Feb. 12: Vendor cash infusion; letters on why bonds did what they did, 2nd home & high bal hits, & Habitat for Humanity
Here in Florida, and everywhere else, it’s Super Bowl Weekend! (According to my grammar book, “weekend” is capitalized since it is a specific weekend.) In Los Angeles, home to 2022 Super Bowl contender the Los Angeles Rams and host of the iconic game this year, the median home price of $950,000 was up over 13 percent from a year earlier. Facing the Rams Sunday will be the Bengals, who are in Cincinnati, where the median price of $209,000 was up more than 12 percent. Read more about the residential and commercial real estate markets in both cities as well as in next year’s host city in the SitusAMC Real Estate Insight Bowl. Prices are going up, but locks are going down, and nothing your capital markets team can do will change the overall interest rate climate. According to Curinos, January 2022 mortgage rate-lock volume was down 40% YoY but up 8% MoM across all channels, while funded volume decreased 36% YoY and 20% MoM. (Curinos sources a statistically significant data set directly from lenders to produce these benchmark figures. We dig further into this data here.) Yes, with rates going up and volatility returning, MLOs from coast to coast are pulling their hair out. On with the show!
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Earlier this week I mentioned the work that Jimmy Carter had done for Habitat for Humanity. I received a few short notes from people who have participated in similar programs, including this one from Tracey King, COO of Partners Credit & Verification Solutions. “When I was studying in South Africa, Habitat for Humanity was doing a ‘building blitz’ in the region. We were supposed to participate in service hours during our stay, so I was oftentimes on the construction site hammering away. It was an incredible experience and I was fascinated by the people who had put their lives on pause to offer their expertise, combined with the endless work of the people in the area, to build something much bigger just a home… They were building a community with purpose. It will forever be a moment in time that changed my perspective on so many things, including what it means to have a home.”
Note on high bal & 2nd home adjustors
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I continue to hear questions about the pricing of high balance and 2nd home conforming conventional products, especially from MLOs in vacation areas and higher priced locations. For thoughts I turned to Pete Mills, SVP of Residential Policy and Member Engagement at the Mortgage Bankers Association (MBA). “The nature of these changes was not surprising. FHFA leadership has been focused less on a quick exit from conservatorship, and more on re-orienting the GSEs’ operations towards loans that better reflect their core missions. For second-home loans in particular, it is difficult to make the argument that these are loans to support core mission borrowers. On a similar note, with conforming loan limits approaching $1 million in high-cost areas, FHFA and the GSEs are under political pressure to show that the GSEs are doing more than simply serving high-income borrowers in expensive markets. At the same time, the GSEs are expected to provide liquidity broadly to the entire market. It’s a challenging balancing act.
“MBA has met with FHFA to discuss the LLPA changes. One key point is that FHFA has made it clear they are in the midst of a broader review of GSE pricing, and they have noted publicly they want to update the current pricing framework to increase support for core mission borrowers. As part of such a comprehensive review and recalibration, we anticipate that the recent LLPA increases could be offset by reductions in LLPAs for products utilized by lower-income and first-time homebuyers. Based on our discussions, we believe FHFA is cognizant of the fact that products like second-home loans can cross-subsidize other, more mission-oriented loans. It’s a delicate balance, and we’ve urged FHFA to monitor this closely to see what second home deliveries look like in the coming months. They can and should be ready to adjust as needed.”
Pete’s note continued. “As for a political push from the Hill… This narrowly targeted and well-telegraphed fee increase does not lend itself to the kind of broad bipartisan backlash industry was able to generate from Congress on the Adverse Market Refi fee, which caught the market by surprise, disrupted pipelines and hit the entire refi market. Key Democrats want to see the GSEs focus on the core mission to help low-to-moderate income (LMI) borrowers. At the same time, many Republicans think that second homes should not have taxpayer support via the GSE guarantees.” Thank you, Pete!
The economy & interest rates
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What does the American Bankers Association’s Economic Advisory Committee have to say? Basically that interest rates will rise, and inflation will slow, and a return to full employment is imminent this year. “Economic growth will slow relative to last year’s robust pace but remain above long-run potential, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. The EAC consensus forecast also anticipates softer but still elevated inflation in 2022 along with three interest rate increases from the Federal Reserve.
The committee made up of 16 chief economists from some of North America’s largest banks forecasts economic growth to slow from an inflation-adjusted 5.5% pace last year (Q4 over Q4) to 3.3% this year and 2.3% in 2023.” The group expects the post-omicron economy to spur continued gains in employment this year, driving the unemployment rate lower.
Lending some perspective, Chris Bennett with Vice Capital Markets noted, “So I’ve been asked a couple of times in this last few weeks, ‘Chris, what the hell is going on with this market? Are you going to write one of those pieces you put out sometimes on it or what?’ And I guess the answer as to why I hadn’t is that I usually only do that when there’s wild or crazy stuff going on, and none of the action of the past 60 days has, in my opinion, been either wild or crazy.
“’But CB, mortgages have gotten whacked three points in the last 3 weeks… That ain’t no stroll in the park, right?’ Well, that is a meaningful move to be sure, but they can get lots bloodier than that. I remember not too long ago a drop of seven points in six weeks, and another longer bear market that was 14 points in barely half of a year. Now those are moves!
“Instead of thinking about where we’ve been, let’s look at where we are in the context of the current macro environment. Let’s say you’re a vibrant young economist, in 2005 the world is your oyster, and you go for a summer ride on your Harley. Tragically, a header by a milk truck puts you into a coma, and you don’t awaken from it until Groundhog Day 2022. As a bond-market junkie, you’re excited to guess where interest rates are 17 years later, and start asking questions about the economy to the medical staff to try to guess. Real GDP? +6.9%. Wow! How about unemployment Doc? Well, the unemployment rate just ticked up to 4.0% from 3.9%. Really? That’s about the lowest it’s ever been! Is there any inflation? Well son, it’s red-hot, over 7% year-over-year.
“’Holy Toledo, that’s hot’ you think! What must the 10-yr Treasury yield be? Five percent? Six percent? Maybe seven percent? That seems crazy but at CPI now at seven percent that’s still a real yield of zero! “Actually son”, the doctor replies, ‘The 10-yr note is barely to two percent and believe it or not people are losing their minds about how high it is.’
“Now, are some of the things in the market unusual and possibly temporary, like supply-chain disruptions, and the ‘great resignation’? Sure, and the market thinks so too, which is exactly why our 10-yr note is around 2 percent today and not that 5, 6, or 7% as our protagonist economist (economists are always the good guys and gals in my stories by the way) would have expected given the current conditions in the US. But 2% ten-year yield, and mortgage rates now up into the mid-3s, is actually a very mild (so far) reaction to the changed conditions on the ground.
“But wait the Fed has rates at zero dude, zero! Why has the market gone and wrecked itself already? The answer is that bond (and equity) markets are always very forward looking. The current Fed Funds rate does not mean squat when you’re looking at a 5-year or 10-year bond (a 30-year mortgage lasts 5-8 years on average, so is most sensitive to and correlated with this part of the yield curve). What matters the most is expectations of the sum of short-term rates in the future, over the life of the longer bond (treasury, mortgage, or otherwise) that you’re going to hold. The belly of the curve (5- and 10-yr included) always has it biggest reaction well before the FOMC goes on a path to easing or tightening. Remember the last time around, opposite direction, in late 2018? Long term rates began declining starting in November 2018, and then dropped 120 basis points before the first rate cut by the Fed, which did not occur for 8 more months, in July 2019.
“The reason the market has done what it’s done has been primarily a change in timeline for Fed tightening in the opinion of the markets. At the start of last year, the market’s bets were that the Fed Funds rate at the end of 2024 would be 1%. As of today the market expects that rate to be over 2%. That is the single biggest reason our 10yr note has made the same trek, from 1% in Jan of last year to about 2% today. Is this it then, 2% is the cap? Maybe, but I think not likely. Just like our economist waking from his coma I can make a case for 2.5%, 3%, or even higher yields, with correspondingly higher mortgage rates.
“It helps to have some historical perspective. When mortgage rates were 3.5% in 2019 but that was down from 4.5% it felt like heaven. The same rates today at 3.5% coming up from 2.5% feel like hell. But the reality is just that the special pandemic time is over, and we’re back to where, on average, we usually are. Over the last decade Freddie Mac reports the average 30-year mortgage rate was 3.75%. Now we’re at 3.69% as of today according to Freddie, right there. The decade prior, the average 30-year mortgage rate was almost 5.50%, and there were still plenty of good years in there too.
“It turns out the Fed has been juicing the economy for far longer than they should have, and now find themselves far behind the curve, and it’s a painful adjustment, but one that if you really think about it shouldn’t be taking people by surprise. If you’re a fan of low rates (and I’m guessing most people that might read this are) there’s one silver lining: The last time inflation in the U.S. fell from above 5% to below it without soon thereafter having a recession was over 70 years ago. It’s quite possible that the Fed’s late counterpunches help trigger a slowdown that next year gets you your wish after all.”
Vendor bits
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This week Insellerate, a leading provider of customer relationship management (CRM) and marketing automation solutions to the mortgage lender and real estate industries, announced a strategic investment led by Argentum with participation from First Analysis. The new capital will be used to expand product development, sales and marketing, and customer success initiatives and to meet increasing demand for its Enterprise Customer Experience Platform. “This investment will enhance our ability to continue offering industry-leading technology and services that meet the growing needs of our ever-expanding customer base,” said Josh Friend, Founder & CEO of Insellerate. Insellerate has experienced significant growth over the last two years. The number of monthly borrower applications has increased by more than 10x, and the platform is processing more than $5 billion in volume each month. Currently, Insellerate supports over 150 clients and 4,000 loan officers.
“The team at ProxyPics has built the technology to meet the requirements of the GSEs for desktop appraisals. Leverage their data collection for photos and floor scans to maximize efficiency. Their industry experience served as a foundation in product development as they understand the challenges that today’s consumers are facing. Schedule a demo with their team to explore a better way to work: sales@proxypics.com.”
Tavant FinDecision has been integrated into Pennymac’s POWER Portal for broker partners. Access to FinDecision’s dual Automated Underwriting Systems (AUS) functionality and other core processes, provides Pennymac an additional tool to yield better, faster decisioning. At its core, FinDecision provides the ability to validate AUS responses (both Desktop Underwriter and Loan Product Advisor) and equivalently review their findings. It also identifies all potential avenues to improve operational efficiency, including optimizing cost and decreasing processing times. FinDecision is a core product within Tavant’s Touchless LendingTM platform and is Loan Origination System (LOS)-agnostic.
Mr. Cooper and Sagent announced the execution of a definitive agreement under which Sagent will buy certain intellectual property rights related to Mr. Cooper’s proprietary, cloud-based technology platform for mortgage servicing. This agreement adds one of the biggest mortgage servicers with more than 3 million loans as a 7-year Sagent customer. Mr. Cooper will receive an equity stake in Sagent leveraging Mr. Cooper mortgage servicing depth and Sagent’s software innovation speed to create the industry’s first cloud-native, homeowner-first servicing platform.
Constellation Mortgage Solutions, financial technology solutions in the mortgage space, has acquired ReverseVision, provider of Home Equity Conversion Mortgage (HECM) and private reverse mortgage sales origination software. ReverseVision serves the industry’s top reverse mortgage lenders and 100 percent of all reverse investors. Its comprehensive reverse mortgage platform and HECM products leverage integrations and APIs that open the total addressable market to allow its users to originate reverse mortgages alongside their traditional lending portfolios, creating seamless lending experiences and expanded opportunities. The acquisition of ReverseVision marks CMS’s second in the mortgage space, following the acquisition of LOS and LSS provider, Mortgage Builder in 2019.
Mortgage analytics firm RiskSpan has collaborated with Verisk to create a first-of-its-kind solution for measuring and mitigating the risks of climate change to the housing finance industry. The collaboration unites RiskSpan’s Edge Platform for mortgage analytics with Verisk Extreme Event Solutions’ proven set of models — relied on by leading insurance, re-insurance, corporate and government entities, to assess the risk from natural catastrophes and climate to a given location by providing a property-specific hazard risk metric. The risk to the housing finance industry from extreme events is significant. According to Verisk, 62 million residential locations are at moderate to extreme risk of flooding alone. The collaboration offers two complementary products, including loan-level scoring and climate stress testing, with applications for loan screening, portfolio management, and financial disclosures.
Where do football players go when they need a new uniform?
New Jersey.
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