Solid Earnings from Wells and MGIC; High Quality Loan Production; Labor Unions Threaten Big Banks; VA Underwriting Update
Sometimes folks ask, "How can you spit out that mortgage & real estate commentary every day at 4AM?"
I enjoy educating folks, and my attention span is pretty short so I try to keep it to a 1-2 minute read, plus I like bad jokes. Who I really feel sorry for, however, are the folks who write health magazines every month. Really, how many ways can one say, "Eat less and exercise more" in a periodical? Stay out of the sun, don't drink too much alcohol, get plenty of sleep, have a balanced diet... this really hasn't changed for hundreds, if not thousands of years, yet every month they sell magazines that tell people to do those things. Then they put a photo of someone that I will never look like on the cover of it to make me believe if I ate less and exercised more, I could look like that. Conversely, mortgage banking and the real estate industry change every day, so usually there is too much to write about rather than not enough.
For example, we're already in the 3rd quarter of 2010, but if you want to see how mortgage companies did in the 1st quarter, check out the MBA's stats on originator profitability. Independent mortgage bankers and subsidiaries saw a sharp drop in their profits in the first quarter of 2010. The average profit made on each loan was $600, a decrease of 32% from the $890 that was earned in the fourth quarter of 2009 and a 44% decline from the $1,088 that was reported in the first quarter of 2009. Companies responding to the survey reported a drop in the average production volume of about 25% - and lower volumes with the same overhead leads to less profit.
Yesterday I mentioned that Fitch (the rating agency) stated that U.S. Prime RMBS (Residential Mortgage Backed Securities) serious delinquencies rose for the 37th consecutive month." I was reminded by an astute reader that these securities are comprised of "vintage" loans, and that newer loans will show a dramatically improved delinquency rate, which explains why new production is in such high demand.
Wells Fargo announced earnings this morning, much better than expected. Wells announced that it is seeing credit quality improve, which is nice. Its revenue was $21.4 billion for the 2nd quarter. Its Wachovia acquisition appears to be starting to reap some benefits and income, which will help since the Wachovia has been such a concern.
Morgan Stanley also announced earnings, which also came out better than expected on $8 billion of revenue for the 2nd quarter, as did Black Rock. MGIC reported earnings yesterday, and announced its first profit in 12 quarters on lower claims costs. Its stock, and that of the other MI companies, rallied on the news - MGIC shares were up over 9%, Radian's was up 10%, and PMI's was up over 3%. (MGIC's stock is up almost 50% this year!)
The Mortgage Bankers Associations said its seasonally adjusted index of mortgage applications rose 7.6% last week, and that the 4-week moving average is up almost 5%. 30-yr rates are about 0.75% better than they were this time last year, which is obviously helping. Purchase apps were up over 3%, and refi's are up over 8%.
Can't we all just get along? Unions are threatening to pull their money out of banks that appear to be slow in modifying mortgages and encouraging their members to do the same. Good for them - let them blame the banks and pull their money out of Citi and SunTrust and BofA and Chase and put it into smaller institutions that a) haven't paid back their TARP money yet, or b) stand the chance of showing up on some FDIC list some Friday afternoon. How about their pension funds stop buying bonds rated by the same rating agencies that mis-rated MBS's, or take it out of the United States and invest it some country like Greece or Portugal? (Sorry, that all just slipped out - I even still have my Teamster membership card from years ago.) In a distantly related story it was reported that more than 40% of the trial loan modifications started under HAMP were canceled as of the end of last month, but permanent mods totaled nearly 400,000=. The Treasury reported that of the 1.3 million trials started, 520k have been canceled, 364k are active, and 389k are permanent.
GMAC Bank's (or is it Ally?) correspondent clients were told of some VA underwriting guideline changes (effective 8/2). If the veteran is converting the current principal residence to a second home upon the purchase of the new principal residence, both the current and proposed principal, interest, taxes and insurance (PITI) must be used to qualify the borrower for the new loan; and minimum reserves of six months PITI for both properties are required. If the veteran is converting a current principal residence to a rental property upon the purchase of a new principal residence, both the current and proposed monthly housing expenses must be used to qualify veteran. Rental income may not be used to offset the mortgage payment. Evidence of cash reserves totaling six months PITI for both properties must be provided.) Phew. That made my brain hurt. Check GMAC's bulletin for more specifics.
The release of Housing Starts and Building Permits data yesterday only confirmed what the building, real estate, and mortgage industry already know: things are slow in many areas. Housing Starts dropped 5% to their lowest level since October, although Building Permits rose 2.1% - mostly due to a 20% jump in multifamily applications. (SFH were -3.4%.) What the numbers indicated was an economy that continues to be slow, which suggests lower rates, which caused bond prices to improve and rates to drop. 2-yr notes hit another record low, and the 10-yr yield in the 2.90 range is certainly lower than where it was earlier this year (4.01%).
Yesterday was a repeat of what seems to be the typical trading pattern as of late: stocks close up but seem to be languishing, and bond prices improved. The yield on the 10-yr dropped to 2.93% (somewhat near the recent low of 2.89% from a few weeks ago), and mortgage yields are coming along for the ride, with rates only 60-70 basis points above the 10-yr. Another interesting thing to note is that MBS's with Interest Only mortgages in them may be in decent demand. A larger-than-normal percentage of bonds trading right now are "IO paper", and since Freddie is exiting this sector, and Fannie's guidelines have tightened, look for volatility to pick up in this area. Overall, MBS volumes was well above average with around $3.0 billion being sold and bought, and mortgages closed about unchanged.
Today we have no scheduled news whatsoever. And the MBA's weekly applications numbers didn't move rates anywhere. But what we do have, however, is Federal Reserve Chairman Bernanke is scheduled to give his semiannual report on the economy to Congress today and tomorrow. The Fed has been pretty transparent lately (to use that buzzword), and certainly no one is looking for the Fed to boost overnight rates any time soon. So you may hear that "The financial markets will be eager to hear from Mr. Bernanke when he provides his semi-annual monetary policy testimony today to the Senate and tomorrow to the House", but they may just shrug it off. The data since the last FOMC meeting have not appreciably changed from last week. With the positive earnings numbers pushing stocks a little higher this morning, we find the 10-yr yield sitting comfortably at 2.935% and mortgage prices are .125-.250 better.
Four married gentlemen happily went golfing. During the 4th hole the following conversations took place.
First Guy: "You have no idea what I had to do to be able to come out golfing this weekend... I had to promise my wife that I will paint every room in the house next weekend."
Second Guy: "That's nothing; I had to promise my wife that I will build her a new deck for the pool."
Third Guy: "Man, you both have it easy! I had to promise my wife that I will remodel the kitchen for her."
They continue to play the hole when they realized that the fourth guy has not said a word. So they ask him: "You haven't said anything about what you had to do to be able to come golfing this weekend. What's the deal?"
Fourth guy: "I just set my alarm for 5AM. When it went off, I gave the wife a slap on her rump, a wink, and said, 'Golf, or sex?"
"She replied: 'Wear sun-block.'"