Will 2013 Mortgage Profits be Like 2012?; State's Rights Prominent in Lending
We've made it to December 7, Pearl Harbor Day, and for something totally
unrelated to mortgages to end the work week send this clever short video to any
aspiring art majors. (It even received a "Whoa!" from my hard-to-impress daughter.)
Unfortunately for some of the folks at Denver's Allonhill, their work
weeks are changing. Although management hired some back recently they are
seeing another round of layoffs - 140 in this round versus 325 in May. More
For some easy stats to remember, there are roughly 70 million homes in the U.S. and 50 million have a mortgage on them (average of roughly $200k). That puts the overall housing market at about $10 trillion. The amount of equity homeowners had in the 2nd quarter climbed by $406 billion to $7.3 trillion, the highest level since 2007. (Thanks to the Pacific Coast Bankers Bank for this one.) And we have to figure that this increase in "national LTV" continued to climb in the 3rd and 4th quarters given values and the number of "cash in" refinancings.
Costs, and revenue, are in the forefront of many lenders minds as they look back on 2012 and project for 2013. Practically every mortgage originator has computed (and reported for public companies) 3Q12 earnings, and as an industry mortgage banking results, title insurers, and vendors have been strong driven by increased origination volume and generally higher gain-on-sale margins. Negative MSR (mortgage servicing rights) marks were largely offset by hedge gains. While rep & warranty losses remain elevated, this was largely in line with expectations of many research firms, and as mentioned yesterday buybacks are continuing.
Looking at publicly traded stocks, financial stocks are up over 20% through November versus about 13% for the S&P 500. If this holds true through December, it will have been the first time since 2005 - are banks (which also represent the lion's share of mortgage originations) really that healthy, and will the net worth of mortgage companies continue to grow? Joe Garrett reminds us, "It seems that a $10 million net worth is the new $2 million, and that $500 million a month in volume is the new $100 million. But before you get too giddy, remember that trees don't grow to the moon, and all bubbles eventually burst...Have your controller or CFO show you what your financials would look like with volume off 50% and margins down by at least 25%. Once you have these new projections, build a plan to at least break even when this happens."
Any business person knows that when volumes begin to drop, margins are the first things to be cut in order to keep business coming in the door to support the overhead (and this is for any business, not just mortgage lenders or vendors). But although this will certainly happen, the 1st quarter of 2013 is appearing to be much like a continuation of 2012 with strong mortgage banking results. For the 3rd quarter, most companies reported moderately higher origination volumes over 2Q12, and analysts expect mortgage volumes over the next several quarters to remain strong supported by refi volume, given the low interest rate environment and strong production through HARP. Also for the 3rd quarter gain-on-sale (GOS) margins were up sequentially for most companies. Margins remain elevated driven by industry capacity constraints and strong investor demand for HARP mortgages - the easiest way to slow volume is to jack up your prices. And the industry sees, and the Fed noted last week, the spreads between primary and secondary mortgage rates remained wide through 3Q and widened after the announcement of QE3, which bodes well for gain-on-sale margins in 4Q12.
But what is happening with servicing values in this low rate environment? Mortgage companies generally took negative marks on their MSR as rates declined. Negative marks were largely offset by hedge gains, which for many companies is merely the boost in lending activity and/or refinancing their own portfolios. One can pretty much expect the negative marks to continue in 4Q as the primary borrower rate declines - but just think how much this new servicing will be worth!
It is interesting to watch lenders expand into new states - in many cases it is not an easy task for licensing, regulatory, compliance, or Ops personnel to merely start working on loans in another state. In fact, though the issue doesn't generally take precedence in discussions of the housing crisis, the goings-on of the past several years have cast light on just how much consumer protection, foreclosure, professional licensing, and other mortgage and real estate laws vary from state to state. The MBA's Research Institute for Housing American, after having studied the situation, has released a report entitled "The Historical Origins of America's Mortgage Laws" that analyzes the variations in legal frameworks and how exactly they came to be that way. It cites a few examples of major differences between states. One is what distinguishes title theory and lien theory varies across the board. Lenders in states that follow title theory retain title to the property until the borrower pays off the mortgage, whereas in states that adhere to lien theory, the borrower owns the property for the length of the loan term, and lenders' interests are limited to cases where the borrower defaults.
Another is that in some states, the standard real estate security instrument is a mortgage, while in others it's a deed of trust. With a mortgage, the legal title to the property is entrusted to a third party trustee. Deed-of-trust transactions, on the other hand, involve three parties instead of two and resulted from judges' concern about lenders including power-of-sale clauses in mortgages. This also gave rise to laws that require lenders to go to court and receive a judge's approval to foreclose in certain states, while in nonjudicial foreclosure states, the inclusion of a power-of-sale clause will suffice to authorize either the lender or the trustee to sell the property. As a rule, the foreclosure process drags on longer in judicial foreclosure states.
(As a quick history lesson, the Deed of Trust was initiated "out West" to encourage "back East" money to lend out West. The Deed of Trust was simple and fast for foreclosure. The mortgage system on the East Coast and Mid-West took much longer, so it has been that way for centuries. States all have their own foreclosure laws (states rights!). And many point out that this is one thing the big banks and Wall Street did not accept when they started MERS, and more specifically how Wall Street, in many cases, seemed to sometimes ignore individual state laws when rushing to create huge residential securities.)
A third is foreclosure laws, which were originally put in place in an effort to protect consumers from the possibility of losing both their property and owing a substantial deficiency judgment when making below-market bids on foreclosures, also vary. The different laws can be traced back to the Great Depression, when much of the country enacted anti-deficiency rules, which certain states later deemed unconstitutional.
There are many advocates, inside of the MBA, and outside, for creating
a uniform mortgage code that would save the industry a considerable amount
of time and effort, especially as the industry continues to integrate across
state borders. But as we know mortgage laws (not the CFPB kind) are
exceedingly slow to change, however, and up to this point, all of the attempts
at standardization have failed. No one has formulated any definitive
theory of the economic reasons for the disparate way mortgage law has developed
across the US, either; rather, the MBA's report puts it down to "the outcome of
path-dependent quirks in wording of various proposed statutes and decisions of
individual judges."
Okay, enough chatter about general mortgage aspects, and on to some
real-life agency, investor, and vendor updates from over the last few weeks.
As always, read the actual bulletin for full details.
As a reminder, in compliance with the Loan Delivery business rules, Fannie
Mae is now requiring all loan deliveries with Application Received Dates on
or after August 1, 2012 to include the new SEC Mortgage Funder field in
addition to the Appraiser's State License Number, Loan Origination Company
Identifier, and Loan Originator Identifier fields.
Fannie has announced plans to update the Lender Record Information form (Form
582) in the coming months. The revised form will be available in January and
should be completed and submitted by lenders 90 days after the respective ends
of their fiscal years.
Lenders are encouraged to prepare for the activation of the proprietary Fannie
Appraisal Messages in the UCDP by reviewing the Appraisal Findings Reports that
are currently available. In late November Fannie released the UCDP User
Guide for Fannie Mae Messaging.
to help users with the transition.
Fannie has announced that it will be implementing new requirements for its FNMA
Mortgage Release deed-in-lieu processes. Borrowers will be able to opt
for a Mortgage Release-immediate move, a three-month transitional arrangement
with no required rent payment, or a twelve-month lease with market rent
payment.
Servicers no longer need written approval from Fannie to postpone foreclosure
sales for loans more than 12 months delinquent, as the requirement has been
eliminated.
Freddie Mac has rolled out a new website to aid servicers in selecting
and managing law firms to handle default-related legal matters as per the
recently announced policy change, which takes effect next June. Servicers
can access fact sheets, FAQs, links to current DCP law firms, and training
opportunities, all of which are available here.
Ginnie Mae's numbers are in for the month of October, over which it
guaranteed $36.8 billion in MBS. Single-family pools comprised the
majority and totaled $34.79 billion, with multi-family pools totaling $707
million. Of the single-family issuances, GNMAII pools exceeded $30.56
billion, while GNMAI single-family pools totaled about $4.23 billion.
Citibank has updated its property flipping policy to prohibit private
sales and For Sale by Owner transactions on new FHA properties. A second
appraisal completed by an FHA-approved appraiser is also be required if the
transaction exceeds between 10 and 50% to substantiate the increase in
value. For improvement transactions, the increase in sales price from the
seller's acquisition cost is now capped at 50% instead of 20%, and in cases
where the sales price is more than $500,000; the maximum increase in price has
been increased from $100,000 to $250,000.
In compliance with the recent policy changes announced by Freddie, Citi has
aligned the pricing differences between LTVs over 80% and those of 80% or less
for all LP Open Access loans. Effective for all LTVs, proceeds from the
new refinance are permitted to go towards paying off the unpaid principal
balance of the first mortgage, any interest accrued through the date when the
mortgage is paid off, related closing costs, financing costs, and
escrows. The previous requirements for establishing stability of income
and investigating the source of large deposits have been removed.
What's going on with the markets? Not much, which is fortunate since there
seems to be enough other things going on, and no one seems to mind the lack of
volatility. Thursday the 10-yr. closed at 1.58% - we've pretty much been near
these levels all week. And it is too early here in Pennsylvania to know where
things will open, but today we will have the unemployment data which can
easily move rates.
Scrabble...
Rearrange the letters below to spell out an important part of the human body
which is even more useful when erect.
P N E S I
People who wrote SPINE became doctors...
The rest are all my friends.