Subservicer, Non-Agency Products; World Debt Increasing; Primer on "Duration" and Mortgage Pricing
Time has a way of slipping by. For example, I’ve really been meaning to transfer a bunch of Lotus 1-2-3 and Quattro Pro spreadsheets I have off of some floppy disks and onto my laptop but never seem to get around to it. Speaking of time passing, Moody’s send out a warning that if the partial US government shutdown (PUGS) continues it could create problems for the U.S. bond market. Entities that depend upon federal money for revenues or paying debts could experience "liquidity strains." As we know the lack of liquidity will take a company, or person, down to their knees faster than anything. Yet nothing is certain but death and taxes, and the IRS plans to recall thousands of workers now on furlough because of the PUGS.
Lender Products and Services
Wrapping up a record-breaking 2018, Angel Oak Mortgage Solutions is looking to continue its extraordinary growth in the correspondent channel. If you’re attending the MBA’s Independent Mortgage Banker’s Conference in San Francisco later this month, there couldn’t be a better time to speak with the leader in Non-Agency about becoming a correspondent lender. Simply contact Sean Marr to schedule a meeting. Also, make sure to see Steven Schwalb speak on non-QM on Wednesday January 30th at 3:30. Non-Agency lenders aren’t all the same – experience the Angel Oak difference.
Do you use Dovenmuehle, Cenlar or LoanCare as your subservicer? Richey May & Co., a public accounting firm recognized as the leader in providing audit, tax, and compliance services within the industry, is planning its 2019 subservicer oversight review program to assist companies with their monitoring and oversight responsibilities. Richey May’s program and subsequent 120+ page report provides value beyond the basic compliance requirements, including face-to-face interviews with all key department heads to observe their processes and challenges, a comprehensive review of business continuity and IT assessments to ensure client and consumer information remains secure, and a summary of the subservicer’s notable accomplishments and strategic initiatives for the future. The optional loan level testing provides succinct and valuable insight into how your personal portfolio is being serviced, potentially uncovering unobserved information and assisting in the client-subservicer relationship. To learn more or to participate in the 2019 oversight program, please contact Kevin Lohry.
What’s the mortgage version of “having your cake and eating it too”? Well, thanks to United Wholesale Mortgage, it means having access to superb service, technology, partnership tools…AND price! UWM has dropped its rates across the board — for conventional, government and jumbo — giving the nation’s No. 1 wholesale lender unequaled pricing in the country, to go along with everything else that makes it the most popular wholesale lender among mortgage brokers. UWM has removed all state adjustments and all Loan Level Pricing Adjustments (LLPA) overlays as well. Now, not only will mortgage brokers enjoy the fastest and easiest experience by working with UWM, they’ll also get their customers unmatched best rates. To learn more, visit www.UWM.com/have-it-all.
Sharing this one final time! Download the free eBook, “2019 Mortgage Lending Resolutions.” 2019 is setting up to be a year filled with challenges and no game plan on how to combat, will most likely leave you sitting on the sidelines. Still, winning is possible, but only if you are agile enough to embrace change and lean into the winds of market challenges to find the opportunity within. This eBook gives you a plan and focus areas to attack this upcoming year. A great quick read for all mortgage leaders and their teams, Download Your Free Copy Here.
Capital Markets
Interest rates are a function of bond pricing, which is, in turn, a function of supply and demand. (There is little reason to originate a loan, or issue debt, if there is no demand: No one wants to buy it, own it in their portfolio, or service it.) On the supply side of things, there is concern. Countries around the world have now amassed the highest level of debt in history at nearly $250 trillion. That level is about 3x the amount of 20 years ago. By country, the U.S., China, EU and Japan have 67% of the global household debt, 75% of corporate debt and almost 80% of government debt. Countries with the highest public debt to GDP are: Japan (238%), Greece (182%), Barbados (157%), Lebanon (147%) and Italy (132%). The US is about 105%. Looking at households, consumer debt is higher than ever as it is expected to hit $4 trillion in 2019 along with $10.3 trillion in mortgages reached in the end of Q3 2018. Experian tells us that consumers, on average, owed $6,826 on their credit cards as of September, up 1.9% from a year before and up 11% from 2011.
I am often asked why lower mortgage rates move differently than higher mortgage rates. (“Rates dropped, but 5% mortgages barely budged. Is my capital markets guy keeping all the profit?” The answer lies in the duration and convexity of the yield curve. Let’s focus on the duration component for today, a.k.a., the length of time in years in which a mortgage is expected to pay off.
Duration influences pricing in life, whether that be on bonds or on how long a car is expected to last. Assuming a stable rate environment, if someone buying loans for their portfolio has a loan that they expect will pay off in six months versus six years, the loan paying off in six years is more valuable as that is a longer stream of interest payments the company can collect. Virtually all of the loans originated prior to 2018 were made below current mortgage rates, which conceptually means people are currently less likely to refinance into higher monthly payments.
For those holding mortgages in their portfolio, the portfolio value falls when rates fall, as a larger chunk of those loans are expected to refinance and be paid off. Exposure to interest rates along various points of the yield curve matters especially when the curve is changing shape. Although most residential mortgages have fairly long maturities (amortized for 15 or 30 years), their effective duration, or sensitivity to interest rates, appears at various points along the yield curve since the average life is historically closer to 6-8 years. This curve-wide interest rate risk is unique in mortgages and is driven primarily by the borrower's option to prepay their loan.
Since the end of September, yield curve flattening has been driven primarily by 10-year treasuries sliding lower relative to shorter-maturity benchmarks like the 2-year. Higher coupons, like 30-year 4.5s and 5.5s, tend to trade to a shorter duration as the coupons can see faster prepayment speeds when rates drop versus 3.5s or 4.0s.
It is also no secret the Fed is continuing and will continue to exit the mortgage market as they reduce their mortgage holdings and allow the balance sheet to run off. The issue with this is it will continue to deteriorate the mortgage universe’s quality of collateral. Analysts will point out that for over 8 years the Fed has been a garbage disposal of sorts as the worst of the worst pools were delivered to them, meaning high WAC, fast paying, poorly serviced pools ended up on their balance sheet. This greatly improved the tradability of the mortgage market which helped to elevate prices of rapidly-prepaying loans while the Fed was buying.
Now that the Fed has scaled back purchases, anything that is in existence currently in the market or that will be created in the future will have to go somewhere else. This will ultimately create demand for high quality pools. The end result on the rate sheet is that you will see markets not paying large premiums for higher rates if they think the loan will pay off and exit their portfolio in six months.
JPMorgan Chase is preparing to issue a prime non-agency MBS deal where the majority of the loans backing the security are mortgages eligible for sale to the government-sponsored enterprises. Kroll Bond Rating Agency notes, “The JPMMT 2019-1 mortgage pool is composed of 1,707 first-lien mortgage loans with an aggregate principal balance of $978,118,609… The underlying collateral consists entirely of fully-amortizing, fixed-rate mortgages, characterized by substantial borrower equity in each mortgaged property, as evidenced by the WA original LTV of 68.4% and WA original CLTV of 69.4%. The weighted average original credit score is 761, which is within the prime mortgage range. Conforming jumbos account for 67.0 percent of the collateral. The loans come from Chase (42%), Quicken (19%), United Shore Financial Services (UWM – 13%). Roughly 45% of the loans came through the retail channel and 30% were sourced through third-party mortgage brokers, the rest through correspondents, DTC, etc.
Looking at yesterday’s bond market, yesterday volatility picked up slightly but in general it was another quiet day as the U.S. 10-year closed yielding 2.73%. The Federal Reserve's January Beige Book noted that eight out of twelve districts reported modest to moderate growth, but increased volatility in financial markets, rising short-term rates, falling energy prices, and trade/political uncertainty caused lower optimism for future expectations. Our bonds often move on international news, and we heard about record repurchase reserves liquidity injection overnight from the People's Bank of China, and British Prime Minister Theresa May surviving a confidence vote by a margin of 19 votes, though it remains unclear how she will proceed with regards to Brexit. Greek Prime Minister Alexis Tsipras is expected to face a confidence vote later today. And Bank of France President Francois Villeroy de Galhau acknowledged that the ongoing yellow vest protest have had a significant short-term impact on the economy but added that measures taken in response should add up to 20 basis points to GDP growth in 2019. Finally, the Bank of Japan will reportedly cut its inflation forecast at its policy meeting on January 23 due to lower oil prices.
Today we’ve had weekly jobless claims (expected to increase, they were -7k to 213k) and the Philadelphia Fed Manufacturing Survey (higher at “17” as expected). Housing starts and permits, which were also scheduled for release, have been postponed due to the partial government shutdown. We will also hear remarks from one Fed speaker, Governor Quarles. We begin today with the 10-year yielding 2.73% and Agency MBS prices little changed versus last night’s close.
Jobs and Personnel Moves
Sierra Pacific Mortgage is looking for talented additions to its teams across the nation. Don't miss the opportunity to work for a company that has been around for more than 30 years and continues to experience growth, prioritizes its culture and employees while offering hands-on support from the leadership team! Management is looking for talented and motivated loan originators throughout the US. Contact Sierra Pacific about all the opportunities they have. If you have the vision and the drive, Sierra will provide the support and tools you need to take your career to a whole new level. Send your resume to careers@spmc.com to learn more. In case you didn’t know, Sierra Pacific Mortgage offers renovation loans, diverse jumbo products, a powerful technology suite and excellent marketing services to set you apart.
For the 3rd year in a row Caliber Home Loans, Inc. has been recognized by Victory Media as a Military Friendly® Brand. Caliber has also been honored as a Military Friendly® Employer 2019. Both designations measureContact Jeremy DeRosa or visit www.joincalibernow.com.”
"Prime Choice Funding, Inc. is a national leader in mortgage lending and is reaching out to current Branch Managers and LOs. Tired of margin compression? Losing out on deals because of pricing? Is your employer getting rich off your loans by juicing up their margin to make up for a slowdown in production? Let us help! We offer great LO compensation while allowing you to price competitively. Don’t worry, we have all the bells and whistles you need for marketing support, loan processing, and more. While many in the mortgage industry are struggling, we are experiencing exponential growth and are expanding nationwide. We provide loan officers with competitive compensation, top-tier fulfillment, and paid marketing that drives business growth. If you’re interested in joining our team visit https://bit.ly/2FvnMkx to apply. For more information contact Kevin McKay (714-263-1601)."
Join the best Brand in the business! BrandMortgage is fully independent and lending in AL, DC, FL, GA, MD, MS, NC, SC, TN and VA. Brand is in search of seasoned and emergent loan officers across our entire footprint. Brand offers a digital loan platform with the full array of Fannie, Freddie and government lending products, and an extensive offering of portfolio programs including jumbo, super jumbo, construction perm, non-warrantable condo and bank statement programs, all in-house. “BrandMortgage has a foundation of integrity, innovation and teamwork with a collaborative, results-driven approach, enabling originators to deliver exceptional service and successfully grow their business. To learn more about joining the Best Brand in Mortgage, contact Gabe Santiago, Corporate Recruiter (678.226.7585).”
Known for his insight on regulation and compliance, congrats to Matt Tully with his new role, joining Sagent Lending Technologies’ executive team as VP of Agency Affairs and Compliance: here’s the link.
And congrats to Gina McLeod who comes to Union Bank as a VP, Account Executive covering San Diego, Temecula, Desert cities and parts of Nevada and Arizona.