Thoughts on Purchase Biz; Gritty Predictions from Wells & Chase; SEC QRM Comment Site

Okay, I received a lot of great comments about the maps website I posted last week, here is another one equally as interesting, especially since "they" say there are about 61,000 people in the air over the United States at any one time, and here is a real time map of every plane in the sky - especially timely as I am heading home from Spokane, WA later today.

Last month this commentary mentioned the possibility of a maximum loan amount reduction by the agencies. It has now become mainstream news - a poorly kept secret perhaps? According to the WSJ, Fannie/Freddie will/may cut the size of conforming mortgages, thus reducing the maximum size of mortgages eligible to be purchased by Fannie/Freddie. But hey, if jumbo rates are lower, maybe that is an advantage? The picture becomes very cloudy with loan level price adjustments due to credit/property type, gfees, maximum buyups and buydowns, and the value of servicing on the .25%. Normally such a move would be considered an impediment for housing although note that banks have been eager to jump into the jumbo market and jumbo rates are now nearly inline w/conforming borrowing costs.

"Rob, who is seems to have the advantage on the race for purchase business?" That is the $64,000 question out there. First of all, no one expects purchase business to entirely replace the volume of refi business that we had six months ago. That being said, one can argue that commercial banks have an advantage, at least in terms of exposure to the homebuyer. Large banks, and many smaller ones, have their branch network, union business channels, wealth management divisions, Realtor services, builder connections, and so on - definitely a multi-pronged approach. Many consumers, however, are suspicious of the large banks, and are much more comfortable working with mortgage brokers and bankers who have made it known that borrowers have more options by using them, and may offer faster processing times. And companies dedicated to the residential mortgage process are perceived to be less likely to "lose the borrower in the shuffle." From a P&L perspective, all else being equal, the cost of funds for a bank is 2-3% less than it is for a mortgage bank using traditional warehouse lines...

Speaking of purchases, I received this note from a broker in the mid-Atlantic region. "I have two purchases in my pipeline that the underwriters have been dragging their feet on, with two different lenders. They actually asked for copies of the companies quarterlies to prove they paid the employees (borrowers) payroll tax.  Both borrows called me this morning to say if they didn't close immediately, they were borrowing money from family and paying cash. This system is broken and getting worse."

Wells Fargo and Chase, regardless of their perceived advantages, both told the industry yesterday that things might become grim in their mortgage divisions. Wells told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter. (To put things in perspective, that is still roughly a billion a day in production for Wells.) Wells has already cut 3,000 jobs in the mortgage business since July (roughly 1% of the bank's total workforce). Mortgage-banking income dropped 3% at Wells Fargo and 14% at J.P. Morgan in the second quarter from a year earlier. At Bank of America, which announced 2,100 job cuts on 8/29, the decline was 22% from the year-ago period.

J.P. Morgan Chase said (during the conference sponsored by Barclays) that it expects to lose money on its mortgage-origination business in the second half of the year. At J.P. Morgan, mortgage originations are on pace to drop as much as 40% from the first half of 2013, said Marianne Lake, J.P. Morgan's chief financial officer, at the conference. She attributed the decline to a drop in refinancings. She said refinance applications are down more than 60% from the peak in May 2013. Chase's share of the purchase market has increased from 7.2% in 2011 to 10.7% as of the first half of 2013 - but it is unlikely to make up for the revenue loss from the decline in refinancing activity, she said.

And M&T Bank Corp. Chief Financial Officer Rene Jones told investors that they should brace for a "significant" decline in mortgage-banking volumes in the third quarter, noting that analyst projections for the industry have been a "little rosier than we would have expected" given the environment. But the Buffalo, N.Y., lender racked up $91.3 million in mortgage-banking revenue in the second quarter, up roughly 30% from the same period in 2012.

"Rate volatility is the enemy of mortgage banking," wrote Paul Miller, an analyst at FBR Capital Markets & Co. in a research report published Monday. Given the recent jump in mortgage rates, "we expect third-quarter results to be relatively weak for mortgage-centric companies." All told, Mr. Miller expects lenders to originate $1.654 trillion of mortgages this year, down from $1.75 trillion in 2012. The decline is expected to bottom at $1.46 trillion in 2014 before rising again in 2015, according to FBR estimates.

Let's move on to some regulatory, investor, and vendor updates!

If you're looking for the SEC site to comment on QRM, here you go.

Yes, margins are shrinking. Cornerstone Correspondent alerted clients, "Don't let the big banks steal your hard earned customers! Remember, Cornerstone will NEVER solicit your borrowers, and we will always provide superior personal service. As a reminder, we will price match, all competition, up to 50 bps.  In order to take advantage of this offer, you must include the entity we are matching in your pricing engine notes.  Please remember to hit ADD NOTES prior to submitting your lock!"

On Sep 7 the commentary noted that US Bank was eliminating its SETH (South East Texas) broker program. I received a note saying, "US Bank does not permit TPO on any of their DPA special programs, and never has. 360 Mortgage was approved and added as an approved master servicer with SETH in August (meaning the only two are US Bank and 360). 360 does accept TPO on the SETH DPA program through its broker channel and approved correspondents can sell us SETH DPA (just like they sell US Bank) except we do allow TPO from brokers (i.e. wholesale lenders can offer this to their brokers).  Brokers or Lenders interested in signing up should access our website and select the appropriate broker or correspondent package. To make it clear the broker does NOT have to broker the loan to us.  They can broker to another wholesale lender who is then required to sell it to 360."

PHH has removed the provision indicating that the Notice of Right to Cancel model form H-8 New Creditor was acceptable for refinances both with a different lender and with the same lender.  The sales guide now states that the H-8 model may only be used for loans involving a new lender.

Cole Taylor Mortgage clients received a note last week from its president, saying, "During mid-July, we had informed you of the agreement to merge between Cole Taylor Bank (CTB) and MB Financial Bank, NA (MB). At that time we were also able to publicly disclose that we at Cole Taylor Mortgage (CTM), with the full acknowledgment and support of the CTB Board of Directors, had already been in discussions with potential financial partners with the objective of transitioning the CTM operation outside of CTB. We have continued those discussions with a narrowed list of private equity fund participants including on site due diligence and in depth financial analysis. We are pleased to report that the discussions have gone very well and continue to be in process. We also continue to bring MB up to speed on CTM's operations and business model." And then basically, "stay tuned, as loose lips sink ships." "Stockholders are advised to read the joint proxy statement/prospectus when it becomes available because it will contain important information about MB Financial, Taylor Capital and the proposed transaction. When filed, this document and other documents relating to the merger filed by MB Financial and Taylor Capital can be obtained free of charge from the SEC's website. These documents also can be obtained free of charge by accessing MB Financial's website under the tab "Investor Relations" and then under "SEC Filings" or by accessing Taylor Capital's website under the tab "SEC Filings" and then under "Documents".

With all this going on, who cares about rates? They sure aren't going back to where they were six months ago, so we may-as-well become accustomed to it. But yes, MBS traders are seeing supply dropping like a rock, and the demand, at least for now, is still strong - and that is helping the MBS "basis." Yesterday current coupon MBS prices improved about .250-.50, although we're giving some of it back this morning on no substantive news, and nothing scheduled (although there is a $31 3-yr T-note auction today at noon CST). The yield on the 10-yr closed Monday at 2.90%, and this morning it is up to 2.94% and MBS prices are worse about .125.

Very punny (part 2 of 3)

A hole has been found in the nudist camp wall. The police are looking into it.
Time flies like an arrow. Fruit flies like a banana.
Atheism is a non-prophet organization.
Two hats were hanging on a hat rack in the hallway. One hat said to the other: 'You stay here; I'll go on a head.'
I wondered why the baseball kept getting bigger. Then it hit me.
A sign on the lawn at a drug rehab center said: 'Keep off the Grass.'
The midget fortune-teller who escaped from prison was a small medium at large.
The soldier who survived mustard gas and pepper spray is now a seasoned veteran.
A backward poet writes inverse.
In a democracy it's your vote that counts. In feudalism it's your count that votes.