Home Point Buys Stonegate and Citi Bails on Servicing Biz, Minority Demographics Helping Lenders

by rchrisman@robchrisman.com

Being a teenager and getting a tattoo seem to go hand and hand these days. I wasn't surprised when one of my daughter's friends showed me a delicate little Japanese symbol on her hip. "Please don't tell my parents," she begged.

"I won't," I promised. "You're 18 now, so I guess it's your choice. By the way, what does that stand for?"

"Honesty," she said.

I certainly am hearing some dire numbers from appraisers out there - like their business, which kind of gets the ball rolling for a loan so could be considered a leading indicator, is down upwards of 50%. Let's hope it's a temporary blip. What if your appraisal was off by a couple mil? Rocker Stevie "Guitar" Miller may have something to say about values of hard to appraise properties. And no, it's not even a yurt.

 How much is your company worth?

 If you own a multi-channel lender doing about $800 million a month, and earning about $17 million a month in revenues on that, what is your company worth? Answer: $211 million. I am, of course, simplifying things immensely, but those are the stats in the Home Point Financial Corp. deal to acquire Stonegate Mortgage Corp. in an all-cash transaction. Willie Newman, the Ann Arbor, Michigan-based Home Point's CEO, stated that as a result of the combination, the business will have full national coverage across all channels of mortgage origination, as well as vertical integration across the mortgage value chain. Stonegate's current HQ is in Indianapolis, did $2.62 billion in volume in the 3^rd quarter of 2016, up 12% from the prior quarter, and total origination revenues reaching $51.8 million, up 35% from the prior quarter. It's been a year and a half since Stonegate's founder and former CEO Jim Cutillo abruptly announced he was leaving the company.

 What does it mean? Well, it won't be the last big company news of 2017 (see below). John M., an industry vet, wrote to me saying, "They probably should have sold in 2014 when their stock price was 15.  Still, a nice premium over the $5-$6 range the last few months, I am guessing the NOL carryforward of $163.5 million was of particular interest to Home Point. Lesson learned...when you run out of MSRs to sell you just sell the whole company!" It summed up several other comments that I received on the deal.

 And in other company news, Citigroup announced its "strategic exit" from mortgage servicing by the end of 2018 and the sale of its servicing to NRZ. "Citi has executed agreements that will accelerate the transformation of the U.S. mortgage business by effectively exiting servicing operations by the end of 2018 to intensify focus on originations. The strategic action is intended to simplify CitiMortgage's operations, reduce expenses, and improve returns on capital."

 Citi has seen its origination market share slide over the years, and it has gained the reputation for being "in the market, then out of the market." But what does the deal say about New Residential? NRZ announced that it was acquiring $97 billion of agency mortgage servicing rights (MSR) from Citibank. Since the end of 3Q, the company has announced roughly $250 billion of acquisitions. The company also announced a 49.2 million share common stock offering to fund the acquisitions. NRZ has announced several significant MSR acquisitions since the end of 2Q including a $72 billion MSR acquisition from PHH announced in December 2016. Servicing UPB at the end of 3Q16 was $354 billion. Since then the company has announced roughly $250 billion in UPB of servicing acquisitions.

 Analysts expect the company can fund the MSRs at around 50% debt, and the advances at around 90% debt. NRZ will be using Nationstar (NSM) to subservice the Citi portfolio.

 Know your borrowers

 While we're on the topic of trends and shifts, one of the additional HMDA fields is "borrower's age." Many lenders are trying to expand their offerings to capture borrowers in their 20's as well as Baby Boomers. Fool.com reports the average college graduate this year will have $37,112 in student debt, a 6% increase compared to last year. At the other end...some view reverse mortgages as the last chance to lend to this generation, born between 1946 and 1964. The youngest are 53 this year! And 10,000 a day of those codgers are turning 62 - eligible for reverse mortgages. Regardless of race, creed, color, or age, it is important for residential lenders to have a working knowledge of the demographics of their client base.

 The Pew Research Center gives us an examination of mortgage-market data indicates some of the continuing challenges black and Hispanic homebuyers and would-be homebuyers are facing.  

 Meanwhile, years ago Asian all-cash buyers rocked the market in certain local communities, but in some areas that has nearly vanished.

 Research done by Bank of America Merrill Lynch finds that millennials are the #1 workforce demographic in the US and account for $1.3 trillion in direct annual consumer spending. Meanwhile, millennials will account for 75% of the workforce by 2025. Millennials want to live closer together and that dense urban living is better for our economy and our environment, they seem to be drawn to communities that have access to all the amenities but also integrate "naturally" into denser cities, and that the freelance economy is allowing many, including millennials, to select where they'd like to live. Smaller/medium cities in North Carolina, Oregon, Colorado and Kentucky have seen an influx in these types of workers. Anna Loehr wrote in Fast Company recently that many freelancers are moving even further out into rural settings. Our digital economy allows workers to live pretty much wherever reliable internet service can reach.
Jeremy Potter points out that, "We're shaking up old notions of household formation, home ownership, economic centers and even so-called work-life balance. Not just millennials, everyone. Hispanic and Asian households can span generations and/or include extended family in addition to nuclear family. The digital economy has us reworking solutions and efficiencies. The traditional economy is evolving and considering bringing manufacturing back to American towns. The period of questioning has begun and is in full swing. I think housing and home ownership are just two issues that top the list for most people."

 Builder Magazine reports that Canuso is introducing large, multi-generational homes in New Jersey that feature more than 3,000 square feet of living space.

 By 2035, more than one in five people in the U.S. will be aged 65 and older and one in three households will be headed by someone in that age group, according to Projections and Implications for Housing a Growing Population: Older Adults 2015-2035, a report released recently by the Harvard Joint Center for Housing Studies (JCHS).

 Do rising mortgage rates pose a problem for millennials entering the housing market? Sure they do, but higher rates impact all borrowers regardless of age. The interest rate move in November and December has lowered the median-sized mortgage that borrowers can qualify for by 9%.

 Companies are certainly following the demographic shifts. For example, National Mortgage Insurance Corporation (National MI), is helping to educate mortgage lenders on how to best reach out to multicultural borrowers. The company is educating lenders through speaking engagements, webinars and social media. For the second year, National MI has joined forces with Kristin Messerli, founder of Cultural Outreach Solutions.

 Changing demographics in the U.S. are leading to an increase in the number of millennials as well as a more ethnically diverse population, per Messerli. One in three home purchases today are made by Millennials, who comprise the most ethnically and racially diverse generation in the U.S. Hispanics are the fastest-growing group in the U.S. home buying market, according to a Freddie Mac report. And per the MBA by 2024 there will be 33% more new minority home buyers.

 Multicultural home buyers represent an important market for mortgage lenders as they look to grow their purchase loan originations business, notes Christina Bartning, VP of marketing and product development with National MI. "It's also critical that private mortgage insurance companies work to help address the multicultural segment, as some of those borrowers may not have a 20% down payment to purchase a home."

 Interest rate news?

 Regarding current origination volume, Fannie's trading desk reports that, "The continued light supply reconciles with what the desk has heard from customers who reported that overall lock activity was down about 5-10% week over week. Primary rates continue to be posted in the 4.125-4.375% range on most rate sheets.  Using 4.375% as the prevailing rate, the primary/secondary spread is ~117bps which is pretty much flat from the previous week.  The primary/secondary spread is the spread between the 30yr primary rate and the interpolated MBS par coupon. It is used as a rough proxy for trends in originator margin." Well said.

 Friday rates improved both Durable Goods and U.S. GDP growth for the fourth quarter were slightly lower than expected. Despite the bond market sensing the Fed won't move overnight rates until June, there is plenty of scheduled news this week to nudge long-term rates one way or another. Jobs and housing constitute a huge portion of the economy, and we'll have our fill of updates this week.

 This morning we've already seen Personal Income and Outlays/Spending/Consumption (+.3% & +.5%, respectively, as expected) as well as the core PCE (Personal Consumption Expenditure) figures (+.1%). Coming up is Pending Home Sales.

 Tuesday has the Employment Cost Index, S&P Case-Shiller Home Price Index from November, Chicago PMI, and Consumer Confidence. Wednesday brings the usual MBA mortgage applications, ADP Employment Report, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending and the FOMC meeting announcement (don't look for any change). Thursday brings Challenger Job-Cut Report, Jobless Claims and Productivity and Costs. Friday closes out with the big boy Employment Report, Factory Orders and ISM Non-Manufacturing Index. The 10-year is currently yielding 2.49% and agency MBS prices are pretty much unchanged from Friday's close.