June 20: Mortgage jobs; yes, rates are higher, so now what? North Las Vegas opts to use eminent domain

Poor George Zimmer, founder and Executive Chairman of The Men’s Wearhouse. Yesterday not only did the men’s apparel retailer fire him, but both his stock and bond portfolios got pounded, beat like a red-headed step-child, whipped like a rented mule.  Yesterday was a great example of a common misconception out there: that bond and stock markets always move in opposite directions – they don’t. Not only did was the U.S. 10-yr T-note down by a point, closing at 2.30%, but the S&P was down about 23 and the Dow down over 200. “I guarantee it!” If there was any good news, it was that agency “MBS held up well in sell-off with two-way flows in lower coupons.” More on this a couple paragraphs down – it is not the end of the world.


For example, companies are still growing. Stonegate Mortgage is hiring new Account Executives to build territories and to meet growing demand in recently licensed states across the nation. Please follow the link to read more about the position and about Stonegate Mortgage Corporation: http://ch.tbe.taleo.net/CH10/ats/careers/requisition.jsp?org=STONEGATEMTG&cws=1&rid=470. Stonegate Mortgage originates, finances, and services agency and non-agency residential mortgages through its network of retail offices and approved third party originators. It also provides financing through our fully integrated warehouse lending platform, NattyMac. “Operational excellence, financial strength and commitment to customer service and technology have positioned the firm as a leading provider in the emerging housing finance market.” Interested applicants should forward resumes to Melissa Dewey at mdewey@stonegatemtg.com.


And Freedom Mortgage is also growing, looking for seasoned Wholesale Account Executives in Northern California and a Regional Underwriting Manager for its Phoenix Arizona Branch. Freedom mortgage is a direct seller servicer for FNMA and Issuer/servicer for GNMA, VA, FHA, and USDA. Freedom was recently ranked #2 in wholesale in total volume gain from 2011 to 2012 and the #3 GNMA issuer Nationwide in Q1 2013. Please contact Keith Bilodeau at keith.bilodeau@freedommortgage.com for more information. “If you are looking for a partner to help you make the conversion from Broker to Banker, Freedom Mortgage has a proven history for providing extremely low risk options for you. Over the last few years we have helped hundreds of clients all across the country make the change, providing them improved execution and putting flexibility back into their hands. For more information on the company visit https://www.freedommortgage.com/.


As if the compliance and regulatory environment isn’t enough, now non-depository mortgage banks and banks with large lending operations are looking at interest rates that noticeably higher than a week ago, certainly more than two months ago. Make sure those extension policies are bullet-proof! Did the Fed say anything really surprising yesterday? Not really. Do many feel rates and stocks over-reacted? You bet. Does that mean it is going to come roaring back? Probably not, but who can foresee the future? So let’s discuss the cold hard facts, and you can draw your own conclusions.


First, the Fed Funds target remains at 0-.25%, the Prime Rate is unchanged at 3.25%, and the Discount Rate is unchanged at .75%. The policy bias points toward maintaining the Fed’s risk bias to growth and unemployment but indicated there had been some improvement. The Fed was expected to make a few changes in its statement, which it did, defend QE3, which it did, re-iterate specific economic thresholds (unemployment below 6.5%, inflation above 2.5%) to the timing of rate increases rather than calendar projections, which it did. The Fed repeated the pace of bond purchases.


The Fed did not make major policy changes at the 2-day standard format meeting. Did anyone out there think the purchase of $85 billion a month was going to continue forever? I hope not, nor do I hope that no one is basing their business model on it. And any loan officer who convinced their boss that his or her business will really take off if rates go down in order to keep their job – well, good luck with that one. But on a global scale, the Fed continues to purchase a significant percentage of agency MBS and CMOs, but yields have moved to a much more attractive level over the past month. It is believed that the effect of Fed tapering of purchases is mostly already priced into yields. Depository banks have been active in 15 year and 20 year pass-through MBS and callable agencies as the recent volatility of interest rates has presented opportunities. For most community banks, as any commercial loan officer will tell you, loan growth remains difficult and margin compression is a primary concern. As Pacific Coast Bankers Bank noted, “Banks should continue to address the extension of the low rate environment for some time to come in their ALCO and planning sessions, but also cover the possibility of a steepening yield curve and how it could impact the bank’s balance sheet, both on the asset and on the liability side.”


Yesterday the commentary discussed the city council of “Las Vegas” considering signing up with Mortgage Resolution Partners and using eminent domain. I received this clarification from Burton Embry: “The issue of eminent domain is in the city of North Las Vegas, not Las Vegas proper.” Thanks! It turns out that the city’s leaders voted to move ahead and partner with MRP: http://www.lasvegassun.com/news/2013/jun/19/north-las-vegas-oks/#axzz2Wkj7GewX.


The yield curve (the difference between overnight rates and long term rates like 30-yr bonds) has indeed steepened, viewed as a good thing for bank earnings. But Basel III is still out there, looming, threatening to impact capital requirements, risk weighting, and the value of servicing. This needs to be kept in perspective, however, and Bill Chudy with Parkside Lending writes, “Don’t forget that some risk weights will go down under Basel III.  Loans with LTV <=60% will have a 35% risk weight (as opposed to 50% currently). This creates some ROE maximizing investment opportunities for bank portfolios on assets that carry little (or zero) credit risk. So if MBS ~20bps OAS, with a GFEE ~ 50bps, then Loan OAS = ~70BPS (20+50). Assuming no credit risk, I get 3x the OAS for less than 2x the risk weighted asset.  Throw in the LLPA for Non-Owner on top of that (~25-40bps) and it no longer makes sense for banks to hold any MBS as held to maturity assets.”


The Fed news yesterday brought the focus back to the economy. When the recession hit, state and local government tax revenue plummeted. Those governments responded by cutting spending and employment, which have still not recovered. On a per-person basis, production of goods and services is about 1% below its pre-recession peak. More recently, higher taxes have come into the picture. Income tax rates were raised on upper-income Americans, and the Social Security payroll tax cut was allowed to expire. And, on top of that, we have sequestration. The United States is not the only country going through a period of budgetary restraint. In Europe, government spending has grown much slower than in other recent recoveries. Among countries that use the Euro, recessions have caused tax revenue to tank, which widens budget deficits. In the face of those enormous deficits, governments have slammed the brakes on spending. However, not all the news from overseas is bad. In Japan, the central bank has adopted a much more aggressive policy to promote growth. If the Bank of Japan succeeds in jump-starting growth, that should offset some of the economic drag coming from Europe. There is so much criticism towards our financial system for not making credit more readily available, especially for mortgages. Banks are in business to lend, and today unlike troubled counterparts in Europe, they have good balance sheets and plenty of money available. In today’s world of low interest rates and a flat yield curve a bank has less than a 3 percent net interest margin. The very best possible outcome on a loan for our forever criticized bank is to get paid back all its principal and make a small spread on the interest. Get paid back 95 % of every loan and it goes broke. Careful scrutiny of any type of loan is judicious business practice and necessary to remain solvent. A top quality financial lending institution can be lucky to earn is 1 to 1.4 percent on total assets.


So again, what happened yesterday? Basically, Ben Bernanke affirmed what the market was thinking anyway – that QE3 will eventually go away if the economy is doing better. Certainly housing is doing better, but the job market – not so much. As for the FOMC statement, there were some upgrades. Labor market conditions were said to have shown “further” improvement versus “some” in the previous one. Also, the Committee saw downside risks to the outlook for the economy and labor market as “having diminished” from last fall versus that it continued to see downside risks.


The analogy is that the Fed, if driving a car, is merely taking its foot off the gas but not putting on the brakes. Bernanke indicated that the Committee’s preference is for holding MBS to maturity, and to reinvesting the pay-downs (homeowners paying off their mortgage early). The yield curve has steepened – good news for banks IF rates are increasing due to the economy doing better.

United States 10-year notes worsened by a point in price, closing at 2.30%. But on a relative basis, what is going to happen to agency MBS? Prices could continue to do well if supply drops – how much mortgage volume will be produced at these rates? In research from Deutsche Bank, mortgage-backed securities analysts said “if the Fed rewrites its playbook and delivers on the promise of holding MBS rather than selling, that could provide major support for MBS spreads for the first time this year.” Yesterday mortgage banker supply was “uneventful” at under $2 billion.


As best I can tell, the sun came up this morning, and we have more data – whether or not it will move rates much remains to be seen. We have Initial Jobless Claims (expected to increase to 340k from 334k), May Existing Home Sales (5.0 million expected versus 4.97 million previously), May Leading Indicators (+0.2 versus +0.6), and the June Philly Fed (-2.0 versus -5.2). Leading up to all of that, world markets did not do well, either in stocks or bonds, following yesterday’s lead. In the early going the 10-yr is up to 2.41% and MBS prices are worse by roughly .250 versus Wednesday’s close.



REDNECK FARM KID in the Marine Corps

Dear Ma and Pa,

I am well.  Hope you are. Tell Brother Walt and Brother Elmer the Marine Corps beats working for old man Minch by a mile. Tell them to join up quick before all of the places are filled.

I was restless at first because you get to stay in bed till nearly 6 a.m. But I am getting so I like to sleep late. Tell Walt and Elmer all you do before breakfast is smooth your cot, and shine some things.  No hogs to slop, feed to pitch, mash to mix, wood to split, fire to lay. Practically nothing.

Men got to shave but it is not so bad, there’s warm water.  Breakfast is strong on trimmings like fruit juice, cereal, eggs, bacon, etc., but kind of weak on chops, taters, ham, steak, fried eggplant, pie and other regular food, but tell Walt and Elmer you can always sit by the two city boys that live on coffee. Their food, plus yours, holds you until noon when you get fed again. It’s no wonder these city boys can’t walk much.

We go on ‘route marches,’ which the platoon sergeant says are long walks to harden us.  If he thinks so, it’s not my place to tell him different.  A ‘route march’ is about as far as to our mailbox at home. Then the city guys get sore feet and we all ride back in trucks.

The sergeant is like a school teacher. He nags a lot. The Captain is like the school board.   Majors and colonels just ride around and frown. They don’t bother you none.

This next will kill Walt and Elmer with laughing.  I keep getting medals for shooting. I don’t know why. The bulls-eye is near as big as a chipmunk head and don’t move, and it ain’t shooting at you like the Higgett boys at home. All you got to do is lie there all comfortable and hit it. You don’t even load your own cartridges. They come in boxes.

Then we have what they call hand-to-hand combat training. You get to wrestle with them city boys.  I have to be real careful though, they break real easy. It ain’t like fighting with that ole bull at home. I’m about the best they got in this except for that Tug Jordan from over in Silver Lake. I only beat him once…  He joined up the same time as me, but I’m only 5’6′ and 130 pounds and he’s 6’8′ and near 300 pounds dry.

Be sure to tell Walt and Elmer to hurry and join before other fellers get onto this setup and come stampeding in.

Your loving daughter, Alice




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Rob Chrisman