Redwood's 0% Default Rate; The Nationstar Model and the Current State of Servicing Valuation

"Rob, where's a good place to learn about the new FHA MIP structure, and the possible implication for Ginnie securities?" Good question, especially since Ginnie just released a set of frequently asked questions about the new premiums.

Hey, hope springs eternal in warehouse lending. Here's a new lender with a slight twist: liquidityspot.com.

And companies need warehouse facilities as they continue to expand. Due to growth and expansion, PMAC Lending Services is looking for strong operations talent to include underwriters, funders, and account managers for its offices in Chino Hills, CA, Concord, CA, and Lisle, IL offices as well as a Servicing Compliance Analyst in Chino Hills, CA.  Additional opportunities are also available for high caliber retail and wholesale Sales Managers, Account Executives and Loan Officers throughout the country. PMAC Lending Services is a direct lender and servicer supplying conventional and government products throughout the US and is Fannie Mae, Freddie Mac and Ginnie Mae approved and has fulfillment operational centers nationwide. Interested candidates should submit resumes to careers@pmac .com. 

Bay Equity, a well-established mortgage banker (BayEquity) is looking for a Regional Vice President of Operations to lead the development of its Retail Operations Center located in Lake Oswego, OR. This individual will be responsible to build, create, and manage a team of operational professionals focused on providing quality customer service and operational efficiency. The position will oversee intake, underwriting, document and funding departments. The Regional Vice President of Operations is responsible for providing coaching, feedback, and training in areas that need performance improvements or operational workflow changes. If you are interested please send your resume to Lily Woo: lwoo@bayeq .com.

What is Redwood Trust's default rate? How about 0%. Here is the complete story. Investors in non-agency paper are critical to its viability, and stats like that certainly help them sleep at night.

"Rob, what do you hear about Basel III? Is it still impacting servicing values?" I will know a lot more after moderating a panel on it at the TMBA in Houston tomorrow, but it almost seems that Basel III has gone away - but it has not. As with many other programs, the intention is good (a more sound and sturdy banking system) but the devil is in the details. The latest is news of a possible Senate bill that would require a quantitative-impact study before the U.S. implements rules by the Basel Committee on Banking Supervision. Although an actual congressional vote could be difficult to achieve, analysts say legislative pressure on regulators might be enough to dissuade them from Basel III adoption indefinitely.

Basel III is often cited as one of the reasons the value of servicing has gone down. But deals still trade, and in fact companies involved in servicing are doing a decent business. For example, a deal involving 3,177 non-performing, unsecured, second lien mortgage loans with total unpaid principal balance of $177.3 million closed on February 1 and was facilitated by MountainView Capital Group, a residential whole loan sale advisor. "This non-performing, second lien pool was one of the largest to trade in the secondary market in the past 13 months," said Jonas Roth, a Managing Director at MountainView Capital Group and the company representative who managed the deal. The pool traded from a special servicer to an asset manager and had national geography, with the largest concentrations of loans in California (21%), Nevada (14%) and Florida (14%). The top five cities were Las Vegas (9%), Henderson (2%), Phoenix (1%), North Las Vegas (1%) and Miami (1%). "Market demand far exceeded supply in the second lien space last year, and we are expecting several more pools to come to market in the first quarter of 2013," added Roth. "Any performing or non-performing closed end seconds or HELOCs will attract multiple bidders." For 2012 as a whole, MountainView Capital Group facilitated the sale of 9,792 second lien loans with total UPB of $615.5 million.

Stephen Fleming of Phoenix Capital writes, "After managing nearly $400 billion in bulk & flow MSR trades over the past 12 months, we continue to see encouraging signs pointing to the resurgence of the true flow (co-issue / forward bulk) servicing rights market. While not fully liquid yet (a client recently described it as "gelatinous"; a fair assessment), it's heading in the right direction, and many of the newly arrived MSR buyers are now seriously evaluating and bidding on portfolios in 2013. While the fair versus trading versus economic value gaps still persist, they are generally compressing - with geo/state level, dynamic par pricing picking up. Case in point: our most recent flow offerings have garnered multiple legitimate bids (5-7 bidders, and more knocking at the door), with some national average conventional net prices landing healthily above a ~3.25x multiple level (Ginnies also show renewed strength) - welcome news to our independent mortgage bank clients. The end game is providing lenders with enhanced and more numerous (avoiding the eggs in one basket situation) secondary options, including the option of holding MSRs, with the net result of better margins and perhaps a better night's rest as well." (If you have questions you can write to him at sfleming@phnxcap .com.)

And Newcastle Investment Corp. announced that it plans to make a public offering of 20,000,000 shares of its common stock and to use the net proceeds from the offering for general corporate purposes, including to make a variety of investments, which may include, but is not limited to, investments in real estate securities, real estate related loans, consumer loans, residential loans, corporate loans, senior living assets, excess mortgage servicing rights and operating real estate. For those of you playing at home, Newcastle is a REIT owned by NSM with its parent company being Fortress Investment Group (FIG) - which also owns Nationstar. NSM services mortgage loans as either a "MSR holder" - they own specific assets called "Mortgage Servicing Rights" which entitles the holder to collect a pre-defined revenue stream in return for servicing the mortgages or they operate as a "fee-based servicer" - someone else owns the MSR asset and contracts with NSM to service the mortgages for a fee.

Last week Nationstar purchased Equifax Settlement Services. What difference does that make? Well, NSM's traditional business model for revenue is as a "non-bank" mortgage servicer. The big distinction here is "non-bank" - they do not take deposits and use those deposits to fund mortgages like banks. ("Basel III? Who cares?") The MSR style of ownership (mentioned above) is a very capital intensive model as MSR assets can be very expensive depending on the quality of the underlying mortgages. As noted about from Phoenix Capital, many MSRs trade at 50-100bps of the unpaid principal balance (UPB) of the underlying loans, so a $10 billion MSR portfolio could require $50-100 million in capital. So in order to grow the MSR servicing portfolio, NSM must continue to purchase costly MSRs requiring an ever-growing capital base, thus making it challenging to achieve high ROEs.

But with Newcastle Investment, NSM can leverage the NCT partnership to buy MSRs. One model that has been shared with investors includes a co-ownership of MSRs with NCT buying 65% with NSM receiving a servicing fee, plus the upside with the remaining 35% ownership. This partnership allows Nationstar to grow its servicing portfolio without having to come up with enough capital to fund 100% of the MSR purchase price, thus leveraging money and increasing its returns on equity. (Yes, Ocwen has the same arrangement with its affiliate company HLSS.)

And so we see where Equifax fits in. When mortgage companies originate and service loans, they often need to engage 3rd party companies for various services such as appraisals, title searches, etc. These are scalable fee-based businesses based on technology and data processing with good margins that Nationstar can now keep in-house and sell to other companies.

Perhaps PHH can learn something from that. Investment banker KBW writes of PHH's recent earnings announcement, "Higher mortgage banking income was offset by lower servicing income." PHH increased its share count, which skewed the numbers somewhat, although, "Pre-tax mortgage banking income declined to $99 million from $122 million in 3Q. Interest Rate Lock Commitments (IRLCSs) fell to $6.2 billion to $6.8 billion QQ. The gain-on-sale margin increased (as a percentage of IRLCs) to 3.98% from 3.80% in 3Q, above our 3.2% forecast. Management noted that HARP volume accounted for about 6% of total volume in 2012. Core servicing income increased to ($54) million from ($63) million in 3Q. Actual prepayments were flat at $75 million and rep & warranty charges declined to $37 million from $41 million in 3Q. The company's estimate of rep and warranty losses over the reserve fell to $40 million from $70 million previously."

Yesterday we received yet another housing price measure, learning from the National Association of Realtors that the national median existing single-family home price was $178,900 in 4Q, up 10.0% from $162,600 in 4Q2011, the strongest year-over-year price increase since the 4Q 2005. The median existing single-family home price rose in 133 out of 152 metropolitan statistical areas. Lawrence Yun, NAR chief economist who in the past has commented about lending standards being too restrictive, said all the conditions for strong price growth are at play. "Home sales are on a sustained uptrend, mortgage interest rates are hovering near record lows and unsold inventory is at the lowest level in 12 years," he said. "Home sales are being fueled by a pent-up demand and job creation, along with still favorable affordability conditions and rents rising at faster rates. Our population has been growing faster than overall housing stock, so supply and demand dynamics are very much at play." Yun added that more housing construction is needed to relieve some of the pressure in the market and keep home prices from overheating.

The market continues to tread water, which is fine since many don't care about having volatility. MBS, and other fixed income, investors seem to be waiting for some direction - on the mortgage side of things from further policy moves (DeMarco change or HARP legislation). Since late January our 10-yr has pretty much sat between 1.95% and 2.01% which has not seemed to have helped the specified pool pay-up market. Certain pay ups have stayed aggressive but one trader opined, "pay ups on LTV paper have probably seen their highs."

And for more on the current state of the agency MBS market, Adam Quinones with Thomson Reuters writes, "Last week I mentioned the market environment had given mortgage BestEx models a personality disorder. This observation has become a hot topic in our secondary marketing chat room.  An extended stay in duration purgatory isn't the only reason though. Supposedly Fannie has been telling clients it wants to shift some of its monopolistic market share over to Freddie. This makes sense given the steeper curve environment/declining payups."

By the time the dust settled Monday, MBS prices were better slightly - certainly better than "worse slightly" - and the 10-yr ended at 1.95%. Today there is no market-moving scheduled news, although we do have a Treasury $32 billion 3-yr note auction at 1PM EST. And in the very early going, as I head to the TMBA conference in Houston, things don't look much changed rate-wise.

Third world problems - do they pale in comparison to first world problems?