Curfews and civil unrest have replaced COVID in the news. Meanwhile, investors are watching record low debt issuance yields from companies like Amazon and Costco (1.50-1.62 percent 10-year notes, lowering their cost of capital dramatically). Low rates for a mortgage these days are certainly more common than finding a jumbo investor offering a 20 percent down product. And those rates could be with us for a long time, impacting LO business and servicing values. Many believe that the Federal Reserve will basically repeat its “postcrisis playbook” from ten years ago and leave the overnight Fed Funds rate near zero for several years. A spike in inflation has not been an issue for decades. (In fact, consumer price increases have been very steady.) What may not be steady is individual states dealing with forbearance or loan modifications from individual servicers. Can you imagine that quagmire (and potential lawsuits) that may result for national servicers if there are 50 different sets of rules, regulations, and governing bodies? More on how servicing strategy is impacting the industry below.
Lender Services and Products
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Digital lending platform developer Blend has spent years enabling consumers to get pre-approved in one-tap, apply for loans, sign disclosures, and complete follow-ups from any device at any time. Actually closing a mortgage, however, has remained a singularly unpleasant event. Until now. With variation in closing processes and constant changes to regulations and technology, it can be difficult to figure out how to get started. How do lenders translate the various closing processes and map this to the different types of eClosings to begin transitioning from a traditional mortgage closing to a more modern digital experience? With Blend Close lenders have a host of feature options to best serve the borrower's eClosing digital experience while reducing close times and increasing pull-through rates. Share this visual tour of the mortgage closing process with your teams as a refresher on the types of eClosing and how they compare to traditional closings.
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Two industry powerhouses have teamed up to bring women in the mortgage industry together from coast to coast. XINNIX Founder & CEO, Casey Cunningham, and New American Funding President & Co-Founder, Patty Arvielo, have joined forces to create Breakthrough: A movement of women in the mortgage industry empowering and encouraging one another to break through the personal and professional barriers to success. Registration is now open for Breakthrough’s first-of-its-kind live “Ask Us Anything” event with Co-Founders Patty and Casey on Wednesday, June 17 at 1 PM ET. Questions can be submitted in advance on the Breakthrough Facebook event or by using the hashtag #BreakthroughAUA on social media. Join in the conversation by following Breakthrough on Facebook, LinkedIn, Twitter and Instagram!
Investors Shifting Servicing Strategy
As rumors continue to have Chase’s correspondent group rolling out its own bifurcation program to add servicing, other investors and wholesalers continue to see servicing values prompt strategy shifts. The servicing market has indeed recovered, or partially recovered, from the dramatic drop we saw in March. Who’s doing what?
Penny Mac saw raised forward estimates to incorporate stronger mortgage banking trends including strong gain-on-sale margins through the rest of the year, which should help offset higher servicing costs. The company is expected to not only continue to effectively hedge any negative impact on the MSR from falling interest rates, but also grow market share as volatility in the market puts pressure on smaller and less efficient originators and servicers. Losses were mostly driven by Agency CRT assets, though the company has had term financing in place for the asset, and therefore didn't need to sell the position at a realized loss to generate liquidity to meet margin calls during 1Q.
New Residential provided good detail on the earnings call to help ease some concerns surrounding liquidity and funding, particularly relating to funding advance obligations on its $450 billion Agency MSR portfolio. Even though servicing expenses will likely rise near term, capital and liquidity required from New Residential should be manageable, even if delinquency & forbearance rates rise further. There is still uncertainty around credit performance, however, per KBW.
Two Harbors looks well-prepared to meet the liquidity demand of advancing cashflows to Agency MBS holders while loans are in forbearance. KBW believes that ROEs are expected to remain below normalized levels, however, as the company preserves liquidity in case forbearances come in higher than expected. Estimates were raised to reflect lower funding costs, and some strengthening on incremental returns for Agency MBS paired with MSR versus previous estimates. The company met all margin calls during 1Q and had $1.2 billion in unrestricted cash at quarter-end. Additionally, the company is now funding all of its MSR with term notes or revolving credit facilities versus at year-end when it still carried $262.6 million in repo funding for MSR.
Black Knight cut 2020 guidance for revenue and for AEBITDA/EPS. The company's Specialty Servicing business effectively comprises everything in Servicing (within Software Solutions) that is not MSP. Foreclosure starts reached all-time lows in February before bouncing up modestly in March. The company noted foreclosure volumes at the peak of the financial crisis were 4-5x the levels seen in 2019. So while the national moratorium on foreclosures will be a revenue headwind for the rest of this year, a rise in foreclosures following the moratorium should drive a notable revenue lift from this business. The company's foreclosure platform has an 80 percent market share. While loan modifications also present incremental revenue opportunities, management clarified that the pricing is higher for foreclosures.
Don’t forget that Ginnie Mae approved the inclusion of a servicing advance financing facility under its Acknowledgment Agreement program. Read the press release for details.
AmeriHome’s monthly newsletter, The AmeriHome Angle, discusses COVID-19 Critical Loan Servicing Impacts in its April edition
Lakeview Loan Servicing announced that the Maricopa and Phoenix IDAs have expanded the Home in Five Advantage program to include a new level of assistance on its conventional loans. The new product will add a 5% assistance option to the three-year forgivable second mortgage for both the Fannie Mae HFA Preferred and the Freddie Mac HFA Advantage first loans. Refer to the product matrix and down payment assistance documents on the Home in Five website for full details and the applicable product codes.
Do lenders have exposure to regulatory action due to their servicer’s failure to process the transfer of data? The answer is yes, per Lenders Compliance Group in a post from late last year. Regulators expect findings of an annual review to be made available during an examination, and without an annual audit of the servicer, the lender is going to come under intense regulatory scrutiny. Common servicer violations include the Consumer Financial Protection Act of 2010 (CFPA), the Real Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act. In a recent example where the CFPB came down hard on a servicer, the servicer failed to acquire or transfer loss mitigation data and certain other information. The servicer did not review loan data provided by prior servicers for accuracy and completeness before putting the loans on its system.
The servicer also did not transfer to its system loss mitigation information from prior servicers in a fully automated manner. Therefore, some consumers who had loan modifications in process or were engaged in pending loss mitigation when the servicing was transferred had incomplete information in their files, and in some cases, their permanent loan modifications were not honored. In other instances, the servicer failed to evaluate consumers’ pending loss mitigation applications for loan modifications or failed to offer permanent loan modifications upon consumers’ completion of loan modifications in process.
Some consumers whose loans were transferred out of the servicer’s system experienced delays in obtaining loss mitigation with their new servicers and accrued unnecessary interest and fees. The servicer also failed to adjust the interest rates on borrowers’ adjustable-rate mortgage (ARM) loans according to the schedule of adjustments under their loan terms and sent borrowers monthly statements that sought to collect inaccurate principal and interest payments. All those violations reflect back on the lender, making the need for an annual review paramount.
Treasury yields across the curve were unchanged to open the week, though the 30-year yield pulled back +4 bps, as mixed headlines dominated the day. On one hand, markets digested the prospect of further domestic unrest and continued tension with China, though on the other, investors focused on signs of economic recovery as U.S. manufacturing rose for the first time in four months. While the manufacturing data was better than expected, and enough to have many market participants under the idea that the worse of the COVID-19 shutdown is in the rear-view mirror, it was not necessarily good. The ISM Manufacturing Index for May ticked up to 43.1 percent, below expectations of 44.0 percent, but up from 41.5 percent in April. It was the third straight reading below 50.0 percent, which is the dividing line between expansion and contraction, but upticks were seen in the key measures of new orders, production, employment, prices, backlog of orders, and new export orders (all were still below 50.0 percent, but up from in April.
As far as other economic releases went, Construction spending declined 2.9 percent m/m in April, though still much better than the 6.0 percent decline expected. Total construction spending is up 3.0 percent yr/yr. The Mortgage Bankers Association’s (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance increased from 8.36 percent of servicers’ portfolio volume in the prior week to 8.46 percent as of May 24, 2020. According to MBA’s estimate, just over 4.2 million homeowners are now in forbearance plans. With no data of note today, unless you consider auto and truck sales for May germane to mortgage rates, we begin the day with Agency MBS prices worse/down a few ticks and the 10-year yielding .70 after closing yesterday at 0.65 percent.
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Atlanta’s First Option Mortgage has tapped Fobby Naghmi as EVP, National Sales Manager, and James Carroll as Retail Operations Director to enhance operations, and create training & transition programs for new hires.