale margin increased slightly to 46 bps vs. 45 bps last quarter (as a percentage of closings). Conventional and jumbo rate locks increased to $3.9 billion from $3.6 billion Q/Q.

 Freddie Mac reported its earnings this week and noted that the percentage of its purchases of loans to first-time homebuyers hit a 10-year high. But the company lost $354 million in the first quarter, but the amount wasn't large enough to force it to request a government infusion. Freddie is vulnerable to quarterly losses due to swings in the value of its derivatives, which are sensitive to interest-rate moves. Freddie said it took a $1.4 billion hit in the first quarter due to the fall in interest rates, as well as a roughly $600 million hit from the widening of spreads on mortgage loans and mortgage securities. When things are good all of its profits, like Fannie's, are pushed to the U.S. Treasury. That has resulted in a dwindling of its capital cushion - its equity fell to $1 billion at the end of the first quarter. Its capital reserve will steadily decrease in any event until it reaches zero in 2018.

 Fannie Mae's adjusted earnings per share (EPS) came in at $0.04 - double of what the company posted in the same quarter last year. It posted a profit of $1.14 billion for 1QFY16, down from $1.89 billion reported in the same quarter last year. The profit in the fourth quarter previous year was $2.47 billion. On a YoY basis, the company's revenue plummeted 7.5%, ending at $4.97 billion. Like Freddie, FNMA has faced headwinds in the form of a declining value of financial instruments, which it previously used to hedge against interest rate swings. This decline was slightly offset by the surge in credit-related income of the company. The company has announced with these earnings that it will send $919 million worth of dividend to the US Treasury Department in June this year.

 Secondary market platform Ldger (no, I am not missing a vowel) announced its second auction of whole loan trading some time in May. Can-I-buy-a-vowel Ldger calls itself "the primary platform for secondary market liquidity solutions for marketplace lending assets" and has announced its second auction of Prosper Marketplace loans. "Ldger is a New York City-based fintech startup offering secondary market solutions for marketplace lending assets. The company's platform underpins its whole loan trading auction and also features a user-driven structured finance solution for data-rich asset modeling, automated transaction execution, inventory discovery and aggregation."

 Up some, down some, so go rates. Fixed-income security prices rallied Thursday, which moved rates lower, which was mostly attributed to initial jobless claims hitting a five-week high of 274K. When you combine that with Wednesday's disappointing release of the April ADP Employment Change, folks began talking about a disappointing jobs number today. Certainly the odds of a Fed increase to short-term rates at its next meeting in June leak out of the market. But San Francisco Fed President John Williams, who does not vote on the FOMC this year, said that two or three rate hikes this year is reasonable and that the U.S. economy is in a very good place.

 As a quick aside, and as a reminder that Mother Nature is very strong, a wildfire around Fort McMurray, Canada's oil sands hub, is set to reduce Canadian oil production by several hundred thousand barrels/day and that has pushed oil prices higher.

 This morning we've had the April employment numbers, further reinforcing that the Fed will not do anything at its June meeting. Average hourly earnings were +.3%. The Unemployment Rate came in unchanged at 5.0%. Nonfarm Payroll came in weak at +160k. February was revised lower, as was March. We closed out the 10-year Thursday at a yield of 1.75% and after the job figures this morning it sank and is sitting around 1.72% with agency MBS prices better nearly .125. Yes, the job data, overall, was disappointing for those hoping for a growing US economy.