Morgan Stanley Settles; The Importance of Water in Lending and Home Ownership

(Note: Monday is a federal holiday, and there will be no commentary.) Here's a note I received from the owner of an independent mortgage bank with a libertarian streak. "A long time ago, at a university far away, I was taught that the elixir for growth in any free economy was cheap energy and cheap money. We have both in spades, and yet, there is no growth. Could something be counteracting the elixir of growth? Like, perhaps, dare I say it? High taxes and high government regulation?" As I mentioned yesterday rates have some LOs licking their chops over refis whereas most investors are dreading having their MBS portfolio potentially prepay. We will be finding out if the "hassle cost" of obtaining a new loan outweighs the actual cost of doing so for many borrowers above 4%.

Morgan Stanley is $3.2 billion poorer - although the company had already set aside the money - to set up yet another huge mortgage-related settlement. "Morgan Stanley relied on a few subprime mortgage originators, especially New Century, to feed its bond pipeline...Morgan Stanley employees frequently tried to increase the 'pull-through rate' of New Century loans getting into securities, even when the loans were lower quality than expected...In thousands of cases, Morgan Stanley included loans that were worth more than the value of the underlying property - something it had told investors it would not do..."

And what I am sure will be a long-running legal morass Flint, Michigan is providing a terrible case study in water, how important it is, and how fragile the system is. (Just think of the panic if Manhattan or Chicago's water supply went bad.) To no one's surprise mortgage lenders are "now demanding" that prospective home-buyers prove that a property is free of contamination in order to receive a loan, according to The Wall Street Journal. "The demand could further bring down home prices across the economically depressed city." Really? The mortgage industry is going to be blamed for this? Anyone who understands lending knows that lenders have always required that municipalities and properties don't have issues such as this.

Jonathan Fox, president of Lenders Compliance Group, wrote a piece on how mortgage banking is and will be affected: Flint - Crisis in Mortgage Banking.

The Law Offices of Peter N. Brewer highlight a recent case where HOA rules were upheld once again. A small group of property owners challenged regulations and fees adopted by the Oak Shores Community Association. These owners rent their homes to short-term vacation renters and challenged a revision that states the minimum rental period is seven days, with is an annual fee of $325 to those who rent their homes, along with other miscellaneous fees. The rule also limits the number of cars, boats and other watercraft that renters can bring to the community. The HOA argued that the rules were supported due to expert witness testimony describing the disadvantage to the HOA of having guests and the added costs sustained by the HOA due to these guests. The trial court ruled in favor of the HOA and they were awarded their attorney fees in excess of $1.1 million.

According to recent data from CoreLogic, foreclosures fell 21.8 percent in the inventory for November 2015, compared to a year earlier when foreclosures fell by 18.8 percent. Florida, Michigan, Texas, California and Georgia had the highest rates of completed foreclosures compared to Washington DC, North Dakota, Wyoming, West Virginia and Hawaii, which all had the lowest rates of foreclosure. The National Association of Home Builders has supported the overturn of the EPA's "Waters of the US" rule, which would have resulted in a rise in project costs and fees. The Houston housing market ended 2015 on a near-record high, with single-family home sales and sales of all property types reaching the second highest level, trailing behind the levels seen in 2014. The Houston housing market may remain cool for an extended period of time due to the drop in oil prices and the slight slowdown in sales allowed for inventory to grow from a 2.5 month supply to 3.2 months.

Since we're talking about the importance of water, and water-related lending issues, there are plenty of fancy places on the water around the nation. As home prices have been on the rise, home value growth for luxury houses have declined the second half of 2015, while homes in entry-level and mid-market areas have continued to rise. The median home value in mid-market ZIP codes and entry-level ZIP codes increased 5 percent and 4.7 percent respectively, last year. Homes in luxury ZIP codes increased 3.3 percent, which is lower than the national home value growth. The decline in luxury home values can be attributed to a variety of reasons including a decline of foreign buyers due to strong U.S. dollar appreciation and financial turmoil overseas, normalization in home value growth, and continued pressure on entry-level home values due to high demand and low supply. Although, the perception of what luxury homes versus entry to mid-level market homes are depends on the market. For example, the median luxury home price in Orlando, Florida ranges from $277,200 to $388,000, while the range for luxury homes in Los Angeles, California is $1,055,900 to $4,224,600.

Speaking of high-brow mortgage news, competition in the jumbo market is fierce, and the typical rate for a jumbo is now 15 basis points below a conforming mortgage. LOs know that jumbo rates have been less than conforming rates in many parts of the country for quite some time. 

Turning to the capital markets, since activity there determines mortgage rates & prices, Fannie Mae announced that it selected the winning bidders in its latest sale of non-performing loans ($1.32 billion with unpaid principal balances of about 6,500 loans). The winning bidder for two of those pools, representing 2,068 loans that carry an unpaid principal balance of $418,414,683, was MTGLQ Investors, L.P., 99% of which is owned by Goldman Sachs.

How did that sit with Democrats? Not so good. Senator Elizabeth Warren and Representative Mike Capuano have criticized the government's practice of selling non-performing loans to private investors. And other activists are saying that nonperforming loans should be sold to housing agencies and non-profit groups.

Speaking at a conference, the CEO of BB&T said he sees no basis for all the "gloom and doom" and that while soft energy prices are a problem, nothing has really changed much in the past few months. He called his loan pipeline "good," said lending market price competition is "more reasonable," and indicated he does not see any "big change in the credit cycle is about to happen." Meanwhile, the CFO at Wells Fargo said at the same conference that they are not seeing any change in loan demand despite market turmoil and that the loan pipeline is "not much different from where it was back in Jan."

The Federal Reserve's first interest-rate increase in nine years isn't the reason markets are volatile, says Janet Yellen, head of the central bank. The increase had little effect on markets because investors expected it, she told the Senate banking committee. Oil prices and the value of China's currency are driving the turmoil, Yellen said.

Thursday bills, notes, bonds, and other fixed-income securities rallied sharply (rates dropped) in the early going and then sagged throughout the day. Treasuries have reached extremely overbought levels in the short run and it would come as a surprise to see some consolidation. Fed Chair Janet Yellen testified before the Senate Banking Committee, saying that the Fed had been surprised by the degree of the drop in energy prices and the U.S. dollar.

In Japan 10-year bond yields are negative as a result of negative interest rates having been recently introduced in an effort to further weaken the yen. But it hasn't worked, and the yen is at a 16 month high versus the dollar. Investors Japan looks relatively safe compared to most other countries. And looking at this country, as ThomsonReuters put it, "The idea of negative short-term rates stimulating demand only seems to be creating a more challenging environment for banks which are supposed to be the medium through which the excess liquidity from the central bank is supposed to flow. Turns out, it might be crushing them."

Today we've had a fair amount of scheduled news that could, in theory, move rates - but what is moving rates now are oil prices and global stock markets. We had the January Export Prices ex-ag. and Import Prices ex-oil (import -1.1%), and January Retail Sales and Retail Sales ex-auto (+.2%, higher than expected, +.6% also better than expected). Coming up are some inventory numbers as well as the February Michigan Sentiment number.

Thursday the new 10-year note ended over .5 better in price and closed at 1.64%. Agency MBS prices finished about .125 better. Today we're at 1.69% and worse .125-.250. Don't forget that President's Day comes early this year - there will be no bond market (or commentary) Monday.