Dec. 18: Mortgage co. opportunites; more on CashCall; the primary/secondary rate difference; higher agency fees will hurt agency production

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

Bitcoin trends aside, US household net worth was $77 trillion as of the end of Q3, up $1.9T Q/Q.  In the third quarter, the value of corporate equities and mutual funds owned by households expanded $917 billion and the value of residential real estate owned by households increased about $428 billion: http://www.federalreserve.gov/releases/z1/Current/z1r-1.pdf. As a byproduct/result, household “deleveraging” is leveling off. With the recovery in household wealth that has taken place over the past two years, the personal saving rate is now better aligned with its historical relation to wealth. Household mortgage debt increased at a 0.9% rate, the first increase since the recession, which helped to flip the household sector from a net lender to a net borrower for the first time since 2007. And how is this for news that will hurt the eminent domain movement: in Texas, less than 5% of mortgage holders are underwater on their home loans: http://www.dallasnews.com/business/residential-real-estate/20131217-less-than-5-percent-of-dallas-area-mortgage-holders-are-underwater-on-their-home-loans.ece.

 

Lenders are continuing to go after market share in a shrinking debt environment, in this case Impac’s correspondent division. In correspondent lending, the need for niche products to fill volume gaps is critical.  With the mortgage slowdown in the market along with rates being turbulent at best, it’s these alternative programs that can provide consumers with options. 203(k) programs have evolved quite well and Impac Mortgage Correspondent division offers a competitive edge with a high margin product that will draw positive attention. “Impac Mortgage trains both sales originators as well as operations with on-line webinars at no cost to our clients with a complete A-Z solution plus a dedicated inside team that answers questions and underwrites – tough to beat the opportunity.” For more information on becoming an approved seller, visit https://www.impaccorrespondent.com/application.

 

For originators looking for opportunities, IKON Financial Group is expanding its Retail Branch Network, and is looking for retail teams nationally. IKON  (www.ikonfg.com) “offers an aggressive comp structure, outstanding lead program, excellent benefits, and a wide variety of loan programs: FHA/VA/USDA, Conventional, Fixed, Jumbo, ARM, loans down to 530 FICO, and no overlays on its VA IRRRL loans. IKON is the 748th fastest growing company in the United States by Inc. 5000.”  Interested retail candidates may contact Chris Barker at chris.barker@ikonfg.com.

 

As a very important clarification to yesterday’s Franklin American news about ceasing jumbo fixed rate locks, the announcement came from FAMC’s correspondent division. To the best of my knowledge FAMC’s wholesale channel is still offering it. Brokers everywhere hope that this continues, although due to the constraints of implementing Appendix Q it is anyone’s guess whether or not that will happen.

 

Change is not necessarily good. Rumors continue to swirl of major changes in the residential lending sector, with the latest set focused on Impac’s retail channel. In Utah, Zions Bank announced that the Volcker Rule will impact it to the tune of -$387 million. The bank can no longer keep trust-preferred collateralized debt obligations issued by banks and insurers until they mature: http://www.businessweek.com/news/2013-12-16/zions-says-volcker-rule-leads-to-387-million-charge-for-cd0s.

 

And of course we all heard about the CFPB & CashCall. I received this note from an astute reader: “With respect to CashCall, the most interesting thing I saw was their attorney saying the charges are unfounded. Did you see that? Happen to see who their attorney is? It’s Neil Barofsky with Jenner & Block. If the name sounds familiar, it’s because Barofsky was the Special Inspector General for the TARP program. I believe it was he who was charged with finding & prosecuting TARP fraud. Kinda funny change of jobs, from policing TARP recipients to defending pay-day lenders.” Here is a Bloomberg article that mentions Neil along with the details of the suit: http://www.bloomberg.com/news/2013-12-16/colorado-joins-cfpb-in-suing-cashcall-short-term-lender.html. And speaking of CashCall, who can forget this Gary Coleman ad: http://www.youtube.com/watch?v=8rAYo0_GEuI.

 

“Some days, the best thing about my job is the chair that spins.” Yesterday could have been one of those days. We may recall that the industry is going to do about $1.7 trillion this year in business. Not bad – especially when compared to 2014’s estimated $1.2 trillion – a 32% drop. (Purchase business is expected up, but refi biz is expected to drop almost 60%.) One has to wonder if those industry estimates incorporate the gfee and loan level price adjustment hits announced recently.

 

The news has not quite filtered its way down to originators and Realtors, but Capital Markets crews everywhere are aghast at the LLPA (loan level price adjustment) changes in store April 1. I should clarify that: companies focused on non-agency or government (FHA/VA) loans are taking the news much better. The upfront fee hike takes mortgage rates for impacted borrowers close to FHA execution levels. Most do not expect the LLPA adjustment to drive a substantial portion of the PMI’s industry’s volume to the FHA, but on the margin conventional loan pricing inclusive of PMI is substantially less competitive. Will we see the intended influx of private capital, or banks focusing on portfolio product?

 

A quick cocktail napkin calculation shows after these changes a borrower with 720-739 credit putting less than 15% down will about 1.75pts (.10% in rate and another 1.25 in LLPA’s) more than they would today. I received this short note from a broker on the Atlantic Coast: “Since over 95% of the industry is Fannie, Freddie, and government, this is very bad for the industry, and more importantly the borrower. It is amazing that no one is suing for disparate treatment by this independent agency. I will not say it is sweeping discrimination, but if the government took the position that banks/bankers cannot price based upon risk assessment, then what makes Freddie & Fannie better qualified? It has been my experience, and observation of government employees that, regardless of the party in power or the best intentions the government, they are grossly under-qualified to make such financial decisions.”

 

Taking a broader look at things has some wondering if, given the impending change in leadership at the FHFA (DeMarco to Watt), this LLPA change will be rescinded or decreased. You can bet that the MBA and NAR will point out the huge negative impact on borrowers, and on housing. And let’s not forget the QM versus non-QM question, yet another factor in possibly decreasing mortgage credit availability to a significant segment of borrowers. Focusing on the LLPA changes, the most impacted borrowers will be those with relatively high FICOs (680-759) and LTVs above 85%. This represents a fairly significant portion of the borrower universe that utilizes PMI as conventional rates have been competitive relative to FHA rates for this subset of loans. The increase in fees goes into effect for loans delivered starting April 1, 2014 – but one can bet that due to rate lock periods, the changes will be implemented on rate sheets soon.

 

“The timing of it is impeccably bad,” said Lewis Ranieri, co-inventor of the mortgage-backed security. “The question becomes: how much can housing take?” In a WSJ story, he is quoted as saying that the “move would backfire and hit the economy. Because the private sector isn’t strong enough to lend more, ‘all this will do is tighten credit. You’re just making housing less affordable.’” Dave Stevens, president of the Mortgage Bankers Association, said, “What had been an exercise by regulators to systematically attract private capital into the mortgage market has now turned into an attempt to shock private capital back into the system. The new up-front risk-based pricing grid means that fees will increase the most for borrowers in the heart of the home-purchase market, those who have credit scores between 680 and 759 and who are putting down between 5 and 20 percent.” The actual announcements can be found here: https://www.fanniemae.com/content/pricing/llpa-matrix.pdf and

http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1326.pdf.

 

Okay, so there will be higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores. But as any lender knows, this group that represents a large share of home buyers, and we know that lenders will not absorb the hit. Fannie and Freddie currently back about two-thirds of new mortgages, and we’ll certainly see that drop when these price changes enter rate sheets. We’re already seeing jumbo (we’re going to have to start saying “non-agency”!) retail rates better than correspondent conforming rates in many markets. This will certainly continue, since non-agency loans don’t have explicit gfees. But historically, “private capital” has never accounted for a huge percentage of the overall market. The higher fees will make conforming mortgages even more expensive than jumbos/non-agency loans.

 

A question is often asked, “What could happen with housing in 2014?” Jeff Lewis, Senior Portfolio Manager of TIG Advisors (a hedge fund) — $1.8 billion AUM — Securitized Asset Fund (http://www.tiedemannfunds.com/tiedemannfunds/login.aspx), writes, “Homebuilder stocks have tended to be fairly good long-term predictors of future housing price movements.  S and P Homebuilders index is down negligibly this year despite double digit Housing Price Appreciation and strong revenue growth year over year for the component homebuilder stocks. Previous turning points for the homebuilders (a peak in late 2005 and a bottom in late 2008) anticipated underlying HPA trends by a year or two, but were ultimately correct in predicting momentum shifts for housing. In addition, the National Association of Realtors Housing Affordability data hovered around a record for cheapness in the vicinity of 200 for a couple of years before the housing market started to see price increases. We are now about halfway back to re-tracing to more normal historical levels of affordability. Given the likelihood of mid-high single digit gains next year that would be accompanied by somewhat higher rates, we could find ourselves in a fairly priced market, in terms of affordability by the end of 2014. To move from fair to expensive would require further stimulus, either from employment gains or government policy. So, the end of the boomlet could be in sight in 2015.”

 

If you drew the Secondary Markets guy in your banks “Secret Santa” pool, and he already has a stock pile of ketchup packets from McDonalds in his top desk drawer….fear not. Print out the New York Federal Reserve’s “The Rising Gap between Primary and Secondary Mortgage Rates (http://www.newyorkfed.org/research/epr/2013/1113fust.html) and call it good. In a very well written article the NYFR present a more detailed calculation of originator profits and costs, and then attempt to explain their rise by considering a number of possible factors. Their final conclusions, drawn by empirical data analysis, are a good read. The widening gap between primary and secondary mortgage rates over the period 2008 to 2012 was due to a rise in orig­inators’ profits and unmeasured costs, or OPUCs, as well as increases in g-fees. The magnitude of the OPUCs is influenced by MBS prices, the valuation of servicing rights, points paid by borrowers, and costs such as those from loan putbacks and pipeline hedging.

 

And speaking of secondary marketing, so what’s so important about “TIC”? Well, the Treasury International Capital Data which tracks the flow of Treasury and agency securities, as well as corporate bonds and equities, into and out of the United States, is a closely watched indicator by many. When your uncle on Christmas Eve (is it that time already?) says, “Japan basically owns us,” he’s actually referring to data being recorded in TIC. The July TIC data report released recently showed that overseas investor holdings of agency MBS increased by $3 billion in July versus declines of $16 billion and $19 billion in June and May, respectively. This modest increase in overseas investor holdings of agency MBS occurred following a $68 billion decline. More importantly, China’s holdings of agency bonds have increased significantly while Japan continued to reduce its agency bond holdings in July. See, your uncle is wrong….its China.

 

One can barely watch or listen, not that I watch or listen much, to all the yammering on the financial news networks about the Fed meeting results today, and the possible scaling back of security purchases by the NY Fed. Yes, it is going to happen. And let’s face it: if they do it, it is because they believe the economy is strong enough to handle it. Economists with Deutsche Bank said they expected the FOMC to announce $10 billion in tapering, but in Treasuries only.

 

Regardless, rates did just fine Tuesday. Agency MBS prices improved about .250, and the 10-yr yield closed at 2.84%. Today there is plenty to talk about: the MBA’s application index, Housing Starts and Building Permits, and a $35 billion 5-yr note auction. And then we’ll have the FOMC’s Statement and release of the Fed Summary of Economic Projections at 2PM followed 30 minutes later by the post meeting press conference by Chairman Bernanke. Today, given the pricing turmoil by the agencies, the last thing capital markets staffs need is interest rate volatility. In the early going, we’re nearly unchanged from Tuesday’s closing price and yield levels.

 

 

Huh? Something that makes fun of both LOs and Realtors? I couldn’t resist: http://theresource.tv/archives/loan-officer-stereotypes-a-spoof/.

 

 

Rob

(Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)