Chase & Wells Earnings and Mortgage Numbers; Flagstar and Freddie; The Return of Subprime?

The
financial industry has taken careful note of former House Speaker Newt Gingrich
writing a $500 check on an account that had no money in it. Both parties say it is the first sign that
he might be qualified to be President.
(Political “wits” said the $500
check, to put him on the Utah Primary ballot, bounced “which was too bad
because Utah is the one state where all of his wives could have voted for
him.”)

Welcome to
Friday the 13th. There are three of them this year. Some folks don’t
like the 13th of anything, for very ancient reasons: there are 13
witches in a coven, many cities do not have a 13th Street or Avenue, many
buildings don’t have a 13th floor on the elevator bank, and legend has it that
if 13 people sit down to dinner together, one will die within the year (rumor
has it that one could refers to the Last Super, where 13 were present). My
guess is that you could find similar things with other numbers, but I am not
going to argue about it.

I really
enjoy my April Fools edition of the commentary. This
headline could have made the edition – but it’s for real: “Big banks Woo Subprime Borrowers Again:
Lenders again willing to extend credit to risky clients.” The full story
can be found here but at this point few people should be asking, “When will mainstream
subprime start to come back?”

Goldman Sachs made the news yesterday when it
settled with the SEC for $22 million.
This was to settle regulatory charges that its analysts shared confidential
research with favored clients during weekly “huddles” from 2006 to 2011 where
they discussed confidential research on stocks with the firm’s traders. The
analysts then passed on the ideas to a select group of top clients, the
regulators said. Critics are quick to point out that $22 million is a “drop in
the bucket” to Goldman, especially how its earnings fared during those five
years.

Boards of
Directors are always open to possible lawsuits, although many are covered by
Directors & Officers Insurance to some degree. The FDIC is going after Jim McMahon (ex-Bears QB) – he sat on the
board of a failed bank. Someone wrote from New Jersey, “Maybe the FDIC
should have required a CAT Scan of all bank board members. They can list the
results on NMLS.”

If you’re
in Washington State next week, you should check out the Washington Association of Mortgage Professionals Housing Summit.
Going to a WAMP event should be on everyone’s bucket list, and it’s priced at
only $59 in advance. You can register on the site or by calling 888 320 0028
for more information.

Yesterday’s
commentary
mentioned a large institution “making good” on the bad debt created
when its agent – AppraiserLoft
stiffed appraisers. It turns out it is MetLife
stepping up to the plate.

The CFPB
has become practically a daily newsmaker. Recently, of course, the CFPB said it
will propose mortgage servicer rules this summer and finalize them by January that
will require servicers to contact to delinquent borrowers; give borrowers an estimate
of when a mortgage will reset at a higher interest rate and an estimate of the
resulting monthly payment; standardize monthly payments; apply monthly payments
the same day; send two warnings before demanding force-placed insurance; inform
borrowers of the cost of the insurance; provide foreclosure counseling to those
who need it; and provide options to borrowers to help them avoid losing their homes.
What member of the public is going to argue with that? Of course, costs will be
passed on to the borrowers.

I went to
colege, and sometimes it even shows in my writing. Getting accepted to college is
a big deal, and can be overwhelming. But the CFPB is here to help – maybe they’ll
even make colleges charge less for tuition in this “we’re heading for a
non-free-market economy.” Editorializing aside, the CFPB has come out with a new prototype Financial Aid Comparison
Shopper for parents of 18-yr olds
: www.consumerfinance.gov/payingforcollege/.
“This is just our starting point, and we need your help to ensure that the
Financial Aid Comparison Shopper addresses the needs of students and their
families. Your feedback will directly impact the changes we make before our
full launch.”

This prompted one mortgage banker from Utah to write, “Everything in the
nation involves consumers and money – so does
that mean the CFPB will become a massive, bloated agency?
This is not a
slippery slope, it is a slippery cliff. I find the CFPB the single scariest
agency in existence.   I think people will realize what has been
created and how much power it has somewhere around 2014 – 2016.”

Right from
the trenches…”Short Term Trend From A High Volume Online Mortgage Loan
Officer” After Friday’s worse than expected jobs report, not only did I
see mortgage refinance applications increase, but borrowers floating their
rates, were coming off the fence to lock in at improved pricing.  That
trend continued Monday and Tuesday as my pipeline of rate floaters realized the
pricing benefit and locked their rates in.  Some of these borrowers saved
close to $1000 in lender fees from Friday to Tuesday.  It’s amazing that
homeowners are refinancing out of 4.375% 30 yr. fixed mortgage rates into lower
rates with nominal fees.  Who could’ve predicted that?” (So wrote
Yale Roth, who has a website at http://iMortgageQuestions.com.)

“Due to inconsistencies with HVE values and restrictive loan amount
calculations,” Flagstar Bank told
its brokers that it “will be indefinitely suspending the Freddie Mac Open
Access Program, Freddie Mac Open Access II
. All loans currently in the
pipeline and registered under the Freddie Mac Open Access II must be locked and
submitted to Underwriting on or before April 27. Loans must be funded and
delivered to Flagstar no later than June 1.

Earnings for Citi come out on Monday,
BofA next Thursday, but this morning we heard from Wells and Chase, #1 & #2
in originations
. JPMorgan,
the biggest U.S. bank by assets, said first-quarter profit fell 3% but posted
first-quarter earnings excluding items of $1.31 per share, up from $1.28 a
share in the year-earlier period and better than expected. Mortgage banking
application volume was up 33% compared with prior year, and Chase originated
over 200,000 mortgages in the first quarter and has “offered more than 1.3
million mortgage modifications since 2009 and completed more than
490,000.”

“The
provision for credit losses was a benefit of $96 million compared with
provision expense of $1.2 billion in the prior year and $779 million in the
prior quarter. The current-quarter provision reflected lower net charge-offs
and a $1.0 billion reduction of the allowance for loan losses, due to lower
estimated losses as mortgage delinquency trends improved. The prior-year
provision for credit losses reflected higher net charge-offs; the prior-quarter
provision reflected a net reduction of $230 million in the allowance for loan
losses.

“Mortgage production-related revenue, excluding repurchase losses, was $1.6
billion, an increase of $722 million, or 80%, from the prior year, reflecting
wider margins, driven by market conditions and mix, and higher volumes, due to
a favorable refinancing environment, including the impact of the HARP.
Production expense was $573 million, an increase of $149 million, or 35%,
reflecting higher volumes and a strategic shift to the Retail channel,
including branches, where origination costs and margins are traditionally
higher. Repurchase losses were $302 million, compared with repurchase losses of
$420 million in the prior year. Mortgage production reported pretax income of
$744 million, an increase of $691 million from the prior year.

Mortgage loan originations were $38.4
billion
, up 6% from the prior year and relatively flat compared with the
prior quarter; Retail channel originations (branch and direct to consumer) were
$23.4 billion, up 11% from the prior year and relatively flat compared with the
prior quarter. Mortgage loan application volumes were $59.9 billion, up 33% from the prior
year and 14% from the prior quarter, primarily reflecting refinancing activity.
Total third-party mortgage loans serviced was $884.2 billion, down 7% from the
prior year and 2% from the prior quarter.

Chase’s mortgage servicing-related revenue was $1.2 billion, a decline of 5%
from the prior year, as a result of a decline in third-party loans serviced. Foreclosure-related
matters, including adjustments for the global settlement with federal and state
agencies, resulted in approximately $200 million of additional servicing
expense. The prior-year servicing expense included approximately $650 million
related to foreclosure-related matters. MSR risk management income was $191
million, compared with a loss of $1.2 billion in the prior year. The prior year
MSR risk management loss included a $1.1 billion decrease in the fair value of
the MSR asset for the estimated impact of increased servicing costs. Mortgage
servicing reported a pretax loss of $160 million, compared with a pretax loss
of $1.9 billion in the prior year.”

Wells Fargo’s results also beat
expectations
with higher
first-quarter profits helped by strong mortgage banking results and set aside
less money for bad loans. Wells (the #4 bank in the U.S. but the #1 residential
lender with market share hovering around 1/3) originated $129 billion of mortgages in the first quarter, up from $120
billion in the fourth quarter and $84 billion a year earlier
. Mortgage
banking non-interest income totaled $2.87 billion, up 42% from a year earlier. The
bank reported a profit of $4.25 billion in the first quarter, up from a year-earlier
profit of $3.76 billion. Credit-loss provisions totaled $2 billion, down from
$2.21 billion a year earlier and $2.04 billion in the fourth quarter. Net
charge-offs, or loans lenders don’t think are collectible, fell to 1.25% of
average loans, compared with 1.73% a year earlier and 1.36% in the fourth
quarter.

Looking at
interest rates, nobody would have guessed that you could mix a series of Treasury
auctions with more bad economic numbers “only to get a market that moved less
than the Santorum Bus Tour.” But look at these rates: Freddie reports that the
15-year average hit a record low (3.11%) and 30-yr average rates are down to
3.875% – who can complain? Our 10-yr t-note went back below 2% briefly this
week as yields on Spanish and Italian bonds increased. MBS prices are doing
well, with news being made as the HARP bonds are entering the market in the
form of 30-year greater than 125% LTV bonds settling in June (2 pools from Citi
and Wells for almost $500 million). It is rumored that the usual suspects were
interested in buying them: money managers, REITS, and primary dealers. Experts
believe that there will be between $1-2 billion in MBS production per
month. 

Trading-wise,
our 10-year notes were marked out at 2.05% Thursday. This morning the Consumer
Price Index came in just as expected, +.3% with a core rate (ex-food &
energy +.2%). Later we’ll have a Consumer Sentiment number for April 13, 2012. We find the 10-yr slightly improved to
2.02% and MBS prices better by about .125.

Some
things make one guffaw as soon as they see the photo. But the new Realtor term
is also excellent: http://sacramentoappraisalblog.com/2012/04/10/parcel-mullet-real-estate-word-of-the-day/.

…(read more)

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