(Thank you to Martha R. for
this one!)
A very simple way to explain
how politics & banking work....
I told my son "I want you
to marry a girl of my choice!
He said "NO!"
I told him its Bill Gates
daughter!!!!
He said "OKAY!"
Got in contact with Bill Gates
& told him "I want your daughter to marry my son!"
He said "NO!"
Told him my son was the CEO of
the World Bank!
He said "OKAY!"
Went to the President of the
World Bank & told him to make my son CEO of the Bank!
He said "NO!"
Told him my son was Bill Gates
Son in Law!
He said "OKAY!"
That's exactly how politics
& banking work.
Who is Gary Johnson? He's the
Libertarian candidate for president this year. And given the
"unusual" presidential situation this year, and the current virtual
tie between the mainstream candidates, Mr. Johnson and his views may garner
more attention than the third party normally have. Regarding housing, and
scaling back government in general, "He...would abolish the Department of
Housing and Urban Development because local governments should choose what
works for them."
Alterra Home Loans LLC, an
independent mortgage bank headquartered in Nevada with offices in 12 states,
announced that it has closed an expansion capital and an equity investment
commitment from Panorama Point Partners, an Omaha, Nebraska based private
equity partnership that focuses on providing financial capital and
growth-oriented services to help promising companies achieve their future
growth goals. Alterra Home Loans LLC, is a 100% minority-owned (Hispanic)
lender and within the past three years Alterra more than tripled its retail
loan production, generating nearly $1 Billion in mortgage loan closings in
2015.
In banking news, we
recently learned that 15-bank holding company Wintrust Financial ($23.7B, IL)
will acquire First Community Bank ($178mm, IL) for about $30.3mm in cash. And
in Washington Commencement Bank ($177mm) will merge with Thurston First Bank
($131mm) in a merger of equals. Commencement shareholders will own about 65% of
the company and Thurston First shareholders will own about 35%. In Indiana
Horizon Bank ($2.6B) will acquire The Central National Bank and Trust Co
($55mm) for about $12mm in cash. OceanFirst Bank ($4.2B, NJ) will acquire Ocean
City Home Bank ($1.1B, NJ) for about $145.6mm in cash and stock or about 1.32x
tangible book. Cathay Bank ($13.2B, CA) will acquire Far East National Bank
($1.3B, CA) for about $340mm in cash (90%) and stock (10%) or roughly 1.26x
tangible book. In Georgia Pinnacle Bank ($685mm) will acquire Independence Bank
of Georgia
($184mm) for about $32.8mm in
cash (100%).
PCBB reports that,
"Online marketplace lender Social Finance (SoFI) is now reportedly
exploring how to become a bank, as the company seeks more stability given
significant disruption in marketplace lending...Community bankers should keep
an eye on this, as the company has made about $10B in student loans and
mortgages and has good hedge fund backing."
The U.S. Department of
Justice announced that Huntington Bancshares and FMER have agreed to sell 13
branches (which include $738 million of deposits) in Northeast Ohio to resolve
antitrust concerns from their planned merger.
We find ourselves at the
beginning of companies announcing their 2nd quarter earnings. For
the big banks, mortgages are expected to be a bright spot in Q2 as the decline
in rates has caused mortgage demand to tick up nicely - but mortgage strength
probably won't compensate for the net interest margin and net interest income
headwinds. And let's not forget the billions in mortgage servicing write-downs
caused by early pay-offs.
JPM (Chase) mortgage
banking results were slightly below expectations for volumes. Retail volume
increased by 29% Q/Q and at $25 billion total volumes were up 12% - driven by
nearly flat correspondent production Q/Q. It appears that the gain-on-sale
margin was up nicely by about 30 bps from .72% to 1.04% - probably because of
its retail production. Expect increases in gain-on-sale margins for the
industry during the second quarter driven primarily by higher industry volumes
driving primary/secondary spreads wider.
Total servicing income
for Chase fell by 15% Q/Q to $428 million from $505 million in 1Q16. Risk
management income (MSR rate marks and hedge results) fell by $50 million Q/Q.
It appears JPM took a smaller negative MSR interest rate mark than last
quarter, when many large banks took a mark that was a double-digit percentage
of the MSR. JPM's MSR capitalization rate declined to 81 bps from 87 bps last quarter
(vs. a decline of 11 bps last quarter), and the multiple of the servicing fee
declined to 2.31x from 2.49x.
A few weeks ago I noticed
a story about how the twenty major banks have lost a quarter of their total
market value this year, about $465 billion, according to FactSet. Bank stocks
were plummeting long before the UK voted to leave the EU, but the vote
triggered additional losses. Some stock prices have come back, but still...
And mortgage servicing is
shrinking at the large US banks although the top seven
banks still service more than a third of all mortgages in the States.
Shrinking...what do they know that smaller banks and independent mortgage banks
don't? The country's largest banks have dropped almost half of their mortgage
servicing since the financial crisis to the tune of $2.5 trillion.
Residential loan servicing,
once thought to be a goal for lenders to strive to own, continues to be a
headache. Servicing is thought to be a lightning rod for regulators, being a
direct touchpoint for consumers and the source of plenty of complaints. States
have a myriad of servicing-related laws, including the traditional
"judicial versus non-judicial" foreclosure policies. And for those
without a defensive team to guard against early payoffs, many lenders watch
their balance sheet assets run off with refinances.
Speaking of which, agency
MBS prepayment speeds picked up again in June. Speeds on both 30-year and 15Y
fixed MBS increased by about 8.5% m/m, while hybrid ARM speeds picked up about
14%. Analysts say that the activity was driven mostly by summer seasonality and
a higher day count in June versus May (22 days from 21) but that we can
expect prepayments to remain elevated over the next few months. The
post-Brexit decline in Treasury yields sent mortgage rates lower although they
have bounced back up recently. Faster prepayment speeds will likely have a
negative impact on mREIT earnings in the third quarter as premium amortization
expense increases and portfolio runoff is reinvested at lower yields.
Conversely, it should
benefit mortgage banks, title insurers and other companies that benefit from
higher mortgage volumes. KBW reports that roughly 55% of borrowers in the
Agency MBS universe have mortgage rates of 4.5% or higher. The national average
rate for a 30-year fixed mortgage is below 3.50%, according to Bankrate. This
suggests that over half the agency MBS market has a big enough incentive to
refinance. Further, if Treasury yields remain stable, one can expect mortgage
rates to continue trending down driven by two factors: 1) lower lender spreads
as borrow demand moderates; and 2) tighter spreads between Agency MBS and
Treasuries.
Back when mortgage rates
were hovering around 3.625% it was reported by Black Knight that if mortgage
rates fall by about 0.15 percentage point from current levels to around 3.5
percent, another 2.1 million borrowers would be able to refinance. That would
bring the total number of loans eligible to around 8.8 million, or nearly 20
percent of loans. There haven't been that many loans eligible for refinancing
since 2012-13, when rates were at historic lows. The MBA has increased its
projections for refinancing. In the middle of December, it expected $415
billion of loans to be refinanced this year, but in mid-February, its forecast
was 25 percent higher, at $520 billion.
Banks in the U.S., and
most of the world, know all about lending. But what about China's $8.1
trillion "shadow lending" Industry? If the United States' lending
industry is one of the most heavily regulated, then China's environment looks
like the wild west. The Peoples Bank of China has changed focus from
stimulating growth in an easing cycle to clamping down on the financial
and debt risks that threaten to derail a tenuous stabilization in the
world's second-largest economy.
Rates? Not doing too much
- perhaps it is the summer doldrums - but many have crept back to where they
were prior to the dramatic Brexit vote. Yesterday U.S. Treasuries traded higher
although agency MBS prices were mixed following two consecutive losing sessions
as the global equity rally paused and fixed-income investors sought to buy the
dip. Unlike the 10-year auction the day before, the $12 billion 30-year
Treasury auction was met with strong demand, sporting the highest indirect bid
in at least five years! And the Fed's Beige Book reported a "modest"
pace of economic expansion in most districts and that news was largely ignored
by markets.
Mortgage rates are pretty much
set by supply and demand, and mortgage bankers are offering up plenty of
supply. On the demand side of the equation don't forget that the NY Fed is in
every day buying agency mortgage-backed securities using money from early
pay-offs and reinvesting the monies back into current coupon mortgages. MBS
reinvestments over the coming four-week period are estimated at $36 billion, up
from $31 billion in the previous four-week period though less than the largest
total: $40 billion in April/May 2015. Very simple math tells us that is $9
billion a week, or nearly $2 billion a business day! At that pace the Fed is
buying nearly 1/3 of the 2016 estimate for mortgage production.
Today we've had the Bank
of England leaving its rates unchanged - an interesting move. We've also had
the usual Initial Jobless Claims for the prior week: unchanged at 254k. And
we've also had the Producer Price Index numbers for June: +.5%, core +.4% -
both stronger than expected but over the long term producer inflation is very
tame. Later we'll see a series of Fed speakers - whether or not they say
anything new remains to be seen.
For those numerically inclined
yesterday the 10-year note improved about .375 to yield 1.47% and 5-year notes
improved about .125 as did agency MBS prices. But we're giving it back this
morning as the 10-year is worse, yielding 1.54% with MBS prices down/worse
about .250.
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