MGIC & Radian earnings; Trends in Borrower Equity; CFPB, HMDA, & 44 lenders

Here’s a letter that, as a lender, you probably don’t want to receive from the CFPB. Remember that the CFPB runs HMDA now, and fired this shot across the bow to 44
lenders. “The letters say that recipients should review their practices to ensure
they comply with all relevant laws. The companies are encouraged to respond to
the Bureau to advise if they have taken, or will take, steps to ensure
compliance with the law.” (I was unable to pull up the actual letter – must be
my computer.)

What have recent 3rd quarter earnings announcements from
those feisty private mortgage insurance companies told us about industry trends?

Investment Corp. beat some estimates due to
lower incurred losses driven by positive reserve development and higher net
premiums earned. NIW (new insurance written) was strong at $14.2 billion vs.
$12.4 billion a year ago, and book value increased to $7.48 from $7.37 in 2Q.
Net premiums earned was $237 million with what looks to be an average premium
margin of 53 basis points. MGIC’s single premium percentage fell to 18% from
21% in 2Q. Incurred losses were $60.9 million, up from $46.6 million last quarter
and down from $76.5 million in 3Q15. Paid claims fell to $161 million from $172
million in 2Q16. Management expects to generate NIW of $46 billion in 2016, and
IIF (insurance in force) is expected to grow by 4-5% this year, vs. previous
expectations of 5% growth. Management noted that it has not seen any signs of
market share shifts given ACGL’s acquisition of UG, but expects opportunities
to arise once the deal closes. The company noted its market share for 3Q was

Group Inc. did well also and saw
higher net premiums earned, partially offset by a higher loss provision, than
analysts were expecting. The higher net premiums earned were because of NIW and
IIF both ahead of forecasts. In terms of credit (mortgage insurance), the loss
ratio came in at 23.6%, paid claims came in at $83 million, and the loss
reserve fell to $822 million from $848 million. Net premiums earned of $238
million, NIW was $15.7 billion (up from $12.9 billion in 2Q and up from $11.2
billion Y/Y), and single premium rose to 27% from 26% in 2Q. It appears that
Radian’s average premium margin was also about 53 basis points. Premium revenue
was stronger than anticipated, driven by a benefit from accelerated single
premium revenue recognition, while losses incurred were weaker due to a smaller
benefit from reserve adjustments. Most notably, new insurance written was up
40% year over year, better than 15% growth for MTG, and driving acceleration in
the pace of insurance-in-force expansion. 

Yesterday the commentary
discussed collateral and appraisals, and reminded readers about the Five
C’s of Credit: capacity, capital, collateral, conditions and character. Let’s see what’s going on with capacity with a slight
twist – do borrowers have the equity?

LOs know that when it comes to
financing residential real estate, no two transactions are the same. For that
matter, no two borrowers are the same. This is especially true when it comes to
financing properties with less than 20 percent equity or less than 20 percent
down payment.

For many years, having less
than 20 percent equity in a property meant that the borrowers were forced to
encounter less than desirable financing options. For a long period, the only
viable financing options for such scenarios were loans with a mandatory mortgage
insurance premium.

During the past year or so,
more financing options
are becoming available for such scenarios as Fannie and
Freddie have joined the FHA in offering low down payment 97% LTV programs. But
they aren’t catching on. It should be noted, however, that mortgage insurance
premiums are now more favorable, less expensive and in some instances, even tax
deductible. Nonetheless, it is encouraging to see that other options are now
available in the current market place.

Now, borrowers with less than
the 20 percent equity mark can finance properties with a second loan in lieu of
mortgage insurance
. What may make this option more appealing is that the second
loan can now be structured as a standard 30-year fixed rate mortgage. A
financing option such as this is more appealing to some borrowers. In many such
instances, both the first and second loans in place can both be a standard
fixed rate mortgage with the monthly payments of both loans going toward
principal and interest with the mortgage interest paid on both loans being tax
deductible in many scenarios. 

There are differences between
the old 100% CLTV programs of 10-20 years ago. But financing with two
fixed-rate loans such as this offers the appeal of being in a more traditional
type of financing structure without having a mortgage insurance premium in
place. The second loan can be paid down or off without penalty as finances
permit. Combined 30-year fixed financing such as this can be used for primary
and secondary homes alike and is available to most property types. Processors
and LOs know that some scenarios with less than 20 percent equity may be better
suited for financing with mortgage insurance and vice versa. 

Possibly refinancing a first
or obtaining a second, given appreciating markets, isn’t new. Let’s go back to
the end of 2015 when Black Knight released its Mortgage
Monitor report
, analyzing data through
November 2015. Highlights of the report included that there were currently 5.2
million borrowers who could qualify and benefit from refinancing, which was
down from 7 million in April 2015 when rates were less than 3.7 percent. Of
these 5.2 million borrowers, almost 2.4 million could save $200 or more each
month and 1.9 million could save anywhere from $100-$200 per month. Rates are
close to the same as the end of 2015, but if rates rise by half a percent, then
2.1 million borrowers would no longer benefit from a refinance and 3.1 million
borrowers would also be out if rates increase by 1 percent. 

At that time Black Knight told
us that the amount of equity that homeowners could tap into is $4.2 trillion,
up $600 billion over the last year, and about 37 million borrowers have an
average of $112,000 in equity. And most markets have appreciated since then!
Most of the equity (38 percent) that is accessible is in California alone and
51 percent of “tappable” equity is tied to first lien mortgages with rates
below 4 percent. But
lenders also know that plenty of those loans have loan level price adjustments
that make the actual pricing worse than current rates, lessening the appeal of
refinancing, thus investors have not seen a huge wave of refinancing of them.

What about the flip side – a
lack of capacity
and LTV available to refinance? Negative equity is when
homeowners with a mortgage owed more than their homes were worth. Zillow’s
negative equity report found that nationally, 12.7% of homeowners fell into this
category, which is significantly better than the high of 31.4% in Q1 2012.
Chicago is the new leader, replacing Las Vegas in the large housing market with
the highest rate of negative equity at 20.3%. The Bay Area has the lowest rates
of negative equity among large markets. San Jose and San Francisco are the only
two large metros with negative equity below 5%. 

The percentage of homeowners
in negative equity has been on a steady decline, driven by a consistent
recovery in home values. As negative equity overall continues to fall, the
epicenter of underwater homeowners in the U.S. has shifted from the notoriously
hard-hit – but quick to recover – Southwest and Southeast, to the
long-suffering and sluggish rust belt states and even New Jersey. The shift is
reflective of a housing market that has evolved from one driven by largely
temporary factors caused by the massive housing boom and bust, to one driven by
more fundamental, traditional factors like job growth, supply and demand.” 

And what about those that want
to buy bank-owned properties? Altisource
Portfolio Solutions
 S.A. (NASDAQ: ASPS), a leading
provider of real estate, mortgage and technology services, polled 100 mortgage
servicing professionals in attendance at the recent Five Star Conference and
Expo in Dallas, the nation’s largest gathering of mortgage servicing
professionals. The poll finds that participants are
optimistic that continued low interest rates will encourage home buying (44
percent) and new financing options from lenders will broaden the buyer pool (39

The survey indicates that
respondents believe offering
more financing options to home buyers for auction properties (38 percent) will
be a factor in attracting a more consumer-based audience,
followed by over a third of respondents (34 percent) who say education about
the auction market and the use of real estate agents to promote auction
properties (34 percent) will be needed to attract consumer interest in
purchasing REO homes. Furthermore, 28 percent of respondents view having access
to more robust market data and insights as the most important aspect to make
the greatest impact in the REO market. 

“The bank-owned real estate
sector was largely untapped by individual home buyers until recently,” said
John A. Vella, chief revenue officer of Altisource. “Today, individual buyers
can benefit from smart financing options like rehab financing, otherwise known
as a FHA 203(k) loan, which bundles the home purchase price and renovation
costs into a single mortgage. This is a huge step in the right direction
because it can help buyers purchase affordable properties from the REO market,
especially at a time when inventory is low and housing prices are continuing to

Yes, rates have slowly been
moving higher. This week’s move, taking the 10-year back up to yields we last
saw in late May, has been attributed to solid economic news out of the United
Kingdom (were all those Brexit fears misplaced?), continued decent news out of
the United States, and the increasing odds of a Fed increase in short-term
rates way off in December. Fortunately, the NY Fed is continuing to buy agency
MBS to the tune of about $2 billion a day using money from early pay-offs. By
the end of the day yesterday the 10-year had worsened .5 in price, to close at
a yield of 1.84%, and agency MBS prices worsened .125-.250 depending on
security and coupon.

For thrills and chills today
we’ve already had the first look at Q3 GDP (+2.9%, higher than expected) and
the Q3 Employment Cost Index (+.6%). Coming up is a 2nd tier number: The University of
Michigan Sentiment Index for October which is expected to increase slightly. After the first volley of strong numbers the 10-year
is yielding 1.87% with agency MBS prices worse .125.

Jobs and Announcements

Jobs for qualified candidates in residential lending continue. Military Direct Mortgage is a fast-growing VA lender looking for experienced loan officers for their direct to consumer call center in Connecticut and call center coming soon to Southwestern part of Florida. Salary and commission plus an excellent benefit program are available. “We operate solely to offer mortgage loans and refinance options to Veterans and active-duty military members and their families.” Please send questions or resumes to Patti White.

In terms of products, FormFree’s founder and CEO Brent Chandler writes, “Rep and warrant relief for automated income and asset verification through The Work Number and AccountChek is a signal to the industry that the paper-based era of mortgage lending is coming to an end. Mortgage technology has finally evolved to the point that lenders can base their decisions on direct-access data – untouched by human hands – and be relatively protected against buyback requests by doing so. This announcement is the culmination of an extensive pilot with Fannie Mae, and to be the first announced preferred provider for automated asset verification is simply phenomenal.”

And on the recruiting side of things Jim Boghos, President of Boghos Search Group, writes, “Loan Originator chief concerns today continue to center on the lack of operational capacity. Lenders who truly offer better service have a tremendous window of opportunity for retail growth in today’s market. The war for processors and underwriters is as intense as I have ever seen it. The capacity issues are plaguing service levels and therefore keeps the door wide open for nimbler service-oriented companies to move into new markets and capture proven people and market share.” If you would like to schedule time with him to discuss your recruitment and growth strategy, contact him at 407-790-7500 ext. 100.

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