Mortgage Applications rise .2% in the week ending 4/19

Mortgage Applications rise .2% in the week ending 4/19 PART 1 OF 1

Mortgage Applications rise .2% in the week ending 4/19

Mortgage Applications rise .2% in the week ending 4/19

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Mortgage applications as reported by the Mortgage Bankers Association rose .2% for the week ending April 19th even as rates fall slightly.

Mortgage applications are primarily interest-rate driven. Applications typically increase as rates fall because home owners take advantage of the drop in rates to refinance. Conversely, they fall as rates rise. They also exhibit a seasonal pattern, correlating with purchase activity during the summer selling season. This year, we are seeing strong origination volume growth, even as we see prepayment burnout. Prepayment burnout was evident in the Refinance index, which was basically unchanged even though the 30 year fixed rate mortgage fell 3 basis points to 3.51% last week Prepayment burnout happens when interest rates oscillate in a narrow range for an extended period of time; each time rates return to a lower range, the number of prepayments (or refinances) drops. The mix of purchase activity versus refinance activity is tilting more towards purchases as the economy improves and refinance activity slows. This favors the mortgage bankers who have a strong retail branching system, and works against the lenders who go direct to the consumer.

Rates remain steady after falling in early April

The first week in April saw a big decline in interest rates as the March jobs report disappointed and the Bank of Japan launched its own version of QE. During the week of April 19, the 10-year government bond yield dropped another 2 basis points. In spite of a macro environment that is more favorable for purchases over refinances, both purchases and refis drove the volume increase last week.

Mortgage bankers had an extremely profitable 2012 as rates fell and real estate prices bottomed. Much of the activity over the past five years has been the “serial refinancer,” or someone who has equity in their home and has taken advantage of refinance opportunities as rates have fallen. These borrowers are highly price-sensitive and tend to go with consumer direct lenders who offer low rates and reduced application fees. These consumer direct lenders will struggle in a purchase environment, and have been laying off staff in anticipation of a drop in volume.

The purchase market is much more relationship-driven. This market requires a branch system of local professionals who have a large network of realtors, real estate attorneys, etc. These bankers compete on the basis of price and service. It also means that there is competition for independent brokers and bankers. A mortgage banker can grow very quickly through M&A activity.

Big opportunities ahead for the mortgage REITs who focus on origination

The mortgage market is undergoing a massive transformation as the private label mortgage market returns. Indeed, the House Financial Services Committee had a hearing this morning discussing how to revive the private label market. Ever since the bubble burst, mortgage origination has been almost exclusively government-driven. 50% of the credit risk of the entire US mortgage market is borne by the U.S. Government.  Originators typically do not hold their mortgages. They either sell them to the big banks or securitize them. Since the securitization market was dead, they had no outlet for non-agency mortgages. Redwood Trust (RWT) has been the only issuer of private label (securities backed by mortgages that are not government guaranteed) mortgage backed securities, and they have focused exclusively on high quality jumbo loans. Pennymac (PMT) noted on their conference call that they recently launched a jumbo product and are targeting a first securitization in Q3.

In the past few weeks, we have seen private label deals from JP Morgan (JPM) and Everbank (EVER). We’ve also seen the first sub-prime deal since the bubble burst. The private label market was a $1.1 trillion per year market prior to 2008.  Since then, approximately $1.5 billion has been issued in total. The return of the private label market opens the door for borrowers of all stripes who have been shut out because they do not qualify for an agency or government mortgage. This particularly helps out the REITs who focus on origination, but it also helps out those that invest in non-agency mortgage backed securities.


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