Monday, March 10, 2014 - Article by: bcahoone - Global Home Finance Inc -
"With only a week to go until St. Patrick's Day, Irish divers were amazed to find that, after 100 years of lying at the bottom of the ocean, the Titanic's swimming pool was still full." The Irish are one of the few groups that appreciate a joke about themselves, and I used this to illustrate that things aren't always what they seem. For example, the U.S. seems to be doing okay, yet the Treasury Department reports that given the projected budget deficit, for every $1 of expected tax revenue, our government anticipates spending $1.25. Is that any way to run a government, or a family?
Every lender & servicer, and therefore borrower, is influenced by the price of servicing. And in recent months we have all seen large blocks of servicing being sold and bought. There was a note on the topic: "I have a basic understanding of how the price of a loan is based on the value of the asset - basically the coupon passed through - plus the value of the servicing. The value of the asset is based on the bond market, but what makes up the value of the servicing?" I will be very brief, since very lengthy documents have been written about valuing servicing. And easy way to explain it to someone else is in terms of cash flow: there is more value in a series of payments that last a long time, and are safe - just like anything else.
As part of the MSR (mortgage servicing rights) valuation, servicing firms, investors, etc., enter several different assumptions to come up with the valuation. These include the float on principal and interest and prepayments (dependent on a multitude of factors, not the least of which is how the lender is selling the loan, and how the loan is being serviced), the cost to service a loan per year (the more loans a company is servicing, the lower the cost per loan since overhead is spread out), the discount rate (there are tiers for excess servicing which doesn't apply on cash), the projected delinquency rates and additional costs associated with delinquencies, earning rates on escrows, escrow advances, and growth rates. Some prefer to put a cap on the multiples of servicing - basis points that the MSR cannot exceed. But those are the basics, and just like the bond market, the values and perceived values are always changing.
How are Freddie and Fannie doing?They're making some nice coin, but at the expense of borrowers who are the mainstay of the cleanest, most thoroughly underwritten and appraised, heavily documented loans in history. (Granted, some of this is going to pay for a tax break extension - remember Congress voting that in?) The industry and MBS investors are keenly interested in how credit is impacted by rates, fees, guidelines, compliance costs, consolidation in the industry - it will all be a real case study. But through its 10-k Fannie reported that its average gfees went to 57.4bps in 2013 from 39.9 basis points in 2012, which was up from 28.8bps in 2011, including upfront fees amortized over expected loan lives. The increase last year included 10 basis points in average base increase, greater LLPAs on higher LTVs, lower FICO loans, and the fabled effects of 10 bps increase passed through to government. Roughly 40% of net interest income in 2013 was from g-fees on loans in MBS, compared with ~30% in 2012, ~25% in 2011 - one can expect this trend will continue and in the near future g-fees will be primary source of revenue.
So why is the U.S. downplaying the huge profits at Fannie & Freddie? Wall Street Journal writer Nick Timiraos points out that Michael Stegman, the Treasury adviser, warned that those recent returns "may significantly overstate the true financial condition" the companies, "especially on a go-forward basis." Some of the profits came from one-time tax reversals as the companies reversed huge write-downs they were forced to take in 2008. More came from releasing loan-loss reserves and one-time legal settlements with Wall Street banks or lenders. And just like homeowners out there, their financial outlook has benefited significantly from strong home-price appreciation and low interest rates, both of which may moderate in future periods.
Addressing the "why kill the golden goose" question, Mr. Timiraos wrote that, "First, the Obama administration doesn't want the profits to remove the urgency for Congress to decide how to overhaul Fannie and Freddie. Some stakeholders 'mistakenly argue that housing finance reform is no longer needed -- that the [companies] are so financially flush' to reduce the need for legislation, he said. 'We could not disagree more.' The administration has made clear it doesn't support returning Fannie and Freddie to their former duopoly status as 'government-sponsored' entities that are neither fully private nor fully public. The profits could not only remove the urgency for any overhaul, but they could also lead lawmakers to grow more comfortable with less dramatic changes whenever they get around to proposing such an overhaul." But really... during an election year? There are many that say when there are other, more pressing issues that Congress is having trouble coming to a consensus on, not only is any substantive change proposal unlikely this year, but everyone is in agreement that it will take years of work to implement.
Meanwhile, Ellie Mae recently calculated that there is some evidence that it may have become a little easier for some Americans to obtain a home loan. Looking at FICO, which is only one score, the average credit score for approved mortgages fell to 727 in December, down from 748 one year earlier. (FICO credit scores run on a scale from 300 to 850.) The report said that some 46% of mortgages that closed in December had credit scores above 750, compared with nearly 57% one year earlier. Meanwhile, around 31% of loans had credit scores below 700, up from 21% one year earlier. The data also showed that the average debt-to-income of borrowers increased: loans closed in December were 39%, up from 35% in June and 34% in January.
There are plenty of LOs who will argue that this shows that the easier loans with higher credit scores have been done, and much of what the industry has left are tougher to do. Others will say that home prices have stopped falling and the economy is slowly improving, making lenders more comfortable to extend loans. Big drops in refinances, impacting volumes, could also lead lenders to become more competitive for home purchases. We're already seeing an upswing in interest in non-QM lending, and in lenders that offer that product. Analysts say it is normal for borrowers with weaker credit to seek out refinancing as rates go up and as the refinance cycle nears its end.
Let's see what lenders and investors have been up to in recent weeks. But first a clarification to posting Friday regarding United Wholesale Mortgage. ("United Wholesale Mortgage has rolled out its new UWM Track, which allows brokers to track the status of a loan in order to provide realtors with up-to-date information. When viewing their loan pipeline in the EASE portal, brokers can see when a loan is submitted to underwriting, has its conditions reviewed and cleared, been approved, when prep and closing documents were sent to the title company, and when it can be expected to fund.") The UWM Track is actually a service that allows the Realtor to see the process of the loan. The broker provides a realtor with a log in and password to a separate portal via UWM's website, and the Realtor can actually track the loan in process.
Rates seem fairly content where they are. Data last week provided further evidence that the economy has lost momentum since the start of the year, although activity has not fallen off the cliff. Nearly all of the monthly data seem to have been affected in some way by the storms and prolonged cold that has plagued the United States since the year started. Friday's employment data (a 175k gain in employment last month followed by a revised +129k increase in January, beating expectations, and the jobless rate at 6.7%) is still being discussed, but the strength led to a selloff in fixed-income securities (including agency MBS which worsened about .250).
This week is pretty light on the economic calendar. Aside from some "third tier" economic numbers that rarely move rates and whatever might happen overseas, we don't have anything until Thursday's Retail Sales number which measures the total receipts at stores that sell merchandise and services to customers. Weekly Initial Jobless Claims and some Import Price numbers come out Thursday as well. And then on Friday we have the Producer Price Index (PPI) to show us inflation at the producer level (but inflation has not been an issue in a long, long time) and the University of Michigan confidence numbers. Agency MBS prices are roughly unchanged from Friday's close, and the yield on the 10-yr is sitting around 2.80%.
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