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Bank M&A - Branches Still Popular, Agency Updates and Another GSE Reform Plan

Friday, April 28, 2017 - Article by: bcahoone - Global Home Finance Inc - Message


(Thanks to Ellen L. for this one.)A man hears a knock at his door. When he opens it, he looks down and sees a snail. He picks it up and tosses it into his yard.Two year later, he gets a knock at his door. Looks down, same snail. The snail looks up and cries out, "What was that all about?"

I often post jobs here, and CEOs will occasionally ask me about retail LO comp versus Consumer Direct comp. For 2015, retail originators averaged total compensation of $88,415 versus $80,376 for Consumer Direct originators, per a STRATMOR Insights report on the subject. While retail originators averaged higher overall compensation, it was due to higher incentives (commissions). The CD originators were paid a higher base salary and/or draw amount than the traditional retail MLO but their average incentives were smaller even with higher productivity.Bank newsBank earnings season is well underway, with scores of banks reporting so far. Overall, the results seem solid, but not inspiring. Banks have reported improved net interest margins but sluggish and variable loan growth. As always, some beat estimates, others don't, reminding us to ask if the estimate was wrong or the analyst. Banks stocks have been volatile during this earnings season.Bank experts love to debate the question about whether bank branches are a thing of the past. Well, the answer would appear to be "not yet." The overall branch count in the U.S. is down only 3.5% from its peak despite massive changes in technology allowing most branch activity to be done electronically from remote locations. Large banks have been reducing branch count by only about 2% per year, and the economics of branch banking is improving with higher rates and continued low interest paid out on deposits. And it seems that the banks with large branch footprints are planning to reconfigure their branch footprint, not significantly reduce them.Bank M&A continues, over the last week or so it was announced that in South Carolina First Community Bank ($913mm) will acquire Cornerstone National Bank ($146mm) for about $25.8mm in cash (30%) and stock (70%) or roughly 1.39x tangible book. In Washington, Washington Federal ($14.9B) will acquire Anchor Bank ($441mm) for about $63.9mm in stock (100%) or about 1.0x tangible book. Central Valley Community Bancorp (Fresno, CA) will Acquire Folsom Lake Bank (Folsom, CA). In Pennsylvania Riverview Bank ($543mm) will acquire CBT Bank ($481mm) for about $50mm in stock (100%) in a merger of equals. This is about 1.27x tangible book. UMB Bank ($20B, MO) will sell its Scout Investments unit to Raymond James (FL) for about $172.5mm in cash (100%). United Community Bank ($10.7B, GA) will acquire Horry County State Bank ($376mm, SC) for about $66mm in stock (100%) or about 1.42x tangible book. South State Corporation (Columbia, SC) has agreed to acquire Park Sterling Corporation (Charlotte, NC).Dr. Rick Roque, Managing Director at Menlo Company, suggests, "As rates increase, there is a 'race' to move on purchase or refinance decisions to save money in the short term and not get locked into a higher 'rate' later. So, higher rates, counter intuitively, become a driver to new originations and not a 'drag', but over time it levels off, where consumers, once they have purchased a home, due to rates, their desire to move or take out another loan diminishes and at that point is where rates become a dampening effect on consumer lending and/or mortgages.I do not see this 'effect' taking place until rates are in the 7-8% range; rates can climb to 5-6% with little to no dampening effect on mortgage lending. The mortgage market will continue to expand simply on demand for new housing - Millennial and Immigrant home buyers are going to seek smaller, 'smarter' homes, built in communities rather than the 'McMansions' of the prior decade built on low interest rates. Millennial and immigrant home buyers are an exploding demographic that will drive housing demands to $3T (approximately 2x the housing market we are in today) largely despite rate increases by the Federal Reserve.Agency updates: conforming conventional rolls onFannie Mae announced several programs recently, including one that allows homeowners to refinance by combining their mortgage with student loans which may result in a sizable drop in monthly payments. The team at SoFi, who has been exclusively working with Fannie on these products for six months, writes, "The borrowers love the product. On our funded loans for this product we have saved borrowers an average of almost 2% on their previous student loan rate and about .25% on their previous mortgage rate."Yes, the Fannie Mae Selling Guide has been updated. It provides new, sustainable solutions for lenders to serve borrowers with student loan debt. For more details, read the fact sheet. It "Improves efficiency by waiving the project eligibility review requirement for Fannie Mae to Fannie Mae limited cash-out refinances on condos and PUDs, simplifies lender processes by allowing cash-out refinances on properties that have been listed for sale in the past six months. This Selling Guide update contains other changes, including improving the streamlined Project Eligibility Review Service process, allowing truncated asset account numbers, eliminating the processing fee for Flash MBS execution, increased flexibility for the Servicing Execution Tool."Effective April 30, Fannie Mae will update the LoanSphere Invoicing system. Changes include updates to the mapping capability of the Create Invoice Line Item to Fannie Mae Claim Line Item, Pending Submitter Review (formerly Pending Servicer Review), and the auto-population of the referral date for foreclosure attorney fees, where applicable. Refer to the Release Notes for details. For more information, visit the Expense Reimbursement page. PennyMac posted updates to tax transcript requirements and underwriting help NPPI reminder. Effective immediately, for Fannie Mae, Freddie Mac, FHA and VA transactions, Lenders may provide The Work Number written VOE, or a written VOE (WVOE) from an equivalent income verification company in lieu of tax transcripts for salaried borrowers. The written VOE must have full income figures supporting the qualifying income. No changes are required to the Arch MI Underwriting Manual as a result of the updates announced in Freddie Mac Bulletin 2017-3. In regard to Freddie Mac Bulletin 2017-2, its Manual will be updated to reflect Arch MI's credit policy position. These changes will be made during its next update to the Manual. A summary of Arch MI's position regarding these updates can be found in its latest Credit Risk Bulletin.Citi Correspondent Lending's recent bulletin covers general policy updates including foreign assets, multiple properties: agency loans and property appraisal sales comps.Fannie Mae's new invoicing system is on its way targeted to launch in the third quarter of 2017. The system will provide a simple, enhanced web-based portal for servicers to access consolidated loan-level invoices, resolve claims, add/retrieve documentation, and communicate with Fannie Mae operations teams.Reform and repent!Some of the smartest folks in the room think, if reform is going to occur, we should start with housing, then the FHA, and then the GSEs (government sponsored enterprises - namely Freddie Mac and Fannie Mae). Sure enough, Treasury Secretary Steven Mnuchin says once the Trump administration has its major tax reforms underway, it will turn its attention to a fundamental overhaul of housing market finance. The issue has remained problematic since the financial crisis of 2008, and many market participants would welcome an initiative to bring private capital investment back into the market and avoid the need for further taxpayer bailouts of Freddie Mac and Fannie Mae. But I'll be darned if "private capital" doesn't want a higher return than the government - tell the borrowers...Like the MBA last week, this week the ICBA, which represents independent community banks, released its blueprint for reform. "ICBA Principles of GSE Reform and a Way Forward" notes that the placement of the GSEs in conservatorship in 2008 was described back then as a "temporary time-out" to allow both companies to stabilize. "After eight years, and into a third presidential administration, Fannie and Freddie, although they have returned to profitability, worked through most their defaulted loans, and continued to provide liquidity to the housing market, have less capital today than when they were placed under government control."The release of the white paper, detailing its principles and recommendations for reforming Fannie Mae and Freddie Mac to support continued access to the secondary mortgage market for community bank lenders, calls on policymakers to allow Fannie and Freddie to rebuild their capital buffers and preserve equal access to lenders of all sizes.Capital markets Zzzzz....Or so it seems. Agency MBS prices did a shade better than Treasury securities on Thursday, but hardly enough to budge rate sheets. There were the usual slight movements in price between Ginnies, Fannies, and Freddies, between 30-year and 15-year maturities, and between coupons, but not enough to impact borrowers in a meaningful way. The 10-year note price improved .125 to close at 2.30%, where we've been much of the week and agency MBS prices also improved .125 - a little unusual.This morning, as capital markets folks prepare to head off to New York for the conference, we've had the first look at Q1 GDP (+.7% - weak), Q1 Employment Cost Index (+.8% - strong). Coming up is the Chicago Purchasing Managers Index and the University of Michigan Sentiment Index. After the initial volley of stats, the 10-year is yielding 2.33% and MBS prices are worse .125 versus last night.

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