Everyone is talking about the future of the European Union. Tad Dahlke sends, “Brexit to be followed by Grexit, Departugal, Italeave, Fruckoff, Czechout, Oustria, Finish, Slovlong, Latervia, Byegium.” And while we’re on it, Brian B. reminded me of a quote from Margaret Thatcher: "The trouble with Socialism is that eventually you run out of other people's money." And from Nevada comes, “The EU cannot function without Britain. Britain, however, can function without the EU.”
The Consumer Finance Protection Bureau has plenty of things on its plate, and last week it announced its annual adjustments to the dollar amounts of various thresholds under the Truth in Lending Act regulations that will apply to certain consumer credit transactions in 2017. The adjustments are based on the percentage change in Consumer Price Index.
The notice addresses the thresholds related to the minimum interest charge and safe harbor penalty fees under the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), the total loan amount and points and fees dollar trigger for high-cost mortgages under the Home Ownership and Equity Protection Act (HOEPA), and the maximum points and fees for qualified mortgages under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The notice also revises one of the 2016 safe harbor penalty fee amounts due to a decline in the 2015 Consumer Price Index that was not fully accounted for. This final rule is effective on January 1, 2017 with the exception of section 1026.52(b)(1)(ii)(B) which is effective following publication in the Federal Register.
PricewaterhouseCoopers' Consumer Finance Group released the Mortgage Risk and Compliance Highlights report for June 2016. It is a comprehensive look at a variety of areas such as compliance, risk, analytics, tech and servicing in the mortgage industry.
A year ago I walked into a bank's Secondary Marketing department to attend a meeting, and was told the team of seven people in the conference room were state auditors starting what would turn out to be a six-month compliance review. In his best David Attenborough, the secondary marketing manager said, "we note the regulatory megafauna in its natural habitat, grazing upon spreadsheets filled with the secrets of the firm..." Needless to say, compliance is no joking matter, unless it's done with a cheap British accent. In its recent paper, Economics of Bank Supervision, the New York Fed uses data on supervisory efforts of Federal Reserve bank examiners to describe how supervisory efforts vary by bank size and risk, and to measure key trade-offs in allocating resources.
Its findings (spread across 4 papers) are interesting; "We look at the relation between supervisory attention and a bank's riskiness as measured by its supervisory rating. Ratings are on a scale of 1 to 5 where 1 is the safest and 3 or higher indicates moderate to significant concerns. To the extent that supervisors are assigned to reduce bank risk, as our model predicts, we expect to see a positive relationship between supervisory hours and ratings, that is, more supervisors working on banks with worse ratings. This result is exactly what we find in the data...to put this in perspective, supervisory attention increases about the same amount when a bank's rating goes from 1 to 3 as when its assets double." In a nutshell: The Fed's analysis estimates that large banks (holding over $10 billion in assets) receive 65 percent more attention since 2008 while small banks receive 19 percent less.
The servicing market is attracting a lot of attention. Banks are selling packages ahead of Basel III or are focusing on owning servicing in their footprint, smaller companies are finding they don't have the capital needed to own a portfolio, and larger lenders are selling portfolios to generate income. Let's take a random look at some recent deals just to give you a taste of what is on the market. (Mentioned are IMA and Mountain View, but of course others like Phoenix Capital and MIAC are very active in the servicing brokering biz.)
Interactive Mortgage Advisors (IMA to their friends) has two packages currently out for bid. The first pool offering, on behalf of an independent mortgage banker, is a $1.588 Billion FHLMC bulk MSR package. The 6,003 loan pool is: 3.828% WAC, $264k average loan size, 99% FRM, 763 WaFICO, 73.9% WaLTV, 93% owner occupied, 87% SFR, 11% Condo, 45% Purchase, 33% R/T, 21% C/O, with the top five states: CA, CO, FL, NJ and UT. Bids on this package will be due on June 29th. The second pool is a $3.061 Billion FNMA/FHLMC MSR package which consists of 14,400 loans. The package has a 3.881% WAC, $212k average loan size, 100% FRM, 758 WaFICO, 76% WaLTV, 88% owner occupied, 88% SFR, 10% Condo, 53% Purchase, 29% R/T, 16% C/O, with top five states: FL, VA, IL, TX and CO. Bids are this package are also due June 29th.
Mountain View has two deals I've seen recently. The first is a $3B GNMA package currently out for bid. The 100 percent fixed rate 1st lien product package has a 3.60% WAC, 703 WaFICO, 93% WaLTV, $241k average loan size, with Top states: California (17.3 percent), New York (7.1 percent), Texas (6.0 percent), and Florida (4.9 percent). June 28th is the bid due date on this package. The second is a $405 million FNMA non-recourse servicing portfolio that is being made available to the national market, plus, the seller would be interested in selling $20mm to $25mm a month of servicing per month on a flow/co-issue basis. The 100 percent retail originated loans have a 4.20% WAC, 725 WaFICO, 76% WaLTV, Low delinquencies, $205k average loan size, with Top states: Florida (13.8 percent), New York (13.6 percent), California (13.5 percent), and New Jersey (9.8 percent).
Switching gears to the primary markets, every lender has some kind of "online" presence, so when the mainstream press says something about "online lending" I am not sure exactly what that means. Regardless, last weekSoFi (Social Finance) completed one of the largest securitization sales of consumer loans backed by online originations in a sign of overall industry health. As the Wall Street Journal put it, the success of the offering is "suggesting that a scandal that recently rocked rival LendingClub Corp. hasn't dented investors' overall willingness to own online unsecured loans."
Yet from last week also came word that once again US regulators are warning everyone that the rapid growth in online lending, which some also call marketplace lending, may pose a risk to financial stability. And Prosper Marketplace hopes to rely more on individual investors to fund its originations in an effort to reduce its reliance on Wall Street.
Ginnie Mae surpassed Freddie Mac in total outstanding mortgage securities backed by single-family loans for the first time, according to researchers at the Urban Institute.
Tthe world's economies. For the United States, given what is going on around the world, the UK leaving the European Union, which could take a couple years, could push the US Federal Reserve to completely change their monetary policy plans and might even provoke a new round of easing. The market is now saying that there is now an implied 0% chance of a July, September and November short term rate hike by the Fed and only an 18% chance in December 2016.
Here in the U.S. we have a new week of tantalizing economic news - but does it make much of a difference given events overseas? Many of these numbers gauge the economy months ago, and have little relevance given the Friday events. Regardless, today we've had International Trade figures ($60.6 billion, widening from April). Tomorrow are the third estimate of the 1st quarter's GDP numbers, along with the April Case-Shiller numbers and June Consumer Confidence. Wednesday opens with Personal Income and Outlays, the PCE Price Index, followed by Pending Home Sales. Thursday has Initial Jobless Claims and Chicago PMI. Friday closes out with PMI Manufacturing Index, ISM Manufacturing Index, and Construction Spending - and then a 3-day weekend.
Looking at rates, we closed the 10-year Friday at a yield of 1.58%. As one would expect with this kind of rally, mortgage prices lagged considerably as everyone is talking about early payoffs and refinancing risk. And what about all those companies that paid "higher than market" prices for servicing - they took it on the chin in the 1st quarter, and it looks like the 2nd and 3rd won't be much better for mortgage servicing rights valuations.
This morning, in the early going, the 10-year is around 1.48% with agency MBS prices better by roughly .250. Yields are falling everywhere on the planet as part of an ongoing drive into risk-free assets. 10yr yields are down 22bp in Sweden (to ~37bp), 5bp in Germany (to negative 10bp), 5bp in France (to 0.32%), 10bp in the US (to 1.46%), 12bp in the UK (to 0.95%), etc. Spanish 10yr yields are off 14bp.