Non-Performing Loan Market On Fire; Rates Back to June 2013 Levels But Production May Drag
Say what you will about Zillow (and people do), the firm does not fall short as a driver of information. As many in the industry are preparing themselves for life post-QM, in a possible rising rate environment, with borrowers who may or may-not have burdensome student debt, coupled with a lack of desire to own the 1950's "American Dream," Zillow writes, "For much of the past three decades, interest rates have trended continuously lower. Although there have been occasional spurts of rising rates, these tended to be short-lived. As a result, a generation of Americans has been able to buy larger homes without spending more on mortgage payments. Over the coming years, interest rates are poised to rise. Homeowners considering moving will have to decide whether to purchase smaller, less expensive homes or spend more on their mortgages. Some may decide instead to remain in their current home-a phenomenon known as fixed rate mortgage "lock-in". As part of its annual Housing Forum on July 24, 2014, Zillow convened experts to discuss their expectations for mortgage rates and residential mobility as interest rates begin to rise, and the discussion has been published on their site along with an hour long YouTube video. Good stuff.
On the good news side of things, Zelman & Associates recently reported that, "The pipeline of loans in delinquency and the foreclosure process has declined approximately 18% year over year and 43% from the peak in 4Q09, although there is still an excess of 1.6 million more homes in some form of delinquency or foreclosure relative to a more normal level. Importantly, the steady improvement in the distressed pipeline has helped to alleviate the negative impact of REO on the market, particularly from a supply and pricing standpoint. Against that backdrop, feedback from our servicer contacts has increasingly reflected a brightening outlook in terms of delinquency trends, success of modification and short sale initiatives and recovery rates on REO dispositions. In terms of demand for REO, contacts reported modest sequential weakening on a national basis in 2Q14, reflecting the softening in the overall market, but demand trends in the hottest REO states, such as Florida, Arizona and California, continue to point to significant investor and owner-occupant interest, leading to continued year-over-year price inflation for distressed assets. While the majority of default-related trends, including incremental delinquencies and pre-foreclosure actions, appear to be heading in the right direction, the processing of late-stage delinquencies into REO remains backlogged, particularly in judicial states, as any success of recent streamlining initiatives has been offset by added compliance complexity due to new CFPB servicing standards."
But there are delinquencies and non-performing loans - and everyone wants to buy them because the yields are currently so good for the companies that want to mess with them, whereas sellers are happy to get them off the books. According to Asset-Backed Alert (ABA), Bank of America and Credit Suisse solicited bids on $700 million of residential non-performing loans (NPLs). The loans are owned by Freddie Mac. Bids were due July 31, and any kind of bids and offers serves to provide pricing information for other NPL buyers. According to ABA, this sale follows a trial auction in which Freddie Mac offered $500 million of NPLs in May. Companies like Altisource Residential, Starwood Waypoint, PennyMac, and New Residential - not exactly household lender names - could be likely buyers.
But there's plenty more where that came from! Freddie's data (10-Q, page 59 for those so inclined) showed approximately $65 billion of non-current loans as of March 31, including $38 billion of seriously delinquent loans. Fannie Mae has another $108 billion, including $64 billion of seriously delinquent loans. As a result, combined NPLs at the GSEs total approximately $173 billion including $102 billion of serious delinquencies. And last week news broke that Wells Fargo was going to hit the market with $1.3 billion of bad debt. This followed Blackstone's deal for $700 million a couple weeks ago. When Flagstar released its 10-Q it noted that it sold $4.8 billion UPB of MSRs to Two Harbors in a subservicing agreement during the second quarter. Indeed, packages of servicing are flying around through flow and bulk deals.
LOs know that without a secondary market, creating a primary for a product is problematic. So it is with great interest that we are watching the secondary market for rental properties grow. All those folks who bought with cash in the last few years have to refi now that the properties have appreciated, right? The hit for non-owner occupied (NOO) has always 1-2 points, sometimes more, sometimes less, due to the higher risk of the borrower making their payments. With the increase in foreclosures, and the large-scale purchase (usually all cash) of those properties by hedge funds and money managers, and the corresponding decrease in homeownership rates, the environment is ripe for it. And why not leverage those rent payments, right?
Jody Shenn and Heather Perlberg of Bloomberg write of Gary Beasley, co-CEO of Oakland's Starwood Waypoint Residential Trust which owns more than 9,000 homes and is planning on selling its first bonds this year tied to rental income, "'It's nice to have the competition of securitization to make the banks want to keep their credit lines competitive.' They're seeking to recoup cash and earn higher returns with cheaper financing after a home buying spree by institutional investors created a new industry of single-family landlords. Starwood Waypoint has $1.4 billion invested in 9,122 rental homes and has spent $397 million on 3,080 nonperforming loans. The company, which boosted its monthly property purchases by $40 million to $100 million last quarter, expects to buy more mortgages than homes this quarter, according to Beasley. The soured debt has become more popular for investment firms as home prices rise and the inventory of distressed properties dwindles.
"Banks are still one of landlords' main sources of financing. In February, Starwood Waypoint received a $500 million credit facility with Citigroup that it expanded in May with a syndicate of lenders to as much as $1.25 billion, according to regulatory filings. The debt carries a variable rate 3 percentage points above the London interbank offered rate. American Residential Properties has a credit facility with banks that it entered into in January 2013 that carries a rate of as much as 3.25 percent more than Libor, while competitor Silver Bay Realty Trust Corp. said in May 2013 that it won a $200 million line with a rate of Libor plus 3.5 percent point."
How 'bout some servicing info? MountainView Servicing Group recently had a $301 million FNMA non-recourse servicing portfolio out for purchase; the package is 99.7% fixed rate and 100% 1st lien product, with $108mm (36%) in HARP servicing, a weighted average original FICO of 725 and weighted average original LTV of 80%, weighted average interest rate of 4.50%, average loan size of $190k, and top states of: California (71.3%), Washington (7.7%), Oregon (5.7%) and Florida (5.3%). Interactive Mortgage Advisors has a $1.2 billion Fannie Mae and Ginnie Mae bulk residential MSR offering: 3.75% WAC, with a wide geographic dispersion, sub-serviced by DMI, and with a weighted average FICO of 744.
And MIAC writes to clients, "The MSR market has enjoyed a long and very productive run. Perhaps now is a good time to begin considering other seasons? MIAC Analytics is unrivaled its proven ability to value, monitor, market and hedge your MSR and MSR related assets. Click here to learn more about MIAC MSR hedging approach." Most companies use new production and income to hedge a drop in servicing income or value, and vice versa. But for lots of smaller lenders, their servicing is their only asset, and we can look for increased interest in this.
Let's talk about rates! Plenty of LOs are excited about the rally in the bond market, and rates dropping. But remember that originating a loan has never cost so much. This is the same as saying borrowers have never paid so much to obtain credit. In fact, the MBA reported that, "Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - increased to $8,025 per loan in the first quarter, up from $6,959 in the fourth quarter of 2013. First quarter 2014 production expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008." These costs are mostly passed on to the borrower. So investors thinking we are going to see a huge boom in MBS issuance should remember that not only are there millions of borrowers with rates less than where they are now, but the impact of any move in rates is dampened by the cost of actually closing a loan. And it doesn't take a math major to calculate how many points $8,025 is on a $100,000 loan.
Having broken through the recent trading range witnessed over much of the year, 10yr yields have struck 2.35% and concerns over an increase in supply have begun churning as mortgage rates follow suit. As mentioned above, analysts and investors are wondering when originators will drop their rate and by how much. You'd think rate sheet pricing would improve on a 1:1 basis, but no, it does not, and in fact the correlation isn't stellar. First you have the difference between risk-free Treasury rates and riskier mortgage-backed security rates. Lenders have the costs noted in the above paragraph. Secondary folks also aren't keen about lowering rates when they have hedges in place on an existing pipeline that has huge mark-to-market gains in it. Astute traders are saying that we may be surprised to see that the expected pickup in origination due to a declining rate being undermined by a primary/secondary spread which is widening out to historical levels. So it is easy to suggest that the overall larger, refi window will be relatively muted as originators protect themselves from getting chopped up in more volatile markets, lenders are spending more on every loan, higher G-fee costs are now present, and more HARP burnout will keep volumes from going too high.
During the last few weeks we had very little scheduled economic news here in the U.S. to move interest rates. But things certainly pick up this week, especially with the avalanche of monthly housing numbers we have grown to know and love. Today we have yet another housing price index, this time from the NAHB (builders). Tomorrow is the Consumer Price Index, Housing Starts & Building Permits. Wednesday we'll see the release of the Federal Reserve's Open Market Committee minutes from the July meeting. Thursday is Initial Jobless Claims, the Philly Fed, Existing Home Sales, and the Leading Economic Indicators. At the close Friday the 10-yr was at 2.35% (the lowest since June of 2013) and is at 2.37% this morning with agency MBS prices roughly unchanged.
Jobs
Good stuff also comes from growing companies, and there is more from Impac Mortgage Corp. regarding adding Sales Professionals to its growing Correspondent sales team. Positions are available in the following four regions: Region 1 (greater San Francisco Bay Area) Region 2 (IL, WI, MN, and IA), Region 3 (MI, IN, and OH), and Region 4 (GA, KY, MS, TN and AL). Candidates must possess a minimum of 5 years' correspondent sales experience along with a current book of business. Impac Mortgage Corp. Correspondent is a leading and innovative mortgage investor and warehouse capital provider working with mortgage bankers, community banks, regional banks and credit unions in 49 states. Direct your inquiries and resumes to resumes@impacmail.com, attention: "Correspondent Sales".
And Diversified Capital Funding is expanding its footprint by opening a new branch office in Walnut Creek, CA! Diversified was founded by Clay Rodrigues in 1989 and became a DBA of American Pacific Mortgage (APM) well over three years ago. APM is a top 20 retail mortgage bank, funding over $4.3B in 2013, ranked #19 in the US by Mortgage Executive Magazine, and also ranked #4 as the best and most rewarding places to work! Diversified prides itself in remaining a purchase focused Originator with purchase power programs like Keys on Time, Fast Trac Funding and SecureLock, in addition to a strong menu of delegated Jumbo Investors. Diversified is seeking seasoned Loan Officers not only in their newest Walnut Creek office, but also other branch locations in Los Altos, Los Gatos, Tracy and Irvine. Interested parties should contact Karen Schenone for the Los Altos branch and Cheri Nunez for the all other locations in Northern and Southern California.