navycmdr
3 days ago
https://x.com/rcwhalen/status/1790715551485939835
Freddie Mac Buying HELOCs? Really Meredith? | UWMC & Disappearing MSRs
May 10, 2024 | Earlier this week in the Financial Times, famed analyst Meredith Whitney
penned a strange comment supporting an equally peculiar proposal by the Biden
Administration for Freddie Mac to buy home equity loans. This is a really bad idea
that is typical of the work coming from the Biden Administration and their surrogates
who occasionally dabble in mortgage finance.
Readers of The Institutional Risk Analyst will recall Ms. Whitney boldly predicting the collapse of the municipal loan market in 2012. We personally witnessed Cumberland Advisors CIO David Kotok tell Business Insider in August of that year from Leen’s Lodge:
“We entirely disagree with Meredith Whitney, who persists in predicting that this world of state and local government finance will end in disaster. We say it won’t. In Maine, we can point to a concrete example.”
As with the earlier call on municipal defaults, we think Whitney’s comments about a surge in new financing from home equity loans are poorly considered and not well grounded in market realities. Anybody in the residential mortgage market will tell you that spending time chasing second liens that must ultimately be sold to a bank means you are nearing a significant inflection point in your career. The chart below from FRED shows all outstanding second lien home equity lines of credit.
Whitney writes:
"Last month, the government-sponsored mortgage finance agency Freddie Mac filed a proposal with its regulator, the Federal Housing Finance Agency, to enter into the secondary mortgage market, otherwise known as home equity loans… A Freddie Mac second mortgage/home equity proposal could unleash a tidal wave of new liquidity - if it's approved.”
And later Whitney writes:
“In 2007, just before the financial crisis, there was more than $700bn in home equity loans outstanding. Today, there is roughly $350bn. Home prices have risen more than 70 per cent since then, so why have home equity loans halved?”
Short answer: Because there is little actual demand. But today's politicians never worry when private markets are telling them that a given policy won't work. The Biden Administration's approach to housing over the past four years has been a complete disaster for consumers and lenders. Andrew O'Hagan, writing about the disgraced Republican congressman George Santos in the New York Review of Books, describes the rules of engagement in the New Gilded Age:
"The most moving thing about Santos’s lies is how many of them could be disproved in seconds. He doesn’t care about the truth, and it may be that his lack of prep is consonant with the radical style in populist politics today, which runs on the idea that everything can be brazened out, everything can be believed, as long as one subscribes to the use of a magical verbal currency in which statements are beyond proof and somehow truer than truth."
Whitney talks about the GSEs unlocking trillions of dollars in new financing for home ownership by having the GSEs purchase second liens. No, sorry Meredith, this is completely wrong. Second liens are mostly originated by banks and mostly retained in bank portfolio. Having the GSEs waste time and money buying and securitizing closed-end second lien loans is a bad idea. Let’s count the reasons why.
First, the demand for all home equity products including HELOCS has been weak since the peak of the market in 2008. The unpaid principal balance of HELOCS in the US has been declining for 15 years, but has risen slightly since 2021. The key factor here is demographics. As the population of homeowners has aged, the need for tapping home equity has waned. Low interest rates over the past 40 years have also detracted from interest in second liens.
Most banks that offer first lien mortgages will originate and retain a second lien, yet there is scant demand even as the equity in homes has soared. That green line in the chart below shows closed-end second liens owned by banks, basically the entire market. There is a little bit of growth, but rates would need to go back to early 2000s levels and loiter for a period of years to really move the needle.
Source: FDIC
Second factor is the rise of the nonbanks. Independent mortgage banks control 3/4s of the US residential mortgage market. Nonbank mortgage firms certainly can sell closed-end second lien mortgages, but they cannot originate and service HELOCs because they are not depositories. A HELOC is essentially a credit card loan secured by the house with a fixed tenor and serviced by a bank. You can go to the bank ATM and take a cash advance on a HELOC.
The second lien mortgages that nonbanks might originate and sell to Freddie are closed end loans. These products usually allow the borrower to draw cash for a period, then convert into an amortizing mortgage. Letting a nonbank sell a second lien loan to Freddie Mac will change nothing other than shifting income from banks to the US government. And it will seriously piss off JPMorgan CEO Jamie Dimon. Big banks love HELOCs, but there is little money in originating them for nonbanks.
The market reality that seems to escape Whitney and the Biden White House is that banks originate and retain second liens because they have the funding. There is vast unused capacity in HELOCs at banks, more than current outstanding loans. But banks will not sell HELOCs to Freddie Mac. They are content to keep these relatively small mortgage loans because the servicing fee of 25-50bp per year more than covers the cost. Like first liens, default rates on HELOCS are near zero.
Source: FDIC/WGA LLC
There is little financial incentive for nonbanks to originate and sell second liens to Freddie because the note’s value is minimal and the servicing strip is likewise an inferior asset vs a first lien loan. When you sell a loan in the secondary mortgage market, dear Meredith, you are really selling the cash flow from the mortgage servicing right (MSR). The MSRs of HELOCs or closed end seconds have little value because of the small note size and short maturity. Indeed, it will be interesting to see Freddie Mac profitably sell pools comprised exclusively of closed-end seconds into the MBS market.
If banks cannot originate and retain HELOCs given today’s higher interest rates and the vast amount of equity locked away in residential homes, then there is something powerful working in the market that refutes Whitney’s thesis. Again, having the GSEs purchase loans that nobody but banks want is not a particularly impressive policy proposal from President Biden.
A final point that Whitney and other proponents of the GSEs buying second liens do not address is credit. By law, the GSEs cannot loan more than 80% against a home unless the borrower gets private mortgage insurance. If Freddie Mac or Fannie Mae buy a second lien of any description that pushes the total encumbrance on the asset over 80%, does the borrower need private mortgage insurance? The law says yes. Federal bank regulators put limits on HELOC exposures for precisely this reason. A second lien is junior to the first and in a home price correction quickly becomes worthless.
It is easy to understand the confusion about HELOCs and seconds. Traditionally home equity loans were products for a rising interest rate environment, yet there is little demand in 2024. There are dozens of banks and nonbanks in the US that offer HELOCs or closed-end seconds, yet the demand from consumers is barely keeping up with the natural runoff of these loans. Part of the issue is that older consumers that predominate among homeowners would be more likely to get a reverse mortgage than a second lien. And many are just happy to let the equity sit given the investment alternatives.
Those pushing for the Biden Administration to allow the GSEs to buy HELOCs should consider whether this election year stunt deserves their public support. The Freddie Mac proposal is part of a shameless election year push by the Biden Administration to appear to be supporting home affordability, this after four years of disarray and scandals at HUD. And four years of home price inflation ? the Biden budget deficits is not doing much to help Americans buy a home.
In fact, the actions taken by the Biden Administration in housing finance over the past four years have been a disaster. The risk-based capital (RBC) proposal from Ginnie Mae for government issuers tops the list of progressive fiascos, but increasing the cost of credit reports for consumers is another great achievement by the White House. Lenders argue that dramatic price hikes by FICO have inflated their credit score costs by as much as 500% since 2022, Inside Mortgage Finance reports.
The litigation between Ginnie Mae and Texas Capital Bank (TCBI) is another wonderful achievement by the Biden White House that threatens the market for government loans. If TCBI is forced to take a loss after receiving the direct verbal assurances of the Biden Administration with respect to a bankrupt government issuer of reverse mortgages, then the market for financing government insured loans may be permanently impaired. Thanks so much President Joe Biden, but the housing industry does not really need any more help from Washington.
UWMC’s Shrinking MSR
United Wholesale Mortgage (UWMC) reported earnings yesterday. Suffice to say, we think everyone in mortgage finance and the various mortgage and bank regulatory agencies in Washington should spend a few minutes on the UWMC 10-K. Eric Hagen at BTIG:
“The company sold $70 billion of UPB in the MSR portfolio as earlier reported, taking it down to $230 billion, and the average WAC of the portfolio to 4.58%. Leverage came up this quarter to 3.5x, driven by a slight increase in warehouse lines of credit, but excluding warehouse debt it remained comfortably below 1x. We think the stock valuation can support higher leverage, although we like how the funding risk is being regulated to a degree by sales of MSRs into a market well-bid with demand right now from originator/servicers looking to boost recapture when rates fall.”
We are not so generous as BTIG. The big headline from UWMC IR was the increase in gain-on-sale and volumes, but to us the story is the sale of 25% of the firm’s MSR to fund Matt Ishbia’s price war in the wholesale channel.
In the UWMC cash flow statement on Page 5 of the Form 10-K, it shows the firm’s holdings of loans up $1.8 billion, in line with a better than expected Q1 for most mortgage banks in the first quarter. But down the page, we see an entry for “Net proceeds from sale of mortgage servicing rights” of $1.3 billion. Really?
UWMC 03/31/2024
Note that in Q1 2024 UWMC capitalized $535 million in new MSRs, but then sold more than 2x that amount to raise cash. Why are we raising cash? To fund operating losses caused by the firm’s attempt to corner the wholesale channel for mortgage loans. But as everyone who works in the mortgage ghetto knows, seeing around corners is a special talent. And visibility is at a premium when the FOMC and various others are trying to make your life difficult.
The old fashioned bankers think not about loans but MSRs. What is the yield on the MSR? If you buy loans on a 7x multiple, as we wrote in our last comment, but sell on a 5x, in the long run you are dead. During the UWMC conference call, Bose George of KBW asked Ishbia about the pricing on MSR sales and the fact that some of the disposals were below carrying cost. Ishbia:
"Depending on the time of the month and where rates are at that moment, the prices are right in line with what our carrying value is. And so sometimes you pick up a little, sometimes you lose a little bit. In general, it's been not a material negative or positive, to be honest with you."
We have always thought that the “sell the loan, sell the MSR” is a bad strategy because it leaves nothing for the future. Issuers like UWMC that sell the MSR are essentially following the logic of Silicon Valley Bank that a future Fed interest rate cut will make it all better with higher loan volumes. But maybe not.
Selling the MSR as a strategy, especially to fund an ill-considered price war in wholesale, a channel nobody owns, we think is a LT loser. But worry not, somehow UWMC managed to pay $194 million to SFS Corp, the holding company controlled by Ishbia and other UWMC insiders. The $2.3 billion non-controlling interest in UWMC represents the true equity of UWMC. And no, our dear friends at Bloomberg, UWMC is not trading at 104x book value at $7.50 per share. Do the math.
If a Fed rate cut is going to wait until December and UWMC continues to pay up for loans in the wholesale channel, then we expect to see more bulk MSR sales from UWMC and other mortgage firms that are burning cash. There are mortgage firms that have refused to cut expenses in line with volumes such as loanDepot (LDI) and then there are firms like UWMC that are selling valuable servicing assets to fund operating losses. When UWMC sells the rest of the MSR portfolio this year, will CEO Matt Ishbia end the price war in wholesale?
In the next issue of The IRA Premium Service, we'll be looking at
the bottom 25 banks in the WGA Bank Top 100 Index.
The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.
navycmdr
5 days ago
SEC Filing | @FannieMae $FNMA
@JarndyceJ read where she’s coming from. https://t.co/MjPxqTbzUO— José E Burgos Lugo, PA (@TheBurgosGrp) May 14, 2024
Appointment of New Director
https://fanniemae.gcs-web.com/node/41856/html
On May 10, 2024, Diane N. Lye was appointed to the Board of Directors of Fannie Mae (formally, the Federal National Mortgage Association), effective as of that date. The Board’s appointment of Dr. Lye is until the earlier of: (1) the next annual election of Board members; or (2) the date on which she resigns or is removed by the Federal Housing Finance Agency, as conservator, while Fannie Mae is in conservatorship. As of the date of this filing, the Board committees on which Dr. Lye will serve have not been determined.
Dr. Lye, age 62, has over 30 years of experience in data science and technology. Most recently, she served as Chief Information Officer at Rivian Automotive, Inc., an electric vehicle manufacturer, from October 2022 to December 2023. Previously, Dr. Lye was at Capital One, National Association, where she served as Executive Vice President and Chief Information Officer for Card Technology, from May 2019 to September 2022, and as Senior Vice President of Enterprise Data, Machine Learning, Risk and Finance Technology, from October 2016 to May 2019. Prior to joining Capital One, Dr. Lye held a variety of technology-centered leadership roles at Amazon, Citigroup, and Bank of America.
Based on its review of the relevant facts and circumstances, Fannie Mae’s Board of Directors determined that Dr. Lye is an independent director.
Director Compensation
Dr. Lye will be paid compensation as a director as described in Fannie Mae’s annual report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 15, 2024, under the heading “Executive Compensation—Compensation Tables and Other Information—Director Compensation,” which description is incorporated herein by reference.
Indemnification Agreement
Fannie Mae is entering into an indemnification agreement with Dr. Lye, the form of which was filed as Exhibit 10.3 to Fannie Mae’s annual report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 14, 2019.
Director Compensation
Dr. Lye will be paid compensation as a director as described in Fannie Mae’s annual report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 15, 2024, under the heading “Executive Compensation—Compensation Tables and Other Information—Director Compensation,” which description is incorporated herein by reference.
https://www.sec.gov/Archives/edgar/data/310522/000031052224000184/fnm-20231231.htm#i99bb51cbd4fd40e29658acb2ee7ed3d9_460
navycmdr
5 days ago
Foreclosure Prevention, Refinance, and Federal Property Manager's Report - February 2024
Published: 5/14/2024 - February 2024 Highlights - Foreclosure Prevention
https://www.fhfa.gov//AboutUs/Reports/Pages/Foreclosure-Prevention-Refinance-and-FPM-Report-February-2024.aspx
?
The Enterprises' Foreclosure Prevention Actions:
--- The Enterprises completed 17,993 foreclosure prevention actions in February, bringing the total to 6,941,211 since the start of the conservatorships in September 2008. Approximately 39 percent of these actions have been permanent loan modifications.
--- There were 5,293 permanent loan modifications in February, bringing the total to 2,692,612 since the conservatorships began in September 2008.
--- Approximately 79 percent of loan modifications in February involved extend term only. Modifications with principal forbearance accounted for 20 percent of all loan modifications during the month.
--- The number of borrowers who received payment deferrals after completing a forbearance plan decreased slightly from 8,628 in January to 8,584 in February.
--- Initiated forbearance plans decreased 7 percent from 7,490 in January to 6,943 in February. The total number of loans in forbearance also decreased from 38,872 at the end of January to 36,837 at the end of February, representing approximately 0.12 percent of the total loans serviced and 7 percent of the total delinquent loans.
The Enterprises' Mortgage Performance:
--- The 30-59 days delinquency rate increased to 0.96 percent while the serious delinquency rate decreased to 0.53 percent at the end of February.
The Enterprises' Foreclosures:
Third-party and foreclosure sales decreased 15 percent to 965 while foreclosure starts declined 13 percent to 5,927 in February.
February 2024 Highlights - Refinance Activities
--- Total refinance volume increased in February 2024 as mortgage rates remained below the elevated levels observed in late 2023.
Mortgage rates rose in February: the average interest rate on a 30-year fixed rate mortgage increased to 6.78 percent.
--- The percentage of cash-out refinances continued at 69 percent in February after rising as high as 82 percent over the last two years. Higher mortgage rates have reduced the opportunities for non cash-out borrowers to refinance at lower rates and lower their monthly payments.
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