USDA Rural Housing Update; The Cost of New Regulations; More on the Pipeline Hedging Environment; Mortgage Jobs & New Warehouse Lender
When I was a kid, my Dad would occasionally open the newspaper and exclaim, "800 Souls Perish in Shoe Fire Factory" or "400 Found Dead in Graveyard". I love headlines. Here was one from over the weekend: "Mortgage rates expected to remain unpredictable". What a shock.
While the doctor was talking to me his nurse came in and said, "Doctor, there is a man here who thinks he is invisible." The doctor said, "Tell him I can't see him now." Many originators can't see the USDA Rural Development program yet - because of "funding" issues.
PHH summed up the most recent news best: On July 29th the President signed H.R. 4899 into law which provides funding for the USDA Rural Development program. This legislation includes several changes, including the ability for the program to be self funding going forward. While this welcomed news will replenish funding, the USDA product cannot be re-activated at this time because the funding approved by H.R. 4899 has not been distributed to the USDA offices. As a result, any Conditional Commitments are still being issued subject to the availability of funds, subject to Congressional approval, etc. In addition, the USDA's final decision to waive the guarantee fee for low income borrowers and delay the implementation of the re-occurring .5% fee until 2013 is still pending. Once these items have been confirmed and funding is allocated to the state offices the program will be re-activated." Purchase g-fees go from 2% to 3.5%, and refi's go from .5 to 2.25%.
Lenders are continuing to look for talent out there. For example, in Southern California, Kinecta Federal Credit Union is hosting a "Mortgage Lending Job Fair" this Saturday, August 14 from 9AM - 1PM at its Operations Center (2100 Park Place, El Segundo). Kinecta's hiring managers and Human Resources staff will be there looking for experienced mortgage lending professionals in operations, sales, and secondary marketing/risk analytics.
From Texas we learn that NexBank has launched a new warehouse lending program designed to give small and mid-sized banks, as well as large mortgage brokers, the capacity and flexibility to grow and compete for business. NexBank has committed $100 million in capital to their new warehouse lines to date, and will be offering multiple tiers to their program: from $100,000 required in net worth to $1 million depending on the size of the warehouse line. I don't know his contact information, but Jed Meaux runs its mortgage division.
I imagine that the small to mid-sized lender would find it difficult, if not impossible, to estimate how much the new regulations will cost. Wells Fargo, however, reiterated that new regulations on overdraft and credit-card fees will cost the bank about $530 million this year in lost revenue. A story in the Wall Street Journal noted that "amendments to overdraft rules, as well as the bank's own voluntary policy changes, will reduce the bank's after-tax revenue by $225 million in the third quarter and $275 million in the fourth quarter", according to a filing by WF. "Wells Fargo noted in the filing that the latest financial regulations (Dodd-Frank) include provisions that will take years to go into effect, and their total ultimate costs aren't known. Still, the bank cautioned, the bill 'could result in a loss of revenue, require us to change certain of our business practices, limit our ability to pursue certain business opportunities, increase our capital requirements and impose additional assessments and costs on us.'"
Friday I discussed hedging mortgage pipelines. Fortunately I received many responses from various sectors. On pull through, and the "stickyness" of pipelines, one correspondent rep wrote, "There are several barriers to breaking and moving a lock. Due to HVCC, many appraisals are not portable. Other compliance issues have also created barriers. Loan complexity has created an environment where if it's hard for a borrower to be approved with one lender, both the broker and the borrower probably don't want to do it again with another lender. And lenders have become very good at reporting on pull through, and making it worth the broker's while not to break locks - and if the broker has poor performance, then they just cut them off. Wholesale investors are no longer 'a dime a dozen'."
A secondary marketing VP wrote, "The correspondent lenders have taken a very hard line on pull through and are monitoring and charging pair-off fees even on best efforts. MERS is helping them detect best efforts abuse. This industry trend is helping secondary managers at independent mortgage banking firms enforce originator best practices - our company pull thru on best-efforts locks is about 80%, which would have been unheard of a few years ago."
I had listed some hedging firms Friday (CMC, Compass, Flatirons, MCM, MIAC, QRM). One principal from a company left off the list wrote to me, reminding me that MCT (San Diego) has been around several years and has established a nation-wide client base and is endorsed by all major investors that have mandatory desks. MCT offers a "conservative, pull-through-based hedging while accounting for MBS duration and convexity, and a transparent and educational relationship with clients." My apologies to MCT.
In my comments I wrote, "Often the basic choice, as it has been for many years, is whether to use a pull through hedge, a delta hedge, or some hybrid to measure risk." I did not mention that hedging had not changed in 20 years, and in fact said that it had become more scientific. A principal from MIAC wrote, apparently agreeing but further elaborating and saying that its hedging had indeed changed in the past 20 years since "the secondary execution has changed". "Hedging a pipeline that is being sold directly to the agencies with servicing retained is a substantially different exercise than hedging one that is being sold to servicing released to investors. In addition to measuring pull-through, hedging is fundamentally about correlating price sensitivity between the loans and hedges. The released execution is far more complex and far more sensitive than a retained execution. The complexity of the pricing and sensitivity dynamics of the AOT-style released execution demands a different and more sophisticated set of tools than existed before AOT-style execution was developed."
"Over the past year, we've seen a renewed interest in retaining servicing, and the pursuit by many market participants (both mortgage companies and banks) of a hybrid secondary execution (both released and retained). The hybrid execution demands an even higher level of sophistication in the tools to efficiently and accurately determine the best execution between these servicing disposition choices and to discretely measure the risk represented by each - SRPs are far more sensitive on a daily basis than the actual MSR value, and are often directionally counterintuitive."
Mortgage companies would prefer to be more preoccupied with the current refinance business rather than some loan that funded 3 years ago, of course. (More on buybacks tomorrow.) So far in 2010, the prices of 30-year Fannie 4.0s, 4.5s and 5.0s are up by roughly 6, 5, and 4 points, respectively. As Paul Jacob with the Banc of Manhattan noted, "investors aren't afraid of MBS prepayment risk; they're afraid of missing yield". If the economy continues to slow, and Treasury rates drop more, some economists think that 30-yr mortgage rates could approach 4% as a standard. But as we all know, borrowers and properties qualifying for a loan is an entirely different issue.
Let's talk about the economy, and about rates. The general feeling is that the labor market is improving, but at a much slower pace than earlier in the year. (In fact, at this pace, it would take seven years to gain back the 8.5 million lost jobs.) The Fed, who meets today, will probably find a way to acknowledge this and scale downs growth prospects. Economic double dips are rare, but the financial press sure likes to talk about them. Inflation hurts bond prices ("fixed income") but a 0% inflation rate can stunt a recovery (real rates are higher, the Fed can't move rates any lower and become more "accommodative", lenders tend to hunker down, and individuals do exactly the same). Since the last meeting in late June, stock prices are higher, the dollar is lower, various credit spreads are tighter, and the recovery is still muddling along.
Yesterday was kind of an average day in the mortgage security market, with a little over $2 billion being sold, and the bulk of it 4% & 4.5%. (Last week, by the way, of the $11+ billion of mortgage-backed securities sold, less than 5% were 3.5's.) This morning we find the stock market pointing to a lower opening, but bonds are steady. We have had some Nonfarm Productivity numbers this morning (which dropped for the first time in a few years - being more productive is generally good for business but maybe not so good for anyone looking for a job), along with "Unit Labor Costs" (which were up slightly), but the possible interest rate-moving news comes out at 1PM easterm with the sale of $34 billion in 3-yr notes, and a little later with the Fed announcement. No one sees any change to overnight rates, but there is conjecture about what, if anything, the Fed may do to nudge the economy along - especially using the cash from all those mortgages paying off early. The 10-yr is sitting at 2.81% and mortgage security prices are unchanged.
A mature (over 60) lady gets pulled over for speeding....
Older Woman: Is there a problem, Officer?
Officer: Ma'am, you were speeding. Can I see your license and registration please?
Older Woman: I'd give them to you but I don't have either.
Officer: Don't have them?
Older Woman: Lost my license 4 years ago for drunk driving. And I don't have a registration because I stole this car.
Officer: Stole it?
Older Woman: Yes, and I killed and hacked up the owner.
Officer: You what?
Older Woman: His body parts are in plastic bags in the trunk if you want to see
The Officer looks at the woman and slowly backs away to his car and calls for back up. Within minutes 5 police cars circle the car. A senior officer slowly approaches the car, clasping his half drawn gun.
Officer 2: Ma'am, could you step out of your vehicle please! The woman steps out of her vehicle.
Older woman: Is there a problem sir?
Officer 2: One of my officers told me that you have stolen this car and murdered the owner.
Older Woman: Murdered the owner?
Officer 2: Yes, could you please open the trunk of your car, please.
The woman opens the trunk, revealing nothing but an empty trunk.
Officer 2: Is this your car, ma'am?
Older Woman: Yes, here are the registration papers.
The officer is quite stunned.
Officer 2: One of my officers claims that you do not have a driving license.
The woman digs into her handbag and pulls out a clutch purse and hands it to the officer.
The officer examines the license. He looks quite puzzled.
Officer 2: Thank you ma'am, one of my officers told me you didn't have a license, that you stole this car, and that you murdered and hacked up the owner.
Older Woman: I bet the liar told you I was speeding, too.