Another Corrsp. Lender bails out;FHLB Atlanta joins MPF;REITs join non-QM fray;Rise of the Vendor

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Guess what opened up on this date 100 years ago? No, it wasn't the first Starbucks. The Panama Canal opened. Do you think the mortgage industry will settle all the lawsuits and complaints by the time the 200 year anniversary rolls around? I hope so. The latest settlement involved Freedom Mortgage and discrimination. And we had the recent SunTrust Mortgage Force-Placed Insurance Class Action Settlement. But those regulating and monitoring lenders aren't immune to making mistakes, and this story explains how the CFPB admits it made false allegations about credit unions. 

I am sure that it was more recent than 100 years ago, but it is a rare phenomenon when a lender's existing branches see a pick-up in purchase business in the autumn and winter months - and companies are gearing their overhead accordingly. Granted, many companies are seeing decent volumes - but it is still summer and much of that is from the addition of LOs and branches. Meanwhile, lenders everywhere are doing what they can to keep decent producers in their stables: free skittles in the lunch room, trips to places with lots of vowels in the name, that kind of thing. (And for some, "decent" might be as few as 2-3 loans a month!) Companies attempting to keep staff include Wells Fargo, as this Bloomberg article points out.

The Federal Home Loan Bank of Atlanta has joined the MPF program that allows its banks, credit unions and other members to sell fixed-rate, conforming mortgages on the secondary market. The FHLB Atlanta became the 10th regional bank in the Federal Home Loan Bank System, a federal housing finance agency, to participate in the Mortgage Partnership Finance (MPF) program, which was created in 1997 by the FHLB of Chicago. Reuters reports that "Through the MPF's 'Xtra' product, home loans made by members of a participating FHLB are bundled and sold to Fannie Mae FNMA.OB, a sibling housing finance agency, at competitive rates, FHLB Atlanta said. At the end of 2013, FHLB Atlanta had nearly 1,000 members and $122.3 billion in assets. All of the district FHLBs provide 'advances' or loans to their members to lend to homeowners or potential home buyers. 'With MPF Xtra, our shareholders, regardless of their size, can offer their customers the same competitively-priced loans and keep the option to sell or retain the servicing of those loans,' FHLB Atlanta Executive Vice President and Chief Business Officer Robert Dozier said in a statement. The other FHLBs in the MPF program are Boston, Chicago, Dallas, Des Moines, New York, Pittsburgh, San Francisco, Seattle and Topeka."

 

Affiliated's correspondent announcement, not impacting its wholesale or retail channels, was short and sweet. "Dear Correspondent Partner, as you are aware, there have been significant changes within the mortgage industry that have impacted our business over the past several years. Based on the current environment, and after careful consideration, Affiliated Mortgage Company has made the difficult decision to exit the correspondent business effective on Friday, August 15, 2014. Per our contract, we will continue to accept locks through August 30, 2014. Effective Monday, August 18, 2014, extensions or re-locks on any locked loan will not be allowed. Rest assured that loans in our current pipeline, as well as those loans locked by the 30th, will be processed and purchased according to our usual guidelines.  We ask that you fulfill your contractual obligations with regard to your active locks with AMC. We will be available to answer any questions or conditions that arise concerning your loans until all pipelines are cleared. Please consider this official termination under the terms of our purchase and sales agreement." To repeat, its wholesale and retail channels are carrying on - business as usual.

 

At the other end of the spectrum, Baton Rouge-based GMFS was purchased last week by Zais Financial out of New Jersey for $61 million, and now Bloomberg reports that REIT Zais will soon start locking and funding non-agency loans within qualified-mortgage rules that will "expand credit slightly beyond what's available in the prime-jumbo market today. Zais CEO Michael Szymanski said, "We expect to see some expansion in our offering versus where the market is today on items such as LTV, transaction type, occupancy status...Could be >85% LTVs, though "certainly not 97%," and "there would be obviously mitigating factors that we felt were a good offset."

 

Bloomberg also reports that rival REIT Western Asset Mortgage plans to start buying new whole loans this quarter, with focus on high credit quality, non-QM mortgages "where we believe that we can earn higher net interest spreads without taking on much incremental credit risk," CIO Anup Agarwal said.

 Secure Settlements, Inc. (SSI), a data intelligence and risk analytics company for the mortgage industry, today announced that it has concluded a strategic joint venture agreement with CIS Information Services (CIS), a credit reporting and business risk assessment firm to streamline and enhance the SSI's suite of vendor management and risk monitoring products and services. CIS will provide technology integration and access to critical public data to improve the SSI risk reports and will also offer the SSI suite of mortgage industry data intelligence products to its existing client base of more than 2,000 businesses nationwide. (Secure Settlements recently partnered E.R. Munro & Company to offer SSI vetted low risk title agents access to competitively priced surety and fidelity bonds.)

 

Hey - here's something you can print out for a little weekend reading at the beach: FHFA's proposal for a single security. FHFA released a white paper requesting input on a proposed structure for a Single Security that would be issued by Fannie Mae and Freddie Mac. The MBA has called for a common agency, TBA-eligible security for more than two years, and development of the Single Security was a significant part of FHFA's 2014 Strategic Plan for the GSEs. "The MBA is analyzing the white paper and will be forming a working group to study its impact and craft a response to FHFA." And if you are interested in being part of this effort contact the MBA's Dan McPheeters. 

Let's see what vendors have been up to recently. After all, plenty of companies are using them to lower fixed costs and rely on their expertise. The residential lending business has become so complicated that it has become like the medical profession. One just doesn't just go to the "eye doctor" anymore. One goes to the retina specialist, or the "cataract surgeon". And lenders just can't rely on a good underwriter to take over servicing or compliance, or a lock desk person to hedge a $100 million pipeline. When one walks around the conference exhibition halls, they are filled with vendors and counterparties peddling their wares. The Rise of the Vendor!

The CFPB is calling out banks for not publicly disclosing campus financial product marketing agreements Full Story. The Office of the Comptroller of the Currency (OCC) has issued Bulletin 2014-37 on Consumer Debt Sales (the "Bulletin"). The Bulletin addresses the application of consumer protection requirements and safe and sound banking practices to debt sales by OCC-supervised institutions (national banks and federal thrifts) of all sizes, including community banks OCC Bulletin.

 

National MI announced that National MI's mortgage insurance products have been directly integrated with D+H's MortgagebotLOS, an all-in-one loan origination system (LOS) that supports retail, wholesale and correspondent mortgage lending. As a result of this integration, lenders who use MortgagebotLOS can now order National MI policies from within the loan origination system, saving time and streamlining the process for lenders," said Pete Pannes, chief sales officer of National MI.

 

Auction.com has launched an online community welcome designed to provide novice and experienced real estate buyers and sellers with a place to learn more about Auction.com and the real estate auction process in general. The new resource is intended to enhance customer support and create a collaborative environment where consumers can learn from the company and each other.  

 

Lender Direct Inc. website turned some heads with its offer to compensate Realtors 0.75% on Every Loan While Being RESPA Compliant. FHA and VA Programs with minimum FICO of 580, FHA manual underwrite ok with max DTI 43%. DU Refi Plus and LP Open Access Refi with 125% LTV max and 620 minimum FICO, just to name a few details Lender Direct is offering. 

Equifax's availability of its verification of hazard insurance (VOHI) for mortgage and home equity lenders is said to improve processing time. Its turnkey process verifies the status of homeowners' insurance on purchases, refinances and home equity loans and lines, reducing delays and processing costs while streamlining the loan origination process.

Rates continue to be very low - there doesn't seem to be much reason for them to go much higher. And the demand for longer-dated maturity instruments continues to be strong - and those are a long way away from overnight Fed Funds in the yield curve. Yesterday we had a decent amount of news. Jobless Claims rose 21k, and the previous week's level was revised up by 1k from 289k to 290k. The 4-week moving average was 295,750, an increase of 2k from the previous week's revised average. U.S. Import Prices fell .2%, and import prices for automotive vehicles fell 0.8% last month - the largest drop since 1992. All is quiet overseas, but there continue to be articles which include both "Europe" and "recession" in the same sentence. 

We come to the end of yet another week here in the business world, with a day including a decent amount of economic news. Despite all the experts thinking inflation would be out of control by now due to Quantitative Easing, it hasn't happened. Today we had the Producer Price Index out: it was expected to be flat with the core rate +.2%, and came out at +.1% & +.2%. The Empire State Manufacturing number of August came out (expected to drop to 19 from 25.60, it came in at 14!) as well as the Industrial Production and Capacity Utilization couplet, expected +.1% and 79%, respectively, and the Thomson Reuters / University of Michigan Survey of Consumers. As a benchmark, the 10-year T-Note saw a 2.40% close Thursday and this morning we're at 2.39% and agency MBS prices are better by about .125.

 

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Catching up with the MBA and CFPB on Privacy,RESPA-TILA, Reg. C, and Servicing Rules

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Most professional baseball teams still have 30+ games left in their season (out of 162), and there is plenty of jockeying in the media regarding the playoffs. Baseball is filled with trivia, but there is one tidbit that sticks out in my mind. See if you can stump your friends with this one: "What are the only two days during the year when there are no professional sports games (MLB, NBA, NHL, or NFL) played?" Please don't write me with the answer, but given the overlap and lengthy seasons of basketball and hockey, my only hint will be that those two days are during the baseball season. Baseball, and other sports, is filled with numbers. So is lending, and Wall Street's reliance on credit scores is legendary. And hey, if you don't like the credit scores coming across your desk, change the credit scores! Seriously, Fair Isaac put in new scoring with several adjustments - most notably to medical bills. Many consumers will see their FICO credit scores increase - not due to their debt payment habits, but instead due to changes of the credit-scoring model.

Overdraft charges did not cause the credit crisis in the United States of America. But the CFPB is hot on the topic anyway. The CFPB reports the largest percentage of consumer complaints in 2013 for all products were for mortgages (47%), credit reporting (13%), bank accounts or services (12%), credit cards (12%) and debt collection (9%). 

Those interested in TILA-RESPA reform should tune in to the CFPB's webinar on Tuesday the 26^th to answer some frequently asked questions about the TILA-RESPA Integrated Disclosure rule. The webinar will be hosted by the Federal Reserve. This will be the second in a series of webinars to address the new rule as creditors, mortgage brokers, settlement agents, software developers, and other stakeholders work to implement it over the next year. 

While we're on the CFPB, the MBA submitted a letter to the CFPB composed of thoughts on the proposed changes to the Annual Privacy Notice Requirement. (There is still privacy?) The MBA submitted a comment letter to the CFPB regarding its proposed amendments to the annual privacy notice requirement under the Gramm-Leach-Bliley Act. In the letter, MBA strongly supported the CFPB's efforts to reduce the burden and costs to the industry associated with providing annual privacy notices, while recognizing the importance of clearly disclosing to consumers a financial institution's policies for the treatment and sharing of nonpublic information. While supportive, the letter also expressed concern that the ability to post a privacy policy online in certain circumstances - rather than send annual notices - will not be as widely available as it should be. MBA then went on to suggest that any notice that complies with Regulation P should be qualified to use the proposed amendment's alternate delivery method if the financial institution is otherwise eligible. 

I continue to be asked about the CFPB and HMDA. As another reminder, the CFPB proposed changes to Regulation C, which implements the Home Mortgage Disclosure Act. Comments are due on October 22. 

What to do with potential borrowers who have minimal trade lines on their credit report, the so-called "thin file" borrowers? It's been suggested in the past that remittance histories could be a possible source of evaluation in establishing risk perimeters, and the CFPB has been tasked with its research. The Bureau recently published a report on its study of the use of remittance histories in credit scoring. I'll spare you from reading the 36 page report (although the link above directs you to the site); ultimately it found that remittance histories have little predictive value for credit scoring purposes, and that remittance histories are unlikely to improve the credit scores of consumers who send remittance transfers. Buckley Sandler have a terrific write-up on this report, they write, "The report follows a 2011 CFPB report on remittance transfers, which was required by the Dodd-Frank Act and assessed, among other things, the feasibility of and impediments to using remittance data in credit scoring. At that time, the CFPB identified a number of potential impediments to incorporating remittance history into credit scoring, and noted the need for further research to better address the potential impact of remittance information on consumer credit scoring." The CFPB determined that for remitter sample members without credit records, remittance histories likely would not allow those individuals to develop a credit profile. 

My daily work plan is pretty straight forward most of the time: a little writing, a little speaking, feed a pack of hungry cats every now and then; if required to, my P&Ps would be a page and a half at best. It's nothing compared to the Office of Inspector General's work plan for ongoing and planned audit and evaluation projects, which is updated bi-monthly and is over thirteen pages long. Recently, the OIG updated its work plan to include audits of the CFPB's information security program, pay and compensation program, and distribution of civil penalty funds. For the CFPB's Information Security, the OIG will implement the statutory requirements by auditing: the Bureau's compliance with FISMA and related information security policies, procedures, standards, and guidelines; and the effectiveness of security controls and techniques for a subset of the Bureau's information systems. OIG will also evaluate the controls around setting employee pay, which is mandated under Dodd-Frank as it requires the Bureau to "provide employee compensation and benefits that are, at a minimum, comparable to those of the Board of Governors of the Federal Reserve System (must be nice, uh?)." 

Ballard Spahr writes, "The CFPB issued a proposed rule amending Regulation C to expand data reporting requirements for mortgage industry participants. The proposed rule is 573 pages and our Mortgage Banking Group will analyze the proposal and work with clients on its impact. Comments are due on or before October 22...Dodd-Frank sought to address the issue (of the absence of important loan and borrower data elements) by directing the CFPB to expand the HMDA reporting categories. Proposed new data elements include the credit score and age of the applicant, the property's value (which provides for the determination of the loan to value ratio), the total points and fees, the term to maturity, and the duration of any loan. The expansion of HMDA data to include more and sensitive borrower and transaction information presents serious privacy concerns. By combining HMDA data along with other publicly available data, it is possible that the identity of specific consumers can be determined from the Loan Application Registers of mortgage lenders that must be made available under HMDA. With the expansion of HMDA data to include credit score, age and other elements, the privacy concern will be magnified. Addressing this concern in the press release announcing the proposal, the CFPB states that it is "looking at ways to improve how the public can securely use HMDA data to protect applicant and borrower privacy." The industry and interested parties should insist on the CFPB making consumer privacy a paramount concern in the consideration of the proposed rule. In announcing the proposal, the CFPB also states that it "views implementation of the Dodd-Frank Act changes to HMDA as an opportunity to assess other ways to improve upon the data collected, reduce unnecessary burden on financial institutions, and streamline and modernize the manner in which financial institutions collect and report HMDA data." The CFPB claims the proposed rule aims to: (1) improve market information, data access, and the electronic reporting process; (2) monitor access to credit; (3) standardize the reporting threshold; (4) ease reporting requirements for some small banks; and (5) align reporting requirements with industry data standards. Our Mortgage Banking Group will assess these aspects of the proposal." 

There are many areas in banking which require further clarification by the CFPB, and mortgage servicing rules are one such area. The American Bankers Association recently sent a letter to the CFPB requesting several clarifications. Ballard Spahr write, "The ABA asks the CFPB to make the clarifications part of "regulatory guidance (or regulatory amendment where necessary) that is readily accessible to all servicers, their vendors and advisors, as well as examiners from other regulatory agencies that will examine banks for compliance with the CFPB rules." In the letter, the ABA states that its members need regulatory certainty regarding how to apply the "120-day rule;" Rather than leave it to the courts to determine if a bank has correctly applied the 120-day rule, the ABA wants the CFPB to specify how the rule applies to rolling delinquencies. The ABA also restated its view that servicers should not be required to provide periodic statements for charged-off mortgage loans. If the CFPB continues to require periodic statements for charge-offs, the ABA suggests there may be value in the CFPB adopting a provision that parallels the periodic statement exemption for open-end credit. The ABA urges the CFPB to finalize as published its interim final rule providing limited exemptions from the servicing rules in situations where the borrower has filed for bankruptcy. The ABA also recommends that if the CFPB elects to issue a final rule that does not include the current exemptions, it engage in a notice and comment process that will allow servicers to provide input on the rule before it is finalized. 

It is pretty interesting when you put an investor's (like a pension fund) representative in a room, and ask them, "Did you rely solely on rating agency ratings to buy your security?" If the answer is "no", then how can they sue the rating agency? If the answer is "yes", well, then why weren't they doing their job? I bring this up because Bloomberg has a story about how banks are arranging a $1 billion commercial-mortgage bond deal tied to the Atlantis resort in the Bahamas but are poised to skip Standard & Poor's grades for most of the securities. "The ratings firm, which is facing a potential enforcement action by the U.S. Securities and Exchange Commission on commercial mortgage securities it rated in 2011, isn't offering preliminary grades on $617 million of senior portions of the transaction, according to a presale report from New York-based S&P. DBRS Ltd. and Kroll Bond Rating Agency Inc. are offering rankings as high as AAA. Bankers have been rethinking whether to hire S&P to rate commercial-mortgage bond deals after its parent, McGraw Hill Financial Inc., disclosed the potential SEC action on July 23. The regulator is probing six bond deals that S&P rated in 2011, including a $1.5 billion transaction that Citigroup Inc. and Goldman Sachs Group Inc. were forced to abandon when the firm yanked its grades after the notes were placed with investors." 

This week is another snoozer for scheduled economic news here in the U.S. But hey, who knows what might happen in Iraq, Israel, Russia, Korea... There isn't much until Wednesday the 13^th with Retail Sales (the total receipts at stores that sell merchandise and related services to final consumers - reportedly accounting for 2/3 of economic activity). Thursday we'll have Jobless Claims and some import price statistics. On Friday things pick up with the Producer Price Index, Empire Manufacturing, and the Industrial Production and Capacity Utilization duo. For the quantitatively inclined, the 10-yr closed Friday at 2.42% and this morning we're sitting around 2.43 with agency MBS prices roughly unchanged.

 

 Executive Rate Market Report:

Unchanged in the treasury market early this morning with US and Europe’s stock markets looking better. No economic reports today. The Iraq/Islamic State; still a concern but the Kurds did re-take some of the ground the militants took last week with the help of US bombs. Iraq politics getting messy; the president of Iraq appointed a different prime minister from the one presently holding the job, setting up a major confrontation between the two politicians. The president acknowledged Saturday that U.S. spies and policy makers had underestimated the group, also known as ISIS and ISIL. "There is no doubt that their advance, their movement over the last several months has been more rapid than the intelligence estimates, and I think the expectations of policy makers both in and outside of Iraq," he said. Ukraine/Russia, not much new over the weekend. A little less tension than last week, but the undertone is still alive and well as it is in Iraq and the mid-east in general. The focus currently is in the Islamic State attacking key Kurdish and Sunni positions but the situation in Syria is beginning to re-boil. Geo-political conditions are likely to continue to drive investors into the arms of US treasuries and help to keep mortgage rates frm increasing. These global issues have a life of hours at times; one day a lot of concern, the next not so much. As the various issues rise and fall in the troubled spots, the bond markets here and globally, ride the waves.

At 9:30 the DJIA opened +45 after increasing 186 on Friday, the NASDAQ opened +19 after jumping 36 on Friday, the S&P +7 after increasing 22 on Friday. The 10 yr note rate unchanged frm Friday at 2.42%; 30 yr MBS prices +6 bps frm Friday’s close. There are no economic reports out today. Last Friday the strong rally in the stock markets was on optimism the tensions in Ukraine and Iraq are likely to ease. That view is following through this morning but those positive views are built on soft foundations and can, (will) change on a dime.

All the technicals we track remain bullish for the bond and mortgage markets, the stock market rallied Friday and so far this morning; good news for 401Ks but the volume on Friday and likely today was very thin, low volume does take a little away from the improvements; the last two weeks of August usually are slow in financial markets so movements can be exaggerated somewhat. This week is Treasury re-funding, it occurs every quarter with issuance of a new 10 yr note and 30 yr bond, other than that there is little significant difference between the monthly 10s and 30s other than re-opening the current on the run note and bond. Demand will drive attention in this present geo-political bouncing ball. Market volatility is possible this week on developing news out of the mid-east and Ukraine.

This Week’s Calendar:

Tuesday,

10:00 am June JOLTS (job openings) (4.588 mil frm 4.635 mil in May)

1:00 pm $27B 3 yr note auction

2:00 pm July Treasury budget (-$96.0B)

Wednesday,

7:00 am weekly MBA mortgage applications

8:30 am July retail sales (+0.3%; ex auto sales +0.4%)

10:00 am June business inventories (+0.4%)

1:00pm $24B 10 yr note auction

Thursday,

8:30 am weekly jobless claims (+6K to 295K)

·  July export prices (-1.0%) July import prices (-0.2%)

1:00 am $16B 30 yr bond auction

Friday,

8:30 am July PPI (+0.1%; ex food and energy +0.2%)

·  August NY Empire State manufacturing index (20.0 frm 25.6 in July)

9:15 am July industrial production and capacity utilization (production +0.3%, capacity utilization 79.2% frm 79.1% in June)

9:55 an U. of Michigan mid-month consumer sentiment index (82.3 frm 81.8)

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Ellie Snags AllRegs; What Investor & Builder Earnings Tell us about the Industry

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Mergers continue - and every one of them hopes it works out (and not like the cover of The Economist titled "The Trouble with Mergers"). New York City-based credit union Education Affiliates Federal Credit Union voted to merge its members and assets with McGraw-Hill Federal Credit Union. The credit union brings 3,779 members and more than $50 million in assets to McGraw-Hill. The East Windsor-based credit union will have 24,000 members and more than $353 million in total assets as a result of the merger. 

But specific to the mortgage biz, Ellie Mae announced plans to acquire AllRegs for $30 million in cash. "The acquisition of AllRegs expands Ellie Mae's position as the industry's market leader of mortgage technology, content and services. AllRegs information management solutions are used by more than 3,000 companies representing every facet of mortgage banking: major lenders and investors, regulators, Federal and State agencies, brokers, mortgage services vendors and law firms. AllRegs product offerings include education and training, loan product and guideline data and analytics, and the AllRegs online reference library that includes investor underwriting and insuring guidelines, federal and state statutes and regulations, Mortgage Mentor 'how to' guides and plain language interpretation and analysis." 

Although Wells Fargo & Chase tend to lead off the bank earning season, we have continued to have a plethora of 2^nd quarter earnings. Here is a random collection of mortgage company-related earnings, certainly highlighted by the continued success of the agencies, which can give us a clue as to the trends in mortgage company revenues. 

Stonegate had operating EPS which excludes a $10.7 million negative MSR valuation adjustment and a small amount of stock comp expense. 2Q origination volume came in at $3.31 billion, up from $2.42 billion in 1Q and gain-on-sale margins increased QoQ to 141 basis points: the higher volumes and a higher gain-on-sale margin beat estimates. (Rate locks per day averaged $72.8 million in 2Q versus $55.0 million in 1Q14.) The period-end servicing portfolio was $16.7 billion of UPB, up from $14.1 billion in 1Q. 

D.R. Horton reported earnings where orders increased 32% in value and 25% in units. The cancellation rate was 24%, though. Interestingly, gross margins fell: many builders have been able to increase prices faster than input costs have gone up. There were some special items in that number so the year-over-year decrease could be misleading.

Nationstar Mortgage Holdings, Inc. had earnings per share of $0.74. The servicing pipeline was flat at $300 billion but the servicing portfolio decreased during the quarter. Servicing operating earnings excludes $25.7 million of one-time expenses related to the sale of servicing advances and fair value mark on the MSR. The quarter-end servicing portfolio was $378 billion (UPB), down from $384 billion last quarter. Origination volume of $4.4 billion was down from $4.7 billion. Gain-on-sale income increased to $151.2 million from $116.2 million Q/Q. Based on total closings, the GOS margin came in at 3.93% from 2.72%, and the total application pipeline increased to $5 billion from $3.5 billion in 1Q, while the recapture rate during the quarter decreased to 32% from 49% sequentially. 

PennyMac Mortgage Investment Trust earnings came in better than expected, possibly due to higher valuation gains on non-performing loans. PennyMac reported GAAP and operating EPS of $0.91, up from $0.50 in 1Q, due in large part to +$0.40 per share of valuation changes and payoffs of mortgage loans. Book value increased to $21.27 from $20.88. The company also carries some of its MSRs at lower of cost or market (LOCOM) and noted that fair value of MSRs is $20.5 million ($0.28 a share) above carrying value. Net gains on investments totaled $73.1 million, up from $42.6 million QOQ and driven by rising prices on NPLs and RPLs in the market place and home price appreciation. On the mortgage banking side, the gain-on-sale margin decreased to 34 bps vs. 52 bps last quarter (as a percentage of closings). Mortgage volume rose to $7.0 billion from $4.8 billion Q/Q.  

Radian's second quarter 2014 financial results were good with "Net income of $175 million, or $0.78 per diluted share. It executed its growth and diversification strategy through the acquisition of Clayton - a leading provider of outsourced mortgage and real estate solutions. Radian is the largest MI company with $165 billion in insurance in force. Shrinking legacy FG book - 82% decline since the company stopped writing new business in 2008." 

Bloomberg writes that "Radian Group Inc. bought $100 million of default protection on an MBIA Inc. unit to help hedge against losses on a collateralized loan obligation backed by the two insurers. Radian is the second insurer, behind MBIA Insurance Corp., on a guarantee of about $377 million on a CLO called Zohar that's backed by loans to smaller companies. Radian purchased half of the protection in August 2013 and the rest in June. Radian's CFO noted, 'We think there's certainly a risk of them defaulting, given their structured-finance portfolio, and also quite frankly their exposure to the transaction.'") 

Richmond American Homes (M.D.C. Holdings) saw net income of $21.5 million, or $0.44 per diluted share vs. net income of $224.9 million, or $4.55 per diluted share and pretax income of $34.0 million vs. $38.0 million. Net new orders were up 5% to 1,419 homes with the dollar value of net new orders of $544.8 million, up 12%. Home sale revenues were $430.7 million, up 8% vs. $400.3 million and average sales price increase of $33,600 per home, or 10%, to $372,000. Homes delivered totaled 1,158 down slightly from 1,183. "For the homebuilding industry as a whole, the spring selling season was modestly slower than a year ago, highlighting volatile conditions in the short-term as the industry continues down a broader path of long-term growth. We saw hesitation from some potential buyers, especially in the first-time buyer segment, following a significant run-up in home prices in 2013 and tepid economic trends that have persisted for much of the past year." 

PulteGroup announced average selling prices rose 12% to $328,000, and gross margins came in at 23.6%, up 480 basis points year over year. Closings dropped 9% in units, however, so Pulte looks to be following the typical builder pattern of higher prices / lower units. 

(The WSJ has a good piece on the weakness of housing, particularly housing construction. As we know, housing starts have been mired below 1 million units for what seems like forever. Normalcy is around 1.5 million units historically. When you look at residential construction's contribution to GDP, it is been about 2.5% - 3%, much lower than its pre-bubble level of 4% to 5%. Not only that, but residential construction usually leads an economy out of recession.) 

Freddie Mac and Fannie Mae each reported out another successful financial quarter as each continued to reduce their respective distressed loan portfolios, replacing them with later vintage performing loans. Neither, however, reported profits at the record levels seen earlier as their portfolios shrink and legal settlements taper off. "The increase in credit-related income was due primarily to an increase in home prices," Fannie Mae said in a statement. Fannie Mae reported net income and comprehensive income of $3.7 billion for the second quarter of 2014 while Freddie Mac's net income was $1.4 billion.  Fannie Mae will pay $3.7 billion in dividends to the U.S. Treasury in September and Freddie Mac will pay $1.9 billion. Once Fannie has made the latest payment in September, it will have returned $130.5 billion to taxpayers in return for the $116.1 billion in taxpayer aid it received. The GSEs in aggregate will have sent the Treasury Department nearly $219 billion in cash payments on its $189.4 billion in senior preferred stock by the end of Q2 2014. 

Two Harbors Investment, a big buyer of servicing, reported GAAP and operating EPS of $0.11 and $0.24, respectively. The difference between GAAP and core earnings reflected realized and unrealized gains on assets and derivatives. Operating EPS of $0.24 was flat with $0.24 in the prior quarter and up from $0.21 Y/Y. The net interest spread decreased to 3.38% from 3.44% in the prior quarter. The yield on Agency RMBS, derivatives and MSRs (the rate portfolio) decreased to 3.7% from 3.8%, while the rate on non-agency MBS decreased to 9% from 9.2%. At quarter end the company's MSR stood at $500.5 million from $476.7 million Q/Q and represented loans with a UPB of $45.6 billion (from $41.6 billion Q/Q). The company added a previously announced $4.6 billion bulk MSR acquisition during the quarter as well as flow amounts. 

Redwood Trust, Inc. had lower mortgage banking gains, although core earnings was negatively impacted by timing differences on jumbo pipeline hedges. Book value decreased to $15.03 from $15.14 on the dividend in excess of earnings, as well as a higher share count. Redwood had lower mortgage banking income, along with slightly higher expenses. (Redwood reported income of $6.3 million from mortgage banking activities in 2Q, up from a $0.7 million loss in 1Q.) Residential loan acquisitions totaled $1.8 billion during the quarter: conforming loan acquisitions of $868 million was up 190% from 1Q and management is shooting for $1 billion a month by year-end. Redwood completed only one residential securitization during the quarter, consisting of $351 million of jumbo loans. The company also completed a second securitization of $306 million that closed in July. Management noted that jumbo gain-on-sale margins came in above the high end of its targeted 25 bps to 50 bps range but that conforming margins were around break-even. This reflects both the more competitive nature of the conforming market and the fact that the company is building out its conforming business and rapidly taking market share. The residential pipeline looked good at $2.0 billion, which includes $1.6 billion of jumbo volume and $400 million of conforming loans.

 Overall, second-quarter earnings at the country's largest mortgage banks met analyst expectations, according to a recent report from Keefe, Bruyette & Woods. Mortgage activity increased from the previous quarter, but remained well below last year's results, the report showed. "A rise in originations boosted second-quarter profits at the ten largest banks, including Wells Fargo, JPMorgan and Bank of America. Origination volumes climbed 22% from the previous quarter, to $108.4 billion. Originations were 60% lower, however, than the same time last year. Gain-on-sale margins were generally flat, due to strong industrywide competition. The average margin was 202 basis points, or one basis point higher than the previous quarter." 

Yes, rates are better this morning - because of turmoil overseas and possible air strikes in Iraq. We saw a 2.42% close on the 10-yr., and in the early going rates are down nicely with the 10-yr yield at 2.40% and agency MBS prices lagging but better by a shade. This is the lowest yields have been all year, and is certainly lower than the 3.00% where we began 2014 - so far proving all the "experts" wrong about higher rates. 2^nd quarter productivity - the only news - came in at +2.5% and labor costs were +.6%. 

 Executive Rate Market Report:

Last night the President authorized air drops of supplies to support fleeing people frm the Islamic State, he also authorized controlled air strikes to assist the refugees, mostly Yazidis, a religious group in northern Iraq. The Yazidis are an ethnically Kurdish group that follows an ancient pre-Islamic religion with links to Zoroastrianism (sure you know what that is). Some 500,000 Yazidis reside in northern Iraq, the Islamic State have targeted the group and other religious minorities, displacing an estimated 200,000 civilians, mostly Yazidis, according to the United Nations. The reaction overnight sent the 10 yr note to 2.35%, the German bund to 1.02%. By 8:00 this morning markets have settled down; the US stock indexes pointing to a better open after selling off 100 points overnight the futures markets, the rate markets coming off the lowest levels. No ground military personnel is likely according to the President last night in his announcement. Just out; the US has started air strikes on the Islamic State militants.

Ukraine/Russia: Germans increased their support of increased sanctions; 82% of Germans in a new survey say Russia can’t be trusted. The poll marks a sharp shift in public opinion. A survey by the same pollster published on March 7 showed only 38% of Germans supporting economic sanctions. Ukraine is considering halting the supplies of gas through Ukraine to Europe. Reports that in Russia there are recruiters looking for more Russians to go to Ukraine. In a news report Russia wants to de-escalate the crisis in eastern Ukraine, easing the Iraq concerns in markets. Not really possible to anticipate anything now in all the global fears; it ebbs back and forth daily. The latest reports have Angela Merkel and Putin are talking.

US and global markets are completely focused on what is happening (and what may happen) in Ukraine and the mid-east; on Wednesday we reported the situation(s) in the mid-east are escalating and likely will continue to do so. How? Not an answer even our government can anticipate. Look for the mid-east turmoil to gather momentum now; Syria, Jordan, Lebanon, Iraq, Iran, and Israel beginning to heat up again. Economic outlooks and data will not carry as much importance as usual as long as all these situations continue to boil.

This morning Q2 productivity was expected to have increased 1.4%, as reported +2.5%; Q2 unit labor costs were expected +1.6%, as reported +0.6%. Q1 productivity was revised frm -3.2.% to -4.7%; unit labor costs revised frm +5.7% to +11.8%. June wholesale inventories were expected to have grown 0.7%, as reported inventories grew just 0.3%, sales were up 0.2%, May sales +0.7%. May inventories revised to +0.3% frm +0.5%. A negative for Q2 GDP.

Good news for the mortgage markets; Fair Isaac announced it is changing how credit scores are calculated. It will stop including any record of a consumer failing to pay a bill if it has been paid or settled with a collection agency, and adding less weight to unpaid medical bills that are in collection.

At 9:30 the DJIA opened +26 after being down 100 points last night in the futures trading; NASDAQ +5, S&P +4; 10 yr note rate 2.39% -2 bp, the low early this morning 2.35%. 30 yr MBS prices +8 bps frm yesterdays close.

Rate markets continue to decline (rate); no matter the comments or news these days investors and traders are buying insurance in US treasuries and pulling mortgage rates lower with it. The US stock market is technically bearish, the bond market technically bullish. Trying to anticipate all of the fundamental issues globally and domestically is difficult; go with how markets are acting instead of focusing on the fundamentals and trying to understand all the details. Fundamentals drive markets, but how they influence price action is best measured by technical factors because market action encompasses everything driving markets---some well-known, some not well-known yet it is all imbedded in the price movements.

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Why Mergers Work - or Don't; Non-QM Continues to Grow; What is RMBS 3.0?

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Ah yes, it's almost that time of year again when the first "Back to School Sale" signs start going up; children everywhere get that 'time is running out' look on their faces...and parents get that 'thank God' look on theirs. It is August, and summertime will be winding down and vacations will be coming to an end, signaling that back-to-school time is near. The U. S. Census Bureau has done some statistical analysis on the issue. Here's a good one: $8.6 billion is the estimated amount of money spent at family clothing stores in August 2013. Sales at bookstores in August 2013 were estimated at $1.6 billion (if you remember college bookstores, the same books will be sold back at a considerable discount...leaving liberal art majors to take over the cafeteria in protest, and economics majors to think about secondary market opportunities); the number of children and adults enrolled in school throughout the country in October 2012 was 78 million. $82,720 is the average earnings of full-time, year-round workers 18 and older with an advanced degree (bachelor's degree or higher) in 2012. Workers whose highest degree was a bachelor's had mean earnings of $70,432. Mean earnings for full-time, year-round workers with a high school diploma (includes GED certificate) was $41,248, while workers with less than a ninth grade education had $26,679 average earnings.

What's the week without some mergers and acquisitions? KBW announced that Independent Bank Corp., parent of Rockland Trust Company, and Peoples Federal Bancshares, Inc., parent of Peoples Federal Savings Bank, announced they will be merging. And here's another one: Peoples Bancorp Inc., parent company of Peoples Bank, National Association, and NB&T Financial Group, Inc., the parent company of Wilmington, Ohio-based The National Bank and Trust Company ("NB&T"), also plan to join up. Friend Bank ($70mm, AL) will acquire City Bank of Hartford ($55mm, AL). In Florida First Commerce Credit Union ($407mm) will acquire First National Bank of Crestview ($89mm). In Kansas TriCentury Bank ($4mm) will acquire 2 branches from Equity Bank ($1.2B). Bank of the Ozarks ($5.0B, AR) will acquire Intervest National Bank ($1.6B, NY) for $228.5mm in stock or about 1.1x tangible book. Alloya Corporate Federal Credit Union ($2.9B, IL) will acquire System United Corporate Federal Credit Union ($995mm, CO). FHLB Des Moines ($82.2B in assets and 1,500 members) is reportedly exploring merging with or acquiring FHLB Seattle ($36.5B in assets and 330 members).

Centennial Bank ($6.8B, AR) will acquire Broward Bank of Commerce ($172mm, FL) and Exchange Bank ($518mm, NE) will acquire The First National Bank and Trust Company of Junction City ($112mm, KS). And Old National Bank ($9.4B, IN) will acquire Founders Bank & Trust ($466mm, MI). 

Why is it that every week banks and other lenders announce plans to merge? For banks, most seek to merge to capture more customers, geography, or product lines. This boosts market share and usually adds assets. After the event, back office functions are consolidated, redundant staffing is eliminated, and efficiencies are squeezed out to get more value. In theory this all works to improve performance. But the reality is that sometimes it does, and sometimes it doesn't. Why don't mergers work? Reasons vary with each deal, but for sure mergers "upset the apple cart" for employees and customers alike. This can diminish a brand and cause the exodus of important employees and customers. Mergers can also bring about unexpected problems. Who will pay the legal bills for old problems not discovered during due diligence? As with some marriages, banks have seen their fair share of horror stories.  

Many of these were related to regulator arranged mergers at the height, and rapid pace, of the financial crisis. Think back on JPMorgan and WAMU, the BofA acquisition of Countrywide, and Wells Fargo's acquisition of Wachovia, and follow the money to the large fines and settlements that ensued as a result of prior issues with those acquired companies. Once again, all over the media this morning is the possible settlement between Bank and America and the Department of Justice. (As I write this, I don't know if there is an actual settlement to shake hands over, or that they're only very close.) $17 billion is a lot of doubloons.  

We also have news of a HUD suit with Allied Mortgage, although as best one can tell none of the Allied executives who were involved in the massive mortgage fraud and cover-ups have been criminally indicted by the Federal Government: they have been civilly charged not criminally. The story about HUD, FHA, the DOJ, Allied, and (now) Allquest Mortgage is the stuff of novels, per insiders.  

Companies everywhere are faced with the QM versus non-QM decision. Non-QM loans are not subprime loans, and although I believe that the QM box is small and excludes plenty of borrowers, the CFPB has gone on record as saying non-QM loans are not bad loans, just that they don't fit the QM box. And as we know, the growth, of non-QM lending has grown, much of it funneled into bank balance sheets. 

Many companies are offering expanded programs. Angel Oak, for example, is offering a jumbo program for borrowers one day out of foreclosure, where short sales or bankruptcies are okay, mortgage lates are okay, and some programs will offer loans to borrowers with FICO scores as low as 500. 

This week Northern California's RPM Mortgage rolled out new products for "Non-Qualified Mortgage Borrowers." (Note to marketing staff: make sure that this is not read as "mortgages for non-qualified borrowers.") The RPM Tailored Line of Loan Solutions bills itself as "Innovative Loan Solutions for Self-Employed and Retired Borrowers Limited by New Regulatory Guidelines." "RPM's Tailored Line provides innovative solutions for the self-employed or the recently retired who have considerable equity, assets and credit but may be challenged by income verification requirements, which have limited their borrowing options in the past. In addition, these solutions give options to borrowers with a short credit history, credit scores that are marginally outside of the guidelines, or a loan to value outside of QM's established 43% ratio." It includes, alternative income verification for the self-employed, requiring only one year of tax returns, 50% LTV for up to $4 million in borrowing for those with substantial assets, considerable equity and excellent credit, and 65-80% funding on loans from $250,000-$4 million for borrowers with a robust investment portfolio." 

Plaza Home Mortgage and CastleLine announced news addressing the perceived repurchase risk that every lender lives in fear of. "In order to help mitigate the financial risk and operational burden caused by repurchase demands, the Plaza Home Mortgage Correspondent Lending Division has launched CastleLine's Certified Loan Program. Using CastleLine's program, Plaza Home Mortgage will protect its correspondent lenders at no additional cost to them, thus substantially mitigating correspondent repurchase risk. The program protects Plaza Home Mortgage, its correspondent partners and investors from loan manufacturing defects such as underwriting errors, fraud and misrepresentations, including defects from compliance, miscalculation of income, occupancy, undisclosed debts and appraisal issues." (Contact Justin Vedder for information on CastleLine's product.)

And for some other relatively recent lender updates...

Flagstar Wholesale Lending has a new Conforming One-Close Construction Program effective as of July 8th.

First Community Mortgage Wholesale is raising the minimum credit score requirement for RD loans to 640: fcmkc bulletin 2014-07a.

Wells Fargo Funding restructured and simplified Non-Conforming pricing to reflect purchase pricing effective August 1st.

U.S. Bank Home Mortgage now requires lenders to provide the Index Rate Percentage by writing it in the upper right hand corner of either the Closed Mortgage Loan Transmittal or the Closed Loan Stacking Order effective August 1st. additionally; effective July 28th, Final Verbal VOE for non-self-employed borrowers will be required. 

Weslend Financial Wholesale has expanded its USDA product guidelines; enhancements include 600 minimum FICO and transferred appraisals allowed. 

M&T Bank is following Freddie's lead on the Freddie Mac Open Access program the amount of proceeds permitted to use to pay closing costs and prepaids to a maximum of 5000.  Additionally, VA Appraisal fees are changing as of August 1^st per VA revised information letter 26-14-01. 

US Bank posted large deposit requirements effective immediately for conventional agency loans Requirements.

The U.S. mortgage-bond industry, through the Structured Finance Industry Group, is taking steps toward creating standards meant to help kick-start sales as the government seeks to wean the housing market from its support. It released the first in a series of papers mapping out its effort to create recommended contract language for new securities. About 200 individuals from 50 companies are working on the project, called RMBS 3.0.

 

Looking at rates, volatility has hit the US asset-backed securities market this week. Investors are looking at car, country club, mortgage, commercial, lease, etc. deals, and monitoring their price & yield spread compared to Treasury securities. (Obviously the higher the perceived risk, the larger the yield spread.) There was very little in the way of scheduled economic news yesterday in the United States, and it has been relatively quiet in Israel and the Ukraine. We've had the only news slated for today: Initial Jobless Claims came in at 289k, down 14k. The 10-yr. T-Note is pretty much unchanged from Wednesday's close (2.47%) and agency MBS prices are also roughly unchanged.

Executive Rate Market Report:

Very early this morning the 10 yr yield fell to 2.445% (again) and since then has held the resistance that has stopped any rate declines for a month now. Weekly jobless claims were out at 8:30. Expected to be up 3K but fell 14K to 289K. The four-week average, a less-volatile measure than the weekly figure, dropped to 293,500, the lowest since February 2006, from 297,500 the week before. Jobs are increasing each month based on BLS monthly employment data as employers are not firing much anymore as the economy improves, slowly, but it is improving. We won’t go there about the quality of the jobs being created, most of our readers know that the quality isn’t very good in terms of hours worked and income earned.

Ukraine/Russia still a serious issue and as it continues large investors and traders continue to hedge against further developments that could escalate and involve other East European countries. Doesn’t seem likely now but situations like this can change rapidly. Yesterday Russia moved another 20K troops to the Ukraine border driving Europe’s stock market down hard and initially dragged the US equity market lower before recovering to essentially unchanged by the end of the day yesterday. Russia banned U.S. and European food imports including cheese, fish, beef, pork, fruit, vegetables and dairy products today. Putin’s government also restricted such imports from Canada, Australia and Norway as it sought to retaliate against nations that have imposed or supported sanctions against Russia. Tit for tat, Russia’s sanctions won’t cause much of a problem but adding more troops does have a worrisome influence.

This morning the geo-political issues, while still there, are being pushed aside since nothing new developed today. Today, at least at the beginning, traders looking more at some better earnings reports and pushing stock indexes higher at the 9:30 open. The ECB meeting didn’t have any new initiatives to stop the decline in Europe’s economies and left its base interest rate unchanged. Yesterday Italy reported its quarterly GDP declined for the second quarter, that qualifies as a recession in the country; Portugal, Spain and all EU economies are suffering frm the sanctions levied on Russia. Mario Draghi saying he doesn’t know what to do (my interpretation). He said the obvious; heightened geopolitical risks could hurt growth. Stock markets in Europe are declining; even Germany’s stock market is down 10%, the best in the region.

The DJIA opened +36, NASDAQ +18, S&P +7; 10 yr note unchanged at 2.47% after 2.44% earlier today; 30 yr MBS prices unchanged frm yesterday.

Interest rate markets, primarily treasuries, will likely continue to be well supported with global stock markets weak; the US stock market after the recent declines is technically bearish. The DJIA is trading under its 100 day average; S&P futures are slightly better, holding just above its 100 day average. The momentum oscillators on the DJIA and S&P are approaching near term oversold levels; a potential for some improvement on a near term basis. US is better than global economies but can’t be expected to gain much on just US growth; like Hillary once said, “it takes a village”.

We don’t expect interest rates or prices will change much today; or in the immediate future. Russia isn’t about to launch an invasion of Ukraine anytime soon; and likely not at all; but that won’t lessen the concerns and the move to safe haven in US treasuries. MBSs won’t change much today. The bullish technical bias remains and is important, never overlook the actual trading, the best way to judge reaction to any news. The 10 still has a positive bias; as long as stocks are not improving and Ukraine is in the news there is little likelihood rates will increase; equally there isn’t any momentum to push rates lower unless geo-political events worsen. We are not ignoring the increased tensions in the mid-east; not much news but there are growing tensions in Iraq, Syria, Jordan, Turkey and Iran that are being monitored closely.

PRICES @ 10:00 AM

10 yr note: +3/32 (9 bp) 2.46% -1 bp

5 yr note: +1/32 (3 bp) 1.64% -1 bp

2 Yr note: -1/32 (3 bp) 046% -1 bp

30 yr bond: +5/32 (15 bp) 3.26% -1 bp

Libor Rates: 1 mo 0.158%; 3 mo 0.234%; 6 mo 0.328%; 1 yr 0.555%

30 yr FNMA 4.0 Aug: @9:30 105.52 unch (-4 bp frm 9:30 yesterday) 3.5 coupon 102.34 unch (-15 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Aug: @9:30 103.37 -7 bp (-7 bp frm 9:30 yesterday)

30 yr GNMA 4.0 Aug: @9:30 106.20 -2 bp (-7 bp frm 9:30 yesterday) 3.5 coupon 103.44 +3 bp (unch frm 9:30 yesterday)

Dollar/Yen: 102.34 +0.24 yen

Dollar/Euro: $1.3350 -$0.0033

Gold: $1305.60 -$2.60

Crude Oil: $97.08 +$0.16

DJIA: 16,501.88 +58.54

NASDAQ: 4375.93 +20.88

S&P 500: 1925.83 +5.59

 

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