I am visiting Montana, and Butte just wrapped up "Evil Knievel Days" over the weekend. (I had an acquaintance who was married to his sister - their kids called him "Uncle Evil." How cool is that?) A senator from this state - Jon Tester - is one of the cosponsors of "The Housing Finance Reform and Taxpayer Protection Act." Last week there was a hearing in their Banking Subcommittee to examine how their legislation would rebuild the housing finance system to "protect taxpayers and ensure that smaller mortgage originators, such as the community banks and credit unions, continue to play an important role in the lending process." The bipartisan reform legislation would wind-down Fannie Mae and Freddie Mac and replace them with "a new system that strengthens the nation's housing market by protecting taxpayers, preserving the 30-year fixed rate mortgage, and ensuring that small financial institutions can continue to serve rural communities." Although nothing substantive is expected out of Washington this year or next, the process continues to grind along.
St. Petersburg, Florida's Mortgage Investors Corp. just laid off 380 employees. Bill Edwards, the owner, cited a recent spike in interest rates and the current climate in the mortgage-backed securities market as reasons for the layoffs. Also not helping was, per the article I read, "In June, the Federal Trade Commission levied a civil penalty of $7.5 million on the company for calling more than 5 million telephone numbers on the National Do Not Call list. The FTC says the telemarketers were calling to pitch home loan refinancing services to military veterans."
"Life is tough, but tougher when you're stupid." In no way, shape, or form, am I saying borrowers are stupid. (We've all been borrowers, right?) "Uneducated" might be a better term, as it seems "About half of prospective home buyers were not aware that mortgage interest rates fluctuate through the day." (Read More...)
"Rob, what have you heard that brokers like me are doing to address the significant differences in the wholesale lenders' jumbo interest rates compared to what B of A, Chase and Wells Fargo are offering? I have lost 3 $750K+ transactions in the last 60 days, with customers who preferred to use my services, because the interest rates were at least .50% different, with no origination charges from the banks. It's more of a difference than a customer is willing to ignore." This is merely a guess, but I don't see it changing. Banks are truly pressing their advantages of having a huge, excess deposit base, and putting that money to work. One area is jumbo mortgages - if a bank can borrow at .125% and loan $900k to a couple doctors at 4.75%, and help their branches and private bankers keep or gain a client, who is going to question that business model? An issue, of course, is that deposits and servicing are not limitless, so banks are being selective, and therefore many are staying in their own backyards. That is, until the securitization model kicks back in, and companies like Redwood, Nomura, Shelterpoint, Chase, etc. are trying.
To take this a step further, banks appear to have a fundamental difference in how they see forward rates while triple-A RMBS investors are demanding a an extra premium for the potential of further increases in rates and extension. A residential mortgage-backed security (RMBS) investor must mark to market their securities, but in most cases banks do not have to mark to market their loans as they will hold them to maturity. Those who follow this kind of thing have noted that what is interesting is that usually when rates appear to be headed higher (but before commercial and industrial loan growth resumes), banks shed securities or at least don't add, and will instead buy mortgage loans. But Wells Fargo said, in their recent earnings call, that it added higher yielding securities last quarter, so maybe Wells has a strong conviction that rates are not headed up and is investing on that belief. Regardless, banks like 'dem jumbo loans and can keep them on their books.
It is rumored that bank buyers kept their distance from the inaugural $500 million Freddie Mac risk-sharing mortgage bond last week, fearful of punitive risk-weighting charges on the new type of security, according to industry experts. So, if not banks, what about insurance company buyers? Nope: supposedly they would have liked the security to have a rating from the US National Association of Insurance Commissioners (NAIC). So about 50 investors bought the unrated Structured Agency Credit Risk (STACR) 2013-DN1, including hedge funds, pensions, money managers, REITs, credit unions, and a few insurance companies. Spreads initially widened considerably from initial price whispers last week, but then tightened in at pricing on Tuesday. The two-tranche structure offered tenors of 2.19 and 8.21-years, respectively. Pricing levels were set at one-month Libor plus 340bp and 715bp. Even though the new bond is considered an obligation of Freddie Mac, the typical 20% risk weighting assessment for Fannie and Freddie agency MBS would not be applied to this deal. Some of the first-loss risk is being laid off to the private capital markets, and the deal is closer to a senior/subordinate private-label RMBS. The risk-weighting charge would likely be much higher if banks held the security; analysts believe that this could be an attractive investment opportunity for a number of mortgage REITs that invest in mortgage credit risk including Redwood Trust, PennyMac, Two Harbors, and American Capital Mortgage.
Here's a little ditty, care of the Mortgage Bankers Association of the Carolinas. "Question: If a loan officer at a mortgage company owns a 10% interest in a title company, is the mortgage company required to provide borrowers with an affiliated business arrangement disclosure?" The answer, per MBAC, is, "If the loan officer directly or indirectly refers any borrower to the title company, an affiliated business arrangement disclosure is required because: the loan officer is a person in a position to refer business regarding a real estate settlement service involving a federally related mortgage loan; the loan officer has more than 1 percent interest in the provider of settlement services; and the loan officer refers business to that provider or affirmatively influences the selection of that provider. (Read More...)
The conversation continues about QM and non-QM, and QRM aligning with QM. "One easy change would simply align the 'qualified mortgage' rule from the Consumer Finance Protection Bureau with the narrower 'qualified residential mortgage' rule to be set by the Fed and other regulators. This does not 'fix' the true sale issue, but provides issuers with enough comfort to do business in the agency markets. But this still leaves the private mortgage market for RMBS outside the QM/QRM rules in legal limbo." (Read More...)
I feel a disturbance in the Force! Bill Kidwell of IMMAAG.COM and Marc Savitt from NAIHP.ORG have joined together for a free webinar on July 30th at 4PM EDT about the CFPB's rule making concerning points & fees calculations under QM. This webinar will focus on the harm caused to both consumers & originators and rally the troops to push congress to pass an amended version of HR 1077 and S.949 to end disparate treatment of consumers and mortgage brokers. Here is the link to register: If you want to know more download their PDF HERE.
Let's take a quick look at some bank and investor news.
HomeStreet Bank, which I wrote about in Saturday's commentary, and its holding company, HomeStreet, Inc. (NASDAQ:HMST) have entered into two separate merger agreements pursuant to which HomeStreet Bank will acquire Seattle-based Fortune Bank for approximately $27.0 million, and Yakima National Bank, based in Yakima, Wash., and parent holding company, YNB Financial Services Corp. ("Yakima National"), for approximately $10.3 million. The combined company had approximately $3.0 billion in assets on a pro forma basis as of June 30, 2013. Fortune has two branches in Seattle and Bellevue (total assets of $142 million, deposits of $121 million, Yakima has four branches in Central and Eastern Washington (total assets of $125 million, deposits of $114 million).
Wells Fargo reminds lenders that it will be retiring the 5/2/5 cap structure for all Conventional Conforming 5/1 ARMs locked as of August 19th, after which all such loans will be required to have a 2/2/5 adjustment cap. This applies to all loans locked, re-locked, and re-negotiated after the deadline, regardless of the AUS, as well as any Mandatory commitments, AOTs, and spec pools delivered. Freddie Mac 5/1 ARMs locked before August 19th will remain ineligible up until this goes into effect.
Fifth Third will be upgrading its lock management systems to accommodate its auto-extension policies, the changes to which will affect all loans beginning on Sunday, July 14th. The enhancements will allow additional lock time at a cost to Fifth Third for closed loan files, the application of extensions where loans are pending, and auto-rolling of expired locks up to 30 days for both delegated and non-delegated loans. Ten-day extensions will be provided at Fifth Third's cost for loans in cases where there are less than 10 days from the date of the closed loan's receipt to expiration, while closed loan packages that are not in fundable condition when they are received will be granted five-day extensions in cases where there are less than five days from the date when the loan was pended to the lock expiration. Best Efforts locks that have been pending in fundable condition for at least five days are eligible for an additional five days at a cost of .125 for up to 30 days.
Turning to rates, which could just chop around here through the end of the year, one research piece noted, "Investors appear to be in a holding pattern and reluctant to buy bonds before the Federal Reserve meeting this week, the results of which will be scrutinized for signs of when the U.S. central bank will pare back its bond purchase program. Bond volatility this week increased to higher levels in the recent range on speculation over when the Fed will begin tapering with most economists expecting September. If the scale back is aggressive, we can expect an equally aggressive (if not worse) sell-off in the bond market, while an open ended response that leaves open the possibility of expanding QE again if there is a deflation risk would allow the markets to digest this policy much easier."
This week is a big week on the economic calendar - watch for those intra-day prices changes! Today we'll have Pending Home Sales. Tomorrow is the Case-Shiller 20-city Housing Index and Consumer Confidence. Wednesday is the ADP Employment Change number, Q2 GDP, the Employment Cost Index, the Chicago PMI, AND the FOMC rate decision. Thursday is Initial Jobless Claims, the ISM Index, and Construction Spending. Lastly, on Friday we have the plethora of employment data, including the unemployment rate, nonfarm payroll, and hourly earnings, but also Personal Income and Personal Spending, PCE Prices, and Factory Orders!
Wednesday and Friday will be the days to watch. Wednesday includes the advance estimate on second-quarter GDP growth, the Treasury's quarterly refunding announcement and the conclusion of the Fed's two-day policy meeting. Although there will be no change to rates, the Committee has in some respects already laid the framework for tapering its large-scale asset purchase program. Others, however, feel the announcement will be a non-event, and there will be little change to the verbiage since there has been little change to the economy.
Regardless, we're looking at the last three business days of July, and companies are more focused on closing locks that are still 3-5 points underwater. On Friday we closed the 10-yr at a yield of 2.56%; here in the early going it is at 2.55% - nearly unchanged.