silicon valley bank

Apache is functioning normally

Apache is functioning normally

For example, bank regulators in July released a plan to increase capital requirements for residential mortgages, the Basel III Endgame rules. Redwood executives are positioning the company to acquire mortgage loans in the market, mainly jumbos, with the expectation that banks will have a reduced appetite. 

Abate doesn’t think “banks are going to necessarily exit the mortgage market,” but they will “be heavily disincentivized from growing mortgage portfolios.” Ultimately, “the real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us.”

Another opportunity is in the home equity space. Redwood launched in September its in-house home equity investment (HEI) origination platform called Aspire. Through Aspire, Redwood plans to directly originate HEIs by leveraging the company’s nationwide correspondent network of loan officers and establishing direct-to-consumer origination channels, the company said. 

“The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI,” Abate said. “The way the investor gets paid is that you share in the upside of the home.” 

Abate explained the impacts of the Basel III Endgame rules on the market, the rationale behind the home equity investment product, and more about Redwood strategies in an interview with HousingWire from a company’s office in New York last week. 

This interview has been condensed and edited for clarity.

Flávia Nunes: How has Redwood strategically positioned itself in the residential mortgage space amid all of these potential regulatory changes?

Christopher Abate: Redwood is almost a 30-year-old company. The company was originally built to serve banks and others with the thought that there was no private sector [to invest in mortgage assets], only Fannie Mae and Freddie Mac. We would partner with banks to buy their loans and securitize them so the banks could recycle their capital. We don’t originate residential mortgages. We don’t service them. We’re very similar to the GSEs. We modeled the business to serve that role in the private sector. The mortgage market has changed over the decades. We’ve seen a few cycles. We’ve got the Great Financial Crisis, the Covid-19 pandemic, and now we’ve had a lot of interest rate volatility. Along the way, there have been many regulatory changes that have impacted the market; the CFPB has been created, and there’s the Dodd-Frank Act. Then there are the Basel rules, the regulatory capital rules for banks. And that’s what’s really in play today. 

We’ve positioned the company, from a strategic perspective, with the thought that banks will be heavily disincentivized from growing mortgage portfolios as an earning asset class. The banks are not going to necessarily exit the mortgage market because the mortgage asset is the biggest that a client takes out, and you want to be there for all the cross-selling in all the other consumer products. Banks will always serve their best clients. But viewing the mortgage portfolio as an investment class, that’s where the posture will shift because the capital required to hold against it [residential mortgages] is going to go up. And just based on the rapidly rising rate of deposits, just given where interest rates are at, the net interest income that they earn is getting squeezed. Banks move slowly. This will be an evolutionary shift, not an overnight shift. 

Nunes: As you noted, bank regulators released a plan to increase capital requirements for mortgages through the Basel III Endgame rules. Can we expect changes to what was proposed?

Abate: Yes, it will change. In particular, some of the sliding scale capital charges are based on things like LTV [loan-to-value]; there’s a fair likelihood that that changes because of the way it disproportionately impacts first-time homebuyers and underserved communities. But the rule is not going away. Bank regulators are paid to keep things safe. And the idea that regulators are going to allow banks to continue to do what a First Republic or Silicon Valley Bank did, I don’t see that in the cards. 

We saw significant changes after the Great Financial Crisis, which was more of a credit crisis. We saw banks getting out of risky credit mortgages like option ARMs and some subprime lending happening back then. There will be changes. Banks will not wait for the rule to be finalized to start implementing it. There will be some evolution to the rule itself. But the thrust of the rule is that it’s going to be more expensive for banks to hold mortgages.

Nunes: If banks won’t wait for the Basel III Endgame to be finalized, how are they anticipating the rules?

Abate: A year ago, banks were very happy to hold mortgages, deposit rates were sticky, and the cost of deposits was still very low. Now, all of them are looking for a capital partner, at least an option to have liquidity. The tone has changed dramatically amongst bank executives. Some banks move more slowly than others.

I like to remind people that independent mortgage banks live and die by liquidity. They care about the basis point. Banks don’t operate that close to the ground. Things take longer to develop, but the relationships are also typically stickier. Once you forge a strong partnership with a bank partner, the likelihood of them shopping for that liquidity is much less than an independent mortgage bank that is trying to optimize every dollar.

Nunes: In your recent 2Q 2023 earnings report, you mentioned acquiring three bulk pools of loans from depositories, primarily with seasoned underlying loans at attractive discounts. How is the secondary market now for these trades in terms of volumes and prices?

Abate: I certainly expect RMBS volumes to go up significantly over time. It’s not something that happens overnight. We’ve been active. We just completed a deal in August. I would expect us to continue using securitization. 

Right now, we’re in this hybrid phase where loans that are getting securitized are partially seasoned loans, and some of the loans have gone down in value–the lower coupon mortgages. The banks have been slowly selling some of those, and Wall Street dealers have quite a bit in inventory. We’re still seeing a lot of that aged collateral coming out through securitization. Issuers like Redwood have been combining current coupon mortgages. We saw this last year in the private sector securitization market, where we had all of this aged inventory. It was hard to get investors to focus on the collateral because there was so much sitting in inventory that they could price it wherever they wanted to. The pricing now is probably the best it’s been in a year, maybe two years. So, the market is finally starting to cross back into more current coupon on-the-run production, which is what we’re focused on.

We’ve completed well over 100 residential securitizations, close to 140 If we factor CoreVest. There’s been years we’ve done 12-15 securitizations. There’s been years where we’ve done none or one. So, we very much want to get volume going again to the extent we could be in the market with certainly a deal a quarter, but if not two or three, that would feel the base to me.

Nunes: In terms of products, what the current landscape brings in terms of opportunities? 

Abate: Right now, the biggest opportunity, ironically, is in the regular prime jumbo market because that was the product banks were most focused on. And they weren’t wrong to focus on it from a credit standpoint because when the banks got through the Great Financial Crisis, all the big regulatory shifts were to get them out of taking risky mortgages on the balance sheet. Then, they started taking less risky mortgages, which are jumbos. The real shift is going to be all those jumbos that were going to banks will come back out, hopefully to non-banks like us. 

Nunes: Redwood also launched a home equity platform. What is the strategy here? 

Abate: When you look at prime rates in the high single digits and add a credit spread to that, even for the most well-qualified borrowers, you are looking at a 10% to 12% interest rate on a second mortgage. For a well-qualified borrower, 750 FICO or above, and a low-LTV first mortgage, you might be comfortable paying 10% to 12%. But that’s the best-case scenario. For everybody else, unlocking that equity is even more expensive. We’re seeing that for the traditional second mortgage products, there’s way more investor demand than consumer demand.

We’ve rolled out the traditional products and a newer product called home equity investment [HEI] options. The interesting thing about HEIs is instead of a homeowner taking out equity in the form of cash and paying a mortgage on it, there is no monthly payment within HEI. The way the investor gets paid is that you share in the upside of the home, so the home price appreciation. There are a lot of use cases for HEI over traditional products. If you think about somebody with a lot of student debt or lower FICO, they’re going to qualify for a very expensive second mortgage. So, this is a good option. It doesn’t add to their monthly payment obligation. You can do what you want with the cash, just like with a home equity line of credit, but not having the payment. It’s a bridge until the second mortgage is cheaper.

Nunes: To invest in this product, investors must believe home prices will keep rising, right?

Abate: There are a couple of things investors care about. You have to believe in a HPA [home price appreciation] story. But one way we mitigate that is we strike the price of the home at a discount to its current appraised value. So that, even if the home is sold next week, the investor will make money. If you believe that interest rates are nearing the top, as far as the Fed’s rate hike cycle, HPA should start to realign. If rates are going down, HPAs are going up. Investors are starting to get comfortable with this huge move in rates, hopefully, this fall is gonna pause. 

Then, ultimately, the investors want to understand if we give you $100,000 with this HEI, when do they get their money back? Because it’s a 30-year product. And that’s where we’ve designed the product, which is unique to Redwood, that creates strong incentives for the homeowner to refi.

Nunes: How did you get the property at a discount? 

Abate: The product is for people in their homes that are not moving out. There isn’t an actual transaction on the property. It’s somebody that wants to stay in their home. And if it’s a $1 million home, and we offer you $150,000 HEI, we might strike that HEI at $900,000. Let’s say it’s a $1 million home, and for purposes of coming up with the investor return, we’re going to call it a home at $850,000. Even if they sold the home at a $50,000 loss, the investor would still generate a return, and that’s what gets investor capital into the asset class. But what the homeowner gets is all of the proceeds, the cash and no monthly payments

The investors are institutional investors, well-known institutions, firms, pension funds, and life companies; they’re all just to varying degrees focused on HEI now. And the big reason is that nobody’s been able to tap this massive home equity opportunity. We are going to give it a try. 

Nunes: Residential mortgages are just one facet of the business. What are your plans for commercial real estate, which has had a challenging year?

Abate: What we do here in New York is our business-purpose lending platform. We realized a number of years ago that investors are becoming a much bigger participant in the real estate markets. Serving them and providing bridge loans to investors who want to flip homes or provide turned-out financing for investors who want to rent homes, that’s an entire other residential business that we run under the flag of CoreVest. In residential, we’ve more or less stuck to our knitting of non-agency. We’ve had opportunities to enter the agency space in the past and participated in certain instances, but mostly, what we do is non-agency. 

Nunes: You mentioned banks, but what are the business opportunities with IMBs?

Abate: We’ve had a great long-term relationship with the IMBs. The IMBs have a big opportunity to pick up some [market] share. Since the Great Financial Crisis, most of our business has been with the IMBs. We have a network of between 150 to 200 [partners], predominantly non-banks that we will buy mortgages from. We expect that to rebalance in the next few years. But the IMBs are also a big opportunity to take clients from the banks.

Nunes: And what are the plans for servicing mortgage rights? 

Abate: Servicing will continue to move out of the banks. That’s another big opportunity that we’ll focus on. We don’t plan to operate as a servicer, but we might own servicing rights. What we’ve done typically is when we own servicing rights, we will subservice. We want to hire somebody with a call center. And we’ll pay them a monthly fee. But when you balance out the revenue potential with the servicing asset, with the cost of service, there are still good opportunities. There’s a lot of competition for servicing. For some mortgage REITs, that’s their primary asset class, just not for us.

Nunes: Can you shed some light on your partnership with Oaktree and Riverbend?

Abate: Both of those are related to the business-purpose lender space. Oaktree is a great example of us expanding our capital partnerships into the private credit sector. Redwood is a publicly traded company, and historically, when we needed to raise money, we would do a common stock offering or a public market deal. When rates started going up, things got pretty ugly for the mortgage REIT space and the public markets. We and all other mortgage REITs started trading at discounts. Raising money in that environment hasn’t been overly attractive. So, building partnerships with private credit firms like Oaktree to focus on specific asset classes is a big part of what we want to do. One aspect that’s attractive to us is we can earn asset management fees.

The Oaktree model is something that we want to replicate on the residential side as the jumbo opportunity picks up. We’ve been in discussions with other private credit investors and institutional investors who see the same opportunity as in jumbo and non-QM.  

Nunes: With a reported cash and cash equivalents of $357 million as of June 2023, can we anticipate any M&A activities, especially considering the challenges faced by many lenders in the industry?

Abate: M&A activity has picked up in the space and based on our track record, we are a logical call. Part of our strategy is: to be active in M&A, you have to be active. It’s not efficient to call on at eight, seven different firms. You start with the ones that have shown interest in actually transacting. We have seen some opportunities, and nothing I can share in this interview, but it’s safe to say we’ve been active in M&As and we’ll continue to focus on that as part of our growth strategy.

We haven’t been open to it [acquiring a lender]. For many years, we’ve wanted to keep the business sort of regulator-light. The best way to do that is not to directly face consumers with products. We’re comfortable originating to investors, that’s what CoreWest does. But investors are sophisticated business-run ventures and not homeowners who may or may not be sophisticated in the financial markets. We have tended to not originate, but I think where we’re at as a company is from a strategic standpoint, we’d be much more open to it through M&A.

Nunes: What do you expect for the macro landscape in the coming year?

Abate: There’s such a vast shortage of supply of homes in many parts of the country, which is supporting home prices. The Fed consciously inflated home prices, particularly during the COVID years. These high asset values prevented normal credit losses you might see through a cycle. The combination of QE-fueled asset prices with an economy that hasn’t dropped off too much has created a strong housing market. 

But credit in residential housing should perform immensely better than many facets of the commercial real estate market. There’s so much vacancy in these central business districts. These buildings are valued based on cash flows– not like a residential home, which is an appraisal. If it’s 50% full, it’s worth half as much. From a credit standpoint, certain facets of the commercial real estate sector will have a rough road ahead.

I’m probably supposed to say this, but I feel better about my sector. The technical supporting housing will continue to be strong. The big challenge with residential today is just transaction activity. If you own a home with a 3% mortgage, you don’t want to sell it. If your home suits your needs, the prospect of doubling your monthly payment to move is very unappealing. The real challenge in residential has been a lot of capacity to make loans, but there’s not much demand. If rates do stabilize, that will change quickly. When the market thought in January that rates were stabilizing, we saw a pickup in loan activity, and then they started going up again; we’ll see what happens this fall. 

 Nunes: Do you see a crisis on the commercial side of the market? If so, how could it impact the residential side?

Abate: It’s hard to say. The only real obvious driver for a crisis is what could be a permanent impairment of occupancy in these commercial office buildings. The way that can affect our markets is there’s a trickle-down effect. If the buildings aren’t full, the restaurants aren’t full, the delis aren’t full, the subways are not full, and the hotels aren’t full because people aren’t traveling to see people in the office. That could have an effect on the economy in general, which would impact housing indirectly. As far as the economy goes, the airports seem more full than ever, and hotels seem to be doing fine. Overall, [the problem] is probably mostly office. But if it keeps getting worse, it certainly could have downstream effects.

Source: housingwire.com

Apache is functioning normally

The U.S. government is seeking to sell $13 billion worth of mortgage bonds amassed after the failures of both Silicon Valley Bank (SVB) and Signature Bank earlier this year.

First reported this week by Bloomberg News, the bonds in question are part of $114 billion in assets the Federal Deposit Insurance Corporation (FDIC) recovered when it assumed control over both banks earlier in the year.

The bonds are secured by “long-term, low-rate” loans made primarily to developers of low-income multifamily apartment complexes.

To aid the impending sales, the FDIC has reportedly considered alternatives to cutting bond prices up to and including repackaging the associated debt into new securities, Bloomberg reported. BlackRock Financial Market Advisory had preliminary conversations with investors about the bonds, the report said, citing unnamed sources.

In April, the FDIC decided to sell a portfolio of $114 billion in MBS it obtained after seizing control of the banks, retaining Blackrock to conduct the sale. In March, First Citizens Bank & Trust Company announced its intent to acquire all of SVB’s deposits and loans that were moved to an FDIC-created bridge bank after the collapse.

Source: housingwire.com

Apache is functioning normally

Mortgage rates have soared to historic highs in America, but one company’s CEO told Newsweek what they’re doing about it.

The popular 30-year term is now over 7 percent, a more than 20-year high. New homebuyers are discouraged from entering the market.

Applications for new mortgages have plummeted to their lowest level since 1996, according to the Mortgage Bankers Association (MBA). Homeowners who may want to sell and buy new properties are hitting pause and in turn stifling the supply of houses for sale, scared away by high rates.

Prospective buyers have been crowded out of the market.

House with sold sign in yard. One startup company is working to lower interest rates for some homebuyers.
Harold M. Lambert/GETTY IMAGES

One startup is hoping to change that. Roam, a new real-estate platform that launched on Wednesday, says it can help potential home buyers find mortgages for as low as 2 percent. The company is focusing on what’s called an “assumable mortgage” business where a homebuyer essentially takes over an existing mortgage from a seller.

“Roam is trying to help buyers wind back the clock on rates and purchase a home with a low rate mortgage included,” Raunaq Singh, founder and CEO of Roam, told Newsweek.

Singh, who worked as a Loan Officer at real estate business Opendoor, came to the idea after he struggled to find an affordable mortgage himself.

“The rates just kept going higher and higher, and the monthly payments kept going higher and higher, which meant that the number of homes I could afford kept getting smaller, and smaller and smaller,” he said in an interview.

Singh stumbled on the idea of assumable mortgages and was shocked to discover that there existed government-backed loans where the buyer could take over an existing mortgage from a seller at much lower rates than currently available in the market.

From there the concept of Roam emerged.

Singh found that few people knew about these mortgages and how to access them. The other thing he discovered was the process to acquire the homes was antiquated with the process still being done on pen and paper in some cases.

Even when a potential buyer has managed to discover these mortgages, they still have to deal with the process of eventually securing the property, which can be cumbersome and complicated. They have to deal with the seller, the seller’s agent, lenders and other parties before the transaction can be concluded.

Roam decided to digitize the process so that buyers could quickly get updates about available homes and make the exercise more efficient.

“We realized, if we quarterback this transaction on behalf of the buyer, everybody else would become more amenable. And we would take the stress out of the transaction,” Singh said.

The company is targeting 4.4 million homes whose mortgages are government-backed, such as those guaranteed by the Federal Housing Administration and the Department of Veterans Affairs.

The attraction of the homes for prospective buyers is that they come with low interest rates. Singh told Newsweek that his company is focused on homes that, if the interest rate is less than or equal to 4 percent, they have to have a loan-to-value of the home ratio of greater than or equal to 50 percent. And if the interest rate on the home is between four and 5.5 percent, they have to have a loan-to-value ratio of 75 percent. The focus for Roam is to make sure that the monthly payment is low for buyers, ideally less than half of what current rates would offer.

Roam, which launched today with an initial seed funding of $1.25 million, is available in Georgia, Arizona, Colorado, Texas and Florida. It has 10 employees.

The funding was led by Founders Fund’s Keith Rabois. Eric Wu, founder of Opendoor, is also an investor. They will both become board members. Other investors include Ryan Johnson, Culdesac CEO, and #ANGELS Founding Partner Jana Messerschmidt. Tim Mayopoulos, former CEO of mortgage company Fannie Mae, is joining the company as a senior advisor. Earlier this year, The Federal Deposit Insurance Corporation appointed him to briefly helm Silicon Valley Bank after its collapse.

The company is registered as a real estate brokerage in the states where it operates and will charge a 1 percent fee on the purchase price of the homes it helps sell.

One challenge the company will face is what happens when buyers take over a mortgage that still has outstanding loans to pay off and may need to borrow at current, high, interest rates to cover the balance.

Singh told Newsweek that the company will assist the buyer in securing financing for that loan. He added that whatever blended arrangement they will recommend, the goal is to help their customers save money.

“We would never recommend that a customer takes on a second lien if the monthly payments will be higher,” he said.

Roam is available as an online platform with a team that’s also available offline, Singh said. The company doesn’t yet have a mobile app.

“It’s something that people have asked us for, it’s something that’s on our roadmap,” he said.

Source: newsweek.com

Apache is functioning normally

The Federal Deposit Insurance Corp. said Tuesday that it was marketing $33 billion in commercial real estate loans it acquired during the receivership of Signature Bank earlier this year. The loans include significant investments in rent stabilized or rent controlled multifamily housing units in the New York metropolitan area.

Bloomberg News

WASHINGTON — The Federal Deposit Insurance Corp. announced Tuesday it would begin marketing $33 billion of commercial real estate loans that once belonged to Signature Bank in New York, which failed during the banking crisis this spring. 

The agency said it is setting up joint ventures to market about $15 billion of credits in the portfolio that are secured by rent-stabilized or rent-controlled units to fulfill its obligation to protect low-income housing availability.

“The FDIC will place the rent-stabilized or rent-controlled loans in one or more joint ventures (JV), with the FDIC retaining a majority equity interest in the JV,” the agency said in a news release. “The JV operating agreement will provide certain requirements that facilitate the financial and physical preservation of these loans and underlying collateral.”

Under the Federal Deposit Insurance Act, the FDIC has a statutory obligation to safeguard the affordability and availability of residential real estate for low- and moderate-income individuals. The agency said the $33 billion of loans — which the FDIC retained in receivership following the failure of the New York-based bank in March — are made up primarily of apartments in the New York metropolitan area. The FDIC previously announced it was considering various means of marketing the portfolio in a way that safeguarded the roughly $15 billion of low-income housing secured loans represented in the portfolio.

FDIC said while it will take on a majority equity interest in the joint ventures, ultimately the winning bidders on the loans will be responsible for maintaining the loan portfolio on their terms. 

“The winning bidders, or partners, will act as the managing member of the joint venture and will be responsible for the management, servicing and ultimate disposition of the loans,” the FDIC said in a statement. “The JV partner will be required to manage the portfolio in accordance with the JV operating agreement and be subject to stringent monitoring.”

The FDIC tapped Newmark & Company Real Estate to assist in advising on the sale. 

The FDIC will be accepting bids for Signature Bank’s former commercial real estate loans over the next three months. The agency indicated that it expects the sales to be finalized by the end of the year. The FDIC said its marketing strategy took into account input from relevant New York municipal and state agencies as well as community groups.

Signature Bank was shuttered by New York State regulators amid mounting withdrawal requests that decimated the bank’s available funds. Signature’s failure, along with that of Silicon Valley Bank, spurred banking regulators to invoke the systemic risk exception that would allow the FDIC to cover uninsured deposits. 

Following Signature’s failure, New York Community Bancorp’s Flagstar Bank acquired most of Signature’s deposits and some of its loans from the FDIC. The deal left out $4 billion of deposits related to Signature’s digital banking business, and a $60 billion loan portfolio.

Commercial real estate loans have been viewed with increasing anxiety by banks and regulators amid growing concerns about the disastrous effects delinquencies on such loans could have on the economy. 

Source: nationalmortgagenews.com

Apache is functioning normally

By Prof. Viral V. Acharya, C.V. Starr Professor of Economics, Department of Finance, New York University Stern School of Business (NYU-Stern), and Satish Mansukhani, Managing Director, Investment Strategy, Rithm Capital

Since the onset of the Federal Reserve’s (the Fed’s) monetary tightening in 2022, the 30-year fixed mortgage rate in the United States (US) has gapped out to 7 percent. Around 300 basis points (bps) at present above the 10-year US Treasury yield (see Figure 1), this spread has historically been stable at around 200 bps; this was the case even during the pre-pandemic interest-rate hikes (2016-19) and quantitative tightening (QT, 2017-20) episodes.

Why is this time different?

We explain below that the current break from this trend is caused critically by the interplay of the Fed’s and domestic banks’ balance sheets. Changes in the risk appetites of institutional investors (bank and non-bank) and the profitability considerations of mortgage lenders have combined with this interplay to produce an unprecedentedly fast and amplified passthrough of monetary tightening to mortgage rates.

Deconstructing the 30-year mortgage rate

In addition to the 10-year Treasury yield, the 30-year primary mortgage rate serves as a commonly cited benchmark for the US economy and financial markets. Two contributors drive the spread between this mortgage rate and the Treasury yield.

The first contributor is the yield offered on the benchmark mortgage-backed securities (MBS) issued by government-sponsored enterprises Fannie Mae and Freddie Mac—the so-called “agency MBS basis”. This basis reflects the risk appetites of institutional investors to absorb or “warehouse” mortgage interest-rate risks on their balance sheets.

The second contributor is the profitability margin for mortgage lenders, known as the “primary-secondary spread”. It captures not only the market power of lenders in mortgage markets but also the banking sector’s balance-sheet constraints in intermediating for the real economy.

Consider, in turn, the 10-year Treasury yields and each of these contributors to the mortgage spread.

Punch #1: Higher 10-year US Treasury yields, driven up by real rates

Excessive monetary and fiscal stimulus throughout the pandemic combined with supply-side shocks to induce a surge in inflation since 2021. Until the last few months, this bout of inflation appeared rather unrelenting. In response, the Fed has tightened its monetary policy aggressively to cool inflation and the economy, and the 10-year Treasury yields, which were just 50 bps in 2020, are now close to 4 percent, a full 350 bps higher.

Viewed through another lens, the 10-year real rate has risen from a pandemic low of negative 100 bps to a post-GFC (Global Financial Crisis of 2007-08) high of 150 bps. Immediately before the pandemic, and even during the rate-hike and QT episodes of the mid-2010s, this real rate stood at barely 50 bps. The overall rise in real rates has also lifted mortgage rates.

Punch #2: A wider agency MBS basis, driven by higher volatility and a reversal in technicals

The agency MBS basis can be considered the market price of the unique option presented to US borrowers to refinance their mortgages or lock in attractive fixed rates (as is the case currently). The higher the volatility and the wider the outlook for the range of interest rates, the higher the price of this option. Compared to the mid-2010s’ rate hikes and QT, agency MBS spreads are 60 to 80 bps wider today.

For about 12 months after the onset of monetary tightening in March 2022, the 30-day rolling correlation of the agency MBS basis to interest-rate volatility (MOVE Index) remained high, ranging from 60 to 80 percent (that the two series were highly correlated until March 2023 can be seen in Figure 2).

However, the “technicals” of the MBS market today have shifted dramatically, with the Fed and domestic banks as the largest holders of this asset class. A key US bank dynamic has emerged since March 2023, given the collapses of three regional banks: Silicon Valley Bank (SVB), First Republic Bank and Signature Bank. In their wake, the agency MBS basis’s correlation to rate volatility has dipped, as seen by the rising agency MBS basis and declining MOVE Index. In contrast, the correlation of basis to the inverse of the stock valuation of regional banks has risen (again, see the individual series in Figure 2), reaching a peak of 35 percent in May 2023, marking the low in the regional bank index and simultaneously a high in the basis.

Punch #3: Wider mortgage-lender margins, driven by low volumes and high volatility

Turning to mortgage-lender margins, mortgage lending is a volume business in terms of the profits it generates for lenders and largely depends on refinancing transactions. Today’s high mortgage rates place a significant disincentive in the economics of the majority of US borrowers who have “locked in” at post-pandemic ultra-low rates, shriveling down lender volumes to mostly purchase transactions. The resulting low volume of home sales is thus translating into high competition among mortgage lenders.

High competition suggests banks should be willing to tighten margins. However, lender margins are modestly higher today than in the mid-2010s’ rate-hike and QT episodes, ranging back then between 90 and 100 bps compared to the present 110 and 120 bps. A key factor driving this margin wider is (again!) higher rate volatility, which increases the pipeline hedging costs of mortgage lenders during the period they commit to making a loan to closing and eventually pooling the loan into an MBS through securitization. This balance-sheet effect seems to have swamped the competitive effect.

Amplifying it all: banks’ and the Fed’s balance sheets moving in tandem

An additional factor has, however, made the confluence of these three effects even more potent.

The GFC, notably the distress in the housing and mortgage sectors, depleted both the capital and liquidity of banks, the largest mortgage lenders then. The nature of the post-GFC regulations and rules, notably the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act), has made it costlier for banks to step into mortgages and MBS. In fact, a number of banks stepped away altogether from mortgage lending and servicing. The Fed filled this gap with some of its post-GFC quantitative-easing (QE) programs to support the mortgage and housing sectors. This backdrop led to relatively low levels of stable growth in the bank ownership of mortgages and MBS leading into the mid-2010s (see Figure 3).

However, as the Fed then halted QE and eventually embarked on QT, other rules, especially the favorable treatment of agency MBS as “high-quality liquid assets” in calculating the liquidity coverage ratio (LCR), led to a rise in the banks’ demands for MBS. This helped stabilize the MBS sector. And although banks made some (unrecognized) losses on their securities holdings by the end of the tightening cycle, cumulatively, the losses remained in aggregate below $75 billion.

Progression from this period into the pandemic saw the balance-sheet holdings of banks and the Fed paralleling (again, see Figure 3). The substantial stimulus led to an abundance of deposits (insured and uninsured) and low-yielding reserves at banks—but due to low demand in 2020, also a relative absence of sufficiently higher-yielding corporate loans in which to invest. The ultra-low rates and flat yield curve thus led to a search for yields, driving banks to buy Treasuries and agency MBS instead.

The post-pandemic monetary tightening of 2022 thus started with a far greater concentration of liquid-asset holdings in the hands of two large, correlated sets of balance sheets—namely, the Fed’s and the banks’. At present, new MBS issuances essentially have demand from neither, implying that the agency MBS basis is driven almost entirely by the risk appetites of non-bank institutional investors. As these investors are far more prone to rollover risks from heightened volatility, they demand greater risk premiums than banks typically would. This has significantly amplified the triple punch delivered to mortgage rates by monetary tightening.

What’s next?

An important lesson is that the unprecedented scale of fiscal and monetary stimulus during the pandemic worked through the commercial-banking system, creating the path dependency in how monetary tightening is now playing out, especially for mortgage markets.

Paradoxically, as mortgage rates rise, the willingness of labor in the US to adjust to sectoral demands lessens as the lock-in effects of ultra-low mortgage rates keep households from moving. This, in turn, keeps labor markets tight, wages high and inflation stubborn.

The Fed is thus caught between a rock and a hard place, with the demand- and supply-side effects of its tightening working in opposite directions. Which way will the pendulum swing? It is hard to know, but this may precisely be why interest-rate volatility has remained high.

ABOUT THE AUTHORS

Prof. Viral V. Acharya is the C.V. Starr Professor of Economics in the Department of Finance at the New York University Stern School of Business (NYU-Stern). He was the Deputy Governor at the Reserve Bank of India (RBI) from January 2017 to July 2019, in charge of Monetary Policy, Financial Markets, Financial Stability and Research.

Satish Mansukhani is the Managing Director, Investment Strategy, at Rithm Capital, a financial-services firm headquartered in New York City. In his prior roles as a sell-side strategist at Bank of America, Credit Suisse and Bear Stearns, Satish was perennially ranked for his work by Institutional Investor magazine.

Source: internationalbanker.com

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One year ago, the Community Mortgage Lenders Association merged with the Community Home Lenders of America, creating the Community Home Lenders of America.

What have we learned from the last year?  First, there is a critical need for a national trade group that distinctly and vigorously advocates for the interests of small and mid-sized independent mortgage banks.  

When Silicon Valley Bank imploded, certain parties in Washington re-doubled their efforts to engage in scaremongering Washington policy makers about the alleged significant taxpayer “risks” of IMBs. This allegation is unfounded – but these types of claims can have consequences, they can’t go unchallenged.

So, CHLA promptly released a report decisively rebutting the overhyped claims of IMB risk, documenting the “ubiquity” of both financial and consumer regulations on IMBs, and explaining how regulatory overreach could undermine the availability of affordable mortgages precisely at a time when homeownership challenges are rising because both mortgage rates and home prices are rising.

We have learned (or reaffirmed) that there is a critical need for an association that continues to educate Congress and federal agencies about the key role of IMBs in access to mortgage credit, leading the market in originating loans for minority, underserved, and first-time homebuyers.

Last October, CHLA continued the practice of releasing an annual “CHLA IMB Report.” This report explains what IMBs are, uses statistics to show the growing mortgage market dominance of IMBs (e.g.,  IMBs originate 90% of FHA and VA loans), and highlights the key issues for IMBs, along with practical policy recommendations.

We have learned that a larger organization means more resources, more member expertise, and a diversity of opinion that strengthens our advocacy efforts. CHLA and CMLA had represented slightly different arcs of the market for smaller lenders.  The combined group gives us more breadth, ranging from the smallest IMBs to much larger mid-sized IMBs that securitize FHA, VA, and GSE loans

On behalf of small correspondent lenders, for example, CHLA has advocated for a Ginnie Mae cash window and a proposal to make aggregators more accountable to correspondent lenders in challenging GSE repurchase requests. Large mortgage lenders often have their own lobbyists in Washington or an outsize role in trade groups.  So CHLA sees vigorous advocacy on behalf of smaller IMB lenders as an essential part of our mission.

We have learned that a larger organization translates into significantly greater policy successes.  Key priorities that CHLA has been an acknowledged leader on came to fruition this last year – including an FHA premium cut, a number of much appreciated flexibility provisions related to Ginnie Mae pooling, and divestitures by ICE in response to CHLA criticism and FTC opposition to their purchase of Black Knight (although our push to fight abuses continues).

We learned (or reaffirmed) that having a bottom-up, member-centric trade group makes it easier to set priorities and take actions that reflect what matters most to community-based IMBs.  Many initiatives CHLA pursued this last year were issues that Members suggested on our weekly calls.  These resulted in CHLA proposals to reign in abusive trigger leads, to fight FICO’s 400% discriminatory fee hike and to develop proposals to recruit more minority and underserved loan originators (the best way to help IMBs do an even better job of serving those borrowers).

Finally, we have learned (or reaffirmed) that a trade group does not just have to reflexively advocate for special interest provisions for their members, but also has a vested interest in consumer protections.  

Consumer confidence in the mortgage process is critical to the success of mortgage lenders and the right thing to focus on.  So, CHLA recently released its “Consumer Bill of Mortgage Rights,” identifying seven critical gaps on mortgage consumer protections.   

These include universal licensing of all loan originators, reigning in trigger leads, rolling back the FICO credit score hikes, consumer protections for dual compensation, and FHA ending their Life of Loan premium policy.

We can’t wait for the next year.  And any IMB that likes what we are doing, give us a call, join our mission.

Source: nationalmortgagenews.com

Apache is functioning normally

Credit Report, Buyer Research, Broker Processing Products; Guild and First Centennial Deal

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Credit Report, Buyer Research, Broker Processing Products; Guild and First Centennial Deal

By:
Rob Chrisman

Mon, Aug 28 2023, 10:31 AM

As the rumor spreads that millions of women are lined up to be weighed at the Fulton County Jail, we head into late summer and early autumn, rarely a time for increased home sale activity. The National Association of REALTORS®’ total membership in July 2023 is 1.56 million. There are about 547k active listings. That’s one listing per three NAR members, which doesn’t even include non-NAR real estate agents. Analysts continue to point to the nationwide housing market struggling with low inventory levels and decreased affordability. While active inventory through the first six months of 2023 was higher than the record lows set in 2022, new listings have been lagging below 2022 levels. Just simply not enough homes? But Hawai’i’s Marcelle Loren writes, “I don’t agree with the reports of a lack of inventory. There’s just a lack of agents digging up properties to sell. For example, the death of Baby Boomers is a source of inventory: Rising costs are prompting more adult children to sell the homes they inherit from their parents. (Today’s podcast can be found here and this week’s is sponsored by Black Knight. Black Knight is an award-winning software, data and analytics company that drives innovation in the mortgage and real-estate industries, and the capital and secondary markets. Listen to an interview with the company’s Conrad Ficca and Richard Lombardi on climate risk and how lenders can mitigate its impact through data.)

Lender and Broker Software and Services

“How will this solution improve the homebuyer or homeowner experience?” This simple question guides the way we develop and deliver products at Black Knight, a mindset we call “Think Customer.” By combining this mentality with a Scaled Agile Framework (SAFe), Black Knight aligns product development and delivery with end-consumer needs while staying ahead of the latest market and technology advancements. Learn more about the value this approach has brought Black Knight clients and their customers in the blog post “’Think Customer’ in an Agile World”.

In this market, hustle is everything. You can’t afford to waste a single deal, or a single minute. That’s why ReadyPrice has launched Shop.Lock.Deliver.® It’s an innovative new platform designed to help independent mortgage brokers like you save time and money. Now you can shop competitive loan offerings from multiple lenders, get rate lock guarantees in real time, receive underwriting findings, and deliver the borrower’s complete loan file to lenders, and all on a single platform, at no cost to brokers. It’s the industry’s most powerful universal delivery portal, and it’s already helping brokers around the country thrive and compete in even the toughest market environments. Multiple lenders. One platform. Zero b.s. Check out ReadyPrice today.

Free report: These growing borrower segments present opportunities for new business in 2023’s market. Wondering how to fill your pipeline when loan volume is scarce? New data from Maxwell gives lenders an exclusive look into home buyer groups taking on higher rates head-on. Did you know, for instance, that the share of 18 to 24-year-old borrowers has increased by 18 percent year-over-year? Now is the time to cater to these rising home buyers. For exclusive data and actionable takeaways, click here to download Maxwell’s Q2 Mortgage Lending Report.

Credit Products for Brokers and Lenders

In today’s competitive landscape, every dollar and interaction matter more than ever. Blend’s first-of-its-kind soft credit pull delivers a simpler pre-qualification process, reducing top-of-funnel friction, cutting approximately $50 per credit file, and safeguarding borrowers from tri-merge solicitation and negative impacts on their credit scores. For lenders, Blend’s soft credit pre-qualification streamlines the application process, reducing drop-offs and increasing conversion rates. It provides lenders with valuable insights without an expensive hard credit inquiry, improving risk assessment and decision-making. Blend seamlessly integrates soft credit checks into the mobile loan officer experience and self-serve processes, with widespread adoption, ultimately leading to substantial cost savings for our customers. For borrowers, soft inquiries remove barriers to accessing early eligibility information, protect borrower credit scores, and promote financial empowerment, encouraging more borrowers to engage with lenders. Soft credit pre-qualification is a game-changer in the lending industry and a true win-win for borrowers and lenders.

Fraudulent employment data in mortgage loan applications cause risks for lenders and borrowers. For many years, it has been common practice for mortgage lenders or brokers to ask for paper pay stubs to help verify loan applicant’s income. But in 2022, out of all mortgage loans that had a fraud investigative finding, 43 percent were classified as income fraud. Technological advances allow lenders to instantly and securely obtain reliable income and employment verifications from a trusted third-party provider. Available for use by credentialed verifiers with a permissible purpose under the FCRA, The Work Number® database is the leading commercial repository of employer-contributed payroll data. Unlock the power of our expansive database, instant access to 161 million current employment records directly from 2.8 million employers and payroll providers. With buybacks on the rise, why use paper-based processes that potentially increase repurchase risk at a time when proven GSE-approved options exist?

The Big Getting Bigger

Guild Mortgage further expanded its market share with the announcement this morning of the company’s acquisition of First Centennial Mortgage, a privately held residential lender headquartered in Illinois. Founded by brothers Steven and David McCormick in 1995, First Centennial will bring 15 branches and nine satellite offices to Guild’s growing national retail network. This acquisition is Guild’s third this year, following its purchase of Cherry Creek in April and Legacy Mortgage in February. (Guild was represented by the STRATMOR Group’s M&A team.)

Lenders tired of the rate volatility, the cost cutting, rates possibly trending higher with the Fed fighting inflation (until the Silicon Valley bank failure drove them down) may be looking at selling their company or merging it. “Valuing a Lender” was recently posted on the STRATMOR website.

Sure enough, STRATMOR’s M&A practice is on fire as big lenders have become small lenders, or brokers, and culturally paired lenders are wondering, “Why have two accounting teams? Two capital markets groups? Two underwriting staffs?” And so on. (Anyone interested in learning more should talk to David Hrobon or Garth Graham.) Of course, as has been mentioned in this commentary, larger lenders are also adept at simply hiring production staff away from smaller, thinly capitalized lenders.

Many owners of lenders around the nation are earnestly interested in making a decision about what to do with their company before a decision is made for them. I have received this question from a number of owners of small lenders. ‘Rob, is it only the lenders who have servicing who have any value? Or can small lenders with decent market share like mine have interest from buyers?”

Garth Graham replied. “Great question, Rob, and one we field nearly every day. We are hearing from lenders who are inquiring about the M&A space, and often trying to find out what is going on and what they should do.

“The answer is that there continues to be good deals for potential sellers, and the reason is that there are a lot of buyers we work with who continue to want to grow market share in a down market. We closed three deals in the last 60 days, and all had upfront premiums with solid earn outs, with a good cultural fit for the parties. Often the premium being paid is driven by the ability for the seller to add the production without having to add all the corporate expense, so it can be painful decisions about the corporate depts (secondary, HR, Risk, technology etc.), but the end result is that the production is worth more to the buyer than it is to the seller due to the cost savings. And that shows up on premium offers. And the seller gets the balance sheet plus a share of that financial benefit. So, it can be a potential win-win. Of course, it has to be a deal that makes sense for the LOs, and production staff too, so that is why culture matters so much.” Thank you, Garth.

To wrap up, in valuing a company, a potential buyer will look at the audited net worth and the discounted cash flows, usually for the next three years of estimated earnings. (The devil’s in the details and assumptions!) The value to a potential buyer will depend on different factors, and three main variables often used in an analysis are loan volumes, margins, cost structure, & profitability, and the current policies, procedures, & business model.

Of course, repurchase obligations are included, as well as existing or potential liabilities. Are there outstanding lawsuits? Is the buyer buying the entire company, or a percentage of ownership… a minority ownership has very little value. It is not a simple process, and making assumptions about the future is problematic. A thorough examination of these factors is where the value of a competent advisor shows itself.

Capital Markets

Spoiler alert: our Federal Reserve doesn’t set mortgage rates, but the “hawkish” tone from Federal Reserve Chairman Jerome Powell was an indication that there won’t be much slack in the battle to bring down inflation. If they are any indication, futures trading is pricing in roughly a two-thirds probability that the central bank will boost its key interest rate by a quarter percentage point in November after a pause in September.

In an eagerly anticipated speech from Jackson Hole on Friday, Fed Chair Powell made no bones about the Fed’s unwavering pursuit of returning annualized inflation to 2 percent. As far as the Fed is concerned, the message is “stay the course” even if that means even higher interest rates. Powell reiterated that the Fed would not change its long-term inflation target of 2 percent as some market commentators may have hoped and reaffirmed the reliance on incoming economic data and the potential to further tighten monetary policy if the conditions warrant. His wholly expected remarks seem to have had a calming effect on markets. Other central bank chiefs echoed Powell in projecting a cautious stance, saying the inflation triggered by Covid-19 and its fallout has not been fully conquered.

While recent data has been trending in the Fed’s desired direction, Powell noted that the previous two months of data are not enough to instill confidence that inflation will continue to trend down towards the Fed’s goal. There are still supply and demand imbalances that put upwards pressure on inflation specifically as it pertains to shelter and non-housing services. Overall, goods prices have declined and residential lease rates are cooling, however home prices remain high due to lack of supply. Given the desire not to repeat the mistakes of the 1970s in declaring victory over inflation too soon, it is not surprising the tone of the Fed continues to be one of caution, which may continue even as more positive data is released.

The Federal Reserve is data-dependent, of course, and this week is packed with potential market moving events including front-loaded month-end supply, and economic data including several labor market indicators, culminating with monthly U.S. employment numbers that will be released on Friday, and Fed-favorite PCE on Thursday, which also happens to be month-end. Other economic data of interest include housing-related releases, consumer confidence, GDP, Chicago PMI, ISM, and construction spending. The start of the week is all about supply with the Treasury auctioning $45 billion 2-year notes and $46 billion 5-year notes. Today also brings Dallas Fed Texas manufacturing for August and comments from Fed Vice Chair for Supervision Barr. We begin the week with Agency MBS prices roughly unchanged from Friday’s close and the 10-year yielding 4.23 after closing Friday at 4.24 percent. The 2-year is at 5.10 after Fed Chair Powell’s Friday comments drove the yield higher.

Employment

“A seasoned executive is looking to explore the next growth and strategic opportunity. Over the course of a twenty-three-year career, I developed expertise in many aspects of the business, spanning retail, wholesale, and correspondent production. Background also includes a deep understanding of MSR and servicing operations. Proven ability to manage businesses at scale, with a strong focus on compliance, credit, and enterprise risk management. Passionate about process optimization and leveraging technology to drive efficiency, all while fostering a positive organizational culture. Track record includes driving maximized revenue through aggressive yet responsible growth strategies. Working for private equity-owned organizations, providing valuable experience in capital acquisition and broad investor relations. If you’re interested in learning more about my background and how I can contribute to your team’s success, please don’t hesitate to contact Anjelica Nixt to forward your note.”

The Maryland regional office of USA Mortgage has added leading Home Loan Officer Jamison Mullen to its team. Mullen, a 20-year industry veteran, joins a USA office headed by Bill Sohan who recently came on board as a regional vice president. “I wasn’t looking for a change. I was with a great company. But sometimes an opportunity arises that you can’t ignore,” said Mullen. “When Bill and Sam Rosenblatt approached me about joining forces, I had to listen. And as soon as I met the corporate leadership team at USA Mortgage, I knew they were the kind of people I wanted to work with for the remainder of my career.” Founded in St. Louis in 2001, 100 percent employee-owned USA Mortgage has offices in 34 states and is licensed in 49 states plus the District of Columbia. For a confidential conversation about joining USA, contact Bill Sohan at 410-963-2308.

Quality. Stability. Virtue. Traits that define a successful mortgage company, or any company, for that matter. But when we’re talking about mortgages, InterLinc Mortgage hits the mark on these three skills, and more. With an average of $32 million in annual production per Loan Originator, the mortgage team not only kept pace through a turbulent market, but they did also so with excellence. Scotsman Guide’s 2022 Top Overall Lender and Top Retail Lender awards prove the grit and sustainability displayed by the producers (which is an assembly of the elite) and its leaders. A company that proves fortitude and character…worth the look.

 Download our mobile app to get alerts for Rob Chrisman’s Commentary.

Source: mortgagenewsdaily.com

Apache is functioning normally

Consumer price increases cooled further in March, which is welcome news for the Federal Reserve, which made the challenging choice at its March meeting to continue with its federal funds rate hikes despite the failures of Silicon Valley Bank and Signature Bank.

The Consumer Price Index (CPI) rose by 5.0% in March, before seasonal adjustment compared to one year ago, a dramatic decrease from the 6.0% year-over-year jump posted in February, according to data released Wednesday by the Bureau of Labor Statistics (BLS).

This was the smallest 12-month increase since the  year ending in May 2021 and the ninth consecutive month of declines. Indexes that contributed to the annual increase were food (+8.5%), motor vehicle insurance (+15.0%), household furnishings and operations (+5.6%), recreation (+4.8%), and new vehicles (+6.1%). Shelter also posted a significant increase, rising 8.2% year-over-year and accounting for over 60% of the total increase in the all items less food and energy index, which was up 5.6% compared to March 2022.

In contrast, the energy index was down 6.4% compared to a year prior.

“Inflation was down significantly in March, but we are still not down to the magic number the Fed is looking for. Housing costs are still a key driver of inflation, accounting for the largest part of the monthly increase in the CPI,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement.

The CPI also cooled on a month-over-month basis, posting a 0.1% monthly increase in March compared to a 0.4% monthly increase in February. Just like the annual index, the energy index was down month-over-month dropping 3.5%, while the index for shelter jumped 0.6% from the month prior as the indexes for rent and owners’ equivalent rent both rose 0.5% from a month prior.

Other indexes that posted monthly increases included motor vehicle insurance (up 1.2%) and airline fares (up 4.0%), while the indexes for medical care (down 0.3%), used cars and trucks (down 0.9%), and food at home (down 0.3%) all fell. This was the first time the food at home index posted a decline since September 2020.

Despite the slower pace of inflation, economist do not believe home buyers facing still elevated prices on top of higher mortgage rates will be out of the woods any time soon.

“The challenge with housing is that there are so many factors beyond the control of the Federal Reserve keeping housing costs high. High inflation led the Fed to raise interest rates, leading to higher borrowing costs, including making it more expensive to finance a home purchase. Higher mortgage rates have slowed demand by pricing some would-be buyers out of the market,” Sturtevant said. “Although home prices have fallen in some housing markets, the year-over-year price declines have generally been modest and affordability is a growing challenge, both on the ownership and rental side.”

Sturtevant recommends the government look into policies to slow price or rent growth, as she says higher interest rates alone will not ameliorate the situation.

“Rate hikes will not solve the housing affordability problem when lack of supply is what fueled rising home prices. What we need is more housing supply to bring down prices and make housing more affordable to more people,” Sturtevant said. “The Federal Reserve is not going to solve the problem, no matter how much some people hope that is the case. In reality, the solution is tough choices at the local level to reduce regulation and responsibly encourage more housing in the places that are best connected to jobs, transportation, services and amenities.”

Source: housingwire.com

A version of this article appears in print on  , Section B, Page 4 of the New York edition with the headline: High Mortgage Rates Are Cooling the Demand for New Homes. Order Reprints | Today’s Paper | Subscribe

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Source: nytimes.com