Aug. 9: Deutsche Bank piece on the lack of MBS; “I can finance a car in less than an hour, why should a house take 2 months?”

Willie Sutton, when asked why he robbed banks, supposedly replied “It’s where the money is.” And this week we had the Bank of America/Department of Justice news. But there was also news involving the State of California suing Morgan Stanley. One almost needs a statistician to figure out how many lawsuits can be filed: 50 states, plus groups like the DOJ, CFPB, HUD, Fannie, Freddie, and so on, versus however many lenders & banks there were back in 2007 – it’s where the money is. The “fun” never has to end!


I received this note from California on younger buyers. “18-year olds putting more thought into which bong to buy, than how they are going to pay off their student loans; borrowing trillions to end up with a liberal arts degree and a work ethic hinged upon ‘I’d like to do something which makes me feel good about myself’….what could possibly go wrong?”


Too much paperwork? Joe Adamaitis writes, “Hey Rob while we are at standardizing the securities side, lets push them into finally standardizing forms across the spectrum of lenders and investors. Can we all please use one disclosure for Net Tangible Benefit, An Inquiry form, a 4506, a Borrower’s intent to proceed, and on and on? Then we can tackle the crazy, zany world of all disclosures including the GFE for simplification. I printed out a package recently whereas the HUD Settlement Booklet (CFPB’s) is 71 pages all by itself! Just stab me and get it over.”


RC contributes thoughts on overall production volumes. “It is beyond me why any analyst would wonder why production volumes are low. As the industry shrinks, it is merely a market-share grab among companies. Sure, as a major lender makes their pricing better or worse, or lays off unproductive LOs or hires other company’s branches, it impacts market share. But it certainly doesn’t create ‘new business.’ There will always be some refis for whatever reason – but there are plenty of homeowners with 3.50% 30-year mortgages already. The lending industry is putting way too much emphasis on Millennials and on people over 65 looking for reverse mortgages. Reverse mortgages have never been a large part of overall production, but yes, volumes could grow as the population ages.”


The opinion continued. “But with younger people, we’re dealing with a group of people who can buy and finance a car is less than an hour. To expect them to want a home loan that can take anywhere from 2 to 8 weeks, involve 3-4 inches of paperwork, sign pointless disclosures that never end, documentation and explanations beyond belief – that is asking too much. On the other side we have lenders who are so afraid of class-action lawsuits, or the CFPB knocking on their door, or buybacks, that they are spending $5-7,000 on every loan – well, it is not a recipe for success. I have had their parents tell me that they will do whatever it takes to never have their kids go through the loan process, and other borrowers say that it is infinitely easier to take cash earning nearly 0% and use that to buy a home rather than jump over the hurdles of obtaining a home loan in today’s environment. For the industry, regulators, or politicians to wonder why lending has not picked up – well – they have to look no farther than what lending has become.”


A Deutsche BankMarkets Research” piece this week spells out QM and ATR’s impact on MBS production. We have to remember that the first half of 2013 was a great time to refi, and there is little likelihood of those borrowers refinancing again. In addition, purchases have lagged. But nonetheless, “With July likely to record less than $10 billion in net agency MBS supply and with early signals from August pointing even lower, the 2014 supply conundrum continues. More than $270 billion of net fixed-rate agency securities came to market last year, but this year the tap effectively has turned off. Something has changed…Since January 10, banks have had to originate loans according to the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules. The Fed survey suggests that the rules have put a drag on all mortgage production. Nearly a fifth of 36 large banks and almost half of 34 other banks surveyed by the Fed said that new lending rules had made them somewhat or much less likely to approve applications for prime conforming mortgages, the loans typically sold to Fannie Mae or Freddie Mac…based on loan features, fees and the loan’s interest rate, the regulations create different categories of legal protection for lenders and, correspondingly, different courses of legal action for borrowers that default or go into foreclosure.


“The CFPB’s new rules include important support for the agency MBS market by automatically deeming all loans eligible for purchase by Fannie Mae or Freddie Mac as Qualified Mortgages. Banks presumably could originate and sell loans to the agencies and qualify for the legal protection allowed by QM under CFPB rules. That makes results from the Fed survey especially surprising. The responses suggest that the CFPB rules nevertheless have created drag on agency production…Some banks have been underwriting loans to Fannie Mae and Freddie Mac guidelines and then re-underwriting them to CFPB standards. The higher risk and higher cost could contribute to lower approvals. The greater drag on agency originations outside the large banks is consistent with concern about risk and cost since these originators may not have the legal staff or operating scale to quickly adapt to CFPB standards. That may lead them to avoid agency-eligible loans that look borderline or complex.”


The Deutsche Bank report then honed in on jumbo loans. “Asked about prime jumbo loans, a much larger share of banks in the Fed survey reported that the new lending rules had at least somewhat lowered approval rates. That held for 47% of large banks and 59% of others. For conforming balances, that held for roughly 20% of large banks and 50% of others. The gap for large banks suggests that they rely heavily on the CFPB rules’ treatment of agency loans.”


But it doesn’t explain all of the drop off in mortgage-backed security production. “Some analysts have suggested that banks are retaining more conventional conforming loans, but the latest data on the Fed’s H.8 report show residential loan balances at banks so far this year up by only $13 billion. Other analysts argue that the volume of cash transactions has gone up enough to cut into loan production, but the latest data from CoreLogic shows the volume of cash sales continues to trend down. The slowing pace of new and existing home sales could explain some of the drop, but steady economic growth, rising payrolls and rising home prices should lead to higher production. The prospects for a sudden rise in supply at this point look very limited. July, August and September made up the biggest months for net supply in 2013. If all we can do over that stretch this year is knock out a few billion, then net supply could go negative over the balance of the year.”


Ted Smith contributes, “Tom Showalter, Chief Analytics Officer at Digital Risk, has some thoughts on the ‘4 Factors Weighing on the Housing Market in the Second Half of 2014.’ 1.)  Unless there is some very specific micro economic event happening in any given MSA, median income growth (decline), complemented by anemic growth in wages per worker strongly suggests that the era of housing price appreciation may be short lived. Outside of certain micro economies (NY Metro, Washington DC, Northern California, and Miami), the general economic outlook is weak. The median household income in 2007 was 55,000; as of 2014 it is 51,017, creating an 8% drop.  What is not revealed by this set of statistics is that small drops in median household income often are coupled with big drops in discretionary household income. This decline in median income suggests very low year over year changes in wages per worker. Ultimately, it is wage & income growth drives housing prices, and this growth is not really happening. Hence, the housing price revival may stall and with it so will home sales and purchase money mortgages, which are showing signs of retreat.


“2.) Juxtaposed to the anemic growth in wages is a robust growth in housing prices, but we aren’t back in 2007. Appreciation is slowing, but a collapse is not imminent. Don’t pay too much attention to the recent spike in price to income ratio’s used to measure housing prices across the US (it has jumped in recent years to ~4.0, when the historical average is closer to 2.6.) While some experts argue that this is a sign of a bubble in the making, this statistic is skewed as a result of an influx of cash buyers. In recent months, 40% of all sales have been paid in cash. The remaining 60% of the sales were made using loans. This 60% distribution represents a skewed, biased distribution when one has eliminated the high income, high net worth folk who would normalize the price to income ratio and reduce it down to its more normal levels. Given all of the statistics about who is buying a home (high FICO, low DTI borrower), the affordability of housing, the source of demand, and the preceding cash purchase trends, it is extremely hard to believe that today’s housing market is as inflated as the 2007 market. For today’s market to be that inflated, it would mean that the typical borrower was lower income, lower net worth. In this market, the borrower has the opposite profile and there are too few homes with excessively inflated prices. Except for a few MSA’s, housing price increases have slowed and prices have barely returned to 2003 levels.


“3.) There are issues with three major segments of the market, suggesting that the housing markets problem is being caused largely by a lack of primary demand, even though houses are remain affordable and interest rates are low. First Time Homebuyer:  this market is hampered by a lack of new household formation, which was negative throughout 2013, turning mildly positive in Q1 2014.  That trend, complemented by lack of high paying jobs and excessive student debt are reducing the ability of this segment to generate robust housing purchases. Move-Up Buyer: CoreLogic reports that the number of households underwater has decreased, with the current number approximately 6 million.  Nonetheless, this segment, which usually has substantial money to post a sizeable down payment, has been constrained by the housing price declines of the meltdown. Baby Boomer:  this segment is seeking to downsize and get into smaller, lower maintenance housing. However, they are running into unexpectedly low prices on their existing residences, which are hampering their move- down plans. Millions of baby boomers are continuing to work, due in part to their high level of health, to the reduced state of their net worth and to the unpredictability of our economy. Those that who have had the children leave the nest and those who are retiring are definitely downsizing their residences. The impact on the housing market will be a softness in the large, suburban track home, the one-time mainstay of the baby boomer with a family.  Their former owners no longer need the space and those who are younger are incurring a number of wealth challenges: downward pressure on income, fewer promotion prospects and meager equity in their current residence, blocking the traditional move-up sale.


“4.) What I am seeing is a long term upward trend (increases in housing prices, housing starts, home sales) from 2007 to today; that’s the good news. Lately, I am seeing volatility in the numbers, which can suggest many things.  What I think it means is that the fundamentals of the economy are starting to impact the housing market. GDP growth since Meltdown has averaged less than 2% – this not enough to replace jobs or generate long term confidence. On top of underwhelming GDP, the decline in the median wage is persistent, a serious long-term issue. If we achieve 1,000K housing starts this year and approximately 5 Million in home sales, we will be lucky and that is with very low interest rates and attractive levels of affordability. We should not expect more until we solve the dilemma of wage/income growth (and with it – GDP growth).”



(Rated R – I guess.) We’re all just animals, right? And this short, 2 ½ minute video, reminds us that many will do whatever it takes to attract a mate.





(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.)

Rob Chrisman