Moody's Being Probed; Lending Club, Alibaba Form Alliance; Current State of the secondary Market
What's ahead of us this month? Valentine's Day, that's what. "The Hallmark Holiday" is quickly approaching and hopefully you have bought your loved one a deserving gift, not something like a door mat. In 2012, there were 1,379 U.S. candy manufacturing establishments, over 14,000 florists (guys, that's a store that sells flowers), and over 23,000 jewelry stores in 2012. In 2013, the median age for first time marriage was 29 years old for men, compared to 26.6 years old for women. In 2013, about 52% of people 15 years and older reported being married and 68.6% of people 15 and older have been married at some point in their lives, either currently or previously. (What states prompted the Census Bureau to use the age 15 as a cutoff?)
No one likes to be probed. In this instance the Justice Department is probing Moody's over mortgage ratings. On the other hand, news comes to the industry that S&P and Calpers settled a lawsuit over mortgage deals for $125 million.
But in something a little more forward looking, Lending Club and Alibaba have formed a strategic alliance to provide U.S. businesses with financing. And if you don't think that residential lending in on their minds, think again.
And Arch MI, Arch Capital Group Ltd.'s U.S. mortgage insurance operation, announced the launch of Arch Mortgage Guaranty Company ("AMG"). AMG is a mortgage insurance company specifically created for mortgage loans that originators intend to retain in their portfolios or include in private securitizations. AMG has been issued a new insurance financial strength (IFS) rating of 'A3' by Moody's Investors Service, representing their highest IFS rating within the U.S. mortgage insurance industry. "Arch MI is very pleased to announce the launch of our newest mortgage credit enhancement solution, Arch Mortgage Guaranty, and its 'A3' IFS rating from Moody's Investors Service," said David Gansberg, President and CEO of Arch MI.
Flagstar announced that Arch Mortgage Insurance is an eligible mortgage insurance carrier on conventional loans delivered through the Delegated business channel. Delegated customers should refer to the Sellers Guide regarding terms and conditions for loans with mortgage insurance.
Arch Capital is now an approved mortgage insurance provider in M&T's Correspondent channel. Arch is acceptable for standard Fannie Mae and Freddie Mac transactions, as well as for HomeStyle Renovation loans. Arch is not permitted with the SONYMA Conventional Plus program. M&T also announced some clarifications to its HomeStyle product guidelines: The sales focus has been cleaned up to reflect FNMA's general guidelines for the intent of the program. Vacant properties are eligible subject to standard program guidelines. The Plans and Specs requirements for both Structural and Non-Structural transactions have been re-defined. Partially completed projects are now acceptable on a case-by-case basis.
Other companies are on the move, literally.
Mortgage Lenders of America has relocated to 10975 El Monte, a building that recently underwent an $8 million renovation. The new building gives the company 72,000 square feet of office space, well over three times what its previous quarters provided. MLA President Philip Kneibert said the company's present work force of around 140 is expected to reach approximately 430 in the next few years. "Moving into the new building signals the start of a rapid expansion that has been in the planning phase for the last two years," said Kneibert.
And Movement Mortgage, LLC, one of the fastest growing mortgage lenders in the country, is establishing its national headquarters in Lancaster County, South Carolina. Movement Mortgage will invest $22 million to build its new headquarters, where it will create more than 650 new jobs in a partnership with the state. The South Carolina Coordinating Council for Economic Development agreed to provide $53 million in tax incentives to help bring jobs and growth to the region. "As Movement Mortgage works toward our goal of financing 10 percent of new home loans in the United States over the next 10 years, we need a national headquarters that offers room to grow and enhances the high levels of employee care, customer service and community investment that define us," said Casey Crawford, founder and CEO of Movement Mortgage. (Founded in 2008 with just four workers, Movement Mortgage employs 1,600 people in 40 states.)
And what is going on in the secondary markets?
For the jumbo prime outlook for 2015, net issuance of jumbo prime deals in 2014 was anemic at best, and we ended the year with approximately $8B of net issuance; that marks a decline from 2013 in which $13.3B of jumbo prime securitizations were issued. There are a few reasons for this slide: (1) arbitrage just isn't there as non-agency deal execution is still not as attractive as agency execution; and (2) strong demand from banks for portfolio loans has driven jumbo rates to levels that are less attractive for securitization. Also, as a few analysts have pointed out, even though the prepay curve has flattened over time, jumbo prime pools are still more "negatively convex" than agency jumbo pools--generally speaking convexity helps investors anticipate what should happen to the price of a particular bond if market interest rates change. So where does this leave expectations for 2015, well much like salaries and wages, many mark 2015 production to be near 2013 levels, and analysts are predicting jumbo prime deal issuance to 13-15B. Why the relatively positive outlook? Mainly attributable to expected additional issuance from REITs, with a slight increase in securitization activity from banks.
BlackRock Inc., a type of peer-to-peer lender, plans to sell the first rated securities backed by consumer loans arranged through Prosper Marketplace Inc. According to a Bloomberg report, about $281 million of the bonds may receive an investment grade of Baa3 from Moody's Investors Service, while $45 million may be rated Ba3. Although a grade of Baa3 sounds more like some chemistry element I failed to learn in high school, it is in fact the lowest rating of investment grade Moody's Long-term Corporate Obligation Rating. Debt instruments rated Baa3 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.
There's been more and more talk regarding peer-to-peer platforms as consumers turn to these outlets to consolidate debt and finance home repairs. Recently, institutional investors have gotten in on the act, helping fuel a surge in originations. BlackRock's main products are unsecured consumer loans for as much as $35,000 and as long as five years.
The appeal of floating-rate securities to investors is pretty straight forward, especially now, with rates at near bottoms; with a fixed-rate bond, when rates rise, the value of the bond falls because newer bonds pay more. But when interest payments rise along with market rates (as in the case of "floaters"), the value of the security remains stable. In January 2014, the U.S. Treasury held its first auction of a two-year floating-rate note (FRN's as they have become known), which pays a fixed spread over the floating thirteen-week bill rate rather than a fixed coupon. The New York Fed followed this initial auction of 2yr Floating Rate Notes, and has since published their finding on overall participation by dealers and subsequent secondary markets.
Recently I got the chance to have lunch with a secondary marketing guy I haven't seen in a while. We talked about a few of his concerns over the span of lunch. The first being mortgage volatility in the coming years, and the fact that we may look back at the last few years of mortgage banking as "peaceful." I don't know, and I certainly don't believe my prognosticating abilities rival my trusty Magic 8 Ball, however, there are many factors which support his concerns. His second concern was something about the curly fries on the menu having lower arb value against the regular fries....I'll let him and his psychologist hash that one out, though.
All I know is that if you ask anyone, in any market, what their biggest concern is, I'm sure a very common answer would be volatility. Volatility ultimately leads to higher transaction costs and higher transaction costs ultimately lead to lower profits....I thought of him when I read Bloomberg's article Mortgage Bonds in Worst Start Against Treasuries in 18 Years in which Jody Shenn writes of the flight-to-quality? "Government-backed U.S. mortgage bonds are off to their worst start to a year relative to Treasuries since at least 1997 as investors in the $5.5 trillion market brace for a surge in homeowner refinancing. Returns on mortgage securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae were 0.6 percentage point less than those on similar-duration government debt this month through yesterday, according to Bank of America Merrill Lynch index data. Ginnie Mae securities, which package Federal Housing Administration loans, have underperformed Treasuries by 0.9 percentage point." The general belief is that refinancing is accelerating after mortgage rates fell to its lowest levels since spring 2013. Investors in mortgage-backed securities are betting this trend will continue as changes to government programs, including a lowering of insurance premiums on new FHA loans, were announced earlier this month.
With all this going on, it is hard to concentrate on what rates are doing. But agency MBS prices closed mostly wider (meaning they lagged Treasury securities) on decent volumes Monday. Volumes picked up after the storm impacted last week's business. We'll have Factory Orders here in the United States, but the news overnight focused on the Bank of Russia responding to pressure from executives of commercial banks and industrialists by lowering its key interest rate. Australia did the same, as has many other countries, pushing its currency to an all-time low. Given all that, the only scheduled news here will be Factory Orders - usually not a big interest-rate mover.
For numbers, the risk-free U.S. 10-yr T-note closed Monday at 1.67% and this morning is worse by .5 with its yield up to 1.72% (still pretty darned low) and agency MBS prices are worse .250-.375.
Jobs and Announcements
In job news, Freedom Mortgage Corporation, the 2nd largest wholesale lender, is seeking highly motivated, experienced account executives for its Southeast Region. Areas include Ft. Myers and Tampa, Florida, Charleston, South Carolina, Birmingham, Alabama, and Jackson, Mississippi. These individuals will be responsible for signing up new account relationships within the territory with aggressive pricing and products offered by Freedom Mortgage. Please submit resumes to Kim Krick.
And, "Looking to expand your horizons in 2015? Looking to be financially rewarded for your efforts? Then look no further. A multi-billion dollar nationally-recognized mortgage lender is expanding its geographic footprint and is searching for very select, top-tier mortgage professionals capable of rapidly progressing into a multi-branch Regional Management role. Our unique regionalized model and superior service offers unparalleled opportunity for growth. The ideal candidate is currently a mortgage broker or an existing retail branch manager, with monthly production of $3-5+M, and possesses strong recruiting skills. First year income for this position is projected to be in the mid-to-high 6-figures. As a direct seller to all agencies, we offer a comprehensive suite of products with virtually no overlays, nationwide licensing and regionalized fulfillment. Our system allows the branch/regional manager direct input into operating margins and MLO compensation, while a culture of dedicated corporate support and recruiting assistance allows the manager to focus strictly on sales and branch network growth. Qualified candidates in search of benefiting from superior pricing, 100% branch credits and multi-branch overrides" are encouraged to submit a letter of interest and/or resume to me at rchrisman@robchrisman. com.
Congratulations are due. Flagstar Bank has hired Mark Landschulz and Jim Levites (ex-Quicken and ex-Freedom Mortgage, respectively) to head its Performing Servicing and Specialized Loan Servicing Divisions, respectively. Both have joined the company as executive vice presidents.