UBS Settlement; Bank Lending Trend; Wells Out of JVs - No Big Deal?
I am fortunate enough to do a little speaking, and in fact next week am heading to New York for a Sterling National Bank event. But I received this note. "Rob, do you know anyone at the CFPB who can speak at our annual meeting?" All requests for CFPB speakers can be directed to Invitations2CFPB@cfpb.gov.
"Teamwork is essential because it allows you to blame someone else." Sometimes banks and mortgage banks work together, sometimes not. "Rob, someone told me that bankers want more regulations. What's up with that?" I have spoken to a number of bank managers and top brass. Banks have been regulated from Day 1, whereas it is hard to argue that mortgage banks ("those cowboys!") had had the same burden. But everyone knows that mortgage banks, and their LOs, are quickly catching up - maybe, as they say, mortgage banking is as heavily regulated as banking but it just doesn't know it yet.
But it is little surprise that mortgage banks view the increased regulatory burden as anything but a cost to be passed on to borrowers, although when pressed management will admit that many lenders and LOs who should not have been in the business have left - a good thing. In the meantime, bankers have pretty much been saying, "Welcome to our world. Our residential lending, policies, and procedures have been policed for years, and if you'd don't like it, we'll be glad to take your market share." That's it in a nutshell - banks may not exactly want more regulation, but they are comfortable in the environment, and have compliance and legal staffing to absorb it.
Banks, for their part are seen (at least on the commercial side) taking on more risk by using a familiar funding tactic that works fine as long as rates remain steady - but if rates increase more, watch out! It is not news that the average maturity of loans has extended significantly (especially true in community banks). Banks are full of cash and have very low loan-to-deposit ratios, and are trying to find decent commercial loans. The number of loans with maturities over 5 years for banks under $1 billion in assets has increased from 14% in 2007 to 27% as of Q1 2013, according to Pacific Coast Bankers Bank. "That near doubling has regulators concerned and bankers are beginning to face questions about contingency plans, stress testing and other factors during recent exams...Some have begun to utilize FHLB advances once again to match-fund longer maturity loans" which helps interest rate risk management. But when loans prepay, the bank no longer has that income generating asset, yet it cannot unwind the funding without significant cost. And with FHLB advances, the bank is using wholesale deposits support loan growth - and regulators take a hard look at that since it is not "core" funding and uses up contingent liquidity and requires collateral. That adds pressure and takes away flexibility.
Unlike mortgage banks, where warehouse costs tend to rise in a rising-rate environment, banks tend to "enjoy" the environment as rates move higher. For most banks, deposit costs lag the overall rise in interest rates, and profitability soars (just look at how well bank stocks have done lately), as retail deposit costs remain far below the cost of institutional deposits. Some banks, instead of going after wholesale deposits, are considering booking a floating rate asset right from the get-go.
And let's not forget Basel III's impact on many banks. Changes to regulatory capital will likely drive larger banks to change the way they invest. To address the capital impact of price movement in their investment portfolios, look for larger banks to take actions that include shortening their duration, moving more securities to HTM, holding more loans versus securities, holding more capital, or buying more floating rate securities. Larger banks are already doing this, as are community banks.
While I am yapping about banks, Wells Fargo announced that it is eliminating its entire remaining joint venture mortgage banking affiliates. Is it a big deal for Wells? Not really - it only has eight nonbank lenders in this program which accounted for 3% of the 2nd quarter mortgage production. But two years ago it had 100 mortgage JVs. And folks who think about these things say the timing is interesting, with the announcement coming so soon after the CFPB/Castle Cook news. Remember Wells' decision to pull out of wholesale after the Department of Justice settlement? Wells, like other investors, has been burned in the past on behalf of their counterparties, and this channel is not viewed as scalable.
Winding down the eight joint ventures will take 12-18 months, and it is believed that other large aggregators may step in and throw them a life ring. Wells may actually make a couple traditional correspondents. (The eight are Bankers Funding Company, Colorado Mortgage Alliance, DE Capital Mortgage, Home Services Lending, Military Family Home Loans, Premia Mortgage, Prosperity Mortgage, and Priva LLC.) But it is truly a sign of the times, given the current regulatory and market environment, and changes in state and federal oversight have increased the complexity and difficulty of operating these joint ventures. It is rumored that HomeServices, at $4 billion a year, will move over to Berkshire Hathaway.
I received a few notes saying this reminded readers of the news that broke in May regarding Paul Taylor Homes in Texas. "A Texas homebuilder will surrender more than $100,000 to the Consumer Finance Protection Agency under a consent order filed on Friday. Paul Taylor, a principal of Paul Taylor Homes Unlimited and Paul Taylor Corporation was accused of receiving kickbacks for referring homebuyers to Benchmark Bank and to Willow Bend Mortgage Company for their mortgages. Under the agreement Taylor is also prohibited from engaging in future real estate settlement services including mortgage origination." (Read More: Kickback Accusations Resolved by CFPB Consent Filing).
Three down, fifteen to go. Huh? UBS Americas will pay $885 million to settle ongoing litigation with the Federal Housing Finance Agency (which oversees Freddie Mac and Fannie Mae) over the bank's sale of toxic residential mortgage-backed securities to F&F. The FHFA has alleged that the various banks violated federal and state securities laws when selling private-label RMBS to the housing agencies. Under the terms of the settlement, UBS will pay approximately $415 million to Fannie and $470 to Freddie to resolve certain claims related to securities sold to the entities between 2004 and 2007. You might remember some of these names, as the settlement agreement covers claims between FHA and UBS in the following cases: FHFA v. UBS Americas, Inc.; FHFA v. Ally Financial Inc.; FHFA v. Countrywide Financial Corp.; and FHFA v. First Horizon National Corp. Of the 18 suits filed in 2011, FHFA has now settled three cases and remains committed to satisfactorily resolving the remaining suits.
Under the "two steps forward, one step back" category, Lender Processing Services (LPD) will be reporting a huge spike in the U.S. loan delinquency rate when it releases its Mortgage Monitor for June. Mortgage News Daily reports, "the total delinquency rate for June was 6.68 percent, a 9.91 percent increase, month over month, in the rate which includes loans 30 or more days past due but not in foreclosure. This jump follows five straight months of decline. The company offered no explanation for the surge beyond referring to it as "seasonal". There were 3,328,000 mortgage loans in the 30+ delinquent category at the end of June. Of these loans, 1,345,000 are seriously delinquent, that is 90 or more days past due."
Let's take a look at some recent vendor, investor, and agency news - it just keeps flowing.
Money manager Hank Paulson sure likes Radian, given its recent stock performance. "When Radian Group Inc. sold shares in 2010 to bolster capital, the buyers lost more than a third of their investment in just two months. The mortgage insurer's offering in February, backed by money managers including John Paulson, is proving second chances can work. Radian has rallied 73 percent to $13.87 since selling shares for $8 apiece as well as debt in February. Rival MGIC Investment Corp. has followed a similar pattern, slumping after a 2010 offering and surging 45 percent since this year's $1.15 billion capital raise." Read More...
Florida Capital Bank Mortgage (FCBM) will now offer financing to purchase transactions in the State of Alabama with an unexpired Right of Redemption after a Foreclosure. Documentation to protect the lender from loss should the right of redemption be exercised will be required. The required documentation will depend upon the difference between the foreclosure sales price and the loan amount of the new lien. The Guidelines are posted on the FCBM website.
FNMA has published what appears to be a "just checking in" memo on the CFPB's QM and Ability to Repay regulation, which is scheduled to go into effect on January 10th of next year. Until the CFPB issues a final rule on Refi Plus, DU Refi Plus, and loans sold under written variances to the Selling Guide, Fannie will continue purchasing these loans but will be monitoring market dynamics in the meantime to assess the possible need for any underwriting, eligibility, and/or pricing changes. The post-purchase file review, repurchase requirements, and/or updates to the reps and warrants framework are also being assessed as they pertain to the new regulations.
For those having difficulty resolving Fatal Edit 72 (the Appraisal Document File Identifier field) when delivering loans to Fannie, a new job aid is available via the Fannie website.
FNMA has made it a requirement that servicers accept modification assistance from a Housing Finance Agency for mortgage loans in connection with any FNMA modification, whether or not principal forbearance is required. In cases where the borrower completes a Trial Period Plan but the servicer does not receive the HFA funds before the due date of the first modified payment, the servicer must re-evaluate the borrower's eligibility for a modification, and loans for which borrowers are no longer eligible must be sent to Fannie for a final decision. If the borrower does qualify for a modification per the servicer's assessment, the servicer is not permitted to require the borrower to complete a new Trial Period Plan, even if the modified monthly payment is higher than it would be in a Trial Period Plan. This policy goes into effect on October 1st.
Cornerstone reminds its correspondent lenders that it will allow a maximum total of 28 days' worth of one-week extensions. After this, the loan will be subject to re-locking at the worse of current market or original pricing minus the extension fees. Jumbo loans are subject to a limit of two extensions that may not exceed 30 day per investor guidelines; anything that needs to be extended past this point will be re-locked at worst case scenario.
Risk management firm Secure Settlements Incorporated has begun testing a new closing table quality control tool that captures closing table loan date, re-enforces quality control measures, and offers resources for educating settlement agents about best practices and what to look for in terms of fraud schemes and money laundering. The mobile app, which is slated to be launched within SSI's vetted settlement network on September 1st, is compatible with both Droid and Apple.
Well, rates continue to chop around these levels - maybe consumers will become accustomed to them, and come back in. Yesterday, in economic news, Weekly Initial Jobless Claims rose by 7K in the latest week to 343K, above the 340K expected. Durable Orders had an upside surprise surging by 4.2% in June, well above the 1.8% expected. And the Treasury auctioned off $29 billion of 7-year notes. The increase in jobless claims was attributed to annual auto-plant shutdowns. Durable Goods, always volatile, was the main culprit in the sell-off - perhaps an increase in demand will help boost manufacturing and the economy in the second half of the year.
By the time the dust settled Thursday, 10-yr T-notes reached the highest level in more than a week, and 30-yr T-bonds approached the highest level in almost two years. Prior to that, however, agency MBS prices had improved. As far as volume was concerned, mortgage banker supply was near the 30-day moving average, per Tradeweb. So if lenders are selling about $1.5 billion a day, and the Fed is buying about $3 billion a day, the supply/demand picture is still pretty good for mortgages. There is little news of consequence today. The current yield on the 10-yr is 2.57%, basically unchanged from Thursday afternoon, so don't look for a lot of change on rate sheets this morning.