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Things are Good in Servicing, Credit Unions and MI; Will the Industry Embrace Non-QMLoans?
The industry is moving toward more acceptance of non-QM loans. The CFPB will be the first to admit that just because a loan is not QM doesn't mean it is a bad loan. And lenders will stress strategic advantages, if they have any. In the past any slowdown in production meant lower margins, lower underwriting documentation guidelines, etc. There is the usual scramble for jumbo lenders, as well as regional or community banks that might have an appetite for anything with less than a 5-year duration. And then there are the lenders, and MI companies, who are trying to ease guidelines to stay competitive and gain (or even retain) market share. The more things change, the more they stay the same...
As most in the industry know, the recent rise in interest rates has led to a decline in the refinance share of mortgage applications and originations. It's the natural ebb and flow of the mortgage markets coupled with consumer behavior. According to the guys and gals over at Goldman Sachs "In June 2012, 75% of conventional mortgages had a 100bp or greater refinance incentive, vs. only 30% today. Maintaining significant mortgage origination volumes going forward will thus depend crucially on growth in the number and size of purchase originations."
Yes, the often relied upon, but all too often forgotten 'Purchase Market' is starting to garner attention. Today's purchase market (or that of 2012) is approximately a third in volume originations than it was in 2005; $500B last year, compared to $1.5T in 2005. The lower level of purchase volume is obviously due to fewer home sale transactions and, to a lesser degree, lower house prices. But it is also significantly impacted by a growth in cash transactions (or, equivalently, a decline in home purchases which are financed with mortgages). So what are the "experts" saying about the purchase market; in a nutshell Goldman Sachs' Credit Strategy Research Group project an increase in purchase origination volumes from today's low levels: growth will come from an increase in home sale transaction counts, house price growth leading to larger loan sizes per home sale, and a slow return of the share of home sales financed by cash back to more historically normal levels. By 2016, analysts project purchase originations of $1.1 trillion, roughly equal to the level seen in 2002.
Sometimes in life, it's never too early to start worrying. Case in point, when the mechanic working on my car last week got on the phone and said, "Don't know yet, too soon to start worrying, Mr. Christmas," I started to worry. However, when the boys and girls over at Wells Fargo Securities Economics Group published their special commentary Housing Data Wrap-Up: August 2013; Too Soon to Worry: The Housing Market Is Simply in Transition, I slept a little easier that night. They write, "While rising mortgage rates are ultimately behind much of the slowdown in housing activity, the decline and its implications are not that straightforward. Higher interest rates have made investing in single-family rental homes less attractive and may also have temporarily priced some would-be buyers out of the market." Their ultimate conclusions, if you can ever box in an economist for just ONE conclusion: The housing recovery continues to be driven by fundamentals, which are improving. Job growth has picked up, mortgage rates remain low and consumer confidence is rising. While the fundamentals are improving, they have not improved as much as prices. Prices have been inflated by investor purchases of distressed homes, low inventories of non-distressed properties and the slow ramp up of new home construction.
But things are pretty darned rosy over at the credit unions! According to the National Credit Union Administration, second-quarter data shows federally insured credit unions experienced brisk loan growth, reporting their highest net worth since 2008 and record membership levels in the second quarter. Megan Hopkins writes, "Loan activity increased 2.3% in the second quarter, and 5.5% over the past four quarters - the strongest growth for that length of time since the beginning of 2009...Membership in federally insured credit unions hit 95.2 million, a record high, in the second quarter of this year - up by 560,670 members, or 0.6%. Nearly 2.1 million Americans have joined a credit union in the last four quarters, NCUA reported." With lower cost-to-funds, access to customer base, and historically lower default rates in mortgage space, credit unions have certain comparative advantages than traditional lenders, making them ripe to grow their lending business' in a contracting market.
And things are pretty darned rosy in the servicing sector. IMA, Phoenix, and MountainView (as well as others) continue to churn out deals. For example, since the beginning of August, MountainView Servicing Group brought eight bulk MSR packages of FNMA, FHLMC, and/or GNMA servicing totaling $5.3bn in UPB to market. In all eight cases, the seller received bids above their booked value and MountainView's assessed fair value. In some cases, winning bidders noted that they bought the portfolios to a modeled yield around seven percent. "And we had six different buyers win at least one of the eight MSR portfolios. Of note, the larger the portfolio, the stronger the relative price and most buyers are still discounting above 100% HARP servicing (however, there are buyers out there willing to pay strong levels for high LTV HARP servicing given their stellar performance). And we currently have a $635mm FNMA A/A MSR portfolio in the market and two larger deals are scheduled to come to market within the next week." (If anyone would like to obtain more color on recent transactions, would like to be added to MountainView's deal distribution, or would like to know where their MSR portfolio would trade, please reach out to Matt Maurer at email@example.com.)
It was bound to happen: the NAIHP is planning on suing the CFPB. "The CFPB is an independent agency with NO OVERSIGHT. From their inception on July 21, 2011, they have continually used their authority to pick winners and losers, causing unprecedented harm to consumers, mortgage brokers, loan originators, appraisers and other small business housing professionals. In order to stop these anti-consumer, anti-competition, job killing rules, NAIHP is filing suit. Before we take action, we need your support." Here is more information.
Huh? Seattle & eminent domain? "Seattle city panel gets bad data on home debts...A Seattle City Council committee gets bad data on underwater homeowners. A Seattle City Council committee heard this past week that more than one in three Seattle homes with outstanding mortgages is underwater - a rate far above the national average. That was the statistic City Councilmember Nick Licata highlighted from a city-commissioned report delivered last week by Cornell University law professor Robert Hockett, who recommends cities force lenders to reduce the principal owed on loans. Problem is, the 1-in-3 statistic is seriously outdated and doesn't represent Seattle proper. Taken from Seattle-based Zillow, it applied to the fourth quarter of 2012 and covered a broad metro area that includes hard-hit Pierce and Snohomish counties." Here you go.
Let's go on to some private mortgage insurance company updates - read the actual bulletins for full details!
This in from Bermuda: Essent Group Ltd. announced that it has filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common shares. So the parent of Essent (the MI company) could raise up to $287.5 million in an initial public offering of its common stock. Essent, which has about 800 customers, reported new insurance written of $10.2 billion for the six months ended June 30.
Genworth U.S. Mortgage Insurance, a unit of Genworth Financial, announced it will reduce rates and expand its "Simply Underwrite" guidelines to eliminate nearly all overlays and ensure ease of use for customers that deliver loans using the automated underwriting systems (AUS) of the government-sponsored enterprises (GSEs). The credit policy changes, effective for mortgage insurance applications received on or after September 16, 2013, closely align Genworth's requirements with those for loans approved by DU and LP. "As a result, loans up to 97 percent loan-to-value, with Fair Isaac and Company (FICO) credit scores as low as 620 that are approved by the GSE systems also are likely to be approved for mortgage insurance coverage by Genworth USMI. Lenders only have to verify that the borrower contributed a minimum of three percent of the home purchase price from their own funds."
UG alerted clients about a change coming next week. Effective September 23, "We are changing the underwriting requirements detailed below...Minimum Contribution from Borrower's Own Funds - Acceptable Sources (Gifts/Grants); and Housing Finance Agency (HFA) Loans Using Expanded Requirements. All underwriting requirement documents will be updated to include these changes. Minimum Contribution from Borrower's Own Funds - Acceptable Sources - Gifts/Grants will be considered the borrower's own funds for purposes of meeting United Guaranty's minimum borrower contribution requirement when all of the following underwriting requirements are met in addition to standard Agency gift/grant requirements.
Exceptions to these requirements are not allowed, including the Performance Premium credit score and DTI ratio variances. (As always, read the bulletin for complete details.)
This morning the MBA released its weekly applications numbers for last week. Applications for U.S. home loans were higher last week by 11%. This is obviously better than the 13% drop the prior week, although analysts are quick to point out some "noise" from the Labor Day holiday. The recent jump in apps has lenders hoping for a good October. Refis were up 18%. To reduce the holiday influence, looking at the two-week average, refis are off by 3% each week and purchases flat, with conventional refis off 2.5% and GNMA refi's off 5.7%. And the 90 day moving average is off by another 6%.
Well, this afternoon (late morning on the West Coast, early morning in Hawaii) the Fed will finally give some substance to what those in the financial press have been yammering about for months. I predict that the Fed will either announce a scaling back of purchases, leave things as is, or announce a tapering to start time in the future. And I predict that bond prices will go up, go down, or stay the same - all possibly within minutes of the 2PM EDT announcement - as investors take their bets off the table. A move from $85 billion to $75 billion is sure in the cards. I am sure it will be a discussion topic in the post-game interview with Coach Bernanke.
So yesterday we saw another improvement in price, both in agency MBS and in the 10-yr T-note. Hey, better than going the other way, right? Besides the much-discussed Fed announcement today at noon MST, we'll have August Housing Starts (+917k expected versus +896k previously) at 8:30 a.m. Here in the early going, the 10-yr yield, which closed Tuesday at 2.85%, is at 2.87% and current coupon MBS prices are off about .125.
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