In non-residential news, just because people have to eat doesn’t mean every grocery store chain thrives. There is chatter out there in the commercial sector that Southeastern Grocers (think Winn-Dixie, Bi-Lo, Harvey’s, Fresco y Mas) could be heading for a bankruptcy filing. The firm has a significant amount of debt maturing over the next two years: Supermarket News.

Servicing News and Primer

Wells Fargo has about $1.5 trillion in servicing. But non-banks have certainly jumped convincingly into the top 10, with LoanCare, Lakeview, Quicken, PennyMac, and others. Wells and US Bancorp have recently seen some rare growth in mortgage servicing portfolios, however, and the two of them report a sequential improvement in their total mortgage servicing portfolios for Q3 2017 - making this the first time in more than four years that two of the nation's five largest banks bucked the industry-wide trend of quarter-on-quarter declines in this figure.

As noted in yesterday's commentary, New Residential is purchasing Lewis Ranieri's Shellpoint, which purportedly includes lender/servicer New Penn Financial and all "related" Shellpoint entities. Shellpoint, a player in the subservicing market with all agency servicing approvals, has $50 billion of servicing-related contracts on its books owned by various entities. Its 2017 annual origination volume is expected to be $6.6 billion, which includes New Penn. According to figures compiled by Inside Mortgage Finance, New Residential ranks fifth among all residential servicers with $343.0 billion of contracts at Sept. 30.

Servicing valuations are influenced more by the cost to service than prepayment speeds. The cost to service has become more impactful to valuations than prepay speeds! Do the math - if you have a $300K FHA loan, Servicing can be valued around 4:1 - call it 2 points, or $6,000.  This is all buried in the net price that the consumer receives. 

Let's say that loan is a low FICO with scant reserves - a very high propensity to default....  When that loan trades in the servicing market, the potential dollar loss that the FHA servicer needs to absorb (due to HUD not having clarity on certain servicing guidelines, and how and when they will pay the costs, versus what the servicer must absorb) can easily eclipse the $6,000 investment. 

Loan officers should know that the value of mortgage servicing rights (MSR) changes almost as often as bond prices in the mortgage-backed security market. The MSR value is the sum of a present value of the future income streams from all mortgage servicing related cash flows, and is impacted by assumptions on prepayment speeds, mortgage age and type, and the rate as which these cash flows are discounted. As a result, the value of the MSR for the same pool of loans may vary company by company.

The most significant driver of mortgage servicing rights value is actual and anticipated portfolio prepayment behavior. As interest rates rise, prepayment speeds generally slow, and as interest rates decline, prepayment speeds generally accelerate as borrowers often elect to prepay their mortgage loans by refinancing at lower rates. Because residential mortgage loans typically contain a prepayment option where borrowers can pay off their mortgage prior to scheduled maturity, the stream of cash flows generated from servicing the original mortgage loan is terminated when the loan is paid off.

As such, the market value of mortgage servicing rights is very sensitive to changes in interest rates, and tends to decline as market interest rates decline and increase as interest rates rise. When mortgage loans are paid off or expected to be paid off earlier than originally estimated, the expected future cash flows associated with servicing such loans are reduced. To determine value of MSRs, companies use models that divide the servicing cash flows into the servicing fee, the net cost to service, the float on taxes and insurance, the float on principal and interest, the gain from prepayments, and the loss due to compensating interest, but it can never be an exact science as the market is always moving.

Capital Markets

In terms of yesterday's bond market, yesterday there was some minor intra-day volatility - not enough to impact borrowers, but trading was influenced by a strong GDP (Gross Domestic Product) and a strong Pending Home Sales figure. Measured by GDP, economic output grew at its strongest pace since the first quarter of 2015, driven by a pickup in both consumer and business spending, and despite the disruptions created by the hurricanes. The 10-year note price worsened almost .375 to yield 2.38% while 5-year notes and agency MBS prices worsened about .125.

Today we'll have the money supply! Just kidding, but remember that? This morning we've already had October Personal Income (+.4%) and Spending/Consumption (+.3%) and Jobless Claims (-2k to 238k). The core PCE price index was +.2%, tame. After this commentary goes out is the Chicago Purchasing Manager's Index - hardly a market mover. After the early round of numbers, which were a shade strong, we find rates slightly up from last night: The 10-year is yielding 2.40% and 30-year agency MBS prices are slightly worse.

Employment and Products

For brokers, Endeavor America Loan Services is now accepting Fannie Mae's higher loan amounts effective immediately. If you are interested in working with EA, please contact SVP of Wholesale Sales James Hooper.

The Capital Markets Division of Mortgage Industry Advisory Corporation (MIAC) is pleased to announce that its whole loan trading desk successfully placed $50,000,000 of newly originated 1/1 ARMs on a servicing retained basis. MIAC's whole loan brokerage team leverages MIAC's advanced pricing analytics for re-performers, NPLs, non-QM, S&D, CRA and ARM mortgages. Synchronized with its whole loan brokerage capabilities, MIAC is the largest independent provider of fair-market valuations for residential, commercial and consumer loans. For additional information, contact Steve Harris.

loanDepot announced a partnership with an industry-leading real estate platform, OfferPad - a direct home buying and selling platform serving buyers known as "internet buyers" or "iBuyers". The company is pleased to partner with OfferPad to further enhance the real estate transaction experience. OfferPad has garnered numerous awards for its innovative approach to the home purchase transaction. Their motivation to shape and improve the future of the home buying experience aligns with loanDepot's desire to change the way America thinks about lending. This unique opportunity to explore what's possible between their core strengths is designed to make a significant improvement in the way that homes are bought and sold. As mortgage and real estate professionals know, the home transition period can be a stressful time with all its moving parts. This union between OfferPad and loanDepot is designed to take the stress out of the transaction and make for a seamless home to home transition. Contact Cassidy O'Sullivan to learn more.

In retail news, "to win market share in the year ahead, align yourself with Planet Home. Get great pricing fueled by the best secondary marketing technology in the country. Head into 2018's rising-rate environment with the support of a dedicated marketing team, plus embedded processors and underwriters working hard to get your loan files into closing as fast as possible. Branches that are well-established in their markets, purchase-money driven, and poised for growth and increased market share can reach out confidentially to John Cutajar to see pricing in their markets (949.860.1925)."

GSF Mortgage Corp. has recently launched its Single Close Construction Program for FHA, VA, and USDA construction lending. Since its launch, GSF has approved more than 60 builders to offer their products. This low down payment construction option is a great alternative in markets that are strapped for inventory. GSF Mortgage is one of the few lenders in the country offering new construction lending for the 100% LTV USDA product. If you are a branch manager, loan originator or processor with construction lending experience or would like to offer construction lending products please, reach out to Rich Obermeier at (262) 957-8901.

According to the MBA, originations will be down massively in 2018, from $2.1T to $1.6T. The upside however is that 75% will be in purchases. Success won't be about rate, it will be about experience. A new paper, "Happy Borrowers: Achieving Financial Success with Customer Satisfaction" explores new research that highlights the three driving factors of borrower satisfaction and how it is linked to financial return. Exclusive to Rob Chrisman subscribers today, it's a must read for all mortgage leaders and their teams. Download your free copy here.

The mortgage industry has seen record-high expenses for loan production this year and upfront costs will continue to rise in 2018, placing more pressure on lenders and banks to increase their production revenue and absorb those ever-rising costs. To help their clients meet their bottom line and streamline the loan process, Informative Research developed the Verification Bundle as a simple, cost-effective solution. With the Bundle, you can create a custom package from IR's wide range of solutions and data partners and combine everything into one invoice for a discounted rate. Not only does the Verification Bundle provide a more affordable, straightforward credit report fee, it also saves you from the logistical stress of managing multiple vendors. Get in touch with them today for more details on how you can potentially save thousands of dollars!