Why Mergers Work (or Don't); Interesting Best-Ex Info; ABA & SunTrust; Goldman Sachs' Fiasco Program

There are 2 million "missing households" in the US - which represents pent up demand for new residences in the US. These are Millennials who are living with their parents or rooming together in an apartment. That represents 2 years of housing starts at the current pace. Rents are increasing, jobs are tough to get, and student debt is high. Fun fact - we haven't been building this few homes since World War II, according to the NAHB.

"The American Bankers Association, through its subsidiary Corporation for American Banking, has endorsed a new solution within its ongoing relationship with SunTrust Mortgage - the Emerging Market Banker program. Bankers may use the program to sell mortgage loans to SunTrust as a correspondent lender, yet with these added benefits and parameters: The Emerging Banker Division is 100% non-delegated; banks utilize approved fulfillment centers to ensure additional compliance safety on each transaction; and the EBD offers conventional products, both conforming and jumbo. No FHA or VA products are available. SunTrust Mortgage is one of eight strategic mortgage lending solutions providers that offer ABA members advantaged programs to help them compete in the areas of compliance, fraud prevention, loan sales, quality control, operational efficiency and mortgage portfolio risk analysis."

Oops - did I say "fiasco" in the subject line? I meant FIGSCO. Goldman Sachs will start marketing a new type of bond transaction this week. It "straddles asset categories and features an unusual triple-recourse structure, as it seeks to take advantage of investors' demand for Triple A rated assets. The so-called Fixed Income Global Structure Collateral Obligation (FIGSCO) issuer is a joint venture between Goldman Sachs and Mitsui Sumitomo Insurance and will provide investors with a triple recourse if things turn sour. Under the structure, investors will have recourse to the pool of assets backing the trade, as well as having an unsecured claim against Goldman Sachs and Mitsui. This triple-recourse mechanism makes the transaction akin to a covered bond issue, where investors have a claim against the assets and the issuer and, indeed, and traditional covered bond buyers are indeed the target. The transaction is expected to diversify Goldman's funding sources and the outright pricing level is expected to be competitive with senior funding. The deal has been structured in response to a lack of supply of Triple A rated assets and net negative covered bond supply."

The article I read on it stated, "But while the transaction uses some covered bond technology, it does not have all the bells and whistles traditionally attached to the sector. There is no legal framework; the assets would not be eligible for a cover pool as defined by European regulation; the bonds will unlikely be repo-eligible at the ECB; nor will they likely count for the Liquidity Coverage Ratio. They will probably have a 20% risk-weighting and be treated as Triple A corporate exposure under Solvency 2."

Speaking of securities, and best execution, I received this timely note from Tom Farmer with pipeline hedging company MCT. "We are seeing lenders impacted to the tune of 20-30 bps on profitability when they are not pricing the file/funding/admin fee into the UPFRONT best ex. From our conversations with lenders, this appears industry-wide. With the plethora of new investors entering the market, the so-called 'File,' 'Funding,' or 'Admin' fees charged by some investors on the transfer of loans have become a much more significant factor in determining the best all-in price. These fees can range pretty dramatically from investor to investor, but some of the newer correspondent channels are charging 2 to 3 times the fees of other established investors. While most lenders and all MCT clients include investor file fees in the best ex prior to committing a loan, MCT has discovered that many lenders do NOT take the File/Funding/Admin fees into consideration with investor best effort pricing on the front end. This oversight can lead to hidden profit leakage/cost that even the most disciplined of correspondent sellers may miss."

Tom's note went on. "Through many industry conversations, we have determined that the vast majority of lenders using 3rd-party product and pricing engines don't currently include the impact of the File/Funding/Admin fees in their upfront pricing, and those that do have noted that there is some degree of complexity in incorporating them. However, not considering the fees on the front end will likely lead to pricing loans to an investor who appears to have the best, BE execution, but actually carries 'hidden' high file/administrative fees that would put them behind other investors in the true best ex. The results of failing to consider the investor fees on front-end pricing can be an unexpected reduction in margins and a distortion of the actual pick-up of a hedged/mandatory execution over the best efforts execution." Thank you Tom!

And while we're discussing eking out every basis point, STRATMOR Managing Director Matt Lind reports that a statistical analysis of consumer direct lending for 2013 showed fully loaded pre-tax profit margins (as a percentage of loan balance) of 146 basis points for "retention" borrowers and 32 basis points  for "new" borrowers. Matt explained these differences as a result of two primary considerations: first, that revenues for "retention" borrowers in 2013 reflected a relatively high net gain on sale for HARP refinances; and second, and most important, that marketing costs, i.e., customer acquisition costs, for new borrowers are substantially higher than for existing borrowers getting a new loan (i.e., retention borrowers). Dr. Lind noted, "These results underscore the challenges faced by direct lenders that do not have an existing customer base against which to market. Included here are not only existing servicing customers but also customers of an affiliated entity, e.g., the customer base of an affiliated bank. These results should be of particular interest to mid-sized regional banks that are not capturing a high percentage of the mortgages being done by either existing mortgage customers, i.e., payoffs, or non-mortgage bank customers (deposit and wealth customers). Such institutions have a big opportunity to increase both origination volume and profits by using advanced lead generation methods coupled with a consumer direct origination platform."

Banks and non-depository mortgage banks continue to merge. Let's face it, the cost of compliance is just too great for some individual companies to bear, so why not have two companies split the cost of compliance (along with HR, accounting, Capital Markets, marketing, etc.) especially when it works out geographically? Univest Corporation of Pennsylvania, the parent company of Univest Bank and Trust Co., and Valley Green Bank announced that they have entered into a definitive merger agreement in an all-stock transaction with an aggregate value of approximately $76 million. (Valley Green was recently ranked the 8th best performing bank out of more than 4,000 banks in the nation in 2013 for banks with assets less than $500 million by SNL Financial.) In Kentucky ("United We Stand, Divided We Fall") Forcht Bank ($939mm) will acquire Grant County Deposit Bank ($79mm). In Texas (unofficial state motto: "We Don't Need the Rest of the Nation"), Meridian Bank Texas ($279mm) will acquire State Bank and Trust Co. ($196mm) - Meridian Bank Texas is a subsidiary of the Marquette Financial Companies ($1.0B, MN). On the flip side, on Friday Valley Bank (Fort Lauderdale, Florida) was closed by regulators and incorporated into Landmark Bank, National Association, Fort Lauderdale, Florida. And Valley Bank, Moline, Illinois, was closed and is now part of Great Southern Bank, Reeds Spring, Missouri.

But deals don't always work out. For example, BAC Florida Bank ($1.5B) has called off its deal to purchase $65mm of international deposits in Florida from Northern Trust Co. ($37.9B, IL). The President of BAC indicated certain integration issues reduced the benefit of purchasing the portfolio, so the deal was mutually terminated. A Deloitte survey finds the main reasons acquisitions don't generate expected value are due to gaps in execution or failure to capture synergies (28%), economic forces (27%), market or sector forces (26%), inadequate or faulty due diligence (13%) or other (6%). A while back KPMG produced a White Paper on integrating people during a merger - it is worth a read. And SNL Financial reports banks that have sold the most branches since 2012 are Bank of America, NC (271 branches sold), Royal Bank of Scotland, RI (159), First Niagara Bank, NY (64), Banco Popular de Puerto Rico, PR (41) and Emigrant Bank, NY (30).

For news yesterday, Existing Home Sales rose to 4.89 million in May from an upward-revised 4.66 million in April, up 5% on a sequential basis but down 5% on an annual basis. Total inventory rose 2.2% to 2.28 million homes which represents a 5.6 month inventory (6 months is considered a "balanced" level). The median home price rose to 213,400 which is up 5.1% on an annual basis. Distressed sales were 11%, down from 18% a year ago. The first time homebuyer continues to be MIA, with only 27% of sales going to first-time buyers. All cash sales were 33%, and median time on market was 47 days. On a regional basis, the West continues to be soft, with sales only up 0.9% m-o-m and still down 11.4% y-o-y. This likely reflects the diminished inventory of distressed properties in the region and stretched affordability given the sharp gain in prices in much of the region

We also had some good news from the Midwest: the Chicago Fed National Activity Index was +0.21 for May, indicating that economic growth picked up. But rates did little, and the 10-year closed at a yield of 2.62%; this morning we're at 2.61% and agency MBS prices are better roughly .125.

Housing and jobs help drive the economy. "New American Funding continues its aggressive growth strategy across the country. A full Operations Center is developing in Dallas; all retail sales and operations positions are open.  Underwriters and processors are sought in San Diego, Missouri, and Arizona, as well. Join the team of over 1000 'happy' people, funding $480 million per month with over 70% of the business being purchase transactions. New American Funding, a mortgage banker headquartered in Tustin, California, made Inc. Magazine's exclusive list of the nation's fastest growing private companies, two years in a row, and was awarded Top Workplaces 2012 and 2013 by The Orange County Register and OC Business Journal.  New American Funding was established in 2003, is licensed in 35 states and is a Fannie Mae, Freddie Mac and Ginnie Mae direct Seller/Servicer, FHA Direct Endorsement and VA Automatic mortgage lender. Send your confidential resume to recruiters@nafinc. com.

And another for LOs: "Are you tired of feeling like LeBron James, trying to win the lending game by yourself? If so, it might be time to join a true team where the players work together to win for our customers. Come be part of our dynasty - join the Aspire Revolution. Email Steve Barton or visit AspireRevolution to learn more.

And there continue to be new products! AmeriHome Mortgage Company LLC continues to distinguish itself from a crowded correspondent marketplace. "This full service Correspondent Lender, while active in the government and conventional space, recognizes the current state of the market and is doing what it can to help clients - mortgage originators - increase revenue and relationship opportunities. As mentioned previously, AmeriHome is positioned to go live with its second market-expanding non-agency product in as many months. Its Core Jumbo Program is a 5/1 ARM with an interest-only option (loans up to $3 million, max 80% LTV, min 680 FICO, with ability to finance investment properties) is scheduled for roll-out in July. This product comes on the heels of the already live Expanded Program. Key features of this QM-eligible product include 600 and above credit scores, up to 83% LTV, and the borrower to be only 2 years out of bankruptcy or foreclosure. Due to popular demand, AmeriHome is extending the Expanded Program's introductory Special Incentive through the end of July where more locks equals more money for the lender." For more information on this enticing incentive, AmeriHome's growing product set or how to quickly become an approved client with AmeriHome, please reach out to AmeriHome's Sales Executives John Hill or Chris Maturo.

And California lender Western Bancorp is rolling out a new jumbo loan. "Noted for its innovative Jumbo ARM offerings and extensive wholesale lending experience, Western has now added a 30-year fixed jumbo to the mix. With 80% LTV up to $2M the 'Tahoe' Jumbo is highly competitive. Included in the program is a Super Jumbo with loan amounts to $5 million, demonstrating their continued commitment to the Jumbo Market. Learn more at the Tahoe Jumbo and Super Jumbo page, or email Western Bancorp."