Mergers continue - and every one of them hopes it works out (and not like the cover of The Economist
titled "The Trouble with Mergers"). New York City-based credit union
Education Affiliates Federal Credit Union voted to merge its members and
assets with McGraw-Hill Federal Credit Union. The credit union brings
3,779 members and more than $50 million in assets to McGraw-Hill. The
East Windsor-based credit union will have 24,000 members and more than
$353 million in total assets as a result of the merger.
But specific to the mortgage biz, Ellie Mae announced plans to acquire AllRegs
for $30 million in cash. "The acquisition of AllRegs expands Ellie
Mae's position as the industry's market leader of mortgage technology,
content and services. AllRegs information management solutions are used
by more than 3,000 companies representing every facet of mortgage
banking: major lenders and investors, regulators, Federal and State
agencies, brokers, mortgage services vendors and law firms. AllRegs
product offerings include education and training, loan product and
guideline data and analytics, and the AllRegs online reference library
that includes investor underwriting and insuring guidelines, federal and
state statutes and regulations, Mortgage Mentor 'how to' guides and
plain language interpretation and analysis."
Although Wells Fargo & Chase tend to lead off the bank earning season, we have continued to have a plethora of 2nd
quarter earnings. Here is a random collection of mortgage
company-related earnings, certainly highlighted by the continued success
of the agencies, which can give us a clue as to the trends in mortgage company revenues.
had operating EPS which excludes a $10.7 million negative MSR valuation
adjustment and a small amount of stock comp expense. 2Q origination
volume came in at $3.31 billion, up from $2.42 billion in 1Q and
gain-on-sale margins increased QoQ to 141 basis points: the higher
volumes and a higher gain-on-sale margin beat estimates. (Rate locks per
day averaged $72.8 million in 2Q versus $55.0 million in 1Q14.) The
period-end servicing portfolio was $16.7 billion of UPB, up from $14.1
billion in 1Q.
reported earnings where orders increased 32% in value and 25% in units.
The cancellation rate was 24%, though. Interestingly, gross margins
fell: many builders have been able to increase prices faster than input
costs have gone up. There were some special items in that number so the
year-over-year decrease could be misleading.
Nationstar Mortgage Holdings, Inc.
had earnings per share of $0.74. The servicing pipeline was flat at
$300 billion but the servicing portfolio decreased during the quarter.
Servicing operating earnings excludes $25.7 million of one-time expenses
related to the sale of servicing advances and fair value mark on the
MSR. The quarter-end servicing portfolio was $378 billion (UPB), down
from $384 billion last quarter. Origination volume of $4.4 billion was
down from $4.7 billion. Gain-on-sale income increased to $151.2 million
from $116.2 million Q/Q. Based on total closings, the GOS margin came in
at 3.93% from 2.72%, and the total application pipeline increased to $5
billion from $3.5 billion in 1Q, while the recapture rate during the
quarter decreased to 32% from 49% sequentially.
PennyMac Mortgage Investment Trust
earnings came in better than expected, possibly due to higher valuation
gains on non-performing loans. PennyMac reported GAAP and operating EPS
of $0.91, up from $0.50 in 1Q, due in large part to +$0.40 per share of
valuation changes and payoffs of mortgage loans. Book value increased
to $21.27 from $20.88. The company also carries some of its MSRs at
lower of cost or market (LOCOM) and noted that fair value of MSRs is
$20.5 million ($0.28 a share) above carrying value. Net gains on
investments totaled $73.1 million, up from $42.6 million QOQ and driven
by rising prices on NPLs and RPLs in the market place and home price
appreciation. On the mortgage banking side, the gain-on-sale margin
decreased to 34 bps vs. 52 bps last quarter (as a percentage of
closings). Mortgage volume rose to $7.0 billion from $4.8 billion Q/Q.
second quarter 2014 financial results were good with "Net income of
$175 million, or $0.78 per diluted share. It executed its growth and
diversification strategy through the acquisition of Clayton - a leading
provider of outsourced mortgage and real estate solutions. Radian is the
largest MI company with $165 billion in insurance in force. Shrinking
legacy FG book - 82% decline since the company stopped writing new
business in 2008."
Bloomberg writes that "Radian
Group Inc. bought $100 million of default protection on an MBIA Inc.
unit to help hedge against losses on a collateralized loan obligation
backed by the two insurers. Radian
is the second insurer, behind MBIA Insurance Corp., on a guarantee of
about $377 million on a CLO called Zohar that's backed by loans to
smaller companies. Radian purchased half of the protection in August
2013 and the rest in June. Radian's CFO noted, 'We think there's
certainly a risk of them defaulting, given their structured-finance
portfolio, and also quite frankly their exposure to the transaction.'")
Richmond American Homes (M.D.C. Holdings)
saw net income of $21.5 million, or $0.44 per diluted share vs. net
income of $224.9 million, or $4.55 per diluted share and pretax income
of $34.0 million vs. $38.0 million. Net new orders were up 5% to 1,419
homes with the dollar value of net new orders of $544.8 million, up 12%.
Home sale revenues were $430.7 million, up 8% vs. $400.3 million and
average sales price increase of $33,600 per home, or 10%, to $372,000.
Homes delivered totaled 1,158 down slightly from 1,183. "For the
homebuilding industry as a whole, the spring selling season was modestly
slower than a year ago, highlighting volatile conditions in the
short-term as the industry continues down a broader path of long-term
growth. We saw hesitation from some potential buyers, especially in the
first-time buyer segment, following a significant run-up in home prices
in 2013 and tepid economic trends that have persisted for much of the
announced average selling prices rose 12% to $328,000, and gross
margins came in at 23.6%, up 480 basis points year over year. Closings
dropped 9% in units, however, so Pulte looks to be following the typical
builder pattern of higher prices / lower units.
(The WSJ has a good piece on
the weakness of housing, particularly housing construction. As we know,
housing starts have been mired below 1 million units for what seems
like forever. Normalcy is around 1.5 million units historically. When
you look at residential construction's contribution to GDP, it is been
about 2.5% - 3%, much lower than its pre-bubble level of 4% to 5%. Not
only that, but residential construction usually leads an economy out of
Freddie Mac and Fannie Mae each reported out another successful financial
quarter as each continued to reduce their respective distressed loan
portfolios, replacing them with later vintage performing loans. Neither,
however, reported profits at the record levels seen earlier as their
portfolios shrink and legal settlements taper off. "The increase in
credit-related income was due primarily to an increase in home prices,"
Fannie Mae said in a statement. Fannie Mae reported net income and
comprehensive income of $3.7 billion for the second quarter of 2014 while Freddie Mac's net income was $1.4 billion. Fannie Mae will pay $3.7 billion in dividends to the U.S. Treasury in September and Freddie Mac will pay $1.9 billion. Once
Fannie has made the latest payment in September, it will have returned
$130.5 billion to taxpayers in return for the $116.1 billion in taxpayer
aid it received. The GSEs in aggregate will have sent the Treasury
Department nearly $219 billion in cash payments on its $189.4 billion in
senior preferred stock by the end of Q2 2014.
Two Harbors Investment,
a big buyer of servicing, reported GAAP and operating EPS of $0.11 and
$0.24, respectively. The difference between GAAP and core earnings
reflected realized and unrealized gains on assets and derivatives.
Operating EPS of $0.24 was flat with $0.24 in the prior quarter and up
from $0.21 Y/Y. The net interest spread decreased to 3.38% from 3.44% in
the prior quarter. The yield on Agency RMBS, derivatives and MSRs (the
rate portfolio) decreased to 3.7% from 3.8%, while the rate on
non-agency MBS decreased to 9% from 9.2%. At quarter end the company's
MSR stood at $500.5 million from $476.7 million Q/Q and represented
loans with a UPB of $45.6 billion (from $41.6 billion Q/Q). The company
added a previously announced $4.6 billion bulk MSR acquisition during
the quarter as well as flow amounts.
Redwood Trust, Inc.
had lower mortgage banking gains, although core earnings was negatively
impacted by timing differences on jumbo pipeline hedges. Book value
decreased to $15.03 from $15.14 on the dividend in excess of earnings,
as well as a higher share count. Redwood had lower mortgage banking
income, along with slightly higher expenses. (Redwood reported income of
$6.3 million from mortgage banking activities in 2Q, up from a $0.7
million loss in 1Q.) Residential loan acquisitions totaled $1.8 billion
during the quarter: conforming loan acquisitions of $868 million was up
190% from 1Q and management is shooting for $1 billion a month by
year-end. Redwood completed only one residential securitization during
the quarter, consisting of $351 million of jumbo loans. The company also
completed a second securitization of $306 million that closed in July.
Management noted that jumbo gain-on-sale margins came in above the high
end of its targeted 25 bps to 50 bps range but that conforming margins
were around break-even. This reflects both the more competitive nature
of the conforming market and the fact that the company is building out
its conforming business and rapidly taking market share. The residential
pipeline looked good at $2.0 billion, which includes $1.6 billion of
jumbo volume and $400 million of conforming loans.
second-quarter earnings at the country's largest mortgage banks met
analyst expectations, according to a recent report from Keefe, Bruyette & Woods. Mortgage activity increased from the previous quarter, but remained well below last year's results,
the report showed. "A rise in originations boosted second-quarter
profits at the ten largest banks, including Wells Fargo, JPMorgan and
Bank of America. Origination volumes climbed 22% from the previous
quarter, to $108.4 billion. Originations were 60% lower, however, than
the same time last year. Gain-on-sale margins were generally flat, due
to strong industrywide competition. The average margin was 202 basis
points, or one basis point higher than the previous quarter."
rates are better this morning - because of turmoil overseas and
possible air strikes in Iraq. We saw a 2.42% close on the 10-yr., and in
the early going rates are down nicely with the 10-yr yield at 2.40% and agency MBS prices lagging but better by a shade.
This is the lowest yields have been all year, and is certainly lower
than the 3.00% where we began 2014 - so far proving all the "experts"
wrong about higher rates. 2nd quarter productivity - the only news - came in at +2.5% and labor costs were +.6%.
lenders thinking about selling or merging, "As the market continues to
consolidate and the cost of compliance gradually increases, it leaves a
significant opportunity for acquiring strong retail talent and
origination market-share", says Dr. Rick Roque, principal of MENLO, an investment banking consulting firm whose efforts help mortgage lenders raise capital, be acquired or seek to attract/expand their production. "Origination
teams, divisions of other companies, or independent mortgage banks are
calling me because their present circumstance is either
under-capitalized or uncertain - they know they can have better
products, pricing and improved execution with less risk, but filtering
through the companies who are high risk versus those who are the right
fit, is too risky of a decision to get incorrect. So if you are a team
of LOs doing $3-5M/month in volume, OR an independent mortgage bank /
broker doing $5M per month to $100M/month in volume (~$60M to $1B+
annually), contact me to review acquisition options. Specific markets of
interest are the North East/New England, Arizona, California, Florida,
Wisconsin, Minnesota, Illinois, Kansas/Missouri, Wyoming, Virginia and
Maryland." Inquiries can be directed to Dr. Roque.