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Mortgage Applications Continue to Drop; What is "gain on sale"?

Wednesday, April 2, 2014 - Article by: bcahoone - Global Home Finance Inc - Message

Friday we'll have the employment data, or unemployment data, depending on how you'd like to look at it. Cynics in residential lending and other heavily regulated industries think that we're approaching the point where half the people who work actually do something and the other half monitor and regulate the first half. We aren't quite there yet, but about 1 out of every 6 American workers is employed by the government, either at the federal, state or local level. The Department of Labor tells us that if you exclude the nearly 8 million teachers in our country from the calculation (teachers are technically employees of their respective local governments), 1 out of every 9 American workers is employed by the government. Roughly 10% of American workers belong to a union versus about 40% of Eurozone workers. And to keep things in context for Friday's number, the highest unemployment rate in the USA since 1947 was 10.8% in November and December 1982. The lowest unemployment rate since 1947 was 2.5% in May and June 1953.

Ellie Mae's temporary failure brings up numerous issues. Bill Cosgrove, the MBA's Chairman-elect visiting Pewaukee for the Wisconsin Mortgage Bankers Association's annual conference, wisely noted that, "This really shows the industry what can happen when data is kept up 'in the cloud.'" Counterparty risk evaluation is something that the CFPB, other regulators, and the agencies view as critical for lenders. It is not enough to guarantee your own system and data. Lenders will be increasingly required to monitor the dependability and validity of every entity that they do business with and an event like this shows how fragile any counterparty risk assessments are. Stay tuned for increasing scrutiny by the CFPB - especially if consumers are impacted.

Its tax time for individuals, but lenders pretty much do their books every month. I received this note: "Rob, my accounting department keeps talking about 'gain on sale margins'. What's the basic formula for this? Is it the after tax gain divided by the total volume of closed loans? Or units closed?" I asked Nicole Yung at the STRATMOR Group which puts together results of companies and analyzes them during peer group sessions held jointly with the MBA. She answered, "Gain on Sale or Gain on Sale Margin is the net of all pricing components including servicing value, discount points and execution gain. It will also take into account investor delivery fees and hedging costs. It will not include pass-through fees, lender fees or Net Interest Spread. It does not include any costs or compensation. We do often speak of Margin which tends to refer to the before tax all-in net profit of an operation. This will include all revenues including Net Gain on Sale less LO Commissions and any other direct and indirect costs."

Targeting real estate agents has been the goal of most loan officers for as long as I can remember and maybe it's time to think outside the box. Loan officer Martin Lopez with iServe Residential Lending has come up with an alternative strategy, "marketing to Divorce Attorneys". Martin has built an online toolbox called AgentBuz that connects mortgage loan officers and real estate agents to attorneys. In America there are over 6,600 divorces daily and Attorneys are in the most influential position to refer this business.

The Federal Trade Commission announced a settlement with CLGX for its $661 million acquisition of Dataquick. CLGX will be required to license national assessor and recorder bulk data, among other items, to Renwood RealtyTrac. CLGX had announced the acquisition in July 2013. CLGX will also be required to provide several ancillary data sets it currently provides to customers to enable RealtyTrac to become an effective competitor in the marketplace. According to the settlement, CLGX would be required to undertake many of these actions within 10 days of the acquisition close.

Thomson Reuters reports that, "In news of interest to MBS participants, the NYFRB announced that beginning April 9 it would increasingly conduct agency MBS purchases over its proprietary trading platform, FedTrade. The Fed currently conducts its Treasury securities transactions, repo and reverse repo transactions, and securities lending operations over FedTrade. Dollar rolls, as well as, any purchases not conducted through their platform would remain over Tradeweb. The press release also said the Desk would publish a tentative schedule each Friday around noon for agency MBS purchases to be conducted for the weekly period beginning on the following Monday. Overall, the change is not expected to have much of an impact on the mortgage market."

It is becoming harder and harder to deny that on a nationwide scale, housing prices are not doing better than they were a few years ago. In housing news, CoreLogic reported that home prices, including distressed sales, rose by 12.2% year-over-year in February, which represents 24 months of consecutive year-over-year increases. From January to February, prices were up 0.8%. Corelogic forecasted that prices could rise by 10.5% year-over-year in March 2014 and 0.5% from February to March. Prices are still nearly 17% below their peak, however, which was set in April 2006. The big gains from 2013 are starting to cool and come back down to more normal historical levels - as they say, "no tree grows to the moon".

Speaking of doing better,yesterday we learned that construction spending increased .1% in February after a 0.2% drop in January. The February increase put levels at almost 9% above the level of a year ago. The small increase in February came from a 1.2% advance in nonresidential projects, led by a 3.5% rise in construction of hotels and motels. Spending on government projects edged up 0.1%, helped by a big gain at the federal level. Residential construction dropped 0.8 percent, the biggest setback since July. We also learned that ISM's manufacturing purchasing managers' index edged up to 53.7 in March from 53.2 in February.

Things have been relatively quiet in terms of supply and demand for agency mortgage-backed securities. Traders report that originator selling is relatively steady, while the same entities are buying the production: the Fed, money managers, overseas accounts, pension funds, etc. Steady as she goes! This morning we learned from the MBA that applications last week were down 1.2% - apps are down 6 out of the last 8 weeks.

Today, aside from the press remembering Charles Keating (representative of the S&L scandal, he died at the age of 90), we'll see the March ADP Employment number. Always of questionable predictive ability (+193k expected), it gives the employees of ADP something to do, and the press something to yammer about. But we'll also see Factory Orders for February which is projected higher at +1.2 percent from -0.7 previously. For numbers, we had a 2.76% close for the 10-yr U.S. T-note, and in the very early going we're at 2.77% and MBS prices are worse a shade.

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