Here’s something you won’t see in North America: the sale and transfer of 1.3% of the last mass of the continent. It just happened in Australia with the purchase of the Kidman Estate. (No relation to Nicole.) For Australians Christmas comes during the summer, somewhat hard for Americans to fathom. While we wait for the day, here's a list of holiday facts from the Census Bureau. Last December our nation's department stores saw $23.8 billion in retail sales, or 14.3% to total 2015 sales for department stores. $1.1 billion is the value of U.S. imports of Christmas tree ornaments from China; 92% of total ornament imports. $346 million is the value of Christmas tree lights from China; 87% of total imports. $392.0 million is the value of U.S. imports of tapered candles in 2015. Many of these candles are used for Diwali, Hanukkah, and Kwanzaa.
In legal news, the American Mortgage Law Group ("AMLG"), a national mortgage banking litigation and compliance firm, has confirmed that the ResCap Liquidating Trust ("Trust") just filed two new lawsuits against correspondent lenders in the District of Minnesota on Friday, December 2. "Having represented a number of the approximately 65 correspondent lenders that were sued by the Trust, as well as a number of correspondent lenders who received demands from the Trust outside of the ongoing cases being litigated in MN, AMLG's prediction that the Trust was likely to file another wave of lawsuits seems to be coming to fruition. In addition to this new activity from the Trust, AMLG has been heavily involved in representing correspondent lenders and brokers against claims brought by Lehman Bros. Holdings, Inc. in the Bankruptcy Action pending in the Southern District of New York. Per AMLG, LBHI is set to file a Second Amended Complaint in January 2017 and it is expected that many more correspondent lenders and brokers will be added to the ongoing litigation. To learn more about these recent litigation developments and more, please feel contact AMLG's Managing Member, James Brody.
As everyone knows, interest rates shot up immediately in the wake of the November 8 presidential elections, triggered by a sell-off in Treasury bonds. Now Black Knight says, in its recent Mortgage Monitor, that the jump in rates eliminated 50 percent of candidates from the refinanceable population that existed before the election and has also pushed home affordability to a post-recession low. Within three-weeks of the election the 30-year fixed-rate increased by 49 basis points, cutting the number of homeowners who might potentially refinance (either because they could qualify or there was a financial incentive for doing so) from 8.3 million to 4.0 million. This matched a 24-month low set in July 2015. At that time refi volumes were 37 percent lower than in the third quarter of 2016. About $2 million borrowers could still save $200 per month by refinancing but Black Knight puts aggregate potential monthly savings at approximately$1 billion, down from $2.1 billion in early October.
Lenders know that mortgage rates are set by supply and demand, and the pool of potential borrowers obviously influences the supply side of the equation. In fact, GSE (Government Sponsored Enterprises - primarily Freddie Mac and Fannie Mae) prepayment speeds were released Tuesday night after the market close. Speeds were slower in November as expected due to fewer refinances, slower seasonal, and lower day count. But the speeds did not drop as much as some street analysts expected.
But agency mortgage-backed securities aren't very glamorous. What else is new out there in the capital markets? Well, for one, Blackstone Group's Invitation Homes has reportedly filed for an IPO that could come as soon as January, a move that could further establish the single-family home market as a bona fide asset class. Starwood Waypoint Residential Trust and American Homes 4 Rent have already gone public.
So, is the private label securitization market returning? Depository banks are certainly happy to sit on their portfolio loans, and not deal with the hassle and expense of securitizing those loans. After all, has a basic flaw - who pays of the rating of a security - of the securitization process been handled by some of the larger rating agencies? Kroll, for one, has made good, well-publicized changes in the model. But we are starting to see some movement in the capital markets as securitizations of non-QM paper by Caliber and Sterling will get AAA ratings. Over half the loans are in California and the average FICO is 712. The big question is how overcollateralized these bonds are, helping to assure investors that the issuers have skin in the game.
Bloomberg's Matt Scully reported that Social Finance Inc. (SoFi) is "close to selling its first bonds backed by mortgages. The company plans this month to privately sell around $170 million of bonds backed by mortgages it made to customers with high credit scores, per a person familiar with the deal. Barclays Plc is arranging the sale and the bonds are expected to carry credit ratings as high as AAA from Fitch Ratings and DBRS Inc., the person said...A public notice made in connection to the offering could be filed with the Securities and Exchange Commission as early as Thursday, the person familiar also said.
"(SoFi) has been making home loans since 2014, and is currently making around $100 million per month, mostly to first-time homebuyers. SoFi also started rolling out new products and services in recent months, including a new mortgage application for mobile devices. The mortgages that SoFi is bundling into private securities this month were made largely to borrowers looking to borrow more relative to the value of the home than the government is willing to finance through agencies like Fannie Mae or Freddie Mac mortgages."
With all the chatter about resolving the Fannie Mae and Freddie Mac conundrum, the fabled "private money" role in financing housing is back on the front burner, including the securitization of non-QM and/or older loans. Last week the rating agency Moody's assigned provisional ratings to two classes of "Re-Performing" RMBS (residential mortgage-backed securities) issued by Towd Point Mortgage, Trust 2016-5. The details are worth a skim to see what rating agencies and investors look at regarding pools of loans.
These certificates are backed by one pool of seasoned, performing and re-performing residential mortgage loans. "The collateral pool is comprised of 2,517 first lien, fixed-rate and adjustable rate mortgage loans, and has a non-zero updated weighted average FICO score of 676 and a weighted average current LTV of 85.90%. Approximately 77.8% of the loans in the collateral pool have been previously modified. Select Portfolio Servicing, Inc. is the servicer for the loans in the pool.
"The methodologies used in these ratings were "Moody's Approach to Rating Securitisations Backed by Non-Performing and Re-Performing Loans" published in August 2016 and "US RMBS Surveillance Methodology" published in November 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies."
"Moody's expected losses on TPMT 2016-5's collateral pool average 12.1% in our base case scenario. Our loss estimates take into account the historical performance of Prime, Alt-A and Subprime loans that have similar collateral characteristics as the loans in the pool, and also incorporate an expectation of a continued strong credit environment for RMBS, supported by improving home prices over the next two to three years.
We based our expected losses on a pool of re-performing mortgage loans on our estimates of 1) the default rate on the remaining balance of the loans and 2) the principal recovery rate on the defaulted balances. The two factors that most strongly influence a re-performing mortgage loan's likelihood of re-default are the length of time that the loan has performed since modification, and the amount of the reduction in monthly mortgage payments as a result of modification. The longer a borrower has been current on a re-performing loan, the less likely they are to re-default. Approximately 69.2% of the borrowers of the loans in the collateral pool have been current on their payments for the past 24 months at least.
"We estimated expected losses using two approaches -- (1) pool-level approach, and (2) re-performing loan level analysis. In the pool-level approach, we estimate losses on the pool by applying our assumptions on expected future delinquencies, default rates, loss severities and prepayments as observed from our surveillance of similar collateral. We projected future annual delinquencies for eight years by applying annual default rates and delinquency burnout factors. The delinquency burnout factors reflect our future expectations of the economy and the U.S. housing market. Based on the loan characteristics of the pool and the demonstrated pay histories, we applied an expected annual delinquency rate of 11% for this pool to calculate the delinquencies on the collateral pool for year one.
"We then calculated future delinquencies using default burnout and voluntary conditional prepayment rate (CPR) assumptions. We aggregated the delinquencies and converted them to losses by applying pool specific lifetime default frequency and loss severity assumptions. Our CPR and loss severity assumptions are based on actual observed performance of seasoned re-performing modified loans and prior TPMT deals. In applying our loss severity assumptions, we accounted for the lack of principal and interest advancing in this transaction." (If you're interested in the full write up on the methodology, click on the link above.)
Turning to the transitory, temporal bond market, which determines interest rates, we didn't have much news in this country yesterday so the U.S. Treasury yield curve steepened sharply after the European Central Bank's monetary policy announcement steepened Eurozone yield curves. The ECB's Governing Council decided to reduce the amount of monthly asset purchases after March 2017, to continue through December 2017. That move encouraged investors to bid yields lower at the front end of Eurozone yield curves (prices move inversely to yields).
This, of course, renewed the debate about how much longer our NY Fed will continue to purchase agency MBS on nearly a daily basis to the tune of $5-10 billion a week. The FedTrade operation, well publicized, began during the Quantitative Easing days. And although the official QE program has come to an end, the Fed is continuing to buy Treasuries and agency MBS securities using monies from early payoffs (prepayments) - primarily securities composed of FHA/VA and Fannie Mae loans. Of course, this is not "business as usual" for the Fed, and the markets are wondering how much longer this will persist. And as we know, supply & demand determine mortgage rates, and if the demand drops...
So yesterday Treasuries yields rushed higher with the 10-year note hitting a high of 2.43% before buyers surfaced. Agency MBS prices traded lower with treasuries with spreads little changed before buyers emerged. The 10-year note worsened .375 to yield 2.39% by the end of the day; 5-year securities and agency MBS prices worsened about .125.
Today there is no scheduled news of substance to move rates. At 10AM ET, 7AM PT, we'll have a University of Michigan Sentiment Index number and then October's Wholesale Inventories. Neither is earth-shattering. We start the day with the 10-year yielding 2.41% and agency MBS prices better a smidge compared to last night.
Jobs and Announcements
Out West Tri Counties Bank in Santa Rosa, CA is hiring for a Home Mortgage Loan Originator to work the Sonoma County market. "We are looking for an originator who knows the region, has connections in it, and would like to have the backing of a $4.5+ billion-dollar community bank. We offer full benefits, employee stock ownership, business partner referrals, and a great culture with a focus on work/life balance. We are looking for a minimum of 5 years' success-filled experienced. Equal Opportunity Employer/Protected Veterans/Individuals with Disabilities." To see the job description and apply, click here CAREERS. You can also email your confidential resume to Don Forbis.
Royce Goldman Enterprise Strategy, specializing in jumbo and non-QM products, has spread the word that it looking for lending partners to "help transition into a new era of growth." "Interest rates sudden rise, loan volumes dramatic decline and originators in shock, yet home prices are red hot and on the rise. It is time for professional originators to take a pause and reconsider business as usual. Royce Goldman originates high capacity consumers looking to work with bankers who can originate Non-Agency Prime Jumbo and Alt-Doc NQM loans. Prime & Alt-Prime loans will likely be the dominate source of liquidity and guideline expansion in 2017. Royce Goldman strategists deliver predictable ROI through proprietary delivery systems that comport to our partner's budgets and workflow architectures. For information about becoming an Origination Partner, please visitwww.roycegoldman.com/enterprisestrategy, or contact Zac Russell (800-966-2173).
If you are looking for some industry-related books for your employees or new ideas to start off 2017 then I would recommend either of Jason C Myers books about selling mortgages. Here are the links, as both books can be found on Amazon: Successful Mortgage Broker and Becoming a Successful Mortgage Broker.