Investor Bales on Wholesale; Right of Rescission Legal Ruling; Capacity and Profit Margins; HARP 3

"Rob, what's going to happen to all those agency MBS owned by the Fed? If rates start to go up, and their prices drop, what will that do to the Fed's balance sheet - won't it be in their best interest to never have their price go down in value?" Good question, since their purchases are holding home loan rates artificially low... but some pretty smart folks are giving it lots of thought. Until then, LO's and lenders are enjoying the rate environment - if the Fed were to stop suddenly, plenty of experts think conforming rates would approach or move past current jumbo rates.

Speaking of which, Synergy 1 Lending is seeking a well-qualified Retail National Sales Manager.  Synergy 1 Lending is headquartered in San Diego, California and runs a centralized fulfillment center out of its corporate headquarters in the Mission Valley area. The sales manager will oversee the growth and production of its national sales efforts and will be responsible for the recruiting, business planning, productivity, personnel management and marketing.  For the right individual, an equity opportunity is available.  Send confidential inquiries to Brad Nease at bnease@s1lending .com.

Up the coast slightly, Orange County based Mortgage Banker American Heritage is seeking an Underwriter Manager to build a retail Underwriting Department and build a successful team of Underwriters. This is an exceptional opportunity for an experienced Underwriting Manager to create and influence the development of this department from the ground up and finally do it right. Minimum 3 years D.E. underwriting experience; prior working experience with Santa Ana HOC;  ability to underwrite to Fannie and Freddie, run DU/LP AUS, interpret findings and verify file requirements. Ability to write underwriting department's credit policy & procedures and function in leadership role to ensure overall credit quality of loan files. If you are interested in building and leading a newly created underwriting department, send your resume to margarita.arvizu@ahlend .com.

And a clarification is owed from a post yesterday from W.J. Bradley. The lender is searching for a Regional Recruiter in Northern California responsible for recruiting in its 15+ branches, not a regional manager, and inquires should be directed to Peter Tenfjord at peter.tenfjord@wjbradley .com. W.J. Bradley is also looking for a Regional Sales Manager for its 10+ branches in CO, UT, and WA - inquires should be directed to Rick Long at rick.long@wjbradley .com.

Out in California, Luther Burbank Mortgage cried out to brokers, "No mas!" on wholesale agency product: "LUTHER BURBANK MORTGAGE TO CEASE ORIGINATING WHOLESALE AGENCY MORTGAGES. Effective today Luther Burbank Mortgage will discontinue issuing rate locks for agency mortgages. Luther Burbank Mortgage will no longer originate wholesale agency mortgages. Current rate locks and loan approvals for agency mortgages will be honored. Loans that have been locked for agency mortgages will be accepted no later than February 8, 2013. Your broker approval status remains in place with Luther Burbank Savings, and we encourage you to continue to submit loans to Luther Burbank Savings for the portfolio loan program. You will continue to receive the Luther Burbank Savings portfolio rate sheet."

For you legal eagles out there, did you know that a borrower can bring a lawsuit seeking rescission more than three years after loan consummation as long as the borrower has sent a written notice of rescission within the three-year period? So ruled a U.S. Court of Appeals. In its decision of Sherzer v. Homestar Mortgage Services, the court rejected the lender's argument that the borrowers' lawsuit was untimely because it was not filed within three years of the loan closing date. Reversing the district court's dismissal of the lawsuit, the Third Circuit held that the borrowers had validly rescinded the loan by sending a notice of rescission to the lender within the three-year period. Law firm Ballard Spahr writes, "The Third Circuit found that the borrowers' position-that they needed only to send notice of rescission within the three-year period to validly exercise their rescission right-was not foreclosed by the U.S. Supreme Court's interpretation of TILA Section 1635(f) in Beach v. Ocwen Federal Bank. The Supreme Court held that Section 1635(f), which provides that the right to rescind expires after three years, operates to extinguish a borrower's rescission right if it is not exercised within the three-year period. According to the Third Circuit, Beach did not address how a borrower must exercise his or her rescission right within such period to prevent its extinguishment." Here is the information from Ballard Spahr.

"What are you hearing from 'the big guys' in terms of origination volumes, capacity, and profit margins?" The general belief is that rising industry capacity will eventually, if it hasn't already, reduced the gain on sales for loans. In other words, gain on sales from newly originated mortgages could fall due to rising industry capacity and likely decline in mortgage applications if rates stay at these levels or go higher. Companies want the production to help their overhead, and the laws of supply and demand dictate that all else being equal, firms will drop their spreads to be more competitive and bring locks in. This would reduce the gain on sale (and primary/secondary spread) from its current roughly 4 points in January to 2-3 points over next few months. We've seen a number of companies making noise out there. BofA/ML recently sold $300 billion in MSR to Nationstar & Walter Investment who both announced intention to ramp up their origination platforms to target HARP. BofAML indicated it will be more active in origination business going forward, although there are no rumors of wholesale or correspondent rising from the ashes. So if we take only the BofA/ML & Nationstar & Walter Investments activity, we could see an increase in volumes & capacity of 5-10%. And this week Wells Fargo improved prices on certain product lines in spite of limited movement in the MBS market.

Anyone running pricing at the aggregators (Wells, Citi, Chase, and so on) will tell you that the key to margins over the past few years, including 2012, has been capacity. If you don't want to do any business, jack up your pricing. Aside from the mechanics of establishing a price, there are five basic components of pricing: demand (capital markets have a buyer - think specified pools), competitive position, margin need or budget (required return on asset), market share (are you gaining or losing), and capacity. When pricing, pricing desks or capital markets groups balance all of these.  However, "the thumb has been on the capacity side of the scale" for several years for most of those in the industry.  So, depending on the above, some have had P/S spreading and other's not so much. Also, what most articles are not taking into account when analyzing the P/S spread is the huge increase in costs - in the g-fee arena, increasing compliance (see the magnitude of the CFPB rules last month?) and the big one: servicing compliance and foreclosure costs.  These costs, even though for prior funded loans, have to be "covered' by the current fundings and eat into margin and the spread.  Some companies have more or less costs depending on their book of business.

While we're yapping about pricing, the Fannie Mae trading desk asked, 'Have you checked out our best efforts pricing lately?  Fannie Mae offers a highly competitive and flexible best efforts whole loan committing option. Fannie Mae handles the pipeline management and interest rate risk in a best efforts commitment, allowing lenders to focus their attention on other critical business priorities and activities. If you commit as best efforts and the loan does not close, you will not incur a pair-off fee. Other program benefits include changing product, pass-through rate and commitment amount without incurring fees - great for managing your HARP and 20/15/10-yr product pipelines."

That being said, time for an editor's note: Sellers know that cash BE is just one option. Some select pipeline hedging vendors analyze released/retained and MBS alternatives besides cash, and help people optimize overall execution. The fact that Fannie sometimes has a good BE price is no different than Wells and Chase sometimes have a good BE price - it is all part of the execution game. Some Fannie cash sellers, even when the spread is narrow, are still choosing to hedge and sell mandatory, almost exclusively. As noted above, Fannie has eCommit One which has BE pricing, and a quick look has the spread to cash execution back between 30 to 45 basis points at the various note rate levels.

Through all of this, plenty of banks and financial companies continue to merge to either grow larger or to save money (on things like compliance or legal). Let's take a look at the last week or so. Publicly held United Bankshares, Inc. CEO's Richard Adams announced the signing of a definitive merger agreement with Virginia Commerce Bancorp, Inc. "The acquisition of VCBI will afford United the opportunity to significantly enhance its existing footprint in the Washington, D.C. Metropolitan Statistical Area." Lakeland Bancorp ($2.8B, NJ) will buy Somerset Hills Bancorp ($351mm, NJ) for $64.4mm (about 90% in stock). Trust Point (MN) will buy the trust division of Anchor Bank ($1.4B, MN) for an undisclosed sum. Trust Point manages $2B in assets and offers investment management, personal trust, wealth management and other services. First Bancshares ($724mm, MS) will buy First National Bank of Baldwin ($190mm, AL) for an undisclosed sum after First National files Chapter 11 bankruptcy. (Per Pacific Coast Banker's Bank, First National is severely strained with leverage capital of only 2.2%.) FIS will buy the 78% interest it doesn't already own in mFoundry, as it seeks to control more mobile banking and payments technology. First California Financial Group ($2.0B, CA) and Premier Service Bank ($139mm, CA) have called off their previously announced merger, as the deadline has passed. First California originally agreed to buy Premier in Feb 2012, then in Nov 2012, agreed itself to be sold to PacWest Bancorp ($5.5B, CA).

Bank of Colorado ($2.2B, CO) will buy New West Bank of Greeley ($171mm, CO) for an undisclosed sum. TowneBank ($4.3B, VA) will buy The Clement Companies (NC) for an undisclosed sum. Clement is a full service insurance agency founded in 1979 offering P&C, personal lines and employee benefits services. Capitol Bancorp ($1.8B, MI) has entered into a sales agreement for its Sunrise Bank of Albuquerque subsidiary ($52mm, NM) with Weststar Bancorp ($1.1B, TX) for an undisclosed sum. United Bankshares ($8.4B, WV) will buy Virginia Commerce Bancorp ($3.0B, VA) for $490.6mm in stock or about 1.82x tangible book (captures 29 offices). One PacificCoast Bancorp ($291mm, CA) has agreed to buy 90% of the stock of Albina Community Bank ($128mm, OR) for an undisclosed sum. Both banks are community development financial institutions (are about 60 in the country). Sterling Financial ($9.5B, WA) has agreed to sell 3 branches to the parent company of Bank of the Pacific ($644mm, WA) for a $1.2mm premium or about 2.77% of core in-market deposits.

But heck, what happened to home loan rates yesterday? The 10-yr Treasury was well behaved, its yield dropping to 1.95%, yet agency MBS prices didn't move, or actually worsened on some rates. Investors were actually taking "risk off" due to renewed concerns focused on government induced refinance programs. We also had two Congressmen write a letter to President Obama urging him to replace DeMarco at the FHFA saying it is inhibiting the agencies' ability to help troubled homeowners out of underwater mortgages.

But the focus was on HARP 3, which was mentioned in this commentary earlier this week. (Along with my opinion that its passage is far from guaranteed given the current state of politics.) We had the Mendez/Boxer bill reintroduced yesterday. The bill proposes: "1) Ensure that streamlined refinancing is available and consistent for all Fannie and Freddie borrowers, regardless of whether they are underwater or not; 2) Reduce up-front fees on refinances; 3) Eliminate appraisal costs for all borrowers; 4) Remove additional barriers to competition; 5) Extend HARP by one year, to allow eligible borrowers more time to access the program."

We've seen these stories and more directly, this bill, multiple times before. While regulatory risk around increased refinancing programs and extension of HARP are real issues, few think they will be occurring in the near future. So we are left with limited originator supply which totaled less than $2.5 billion Thursday, while the latest report from the New York Fed indicated buying at a pace equivalent to $3.7 billion per day. (Despite the assurance from the FOMC's recent statement regarding its outright asset purchases and reinvestment of paydowns, there is still chatter about the FOMC minutes from January that discussed the possibility of slowing or ending outright buying before the end of the year.)

Today we'll have the December numbers for International and Wholesale Trade - typically not earth-moving statistics. In the incredibly early going, the 10-yr is at 1.97% and MBS prices are down.

A German tourist jumped into the freezing water and saved my precious little dog.

Upon getting back to the bridge, he checked my puppy out and told me, "Ze dog is okay. He vill be fine."

Due to his selfless heroic act, I asked "Are you a vet?"

He replied, "Vet? I am ---- soaked!"