Veteran’s Day: VA & QM; ATR & QM for small lenders; earnings summary continues; will the election change things for lenders?

Lenders know that as the United States continues fighting overseas the population of veterans is steadily increasing. And with it VA lending. The US Census Bureau tells us in 2013 there were 19.6 million veterans living in the United States, with 1.6 million being female veterans. The top three states where most veterans live are California (1.7 million), Texas (1.5 million), and Florida (1.5 million). The annual median income of veterans in 2013 was $36,381 compared to $25,820 for nonveterans. Of the 19.6 million veterans in the US, 3.6 million have a service-connected disability. There were 9.3 million veterans who were 65 years and older in 2013, and 1.6 million veterans who were younger than 35. Although the percentage of millennial veterans is relatively small, this number is only going to increase in the coming years. LOs and real estate Agents should be marketing to this population and educating past, future and current veterans about the benefits of VA loans.


Bloomberg reports that “Seasoning and recoupment-period standards under the VA’s QM rule may cut down on refis that aren’t ‘a good outcome for the borrower,’ Mike Frueh, director of the VA’s loan guaranty service, said.” QM status requires 6 months seasoning and the upfront costs to be recouped by borrower through lower payments within 36 months. It is indeed an interesting time for VA loans as their volume steadily climbs. For fiscal year 2014 VA volumes are running around a total loan count of 438,398 ($99.6 billion): purchase 271,701 and refi 166,697. VA backed a record 629,293 loans in FY 2013, including 241,190 purchase loans. It is estimated that about 4% of fiscal year 2013 VA refis would have been non-QM because of the seasoning requirement, and supposedly there are ‘anecdotally’ many loans with recoupment periods exceeding 15 years. Of course lenders can still make non-QM VA loans assuming they can find a warehouse bank and/or investor for them.


Turning to home equity lines of credit, regulators are worried about HELOCs because they were structured as interest only for the first 5 year to 10 year draw periods and because the Fed estimates 60% of outstanding credit lines will reach the end of their draw period (and have to pay principal plus interest) over the next 3 years. But their production is increasing as markets appreciate and homeowners are using them for remodeling.


What’s the daily commentary without some news from the CFPB? “We’re updating the Small Entity Compliance Guides for the Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA and TILA Mortgage Servicing Rules. These updates incorporate adjustments to the rules that became effective on November 3, 2014. Check out the updated guides and other resources. The adjustments include two changes that will help certain nonprofit organizations continue to provide mortgage credit and servicing to underserved populations. Other changes lay out limited circumstances where lenders that exceed the points and fees cap can pay a refund of the excess amount plus interest to consumers and still have the loan be considered a Qualified Mortgage.”


And of course Fannie Mae. Fannie Mae CEO Timothy Mayopoulos laid out further details on the new low downpayment program. Private Mortgage Insurance would have to cover the first 20% of loss, however, which would limit the program. That said, he expects the cost of one of these mortgages to be less than the cost of a FHA loan.


Speaking of which, Fannie Mae will send another $4 billion to the Treasury Department after posting a solid profit in the third quarter. Freddie Mac also reported a third quarter profit and plans to send the government $2.8 billion in funds. Fannie’s profits were up slightly from the second quarter, but down significantly from the same time in 2013, when it sent $8.6 billion in gains to the Treasury. But we are reminded that under the terms of their rescue the two agencies are required to send all profits to the Treasury Department. The amount the two have wired off to the government has since exceeded the amount they required in the rescue. Fannie has sent the government $134.5 billion in dividend payments compared to $116.1 billion in draws, and Freddie has sent $91 billion compared to $72.3 billion in rescue funds. The money the two enterprises give to the government does not wind down that investment.


Yesterday the commentary embarked on a consolidated list of lenders and vendors and their recent company earnings announcements. I figured we’d continue that today, since there are dozens of publicly held lenders and MI companies to help others check how their 3rd quarter stacked up.


United Guaranty Corporation reported pre-tax operating income of $135 million for the third quarter of 2014, compared to pre-tax operating income of $43 million in the prior year quarter resulting from decreased first-lien claims and claims adjustment expenses incurred and an increase in first-lien net premiums earned. UG saw lower new delinquencies, an increased rate of cures, increased first-lien net premiums earned due primarily to higher persistency, domestic first-lien new insurance written decreased 11 percent to $12.6 billion in principal of loans insured, driven primarily by declining mortgage originations from refinancing activity. Quality metrics remained high, with an average FICO score of 750, and an average loan-to-value of 92 percent on new business.


Essent Group Ltd. reported net income for the quarter ended September 30, 2014 of $25.1 million or $0.29 per diluted share. As of September 30, 2014, Essent had primary insurance in force of $46.4 billion and consolidated stockholders’ equity of $794.9 million. For the third quarter New Insurance Written (“NIW”) totaled $8.8 billion, which included $1.5 billion of NIW related to a pool of loans on which Essent Guaranty was selected by Fannie Mae to be the sole insurer. Additionally, Essent’s Bermuda reinsurer, Essent Reinsurance, Ltd. was selected by Freddie Mac to participate in Freddie Mac’s ACIS 2014-2 transaction and insure $28.5 million of risk that Freddie Mac had retained as part of its STACR 2014-DN1 transaction. Also during the quarter, Essent Re began reinsuring new business from Essent Guaranty as part of the affiliate quota share effective July 1, 2014. The average premium margin was up to 56.2 bps, from 54.3 bps from last quarter.


Radian reported a strong operating quarter with lower expenses and lower incurred losses (although this was driven by the BAC settlement). Operating EPS excludes $7.8 million (+$0.03/share) of investment losses and $15.8 million (-$0.07/share) of net fair value gains on derivatives and financial instruments, along with another penny of adjustments. Operating EPS is also based on pre-tax income. New Insurance Written was $11.3 billion – up from $9.3 bn in 2Q and down from $13.8 bn Y/Y. Insurance-In-Force (IIF) increased to $169.2 bn from $165.0 bn in 2Q. Radian Guaranty’s risk-to-capital ratio improved to 18.4x from 18.7x last quarter.


Farmer Mac reported GAAP EPS of $1.02 which included the add-back of $0.4 million of premium amortization along with the exclusion of derivative gains of $2.7 million. The company also reported $12.5 million of core net income excluding the net financing costs of the repo initiative and the effects of pre-funding the Falcon preferreds. The portfolio net spread increased to 89 bps, from 84 bps in 2Q14 and from 83 bps in 3Q13. Outstanding guarantee volume declined to $14.0 billion, with $630.5 million of new business. This was down from last quarter’s balance of $14.1 billion, as paydowns and maturities slightly exceeded new volume.


Toll Brothers pre-announced good numbers (a good sign for luxury home builders, versus, say, D.R. Horton which specializes in starter homes) as deliveries increased 22% in units and 29% in dollars. ASPs increased to $747,000 from $732,000 last quarter and $703,000 a year ago. Signed contracts rose 10% in units and 16% in dollars. Clearly things are still hitting on all cylinders at the luxury end of the market.


PennyMac reported GAAP and operating EPS of $0.69, down from $0.91 in 2Q. The company had a +$0.42 per share of valuation changes and payoffs of mortgage loans; 2) -$0.09 on net interest income; 3) -$0.06 on gain on sale income; and 4) -$0.25 on other revenues. It also had a write-down of excess servicing spread (ESS) driven by higher expected prepayments – possibly made up for in future quarters as it recaptures income from prepayments. The gain-on-sale margin declined to 26 bps based on non-FHA fundings, from 34 bps in 2Q. Total fundings of $8.1 billion were up from $7.0 billion in 2Q. The company also sold $80 million in UPB of performing loans. The company made no investments in NPL and REOs during the quarter, down from $38 million last quarter and $930 million a year ago. The company noted that NPL sales activity remains strong and the company is an active bidder; however, the company believes that recent transactions rely more heavily on home price appreciation and leverage to generate acceptable returns.          The company also added $40 million in new MSRs from its correspondent production. The company now has $533 million of MSR and ESS assets relating to roughly $60 billion UPB.


Nationstar reported GAAP EPS of $1.22. Operating EPS excludes $6.8 million of one-time expenses less $1.2 million of positive MSR marks. Book value increased to an estimated $13.24 from $12.04. Servicing had increased pre-tax profitability at 9.8 bps from 9.0 bps last quarter. Servicing operating earnings excludes $4.4 million of one-time expenses related to the sale of servicing advances and the $1.2 million positive fair value mark on the MSR. The quarter-end servicing portfolio was $377.8 billion (UPB), flat with $378 billion last quarter and in line with our estimate. Origination volume of $4.1 billion was down from $4.4 billion. Gain-on-sale (GOS) income declined to $128.4 million from $151.2 million Q/Q (below our $157.5 million forecast). Based on total closings, the GOS margin came in at 3.48% from 3.93%. Solutionstar revenues came in at $85.5 million from $83.4 million last quarter.


PHH reported 3Q diluted GAAP EPS of $4.00, much of it due to an add-back of a $40 million negative mark on the MSR, along with the exclusion of a $303 million discontinued operations gain attributable to the sale of the Fleet segment. Also noted were $54 million of unusual expenses, including a $24 million charge of related to the early repayment of debt, $22 million in legal and regulatory charges, and $8 million in severance. Pre-tax mortgage banking income fell to a loss of $28 million from a loss of $27 million in 2Q. Mortgage volume rose to $9.9 billion from $9.3 billion. Interest rate lock commitments fell Q/Q to $1.8 billion from $2.1 billion. It had total gain-on-sale margin (as a percentage of IRLCs) of 3.73%, down Q/Q from 3.88%. Core mortgage servicing income was down Q/Q. The decline to a loss of $31 million from $2 million reflected higher servicing expenses than forecast (though the $31 million loss includes $22 million of legal and regulatory charges).


Although most are sick of politics, and politicians are yapping about 2016, I figured we’d sum things up about how the results will impact lending. It won’t take long. Read MBA’s Mid-Term Election Analysis.


But let’s dig a little deeper. Plenty of politicians will want to make the headlines talking about financial regulation. Will some of it be scaled back? Republicans want to have a much bigger hand in GSE reform and the infrastructure for the housing market going forward. At the margin, this means fewer subsidies, or in other words, higher priced MI and maybe slightly higher rates.


Isaac Boltansky with Compass Point Research and Analytics wrote a piece on the election results. Not that I am an expert, but I agree with his summary. “Big bank bashing has become one of the few bipartisan issues on Capitol Hill and we expect the climate for money center banks on Capitol Hill to remain inhospitable in the next Congress…We expect the GSE reform conversation to return to Capitol Hill in the next Congress but doubt that there will be substantive progress…We believe that tax reform will ultimately take a herculean policy effort and a unified political landscape, which underscores our pessimism regarding the prospects of tax reform in the next Congress…The Private Mortgage insurance industry lost a powerful ally with Sen. Hagan’s (D-NC) defeat but the industry remains well positioned on Capitol Hill and ingrained in the mortgage finance system. We continue to believe that the finalization of the Private Mortgage Insurance Eligibility Requirements (PMIERs), which we expect by the end of 2014, will further solidify the PMI’s role in the mortgage finance market and provide a platform for the industry to expand the types of risk it insures…Significant Changes to the CFPB Unlikely. While we expect a concerted legislative effort to alter the CFPB we simply do not believe these efforts will come to fruition given practical and political considerations. We believe that the combination of the White House’s commitment to the bureau’s mission and a lack of a filibuster-proof majority in the Senate are likely to insulate the CFPB from significant legislative changes.”



Okay… in honor of Veteran’s Day, those ad execs have really done it again with this short video.





(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