As the East Coast swelters and Hawaii floods, loan officers I’ve spoken to recently believe the high price end in some markets is starting to stall a little bit as markets correct toward normalcy. I’ve spent much of this week in Montana and, as a small random sample, inventory for sale in certain areas is ample. On a bigger scale, nationwide sales of existing, pre-owned homes fell for the fourth consecutive month, with single family home sales falling 0.2 percent for an annual rate of 4.75 million homes. As it stands, homes were on the market an average of 27 days, up from an average of 26 days in June. For a positive thought, want some good PR for your company and for the residential lending biz? Forget cookies - how about helping the local Girl Scout Troop build and sell a Tiny House?
Servicing Trends and Sales
Servicing values fluctuate all the time, and usually make up the lion’s share of price differences in rate sheets. Depository institutions still have a majority share of the agency servicing market, but nonbanks continued to gain ground during the second quarter, according to a new Inside Mortgage Finance analysis of agency mortgage-backed securities data. “As of the end of June, nonbanks serviced $2.887 trillion of single-family loans in MBS pools issued by Fannie Mae, Freddie Mac and Ginnie Mae. That was up 2.8 percent from March and represented a 14.5 percent increase from a year ago – more than triple the growth rate for the overall market. In the Ginnie MSR sector, non-banks controlled 60% of the market at June 30, compared to 55% a year ago. Agency servicing held by banks, thrifts and credit unions declined by 2.2 percent over the past year. The biggest drop for depositories was in Ginnie servicing, which fell 4.3 percent from June 2017.”
Two Harbors continues to benefit by its floating rate non-agency securities and positive credit performance along with slightly faster prepayment speeds in the non-agency portfolio. Analysts view the more favorable MSR acquisition environment and attractive MSR financing as positive for returns in the coming quarters. Recall that TWO on-boarded the $1.1 billion of capital from the CYS merger transaction at the end of July.
In servicing, there’s an active market out there. Banks are buyers, as well as non-banks, REITs, and private equity firms are buying conventional conforming servicing. And at a 5-multiple level in some bulk deal cases! On the Ginnie side, for FHA & VA loans, 3 multiples are out there from REITs and private equity funds – banks are on the sidelines. Why? Because of Basel III, additional capital is required by a bank to retain servicing making the MSR (mortgage servicing right) less attractive. Servicing experts are watching for Ginnie potentially changing capital requirements or implementing stress tests, MSR values to increase with rising rates, and continued cash flow problems for smaller lenders who had hoped to retain servicing. Phoenix said MSR values are up sharply in 2018 with good liquidity, many investors, and prices at their best levels since 2014. And in terms of execution, Tom LaMalfa’s survey this year at the conference asked, “When you sell servicing, is it usually on a bifurcated basis?” The majority answered, “No.”
The trend of a sequential decline in the total mortgage servicing portfolio for the five largest U.S. banks (Bank of America, Chase, Citi, US Bank, and Wells) continued in the first quarter of 2018, as a notable reduction in third-party mortgage servicing portfolio mitigated small gains from fresh mortgage originations for the period. The decline has been seen across most U.S. banks since 2012 and is a result of the increased capital requirements that banks’ mortgage servicing rights attract in the wake of the economic downturn of 2008.
U.S. Bancorp has bucked this trend over the years, though, as its traditional loans-and-deposits business model, its risk-averse growth strategy and its lower capital requirements compared to its larger peers have helped it build a sizable capital buffer. With the regional banking giant focusing its efforts on growing in its mortgage business since the recession, it has done well to make the most of the vacuum created by Bank of America and Citigroup’s de-emphasis of the industry.
The total mortgage servicing portfolios of many banks have changed over recent quarters. The overall change in industry dynamics over the years is evident from the fact that these five banks service 35% of all outstanding mortgages in the U.S. now – down from almost 60% in late 2012. (The total value of U.S. housing debt outstanding is taken from the quarterly data compiled by the New York Fed.)
Going back to earlier this year, subservicers increased their base of contracts to $2.19 trillion in the first quarter, a modest 3.3 percent sequential gain, according to survey figures compiled by Inside Mortgage Finance. Compared to the same period a year earlier, contracts increased by 15.3 percent. “Overall, these third-party processors managed 18.3 percent of home mortgage payments at the end of the first quarter, compared to 16.4 percent a year ago. It appears the sector is healthy, but some vendors have been engaging in steep price cuts to gain market share. (Sounds familiar to lenders, huh?) Also, two top-10 ranked subservicers – PHH Mortgage and Ditech Financial – have uncertain futures, which means their accounts could eventually wind up elsewhere.
Looking at the bond markets, rates were up slightly Monday, and the U.S. 10-year closed +2bps to 2.85% - all treasuries beginning the week in the same direction. The biggest news of the day came in the form of an announcement of a preliminary agreement to replace NAFTA in a new deal with Mexico, though Canada is yet to enter the agreement, which calls for auto worker minimum wage and regional auto content requirements. In other international news, a Chinese journal reported that China's export growth may slow to about 2.0% year-over-year during the second half of 2018. And Japan's Prime Minister Shinzo Abe declared his candidacy for their September election.
Today’s economic calendar kicked off with advance indicators for July (merchandise trade deficit widening to $72.2 billion) and retail and wholesale inventories (+.7%). The S&P CoreLogic Case-Shiller 20-City Home Price Index for June is expected to increase and consumer confidence in August to decline before the day rounds out with the Richmond Fed’s manufacturing and the Dallas Fed Texas Service Sector Outlook Survey for August. We start with the 10-year yielding 2.85% and agency MBS prices worse a smidge.
Products and Services for Lenders and LOs
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