Who is Buying What From Who May Be a Surprise

By rchrisman@robchrisman.com

 

(Thanks to Larry A. for passing this along. An oldie but a goodie.)

Heaven is getting too crowded so St. Peter tells a long line of men they will have to answer one question honestly before getting in.

So he asks the first man, "Did you ever cheat on your wife?"

The first man replies, "No, sixty-one years of marriage and I was always faithful." St. Peter says, "True, and here are the keys to your new SL 500 convertible Mercedes, new every year for eternity." Happily, the man drives off down the highway of Heaven.

St. Peter asks the second man, "Did you ever cheat on your wife?"

The second man briefly looks down, hesitates slightly and replies, "Yes, just once. I knew it was wrong but it was a one time, very passionate encounter and I'm sorry."

St. Peter says, "That's OK. Because you told the truth, here is your mountain bike, off you go."

The third man in line had been listening in on all of this and shaking his head said to St. Peter, "Don't even ask, I was a dog. I cheated on my wife all the time."

St. Peter says, "That's OK, because you told the truth you still get into Heaven, here are your rollerblades."

Somehow the guy on the mountain bike and the guy on the rollerblades teamed up and as they were traveling down the highway of Heaven, up ahead they saw the guy in the Mercedes pulled over to side of the road with the door thrown open and his head in his hands crying. As they pulled up they both asked, "You have this new Mercedes, new every year, to drive for eternity... what's the matter?

The first and always faithful man looked up and cried, "I just saw my wife go by on a skateboard!!"   

 Lenders can make, and lose, plenty of money on a) income from servicing, and b) changes in value of that servicing. Of course all the news about servicing rights write-downs are roiling the industry, and company earnings. Versus the larger companies that have been buying servicing at high multiples, however, smaller lenders have been reaping the benefits by selling to those larger companies that are now taking the hits for loans that pay off early or have less value. In its most simplistic terms, why would a small to mid-sized lender, who has the ability to retain servicing, and who values it at a multiple of 3.5:1, hold it if someone else is willing to pay them 4:1? More on the servicing market below.

National Mortgage Professional Magazine is seeking the best Mortgage Technology Providers to be featured in their third annual Mortgage Technology Provider Directory, appearing in their June 2016 edition. If your company offers a unique product and is loved by techies and clients alike, you need to be featured in this directory! Follow this link by June 1 to include your company.

 Speaking of which, I received this note from editor Joel Berman. "Rob we are launching NMP University headed by Executive Director, and Head Coach, Ron Vaimberg who has a long history of trainer & coach in mortgage industry. It launches fully in 6/16 & will aggregate pre-licensing courses & continuing education courses (online) & training & coaching. The beauty of NMP U is that it will present dozens of highly qualified trainers & coaches that will be offered for individual & group courses that heretofore were promoting themselves independently. In addition to be considered to be part of NMP U these trainers & coaches have to offer their services discounted to our readers off their usual rate."

 On Monday, may 16^th, Plaza is providing a webinar which will offer Loan Officers deeper insight on using LinkedIn to reach a broader audience. Gain a better understanding of LinkedIn basics to increase your visibility, and come away with tips on sharing and searching inside LinkedIn. Register for this Plaza training now.

 If you're near San Jose next Friday, don't miss the Silicon Valley Chapter CAMP Spring Mini-Fair. This year's event includes Breakout Sessions with myself and Italina Kirknis. Register now for this May 20^th gathering.

 Turning to bank news, the Swiss government approved its final "too-big-to-fail" bank rules yesterday, setting a 5% leverage ratio of core capital to total assets for UBS and Credit Suisse. "With the new provisions, Switzerland will be one of the countries with the highest capital requirements in the world for global systemically important banks and will meet the capital standard for such banks as approved by the [Group of 20] countries," the government said in a statement.

 Small banks in this country continue to be bought or merge with others in efforts to increase efficiency, cut costs, and compete geographically. There has to be a huge cultural alignment for a merger to work, and interestingly the Wall Street Journal reports 26% of M&A deals done in 2015 did not use investment banks for advice versus only 13% in 2014. So far this year that number has climbed even more to 27%.

 Just in the last week it was announced that in New Jersey Investors Bank ($21.1B) will acquire The Bank of Princeton ($1.0B) for about $154mm in cash (40%) and stock (60%). Wesbanco Bank ($8.5B, WV) will acquire Your Community Bank ($1.6B, IN) for about $221mm in cash and stock or about 1.73x tangible book. In Maryland Revere Bank ($1.1B) will acquire Monument Bank ($514mm) for about $65mm in stock or roughly 1.61x tangible book. Bar Harbor Bank & Trust ($1.6B, ME) will acquire Lake Sunapee Bank ($1.5B, NH) for about $143mm in stock. In Florida Sunshine Bank ($522mm) will acquire Florida Bank of Commerce ($302mm) for about $40mm in stock or roughly 1.28x tangible book. The Farmers National Bank of Canfield ($1.9B, OH) will acquire Bowers Insurance Agency. But last Friday the FDIC closed First CornerStone Bank ($107mm, PA) and sold it to First-Citizens Bank & Trust Co ($31.3B, NC) under a purchase and assumption agreement.

 Of course banks are staring at the Basel III rules barreling down on them. As banks know this will impact the amount of servicing that can be held, and it will be interesting to see how this plays out in servicing values. And sometimes readers wonder about the value of servicing of loans created by lenders associated with builders. Builder business definitely has various attractive features from the MSR/IO valuation perspective, including purchase/retail focus, and often slower prepay speeds thus induced.

 For a current update on the servicing market and its nuances, Stephen Fleming, SVP with Denver's Phoenix Capital, Inc., contributed, "Here on the Phoenix Capital Desk, the MSR market in 2016 YTD has been punctuated by the 60 bps interest rate slide from Q4 '15 to Q2 '16, returning mortgage rates to within 25 bps of historic lows. This rate volatility, along with consistently increasing servicing costs and subdued capital raising prospects among most buy-side private money firms, has dampened pricing and decreased demand. That being said, Phoenix sees the more capital-robust buyers (non-bank and bank) as likely to continue to recognize the investment return & market share opportunity before them and accordingly continue to provide reliable competitive levels, albeit reflecting the recent disappointing prepayment performance. From an originator's view, the retain vs release discussion remains a key inflection point in Phoenix client dialogue - focused to ensure the proper analytics exist to make the best short and long term cash flow decisions.

 "Sellers of servicing rights must also consider the bulk vs flow dilemma. Many of Phoenix Capital's clients who regularly monetize MSRs chose to engage in flow transactions the past years, leaving few of them with substantial bulk selling needs presently. A flow transaction minimizes a seller's exposure to the negatively convex MSR asset in declining rate environments and spares them the distress of largely untraded bulk transaction attempts. While buyers are concerned about managing rate volatility, as well, the steady delivery of MSR assets at current market rates serves as a meaningful enticement." Thank you Steve!

 And Michael Ehrlich with ThomsonReuters also had some very valuable observations on the current servicing market and who the players are. "Co-Issue servicing sales accounted for 62% of (servicing deals this year), while bulk/mini-bulk transfers represented 34% of the total servicing transfers. Cash-window servicing released, primarily through the Freddie Mac CSR program came in at $6 billion, or just over 3% of the total. Non-Banks were the predominant buyers, with the top 4 non-bank buyers accounting for over 60% of the total servicing acquisitions. Leading was Pingora at $40B, $27.5B for Lakeview, $19.4B for Roundpoint, and $12.7B for Seneca Mortgage Servicing.  Non-Banks acquired nearly 100% of the GNMA servicing transfers, with Nexbank of Texas being the only bank buyer ($69M).

 Mr. Ehrlich went on with his analysis. "The top non-bank servicing sellers were Stearns, loandepot.com, CMG, Prospect, Fairway Independent and Impac with Stearns selling over $9 billion in GSE servicing (2015 issuance) and CMG selling over $3.5B in GNMA servicing.

 "The top depository bank sellers of 2015 servicing were Flagstar Bank, PrimeLending (PlainsCapital), Discover Home Loans, Fremont Bank, and Provident Savings Bank. Flagstar sold $8.5B ($5.2B in conforming, $3.3B Govy), of which $5.74B was sold in bulk/mini-bulk to Marix Servicing (Walter Capital Opportunity Corp) and Lakeview Loan Servicing. PrimeLending sold their servicing primarily through co-issue arrangements with Roundpoint ($2.6B) and Colonial Bank ($1.7B).

 "There are several factors a seller needs to consider when looking at co-issue vs mini-bulk flow servicing options. In co-issue transactions where the servicer is identified at the time of lock, such servicing transfers will not require the RESPA notification for a change in servicer. This is true even where the first payment is taken by the servicing seller. Mini-bulk transactions will require borrower notification of a change in servicer as per RESPA. Generally, only sellers with their own in-house servicing platform will sell servicing flow mini-bulk (pool servicing and sell at end of quarter). If using a sub-servicer, then it is usually operationally advantageous to co-issue rather than sell mini-bulk.

 (More on the servicing environment tomorrow, along with some news on servicing packages.)

 No one is saying rates aren't great, and more economists are jumping on the bandwagon saying they're going even lower. The refi boom just won't end. In terms of the bond markets, U.S. Treasury yields, things are definitely being impacted by the oil market, profit taking, and a very solid 10-year T-note auction. The $23 billion 10-year Treasury auction was met with the highest indirect bid on record (73.5%). The primary dealer takedown of 14.7% was the lowest on record for a reopening. Folks like our fixed-income market!

 Today we've had Initial Jobless Claims for the week ending 5/7 (+20k to 294k, worse than expected), and April Import Prices (+.3%, lower than forecast). Later today will be a $15 billion 30-year Treasury auction. Wednesday we closed the 10-year at 1.74% and this morning it is sitting around 1.76% with agency MBS prices worse about .125.