Are you wearing an Apple watch to that important business meeting? Maybe you shouldn’t, unless you don’t mind people listening in. How much does it cost to defend yourself against a Department of Justice lawsuit? I'm sure Moody's Corp. rating agency has thought about the cost of a civil suit, as it is about to pay for it. You can bet that Fitch is watching closely; S&P settled last year for $1.5 billion. Gee, inflating ratings to gain business from lenders & banks? The question is, has that model been fixed by those doing it ten years ago?

Recently the commentary mentioned earnings from the big banks, specifically their mortgage operation. What about smaller, but still large, banks - how are they doing mortgage-wise? We had three good examples this week. U.S. Bancorp's profit, on earnings of $1.5 billion, was lifted by mortgage refinancing. Mortgage banking revenue increased 40% from last year on increased refinancing activities driven by lower longer-term interest rates. Unfortunately for it and other banks, the continued low interest rate environment isn't helping other areas. For example, net interest margin (NIM), an important measure of lending profitability, continued to fall, hitting 2.98% from 3.02% in the second quarter and from 3.04% last year on higher average cash balances. Fee-based income rose 4.5% due to higher mortgage banking revenue, trust and investment management fees and card revenue.

BB&T Corp. saw similar things. An increase in home-lending activity at BB&T Corp. helped a surge in mortgage earnings. Residential mortgage banking income was $188 million before taxes, more than doubling from $71 million in the second quarter and $93 million in the third-quarter 2015. The bank attributed the improvement in mortgage income "to net mortgage servicing rights valuation adjustments and higher production volumes." Margins are what counts but volume was also solid: during the period that began on July 1, 2016, and ended on Sept. 30, residential loan originations came to $6.264 billion. Business climbed from $5.605 billion in the prior three-month period and $5.039 billion in the year-prior period. In the nine months ended last month, mortgage production amounted to $15.471 billion. Retail originations accounted for $2.4 billion of third-quarter 2016 production, while correspondent purchases made up $3.9 billion. Refinance share was 43 percent during the latest three-month period, the same as in the second quarter.

BB&T's servicing portfolio has been around $122 billion for over a year, with loans serviced for others accounted for $90 billion of the most-recent total servicing portfolio. Using my HP-12C that means BB&T owned about $30 billion in residential mortgages as of the end of last month. Unfortunately, mortgage delinquency of at least 30 days was 3.69 percent as of Sept. 30, 2016 this number has caught analyst's eyes. Delinquency deteriorated 5 basis points compared the three months prior and 90 BPS versus one year prior.

And SunTrust Banks reported a net income of $457 million in the third quarter, down slightly from the second quarter. But revenue hit $2.2 billion, up $10 million from the last quarter and $78 million from last year. Of that, $7 million was due to an increase in mortgage production income, which in turn was attributed to higher funding volumes. Noninterest income increased $78 million, or 10% from last year, to $889 million, driven primarily by growth in mortgage and capital markets-related income. Residential mortgage is up 7% to $1.8 billion year-over-year. Everything isn't rainbows and unicorns, however: bucking the general improvement in mortgage delinquencies, SunTrust's total residential nonperforming loans increased from $318 million last year to $429 million this year.  

Speaking of returns, at this point most in the industry know that Freddie and Fannie don't retain their profits. (It's been a sweet deal for the U.S. Treasury who sweeps up earnings in the form of a dividend.) But just as underwriters want borrowers to have cash reserves after buying a home, one can't expect F&F just to venture off on their own without saving up some capital ahead of time. Gotta make hay while the sun shines and they're earning billions!

With that in mind, the CBO Report on GSE capital retention came out last week. The report on GSE capital retention. The CBO found that there would be a roughly $85 billion budgetary cost to capital retention given the terms under the Third Preferred Stock Purchase Agreement. On the other hand, as Isaac Boltanksy points out, the CBO noted that capital retention would lessen the market uncertainty associated with potential GSE draws and even "loosen credit availability slightly." He opines that it is unlikely to materially shift the underlying dynamics driving the GSE policy conversation.

Citi Correspondent has updated credit overlays for its conventional and government loans.

Flagstar Bank announced improvements to the Fannie Mae Fixed Rate, Doc. #5301 and Freddie Mac Fixed Rate, Doc. #5302 products. Loan to value (LTV) requirements on 1-unit investment purchases will be increased from a maximum of 80% to a maximum of 85%. Effective immediately on Flagstar underwritten loans that are currently in underwriting, page 2 of the Social Security Number Verification form #3257 (SSA-89) which includes the required Privacy Act and Paperwork Reduction Act statements will be required for any transaction requiring Social Security Verification. The Social Security Administration will begin rejecting requests that do not have the second page starting November 1, 2016.

Franklin American has expanded its Conventional High Balance Fixed Product to include 20 and 25 year terms effective immediately. Due to inactivity, the Conforming 10/1 ARM will be suspended until further notice. Effective with locks beginning October 14th, Franklin American updated its USDA/Rural FICO adjustments.

For all new Agency and M&T Treasury loans registered on or after October 20th, if an underwriting analysis of a self-employed borrower's business tax returns and/or K-1's show the income not to be stable, the underwriter must now complete a new "Business Liquidity Test" to determine liquidity for continued payment. M&T will define stable income as a decrease of more than 10% or increase of more than 25% from the previous year's earnings.

Paramount Residential Mortgage Group has Non-Agency niche Conforming and Jumbo products for Wholesale Originators. View its Product Profile Updates for details.

Any one doing conventional conforming product knows all about private mortgage insurance. And those folks took notice with the announcement that China Oceanwide will be acquiring Genworth Financial. (Isn't the first, won't be the last, big name in mortgage being purchased.) Genworth stated that at $5.43 per share the all-cash transaction offers greater and more certain stockholder value than other "actionable alternatives." Apparently, if it goes through, Genworth will receive $1.1 billion in additional capital commitment, enabling debt reduction and cash infusion to the U.S. life insurance biz. Folks were quick to note that it is a good deal for shareholders given GNW's challenging situation that was exacerbated by the $400-$450m p/t long term care reserve charge. Regulatory approval is a legitimate deal risk - but nothing that $1.1 billion can't help with, right?

Who is China Oceanwide Holdings Group Co., Ltd.? It's a darned big company. Do they have mortgage insurance in China? Darned if I know. But China Oceanwide has agreed to acquire all the outstanding shares of Genworth for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The acquisition will be completed through Asia Pacific Global Capital Co. Ltd., one of China Oceanwide's investment platforms. "As part of the transaction, China Oceanwide has additionally committed to contribute to Genworth $600 million of cash to address the debt maturing in 2018, on or before its maturity, as well as $525 million of cash to the U.S. life insurance businesses. This contribution is in addition to $175 million of cash previously committed by Genworth Holdings, Inc. to the U.S. life insurance businesses.

Rates? Yup, up, down, all around. But we had a quiet Friday, and kind of a quiet week when all was said and done. Harkening back to Friday the 10-year note closed 2 ticks higher in price, closing at 1.74%; everything else was nearly unchanged as far as borrowers could see on rate sheets.

Despite the conference in Boston I know more than a handful of very successful CEOs who are spending their time wooing personnel early this week while their staff attend the conference. We have an entire week of sustainable, farm-fresh economic updates starting with today's Chicago Fed National Activity Index. We also have four Fed Presidents speaking, although it is thought they will say little that hasn't been already said.

Tomorrow is a gaggle of housing news (FHFA House Price Index and the S&P CoreLogic numbers from August) with Consumer Confidence thrown in. Wednesday the MBA is managing to rush back from the conference and put out its usual weekly application data, along with New Home Sales; we'll also have some trade figures and some 2nd and 3rd tier figures. Thursday we'll have the usual jobless claims, along with Pending Home Sales. Plated up for Friday we'll see the Employment Cost Index, 3rd Quarter Gross Domestic Product, Core Personal Consumption Expenditures, and some University of Michigan figures about the economy.

After all of that you can be guaranteed that rates will be lower, higher, or the same by Friday. To start the week, we find the 10-year at 1.73% with agency MBS prices a shade better versus the end of last week.


Jobs and Announcements

SocialSurvey is hiring a Mortgage Industry Software Sales Executive. "SocialSurvey provides a platform for our clients to collect customer feedback, share it on social media, boost SEO, retention, recruiting, and social proof.  With over 10,000 users in the first year of business, this is a great opportunity for somebody with the right experience and contacts. If you can get us the meetings, we can help make you a rock-star. SocialSurvey is offering salary, commission and equity to the right candidate. If this is fit for you, or you know somebody, send confidential resume and contact info to Scott Harris."

How quickly do consumers expect a company to respond to their online inquiries? How well does the mortgage industry meet that expectation? Recently, InSellerate, a Sales Automation System designed specifically for the mortgage industry, researched these questions. They sent digital inquiries to 1,029 mortgage companies scheduled to attend the 2016 MBA Expo. The results found that most companies did not meet consumers' expectations. While 72% of consumers expect a company to respond to an online inquiry within an hour or less over 64% of the companies contacted did not respond to the inquiry at all. Of those companies that did respond, half of them failed in meeting the deadline. For a summary of the findings, click here, or if you are attending the MBA Expo and want to see your company's response time visit InSellerate at booth #928.

PCLender, a leading loan origination software system (LOS) provider, has announced the release of its next generation LOS. The new system supports consumer direct, retail, wholesale and correspondent business channels, has a new user interface, and provides many new features such as paperless document management, investor delivery and record archiving. It's the LOS that's helped Movement Mortgage reach its goals as the mortgage lender scales nationwide. Per PCLender CEO Lionel Urban, "The system can be customized very easily, so that small to medium lenders don't need to have in-house IT people customize their LOS systems." Industry best practices are pre-configured, and fine-tuning is as simple as tweaking the presets that come built-in. Rapid improvements to origination technology over the last two years, combined with the large-scale withdrawal from the mortgage market by the largest banks, has led to what Urban refers to as "a potential golden age for mid-size and smaller lenders."

Ivy Zelman writes, "I hope you are having a great week. It's been an exciting one for Cleveland fans with the Indians headed to the World Series for the first time since 1997. I wanted to personally reach out to tell you about an exciting new product we launched called The Z Report. My goal for this newsletter is to provide the industry with a thoughtful and credible, high level go-to source for overall key housing topics. This 1-minute video further explains my vision. For example, it appears that the long-term increase in Asian and Hispanic homeownership rates is under appreciated, and that the government data on single family starts is wrong and is understating the double digit new order growth reported by builders. We are confident that you and your board members, as well as key senior executives, would reap the benefits of the in-depth analysis that The Z Report provides, concisely summarizing our abundant Institutional Zelman Research. Hope you can check it out or sign up for a free trial here ­ we are excited about it!