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.

Stonegate 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.

D.R. Horton 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.

Radian's 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 past year."

PulteGroup 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 recession.)

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.

Overall, 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."

Yes, 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%.


For 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.