What are companies doing with the 2020 money they were going to spend on travel and entertainment? Saving it for the second half of 2021? Last week I paid a visit to Southern California. (The airports were uncrowded, masks universal.) I guess that I look pretty sketchy because I’ve lost track of the number of times over the years a drug detecting dog in an airport has sniffed my carry-on. There is plenty of talk about “bio-indicator” dogs being able to sniff out a COVID infection. Wouldn’t that be interesting? What is also interesting is the continued shift to the suburbs around the nation. Apparently, many don’t want to live in downtown “wherever” with their 2.3 kids and 1.2 dogs, and the office space was just given back to the landlord because your company will be working from home forever… Yes, people are reconfiguring their lives. But it is best not to forget those unemployed hourly workers.
Lender Services and Products
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It's Good to Know What Others are up to and Why
With more lenders “going public,” we’ll have a better look at financial performance in residential lending. More transparent are home prices. Low mortgage rates are driving the rise in home prices according to NAR. A tight inventory situation is also an issue. I wonder if we will even see the normal seasonal downtick in prices during the winter months this year. Potential buyers are wary of rising rates in the future and may be pushing to buy now. And the low rates continue to help lender’s volumes. In this lending game, it is good to check out the other teams once in a while.
On the earnings call that I listened in to, roughly 60 percent of Rocket’s business comes from Direct to Consumer (40 percent from mortgage brokers or other partners like credit unions and real estate agents), helped Rocket set a record production number in the second quarter and continue strong into the third quarter. 4.7 percent of its servicing portfolio is under some type of forbearance plan. Its goal to close $40 billion per month, 25 percent market share by 2030, although Rocket expected to do about $80 billion in the 3rd quarter. Employees are focused on retention of its existing servicing customers (it’s less expensive to keep a customer than obtain a new one, right?).
Rocket has numerous revenue sources, but the majority comes from Quicken Loans. Market share will come from retention (above 80 percent of the customers they can and want to retain, and who will be profitable) of their existing customer base, and grow its servicing portfolio. But Quicken sells off the servicing of those customers that don’t fit its profitability model, which also makes sense. Quicken views its brokers as key to its distributed retail model. Vanilla product – fits the manufacturing model. Focus is not on competing on price, which in turn has helped Quicken’s margins. Very little of the MSRs are hedged.
KBW released some notes on Q3 guidance from large servicers Penny Mac and Mr. Cooper. Penny Mac is expected to have strong Q3 earnings due to strong production trends as volumes accelerated in August. Additionally, the company expects the "exceptional financial performance" to continue into next year. Correspondent acquisitions continue to rise, as did correspondent locks compared to the start of 2020. Mr. Cooper updated guidance to account for stronger adjusted lock volumes, partially offset by lower margin because of a mix shift toward correspondent production. Mr. Cooper predicted net servicing revenue for the quarter to break even, versus investor expectations for a -$13 million loss. Servicing revenue continues to be driven by sustained levels of high prepayment speeds, offset by a one-time settlement benefit. Finally, the company expects strong results in its title business, which is a positive read-through to title insurers (Fidelity National, First American, and Stewart Information).
Stepping back slightly, over the summer KBW analysts had some thoughts on Penny Mac. PennyMac has roughly $20 billion of delinquent loans in its servicing portfolio that are eligible for repurchase, and assumptions are that the company will repurchase around half that number over the next 18 months resulting in gross gains. A large chunk of this will be from Ginnie Mae early buyout (EBO) loans, which will then be re-securitized, creating a more material near-term opportunity.
KBW Financial Services recently released its quarterly assessment on some of the large originators in the mortgage space. Mr. Cooper’s origination segment beat expectations, driven by lower expenses and slightly higher volumes, partly offset by lower gain-on-sale (GOS) margins. Mortgage originations of $19.8 billion were up +60% quarter-over-quarter. Servicing segment earnings missed slightly, as the quarter-end servicing portfolio fell to $588 billion from $596 billion last quarter, and the company reported an adjusted servicing loss – though it was just about breakeven. The company repurchased 1.2 million shares for $23.3 million after the Board authorized a $100 million share repurchase program last quarter.
New Residential saw mortgage volume jump sharply to $18.1 billion from $8.3 billion last quarter, though gain-on-sale margin fell to 270 bps versus 370 bps last quarter. Direct to Consumer (DTC) production increased to $3.4 billion, up 12% quarter-over-quarter, but declined to roughly 20% of channel mix as compared to 40% last quarter. The mortgage servicing portfolio declined to $571 billion of unpaid principal balance (UPB) from $610 billion last quarter. The lower mortgage servicing revenue (which includes the negative MSR mark net of hedges), caused operating EPS to slightly miss expectations. Book value included a negative impact from one-time term loan discount write-off. The economic return totaled 9% versus 6% last quarter, though it wasn’t expected to elicit much reaction. Finally, the company issued two MSR securitizations for $426 million, closed a new $500 million MSR and servicing advance facility and completed three residential loan securitizations with total collateral of $1.3 billion.
KBW commented that Flagstar looks well positioned in both the mortgage business and bank arms of the company. Q3 EPS beat estimates, largely due to reduced credit provisioning, a bigger balance sheet (largely warehouse), and accretive buybacks from MP Thrift (using proceeds from a sub debt offering). These were partially offset by a higher tax rate and slightly lower mortgage earnings. Margin held steady at a 2.84% average due to 1) widespread use of interest rate floors above zero, 2) executing a $2 billion, 3-year to 7-year swaps program to lock in low funding rates and 3) the upcoming maturity schedule of CDs and promotional savings accounts can be converted into lower cost deposits. Strong yields in warehouse lending were effectively responsible for all the asset growth in the quarter. This will allow Flagstar to sustain its pricing in this business, and increased market share should prevent balances from dropping meaningfully when mortgage volumes slow. Even if the yield curve begins to steepen (a historical headwind for the mortgage origination business), Flagstar is hedged by the commercial/community bank.
Last week’s economic data continues its positive momentum despite increasing coronavirus cases in the US and abroad which have led some countries to enact a new round of closures. As expected, Q3 GDP increased by an impressive annual rate, led by a rebound in consumer spending. Residential spending jumped 59.3 percent as the single-family housing market heated up. Nominal incomes rose modestly in September and real consumer spending increased nicely due to an increase in durable goods such as automobiles. The personal savings rate was a still high 14.3 percent. Initial claims for unemployment benefits continue their slow decline but are still nearly 100k higher than their peak during the previous recession. New home sales fell 3.5 percent on an annual basis in September with a tight 3.6 months’ supply and rising prices affecting sales. This follows four consecutive months of gains and the sales for the rest of the year are expected to remain high.
Looking at Treasury note and bond action yesterday, the week began with a whole host of economic releases. The ISM Manufacturing Index for October beat expectations as it registered its highest level in more than two years. The fifth consecutive month of expansion was highlighted by the New Orders Index hitting its highest level since 2004, signaling that the recovery in the manufacturing sector is running at a fast pace. Total construction spending increased in September, though not as much as expected. Regardless, construction spending is healthy. Additionally, Markit Manufacturing PMI for October was revised upward. Despite the positive economic reading, a lack of a new stimulus package, the election uncertainty, and the new wave of coronavirus cases in the U.S. and Europe had Treasuries and MBS closing Monday mixed.
Today’s economic calendar is on the light side, and unlikely to have any material impact on interest rates. Though the election is at the forefront of everyone’s mind, the result may not be available today and tomorrow’s refunding announcement and/or Thursday’s Fed comments on Fed buying may have as big of an impact on the bond market. The Mortgage Bankers Association’s latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance (2.9 million) decreased by 7 bps to 5.83% of servicers’ portfolio volume as of October 25. Later this morning brings Redbook same store sales for the week ending October 31 and September factory orders. The Desk will target up to $7.6 billion MBS, including over $6 billion UMBS30s. We begin the day with Agency MBS prices down/worse a smidge and the 10-year yielding .87 after closing yesterday at 0.85%.
A fast-growing Top-20 independent mortgage bank is seeking a Head of Production and Risk Analytics to accelerate its growth into becoming a Top-5 company in its space. Candidates must understand mortgage banking models and have detailed knowledge and experience in mortgage lending metrics, budget building and risk modeling. Superior ability in Excel is required. Just as this company is ambitious and growth-minded, this position presents a strategic growth opportunity for the right candidate. If interested, please send your resume confidentially to Anjelica Nixt; please specify role.
A well-established consumer direct lender based in the southwest is looking for a new VP of Marketing to help double the company from $4 billion funded in 2020 to $8 billion funded in 2021. In this role you will have full authority to build out the entire marketing department from the ground up as you see fit while reporting directly to the CEO. The Lender is looking for an expert at demand generation marketing with a secondary skillset in digital marketing. The right candidate will be analytical, process oriented, adaptable, while having at least 5 years in demand generation marketing. Lead vendor relationships and vendor management experience are also required. Positive leadership style, team-oriented atmosphere, and people development skills are also required. If you are interested, please send your resume to Anjelica Nixt; please specify role.