Chase Mortgage Results - The Impact of Servicing; Current Rates Low Enough For Refi Boom?

Who is Gary Johnson? He’s the Libertarian candidate for president this year. And given the “unusual” presidential situation this year, and the current virtual tie between the mainstream candidates, Mr. Johnson and his views may garner more attention than the third party normally have. Regarding housing, and scaling back government in general, “He…would abolish the Department of Housing and Urban Development because local governments should choose what works for them.”

In banking news, we recently learned that 15-bank holding company Wintrust Financial ($23.7B, IL) will acquire First Community Bank ($178mm, IL) for about $30.3mm in cash. And in Washington Commencement Bank ($177mm) will merge with Thurston First Bank ($131mm) in a merger of equals. Commencement shareholders will own about 65% of the company and Thurston First shareholders will own about 35%. In Indiana Horizon Bank ($2.6B) will acquire The Central National Bank and Trust Co ($55mm) for about $12mm in cash. OceanFirst Bank ($4.2B, NJ) will acquire Ocean City Home Bank ($1.1B, NJ) for about $145.6mm in cash and stock or about 1.32x tangible book. Cathay Bank ($13.2B, CA) will acquire Far East National Bank ($1.3B, CA) for about $340mm in cash (90%) and stock (10%) or roughly 1.26x tangible book. In Georgia Pinnacle Bank ($685mm) will acquire Independence Bank of Georgia ($184mm) for about $32.8mm in cash (100%).

PCBB reports that, "Online marketplace lender Social Finance (SoFI) is now reportedly exploring how to become a bank, as the company seeks more stability given significant disruption in marketplace lending...Community bankers should keep an eye on this, as the company has made about $10B in student loans and mortgages and has good hedge fund backing."

The U.S. Department of Justice announced that Huntington Bancshares and FMER have agreed to sell 13 branches (which include $738 million of deposits) in Northeast Ohio to resolve antitrust concerns from their planned merger.

We find ourselves at the beginning of companies announcing their 2^nd quarter earnings. For the big banks, mortgages are expected to be a bright spot in Q2 as the decline in rates has caused mortgage demand to tick up nicely - but mortgage strength probably won't compensate for the net interest margin and net interest income headwinds. And let's not forget the billions in mortgage servicing write-downs caused by early pay-offs.

JPM (Chase) mortgage banking results were slightly below expectations for volumes. Retail volume increased by 29% Q/Q and at $25 billion total volumes were up 12% - driven by nearly flat correspondent production Q/Q. It appears that the gain-on-sale margin was up nicely by about 30 bps from .72% to 1.04% - probably because of its retail production. Expect increases in gain-on-sale margins for the industry during the second quarter driven primarily by higher industry volumes driving primary/secondary spreads wider.

Total servicing income for Chase fell by 15% Q/Q to $428 million from $505 million in 1Q16. Risk management income (MSR rate marks and hedge results) fell by $50 million Q/Q. It appears JPM took a smaller negative MSR interest rate mark than last quarter, when many large banks took a mark that was a double-digit percentage of the MSR. JPM's MSR capitalization rate declined to 81 bps from 87 bps last quarter (vs. a decline of 11 bps last quarter), and the multiple of the servicing fee declined to 2.31x from 2.49x.

A few weeks ago I noticed a story about how the twenty major banks have lost a quarter of their total market value this year, about $465 billion, according to FactSet. Bank stocks were plummeting long before the UK voted to leave the EU, but the vote triggered additional losses. Some stock prices have come back, but still...

And mortgage servicing is shrinking at the large US banks although the top seven banks still service more than a third of all mortgages in the States. Shrinking...what do they know that smaller banks and independent mortgage banks don't? The country's largest banks have dropped almost half of their mortgage servicing since the financial crisis to the tune of $2.5 trillion.

Residential loan servicing, once thought to be a goal for lenders to strive to own, continues to be a headache. Servicing is thought to be a lightning rod for regulators, being a direct touchpoint for consumers and the source of plenty of complaints. States have a myriad of servicing-related laws, including the traditional "judicial versus non-judicial" foreclosure policies. And for those without a defensive team to guard against early payoffs, many lenders watch their balance sheet assets run off with refinances.

Speaking of which, agency MBS prepayment speeds picked up again in June. Speeds on both 30-year and 15Y fixed MBS increased by about 8.5% m/m, while hybrid ARM speeds picked up about 14%. Analysts say that the activity was driven mostly by summer seasonality and a higher day count in June versus May (22 days from 21) but that we can expect prepayments to remain elevated over the next few months. The post-Brexit decline in Treasury yields sent mortgage rates lower although they have bounced back up recently. Faster prepayment speeds will likely have a negative impact on mREIT earnings in the third quarter as premium amortization expense increases and portfolio runoff is reinvested at lower yields.

Conversely, it should benefit mortgage banks, title insurers and other companies that benefit from higher mortgage volumes. KBW reports that roughly 55% of borrowers in the Agency MBS universe have mortgage rates of 4.5% or higher. The national average rate for a 30-year fixed mortgage is below 3.50%, according to Bankrate. This suggests that over half the agency MBS market has a big enough incentive to refinance. Further, if Treasury yields remain stable, one can expect mortgage rates to continue trending down driven by two factors: 1) lower lender spreads as borrow demand moderates; and 2) tighter spreads between Agency MBS and Treasuries.

Back when mortgage rates were hovering around 3.625% it was reported by Black Knight that if mortgage rates fall by about 0.15 percentage point from current levels to around 3.5 percent, another 2.1 million borrowers would be able to refinance. That would bring the total number of loans eligible to around 8.8 million, or nearly 20 percent of loans. There haven't been that many loans eligible for refinancing since 2012-13, when rates were at historic lows. The MBA has increased its projections for refinancing. In the middle of December, it expected $415 billion of loans to be refinanced this year, but in mid-February, its forecast was 25 percent higher, at $520 billion.

Banks in the U.S., and most of the world, know all about lending. But what about China's $8.1 trillion "shadow lending" Industry? If the United States' lending industry is one of the most heavily regulated, then China's environment looks like the wild west. The Peoples Bank of China has changed focus from stimulating growth in an easing cycle to clamping down on the financial and debt risks that threaten to derail a tenuous stabilization in the world's second-largest economy.

Rates? Not doing too much - perhaps it is the summer doldrums - but many have crept back to where they were prior to the dramatic Brexit vote. Yesterday U.S. Treasuries traded higher although agency MBS prices were mixed following two consecutive losing sessions as the global equity rally paused and fixed-income investors sought to buy the dip. Unlike the 10-year auction the day before, the $12 billion 30-year Treasury auction was met with strong demand, sporting the highest indirect bid in at least five years! And the Fed's Beige Book reported a "modest" pace of economic expansion in most districts and that news was largely ignored by markets.

Mortgage rates are pretty much set by supply and demand, and mortgage bankers are offering up plenty of supply. On the demand side of the equation don't forget that the NY Fed is in every day buying agency mortgage-backed securities using money from early pay-offs and reinvesting the monies back into current coupon mortgages. MBS reinvestments over the coming four-week period are estimated at $36 billion, up from $31 billion in the previous four-week period though less than the largest total: $40 billion in April/May 2015. Very simple math tells us that is $9 billion a week, or nearly $2 billion a business day! At that pace the Fed is buying nearly 1/3 of the 2016 estimate for mortgage production.

Today we've had the Bank of England leaving its rates unchanged - an interesting move. We've also had the usual Initial Jobless Claims for the prior week: unchanged at 254k. And we've also had the Producer Price Index numbers for June: +.5%, core +.4% - both stronger than expected but over the long term producer inflation is very tame. Later we'll see a series of Fed speakers - whether or not they say anything new remains to be seen.

For those numerically inclined yesterday the 10-year note improved about .375 to yield 1.47% and 5-year notes improved about .125 as did agency MBS prices. But we're giving it back this morning as the 10-year is worse, yielding 1.54% with MBS prices down/worse about .250.

Jobs And Announcements

In operations job news, "LenderLive, a domestic-based mortgage company and service provider, is actively seeking talented individuals to fill processing, underwriting and closing positions in a number of locations throughout the country. As one of the nation's leading private-label mortgage fulfillment firms, LenderLive offers the scale, experience and security to support its clients' origination, servicing and loan purchase operations. Contact recruiting@lenderlive.com for more information or visit our website for a list current openings."

United Guaranty Residential Insurance Company (United Guaranty), the number one mortgage insurer in terms of New Insurance Written for five consecutive years, is seeking a Senior Account Executive for Oregon, Idaho, and Montana. "We're looking for a highly motivated individual to write and successfully execute a business plan to achieve United Guaranty's objectives. The ideal candidate will have experience in business-to-business direct sales and extensive knowledge and experience in mortgage origination, particularly mortgage insurance. The candidate we select will deliver exceptional customer service, build strong relationships with clients at all levels, work closely with lenders to provide training on our industry-leading products, and provide expertise to help our clients in meeting their goals." For more information or to apply, please visit the United Guaranty Job Openings Web page.

And in wholesale job & growth news, Parkside Lending, LLC, a national wholesale and correspondent lender, is pleased to announce several new additions to the team. Linda Jacopetti, SVP of Government Operations, brings over 25 years of industry experience to her role at Parkside. She will be directing the operations and execution of Parkside's government lending platform, specifically the optimization of the current FHA program and the development and launch of the upcoming rollout of VA. In addition, Parkside Lending welcomes several new highly-regarded Senior Account Executives including Steve Swasey in UT;Jacque Gehrich and Khadija Dadabhoy covering Orange County; Denise Tully for San Fernando Valley/LA; Dave Roberts in MD and Tom Steibel covering MO. If you are an exceptional account executive looking for a company that truly values long-term client relationships and does not have a retail channel that competes with your customers, please send your resumes to Director of Recruiting Rick Nelson.

Ditech announced that it is launching a wholesale lending channel, and is already accepting broker applications. The company said that the expansion in wholesale lending is a "natural progression" as it expands its business lending division. The company also said that brokers doing business through Ditech's wholesale channel will have access to a "variety of products, automated notifications, training, and custom reporting," among other product and service offerings.

And Alterra Home Loans LLC, an independent mortgage bank headquartered in Nevada with offices in 12 states, announced that it has closed an expansion capital and an equity investment commitment from Panorama Point Partners, an Omaha, Nebraska based private equity partnership that focuses on providing financial capital and growth-oriented services to help promising companies achieve their future growth goals. Alterra Home Loans LLC, is a 100% minority-owned (Hispanic) lender and within the past three years Alterra more than tripled its retail loan production, generating nearly $1 Billion in mortgage loan closings in 2015.