Friday the 13th comes three times this year, and this is one of them.
I can think of three more companies that won't be sending chocolate to the CFPB or Federal Trade Commission tomorrow. None of the companies admitted wrongdoing, but were accused by the FTC and fined by the CFPB for falsely implied affiliation with the U.S. government. The CFPB filed a lawsuit against reverse mortgage lender All Financial Services and issued consent orders against Flagship Financial Group and American Preferred Lending. The allegations stem from a joint review by the FTC & CFPB. The agencies surveyed consumer complaints and 800 randomly selected mortgage ads to catch potential wrongdoing. The CFPB said the three companies "imitated U.S. government notices" in mailings to consumers such as an eagle resembling the Great Seal of the United States. Headers on the notices read, "GOVERNMENT LENDING DIVISION" and "Housing and Recovery Act of 2008 Eligibility Notice."
Utah's Flagship has agreed to pay a civil penalty of $225,000 while California's American Preferred will pay $85,000 - probably enough to really hurt but not put them out of business.
Reverse mortgage lenders are particularly interested in All Financial. It is also accused of claiming reverse mortgage borrowers had no monthly payments without informing them they still had to pay taxes and insurance, and supposedly failed to disclose that payments could come due if the borrower dies and the spouse, who did not sign the mortgage, remains in the home.
The CA Department of Business Oversight has fined online loan servicer CashCall $1 million to settle allegations the company deceived consumers, exceeded interest rate caps for nonbank lenders and lied to regulators about how much they would charge for personal loans.
"Well a great black river a man had found
So he put all his money in a hole in the ground
And sent a big steel arm drivin' down down down
Man now I live on the streets of Houston town.
Packed up my wife and kids when winter came along
And we headed down south with just spit and a song
But they said 'Sorry son it's gone gone gone'."
So sang Bruce in "Seeds". Will the decline in oil prices have the same impact on the Texas economy, and other states like North Dakota, Alaska, and Alabama? Remember when a pipeline shut down in Nigeria would cause a spike in oil prices? Now none of our oil comes from Nigeria. Citibank says the US gets about 25% of its oil from overseas sources, and the drop in oil prices is projected to put $1,400 into the pockets of every household in the US. That certainly helps consumer confidence in general, but not if your livelihood is oil. And the New York Times reports lower oil prices could hurt large bank lending to the energy sector and reduce fees. Meanwhile, it could also hit banks in energy producing states with more defaults and also extend to companies that service oil producers in other states.
Jeff B. sent me a note recently saying, "I was amused to learn the price of gas may enable first time homebuyers to save more for a down payment. In most areas they can buy without any money - the underlying challenge remains- lack of wage growth. Middle America is still not enjoying a real recovery."
With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact, and thus an impact on mortgage rates. The two primary factors that impact the price of oil are supply/demand and market sentiment. As demand increases (or supply decreases) the price should go up and vice versa. The price of oil as we know it is actually set in the oil futures market. (Remember that an oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller - either a trader, hedger, or speculator - are obligated to fulfill their side of the transaction on the specified date.)
But speaking of price, analysts are quick to point out that oil prices aren't actually that low on a historical basis. Sure it has gone from more than $100 per barrel to less than $50 in a few months, helping all of us every time we put gas in our car or turn on our thermostats. But $50 a barrel for oil is still kind of high, compared to what it has cost in the past, especially when you adjust for inflation. The average price for imported oil from 1986 to 2004 was $33 per barrel. And there have only been two times in the past 40 years when oil prices jumped to an inflation-adjusted $100 a barrel: in the 1970s and starting in 2008.
While all oil-producing nations are suffering as oil prices collapse, the hardest hit nation is Venezuela. It's getting crushed as oil prices collapse since oil accounts for 95% of export earnings, 45% of budget revenues and 12% of GDP. If oil prices don't rebound soon, Venezuela will default on its $35 billion in foreign debt, unless Beijing continues lending Venezuela more money on top of the $50 billion already lent. And no, I don't know what mortgage rates have down there.
While oil prices here are down 56% since 7/1/14, the picture is vastly different elsewhere because oil is quoted in US dollars. Because the Canadian dollar has fallen vs. the US dollar, when converted into Canadian currency the decline has been less severe at just 49%, while in Russia, oil prices in Rubles are unchanged. Thus, all else equal, oil exploration and production will fall less there than here.
Although lower oil prices are generally good for most Americans, the decline presents another side for states and countries that produce oil, and thus the mortgage banks and banks in those states. Vox Media reports that low oil prices will boost economic activity in 42 US states but will cause economic contraction in 8 others (the largest effect will be felt in AL, ND and TX). Those states whose economic miracles have been based on shale drilling, fracking and more expensive extraction techniques will particularly be at risk. Given their size, community banks are most likely to be involved in lending to smaller companies that support the activities of large oil and gas (O&G) companies or the exploration and production segment (E&P).
Among the unique aspects to E&P is that certain extraction techniques like fracking and oil shale drilling are only profitable and sustainable if oil prices remain reasonably high. A report by Goldman Sachs finds that at $90 a barrel or less, many hydraulic fracturing projects become uneconomic and fracking producers often need a price of $80 or $85 in order to break even.
Underwriters and bankers know that any lending based on commodity pricing carries increased risk and oil & gas companies also typically cannot lower expenses if revenue declines, leaving them in a tough spot if the current environment persists. Banks that have been active O&G lenders should take another close look at their portfolios and consider the ability of borrowers to maintain their cash flows and debt service if the price drop is long term. For banks proactively addressing the riskiest loans and developing damage control strategies at this point is critical.
So yes, the drop in prices generally equates to more money in most people's pockets. There are, however, drawbacks for lenders who have commercial loans with those companies, individuals who have investments tied to them, and borrowers employed in that industry. Caution is advised.
Oil price changes certainly change the economic picture. Economic forecasters are always looking ahead and as the refinance business has heightened analysts are not afraid to opine the implications this may cause. Mortgage-backed securities are sensitive to sudden shifts in rates, resulting in potential negative effects on returns, as borrowing costs impact the rate at which homeowners refinance, resulting in securities being paid off sooner than expected. When securities are paid off more quickly, returns can suffer, which was evident last month. For example, according to Bank of America index data, the mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae last month returned 0.95 percentage points less than other comparable government debt. This was the largest underperformance since November 2008.
Within the past seven years, oil fell to the lowest level last month; similarly, the interest rate for a 30-year fixed rate mortgage fell to 3.59 percent at the beginning of February. The refinance share has boomed among the low interest rate environment, as refinance applications grew 84 percent in the last three weeks of January. This can negatively impact the return on mortgage bonds as more homeowners repay at par loans that are bundled within securities that trade for a higher value. Yet, as oil prices begin to stabilize, bond yields are expected to rise, which should move interest rates above 4 percent, downsizing the refinance market share.
Turning to the markets ahead of this three-day weekend, yesterday we learned that Retail Sales fell 0.8% in January following a 0.9% decrease in December. Initial jobless claims increased 25,000 to 304,000. The 4-week moving average (a better measure) was 289,750, a decrease of 3,250 from the previous week's revised average. With no news of substance this morning the 10-yr closed Thursday at 1.99% and this morning we're at 2.02% with agency MBS prices worse about .125.
Jobs and Announcements
Lucky Union Home Mortgage, a privately-held lender, is currently seeking a VP of Secondary Marketing who is looking to be a valuable member of the Senior Management team. Headquartered in Strongsville, Ohio, UHM is led by industry leader, Bill Cosgrove, the 2015 MBA Chairman. This successful candidate will be in charge of running day to day secondary operations including, pipeline and interest rate risk management, managing best execution and working with an outside advisory firm. UHM is pursuing executives with the ability to grow with it as UHM doubles its current production of $150 million per month over the next 18-24 months. This person must have experience selling to FNMA/FHLMC (cash and MBS) as well as, GNMA securities. If you want to join a company with a successful track record as a retail lender and be a part of an expanding wholesale and correspondent channel contact, Lucas Engle. Relocation assistance available.
Citibank, N.A. is searching for experienced, high-performing Home Lending Officers (HLOs) in key Citibank retail markets including New York, Boston, Washington, D.C., S. Florida, Chicago, Los Angeles and San Francisco. HLOs work with customers to offer lending solutions that meet their home financing needs and promote Citi and its financial services. HLOs work as a team with bank branch staff to drive mortgage originations and will develop key referral relationships with Realtors, Builders, etc. to develop self-sourced business. Ideal candidates will have expert knowledge of lending products, services and pricing alternatives and the ability to explain them to clients and referral sources. Citibank offers the best of both worlds - an established global brand with a 200-year history that operates in many ways like a small local lender. Citi has exclusive products and relationship pricing discounts and offers one of the best retail branch partnership models in the industry. To learn more about Citibank and this opportunity apply today here.
And a well-established Southern California lender is looking to sell "new production, high quality, prime based piggy-back HELOCs on a servicing released bulk or flow basis. The HELOCs are originated behind a DU underwritten agency first mortgage. The HELOC structure is a 30-yr term with 10-yr initial IO period where borrowers are qualified at fully amortizing 20-yr P&I payment. Recent bid tape stratifications show a WAC of 5.345, CLTV 79% (max CLTV 89.9), FICO 745, DTI 42, and average balance of $105k. If you are interested in this great opportunity to add net interest margin to your balance sheet at a low risk, please contact me.
A big shout out to Steve Plaisance who took over the role of CEO of Arvest Mortgage and Central Mortgage, subs of Arvest Bank. (I am proud to say my son and I had burgers with Steve and his kids in Tulsa at Brownie's.)
And a quick congrats to Bret Wedding. AK-47 Holdings appointed him to EVP of AMC Links, LLC. Mr. Wedding is a former military combat veteran who will lead all National Marketing and Business Development efforts of Lehi, Utah's AMC Links. AMC Links is the nation's first statutory registered appraisal management company.