Texas and Reverse Mortgages; More on Possible Ginnie Changes; Upcoming Training
Here in Austin, at the Texas Mortgage Banker Association's yearly conference, the talk is not so much about the Millennial generation but about how the Texas House of Representatives approved legislation, already approve by Texas' Senate, which would allow reverse mortgage lending in Texas. But before it can become a law, the legislation will go to voters in Texas on November 5th for approval. This potential law would amend the Texas Constitution to authorize the "Reverse Mortgage for Purchase" program in Texas and would enhance consumer disclosure requirements for all reverse mortgage loans in Texas. Oh, and by the way, Texas is the only state that doesn't allow the reverse mortgage for purchase program for homeowners.
Redwood Trust doesn't securitize reverse mortgages, but did issue another bond. This one was made up of $424 million of non-agency residential mortgages. The offering reportedly included $299 million of debt that priced to yield 2.82 percent, or 1.90 percentage points more than benchmark swap rates. Similar securities were sold by underwriters at spreads of 1.75 percentage points last month and as low as 0.97 percentage point in January. The market is hoping for a tight spread, but relative yields have been widening as sales increase (supply versus demand) and some thinking out there that government-backed housing debt offers better value and that mortgages will prepay slower than expected if interest rates rise, or faster if they fall.
Speaking of supply and demand, Bloomberg reports that the issuance of non-agency securities has hit roughly $5.5 billion this year, up from about $3.5 billion in all of 2012. In 2005 and 2006 we hit $1.2 trillion. Investors freely admit that the yields for agency products (Fannie, Freddie, Ginnie) are artificially being held down by the Federal Reserve's QE3 program of purchasing those securities.
While we're on agency MBS, Friday's commentary discussed the move toward a single Ginnie Mae security. At this point there is a fair amount of talk about the pros outweighing the cons of doing it; the question is how, and what are the options in a combined GN MBS program? Generally, investors want a deep and broad market, with as many TBA-eligible loans and pools as possible, but any new platform should retain some of the beneficial features of the current GN2 program. Taking into account TBA eligibility, varying payment delays, and the merits of a conversion mechanism, experts think that there are three potential options for implementing a combined GNMA MBS program - perhaps a Ginnie III?
In the first option for a single issuance platform, the Government National Mortgage Association could maintain existing GN1 and GN2 pools, with new issuance through the GN2 program, mesh the payment date for existing GN1 and GN2, and for new issuance, for investors, and expand TBA (to be announced) eligibility to single-issuer pools and certain custom pools (i.e., specified pools). Under this option, the payment dates are harmonized at either the 15th or 20th, with newly issued Ginnie securities having the same payment date, and any current GN1 and GN2 securities retain TBA eligibility and would be deliverable into a single TBA contract. Generally it is believed that this option results in the greatest float and liquidity, and helps foster a robust specified pool market. It is also one of the easier approaches to implement operationally. The expansion of TBA eligibility, however, to include single issuer and specified pools would result in increased risk of certain structural characteristics, and adverse selection for the TBA deliverable, so it erodes one of the key benefits to investors of the GN2 program.
The second option is to convert GN1s into multi-issuer pools through an optional conversion program, with new issuance through GN2, mesh the payment dates to investors for existing GN1 and GN2, and for new issuance, and keep the TBA delivery requirements generally unchanged. Investors of Ginnie Mae I securities can choose to convert their holdings into a GN2 security. For a given month, those choosing to convert would tender their GN1s, which would be aggregated into a single, large, multi-issuer pool with other tendered GN1s of the same coupon. The conversion would not affect existing GN2 pools. This helps liquidity, which is important, for GN1 through the conversion option, and overall float would also likely improve if a significant volume of conversions materialized. Unlike the first option, this option retains the key features of the GN2 program that mitigate adverse selection of the TBA deliverable. One key drawback of this second option, however, is that this approach does not create a healthy specified pool market because the lack of TBA eligibility for specified pools limits their creation.
So perhaps there will be a third option combining the benefits of the first two. GNMA could convert GN1s into multi-issuer pools through an optional conversion program, with new issuance through GN2, mesh the investor payment date for existing GN1 and GN2, and for new issuance, and expand TBA eligibility to include certain specified pools, and create multiple-issuer specified pools to reduce adverse selection and other risks. This option would have the same conversion mechanism as option two, but would expand TBA eligibility to certain specified pools. The goal would be for common specified pool categories like loan balance or seasoned issuance to be TBA eligible and require aggregation into multi-issuer pools which maintains the key benefits of the GN2 program. Fewer, larger pools are a big advantage of the current Ginnie II program. Stay tuned, as this process could take quite some time!
All this is in the secondary markets, and although it will indirectly benefit the primary markets (borrower rate sheets) it will pretty much be invisible to them. The CFPB is not as concerned with the secondary markets as it is with the primary markets. In fact, consumer complaints are the number one risk factor considered by the CFPB, and companies have been created to help lenders with this issue. For example, MQMR's post-closing borrower outreach program, Bankers Performance, includes payment reminders and customer service surveys. Bankers Performance identifies key red flags that allow lenders the opportunity to mitigate consumer complaints prior to regulatory involvement. In addition, lenders are empowered with information to reduce borrower payment confusion, identify unlicensed LO activity, mitigate potential early defaults, and most importantly manage their brand. Often times, lenders are able to monetize Bankers Performance results by converting upset customers into repeat borrowers and referral sources. Anyone interested can learn more at www.mqmresearch.com/bankers-performance.
Since we're in the middle of the Texas Mortgage Banker's yearly conference, let's move on to some upcoming conferences and training events.
Fannie Mae will be holding some good webinars today, tomorrow, and June 5 on various topics including its updated post-purchase review file process on May 21st that will cover give an overview of the changes, how lenders will be affected, and how to bets prepare for the new framework. To register, go to https://www.fanniemae.com/singlefamily/hfi-spotlight.
The FHA will be holding a two-part appraisal requirements training, the first part of which will take place on May 22nd. Part A will discuss lender and appraiser responsibilities as they relate to FHA guidelines, Minimum Property Requirements and Minimum Property Standards, and appraisal protocol. Part B, scheduled for May 29th, will cover how to review FHA appraisals on various property types. Registration for the first training can be found at http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=1709&update=N; for the second, http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=1710&update=N.
Richey May & Co., an accounting firm based in Denver that specializes in serving mortgage banking companies nationally, will be hosting its 4th annual Mortgage Banking Roundtable on June 20th in Denver. The event is designed specifically to facilitate peer-to-peer discussion among the CEO's and Presidents of independent mortgage banking companies regarding trends in the industry and best practices. Last year, there were more than 100 attendees representing approximately 60 companies. For more information, email Nathan Lee at nathan@richeymay.com.
Anyone interested in Hawaii will be interested in the Mortgage Bankers Association of Hawaii Conference on June 27-28, 2013, to be held at the Hawaii Prince Hotel Waikiki in Honolulu, Hawaii. I will have the pleasure of speaking at their conference themed "The Lending Games: Catching Fire" which cleverly depicts the hot topic on everyone's mind: the regulatory lending changes and their impact on our industry. They have a full line-up of top notch speakers scheduled. Just follow these 3 simple steps: 1) Register for the conference at www.mbahawaii.org; 2) Send in your payment with registration; and 3) Book your flight & hotel. Hope to see you there!
The New Jersey Mortgage Bankers Association will be hosting the "Let's Make a Deal" Tri-State Wholesale Lending Fair in Atlantic City, NJ on July 17th. Absolute Home Mortgage, Alpha Funding Solutions, E Mortgage Management, Origination News, RBAC, and United Wholesale Mortgage are all scheduled to be exhibiting, and there are still exhibition spots available. To find out more and to register, go to http://www.mbanj.com/.
Normally considered a "second tier" number in terms of being able to move markets, the Conference Board's Leading Economic Index increased 0.6% in April to 95.0, following a 0.2% decline in March, and a 0.4% increase in February - and moved markets. Most think, however, that the markets were looking for an excuse to move, although the LEI numbers (wasn't it the Leading Economic Indicators?) points to a continuing economic expansion with some upside potential. Friday we also had the Thomson Reuters/University of Michigan preliminary index of consumer sentiment, which rose to 83.7 in May, the highest since July 2007.
So when we threw those numbers onto a week of nervousness about the Fed's continued buying of fixed-income debt, some decent jobs and retail sales reports, no inflation, a rallying stock market, and some stability overseas, rates moved higher. The consumer is showing surprising strength. Current coupon MBs prices fell/worsened about .625, and the 10-yr closed the week with a yield of 1.95%.
This week is pretty light, news-wise, and remember that due to next Monday's Memorial Day holiday the bond markets will be closing early on Friday. The big story this week could be Wednesday's release of the FOMC Minutes from the May 1 Fed meeting - what are those guys in the suits thinking about QE3? It has to end sometime, right? But we'll also have Existing Home Sales on Wednesday and New Home Sales on Thursday, along with Jobless Claims. Durable Orders, an important indicator of economic growth, will be released on Friday.