Amidst rumors of PIMCO buying a large retail residential lender (don't ask me, I'm always the last to hear), residential business is really picking up. The MBA upped its forecast (see a few paragraphs down), and the return of first time homebuyers have increased existing home sales in May - reaching the highest level in almost six years. NAR reported that all of the major regions experienced sale increases with the Northeast experiencing the greatest increase. All existing home sales rose 5.1 percent to a seasonally-adjusted annual rate of 5.35 million units and sales are now 9.2 percent higher than a year earlier. The median existing-home price for all housing types in May was $228,700 and first-time homebuyers contributed to 32 percent of those sales, compared to 27 percent a year ago. (More on home & housing trends below!)
The FHA/HUD/OIG/Nova drama continues about certain Housing Finance Agency down payment assistance programs. The issue was the focus of a memo by Ed Golding. Some of your questions may have been cleared up when acting FHA Commissioner Ed Golding issued a release in response to the recent HUD OIG Audit report examining lender participation in certain Housing Finance Agency down payment assistance programs. The note reaffirms that FHA supports these programs and that FHA provides the Housing Finance Agencies the discretion needed to properly fund these programs. The note also indicates that HUD is "taking active steps" to fully resolve the issues raised in the OIG audit and provide greater clarity to the market.
That being said, the word on the street is that the HUD program staff disagrees with the OIG findings and is resisting the recommendations. If the OIG does not relent, the issue will be resolved by the HUD Deputy Secretary. Many believe that the reference to "completely" resolving the issues raised by the OIG and providing "proper clarity" means that HUD will be issuing a Mortgagee Letter or other guidance reaffirming the basic structure, and possibly making adjustments to be applied on a prospective basis. And most believe that the Housing Finance Agencies will be communicating with their lenders regarding the Golding note and urging lenders to continue participating on a "business as usual" basis.
The MBA believes that the Golding note coming so quickly is a strong sign that HUD plans to fight the OIG conclusions hard. Lenders participating in Housing Finance Agency down payment programs funded through premium pricing mechanisms will still need to make their own legal risk assessments regarding their ongoing participation in these programs.
Change and drama in banking continues unabated. For example, Fed governors voted unanimously to impose additional capital surcharges on the 8 largest banks for more cushion against unexpected losses and reduce the potential for future financial bailouts. The aggregate surcharge is about $200B and the banks impacted are JPMorgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, State Street and Bank of New York Mellon. Too big to fail? Speaking of big banks, FDIC data shows the total number of institutions has declined 23% from the end of 2007 to the end of 2014 (8,354 vs. 6,509). Despite the decline in numbers, assets in the industry have climbed 19% (from $13.0T to $15.6T).
Just in the last week it was announced that PeoplesSouth Bank ($492mm, GA) will acquire 6 FL branches from Cadence Bank ($8.1B, AL). OGS Investments, Inc. (Ocala, FL) has agreed to merge with HCBF Holding Company, Inc. (Fort Pierce, FL). In Utah Zions Bank said it will lay off up to 7% of its employees (about 770 of 11,000 total) and close 23 branches as it seeks to cut costs and improve efficiency. Wells Fargo is cutting more jobs from its Charlotte-area mortgage operation, announcing 91 layoffs in Fort Mill, S.C. InterBank ($2.8B, TX) will acquire The First National Bank of Throckmorton ($35mm, TX). Preferred Bank ($2.1B, CA) will acquire United International Bank ($179mm, NY) for shareholder book value plus $1.2mm in cash. Sunshine Bank ($247mm, FL) will acquire 2 FL branches from First Federal Bank of Florida ($1.2B, FL) for a 1.80% deposit premium. Sunshine gets $56.4mm in deposits and $8.3mm in loans. American Riviera Bank ($230mm, CA) and the Bank of Santa Barbara ($182mm, CA) have agreed to merge for $15.4mm in stock (100%).
While we're on banks - oh, those pesky overdraft fees. Compass Point found a correlation between high overdraft fees and a high level of complaints from consumers. That's crazy because I've never met someone who doesn't love high overdraft fees. Joking aside, what's going on with overdraft fees? Well, there's new rulemaking coming. Compass point evaluated overdraft fees and the impact new rulemaking will have on the potential of lost overdraft revenue for banks. Overdraft rulemaking is expected to take its net step in October 2015 with the final rule coming in 4Q2016.
Housing is "en fuego", which is also the term they use about the salsa at my favorite Mexican restaurant.
"Bidding Wars Return to Home Market" read the headlines. This time, the battles are prompted by too few homes offered for sale, not easy-to-get mortgages.
Single-family rentals now account for 13% of the overall housing stock, up from 9% in '05. In certain markets there are signs of rental overheating. Rents in markets such as Denver, San Jose, and Houston are higher than they should be given underlying real estate values.
And it seems lenders are seeing increased cash-out refis and purchase supply on higher home values, and prepayment activity in higher HARP coupons as previous underwater homeowners sell to get out from their mortgage. If the market continues to make steady progress and to hold up as mortgage rates tick higher, it could lead the Fed to begin tapering reinvestment purchases sooner than the market expects, which is sometime later in the second half of 2016.
The MBA released on updated forecast on originations with purchases upgraded to $801 billion in 2015 from $730 billion and 2016 revised higher to $885 billion from $790 billion. Among other things MBA Chief Economist Mike Fratantoni sagely observed, "...the cash share of purchases has declined...More sales are being financed, and more applications are being approved. And we expect that this trend will continue into 2016 and beyond, as the broader economy and job market continue to improve." Jobs & housing, housing and jobs! And the MBA's forecast on refinance originations for 2015 was unchanged at $551 billion, compared to $484 billion.
As a result, we have an updated MBA projection of total originations at $1.35 trillion in 2015 and $1.26 trillion in 2016 versus $1.12 trillion in 2014. We'll find out the actual 2015 number late in 2016 when the HMDA data comes out.
Remember in school, when you used to always complain about never needing to know anything you learned? Well, now you can use the information. The Federal Reserve will be changing how they calculate the average or effective rate in the federal funds market in early 2016. They have decided to go from a "volume-weighted mean" to a "volume-weighted median." Finally, the fifth grade math vocabulary comes to use. But, this is just a little more important. The Fed decided to use this in an effort "to provide a more robust measure of trading conditions federal funds market." When the fed decides to lift interest rates, the change will come along with two statements: 1. Announcing the policy change and a "separate one outlining exactly what steps will be taken to carry out the decision in the marketplace." The second statement would explain details regarding the settings of the policy tools and the "changes in administered rates."
As we all know, many people focus on the 10-year treasury yield, but what about the 2-year Treasury? Wells Fargo takes a closer look at the 2-year treasury to help investors understand the relationship between nominal GDP, Fed policy and Treasury market. The 2-year Treasury is less prone to volatility. With new capital holding requirements and stronger foreign demand that created supply and demand imbalances within Treasuries have a large effect on the larger notes, the 2-year Treasury was impacted less dramatically. The 2-year yield has begun to rise slightly higher, what does this tell us? Some analysts believe that this slight movement is reason to believe that the Fed will not change the stance of monetary policy anytime soon. However, the changes in the Treasury markets mentioned above, and taking a look at the two different components (term premium and the risk neutral yield) of the 2-year treasury, paint a different picture. Leading up to a tightening cycle, the risk neutral yield has historically served as a good leading indicator of FOMC rate hikes. Wells Fargo believes that "the 2-year yield has become decoupled from nominal GDP due to the exceptionally low rate environment but can still provide some insight into how current economic conditions are reflected in the Treasury market. In today's environment of underpricing risk, make sure to look at the 2-year yield for future rate movements.
Turning to the bond markets and thus interest rates, we had a somewhat unusual move Wednesday: the 2-year and 5-year Treasury notes sold off while 10-year notes and the 30-year bond rallied. For those following the slope of the yield curve, in the past 5 trading days 2's/30's has narrowed by 22 basis points with the 2-year yield gaining 6 bps and the bond yield losing 16 bps. What does that mean? The economic data continues to reflect a somewhat steady U.S. recovery and the relative weakness in 2-yr and 5-yr notes shows investor confidence that the Fed will raise interest rates in response to that data. The relative strength in 10's and 30's may be resulting from a stronger dollar (meaning imported disinflationary pressure) and lower commodity prices as well as confidence that the Fed is minding the inflation threat.
The headlines were grabbed by the FHFA Housing Price Index increasing by 0.4% in May (after rising by an upwardly-revised 0.4% in April) and Existing Home sales surging 3.2% in June to their highest level since February 2007!
Today we've had Initial Jobless Claims (280k was expected, and it came in at 255k, the lowest since 1973). At 10AM EDT we have June's Leading Economic Indicators (expected +0.2% m/m). Wednesday saw a 2.32% close on the 10-year yield and this morning, in spite of the jobs number, rates are lower: 2.31% with agency MBS prices better by .125!
Jobs and Announcements
In jobs news, Ellie Mae is definitely in a growth phase and is looking for an Implementation Project Consultant, field based. The Professional Service Consultant is responsible for working with clients who have requested support regarding their existing Encompass database. This individual will need to have a strong analytical mind and ability to identify issues related by the client, scope out additional opportunities to sell services for the team, provide guidance to clients on Encompass Best Practices based on their business model. The ideal candidate will have 5+ years' experience with Encompass Administration & program/project management. Working knowledge of Salesforce command SharePoint. Ability to travel 50-70% of the time is required
Radian is currently seeking a Sr. Account Manager in the Southern California market. "Radian (which earned $50 million last quarter) connects lenders, homebuyers, investors and loan servicers using a suite of private mortgage insurance and related risk management products and services, and this position is responsible for maintaining and growing existing account relationships within the territory. Specifics include daily sales calls in-person on customers based on a sales call plan. Be able to listen to customers' needs, evaluate their business model, and create value proposition using Radian products and services. Prepare and execute an annual business plan to drive incremental New Insurance Written (NIW). Meet with Retail, Wholesale, and correspondent branch managers to develop relationships and facilitate contract underwriter placements when necessary, Please send confidential resume and inquiries to Kim Martin.
And due to an organizational change, a fully operational, mainly consumer direct lending group is seeking a new home. The optimal parent would be a bank that has a retail residential origination channel but no consumer direct, or one that has no mortgage group currently. The group, located west of the Mississippi, has excellent public customer reviews on Lendingtree and Zillow, can easily accommodate branch referrals and portfolio retention, a long history of successful "on-line" lending, and existing state-of-the-art LOS and sales technology. Its current production is 50%/50% purchase/refi with $120 million in production during in the first half of 2015 at 90% conventional. The group is active in over 20 states and has a fully centralized operation (processing, underwriting and closing) with a highly scalable technology and origination platform. No other information can be released without a NDA, and interested parties should contact cdopportunity@gmail.com for more information or to express interest.
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