Nonbanks Thanked for Picking Up Slack in Mortgage Lending

Independent mortgage banks forced to the sidelines following the housing bust are making a comeback.
At a conference in san Diego Thursday, officials at Fannie Mae, Freddie Mac and Ginnie Mae all heaped praise on nonbank mortgage lenders for stepping up to provide loans for home purchases at a time when many banks have scaled back. The message: without them, many recent home buyers might still be renters.
"If you guys had not stepped up we would have had a hole," Ted Tozer, the president of Ginnie Mae, told 500 independent mortgage bankers at an industry conference. "The numbers prove that if you are driven out of the industry and we don't support you, the industry can't operate."
The government-sponsored enterprises are purchasing more loans than ever from nonbank mortgage lenders largely because big banks have pulled back from selling to Fannie and Freddie after getting clobbered with repurchase requests. Large banks have also dramatically scaled back their Federal Housing Administration lending after paying huge fines to FHA and the Department of Housing and Urban Development to settle claims of improper underwriting. JPMorgan Chase Chairman and Chief Executive Jamie Dimon said earlier this year that the banking giant would be "very, very cautious" about originating FHA loans, given the risk of paying out more claims.
Wells Fargo, JPMorgan Chase and Bank of America have all lost market share in the past four years to independent mortgage bankers, Tozer said.
"Those three organizations pulling back created a hole of one-third of our capacity," he said. "The landscape for banks has changed."
Indeed, following the crisis nonbank lenders were struggling to find new loan business because their main source of funding — bank warehouse lines of credit — had largely dried up. That funding has returned even as banks themselves have pulled back on mortgage lending.
Wells Fargo's share of Ginnie's loan volume fell to 24% this year from 38% in 2010. JPMorgan Chase's share fell to 3% this year, from 9% in 2010. B of A now has 2% share, down from 16% four years ago, he said.
By comparison, independent mortgage banks now have a 50% share of Ginnie's business, down from 14% in 2010.
Ginnie does not originate or purchase mortgages. Rather, it guarantees the timely payment of principal and interest on securities that are backed by loans insured by other government agencies, primarily the FHA and the Department of Veterans Affairs.
To be sure, there is concern that nonbank mortgage lenders may be picking up too much of the slack. A report from the Federal Housing Finance Agency's Office of Inspector General in July concluded that nonbank lenders pose a risk to Fannie and Freddie because they have limited oversight from regulators and are not as well capitalized as banks.
But at a panel discussion here, Paul Mullings, a senior vice president at Freddie Mac, seemed to dismiss the report's findings.
"We do not see this as a risk that cannot be managed," Mullings said.
Independent mortgage bankers now make up 33% of Freddie's business, up from 9% in 2010, he said. Mortgage banks now account for 40% of sales to Fannie, up from just 4% in 2007.
Tuck Reed, a senior vice president of corporate strategy at Fannie Mae, called the growth of nonbank lenders "phenomenal" and vowed to provide more liquidity and improvements in policies and tools. Fannie is now allowing mortgage banks to use its collateral underwriter tool to evaluate appraisals, and an early check automated tool for checking data on the delivery of loans.
"We appreciate your business, we want your business very much and we are committed to earning your business," Reed said.

Refi and Purchase Activity Drop in Latest MBA Application Survey

Mortgage applications decreased last week as both refinance and purchase activity fell.
The Mortgage Bankers Association's market composite index was down 4.3% on a seasonally adjusted basis for the period ending Nov. 21. Loan application volume increased 4.9% the week before, which included an adjustment for Veterans Day.
The refinance index dropped 4% week over week, while the purchase index plunged 5% during this time period, the Washington-based trade group said.
Refinances accounted for 63% of total applications, up two percentage points from the previous week. The adjustable-rate mortgage share of activity increased one basis point, to 7%, of all activity. Federal Housing Administration applications made up 9.4% of the volume, which is down five basis points compared to a week earlier. The Veterans Affairs share decreased 12 basis points, to 10.3%, while USDA applications held steady at 0.8% of all mortgage loan applications.
The average contract interest rate for a 30-year and 15-year fixed mortgage was both down three basis points respectively at 4.15% and 3.35%. FHA-backed mortgages saw average 30-year fixed rates rise five basis points, to 3.9%. Lastly, the average 30-year fixed rate jumbo loan remained unchanged at 4.1%.
The MBA survey covers over 75% of all U.S. retail residential mortgage applications.

The Rise

Mortgage rates across major loan product types rose nationally this past week, up from their lowest rates of the year, according to a Freddie Mac survey.
Rates were helped by increased demand, according to Freddie Mac chief economist Frank Nothaft.
"New-home sales grew at an annual rate of 467,000 sales in September, the fastest rate observed during the recovery," Nothaft said in a press release.
The survey, Freddie Mac's regular weekly snapshot of mortgage markets called the Primary Mortgage Market Survey, found that average 30-year fixed mortgage rates climbed to 3.98%, up from an average of 3.92% the week before. That's still down from the same time last year, when the average 30-year fixed mortgage rate was 4.1%.
Rates for 15-year fixed mortgages averaged 3.13%, up from 3.08% last week, but still below down from 3.2% last year.
Five-year Treasury-indexed adjustable-rate mortgages saw a 2.94% average, up slightly from last week's 2.91%, and two basis points off last year's 2.96%. The one-year Treasury-indexed adjustable-rate mortgage averaged 2.43%, up two basis points from last week but still eight basis points lower than last year's 2.51%.

Stocks are down a bit and Bonds are higher this morning.  The news of the day was Gross Domestic Product (GDP), which was reported up 2.5%, lower than expectations of 3.1%.  This was a lousy GDP number, and shows the US economy is sluggish.  And that’s with this incredible amount of stimulus and Quantitative Easing (QE). 
Remember, QE, while specifically is the government purchase and reinvestment of Treasury Bonds and Mortgage Backed Securities, has dramatic ripple effects.  Think about this – if you were lucky enough to have accumulated $1M in savings, three years ago you could have invested this money in a “no risk” investment like 3-Yr Treasuries and given yourself a nice $50k per year income.  But today, that same investment would only give you $2k per year in income. 
The government’s QE has made it very difficult for people to receive any sort of meaningful “no risk” income, even if they have accumulated millions of dollars.  This is forcing so many of us to search for alternatives… all with higher risk.  People are flocking to the Stock market, many without experience, because there are few other places to put your money.  It’s no wonder why Stock prices have risen in virtual lockstep with QE (See the chart below).




When the music stops, it’s going to get ugly for Stocks.  And this is why we may be entering a strange news environment regarding employment.  The Fed has made it clear, at least for today, that the trigger for stopping QE is a 6.5% rate of unemployment.  In a normal world, good news for the Job market would be good for Stocks and bad for Bonds.  But in the newly created “world according to Fed”,  the closer the unemployment rate gets to 6.5%, the more concern there is that QE will end.  This leads to a selloff in Stocks, which leads to improving Bond prices.  This makes it more difficult to navigate through some of the upcoming Job reports, including the releases next week. 
And an important takeaway from this is that real estate has been, and will continue to be, a beneficiary of the present environment where there are no longer any “risk free” trades that offer a meaningful return. 
We will continue the same floating stance we have adopted since April 11^th.  This philosophy has helped us to gain almost 100 BP, as well as 15 days of time.  But there may be some overhead resistance from the highs reached on April 5^th, which is a bit higher than present levels.  We will watch this carefully throughout the day

Market Commentary for 9/27/12 -  Mortgage bonds are weaker this morning after a better than expected initial claims report for last week.  Initial claims dropped to 359,000, the best number we have seen in a while.  In other important news GDP was revised all the way down to 1.3%, and durable goods sank by over 13%... the worst drop in over 3 years.  Overall the economic news is concerning, to say the least  but GDP and durable goods look backwards, while initial claims is a more forward looking indicator.  This likely explains the market’s reaction, at least initially so.

 

Be the Gate Keeper Take Control of the Lead The Law of The Gate Keeper states: The business professional that refers out the most business will create the most reciprocal referral relationships in return. Translation: The business professional who controls the lead WINS! Regardless of your vocation, there will always be other business professionals that you should seek to align yourself with because they represent a potential increase in business for you through referrals. The easiest way for you to develop relationships with the people you want to work with is to start off the relationship by referring new business to them. This is The Gate Keeper concept in its truest form. Start with knowing what your own clients need. Position yourself to refer out a significant amount of business by first knowing the needs of your own clients. When you begin working with clients, ask a lot of probing questions to get an idea of their needs. Are they happy with their existing real estate situation? Are they happy with their existing accountant, or their financial planner? Are they happy with their current insurance situation? Are they happy with their lender? Do they need to be introduced to people who provide these other types of services? The more you position yourself with your clients as a conduit to professionals in other areas of finance and commonly needed services, the better off you will be in the long run. In your marketing material, you must continually remind your clients that you want to be in the forefront of their mind at all times when they have important decisions to make in their lives. Make sure they know that they should always consider you to be a resource in the future. Too often we leave our relationships with our clients open ended, and we fail to educate them on the role that we would like to play in their lives. The more you make your clients aware that you wish to be an ongoing resource to them, the more they will use you and, in time, they will provide you with more business to refer out to other professionals. Learn more about the professionals with whom you want to have a referral relationship. One of the easy ways to go about putting yourself in a position to refer out a business is to sit down with the parties that you desire to refer business to and ask them to educate you on how they would like you to represent them in a conversation. Ask them to provide you with the proper scripting you will need to refer business to them. You will find this to be a very successful appointment with the prospective strategic partner that you are seeking to align yourself with. Use their wealth of knowledge on how they sell themselves and learn how to sell them. Be the Gate Keeper of the lead, and the rest will take care of itself. Let's discuss ways we can refer business to one another!

 Mortgage backed securities opened slightly higher this morning, as they continue to be weighed down by this week's Treasury auctions and low volume.  Prices are being supported this morning by a dip in Stock's, after German exports slid and fast food giant McDonald's reported same store sales that were a bit lower than expectations.  This afternoon's $24B Treasury offering will sway sentiment, as prices may not be able to push much higher than current levels.