Details on the Fed Basel III Vote Tomorrow; How it May Impact Rate Sheets / Volumes, and the BofA Servicing Sale

Today is June 6th, and 68 years ago the most famous D-Day took place on the shores of Normandy. (D-Day, by the way, is a variable used in planning, just like H-Hour, for many events.) The German Lieutenant barges in and says "Mein Fuhrer, the Allies have invaded Normandy!" Puzzled by the outburst Hitler replies, " Funny.... I did nazi this coming." Speaking of "not seeing" something coming, I received this note: "Rob, when do you think that the CFPB, in its efforts to ensure counterparty accountability, will require lenders to monitor what borrowers do with the money that is lent to them? If they're going to make sure that the borrower can pay back the loan through QM, why not go a step farther and track what they're doing with the money." I have not heard that, and let's hope it never comes to that, because of the cost of something like that will, of course, be passed on to the person refinancing, causing borrowing costs to go even higher.

What are you doing tomorrow at 9AM PST? You could always listen in to the "White House Call with Nevada Leaders" as "Senior Administration Officials" discuss the President's refinancing proposal with Nevadans. One must RSVP by 8AM PST on Thursday, June 7th to join them, "and please be sure to dial in 3 minutes early so that we are able to start the call on time. Please RSVP here; the call-in number is (866) 837-9781, Passcode Title: White House Call with Nevada Leaders.

The Fed has to be "raking in the bucks" - remember that every day it has been in, buying 1-2 billion of agency MBS, and now these positions are trading at premiums such as 104, 105, 106 - that is a very nice gain IF they sell and IF their pools don't refinance. Speaking of the Fed, with the swearing in of a seventh board member, the Federal Reserve is at full capacity for the first time since 2006, and President Obama nominated six of seven governors.

In his most recent press conference, Bernanke warned that there was nothing which the Fed could do regarding the "fiscal cliff." Bernanke said, "And I am concerned that if all the tax increases and all the spending cuts that are associated with the current law which would take place, absent any Congressional action, that would occur on January 1st that that would be a significant risk to the recovery. So I am looking and hoping that Congress will take actions that will address ... both requirements of good fiscal policy." The markets are well aware that under current laws, at the start of 2013 a) the end of the "Bush era" tax cuts occur, the most notable of which is an increase from 15% to 43.5% in the top tier of tax on dividends, b) a 3.8% tax surcharge which combined with the expiration of the "Bush era" tax cuts would move the top capital gains rate from 15% to 23.8%, and c) massive spending cuts mandated by law. This is all law, until Congress decides to change it, but the tax increases alone on dividends and capital gains are going to have a very significant negative effect on equities and may also drive interest rates up as investors demand real positive after-tax returns.

We "only" have six (6) more months of election stuff to listen to every day. But as one reader wrote, "Bernanke is making one gigantic point: There is nothing which the monetary policy of the Fed can do in face of insanely irresponsible fiscal policy. Forget everything else. If one increases taxes and decreases spending per what is in place then GDP will take a sizable hit because both consumers and government will be spending less. The worst part is that there is an election coming and the imbeciles in Congress cannot be bothered with this trivia before mid-November. Reelection is more important to them than the economy. This is, in my mind, the heart of the problem."

Tomorrow is a very important meeting by the Federal Reserve, during which it will vote on Basel III. More details 

Many folks have asked about how Basel III will impact borrower's prices. In December 2010, the proposed Basel III Accord was finalized which, if adopted by U.S. banking regulators, will result in a new regulatory capital regime for MSR (mortgage servicing rights) assets. Under the Basel III Accord, the amount of MSRs that can be counted as Tier 1 capital is capped at 10%, effective January 1, 2013, with a phased implementation through 2018.  In addition, a bank must deduct the amount by which the aggregate of the following three items exceeds 15% of Tier 1 capital: (i) significant investments in unconsolidated financial institutions; (ii) MSRs; and (iii) deferred tax assets arising from temporary differences. The exclusions from the 10% and 15% thresholds will be phased in from 2013 to 2018.

What does this mean? Basel III as currently proposed (and fully phased in) will increase required capital for most entities but will significantly increase the effective capital requirements for entities with large MSR positions relative to their Tier 1 capital. This includes a few score of banks, including Wells Fargo. Under Basel III, for those institutions at or above the 10% of Tier 1 capital level, the marginal capital requirement is effectively 100%.  The net effect of Basel III is potentially a significant increase in capital requirements for the industry as a whole. Some of the largest originators, who are market leaders in setting mortgage rates, will need to either raise mortgage rates while reducing servicing released premiums paid in order to compensate for any incremental capital required, or accept lower returns. And you can bet that if Wells or Citi or Chase lowers their SRP's, the market will follow - and the borrower will bear the brunt of it.

But there are, alternatively, other solutions to manage the 10% capital limitation, including acquisition/merger, selling the MSR, and structuring and/or holding more loans on balance sheet (eliminating the recognition of a separate servicing asset). So it is no surprise to see the news yesterday that non-depository Nationstar Mortgage has signed a definitive agreement to acquire approximately $10.4 billion in residential mortgage servicing rights, as measured by unpaid principal balance, from Bank of America. The acquired servicing portfolio consists entirely of loans in government-sponsored enterprise (GSE) pools - expect the loans to transfer from Bank of America in July. Nationstar currently services more than 635,000 residential mortgages totaling nearly $103 billion in unpaid principal balance.

This leads into a little agency news. Fannie Mae's FHFA appointed Timothy Mayopoulos as its new chief executive officer. Mayopoulis has interesting credentials: he's been Fannie general counsel for three years - prior to that he was general counsel for BofA. Mayopoulos' promotion from general counsel takes effect on June 18, and the promotion means a pay cut for him - he will make $9.73 per hour. Seriously, his salary will be around $500,000 - which is much less than the CEO of an average sized mortgage company's earnings for the last few years.

Fannie Mae bought just $52 billion of home mortgages from its seller/servicers in April, a 45% plunge from March, and Freddie Mac bought $26 billion of loans, a 39% decline from March. Were the March purchase figures an aberration because lenders rushed to get loans closed before an incoming g-fee increase, pushing the March numbers higher? Perhaps.

But the market for "investor kicked loans" remains competitive with many investors looking for loans that have been rejected by aggregators and/or the agencies. They all have their pluses and minuses. For example, some provide higher prices but will reject loans for non-eligible related issues while others will provide a lower price but will reject fewer loans. Some will purchase 30-day+ RESPA cures and some won't, some will run updated property valuations and some won't. Readers have noted that there are more investors interested in Fannie product rather than Freddie, and very few will purchase HomePath, Texas cash outs, and VA IRRRLs. Don't ask me for names (I don't have them) but pricing is typically two to five points back of corresponding screen prices (mid 90's to 105) with the spread back of screen depending on the loan's perceived risk, and for non-agency eligible loans (i.e. scratch and dent loans), look for pricing in the 70's & 80's if the loan is performing.

This morning we learned, from the MBA, that the number of mortgage applications filed in the U.S. last week rose 1.3% from the prior week, with the refinance numbers +2% hitting 78% of total applications! ARM's seem stuck around 5%. One interesting thing to note: the average rate on 30-year fixed-rate mortgages with conforming loan balances fell to 3.87% while rates on similar mortgages with jumbo loan balances decreased to 4.13% - a spread of about .25%.

Lenders have certainly been in selling: originator selling over the past couple days has been over $7 billion, and as supply/demand laws dictate, MBS prices worsened relative to Treasury prices. As one trader put it, "Watching MBS break 12 'wider' in two session was about as enjoyable as watching my wedding video with my Mother-in-Law." The daily Fed buying of $1-1.5 billion can only do so much - what happens if it goes away entirely, leaving money managers, REIT's, and hedge funds on their own to absorb the supply? So Tuesday both current coupon MBS prices and our 10-yr T-note were worse by .250-.375, and the 10-yr closed at 1.56%.

Today things were pretty quiet in Europe, and we did have a little news out this morning. The final Q1 reading on Productivity (-0.9% vs. -0.5% previous, worse than expected) and Unit Labor Costs (+1.3% vs. +2.0%, also worse than expected). Later we'll have the 2PM EST release of the Beige Book, containing economic anecdotes from the 12 Federal Reserve Districts in preparation for the June 19-20 meeting. We find the yield on the 10-yr at 1.63% and MBS prices lower from Tuesday's close.

 
At Sunday School they were teaching how God created everything, including human beings.
Little Johnny seemed especially intent when they told him how Eve was created out of one of Adam's ribs.
Later in the week his mother noticed him lying down as though he were ill, and she asked, "Johnny, what is the matter?"
Little Johnny responded, "I have pain in my side. I think I'm going to have a wife."