General Lending Environment Trends; July Events; What's Moving Rates?

I don’t think that my cat Myrtle has been asked any survey questions by any pollsters. (If she has, she hasn’t mentioned it, and if she was, I know exactly what her response would be, which would be to ignore the question.) But plenty of people out there feel compelled to answer, and in this case answered survey questions from Redfin about the impact of interest rates on potential homebuyers proving what many LOs know: a good school district for their kids trumps a slightly higher, tax-deductible mortgage payment. The Redfin survey (of more than 4,000 people) showed that, of the respondents who planned to buy a home in the coming year, only 5% said they'd call off their search if rates rose above 5%. And twenty-four percent of buyers said such an increase would have no impact on their search. Good LOs know how to focus on their strengths rather than sell rate, and help the borrower remember that having a home is more important than $50 or $100 a month.

General Residential Lending Environment

It seems 2018 is rushing by, and we’ve wrapped up with the 2nd quarter. For many lenders, the 4th quarter of 2017 was dismal, margin and volume-wise, the 1st quarter was even worse, but many I have spoken to saw a bit of a bounce in the 2nd. Others, not so much, they’re still selling off servicing they thought they’d have for years, and warehouse banks, correspondent investors, and other counterparties are keeping a close eye on them.

Small lenders, who can’t continue to pay for on-staff attorneys, senior people heading all departments, vendor managers, etc., are interested in merging with larger lenders. Larger lenders, arguably able to weather this environment, want to find those lenders.

“What’s your Plan B? With flat growth, low inventory, and margin compression, 2018 certainly has its challenges – and the 4th quarter is looming.  If your current quarterly results are making you question whether you’re prepared to handle this market dynamic or have the tools & support you need to grow your business – now is the time to consider a strategic conversation with American Pacific Mortgage. This video describes the unique solution we've built, and an invitation from APM's Chairman, Kurt Reisig, on how we could strategically work together. Our business model empowers independent mortgage banks to operate under their brand, retain most of your key employees, and tap into our resources to compete. We provide the support, resources and technology, so you can focus on growing production. If you're interested in a confidential owner-to-owner conversation, to explore a “Plan B” with Kurt Reisig, please contact Peter Schwartz (916.770.0053) or Mike Haden(916.223.3687).

Stearns Lending, LLC, a leading independent mortgage bank has entered into a definitive agreement to acquire an equity interest in Certainty Home Loans, LLC, an independent mortgage lender headquartered in Plano, Texas. After the closing, Certainty's current ownership will continue to hold a significant share of the equity. The Executive Team of Certainty will continue to be led by Jim Clapp, as President, and Doug Casbon continues as EVP, National Production Manager. Certainty will continue to operate under the same name after closing.

In 2017, Certainty Home Loans originated $1.4 billion in residential loans, offering home purchase, refinance, renovation and reverse mortgage loans. Stearns Lending, LLC is a leading provider of mortgage lending services in Wholesale, Retail, and Strategic Alliances sectors throughout 49 states. David Schneider, CEO of Stearns Lending, noted, among other things, “This structure leverages the experience Stearns has with its current Joint Venture business model which currently operates under ten different brands across the country." The transaction is expected to close by August 31, 2018, pending regulatory approval.

Capital Markets

Although the prospect of much higher rates has temporarily ebbed, loan officers courting builders still want a long-term rate lock program. San Diego’s Mortgage Capital Management (MCM) published an article a while back on long-term float down locks worth reading.

And just like that, we’re halfway through 2018. Long-term rates have been relatively stable. The yield curve, which historically has been an indicator of economic trends, isn’t such a great indicator currently. The reason? With the NY Fed continuing to buy billions of dollars of long-term securities (like 30-year mortgage-backed securities) every week, it increases the demand, which increases the price, which keeps prices higher and rates lower than usual. But the rise in rates since 2016 signals investors no longer fear the global economy will suddenly fall apart, but the recent leveling off suggests investors doubt growth is truly picking up in a sustained way.

Fed interest-rate increases almost guarantee short-term Treasury rates moving higher. A bigger question for investors is whether those increases will curb growth along with inflation. That would pull down yields further out on the yield curve (like with 30-year or 15-year mortgages, to some extent), potentially signaling a slowdown.

Pension funds' big shift into bonds as the equity market stays strong could be a reason the US has the flattest yield curve since 2007. Purchases of Treasury STRIPS -- Separate Trading of Registered Interest and Principal of Securities -- surged to a record $284 billion in May.

Although we are almost a month away from the advance estimate for second quarter GDP as well as the next FOMC meeting, the economy looks solid despite recent uncertainties surrounding trade. The trade gap in goods contracted by $2.5 billion in May, signaling that net trade could have a positive impact for GDP growth in the second quarter. In May, personal income increased 0.4 percent, consumer spending increased by 0.2 percent and the PCE index increased by 0.2 percent. Real consumer spending was flat in May though it is expected to increase in June.  A large drop in new orders for cars and trucks led to the second straight month of declines for durable goods orders, which fell 0.6 percent in May. Transportation often exaggerates gains and losses in this series and core capital goods fell 0.2 percent, though April’s core reading was revised upward to +2.3 percent. While trade tensions remain a concern, consumer confidence is near a multi-decade high buoyed by low unemployment and strong hiring.

Easing regulations and a stronger economy are key reasons why some 60% of economists surveyed by the Wall Street Journal expect moderately stronger growth in the medium term. Of note, 33% said they didn’t expect any economic growth effects from regulatory rule easing.

There are other economic signs. The ISM Non-Manufacturing Index increased 1.8 points to 58.6 amid concerns of higher costs tied to tariffs, changing outlooks on trade and labor shortages of qualified labor. A number near 60, or above, is considered strong and all but one industry covers by the index reported growth in May. The US trade gap condensed for the second straight month to -$46.2 billion in April lead by an increase in petroleum exports and a decline in cell phone imports. First quarter productivity was revised down from a gain of 0.7 percent to a gain of 0.4 percent due to a downward revision in output and a small upward revision to hours worked. Unit labor costs increased at 2.9 percent annualized rate and are up 1.3 percent year-over-year. When adjusted for inflation, real wages are at a quarterly annualized rate of -0.2 percent. Job openings remain strong as a rate of 4.3 percent, remaining at March’s all-time high for a second consecutive month.  All these signs point toward moderate to strong real GDP growth in the second quarter, which some analysts believe will be the strongest of the year.

U.S. Treasuries ended the month, quarter, half of 2018 on a generally flat note, with the 10-year closing unchanged at 2.85%. Treasuries largely ignored strong economic data from Friday, headlined by an expected increase in the Core PCE Index. Real PCE was flat, which is likely to prompt some downward revisions to Q2 GDP forecasts. Additionally, there was some support for the Federal Reserve to keep moving the fed funds rate higher as the price indexes are moving in the direction the committee anticipated. Separately, the Fed announced that 31 of the largest 35 banks passed the second round of stress tests, which caused a slight rally in bank stocks. One rumor of note, which caused some yield curve flattening, was a story that the ECB is considering a slight twist to their operation process for managing their reinvestments next year.

Other economic releases from the end of last week include an expected personal income jump from May, weaker than expected personal spending numbers, and an increase in the personal savings rate. The University of Michigan's final Index of Consumer Sentiment for June failed to meet expectations but was on par with the final reading for May, as tariff concerns offset favorable assessments of jobs and incomes. Chicago PMI hit the highest reading since January, with elevated input prices and supplier times slowing production for manufacturers.

This holiday-interrupted week in the U.S., which includes central bank decisions from the Riksbank and RBA, kicks off today with the June ISM Index and May Construction Spending at 10:00 ET. Tomorrow we have May Factory Orders (prior -0.8%) and June Auto and Truck Sales before bond and equity markets close for Independence Day on Wednesday. Things resume Thursday with the weekly MBA Mortgage Applications Index (prior -4.9%), June Employment Change (prior 1+78K), weekly claims figures, June ISM Services, and June FOMC Minutes. The final day of the week sees June Nonfarm Payrolls (prior +223K), Nonfarm Private Payrolls (prior +218K), Unemployment Rate (prior 3.8%), Average Hourly Earnings (prior 0.3%), and May Trade Balance (prior -$46.2 billion).

This morning, unfortunately, trade tensions aren’t easing – Canada’s retaliatory measures went into effect as planned on 7/1 and the U.S. looks set to impose tariffs on $34 billion worth of Chinese goods this Fri 7/6 (to which China has threatened to respond in kind). Meanwhile, the auto threats aren’t abating out of Washington and Europe has threatened roughly $300 billion in retaliatory tariffs should Trump proceed with his car plans. While capital markets folks enjoy the respite from volatility, we begin the week with rates compared to Friday’s close. Due to the trade tariffs negatively impacting our economy, stocks are taking a hit, but the 10-year’s yield is back down to 2.83% and 30-year agency MBS prices are better nearly .125.

Trainings and Events

FAMC has published its July 2018 Wholesale “Customer Training Calendar”.  This month’s calendar offers a variety of training opportunities such as “Mortgage Fraud”, “Quarterly Agency Updates and Communications 2Q18”, “TRID 2.0 and the Recent Tax Changes – See What’s Ahead!” and “2018 Top Mobile Apps for Homebuyers”.

Learn the roles and responsibilities of lenders, underwriters and appraisers when it comes to analyzing appraisals for single-family residences. Plaza’s upcoming July 9th training.

The National MI trainings for the month of July features: Self-Employed Borrower training on July 12th at 10 AM PST and the 2018 Top Mobile Apps for Homebuyers on July 18th at 11:00 AM PST.Register early on its National MI University website.

On July 17th, FHA has a free, on-site training in Omaha. This training will provide a wide-range of topics, including: FHA’s Single Family Housing Policy Handbook 4000.1 (featuring topics such as underwriting the FHA appraisal and endorsement protocols); Loan Review System (LRS).

On July 18th in Omaha, FHA is offering free, on-site training that will cover FHA appraisal requirements, including FHA appraisal protocol and updates to FHA appraisal policy. This training also takes an in-depth look at a variety of appraisal-related topics including: property acceptability criteria; minimum property requirements; property defects; appraiser responsibilities and requirements.

The historic (I have my 1987 badge) Western Secondary Market Conference will be July 16th-18th at the Westin St. Francis Hotel, San Francisco.

Join mPower at NAWRB’s 2018 Women in Real Estate Ecosystem Conference on July 29th-31st at the Standard Club in Chicago. Adding mPower to the agenda falls naturally in line with this year's conference theme, "Year of Women."