May 26, 2009: Rates moving higher; big banks learn how to spell “accretion”; servicing of interest

May 26, 2009: Rates moving higher; big banks learn how to spell “accretion”; servicing of interest Rob Chrisman

I was driving along the other day with my son and daughter, listening to the radio about yet another company that was laying-off employees. My son said, “The economy is so bad that McDonalds is now selling the ¼ ouncer, and parents in Beverly Hills fired their nannies and learned their children’s names.” Not to be outdone, my daughter rejoined, “Yes, and I heard that people in Africa are donating money to Americans, and Jewish women are marrying for love.” So I said, “Yup, Motel Six won’t leave the light on for you, and the mafia is laying-off judges.”

Boy, if it hadn’t been for the “price changes for the worse” yesterday, I wouldn’t have gotten any e-mails at all! Not that mortgage prices trade in lock-step with the 10-yr anymore (but they are pretty close in price to whatever the 5-yr is doing) but yesterday the 10-yr broke through the 3.50% level. This morning we are at 3.53%, and mortgages are another .250 worse. Oil prices hit a 2009 high after the Consumer Confidence numbers came out, and OPEC is suggesting that we’ll be at $75 per barrel before too long. For mortgage-backed securities, they were worse in price by .25-.5, depending on coupon. The expectation, however, is that the Fed will still “defend” securities backed by mortgages. But with the government selling $100’s of billions of debt, and the stock market believing that the economy is on the rebound, rates have little choice but to move higher.

Most analysts feel that the only reason that mortgage interest rates have remained as low as they have is because the government continues to buy mortgage backed securities. And until the private sector starts to buy larger volumes, the situation remains uncertain at best – just look at the jumbo loan market which continues to suffer from the lack of investors. (And yes, I know that there are buyers of jumbo loans out there, but the historical spread between conforming and jumbo has been about .25-.5%, and now it is over 1.0%. Banks, who are the owners of jumbo product, can charge more because these loans must remain on their books thus eating up their capital.)  If, going forward, the economy is going to rebound – and most expect it will – look for rates to continue higher.

How do you make $29 billion in this economy? If you’re JPMorgan Chase, you take advantage of an accounting rule that lets one transform bad loans it purchased from WaMu into income. Not to be outdone, Wells Fargo, Bank of America, and PNC Financial will also benefit from their takeovers resulting in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce. All of these banks acquired loans that were marked down before they went on the books, and now they are “writing them back up”, known as “accretion”. Nice.

How are loan modifications working? Not so well, according to the rating agency Fitch. Mortgages that are modified only delay the inevitable, they say, and predict up to 75% of such loans will re-default after 12 months.

Servicing continues to be of interest. For example, some of the mid-tier players, such as Franklin American, are actively weighing the decision to keep (retain) servicing, especially in certain geographic areas. Gone is the notion that it always makes the most sense to hold on to lower note rates, since often times large investors will pay the highest servicing-released premiums for precisely those loans. Of course, the first major decision is whether or not a particular company can actually retain servicing. But once that is determined, risk management companies such as MIAC, Flatirons, and MCM are regularly educating clients, and potential clients, on this topic. For example, today at 3PM EST Phoenix Capital and Compass Analytics will be hosting a webinar covering whole-loan best execution between retaining servicing and selling servicing released. (If interested, contact kkramer@compass-analytics.com.)

 

And while we’re talking education, here in California the 37th Annual Western Secondary Market Conference is coming up in early July. (Has it almost been a year already?) Not only will the big investors have speakers, but they’ll have panels on the future of correspondent lending, net branching, servicing, risk management, warehouse banks, etc. Contact Stacey@cmba.com for information

A pompous minister was seated next to a Cajun on a flight across the country. After the plane was airborne, drink orders were taken. The Cajun asked for a whiskey and coke, which was brought and placed before him. The flight attendant then asked the minister if he would like a drink. He replied in disgust, "I’d rather be savagely assaulted by brazen trollops than let liquor touch these lips." The Cajun then handed his drink back to the flight attendant and said, "Darn, me too. I didn’t know we had a choice."

Rob

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