September 18, 2014

Details on the Fed Basel III Vote Tomorrow; How it May Impact Rate Sheets / Volumes, and the BofA Servicing Sale

Today is
June 6th, and 68 years ago the most famous D-Day took place on the shores of
Normandy. (D-Day, by the way, is a variable used in planning, just like H-Hour,
for many events.) The German Lieutenant barges in and says “Mein Fuhrer,
the Allies have invaded Normandy!” Puzzled by the outburst Hitler replies,
” Funny…. I did nazi this coming.” Speaking of “not
seeing” something coming, I received this note: “Rob, when do you think that the CFPB, in its
efforts to ensure counterparty accountability, will require lenders to monitor
what borrowers do with the money that is lent to them?
If they’re going to
make sure that the borrower can pay back the loan through QM, why not go a step
farther and track what they’re doing with the money.” I have not heard
that, and let’s hope it never comes to that, because of the cost of something
like that will, of course, be passed on to the person refinancing, causing
borrowing costs to go even higher.

What are you doing tomorrow at 9AM PST? You could always listen in to the
White House Call with Nevada
Leaders
” as “Senior Administration Officials” discuss the
President’s refinancing proposal with Nevadans. One must RSVP by 8AM PST on
Thursday, June 7th to join them, “and please be sure to dial in 3 minutes
early so that we are able to start the call on time. Please RSVP here;
the call-in number is (866) 837-9781, Passcode Title: White House Call with
Nevada Leaders.

The Fed
has to be “raking in the bucks” – remember that every day it has been
in, buying 1-2 billion of agency MBS, and now these positions are trading at
premiums such as 104, 105, 106 – that is a very nice gain IF they sell and IF
their pools don’t refinance. Speaking of the Fed, with the swearing in of a
seventh board member, the Federal Reserve is at full capacity for the first
time since 2006, and President Obama nominated
six of seven governors
.

In his
most recent press conference, Bernanke warned that there was nothing which the
Fed could do regarding the “fiscal
cliff
.” Bernanke said, “And I am concerned that if all the tax
increases and all the spending cuts that are associated with the current law
which would take place, absent any Congressional action, that would occur on
January 1st that that would be a significant risk to the recovery. So I am
looking and hoping that Congress will take actions that will address … both
requirements of good fiscal policy.” The markets are well aware that under
current laws, at the start of 2013 a) the end of the “Bush era” tax
cuts occur, the most notable of which is an increase from 15% to 43.5% in the
top tier of tax on dividends, b) a 3.8% tax surcharge which combined with the
expiration of the “Bush era” tax cuts would move the top capital
gains rate from 15% to 23.8%, and c) massive spending cuts mandated by law.
This is all law, until Congress decides to change it, but the tax increases alone
on dividends and capital gains are going to have a very significant negative
effect on equities and may also drive interest rates up as investors demand
real positive after-tax returns.

We “only”
have six (6) more months of election stuff to listen to every day. But as one
reader wrote, “Bernanke is making one gigantic point: There is nothing which
the monetary policy of the Fed can do in face of insanely irresponsible fiscal
policy. Forget everything else. If one increases taxes and decreases spending
per what is in place then GDP will take a sizable hit because both consumers
and government will be spending less. The worst part is that there is an
election coming and the imbeciles in Congress cannot be bothered with this
trivia before mid-November. Reelection is more important to them than the
economy. This is, in my mind, the heart of the problem.”

Tomorrow
is a very important meeting by the Federal Reserve, during which it will vote
on Basel III. More details 

Many folks have asked about how Basel
III will impact borrower’s prices.

In December 2010, the proposed Basel III Accord was finalized which, if adopted
by U.S. banking regulators, will result in a new regulatory capital regime for
MSR (mortgage servicing rights) assets. Under the Basel III Accord, the
amount of MSRs that can be counted as Tier 1 capital is capped at 10%, effective
January 1, 2013, with a phased implementation through 2018.  In addition,
a bank must deduct the amount by which the aggregate of the following three
items exceeds 15% of Tier 1 capital: (i) significant investments in
unconsolidated financial institutions; (ii) MSRs; and (iii) deferred tax assets
arising from temporary differences. The exclusions from the 10% and 15% thresholds
will be phased in from 2013 to 2018.

What does this mean? Basel III as currently proposed (and fully phased in) will
increase required capital for most entities but will significantly increase the
effective capital requirements for entities with large MSR positions relative
to their Tier 1 capital. This includes a few score of banks, including
Wells Fargo. Under Basel III, for those institutions at or above the 10% of
Tier 1 capital level, the marginal capital requirement is effectively
100%.  The net effect of Basel III is potentially a significant increase
in capital requirements for the industry as a whole. Some of the largest originators, who are market leaders in setting
mortgage rates, will need to either raise mortgage rates while reducing
servicing released premiums paid in order to compensate for any incremental
capital required, or accept lower returns
. And you can bet that if Wells or
Citi or Chase lowers their SRP’s, the market will follow – and the borrower
will bear the brunt of it.

But there
are, alternatively, other solutions to manage the 10% capital limitation,
including acquisition/merger, selling the MSR, and structuring and/or holding
more loans on balance sheet (eliminating the recognition of a separate servicing
asset). So it is no surprise to see the
news yesterday that non-depository Nationstar Mortgage has signed a definitive
agreement to acquire approximately $10.4 billion in residential mortgage
servicing rights, as measured by unpaid principal balance, from Bank of
America.
The acquired servicing portfolio consists entirely of loans in
government-sponsored enterprise (GSE) pools – expect the loans to transfer from
Bank of America in July. Nationstar currently services more than 635,000
residential mortgages totaling nearly $103 billion in unpaid principal balance.

This leads
into a little agency news. Fannie Mae’s FHFA appointed Timothy Mayopoulos as
its new chief executive officer. Mayopoulis has interesting credentials: he’s
been Fannie general counsel for three years – prior to that he was general
counsel for BofA. Mayopoulos’ promotion from general counsel takes effect on
June 18, and the promotion means a pay cut for him – he will make $9.73 per
hour. Seriously, his salary will be around $500,000 – which is much less than the CEO of an average sized
mortgage company’s earnings for the last few years
.

Fannie Mae
bought just $52 billion of home mortgages from its seller/servicers in April, a
45% plunge from March, and Freddie Mac bought $26 billion of loans, a 39%
decline from March. Were the March purchase figures an aberration because
lenders rushed to get loans closed before an incoming g-fee increase, pushing
the March numbers higher? Perhaps.

But the
market for “investor kicked loans” remains competitive with many investors
looking for loans that have been rejected by aggregators and/or the agencies. They
all have their pluses and minuses. For example, some provide higher prices
but will reject loans for non-eligible related issues while others will provide
a lower price but will reject fewer loans. Some will purchase 30-day+ RESPA
cures and some won’t, some will run updated property valuations and some won’t. Readers
have noted that there are more investors interested in Fannie product rather
than Freddie, and very few will purchase HomePath, Texas cash outs, and VA
IRRRLs. Don’t ask me for names (I don’t have them) but pricing is
typically two to five points back of corresponding screen prices (mid 90’s to
105) with the spread back of screen depending on the loan’s perceived risk, and
for non-agency eligible loans (i.e. scratch and dent loans), look for pricing
in the 70’s 80’s if the loan is performing.

This
morning we learned, from the MBA, that the number of mortgage applications
filed in the U.S. last week rose 1.3% from the prior week, with the refinance numbers +2% hitting 78% of
total applications!
ARM’s seem stuck around 5%. One interesting thing to
note: the average rate on 30-year fixed-rate mortgages with conforming loan
balances fell to 3.87% while rates on similar mortgages with jumbo loan balances
decreased to 4.13% – a spread of about .25%.

Lenders
have certainly been in selling: originator selling over the past couple days
has been over $7 billion, and as supply/demand laws dictate, MBS prices
worsened relative to Treasury prices. As one trader put it, “Watching MBS break
12 ‘wider’ in two session was about as enjoyable as watching my wedding
video with my Mother-in-Law.” The daily Fed buying of $1-1.5 billion can only
do so much – what happens if it goes away entirely, leaving money managers,
REIT’s, and hedge funds on their own to absorb the supply? So Tuesday both
current coupon MBS prices and our 10-yr T-note were worse by .250-.375, and the
10-yr closed at 1.56%.

Today
things were pretty quiet in Europe, and we did have a little news out this
morning. The final Q1 reading on Productivity (-0.9% vs. -0.5% previous, worse
than expected) and Unit Labor Costs (+1.3% vs. +2.0%, also worse than expected).
Later we’ll have the 2PM EST release of the Beige Book, containing economic
anecdotes from the 12 Federal Reserve Districts in preparation for the June
19-20 meeting. We find the yield on the
10-yr at 1.63% and MBS prices lower from Tuesday’s close.

 
At Sunday School they were teaching how God created everything, including human
beings.
Little Johnny seemed especially intent when they told him how Eve was created
out of one of Adam’s ribs.
Later in the week his mother noticed him lying down as though he were ill, and
she asked, “Johnny, what is the matter?”
Little Johnny responded, “I have pain in my side. I think I’m going to
have a wife.”

 

Article source: http://www.mortgagenewsdaily.com/channels/pipelinepress/06062012-basel-iii-bank-of-america.aspx