Maybe Lenders & Investors Should Not Expect Too Much from a Cut in FHA Insurance Premiums

Congrats to Allan Landon, the former CEO of Bank of Hawaii Corp. President Barack Obama plans to nominate him to be a Federal Reserve governor after months of pressure to select a policy maker with community banking experience. Landon, 66, was chairman and CEO of BOH from 2004 to 2010, and was president, chief operating, financial and risk officer from 2000 to 2004. He was selected to fill one of two vacancies on the seven-seat board and would bring the experience of running a bank to a board dominated by lawyers and economists, and will vote on monetary policy. And we could see our first rate increase since 2006 - how many of your LOs have been in the business for more than 9 years?

Yesterday I noted how Ocwen's woes had driven its stock price down by 75%. Of course this has a ripple effect on other non-bank lenders and servicers. Just look at Nationstar (high near $38 per share, now in the $27 range) and Walter Investment (high near $50, now near $15 per share) compared to a Wells (high near $56, now in the $52 range - not impacted as badly). Obviously Ocwen has been hurt the worst given its past business practices and attention from regulators. Nonetheless, employees should learn from the past lessons of Lehman, Countrywide, Fannie, PNC, and others: do not invest your entire 401(k) in the stock of your company.

You couldn't swing a dead cat around yesterday without someone sending an e-mail about the FHA mortgage insurance premiums. (Sorry Myrtle and Gusto.) FHA applications currently account for about 10% of volume - this will no doubt boost it at the expense of Freddie & Fannie and all the private MI companies. The White House sent out a Fact Sheet on the proposal. I received an e-mail from Barbara Boxer's office. ("Boxer Praises Obama Administration's Decision of Lower Fees on FHA Loans. The Move Will Allow More Families to Achieve the Dream of Home Ownership. U.S. Senator Barbara Boxer (D-CA) today praised President Barack Obama and Housing and Urban Development Secretary Julian Castro for the decision to lower fees on FHA loans by a half point, a move that will make it possible for more American families to own a home. 'Last month I organized 17 of my Senate colleagues to urge the Administration to lower FHA premiums and I applaud the President and Secretary Castro for doing just that," Senator Boxer said. "This important step will save new homeowners thousands of dollars and help make the dream of home ownership a reality for more families.'")

And we heard from various organizations. "'The Community Home Lenders Association commends the President for announcing that FHA will be reducing the annual premiums it charges by 50 basis points,' said Scott Olson, Executive Director of CHLA.  'As we noted when we first called for a reduction almost a year ago, this is a big step in making mortgage loans more affordable and helping more qualified borrowers buy a home.' CHLA first called for a significant reduction in FHA premiums in February 2014, and renewed its call for a reduction in a letter to HUD Secretary Castro just last month.  CHLA has noted that an improving FHA Fund, along with strong loan performance mean that this important step can be taken in a financially responsible fashion."

"Any reduction in the mortgage insurance premium is welcomed news; however, 0.85% is still too high," said Marc Savitt, president of the National Association of Independent Housing Professionals and The Mortgage Center, "HUD also needs to allow borrowers to drop the monthly insurance premium once the loan reaches 80% LTV. Lowering the costs associated with FHA financing, will allow more borrowers to qualify and afford the program."

So the Federal Housing Administration (FHA) is being asked to reduce annual mortgage insurance premiums from 1.35% to 0.85% - but there is some confusion about whether or not it still has to be approved by Congress. The upfront premium of 1.75% remains unchanged, and the timing is uncertain. VA loans are not impacted. "For the typical first-time homebuyer, this reduction will translate into a $900 reduction in their annual mortgage payment." If the deal applies to refinancing borrowers, existing homeowners who refinance into an FHA mortgage will see similar reductions to their mortgage payments as well. So we go back to October 2010 levels on the annual premium.

The FHA's capital-reserve ratio, which it is supposed to keep above 2%, grew to 0.41% in 2014 - better but still not meeting the requirements. The FHA is required to keep enough cash to cover all projected losses in its $1.1 trillion portfolio, and the report estimated that the FHA's Mutual Mortgage Insurance (MMI) Fund won't return to the congressionally mandated 2% threshold until 2016.

Investors expect FHA (which go into Ginnie Mae securities) prepayment speeds to be broadly faster as a result. What will it do to conventional securities made up of Fannie & Freddie loans? Most think it will not have much of an impact: seasoned high coupon conventional securities have their own HARP program. Besides, even with reduced MIPs, FHA lending remains an expensive channel for conventional borrowers. The administration cites an estimate that 800,000 borrowers are expected to take advantage of the change and refinance versus estimates of roughly 4 million FHA loans falling under the MIP window. Remember that seasoned FHA loans where LTVs have improved through borrowers making their payments or appreciation, have increasingly opted for conventional refis, thus muting the potential impact of this MIP cut.

Any loan officer will tell you that the FHA program has traditionally had the greatest market share advantage versus Freddie & Fannie in higher LTV loans. So yes, the MIP cut should expand the universe where Ginnie is competitive. For instance, for a 95 LTV loan, FHA had a pricing advantage for loans below a 680 FICO (roughly speaking); after the MIP cut, the FHA advantage expands to loans under 720 FICO.

Now investors are wondering if this reduction in MIP will nudge the FHFA to lower the g-fees in conventional products. The Government Sponsored Enterprises (GSEs) may ultimately respond by lowering g-fees or by re-pricing their Loan Level Price Adjustment (LLPA) grids. No one puts Baby in the corner! The LLPAs can increase rates by up to 75 basis points, so any reduction would help borrowers and thus the housing market. Sure the premium cut will make FHA more competitive at the lower end of the market (mainly sub 680 FICO) versus private mortgage insurance, but the private MIs should remain a better deal for higher quality borrowers. In addition, the potential for lower loan level price adjustments (LLPAs) and potentially lower guarantee fees (G-Fees) in connection with the final PMIERs rules expected to be released in 1H15 should make private MI even more competitive.

Isaac Boltansky with Compass Point points out that HUD has the authority to lower FHA MIPs and Congressional approval is not necessary. "We expect to hear a considerable amount of opposition from Congressional Republicans but there is no direct means of challenging this action. Lawmakers could conceivably choose to use an upcoming legislative battle to compel a policy change but our sense is that lawmakers will avoid a direct policy fight over FHA premiums."

Through the holidays and into this week banks continue to merge and acquire. No one should expect it to stop on the banking side, and everyone expects it to continue with residential lenders as well. Recently we all learned from Chemical Financial Corporation that Chemical Bank ($6.6B, MI) will acquire the parent company of The Bank of Northern Michigan ($412mm, MI) and The Bank of Holland ($806mm, MI) for about $184mm. First Merchants Bank ($5.6B, IN) will acquire Cooper State Bank ($136mm, OH) for about $14.5mm.

In Oklahoma InterBank ($2.5B in assets) will acquire First State Bank ($22mm). First NBC Bank Holding Company, the holding company for First NBC Bank ($3.7 billion), and State Investors Bancorp, Inc., the holding company of State-Investors Bank ($269 million in assets), jointly announced the signing of a definitive agreement for First NBC to acquire State Investors by means of a merger. In Texas Guaranty Bank & Trust ($1.3B) will acquire Texas Leadership Bank ($75mm). The bank holding company of Falcon National Bank ($171mm, MN) and State Bank of Richmond ($87mm, MN) will acquire Community Pride Bank ($96mm, MN). In Ohio LCNB National Bank ($1.1B) will acquire Brookville National Bank ($109mm) for about $12.6mm in cash and stock or roughly 1.19x tangible book. Citizens State Bank and Trust Co. ($111mm, KS) will acquire The State Bank of Delphos ($44mm, KS). Armstrong Bank ($653mm, OK) will acquire Benefit Bank ($188mm, AR) for an undisclosed sum.

But Home Federal Bank ($1.3B, SD) will close 3 branches as it seeks to boost efficiency and reduce expenses. United Bank ($5.3B, CT) will close 5 branches as part of a restructuring initiative following a merger in April. But the number of bank closures last year really dropped. The total number of bank closures the past 3 years has been 2014 (18), 2013 (24), 2012 (51). Banking experts think that in 2015 we will see even fewer.

In mortgage M&A, the parent of The Federal Savings Bank, a mortgage lender that located in Chicago three-plus years ago in return for more than $20 million in tax breaks and other funds from the state and city more than three years ago, is acquiring Baytree National Bank & Trust, a troubled Lake Forest bank. Baytree has nearly $90 million in assets and employs about 13. It was launched in 2000 by Howard Adams, co-founder of Wintrust Financial Corp. The Calk Brothers are mortgage bankers that bought Kansas' Federal Savings Bank four years ago, moved it to Chicago, and expects to generate $3.5 billion in new mortgage loans this year. Federal Savings Bank employs 700 nationally, with 326 in its Chicago loan production office and another 70 or so working in the suburbs.

Turning to the markets, later today the Treasury will announce next week's 3, 10, and 30-year auction amounts. Probably the most interest, and least surprising given most of the news came out yesterday, will be the appearance of President Obama speaking from Arizona about the FHA insurance premium reductions of one half percent. That comes on at 10:25AM Arizona time, and is billed as "a new executive action to help Americans own a home." This morning we had Jobless Claims (+298k prior, it was -4k to 294k). For numbers we had a 1.95% closing yield on the 10-yr T-Note and this morning we're at 2.00% and agency MBS prices are worse .125-.250. 

Jobs

For other job news, Northern California's Opes Advisors is looking for an Application Manager to be an integral part of its IT team and support organization. "The best candidate knows the Mortgage business, Ellie Mae's Encompass, and is strong leader with demonstrable skills who understand both our market place and the integration of technology to enable our users to be more productive. The person will manage a small team of Analysts and support personnel and provide leadership and high value by applying both business and technical knowledge. The candidate will work with business owners to implement a practice of continual improvement and usage of business enabling technologies, lead a weekly discussion with business owners to partner with changes and support issues, and provide guidance to the organization in establishing an overall long term plan and framework for Mortgage related applications to ensure effective use processing capability and performance." For a complete job description, to learn more about Opes' opportunities, or to submit a confidential resume, please contact Bill Swartz.

Also in Northern California, an FDIC Bank branch located in Rancho Cordova, CA is looking for an experienced Loan Processor for immediate opening. The person must be able to review loan file to verify procedures per guidelines, prepare loan disclosures in compliance with investor guidelines, ensure integrity of all data and process inputs, order necessary documents and follow-up with vendors/third parties to obtain in timely manner, manage pipeline of loans within required performance standards for welcome, approval and status calls, obtain and review customer documents, and clear conditions commensurate with authority level, submit loans to underwriting for conditional review and full approval upon receipt of appraisal, and partner with sales and underwriters on difficult and/or exception transactions. Encompass knowledge is a must. Submit confidential resumes to me at rchrisman@robchrisman.com.