Monday Morning Cup of Coffee takes a look at news coming across HousingWire's weekend desk, with more coverage to come on bigger issues.
The recent spate of low mortgage rates and modest job growth hasn’t changed the landscape – residential mortgage production remains very low.
Chris Flanagan, MBS/ABS strategist at Bank of America/Merrill Lynch, says that the mix of positive fundamentals and benign technical conditions for securitized products means spreads have further narrowing potential.
“The US economy remains in a ‘rehab recovery.’ On the positive side, banks and households have repaired balance sheets and refinancings have brought household debt service ratios to the lowest levels of the past 30 years,” Flanagan says in a client note. “Meanwhile, continued low inflation gives the Fed room to ‘risk manage’ and go for a ‘super slow’ exit, hiking rates at every other meeting starting later this year.”
He further says that oil price weakness will return in the second quarter as onshore storage will hit max capacity. Price recovery will come in the second half of the year.
Turning to the bigger picture, Flanagan says this about agency MBS.
“…(I)t is a new normal when it comes to mortgage lending: loosening of standards, especially as it relates to documentation, is not around the corner, and there really is not much that can be done on the policy front to change things,” Flanagan said. “For example, the intense market reaction to the FHA MIP change earlier this year should give the FHFA pause in lowering conventional g-fees. The high cost of servicing in the post-crisis era was also noted as a permanent new feature of mortgage lending. All of this means that, with the exception of newly produced loans where documentation is fresh, S-curves are substantially flatter than in the past. We remain overweight the basis as we position for a range trade on rates in the months ahead and lower prepays due to the recent rate backup.”
Turning to the long view, he says demographic changes may pen up, and then explosively release, housing demand.
“The millennial cohort (age 10-29) is massive in size (80+ million) and will become a significant source of demand for housing in the next decade (eventually they will leave the nest); minorities, who may be less likely to become homeowners, will account for a large share of household growth over the next decade; weak income growth has been an important driver of falling homeownership rates; all of these factors are leading to slow expansion of the housing stock,” he says. “There is no simple answer as to when things will turn to the upside in terms of housing and mortgage demand, but the longer it takes, the more likely it will be that the upside could become somewhat explosive. Like a coiled spring, the potential is building. The demographics argue that the longer term risks for housing activity are skewed to the upside rather than the downside.”
Meanwhile, some neutral news for Ocwen Financial (OCN). Moody's Investors Service believes that Wells Fargo's termination of two servicing agreements with Ocwen will not result in cash flow disruptions.
“Wells Fargo’s (the trustee’s) recent decision to terminate two servicing agreements with Ocwen Loan Servicing LLC , the mortgage servicer in two RMBS transactions, is likely to have a neutral credit impact on these transactions,” Moody’s says in a client note. “The decision, the result of a majority investor vote, will not have material consequences for these transactions because all participants have strong incentives to implement an orderly transfer of servicing responsibilities from Ocwen to the desired successor servicer, Select Portfolio Servicing.”
What to do about the GSEs is a hot button topic all around, and now those who believe that Fannie Mae and Freddie Mac should be recapitalized and brought out of conservatorship have gained yet another ally, if an unexpected one.
The Labor Council for Latin American Advancement says it believes that recapitalization of the GSEs and ending the conservatorship of Fannie and Freddie is a critical first step toward preserving affordable housing for Latino families.
“LCLAA is a national organization that represents the interests of more than two million Latino trade unionists across the country. Our mission is hinged on building political and economic empowerment for Latino families by supporting economic and social justice for workers. Part and parcel to that mission is our ability to advocate for policies that support the growth of a robust middle class that includes hardworking Latino families,” the organization writes in an open letter to Treasury’s Michael Stegman.
“Homeownership is a critical element of the American dream. From a labor perspective, nearly 2.2 million Latinos are employed in the construction industry, so for Latinos ensuring a robust housing market not only means better jobs and opportunities, but it also is a driver for safe communities and economic stability.
“The future of our community's ability to claim a piece of the American dream is tied to the policies that will ensure access to affordable housing and access to mortgage credit. In 2013, the latest numbers we've seen on mortgage origination numbers, show that just 71,013 Latinos received conventional mortgages,” LCLAA writes. “These numbers clearly indicate that the private market simply does not service Latinos, African Americans, or low and moderate-income borrowers, and that's precisely why we oppose ending the role of Fannie and Freddie in housing finance.”
No banks were reported failed by the FDIC for the week ending March 6.