More on QM & Non-QM Production Possibilities; Cortland Leaving Wholesale and Other Bank M&A News
Welcome to "Talk Like a Pirate Day", even held in Minnesota where I am heading today. Of course, 3.14159...% of sailors are Pi Rates. Let's face it: the financial services industry, which one can argue includes real estate agents, lenders, bankers, etc., possibly pirates, has a large number of rich people working in it. Last year, the richest 10% received more than half of all the income in the United States. Let me repeat that: in 2012, the richest 10% (anyone making more than $114k) received more than half of all income. If you pocketed more than $394k, congrats - you were in the top 1%. There are a few more jaw-dropping numbers in this write-up.
We're all mature until someone pulls out bubble wrap. Speaking of mature, there has been a lot of press lately, including this daily commentary, about non-QM lending, and (gasp) subprime lending, a mature segment. I even saw a list of "ex-subprime" executives, and the companies they're working for now (PennyMac, Rushmore, Caliber, New Penn, and so on). It is easy to make the argument, however, that companies like IndyMac, GMAC, Greenpoint, etc., weren't necessarily subprime, but more Alt-A, and more accepting of alternative documentation than the traditional subprime companies. Institutions such as Beneficial, Household Finance, and Aames, it can be argued, knew their business, knew how to process and underwrite, knew how to service, and knew where to set their LTVs and credit guidelines. And they knew where to set their rates, which is very important in this risk/return world. Could they return? Sure they could - but are LOs, AEs, and borrowers ready to accept 60% LTV, full documentation, 9% loans? We'll see.
And returning to the non-QM space, or even the QM space, many people in the industry are wondering how lenders will avoid some random class-action lawsuits in the future about these loans, or whether DU or LP determining if a loan is QM is enough. Good question. And certainly the market for non-QM loans will increase (but at what price?) although originators probably won't want the risk of possible lawsuits, and will be happy to give up any sign of owning/originating the loan. I have heard from a couple sources that Raj Date's Fenway Partners, which certainly has gained the most press in the non-QM future, does not have plans to "buy" non-QM loans. Insiders say that it is going to obtain "referrals" and close them via a process it is building. If this turns out to the case, some wholesale model derivative will be of great interest to the industry as some type of wholesale execution will probably protect the originator.
Dan Perl with Citadel Servicing in California writes, regarding a note in the commentary ("......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."), "A very timely statement and a big reminder that Mortgage Loan Originators with an eye focused exclusively on QM mortgages are missing a very large economic opportunity. It a mystery to me why any conversation about non-QM mortgages is usually accompanied by a statement that such mortgages are "bad...and might be illegal". What comes with this thought process is a disenfranchising of a good portion of the US public who want and can afford to own a home but for one reason or another in the current restrictive lending environment are locked out of financing. If a number of steps are taken such as explaining the loan program completely and providing the proper disclosures and then coupled with a non- balloon 30 year amortized loan with reasonable points & fees, the lack of a prepayment penalty not to mention a firm handle on ATR ('Ability to Repay') as well as a decent down payment, you have a recipe for making a good paying loan. While not afforded a QM safe harbor; what is created is 'rebuttable presumption' mortgage that is fully compliant with Dodd-Frank scriptures despite being a Section 35 & 32 loan. There is nothing illegal here, or bad - just good business in my estimation."
Banks are definitely looking at QM versus non-QM, especially with regard to designing portfolio products to match their liabilities and continue to earn some doubloons. The second quarter 2013 FDIC is available on line. FDIC-insured institutions reported aggregate net income of $42 billion in the second quarter of 2013, an $8 billion (23%) increase from the $34 billion in profits that the industry reported a year earlier. This is the 16th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income, lower noninterest expenses, and reduced provisions for loan losses accounted for the increase in earnings from a year ago. Year-over-year earnings increased at more than half (53.8 percent) of the 6,940 insured institutions reporting financial results. The proportion of banks that were unprofitable fell to 8.2 percent, from 11.3 percent a year earlier. The QBP provides the earliest comprehensive summary of financial results for all FDIC-insured institutions.
While we're on banks, let's look at some relatively recent bank, especially M&A, news!
Cortland Bancorp in Ohio is exiting the wholesale mortgage business. CSB Mortgage, a unit of the $534-million-asset Cortland, has already stopped accepting residential mortgage loans from brokers, the company disclosed in a regulatory filing. A group of employees will be retained to wind down the unit's operations and to process existing broker-originated loans, Cortland said. Cortland is leaving the business "to streamline its mortgage operations and intensify its focus on its commercial and business banking lending channels and its retail banking offices in its local footprint." Wholesale originations constituted up to 90% of the volume generated by CSB Mortgage at the peak of the business, the filing said. The wholesale mortgage operations brought Cortland gains of more than $1.3 million in the first half of this year and $1.8 million in 2012. Cortland's bank earned $1.7 million during the first half of 2013, according to the Federal Deposit Insurance Corp.
A division of Synovus Bank ($26.2B, GA) will sell 4 Tennessee branches to IberiaBank ($12.8B, LA) for a nameless sum. BB&T CEO Kelly King said at an investor conference that the bank has closed 43 branches (2.5% of total) in recent months as part of a consolidation effort aimed at boosting efficiency. In Virginia Cardinal Bank ($2.9B) will acquire The Business Bank ($331mm) for about $52mm.
KBW has been busy. It announced that Evansville-based Old National Bancorp and Fort Wayne-based Tower Financial Corporation jointly announced the execution of a definitive agreement under which Old National will acquire Tower Financial Corporation through a stock and cash merger. Also announced is that Midland States Bancorp, parent of Midland States Bank, headquartered in Illinois, has agreed to acquire Heartland Bank and its subsidiaries from Love Savings Holding Company, parent company of Heartland Bank. Lastly, Simmons First National Corporation, through the U.S. Bankruptcy Court, approved a Stock Purchase Agreement between SFNC and Rogers Bancshares for the stock of Metropolitan National Bank. SFNC will purchase all of the issued and outstanding shares of common stock free and clear of all liens, claims and encumbrances, and assumes no liabilities of RBI. Under the terms of the agreement, RBI will receive $53.6 million in cash.
So where are bank M&A versus historical averages? SNL Financial reports bank M&A activity so far this year is behind last year's pace. Through the end of August there were 134 deals, so 2013 would extrapolate to about 200. That compares to 236 deals for 2012, 149 in 2011 and 179 in 2010. And research by Hovde Group finds M&A activity each year as a percent of total FDIC insured institutions has been running 4% to 5% over the past 4Ys.
And a few banks are still being closed - but much fewer than in past years. The latest happened in Texas with First National Bank, Edinburg, becoming part of PlainsCapital Bank out of Dallas. And on Friday the 13th The Community's Bank in Bridgeport, CT was closed by the Connecticut Department of Banking. An assuming institution could not be located; therefore, the FDIC will fulfill its obligation to insured depositors by mailing checks for their insured amounts.
How 'bout that Fed announcement? It was a good news/bad news story. The bad news is that the Federal Reserve has a more downbeat outlook on the U.S. economy for 2013 and 2014 than it did three months ago. Are rates going to go back to where they were six months ago? I very much doubt it, not with the continued strong housing and other economic indicators. But the Fed predicts that the economy will grow just 2 percent to 2.3 percent this year, down from its previous forecast in June of 2.3 percent to 2.6 percent. And next year's economic growth will be a barely healthy 3 percent, the Fed predicts, and unemployment is expected to chop around at these 7+% levels - so maybe rates will stay around these levels for quite some time.
The good news, of course, and what the stock market latched on to, is that the Fed will continue to buy $85 billion a month of Treasury and MBS. "The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While "downside risks" to the outlook have diminished, "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement."
And so both stock and bond markets rallied yesterday on the news that the FOMC would continue to buy $85 billion in Treasuries and MBS. (I won't say that the commentary discussed this possibility yesterday...but I guess I just did.) So rate went down, stories of loans locked in earlier in the day being cancelled were rampant, and once again Capital Markets staffs are having their renegotiation policy questioned. By the end of the day the 10-year Treasury note was marked higher by about 1.25 in price, with its yield dropping to 2.71%, and agency MBS prices were all over the map but generally better by a point.
So now we can focus on yammering about Bernanke's replacement (probably Yellen), Congress and the debt ceiling (probably kick things down the road after a lot of headline-grabbing posturing), and daily economic news (probably continue to be mixed). I hope that I am not sounding too jaded. This morning we've had Initial Jobless Claims (expected to increase to +330k from +292k, it actually jumped from a revised 294k to 309k). At 10AM EDT are August Existing Home Sales, Leading Economic Indicators, and the September Philly Fed. The 10-yr. is sitting at 2.71% and MBS prices are almost unchanged versus Wednesday's close.
A seaman meets a pirate in a bar. The two men take turns boasting of their adventures on the high seas.
The seaman notes that the pirate has a peg-leg, hook, and an eye patch. He asks, "So, how did you end up with the peg-leg?"
The pirate replies, "Arrr, we was in a storm at sea, and I was swept overboard into a school of sharks. Just as me men were pulling me out, a shark bit me leg off."
"Wow!" said the seaman. "What about your hook"?
"Well," replied the pirate, "while me men and I were plundering in the Middle East, I was caught stealing from a swarthy merchant. I was arrested and me hand was cut off."
"Incredible!" remarked the seaman. "How did you get the eye patch?"
"A sea gull dropping fell into me eye," grumbled the pirate.
"You lost your eye to a sea gull dropping?" the sailor asked incredulously.
"Well," said the pirate, "it was me first day with the blasted hook..."