Latest on Fannie & Freddie; Stearns Takes #1 Wholesale Spot; Servicing ValuePrimer
Every lender & servicer, and therefore borrower, is influenced by the price of servicing.
And in recent months we have all seen large blocks of servicing being
sold and bought. I received this note on the topic: "Rob, I have a basic
understanding of how the price of a loan is based on the value of the
asset - basically the coupon passed through - plus the value of the
servicing. The value of the asset is based on the bond market, but what makes up the value of the servicing?"
I will be very brief, since very lengthy documents have been written
about valuing servicing. And easy way to explain it to someone else is
in terms of cash flow: there is more value in a series of payments that
last a long time, and are safe - just like anything else.
part of the MSR (mortgage servicing rights) valuation, servicing firms,
investors, etc., enter several different assumptions to come up with
These include the float on principal and interest and prepayments
(dependent on a multitude of factors, not the least of which is how the
lender is selling the loan, and how the loan is being serviced), the
cost to service a loan per year (the more loans a company is servicing,
the lower the cost per loan since overhead is spread out), the discount
rate (there are tiers for excess servicing which doesn't apply on cash),
the projected delinquency rates and additional costs associated with
delinquencies, earning rates on escrows, escrow advances, and growth
rates. Some prefer to put a cap on the multiples of servicing - basis
points that the MSR cannot exceed. But those are the basics, and just
like the bond market, the values and perceived values are always
How are Freddie and Fannie doing?
They're making some nice coin, but at the expense of borrowers who are
the mainstay of the cleanest, most thoroughly underwritten and
appraised, heavily documented loans in history. (Granted, some of this
is going to pay for a tax break extension - remember Congress voting
that in?) The industry and MBS investors are keenly interested in how
credit is impacted by rates, fees, guidelines, compliance costs,
consolidation in the industry - it will all be a real case study. But
through its 10-k Fannie reported that its average gfees went to 57.4bps
in 2013 from 39.9 basis points in 2012, which was up from 28.8bps in
2011, including upfront fees amortized over expected loan lives. The
increase last year included 10 basis points in average base increase,
greater LLPAs on higher LTVs, lower FICO loans, and the fabled effects
of 10 bps increase passed through to government. Roughly 40% of net
interest income in 2013 was from g-fees on loans in MBS, compared with
~30% in 2012, ~25% in 2011 - one can expect this trend will continue and
in the near future g-fees will be primary source of revenue.
why is the U.S. downplaying the huge profits at Fannie & Freddie?
Wall Street Journal writer Nick Timiraos points out that Michael
Stegman, the Treasury adviser, warned that those recent returns "may
significantly overstate the true financial condition" the companies,
"especially on a go-forward basis." Some of the profits came from
one-time tax reversals as the companies reversed huge write-downs they
were forced to take in 2008. More came from releasing loan-loss reserves
and one-time legal settlements with Wall Street banks or lenders. And
just like homeowners out there, their financial outlook has benefited
significantly from strong home-price appreciation and low interest
rates, both of which may moderate in future periods.
the "why kill the golden goose" question, Mr. Timiraos wrote that,
"First, the Obama administration doesn't want the profits to remove the
urgency for Congress to decide how to overhaul Fannie and Freddie. Some
stakeholders 'mistakenly argue that housing finance reform is no longer
needed -- that the [companies] are so financially flush' to reduce the
need for legislation, he said. 'We could not disagree more.' The
administration has made clear it doesn't support returning Fannie and
Freddie to their former duopoly status as 'government-sponsored'
entities that are neither fully private nor fully public. The profits
could not only remove the urgency for any overhaul, but they could also
lead lawmakers to grow more comfortable with less dramatic changes
whenever they get around to proposing such an overhaul." But really...
during an election year? There are many that say when there are other,
more pressing issues that Congress is having trouble coming to a
consensus on, not only is any substantive change proposal unlikely this
year, but everyone is in agreement that it will take years of work to
Mae recently calculated that there is some evidence that it may have
become a little easier for some Americans to obtain a home loan.
Looking at FICO, which is only one score, the average credit score for
approved mortgages fell to 727 in December, down from 748 one year
earlier. (FICO credit scores run on a scale from 300 to 850.) The report
said that some 46% of mortgages that closed in December had credit
scores above 750, compared with nearly 57% one year earlier. Meanwhile,
around 31% of loans had credit scores below 700, up from 21% one year
earlier. The data also showed that the average debt-to-income of
borrowers increased: loans closed in December were 39%, up from 35% in
June and 34% in January.
are plenty of LOs who will argue that this shows that the easier loans
with higher credit scores have been done, and much of what the industry
has left are tougher to do.
Others will say that home prices have stopped falling and the economy
is slowly improving, making lenders more comfortable to extend loans.
Big drops in refinances, impacting volumes, could also lead lenders to
become more competitive for home purchases. We're already seeing an
upswing in interest in non-QM lending, and in lenders that offer that
product. Analysts say it is normal for borrowers with weaker credit to
seek out refinancing as rates go up and as the refinance cycle nears its
Let's see what lenders and investors have been up to in recent weeks. But first a clarification to posting Friday regarding United Wholesale Mortgage.
("United Wholesale Mortgage has rolled out its new UWM Track, which
allows brokers to track the status of a loan in order to provide
realtors with up-to-date information. When
viewing their loan pipeline in the EASE portal, brokers can see when a
loan is submitted to underwriting, has its conditions reviewed and
cleared, been approved, when prep and closing documents were sent to the
title company, and when it can be expected to fund.") The UWM Track is
actually a service that allows the Realtor to see the process of the
loan. The broker provides a realtor with a log in and password to a
separate portal via UWM's website, and the Realtor can actually track
the loan in process.
As a reminder, Arch US MI, the US-based subsidy of Arch Capital Group Ltd., has acquired CMG Mortgage Company from PMI Mortgage Insurance, allowing it to serve lenders in all states, including CMG MI's existing credit union customers. It
has also entered into a distribution agreement with CMFG Life Insurance
Company and a reinsurance agreement with an affiliate of CUNA Mutual. CMG is approved with both Agencies as an MI provider.
Congrats to Stearns Lending, which became the #1 wholesaler in 2013.
First Guaranty Mortgage Corp.
appointed Gretchen Malatesta as its new Chief Strategy Officer, where
she will be responsible for managing the company's overall corporate and
geographic growth strategies. Malatetsa previously served as Executive
Vice President and CFO of Greenlight Financial Services, Chairman and
CFO of The Magi Companies, Managing Director of Guggenheim Capital
Markets, and Chief Accounting Officer at Impac Warehouse lending Group. She
participated in the securitization of $50bn residential MBS and $5bn
commercial MBS structured as Non-Agency MBS, RMBS, CMBS, REMICs, and
CMOs and the offerings of over $1bn in equity capital.
A few weeks back Thomson Reuters has launched its new Exchange magazine, a digital publication specifically designed to share news and analysis across a variety of financial industries. Each
quarter will address several key topics; this issue features articles
on the Q4 TRust Index findings, crowd psychology, governance survey, and
the Breakingviews annual predictions, amongst others. Download your copy.
seem fairly content where they are. Data last week provided further
evidence that the economy has lost momentum since the start of the year,
although activity has not fallen off the cliff. Nearly all of the
monthly data seem to have been affected in some way by the storms and
prolonged cold that has plagued the United States since the year
started. Friday's employment data (a 175k gain in employment last month
followed by a revised +129k increase in January, beating expectations,
and the jobless rate at 6.7%) is still being discussed, but the strength
led to a selloff in fixed-income securities (including agency MBS which
worsened about .250).
week is pretty light on the economic calendar. Aside from some "third
tier" economic numbers that rarely move rates and whatever might happen
overseas, we don't have anything until Thursday's Retail Sales number
which measures the total receipts at stores that sell merchandise and
services to customers. Weekly Initial Jobless Claims and some Import
Price numbers come out Thursday as well. And then on Friday we have the
Producer Price Index (PPI) to show us inflation at the producer level
(but inflation has not been an issue in a long, long time) and the
University of Michigan confidence numbers. Agency MBS prices are roughly unchanged from Friday's close, and the yield on the 10-yr is sitting around 2.80%