In
preparing to write a small blurb about the Unmarried and Singles Week
that starts in 10 days, which, as best I can tell, is nowhere near Valentine's
Day, I Googled "top songs about being single." Bon Jovi's It's My Life topped
three lists I reviewed, along with some fellow named Lil' Wayne...which
ironically is the same nickname I gave an intern back in '93 (I'll assume they
aren't the same guy). According to the Census Bureau, 105 million is the
number of unmarried people in America 18 and older in 2013, and making up 44%
of all U.S. residents 18 and older; 62% is the percentage of unmarried U.S.
residents 18 and older in 2013 who had never been married, with another 24
percent being divorced and 14 percent being widowed. And 18 million is the
number of unmarried U.S. residents 65 and older in 2013. These seniors made up
17 percent of all unmarried people 18 and older.
The
commentary's note yesterday about USDA changes caused a flurry of
e-mails. To clarify/repeat, the "4 basis point to 5 basis point"
annual premium change, and its resulting state-USDA-level complications &
delays, still takes place in 20 days. The USDA has temporarily
suspended (until October 2015) its process for determining if
an area is still "rural in character" (RIC) and
therefore, still eligible for USDA guaranteed mortgages. "Several areas
were in danger of losing their eligibility because new development has
taken place and it is necessary for USDA to now determine if the area
is still RIC. USDA says this suspension will allow time for it
to thoroughly review and apply its RIC process for these areas. More
information about this USDA announcement and the RIC process can be found in
the FAQs here.
Mergers
& acquisitions continue to motor along. In Maryland, Congressional Bank
($430mm) will acquire American Bank ($456mm) for an undisclosed sum. Over in
Arkansas Farmers Bank & Trust Company ($885mm) will acquire 1st Bank
($311mm) for about $32mm in cash. BB&T Corporation (NYSE: BBT) and The Bank
of Kentucky Financial Corporation (NASDAQ: BKYF) announced the signing of a
definitive agreement under which BB&T will acquire The Bank of Kentucky in
a cash and stock transaction for total consideration valued at approximately
$363 million. This acquisition will establish a presence for BB&T in the
Northern Kentucky / Cincinnati market. (The Bank of Kentucky, headquartered in
Crestview Hills, Ky., has $1.9 billion in assets, $1.6 billion in deposits and
32 banking offices.) And after the latest sale of Texas branches is concluded, Citigroup
says it will have reduced its footprint by 11% since the end of last year and
its banks will only operate in 13 states in the U.S. The company's retail
banking business has been struggling. Income from continuing operations at the
unit fell 46 percent in the second quarter. Revenue from the business accounts
for nearly a quarter of total revenue. The bank had 3,463 branches in 35
countries as of June 30, with a little over a third of them in North America.
Forget
the Federal Reserve, NCUA, OTC, or the FDIC - everyone is talking about Federal
Home Loan Banks. As an example, the director of the regulatory agency
overseeing the FHLB system, Mel Watt, said in a recent speech that the agency
is not opposed to the proposed merger of FHLB Des Moines and Seattle. His
support could mean bankers will see more FHLB mergers in the future. This spate
of FHLB news in recent months has people wondering, "Who, what,
why..." First of all, traditionally community banks, thrifts, commercial
banks, credit unions, community development financial institutions and
insurance companies are all eligible for membership in the Federal Home Loan
Banks. The Federal Home Loan Banks are a group of cooperatives that lending
institutions use to finance housing and economic development in local
communities.
They've
been around for the better part of a century. The FHLB system was set up in
1932 after a string of bank failures caused by runs on deposits, and has
accepted insurers since its start. Members buy stock in the institutions and
get access to low-cost, wholesale funding in return for pledging collateral
such as mortgages.
And
get this: about 80 percent of U.S. lending institutions relies on the Home Loan
Banks for low-cost funds. Because the Home Loan Banks are cooperatives, their
low costs are supposedly passed on to consumers and communities, and they don't
have the pressure for high returns that they otherwise would have if their
stocks were publicly traded. The returns they do make go directly toward
replenishing their ability to keep a reliable supply of funds flowing to
communities through local financial institutions. Federal Home Loan Banks
require their members to put up collateral against the advances they receive.
If you want to do a little research on your own, feel free: FHLB.
But
returning to recent news about them, the overseer of the Federal Home Loan
Banks (the FHFA) is planning changes to membership rules that would keep
investment firms and lenders lacking customer deposits out of the U.S.
government-chartered system. Bloomberg wrote earlier this month, "The
FHFA, which has voiced concern that firms are using specialized insurers to
join FHLBs, (is) proposing new rules limiting insurer access to home-loan banks
to companies dealing primarily with 'non-affiliated persons.' The existing
memberships of captive insurers -- which mainly offer coverage to their owners
or customers of those parent companies -- would be 'sunset' over five years.
Real-estate investment trusts that buy mortgage debt and other lenders known as
shadow banks have been using captive insurers to flock to the FHLBs in recent
years for dependable funding that can offer better terms than traditional banks
or bond markets. FHFA Director Melvin Watt said in a May speech that the new
members could raise "issues" for the safety of a system with $815
billion of debt that's seen by investors and credit raters as being backed by
taxpayers. Captive insurers should remain a part of the FHLBs' membership base
because they help support the U.S. housing market, which is the system's
mission set by Congress, said David Jeffers, a spokesman for the Council of
Federal Home Loan Banks, a trade group for the lenders.
Mortgage
REITs Redwood Trust Inc., Annaly Capital Management Inc., Invesco Mortgage
Capital Inc., and Two Harbors Investment Corp. have all joined the network of
regional lending cooperatives since October through captive insurers.
Commercial real-estate lender Ladder Capital Corp. joined in 2012. But a
recently started program in which Redwood will buy large mortgages from FHLB
members isn't tied to its own membership.
The
FHFA said other proposed rules include a new test requiring all members to hold
1 percent of their assets in home-mortgage loans, and a requirement that some
keep 10 percent in residential-mortgage loans on an ongoing basis. It will also
clarify how an insurer's "principal place of business" is identified
for determining the appropriate Home Loan Bank district.
Switching
gears somewhat, a while back Isaac Boltansky with Compass Point Research and
Trading LLC put out an interesting piece on a servicing bill that a House
Committee passed as a result of Basel III. On July 30 the House Financial
Services Committee advanced the "Community Bank Mortgage Servicing Asset
Capital Requirements Study Act of 2014" (H.R. 4042) out of committee
by a vote of 44 to 9 "which
caused a number of inbound questions from clients. We believe that H.R. 4042,
if enacted, would be an incremental positive for regional and community banks.
We include below our thoughts on this bill, its likelihood of passage, and its
potential impact.
"The
bill would require bank regulators to 'conduct a study of the appropriate
capital requirements for mortgage servicing assets for nonsystemic banking
institutions.' The study, which would have to be delivered to Congress no later
than 6 month after enactment, would have to consider a number of criteria
including the risk of mortgage servicing assets and the impact of Basel III
capital rules. H.R. 4042 would also delay the implementation of the mortgage
servicing components of Basel III for nonsystemic banking institutions for as
long as 9 months after the bill's enactment...(although) it contains no guarantee
whatsoever that the Basel III rules covering mortgage servicing assets for
covered banks would be softened.
"With
that being said, there is little doubt of the Basel III changes the industry
would push to enact. For example, the Mortgage Bankers Association (MBA) has
recommended the current MSR cap as a component of tier 1 capital be revised. As
the MBA states: 'MSRs are currently
limited by a 10 percent cap; MBA recommends the use of at least a 25 percent
cap for MSRs on the books of banks and a 50 percent cap for MSRs on books of
thrifts and savings and loans.' MBA also recommends that MSRs should be
excluded from the 15% aggregate cap for DTAs, MSRs, and equity interests."
Good job Compass!
Turning
to the markets, at this point, everyone knows that QE (Quantitative Easing) is
going to end around Halloween. While a tapering of QE could correlate to higher
rates, it doesn't necessarily cause higher rates. Correlation does not
equal causation. Historically, the Fed sets short term rates (like the
overnight Fed Funds rate); it does not set Treasury rates, or 30-year mortgage
rates. That is a function of supply and demand. So what the Fed has done is to
increase demand, thus increase the price of securities and thus keep rates low.
The market knows that the Fed will stop next month - but what will increase is
the potential for volatility!
We
certainly have not had much volatility (leading to intra-day rate changes) this
summer and yesterday was no exception. Today the news has picked up. We still
have a $13 billion 30-yr bond auction ahead of us, but we had Initial Jobless
Claims increase 11k to +315k - higher than expected. The newly auctioned off
10-yr. had a 2.53% close Wednesday, and in the early going we're at 2.52% with
agency MBS prices better by .125.
