Apr. 11: CFPB on loan closings; how Chase & Wells mortgage earnings reflect the industry while lenders continue to sell their only asset: servicing

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...

What is the Economic Census? According to U.S. Secretary of Commerce, Penny Pritzker, “the economic census is one of the Commerce Department’s most valuable data resources,” ya, but what does it show? “By providing a close-up look at millions of U.S. companies in thousands of industries, the economic census is an important tool that shows policy at the local, state and national level, and helps businesses make critical decisions that drive economic growth and job creation.” Oh, OK.

 

Before I forget, a job ad yesterday for TruHome had the incorrect website (it was within the company at least). For those interested in TruHome, visit www.truhomesolutions.com, or contact Karen Steen at ksteen@cacu.com. TruHome Solutions, LLC is seeking a highly motivated and proven leader to join its leadership team as the Vice President of Mortgage Technology.

 

Hey, if you’re going to be around Washington DC on the 23rd, the CFPB has announced that it will be holding a forum on the mortgage closing process. The announcement states that the event will feature remarks from Director Cordray, and a discussion with consumer groups, industry representatives, and members of the public. The CFPB has indicated that the next phase of its “Know Before You Owe” initiative is to identify ways to improve the closing process.  To kick off that phase, the CFPB published a notice in the Federal Register in January 2014 in which it asked 17 questions intended to provide the CFPB with information about “what consumers find most problematic about the current closing process.”  The forum appears to be a continuation of those information gathering efforts.

 

April Fool’s Day has a way of sneaking up on people. So much in fact, on April 1st, the CFPB released its Small Entity Compliance Guide for the TILA-RESPA Integrated Disclosure Rule. As far as I can tell, it was neither an attempt to trick, nor published to deceive, in any way – maybe next year. As a reminder, the Bureau has organized the guide in a very informative and very reader friendly FAQ style, which includes a step-by-step guide for completion of both the Loan Estimate and the Closing Disclosure forms. As most know, applications received on or after August 15, 2015, the integrated disclosures must be used; for applications received prior to August 1, 2015 the old disclosure forms must be used: Compliance Guide.

 

The CFPB has certainly taken an interest in servicing. As this commentary has detailed several times in recent months, the servicing market has become quite interesting as lenders needing cash are peeling off chunks of servicing – one of the few assets a lender has – and selling them to non-banks like Stearns (servicing about $26 billion). This, of course, bypasses the aggregators, much to the concern of correspondent departments at Wells, Citi, Chase, US Bank, and so on, who are paying less for servicing. But this trend has regulators concerned, and by the time it makes Business Week we know it is a full-fledged event: http://www.businessweek.com/news/2014-04-09/nationstar-sees-more-deals-as-regulators-investigate.

 

So what’s recently been put out on the servicing sale block? Phoenix Capital is offering $411 million 100% Fannie Mae MSR’s, with bids due April 11th, and possessing a pool characteristics of: 86% Fixed30, 14% Fixed15, <1% ARM,  99% Current Loans; 1% DQ; <1% BK, 4.181% WaC, 746 WaFICO; 79% WaLTV, $176k WaLA, 54% Single Family; 82% Owner Occupied, 66% Purchase Money Loans, 47% FL Originations, 100% retail.

 

Mountain View Servicing Group had two offerings the first week of April, the first was $923 million FHLMC non-recourse servicing, 100% FRM 1st lien product, 3.66% Wac, 768 WaFICO,72% WaLTV, $255k WaLA, no DELs, California (35.1%), Virginia (7%), Washington (5.4%), and Arizona (5.2 %). The second was $205 million of FNMA non-recourse servicing with bifurcation of origination and servicing reps and warrants on 98.5% of the servicing portfolio; the pool was 96% fixed rate and 99.8 percent 1st lien product, 71% WaLTV, 5.12% WaC, $213k WaLA, with state originations of New York (81.4%), California (6.3%), New Jersey (4.7%), and Florida (2.5%).

 

And Interactive Mortgage Advisors (IMA for the folks playing along at home) is brokering the servicing rights to a $3.5 billion Ginnie Mae bulk residential pool. One doesn’t want to make a mistake with 19,000 loans. “Quality characteristics of this portfolio include: 3.758% Wtd Avg Note Rate, wide geographic dispersion highlighted by CA, TX, TN and OH, total delinquencies including foreclosures of only 3.85% on 20 months of seasoning, Wtd Avg Fico 719, new appraisals on 100% of the 646 VA IRRL Loans, and currently sub-serviced by Cenlar.

 

Returning to MountainView Servicing Group, it is also a sale advisor for a homebuilder’s $200 million Fannie Mae MSR portfolio and an additional $30-40 million of servicing per month from the builder. “The bulk portfolio, with $200 million of unpaid principal balance, is 100 percent fixed-rate and first lien Fannie Mae product with a weighted average original FICO of 755, a weighted average original loan-to-value ratio of 82 percent, a weighted average interest rate of 3.91 percent, and low delinquencies. All of the loans were originated by the mortgage financing subsidiary of a homebuilding company, and the average loan size is $235,563. Top states for the portfolio are North Carolina, Ohio, and Florida.

 

American Banker highlighted the current event in a recent article “Mortgage Lenders Sell Cash-Cow Servicing Rights to Survive.” “Normally, mortgage servicing rights would be a cherished asset in a market like this. Servicing rights rise in value as interest rates climb, largely because borrowers are not refinancing, so fewer loan are paying off. The reliable income stream offsets lower origination income…Yet after slogging through several quarters of high expenses and shrinking profits, many lenders are now selling servicing rights to raise cash to cover payroll and expenses, industry sources say. Some of these lenders built expensive retail networks and are paying never-before-seen commissions to loan officers. The steep drop in refinances and home purchases is squeezing profits.” Roughly 75% of all sellers of mortgage servicing rights in the past year were mortgage bankers.

 

One wonders if lenders underestimated the cost incurred in servicing. It is not cheap, and regulators like the CFPB are focused on making sure it is done flawlessly – which will continue to add to the cost. Servicers are required to advance mortgage payments to investors when a borrower stops paying on some types of loans. The article in AB goes on to give a little primer about servicing. “Mortgage servicing rights are an esoteric and volatile niche asset that serves as a hedge when mortgage rates rise and lending volumes fall. Servicers are paid a sliver of interest, usually 25 basis points of the loan balance annually, to collect principal and interest payments from borrowers and remit those funds monthly to investors. Servicers also collect and remit taxes and insurance for some borrowers, and deal with delinquencies and foreclosures.”

 

Once again, we are reminded that a non-depository mortgage lender mostly offers a good income and lifestyle for its employees, but little in the way of accumulated net worth besides cash in the bank (that is often used to satisfy investor & warehouse demands). What is a lender really worth, besides the value of its retained servicing, if its people can walk out the door? The value of its office furniture? Its franchise value and goodwill? I’ll save that discussion for another time. But lenders having to sell servicing to pay for overhead, hoping for a huge increase in volume and fee income, may have challenging times ahead.

 

As they say, “money talks and — —- walks.” I don’t know who the “they” is in that sentence, but “regulators” are boosting the capital rule for the eight largest U.S. banks: http://www.reuters.com/article/2014/04/08/us-financial-regulations-leverage-idUSBREA3709B20140408. Regulators plan to subject the eight largest U.S. banks to a leverage ratio of 5% equity to total assets, which means that the rule will force the banks to increase capital by about $68 billion total. The rule has prompted complaints that U.S. banks will be at a competitive disadvantage to foreign counterparts, which are subject to a less-stringent ratio.

 

Speaking of banks, we did have earnings from Wells Fargo and Chase today. JPMorgan Chase & Co. (NYSE: JPM) today reported net income for the first quarter of 2014 of $5.3 billion, compared with net income of $6.5 billion in the first quarter of 2013. Chase’s mortgage numbers reflect those of the industry: net income was $114 million, a decrease of $559 million from the prior year, driven by lower net revenue and lower benefit from the provision for credit losses, partially offset by lower noninterest expense. Mortgage Production reflected a pretax loss was $58 million, a decrease of $485 million from the prior year, reflecting lower revenue partially offset by lower expense and lower repurchase losses. Mortgage production-related revenue sank due to reflecting lower volumes. Production expense dropped due to lower headcount-related expense and a drop in non-MBS related legal expense. Repurchase losses for the current quarter were down. Chase’s mortgage servicing had a pretax loss due to a higher MSR risk management loss, largely offset by lower expenses. Mortgage application volumes were $26.1 billion, down 57% from the prior year and 17% from the prior quarter.

 

Wells Fargo’s numbers came in ahead of estimates, and analysts continue to talk about its servicing income balancing the loss of mortgage originations. Wells Fargo reported its home lending originations amounted to just $36 billion, compared with the $109 billion reported a year earlier and $50 billion in the prior quarter. Wells has a significant share in funding home purchases, an area that held up better than refinancing businesses. But mortgage banking noninterest income totaled $1.51 billion, down 46% from a year earlier (versus Chase’s drop of 68%) and mortgage banking profit of $114 million, down by $559 million from the prior year. Wells Fargo has cut roughly 7,000 jobs since July.

 

The market is continuing to ruminate on the Fed’s March meeting minutes released Wednesday. Several Federal Reserve policy makers said a rise in their median projection for the main interest rate exaggerated the likely speed of tightening, according to minutes of their March meeting. As we know, Treasury yields rose last month after policy makers predicted that the benchmark interest rate would rise faster than previously forecast. Janet Yellen, presiding over her first meeting as chair, later downplayed the importance of the forecasts, even as she said that rates might start to rise “around six months” after the Fed ends its bond-purchase program. The FOMC next meets April 29-30 – so the press and analysts can jabber about that in a couple weeks.

 

For substantive news, yesterday, before the stock markets sank like the Titanic, we learned that Jobless Claims decreased by 32,000 to 300,000 in the week ended April 5, the lowest since May 2007. The four-week average of claims, a less-volatile measure than the weekly figure, fell to 316,250, the lowest since the end of September. Inflation watchers received some news to chew on: import prices increased 0.6% in March, climbing for a fourth month led by higher costs of food, fuels and industrial supplies.

 

I was reminded why I will never be a day trader. If someone had told me that on Thursday Jobless Claims would hit a 7-year low, and that import prices would show an increase, I would have sold my bonds and bought stocks. And I would have lost a heckuva lot of money since the markets moved in the opposite direction. The 10-year Treasury was marked higher by .5 in price with yield down six basis points to 2.63%, its lowest level since early March, and MBS prices rallied between .250-.50. Meanwhile, our friend the Fed continues to buy about $2 billion of agency paper per day. (The buying is anticipated to decline to a daily pace of $1.8 billion over the first half of May, assuming the FOMC announces another $5 billion in tapering at its upcoming meeting.)

 

Ahead of this spring weekend we’ve had the Producer Price Index (PPI) for March, showing a “hot” +.5% which was +.6% without volatile food & energy components. The PPI is +1.4% year over year, and removing food & energy it was also +1.4%. We’ll also have the preliminary April Consumer Sentiment number around 7AM PST. In the early going the 10-yr is sitting around 2.62% and agency MBS are roughly unchanged.

 

 

An Italian Boy’s Confession. (And oldie but a goodie.)

“Bless me Father, for I have sinned. I have been with a loose girl.”

The priest asks, “Is that you, little Dominic Pomilia?”

“Yes, Father, it is.”

“And who was the girl you were with?”

“I can’t tell you, Father, I don’t want to ruin her reputation.”

“Well, Dominic, I’m sure to find out her name sooner or later so you may as well tell me now. Was it Tina Minetti?”

“I cannot say.”

“Was it Teresa Mazzarelli?”

“I’ll never tell.”

“Was it Nina Capelli?”

“I’m sorry, but I cannot name her.”

“Was it Cathy Piriano?”

“My lips are sealed Father.”

“Well then, was it Rosa DiAngelo?”

“Please, Father, I cannot tell you.”

The priest sighs in frustration. “You’re very tight lipped, and I admire that. But you’ve sinned and have to atone. You cannot be an altar boy now for 4 months. Now you go and behave yourself.”

Dominic walks back to his pew, and his friend Franco slides over and whispers, “What’d you get?”

“Four months’ vacation and five excellent leads.”

 

 

Rob

  (Copyright 2014 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.)