Servicing Market Troubles Hit Borrower's Rates - Why?

By rchrisman@robchrisman.com

(Thanks to Tony H. for this one.)

A female college student coming back from Europe is sitting next to a priest.

She: "Excuse me could you do me a favor? I used the very last of my vacation money to buy an expensive artisanal razor. It's so beautiful it's a piece of sculpture. I have no money to pay any duty fees when we land. Could you bring it through customs for me?"

Father: "Sure but as priest I cannot lie about it." and then puts the razor in a pocket of his robe.

Upon arriving the Customs Officer asked, "Do you have anything to declare?"

Father: "From the top of my head to waist I have nothing to declare."

Customs Officer: "That's an odd answer. Do you have anything BELOW your waist you would like to declare?"

Priest: "Yes I have something that was created by a master, held by the hand, made for a woman and has never been used."

Customs Officer: "Welcome to the United States Father."

 

I don't know how it is that we only have two business days left in July - time flies. For me this month has included Honolulu, Denver, Sacramento, San Francisco, and now Austin for several days - pretty nifty places. The mood out there among residential lenders? It has improved nicely as 2016 has progressed although there are grave concerns about the servicing market - see below. But lenders are licking their chops knowing that about half of securitized agency mortgages have interest rates higher than 4 percent, according to Inside Mortgage Finance. Loan officers know that not all of these loans can be refinanced as some borrowers may not have enough equity in their homes, can't qualify credit-wise, or the high cost charged by lenders to cover skyrocketing compliance costs just doesn't warrant refinancing.

My guess is that EverBank reps are running around, saying that they don't know anything more than what they've read in the newspapers about the company being on the block. (Companies being purchased always try to put a good spin on things: additional capital, portfolio products, no layoffs, efficiency, and the like. We've all seen the opposite happen, of course, but hope springs eternal.) But back to EverBank who the Wall Street Journal stated was in "advanced negotiations" with a financial services firm to be acquired. The deal, however, "is not certain." Shares jumped 13% earlier this week, making everyone forget that its profits in the 2^nd quarter fell to $21.6 million versus 2015's 2^nd quarter income of $41.6 million - primarily due to the same servicing write-down issues plaguing any company servicing loans. Total originations (in the 2^nd quarter) fell 11% to $3.08 billion.

 Are folks born between 1982 and 2000 (Millennials), including minorities, saving up their shekels to buy a house? It appears that they are. New research from TD Bank reveals that millennials are more conservative with their money than their youth would suggest. In fact, nearly two-thirds are saving cash in order to buy their first home. Nearly three-quarters of millennials (74 percent) say that saving for a down payment still represents the most significant hurdle to achieving the American dream, according to TD Bank's second annual First-Time Home Buyer Pulse, which polled more than 1,000 Americans looking to purchase a first home within the next five years.

 One-fifth of millennials (19 percent) plan to supplement their savings for a home with financial assistance from friends and family, and 65 percent plan to have a spouse or partner as a co-signer. TD tells us that "move-in ready homes" continue to be the most popular choice for busy millennial home buyers (78 percent) and those structures had better have an attractive design, a nice backyard or pool, and proximity to schools or childcare.

 "Sixty-five percent of all consumers indicated that saving for a down payment is delaying their first home purchase. More Americans (one-third) are putting less than 20 percent down on a home; the percent was even higher among millennials (35 percent). Thirty-seven percent of first-time buyers will take advantage of mortgage affordability programs."

 Well, is the FHA program a "mortgage affordability program?" What about HAMP and HARP? The U.S. Department of the Treasury, the U.S. Department of Housing and Urban Development (HUD), and the Federal Housing Finance Agency (FHFA) issued a "white paper" that is designed to serve as a guide for future loss mitigation programs. The guidance draws on lessons learned from the implementation of the government's crisis-era housing foreclosure prevention/loss mitigation recovery programs, and outlines five principles the agencies believe were essential to the success of the government's programs and should provide a foundation for any future loss mitigation programs.

 The paper recommends five governing principles for future loss mitigation including accessibility, affordability, sustainability, transparency and accountability. "These principles are designed to help maximize foreclosure-avoidance and reduce losses on mortgages which should be in the interest of all concerned stakeholders."

 Daniel Goldstein did a piece on FHA & first time home buyers. "The Federal Housing Administration lowered mortgage insurance premiums (MIP) on its loans in most cases by $800 to $900 a year (and in higher-priced areas of the country even more), in an effort to entice first-time borrowers to become homeowners." Did it work with Millennials and other first time home buyers? I guess not.

 One of the big topics at the California MBA's Western Secondary conference this week was the deteriorating market for servicing, specifically FHA/VA servicing demand. It is rumored that servicing buyers will soon be, if not already, adding restrictions to lenders selling FHA/VA servicing. But check with the servicing buyers for specifics.

 Why should every LO and every company be aware of this issue? Because the value of servicing is as important in determining the borrower's rate sheet price as MBS prices, loan level price adjustments, and profit margins.

 Seth Sprague with Phoenix Capital said that, "It is estimated that over 70% of the [Ginnie Mae MSR] deals brought to market in 2016 did not trade." Ouch! Why not? There are many factors impacting the liquidity of the MSR (mortgage servicing rights) asset. These include the Basel III impact on banks, risk overhang from the FHA using the False Claims Act to persecute lenders, elevated FHA servicing costs and policy uncertainty, MIP uncertainty, and prepayment speeds (especially with IRRLs and FHA streamlines or from certain lenders known for their refinancing). And don't forget the myriad of federal, state, and local rules governing servicing.

 There are factors impacting the liquidity of non-bank servicers. Per the MBA these include the lack of financing for Ginnie MSRs, the Ginnie acknowledgment agreement, structural issues (can't split pools, bifurcate R/W), financing for servicing advances & DQ buyouts, sub-servicer capacity, and the pullback by private equity MSR buyers.

 And then we have GNMA policy concerns. The size of Ginnie's book of business has grown dramatically in recent years but its staffing and funding has not kept pace. There is a lack of resources for counterparty management. Ginnie's staff is concerned with inexperienced issuers with unseasoned books, and its need for data, liquidity metrics dashboard, and a suitable stress test. Lastly, Ginnie's management has expressed concern that there are too many "opportunistic" MSR buyers.

 One concern is exemplified by a recent enforcement action. Laurence Platt with Mayer Brown, LLP, writes, "The United States Securities and Exchange Commission ('SEC') continues to bring enforcement actions focused on government-guaranteed residential mortgage backed securities, notably including those guaranteed by the Government National Mortgage Association ('Ginnie Mae' or 'GNMA'). Most recently, on May 31, 2016, the SEC announced that First Mortgage Corp. ("FMC") and six of its senior executives agreed to pay $12.7 million to settle charges of defrauding investors in the sale of residential mortgage-backed securities ('RMBS') guaranteed by Ginnie Mae. Importantly, when bringing these cases, the SEC has been seeking penalties against not only the companies but also the senior executives. Another important takeaway is that not only are public companies subject to the enforcement scrutiny of the SEC but...any issuer of Ginnie Mae mortgage-backed securities is subject to certain aspects of the federal securities laws as well.

 "The Securities Act Section 17(a) and Exchange Act Section 10(b) are the most commonly cited statutory provisions prohibiting fraud in the United States securities markets. The SEC adopted Rule 10b-5 to implement the fraud prohibitions of Section 10(b). Rule 10b-5 makes it unlawful for any person, in connection with the purchase or sale of securities, directly or indirectly to: (1) employ any device, scheme or artifice to defraud; (2) make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or (3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Section 17(a) prohibits similar conduct in connection with the offer or sale of securities. It is critically important for issuers of securities in the GNMA market to understand that they are, and will continue to be, subject to the antifraud provisions of Section 17(a), Section 10(b) and Rule 10b-5. As demonstrated by the SEC's recent action, the penalties for issuers and their officers for violating these provisions can be severe.

 "The SEC Enforcement Division has been focusing on RMBS since before the financial crisis. In 2010 it strengthened its ability to bring enforcement actions arising from RMBS by creating a specialized investigative unit now known as the Complex Financial Instruments Unit.

 "As seen in the FMC case and earlier enforcement actions against Taylor, Bean & Whitaker Mortgage and Radius Capital, the SEC's Enforcement Division will continue to scrutinize issuers in the governmental-backed securitization market and those issuers must be prepared to demonstrate their compliance with the US securities laws and regulations. Issuers of GNMA RMBS must be particularly careful to comply not only with HUD and GNMA regulations but with the requirements of the federal securities laws as well." Thank you Mr. Platt!

 Turning to interest rates, although the yield on the 10-year stayed in the 1.50% range Wednesday we still had a nice rally. U.S. fixed-income security prices climbed ahead of the afternoon release of the FOMC policy statement, continuing their advance after the release. It was no surprise that the statement left the fed funds target range at 0.25% to 0.50%. The statement did not raise concerns that policymakers are in a rush to raise rates, but it was noted that "near-term risks to the economic outlook have diminished." The FOMC statement "tilted hawkish" but not enough to merit much of a change in the odds of a September rate hike.

 Perhaps of more use was the NY Fed's release of its FedTrade schedule covering the July 28 to August 10 period. The information continues to be transparent, and no MBS trader is surprised by the Fed. The schedule sees the Desk purchasing up to $19.525bn Class A, B and C MBS, and sees operations every day during the period.

 Today we've already had the usual Weekly Initial Claims (+14k to 266k) but also June International Trade in Goods ($63.3 billion). Later the NY Fed will be buying MBS. We'll also have a $28 billion 7-year note auction - yes, the government buys and sells fixed income securities.

 Yesterday the 10-year note improved .375 to yield 1.51% whereas 5-year Treasuries and agency MBS prices improved about .250. This morning we're at 1.53% with agency MBS prices worse nearly .125.