can be a minesweeper - once. But not "once in a while." This note
reached me: "Rob, every once in a while you'll mention 'AOT' like everyone
should know what that is. Aioli, onion, and tomato sandwich? What is it, and
how does it help LO's like me?"
Sorry about that - "AOT" stands for "assignment of trade." An assignment of trade is a tri-party agreement between an Assignor (like an originator's lock desk), an Assignee (a correspondent lender like Wells or GMAC) and a broker/dealer (like Goldman Sachs or Cantor Fitzgerald). A lender will sell a mortgage-backed security to a dealer, often to hedge (protect) its interest rate risk. At some point in the future the dealer is expecting this security to be delivered to it, and the seller is obligated to deliver it unless it buys back the security ("pair it off").
But a third option exists whereby the lender sends the loans to Wells (the assignee), and assigns the trade to them as well. At that point Wells is obligated to deliver a security to the dealer. Put another way, after the MBS is sold to the dealer, when the loans are closed and ready to be delivered, the originator sends the files to the correspondent lender who then delivers the MBS to the broker/dealer (at which time the originator lock desk has fulfilled its delivery agreement while avoiding pair-off fees). Avoiding expenses is the name of the game, whether it is the lender not paying the bid/ask spread to the dealer, or not paying the assignee for failing to deliver any loans. In theory saving these expenses leads to better pricing to originators.
To take this a little further, the lender is essentially investing in the servicing strip (sometimes there's excess servicing too) while the lock desk is executing at TBA prices instead of the lender's marked-up rate sheet. AOTs are generally more profitable when servicing released premiums are rich, which is not the case at the moment. That is why so many originators are setting up relationships with sub-servicers.
Speaking of MBS, I have received several questions about how the 10 basis points increased guarantee fee will impact pricing. First, don't be confused on who will pay for it: new borrowers on Fannie, Freddie, and FHA loans. The 10 basis points will be in either rate or price. In very basic terms, a guarantee (or guarantor) fee is spread out over the years. With a 25 basis point guarantee fee the basic calculation for conventional loans is:
4.50% mortgage rate -.25% (servicing) -.25% g-fee = 4.00% security rate. This is why 4.50% mortgages go into a 4% security. If you want to put a 4.50% mortgage into a 4% security after this, the lender will have to pay an upfront fee, let's say for simplicity pegged at 2:1, to buy down the guarantee fee to .250%, so the actual upfront cost will be higher/worse by 10 bp. x 2 = 20 basis points.
PIMCO knows a lot about mortgage security pricing and values, but Bill Gross has made some bad choices recently. The Financial Times reports that, "Pimco's flagship bond fund, the world's largest, experienced annual outflows for the first time in its history in 2011, according to research group Morningstar. The $240bn Total Return Fund run by Bill Gross had attracted fresh investor capital every year since its inception in 1987. However, Mr. Gross ranked behind more than two-thirds of his peers last year, following a high-profile bet that US government debt would fall in value. Investors pulled $1.4 billion from the Total Return Fund in December, taking outflows for the year to $5 billion, according to Morningstar. Since November 2010, Pimco has seen a net $13.7bn pulled from its flagship fund. To the end of November, Morningstar calculates that US investors allocated a net new $122bn to fixed income funds, while taking $74bn out of domestic stock funds. It follows a year in which Mr. Gross found himself on the wrong side of one of the best trades of 2011, buying US Treasuries, with long-term bond funds offering returns of more than 30 per cent. In February, Mr. Gross warned that demand for Treasuries would fall when the Federal Reserve's bond-buying program, known as quantitative easing, came to an end, and voided his fund of exposure to government paper."
New mortgage applications help fill
the supply of MBS's, and they are down:
the MBA notes that apps fell about 4% for the week ended 12/30 (purchases
-9.6%, refi's -2.5%). Refinancing applications represented about 82% of total
mortgage activity in the latest week, the highest share of the year. The MBA
released data for two weeks this morning, rather than one, because of the Christmas
and New Year holidays, and in the week ended December 23, total mortgage demand
climbed 0.3 percent, with refinancing up 0.5% and purchase applications down
0.1% - no surprise to lock desks.
Is MICA missing the boat on accurately monitoring the private mortgage insurance business, as some would suggest? Mortgage Insurance Companies of America is the trade group representing Genworth, MGIC, Radian, and RMIC. These companies that report through MICA wrote 25,074 new policies in November against 27,970 applications received for coverage. According to the monthly statistical report on its member companies from MICA, this was down substantially from October's book of business when 29,508 applications were received and 26,293 policies written. But heck, PMI and RMIC aren't writing new policies. And MICA's numbers don't include UG, which has really come on strong in 2011, and Essent, also up and coming.
Remember the banks that still owe TARP money? Bloomberg reports Regions Financial has reportedly ended talks to sell its Morgan Keegan brokerage to Stifel Financial after the two companies could not reach agreement over terms. Regions' is reportedly now in talks with Raymond James as it seeks a buyer for Keegan to boost capital and repay $3.5B in TARP.
At the end of last week Mountain West Financial noted a change in its relationship with AXIS Appraisal Management. It has subsequently released information to correct the bulletin since it (the bulletin) conveyed a different message then what MWF intended: "Mountain West Financial would like to clarify a recent bulletin to our mortgage brokers. We are not severing our relationship with AXIS Appraisal Management and continue to value them as an AMC. We are merely revising our ordering protocol to direct all appraisal orders to be placed through our Appraisal Department."
O2 Funding? This is the wholesale company that previous Option One management opened up in 2011. Now there's a bulletin on their home page that states they're not accepting any new rate locks, applications, or submissions until sometime into the 1st quarter - that is certainly one way to shut off business: http://o2funding.com/.
On the flip side, most agree that large aggregators offer excellent traditional lending programs, but they often burrow niche loans for themselves, offering them to homebuyers directly through retail channels, and their purchase turn times are wreaking havoc for sellers. This leaves mortgage bankers with few options in the secondary market. There are, however, a few smaller aggregators that offer mortgage bankers options. One such company is Pacific Union Financial. "Their niche has been offering a minimal overlay FHA and FNMA product (scores to 560, no DTI limitations with approve eligible, flips over 20%, 5-10 NOO, etc.) and they recently released a standard FHA product (that still allows high DTI and flips with over 20% appreciation) and offers a 5 day review turnaround." They're at www.corr.pacuniondirect.com - and no, this was not a paid advertisement.
Turning to the markets, remember Europe? Nothing has essentially changed there: they will continue to struggle to find a cure-all for their debt problems but after two years of little to no progress, smart folks are not expecting much. Its debt crisis may pull Europe into a recession, and then the question is whether or not it will pull the U.S., and the world, into a recession?
But here in the United States of America, "an ongoing modest acceleration in economic activity" seems to be where we are. The Institute of Supply Management (ISM) number beat expectations yesterday, and is at its highest level since April 2010. And construction spending came in stronger than expected at 1.2% in November but that was offset by a downward revision to the October figure. Private construction spending is the highest since 12/09, and Federal construction outlays increased 5.3%, the biggest gain since August. But the FOMC minutes showed that the Fed saw few signs of recovery in the housing market with home prices continuing to decline in most areas of the country.
By the end of Tuesday the 10-yr T-note's yield stood at 1.96%, but the price story for mortgages, and mortgage-backed securities, was much better. Once again, supply and demand are helping mortgage prices: the Fed is buying MBS's, as are investors, money managers, hedge funds, and banks. So although the 10-yr was worse by about .75, MBS prices were only off .125. This morning we'll have Factory Orders for November at 10AM EST, but so far rates are nearly unchanged at 1.94% with MBS prices a shade better.
"Where are you from?"
Harvard grad: "I come from a place where we do not end our sentences with prepositions."
Texan: "Okay - where are you from, jackass?"
If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the time frames for borrowers returning to A-paper status after a short sale or foreclosure. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.