Tuesday, April 27, 2010

How Will Mortgage Bankers Survive in 2010?; HUD Online Training; Mortgage Rate and Yield Spread Primer

What are mortgage bankers grappling with as we proceed through 2010?

Buybacks continue on, from both the agencies and large investors. Firms will continue to deal with this (and reserving for repurchase requests) for years to come. A possible requirement to hold up to 5% in capital of any loan securitization has been mentioned, but seriously, not even Bank of America or Wells Fargo could handle this one, much less a small mortgage bank trying to hedge. Depending on geographic area, some mortgage banks are anxiously awaiting the return of an adequately priced and risk-weighted jumbo market, and there have been some steps in that direction lately.

Of major concern, however, is the overall size of the mortgage market in 2010 and 2011. No analyst or investor is predicting increased production in either year versus that of 2009. Many are predicting 2010 to be about half that of 2009, volume-wise. And will margins be twice as much to compensate for it? I doubt it - if anything mortgage companies have shown a tendency to cut margins to the bone in an effort to maintain volumes and keep their staff employed. But the first quarter of 2010 was not all that bad, and the second quarter, although slower, is "ok". So where does that leave the 3rd and 4th quarter? Things could become ugly. Some originators continue to talk about adding production staff, but throwing bodies at diminishing volumes may not be the perfect answer. Some mortgage banks, and smarter minds than mine, are installing metrics to measure both loan agent and branch profitability while they are selectively adding production staff. So that if and when the time comes to smartly reduce staff, they'll be ready.

Kate Berry with American Banker wrote a very good article on 4/14 about pull through. Tightened underwriting guidelines have increased the risk that a loan will not make it all the way through the pipeline. So not only are more hours being spent on processing and underwriting loans that don't qualify, but lenders' hedge costs are impacted by seeing pipelines that many not materialize. The author reports that the MBAA reports that retail loan officers had an average pull-through rate of 64% in the first half of 2009. This means, on the flip side, that 36% fell out, often after having been extended with more hedge costs. Obviously a shorter lock period is better for hedging purposes: it gives the borrower less time to drop out. Also, other companies are pre-underwriting the loan, and running it through QC and compliance, before it can be locked. And on the investor side, whether wholesale or correspondent, lenders are carefully watching their client's pull through rates and base pricing on it.

The Census Bureau actually does something more than hire people. It issues reports! One of its latest updates shows that homeownership rate here in the US fell to an average of 67.2% of qualifying Americans who own homes in Q110, dropping 1bp from 67.3% in Q409. It was the lowest rate since the 67.1% mark in the first quarter of 2000. The rate reached its height in 2005. Is this really a bad thing? I don't think so, although I am not sure what they mean by "qualifying" which is critical. Many argue that "unqualified" borrowers helped put us into this mess. The national vacancy rate for homeowner housing remained almost unchanged from a year ago. Homeowner vacancies reached 2.8% in the South, the highest of any region, and the West followed with a 2.7% vacancy rate. The Midwest was third with a 2.6%, and the Northeast had the smallest rate at 1.8%.READ MORE. SEE CHARTS

Investor changes continue, although there is more focus on documentation rather than changing LTV's and DTI's. GMAC has posted an update to its guidelines which applies to its Conforming, Jumbo, FHA product lines, and has suspended its Conforming IO Flex ARM product. Citi has posted an update to its guidelines which applies to its FHA product line, and has suspended its Agency Community IO product.

Who can't use some additional training?

HUD's Mortgagee Letter 2009-45 announced its "Eclass System" to provide a web-based training to HUD-Approved Lenders, HUD-Approved Housing Counseling Agencies, Non-Profit Housing Counseling Agencies, and HUD staff. Eclass is required to be completed prior attending HUD Loss Mitigation Training. Modules include "Early Delinquency Servicing Activities", "HUD's Loss Mitigation Program Overview", "Special Forbearance Option", "Loan Modification Option", "Partial Claim Option", "FHA's Home Affordable Modification Option (FHA-HAMP)", "Pre-foreclosure Sale Program", "Deed-in-Lieu of Foreclosure", "Extension of Time Requests and Variances", "Single Family Default Monitoring System", "HUD's Tier Ranking System", and "Property Condition and Re-Conveyance Appeal Process". Check out address: https://elcass.hud-nsctraining.com FHA Mortgagee letters can be found online at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

Gone is real estate investment trust American Mortgage Acceptance Company, which filed for Chapter 11 bankruptcy protection. The REIT, which invested in multifamily and commercial property mortgage loans, said in court documents it had assets of about $6.4 million and liabilities of about $120 million versus assets worth $666 million in 2007.

For the most parts folks in the business know that mortgage rates are not pegged to the 10-year Treasury note, but Secondary Marketing staffs are occasionally asked, "How are mortgage rates set?" Agency mortgage rates are based off of Mortgage-Backed Security (MBS) pricing, which, although they are usually traded as a spread off of Treasury securities, are influenced by many different factors. Interest rate expectations, supply and demand, inflation expectations, tax rates, and prepayment & delinquency expectations all are factored in. After all, MBS's are not, in theory, backed by the US government but instead are backed by borrowers. Unless the United States heads down the path of Greece, rates on Treasury securities will always be less than rates on mortgages. Unfortunately, our government is spending about $1.50 for every $1.00 it brings in, and our debt is almost 60% of GDP - neither of which are conducive to lower yields in general. MORTGAGE RATES PRIMER and YIELD SPREAD PRIMER

Not much happened in the markets yesterday. The $11 billion 5-yr TIPS auction went "ok" or was "sloppy" depending on who you ask. News from Greece and the Euro continues to push the markets, as it very well may for months to come. Concern over sovereign credit risk also dragged down the euro and Greek bank stocks and pushed the cost of insuring Portugal's debt to new highs, underlining concerns that it could be the next euro zone state to suffer a debt crisis. The backing of Germany is vital for any aid package. And no one knows what is going to come out of the financial reform measures that are being debated in Congress. Of interest to folks who follow the news of mortgage investors, the US Treasury plans to start selling off its 27% stake (7.7 billion shares) in Citigroup, and Morgan Stanley has the authority to sell up to 1.5 billion common shares. As you'd expect, this pushed Citi's share price down.

There might not be much happening today either, although we do have this auction to get through: $44 billion 2-yr's today ($44 billion 5-yr tomorrow, and $32 billion in 7-yr's Thursday). Traders are continuing to report that "Non-agency spreads grind tighter in the absence of meaningful supply" meaning that non-Fannie, Freddie, and FHA loan production is slow, and the demand for it may be picking up a little. But who is going to trust a rating agency evaluation of any new securities? Don't look for much from the FOMC meeting tomorrow, as overnight rates will remain unchanged. Currently the 10-yr is at 3.75% and mortgage prices are better by between .125 and .250.

A husband in his back yard is trying to fly a kite. He throws the kite up in the air, the wind catches it for a few seconds, and then it comes crashing back down to earth.

He tries this a few more times with no success.

All the while, his wife is watching from the kitchen window, muttering to herself how men need to be told how to do everything.

She opens the window and yells to her husband, "You need a piece of tail."

The man turns with a confused look on his face and says, "Make up your mind. Last night, you told me to go fly a kite."

How Will Mortgage Bankers Survive in 2010?; HUD Online Training; Mortgage Rate and Yield Spread Primer

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