Interest rates, falling production and policy weigh on mortgage industry


When asked about the most pressing issues facing the US mortgage industry, participants at the Mortgage Bankers Association Secondary Market Conference refer to a familiar worry list.  Chief among them is the aggressive action from the Consumer Financial Protection Bureau, which one large seller servicer says has changed its approach to the mortgage industry not at all since the election of Donald Trump.

“These people at the CFPB have no idea how our industry works and they do not appear to care,” the top-ten seller/servicer said.  “They only thing that the CFPB seems to be interested in achieving is levying penalties and issuing enforcement actions.  How can we invest in new technology and systems if nobody in the loan servicing sector is making money?”

One bright spot noted by several market participants is that with PHH Corp, Quicken and now Ocwen all fighting the CFPB in court, the mortgage industry seems to be shedding its reluctance to fight excessive regulation.  Many participants expect to see significant changes at the CFPB once its director Richard Cordray departs, but until then it is “business as ususual,” according to an official of a large bank aggregator.

One major concern among mortgage bankers is the direction of interest rates for the duration of 2017.  The sharp rise in the 10-year Treasury following last year’s election has dramatically slowed new loan originations, causing many seller/servicers to lay off staff focused on mortgage refinancing volumes.  Most participants said that the 10-year Treasury would need to go down to 2% or lower before refinancing volumes would really come back.

Another related topic is the state of the Federal Housing Administration (FHA) market in the wake of last year’s changes to the Ginnie Mae acknowledgement agreement.  Many market participants welcomed the change, but they note that the basic posture of the FHA when it comes to reimbursement of advances, for example, has not really changed significantly.

“There is a reason why there are so few bidders for GNMA servicing,” one veteran industry observer said.  “Until the federal government starts to address some of the concerns of servicers and investors, the poor liquidity in the market for GNMA servicing is unlikely to change.”  And more than several MBA Secondary participants expressed concerns that we will see more smaller servicers exiting the GNMA market this year. 

With the MBA estimating just $500 billion in refinancing transactions in 2017 compared with $900 billion last year, the projected 10% growth in purchase loan originations to $1.1 trillion in 2017 will not nearly take up the slack, say conference participants.  “All of the parts of the industry food chain are working extra hard to fill up the production pipeline,” notes one bank aggregator.  “The GSEs continue to be at a disadvantage compared with GNMA execution.”

One topic that virtually nobody raises as a priority for 2017 is GSE reform, the subject of an extensive paper by the MBA and a panel at the conference.  While virtually everyone asked would like to see the situation with the GSEs sitting in conservatorship resolved, none are seeking a fundamental change in how the conforming market functions.  Generating business is the top priority of most attendees at the MBA this year, a stark change from the comfortable position that many firm’s had in terms of production this time last year.

Last week President Trump announced he intends to nominate Pam Patenaude to be Deputy Secretary of HUD, a move that drew some measure of relief from MBA Secondary attendees.  The question of who will be tapped to lead GNMA is front of mind for many industry players, however. 

Regulatory reform is another hot topic at the top of the list of conference attendees.  House Financial Services Committee Chairman Jeb Hensarling (R-TX), has formally introduced his bill to the new Congress, H.R. 10, which is version 2.0 of the Financial CHOICE Act.

The legislation would  restructure the CFPB by taking away its supervisory functions and allowing the president to fire its director at will, and contains MBA-supported legislation to permit transitional licensing under the SAFE Act as well as higher tolerances for points and fees under the Qualified Mortgage rule.     

One rising topic for MBA participants is MA, as many non-bank seller/servicers have put themselves up for sale.  Given the volatility of the financial markets and particularly interest rates, getting a good read on where agency or government servicing assets should be changing hands is not easy. 

Despite claims early in the year that the mortgage for mortgage servicing rights had settled down, in fact the bid-offer spread for GNMA MSRs remains extremely wide, from the mid-two times range in terms of cash flow multiples into four times.  For most non-bank firms, the MSR is the only significant capital asset.

“If you want a good barometer for change in the mortgage industry, just watch spreads on agency and GNMA servicing in the secondary market,” notes one bank servicer. “When the spreads come in, then folks in Washington will know that they are headed in the right direction with reform.”




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