Capital Markets Eye Margin Requirements and QRM; Fed Minutes: Much Ado About Nothing

Hey, the next time you are dreading the job of giving that quarterly review to that obstinate employee, think about this task.

Companies are looking for talent like that! I have been asked to assist a well-known Texas based retail lender fill a secondary marketing position. The ideal candidate has a minimum of three plus years of secondary experience working in a mandatory environment and selling directly to the GSE's. The opportunity is based in the Dallas/Fort Worth market. The lender has expected volumes in 2013 of $800 million, mostly purchase business, has full agency approval, a mandatory platform, and wants to add to the depth of its Capital Markets Department. Please send your confidential resumes to me at rchrisman@robchrisman .com.

Well, for all those veteran LOs who were pleading a couple years, "Lord, just give me one more refi boom!" is it ending? The jungle drums out there are sounding out waning pipeline sizes, and refi's are at their lowest level since May. Yesterday's MBAA Mortgage Applications Index was down by -1.7% for the week ending Feb. 15, which is not as significant drop as seen the week prior (-6.4%). Refinance applications fell by -1.6% while purchase applications were down by -1.7%. Refinance applications as a percentage of total applications are at 77.2%, a drop from the week prior at 82%. Digging into it, conventional refi's were essentially unchanged on the week but GNMA (primarily FHA & VA) declined by 7.26%. Year over year, the overall index is up 2.1%, the refi index is down 1.8%, and the purchase index is up 18.7%.

Many companies and originators, rightly or wrongly, are hoping for another refi program out of the government. Can President Obama create a refinance plan for non-government borrowers? Put another way, if a borrower has a jumbo loan with Union Bank, and its sitting in UB's portfolio earning 5%, can the president force UB to refinance it to a lower rate? It is a long slippery slope as the government intrudes into private enterprise.  More

"Rob, I run a secondary group for a small lender in the Northeast. We hedge our pipeline, so we're out there selling MBS to broker dealers. What do you hear about margin requirements?" From what I understand, margin requirements seem to be loosening up at few dealers. Typically, dealers who buy loans are a little more relaxed about it, but couple that with a few small regionals entering the picture and margin becomes a topic again. Veteran sales staff will often tell clients that if you do business with small regionals who don't ask for margin to be posted, they are probably doing that with all their accounts. Dealers already post 2-2.5% notional on trades with mortgage bankers not on the MBSCC/FICC. If ABC Mortgage is short $10 million Fannie 3's in April to a reputable firm such as Cantor Fitzgerald, Cantor then has to post $250k for ABC Mortgage + 100% of market volatility. So if posting $100-250k with a dealer who has already posted 2.5% notional + 100% of future market volatility is too much for you, then chances are a firm like Cantor can't trade with you. Don't forget - the mortgage company usually does not have to post a dime till the market moves significantly against it. If ABC sold Cantor $10 million at a price of 100.00 and ABC has $250k in a margin account, it doesn't post until the short moves up to a price of 102.5. At that point we would have already posted twice that amount with FICC.

The MBA is keenly aware of developments, and how they may impact smaller mortgage banks that hedge their pipelines. In fact the MBA has a working group dedicated to keep margins from being required as an industry-wide practice and thus hinder hedging. A recent work published by TMPG (Treasury Market Practices Group) suggests that more groups are pushing that margin be mandatory. Here is a link to the November paper "Margining in Agency MBS Trading" (TMPG White Paper). Does that answer your question?

This brings up the topic, "Whatever happened to QRM?" This is best known as the "skin in the game" proposal which last year turned heads with talk about forcing residential MBS issues to keep 5% cash reserves. A quick thought about the math on that one makes one realize that it is nearly impossible: for every million issued, $5k in the bank; $100 million, $500k. The financial difficulties lead to many questions about what constitutes a securitizer, LTV's, which types of securities, and how long cash must be held. The industry is still critical of the regulators' 2011 proposal for QRM, which was seen as having an overly narrow exemption. Bankers and housing advocates were particularly opposed to a 20% down payment requirement for loans avoiding risk retention.

The industry's positive reaction to the Consumer Financial Protection Bureau "qualified mortgage" rule, which governs mortgage underwriting, prompted cautious optimism that a related securitization rule may also turn out better than expected. The CFPB used a broader definition for QM than previously feared, affording more loans legal protection under the CFPB's ability-to-repay standards. The bureau established a clear safe harbor for prime loans meeting QM criteria, for example. So now folks are focused on "Qualified Residential Mortgages", or loans exempt from pending securitization restrictions. With the QRM definition seen as being somewhat dependent on QM, industry observers hope the still-pending securitization rule will similarly expand the pool of loans exempt from credit risk retention.

But the law is the law, right? But let's remember "unintended consequences"! Under the Dodd-Frank Act, approved by the public voted for, lenders must hold 5% of the credit risk for mortgages they securitize. But the law left it to six financial regulators (not including the CFPB) to define QRM, a new category of ultra-safe loan that can skirt the requirement. (The reform law also mandated QM.) The risk-retention rule is expected to be completed later this year. "Now we are going to get it in higher gear and get this in place. My hope would be by the second half of this year, we would have the rules in place," Comptroller of the Currency Thomas Curry, whose agency is among those writing QRM. Speaking of which, the leadership of several agencies involved in the QRM rulemaking has changed since the 2011 proposal, possibly lessening the agencies' interest in a strict down payment requirement. Maybe the QM rules are enough, since many analysts think that a high down payment coupled with the CFPB's debt-to-income ratio of 43% or less, as outlined in QM, would squeeze many borrowers out of the market. In other words, there aren't a lot of independent first-time home buyers with 20% down.

The latest QRM news comes from Fed Governor Daniel Tarullo, who some might say looks somewhat like John Malkovich. Given the amount of regulations that we must digest, and all the conflicting regulations and paperwork that lenders have to grapple with, a non-event here would sure be helpful. More

Some say that all of this is a lot more interesting than the fixed income markets. They're probably right. Sometimes Secondary folks feel a little isolated out there, wondering, "What's going on with the 2 ½ coupon? Why are Fannie prices so much better than Freddie's?" and so on. "Participants can share perspective on all topics impacting secondary marketing, pipeline hedging and home loan risk, and build contacts by participating in the chat with 600+ mortgage professionals.  Thomson Reuters also connects participants to their in-house mortgage analysts; providing market and trading commentary, real-time.   Access to the Secondary Marketing chat community is available to users of their Mortgage Banks platform which includes secondary marketing/capital markets departments, pricing desks, broker dealers and hedging firms.

Speaking of that group, last week Thomson Reuters' Adam Quinones wrote, "BestEx disparity is more disproportionate than originally estimated.  Although input is anecdotal and likely correlated to wallet size, a common theme has emerged. Frustrating loan pricing fluctuations are becoming an ordinary occurrence. Rate sheets are all over the place.  Some say the GSEs are known to add margin when the market gets volatile (makes sense given bearish chop we've experienced in 2013). Others indicate a bigger shift is underway at the highest level of housing finance. Fannie wants less liquidity liability. Freddie wants more.  Using a sampling from each Enterprise, it looks like Freddie's effective Gfee is 6bps cheaper than Fannie. Assuming 1bp Gfee strip = 6bps rate sheet price, the 12 tick TBA spread between Gold 3s and FN 3s makes sense.  If Fannie really does wish to reduce their footprint we should expect that product swap to level off (Dear Ben Bernanke...).  We should also expect stronger net worth requirements in the not so distant future."

Fixed income: rates go up a little, down a little - we could easily see this for all of 2013. (But gfee increases and loan level price adjustment changes will definitely impact borrower's rates.) Inflation is well under control - and when was the last time we actually had economy-wide inflation - and the housing market is doing pretty well. But the big focus yesterday was on minutes from the Fed meeting. You'll all recall the knee-jerk reaction last month to the release of those minutes, which for some reason put the fear of the end of QE# (the Fed buying securities) into the market. Prices went down, rates shot up, reminding us of the eventual exit of the Fed buying.

So yesterday's release of the next meeting's minutes gave the pundits something to conjecture about, and then analyze after they came out. The minutes on the whole are probably no different than people were expecting. The discussion around asset purchases can be accused of being "hawkish" in that there is a lot more language around the risks of further balance sheet expansion but overall there isn't anything too shocking.  Also keep in mind there a line about how some Fed officials are worried about curtailing QE too early.  This line in particular is interesting and suggests a possible nuance to the current QE strategy - "a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases" (i.e. the Fed may stop buying but could hold its present portfolio for longer). The Fed is clearly talking more about doing less but only in response to improved growth figures and not inflation worries.

The minutes said "Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved." Is this stunning? Absolutely not - but still the market chopped around a little, and the minutes contributed to increased volume on the day with Tradeweb reporting at 93% of the 30-day moving average from 68% yesterday. Mortgage banker selling also ticked up to over $2.5 billion from $2.0 billion on Tuesday. Supply was split between 30-year 3.0 percent and 3.5 percent coupons.

But that is yesterday's news. Today we've already had weekly Jobless Claims (expected at 355k from 341k, they were up 20k to 362k from a revised 342k) and the Consumer Price Index which was unchanged. For anyone looking for a little inflation, the core rate (ex-food and energy) was +.3%, slightly more than expected. Later we'll have more housing news with Existing Home Sales (4.9 million versus 4.94 million), but also Januarys Leading Indicators (+0.3 percent from +0.5 percent previously), and February's Philly Fed Index (+1.0 compared to -5.8 in January). In the early going, our risk-free 10-yr T-note, which closed Wednesday at 2.02%, is sitting around 1.98%, and agency MBS prices are better by about .125.

Boudreaux takes his wife, Cloteele, to a dance down on the bayou, last weekend. There was this guy on the dance floor dancing like crazy - breakdancing, moonwalking, back flips--the whole works.

Cloteele turns to Boudreaux and says, "See dat guy? Twenty-five year ago, he propose to me and I turn him down."

Boudreaux paused and said, "Look like he still celebratin'!"