Servicing Transfers on Fire; Banks Will Pay for Target Fiasco; HARP 3.0 Hopes Dim but Rates Improving

News

Just like the industry counted down to QM, now we can count down to Girl Scout Cookie Season! We have about 16 days – but there is a lot about these treats the public doesn’t realize. As was noted in this mortgage commentary
last year, two commercial bakers are licensed by Girl Scouts of the USA
to produce Girl Scout Cookies: ABC Bakers (Interbake Foods, owned by
George Weston LTD.) and Little Brownie Bakers (Keebler, owned by
Kellogg’s) – based on geography. Thin Mints make up 25% of the total
sales, followed by 19% from Caramel deLites (from ABC)/Somoas (from LBB)
– so the name for the same cookie depends on the bakery. And the number
of cookies per box, which has not only dropped over the years to save
money, varies based on where you are in the country! The dark underbelly
of the industry...where is the protection for the consumer from the CFPB??

Yesterday
I mentioned the Flagstar layoffs, and mortgage banking results.
“Flagstar, which laid off 600 last week, announced its earnings.
Mortgage banking income fell to $44.8 million from $75.1 million in 3Q.
Total mortgage originations came in at $6.5 billion, down 16.9% from
$7.8 billion in 3Q. Rate lock commitments fell 22% to $6.5 billion from
$8.3 billion. The gain-on-sale (GOS) margin (based on closings) fell to
0.66% from 0.90%.” I received a few comments that should be noted as
they are justified. First, “Rob, what about the upside (positive) that Flagstar also showed a profit of $160.5 million for the 4th quarter?”
And also, “Flagstar did not lay off 600 people last week. The bank
laid-off somewhere south of 350; approximately 200 were laid off in
September of last year and approximately 65 employees retired or left on
their own during Q4 2013.”

A
daily commentary on the mortgage industry tends to encompass a lot of
subjects, most of which have their own special newsletters, periodicals,
and so on. But one trend that is hard to ignore is the huge wave of servicing pieces moving back and forth between companies. Citigroup will lay off 950 people in its mortgage servicing unit after it sold the rights on 64,000 loans to FNMA. The
latest big block was Wells Fargo selling its mortgage servicing rights
on 184,000 loans (UPB of $39 billion) to Ocwen Financial for an
undisclosed sum. The sale will be finalized as servicing is transferred
over the course of 2014. Plenty of analysts think Ocwen (New Co. spelled
backwards) will be buying/obtaining about $100 billion during 2014, so
this is no surprise. The loans underlying the MSRs are primarily in
private label securities – in the past this has been the highest margin
business for Ocwen because of the high delinquency rates on private
label portfolios. It is viewed as a positive for Home Loan Servicing
Solutions (HLSS) because these MSRs should good assets for HLSS to
invest in. Assume a purchase price of 40 basis points for the MSRs, the
cost of the MSRs would be $156 million. Throw in some ducats for the
company’s investment in servicing advance equity (assuming a 5%
delinquency rate and an 11% advance rate) and we’re talking about $350
million of capital when this portfolio is moved to HLSS.

And the packages just keep coming (last week this commentary listed off several billion up for sale). Mortgage Industry Advisory Corporation (“MIAC“),
announced it is offering up three pools, mysteriously named R1-0114,
R2-0114, and R3-0114. Pass me the decoder ring! The pools are $509
Million FNMA and FHLMC mortgage servicing, $25 million FNMA and GNMA
mortgage servicing, and $669 million FNMA and GNMA mortgage servicing
portfolio, respectively. MountainView Servicing Group
is brokering a $224 million FHLMC/FNMA non-recourse servicing portfolio
and a Fannie Mae MSR portfolio with total unpaid principal balance of
$1,267,880,877.

Not that I am any soothsayer, but I have been saying for quite some time that companies are going to be needing cash, and that servicing loans is not for amateurs
– hence the rise of subservicers. GOS (gain on sale) margin
compression, on top of drastically smaller pipelines, is the driver for
companies selling blocks and flow servicing. Long term thinking would
conclude the asset will appreciate nicely with rising rates, if we find
ourselves in that environment (which would lead to the next industry
trend: even deeper cuts to expenses). Like I said Рnot for amateurs.

So what are the servicing buyers thinking?
Housing values are doing well, and rates are expected to creep higher
over the long run, so adding servicing is good – right? But a company
just doesn’t go out and start it up next week like the old days: buying,
boarding, collecting the payments, remitting to investors, charging
fees, and handling delinquencies. Refis are only a pen-stroke away in
this era of government-sponsored assistance programs like HARP, HAMP,
and HARP 2.0. Telemarketers are combing, and re-combing, over pools of
loans, looking to pick the low hanging fruit. But buyers are faced with
high premiums – after all, this the is the cleanest, best documented,
lowest rate product ever – who wouldn’t want to own that? Just like the cost of originating a compliant loan is only going to increase, the cost of servicing is only going up.
Loss mitigation is not cheap. And the owner of servicing had better be
prepared to defend that servicing against the barbarians at the gate –
putting the photo of the LO on the monthly statement is so…2008.

Speaking
of costs, per the Credit Union National Association (CUNA), Target’s
holiday shopping season data breach is costing the nation’s credit
unions an estimated $25 million to $30 million. The hack cost about
$5.10 per new credit card issued. Added up, that comes to tens of
millions of dollars for the financial institutions. Credit
unions and banks have criticized Target over the data breach. Even
though the financial institutions had no involvement with the incident,
they have to finance the cost of reissuing new cards for shoppers
affected by the hack. “Contrary to what some may think, these
expenses will not be reimbursed to credit unions and their members by
Target or other retailers,” CUNA President Bill Cheney said in a
statement. “Rather, credit unions must solely cover these costs of card
program administration, including in these circumstances of reacting to a
merchant data breach.”

Banks
are not reimbursed either, and we can certainly expect some
class-action Target lawsuits. In fact, many banks and credit unions are
incurring the expense of helping their depositors and card holders deal
with this event.
(Speaking of credit unions, in Wisconsin Oshkosh-based CitizensFirst,
Neenah-based Lakeview and Calumet County-based Best Advantage credit
unions say their boards of directors have approved the merger. While
CitizensFirst’s charter will remain, the members of Lakeview and Best
Advantage need to approve the merger. Votes are expected to take place
at their annual meetings over the next two months. The merged credit
union will have a new name. It will have $600 million in combined
assets, with 10 branch locations serving 47,000 members. Currently, the
three credit unions have locations in Oshkosh, Fond du Lac, Appleton,
Neenah, Sherwood and Brillion.)

The
dust has settled on thousands of disappointed loan officers, or, for
that matter, any company pinning its survival on another HARP-related
refi boom. At
the ABS (Asset-backed Securities) Conference, Michael Stegman, the top
housing policy advisor at the Treasury Department, weighed in on
extension of the HARP eligibility date
. He said that the Treasury
Department believed there should be no change in the HARP eligibility
date. He added, “Very few homeowners whose loans were originated after
the cut-off date are underwater and advancing the date would do more
harm than good by prolonging market and investor uncertainties.” While
FHFA Director Watt has not provided any information on what changes he
might make to HARP, it would seem likely he would take note of these
remarks and behave in a partisan manner. This may aid flows up in coupon
with odds potentially lower now of increased call risk related to HARP
extension. Isaac Boltansky with Compass Point LLC writes, “One of the
most talked about policy changes that could occur administratively at
the FHFA (i.e. without legislation) would be a change in the eligibility
date for the Home Affordable Refinance Program (HARP). A change in the
HARP eligibility date would allow borrowers who have previously
refinanced through the HARP to refinance through the program for a
second time (i.e. “re-HARP”). Currently, only loans which were sold to
the GSEs prior to May 2009 are eligible to refinance through HARP. If
that cutoff date was moved to May 2010, as some have called for, then
borrowers who refinanced through HARP between May 2009 and May 2010
would be able to refinance through the program for a second time. There
have been numerous pushes to either extend the eligibility date by 1
year or remove it completely.”

(Read More: Treasury Official Throws Cold Water on Fannie/Freddie Optimism, HARP Extension)

Before
LOs start combing the Want Ads, he adds that it does not end the debate
completely. “But it does bring a degree of clarity to the issue. There
has been uncertainty regarding Director Watt’s policy priorities since
he took over the FHFA earlier this year. Director Watt could break with
the Obama Administration by expanding the HARP eligibility despite the
Treasury’s opposition. This outcome as unlikely but note that it remains
a possibility – one
can expect the White House to continue pressing for the expansion of
mortgage refinance opportunities to borrowers without government-backed
mortgages
. As a reminder, the HARP is only for borrowers with
GSE-backed mortgages. For example, Stegman stated: ‘We must not forget
about the inability of performing underwater borrowers whose loans are
held in private label security trusts to access refinancing.’ Expect
President Obama to once again mention mortgage refinancing during his
State of the Union address on January 28 but… the issue of expanding
refinancing opportunities is probably more rhetoric than policy priority
at this point in time.

How ’bout these rates!?
Sure, we had some news here in the U.S.: weekly Jobless Claims were up
1k, and the FHFA House Price Index was up 0.1% in November (up almost 8%
for the year), and Existing Existing-Home sales were up 1% in December
(2013 was the strongest year in seven years – the national median
existing-home price for all of 2013 was $197,100,  11.5% above the 2012 median of $176,800, and was the strongest gain since 2005 when it rose 12.4%).

But
the big news came from China, which showed a weak manufacturing report
(PMI). If China’s economy is weak, that means that the world is not
ordering as many goods from China – so maybe the world economy is a
shade weaker than thought? China’s PMI manufacturing index dropped to
49.6, below the consensus of 50.3. Readings below 50.0 indicate a
contraction in the sector. China has been an important engine of growth
for the world economy, so a slowdown would have significant implications
for global markets.

Regardless
of the reason, LOs and borrowers will take it. But Capital Markets
personnel are nervous – no one wants too much improvement during a rate
lock period – no one wants renegotiations on loans – Wall Street certainly doesn’t renegotiate on the hedges which allow lenders to sell loans at a better price! Thursday prices on 30-year FNMA 3s through 4.5s ranged from +17+ ticks to +8+ ticks, more than recovering Wednesday’s losses. The
10-yr. T-note saw a 2.77% close, and this morning we’re down to 2.74%
and seeing a further, small improvement in agency MBS prices.

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