Bank Mergers Continue; Lots on The MI Industry Updates

After my swimming lessons, my grandmother would take me to 7/11 for a Slurpee. She'd count out her carefully saved coins, and I would have a refreshing treat - great memories! (I was 42 years old, but no matter.) Did you know that today, and every 7/11, participating 7-Eleven stores are giving out free small Slurpee drink from 11AM to 7PM? (See, and you say you never learn anything by reading this!) Slurpees took their name in 1967, so plenty of Baby Boomers have consumed their fair share of them. Pew Research reports Baby Boomers started turning 65 years old in 2011 and every day for the next 16 years, about 10,000 more will reach that threshold. The latest Merrill Edge Report finds 63% of Americans say having enough money for current living expenses is a higher priority than saving for retirement - perhaps that is why 55% of those surveyed say their biggest fear is running out of money in retirement. And the Insured Retirement Institute finds about 50% of people 50 to 55 years of age have less than $100k saved for retirement. How do you spell "reverse mortgage?"

The Senate voted overwhelmingly to confirm Julian Castro as the new secretary of Housing and Urban Development on Wednesday, elevating Mr. Castro to President Obama's Cabinet. Castro has served for three terms as mayor of San Antonio, and was the keynote speaker at the 2012 Democratic National Convention. His twin brother, Joaquin, is a Democratic congressman. Congratulations! And national due diligence, quality control, and mortgage fulfillment provider RECOVCO announced the appointment of three managing directors. "Reporting to Blane Bauch, the company's chief sales and marketing officer, Michael Moore, Greg Botto, and Bill Pearson immediately bolster the business development team with coveted professionals that collectively bring nearly one century of experience and exceptional track records to the company."

The juggernaut of bank and mortgage company mergers and acquisitions continues to roll on. Just in the last week or so... Mortgage origination and processing company Complete Financial Solutions Inc. (WA) has signed an agreement to acquire 23.3% of American Patriot Bank ($74mm, TN) for $245k and will purchase a controlling interest for an additional $1.1mm within 9 months of approval of a change in control by bank regulators. First Midwest Bancorp (FMBI) in Itasca, IL ("Please Don't Pronounce the "S") has agreed to buy Great Lakes Financial Resources in Chicago. In Pennsylvania ("Cook With Coal") The Gratz Bank ($206mm, PA) will acquire The First National Bank of Minersville ($81mm). In Kentucky ("Five Million People; Fifteen Last Names"), Ohio Valley Financial Group ($259mm) will acquire BankTrust Financial ($130mm). Texas' ("Se Hablo Ingles") First State Bank ($722mm) will acquire North Texas Bank ($146mm). Over in Wisconsin ("Come Cut the Cheese") American Bank ($325mm) will acquire InvestorsBank ($204mm).

But wait - there's more! Up in Idaho ("More Than Just Potatoes...Well Okay, We're Not, But the Potatoes Sure Are Real Good") D. L. Evans Bank ($997mm) will acquire Idaho Banking Co. ($102mm) for a reported $10mm at a bankruptcy court auction. The First ($988mm, MS) will acquire Bay Bank ($78mm, AL). In Arkansas ("Literacy Ain't Everything") Cross County Bank ($199mm) will acquire Forrest City Bank ($56mm). I know that the commentary mentioned this earlier this week, but up in Indiana ("2 Billion Years Tidal Wave Free") MutualBank ($1.4B) will acquire Summit Mortgage Inc. And in nearby Ohio ("At Least We're Not Michigan") The Union Bank Co. ($555mm) will acquire The Ohio State Bank ($94mm) for an undisclosed sum. Union will assume $3.0mm in trust preferred stock plus unpaid interest, repay $550k in senior debt and make a cash payment of 50% of Ohio's tangible capital at closing.

Who says that mortgage insurance is boring? Plenty of MI companies weighed in (and did a little self-promoting) on the Federal Housing Finance Agency ("FHFA")'s release for public input the proposed Private Mortgage Insurer Eligibility Requirements ("PMIERs" - as if we need yet another acronym in our lives). The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. Private mortgage insurers looking to do business with Fannie Mae and Freddie Mac would have to hold minimum amounts of liquid assets under new standards proposed today by the companies and their regulator. To back loans packaged into securities by the U.S.-owned mortgage-finance giants, insurers would have to hold liquid assets worth at least 5.6 percent of their risk exposure, and possibly more depending on the quality of the loans they cover.

From Bermuda, where "tax" is a four letter word, Essent Group Ltd. stated, "Assuming the PMIERs are enacted as proposed, Essent's mortgage insurance subsidiary, Essent Guaranty, Inc., would be in compliance with the new capital adequacy requirements in the PMIERs based on financial information as of March 31, 2014. 'We commend FHFA, Fannie Mae and Freddie Mac for all of their work in revising the PMIERs,' said Mark Casale, Chairman and CEO. 'Updating the PMIERs is important to the health of the housing finance system in general, and the mortgage insurance industry in particular. We believe that the proposed risk-based capital adequacy framework in the PMIERs is fundamentally sound. The PMIERs will serve as an important set of national standards that give industry counterparties added confidence in the claims paying capacity of private mortgage insurance companies, including Essent."

Arch MI chimed in. "We are proud to announce that, if the GSEs' draft financial requirements went into effect today, Arch Mortgage Insurance Company (Arch MI) would meet those requirements. For more information, please review our recent press release. Arch MI's financial strength today allows us to meet the PMIERs standards immediately - which means we can meet your needs and counterparty demands now. You can be confident that loans insured by Arch MI are backed by financial strength that amply satisfies the new rules on asset requirements and offers you greater flexibility in solving your capital issues."

Northern California's National MI remarked, "'National MI believes that the proposed eligibility requirements for private mortgage insurers will go a long way to help restore confidence in an industry affected by the recent housing crisis,' CEO Brad Shuster said. 'A strong and financially sustainable private mortgage insurance industry is a key component of a healthy residential mortgage market...National MI believes it will be well-positioned to meet the new eligibility requirements when they become effective and to continue serving the needs of mortgage lenders.'"

I had no success trying to find an announcement on UG's website's news page.

USMI jumped in. "Once finalized, the new PMIERs will complement the significant progress the industry has made since the housing downturn. The MI industry has recapitalized, attracted new entrants and finalized new master policies that will go into effect October 1 of this year and provide greater clarity and transparency on the mortgage insurance process - from origination through servicing and claim settlement. Mortgage insurers have played a very important role during the downtown, covering approximately $44 billion in claims since the GSEs entered conservatorship, resulting in a substantial savings to taxpayers. The draft PMIERs are subject to a 60 day notice and comment period. USMI member companies expect to provide comments to FHFA during the public input period and to work closely with FHFA and the GSEs to implement the PMIERs."

From Philadelphia, Radian noted, "'Radian fully supports the need for strong counterparties to Fannie Mae and Freddie Mac, and the need for well-defined standards against which private mortgage insurers should be measured,' said Radian Guaranty President Teresa Bryce Bazemore.  'We believe appropriately structured PMIERs will better position our industry to continue serving its critical role in the housing finance market, including providing worthy borrowers with access to homeownership.' The proposed PMIERs reflect limited initial input from Radian.  The company will provide additional commentary to the FHFA on several areas of the proposed PMIERs during the public comment period, which is expected to end on Monday, September 8, 2014.  Among these areas, Radian will note that the proposed capital requirements are more onerous than Radian's historical default experience suggests would be needed to withstand a severe stress event."

Interestingly, Inside Mortgage Finance reported recently that since under the new rules stacked capital would not be allowed unless the subsidiary can pay a dividend, is publicly traded, or if the parent company can guarantee the dividend, it could raise concerns in the market about Radian's capital position. ("Capital stacking" is putting the assets of one insurance company into another so that the capital of the first company counts for the second.) KBW reports that at the end of the first quarter Radian's mortgage insurance business had $1.4 billion of statutory capital and $27.1 billion of net risk in force for a risk-to-capital ratio of 19.2 to 1. Radian Asset Assurance, the financial guaranty business, is the source of most of Radian's capital. At the end of 1Q, Radian Asset Assurance had capital of $1.2 billion that was counted towards capital for the mortgage insurance business.

"Radian Asset Assurance paid a $36 million ordinary dividend to Radian Guaranty in 3Q13 and is expected to pay a $32 million ordinary dividend to Radian Guaranty in 3Q14. Since that unit stopped writing insurance in June 2008, it has paid cumulative dividends of $420 million to Radian Guaranty. Given the 80% reduction in risk-in-force at Radian Asset Assurance, the company has asked its regulator, the New York Department of Financial Services (DFS), for permission to make a special dividend later this year. We believe that investors had expected a haircut on stacked capital, but the IMF article suggests that the haircut will effectively be 100% and stacked capital will not be allowed unless it can be paid out as a dividend. We continue to believe that the haircuts are unlikely to be 100% and that there will be at least one year and potentially longer to comply. Also, sources of incremental capital for Radian mortgage insurance include 1) ordinary and special dividends from Radian Asset Assurance; 2) almost $800 million in cash at the holding company; 3) $500 million in statutory capital over the next 2-3 years from reversal of the DTA; and 4) estimated earnings of around $450 million through the end of 2015. Finally, reinsurance should be readily available to the company; however, this would result in a reduction in earnings."

Coincidentally, Radian released its monthly operating statistics for June. New default notices increased 1.0% from May and the ending delinquent inventory declined 2.6%. Ending delinquent inventory was down 7.9% from 1Q. June new insurance written (NIW) came in at $3.53 billion, up 18.9% M/M, with NIW for 2Q totaling $9.34 billion. 2Q NIW was slightly below our estimate of $10.9 billion, but we think slower prepayments will provide a partial offset. New default notices increased 1.0% M/M to 4,024 from 3,984, compared with a 15.6% M/M increase in May and a 4.5% decrease in June 2013. For 2Q, new default notices totaled 11,454, down 5.4% Q/Q. This compares to an 11.9% decrease last quarter and a 1.3% decrease in 2Q13. The NIW number that totaled $3.53 billion in May is up 18.9% from $2.97 billion in May. Total NIW for 2Q came in at $9.34 billion.

MGIC is expanding its Go! program to include loans receiving "Ineligible" responses due to the LTV or loan instrument that are accompanied by a valid risk rating of DU® Approve or LP® Accept. This expansion is subject to additional overlays: Primary residences only, Maximum LTV/CLTV - 97%/97%, Property Type - 1-unit, Loan Purpose - Purchase, rate/term refinance or construction-permanent, Maximum DTI - 45%, Loan Types - Fixed-rate or ARMs with an initial fixed term of at least the first 5 years (Qualify ARMs using MGIC's Underwriting Guide Section 3.06b).

Arch MI is offering a complimentary webinar titled "Processing - Using the 1003 as a Roadmap." Two Sessions Available: July 17, at 10am and 1pm Pacific. Learn how the loan application, or 1003, provides a valuable roadmap to guide you to a quality loan decision. Learn how this roadmap can help you gather and verify the documentation required to successfully process a mortgage loan.

We've seen a little volatility in the market - but certainly not enough to move rates and prices out of the range they've been in for several months. The 10-yr closed Thursday back in the 2.50's (2.53%) after some news overseas pushed yields lower. But agency MBS prices still hung on to slight gains by the end of the day - better by about .125 - even if Treasury rates went back to unchanged versus Wednesday. It's all about supply and demand, and the Fed will be soaking up production for another month or two, even with QE tapering off. There is no scheduled news for today, and rates are virtually unchanged from Thursday's closing levels.