Bank Mergers; A Primer on Odd Rate Sheet Pricing; Demand for Non-Agency Loans Picks Up

Once
again the banking mortgage industry makes headlines – for the
wrong reasons
. Poppi Metaxas, the former president and chief executive
officer (CEO) of Gateway Bank, FSB, of Oakland, CA, has been indicted for bank fraud, bank fraud conspiracy, and perjury. Here you go.
And she is not the only one looking at doing hard time in the Big
House. Here’s another bank executive, this one in Arkansas, in trouble
for mishandling funds. Bring on the Habitat for Humanity and Wounded Warrior stories!

On the job side, private mortgage insurance company Genworth Financial is seeking an experienced Account Manager in its Northern California territory.
Candidates should have exceptional customer interaction skills as well
as a proven track record of sales execution and leadership. The person
hired will be expected to provide the highest level of internal and
external customer service, manage customer relationships and develop
growth strategies for assigned accounts, develop calling plans to cover
all assigned accounts, monitor branch volume and calling activity and
take necessary actions to achieve account volume goals, execute and lead
implementation of Genworth products and initiatives, identify and
communicate new opportunities to provide solutions to customer needs.
The ideal candidate will have 4+ years of experience in a regional or
territorial sales role, have a college degree or equivalent
industry/sales experience, great presentation and communication skills,
and have the ability to work flexible hours with occasional overnight
travel. Candidates should contact Kristin Miller at Kristin.Miller@genworth. com.

The
number of banks in the United States grows smaller every week. Not
because they are being shut down and folded into others, but because of
mergers and acquisitions.
I am sure that we can expect the same in residential lending as smaller
firms decide the costs are too great to go it alone and join forces
with larger companies, and/or owners decide to take the proverbial chips
off the table. But returning to recent bank news, in Minnesota
KleinBank ($1.6B) will acquire Prior State Bank ($206mm) for an
undisclosed sum. The parent company of Platte Valley Bank ($445mm, NE)
and two other banks will acquire Mountain Valley Bank ($157mm, CO) for
an undisclosed sum. In Virginia Middleburg Bank ($1.2B) will sell its
62% stake in mortgage banking firm Southern Trust Mortgage to Sonabank
($716mm), EVB ($1.0B), and executives of the mortgage firm. Arkansas’s
Simmons First National Bank ($3.2B) will acquire Delta Trust Bank
($431mm) for about $66mm. William H.W. Crawford IV, President and CEO of
Rockville Bank and Rockville Financial, Inc. and Richard B. Collins,
United Financial Bancorp, Inc.’s Chairman, President and Chief Executive
Officer, today announced that the Connecticut Department of Banking has
approved Rockville Bank’s application to merge with United Bank of West
Springfield, Massachusetts.

In
Connecticut, Bankwell Bank ($781mm) will acquire Quinnipiac Bank
Trust Co. ($99mm) for about $15mm in cash (25%) and stock (75%). In
Texas, PlainsCapital Bank ($8.4B), and owner of PrimeLending, will acquire brokerage and financial firm SWS Group ($3.9B) for about $260mm. SWS owns Southwest Securities, Inc.
and other entities and has 900 employees. In other banks news,
Community Mutual Savings Bank ($263mm, NY) has filed a lawsuit against
Customers Bank ($4.2B, PA) for terminating a previously announced
merger. Community Mutual is seeking a $1mm termination fee and
reimbursement of legal fees from customers. United Midwest Savings Bank
($180mm, OH) will sell a branch to Heritage Bank, Inc. ($495mm, KY) for a
1.75% deposit premium. Fairfield National Bank ($440mm, IL) will sell a
branch to The Peoples State Bank of Newton ($350mm, IL) that has $12mm
in deposits and $2.7mm in loans. In Wisconsin, First Federal Bank of
Wisconsin ($120mm) will merge with Bay View Federal Savings and Loan
Association ($135mm), as both entities seek to expand and reduce costs.
And Gateway Bank FSB ($212mm, CA) will sell a branch to Cathay Bank
($11.0B, CA) for an undisclosed sum.

Speaking of banks, I received this note from an LO out in California. “Rob, what are you hearing about Union Bank offering special pricing to borrowers of Asian descent?
I have lost 3 deals on .250% in rate. Not in price, mind you, but in
rate. Can that happen in this day and age?” Well, Union Bank does have
Asian ownership. Although I have trouble believing this pricing break, I
have received similar notes from a couple other LOs in California. One
of the LOs said that she’d heard that Union was not meeting its minority
lending criteria. But this is way, way above my pay grade to barely
discuss, and I have not seen anything in writing. If you’d like to press
the issue, here is the CFPB’s whistleblower site.
If this happening it would be surprising, and perhaps the CFPB is
probably already looking into it by looking at lock prices for similar
loans on the same day.

Pricing aside, let’s take a look at something odd occurring on rate sheets everywhere.
I received this note: “Rob, the difference in my rate sheet prices has
gotten way out of whack. (Editor’s note: why doesn’t anyone say, “In
whack”?) In the past it was about .5 for every .125%, but now the price
differences are all over the map, but much higher. What is going on?” I
am happy to answer that question, which basically involves several
aspects of the capital markets, and simplify it somewhat – but it is a
complex topic. That being said, every LO worth their salt should know a
little about this topic in order to converse with the secondary
marketing group.

To
start, every agency loan across the nation is priced to the sum of the
price of the mortgage-backed security into which it will be placed
(think of them as buckets), the value of its servicing in the market,
and the sum total of loan level price adjustments. Oh, and we can’t
forget profit margins. The agency MBS market is liquid, its prices easy
to obtain. (Due to an archaic but accepted method, MBS prices are quoted
in 32nds; thus 99-16 equals 99 and 16/32, or 99.50, 99-08 is 99.25,
etc. For this write-up, we’ll switch to guns, uh, I mean decimals.)
After converting to decimals and rounding a little, a recent price run
showed Fannie 2.5s at 92.50, 3.0s at 96.50, 3.50% at 100.625, 4.00%
securities at 104.00, and 4.50% securities at 106.75.

So
far so good. Investors will pay more for pools of higher rate/yielding
mortgages, which makes sense. (The math is actually more complex, but we
can talk about that, and how mortgage rates are set, some other time,
like partially in tomorrow’s – Saturday’s – commentary.) But something
smells fishy
, and it is not my cat Myrtle’s wet food. I did the math,
and the differences between the securities/buckets, spaced .5% apart,
are 4.0 points, 4.125 points, 3.375 points, and 2.75 points. In the “old
days”, lenders could basically count on a ratio of 4:1, so that every
.125 in rate equated to .5 in price (4x.125). This was because the
security market priced MBSs that way through supply and demand. It was
pretty much linear around 100.00 but got a little flighty away from par
which we will conveniently ignore. So using the above example, prices
might have been more like Fannie 2.5’s at 96.625, 3s at 98.625, 3.5%
securities still at 100.625, 4% securities at 102.625, and 4.50%
securities at 104.625.

So
there are big differences between where security prices are trading now
versus where they were in the past, relative to each other. We still
have the value of the servicing (usually higher for lower rate loans,
given the tendency to stay on the books longer), the loan level price
adjustments, and the profit margins. Every lender out there has the same
MBS market prices as a base. After that, anything goes! Investors in
servicing might value servicing different for different agencies.
Investors and/or aggregators may have different loan level price
adjustments, including buyup and buydowns (which are much higher and
punitive now than in the past) and different profit margins. And note
that, for the most part, we’re not seeing these price differences as much in jumbo pricing: the difference in .125% in rate is much closer to the historical norm of .5 in price.

Yes,
lenders set their own profit margins and control their own overhead,
but unfortunately for scores of capital markets personnel who set rates
and prices every day, they are at the mercy of the agencies, who set the
LLPAs and buyup/buydown grids, and large investors, who set the value
of servicing and their own profit margins.
And let’s throw in some additional nuances. Let’s say a particular bank
is behind in satisfying its CRA requirements. It will either cut its
profit margin on those loans, or increase the pay-up to sellers in order
to increase the flow of that business. And while that is happening,
other investors have to compete. There will be more information
tomorrow, but if you have more questions, ask your capital markets
person about “convexity.”

It’s
no secret that many equity firms have started to monetize the poor
housing market
with a basic business model of: buy distressed homes,
lease them, securitize them, repeat. So much so, that Congress has
started to take notice. As a reminder, in late January a Bloomberg
article entitled “Wall Street Bonds Draw Scrutiny Where Subprime Spread,”
John Gittelsohn and Heather Perlberg write about this niche practice
which has become known as “Rental Bonds”; a practice which has caught
the attention of first-term Congressman Mark Takano. “Deutsche Bank AG
led the first rental bond sale in November, raising $479 million for
Blackstone’s Invitation Homes, which has spent more than $7.8 billion on
41,000 homes. Goldman Sachs, JPMorgan and Wells Fargo Co. are now
preparing to sell as much as $500 million in bonds for American Homes 4
Rent (AMH), the second-largest landlord, with more than 21,000 homes.
JPMorgan and Credit Suisse Group AG are working with Colony American
Homes Inc., a property company run by Tom Barrack that owns more than
15,000 rental houses.” The implications of such practices remind many of
similar practices leading up to 2008, and call into question similar
fiscal responsibilities of buyer and sellers alike.

In the realm of securities financing, “nearly one-half of dealers reported an increase in demand for funding of non-agency residential mortgage-backed securities
(RMBS), and two-fifths of respondents also noted increased demand for
term funding against such collateral,” the Fed said. Here is the “SCOOS”
report
released by the Federal Reserve yesterday.

Supply
and demand drives mortgage prices, and the market activity Thursday was
forgotten after the unemployment data this morning. As a benchmark, the
yield on the U.S. 10-yr T-note closed Thursday at 2.79%, and prior to
the numbers it was unchanged at 2.79%. Nonfarm
Payroll came in at +192, but January was revised +15k and February
+22k, for total revisions of +37k. The Unemployment Rate came in at
6.7%, and Hourly Earnings were unchanged. Right after the data rates improved slightly, and the 10-yr is down to 2.78% and agency MBS prices are a shade better.

Article source: http://www.mortgagenewsdaily.com/channels/pipelinepress/04042014-mortgage-prices.aspx

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