Decoding Compliance

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the latest ORIGINATION Or ig i nat ion M In Q 3 2012, mortgage debt saw a decrease of $120 billion, representing a 1.5 percent decline from Q2. While mortgage debt was mostly flat, home equity lines of credit (HELOC) saw a significant decline, falling by $10 billion, or 1.7 percent, to $563 billion. Fourth-quarter delinquency rates for HELOCs fell to 3.5 percent, a decrease from 4.9 percent in the previous quarter. According to the report, the decline can largely be attributed to "high charge-offs of delinquent HELOCs." A smaller percentage of mortgages were in the seriously delinquent category, or 90 days or more past due, after falling to 5.6 percent in Q 4, down from 5.9 percent in Q 3. Fewer individuals also had foreclosure notations added to their reports. During the last quarter of the year, the total was about 210,000 individuals, representing a 13.3 percent decrease. New mortgage balances in Q 4 also increased, according to the report, with originations growing to $553 billion, The Fed report says the level of originations has been on the rise after bottoming out in Q 3 2011. While others say the proverbial sky is still falling, FNR makes a case for sustained profitability in the market. A new report from FBR Capital Markets asserts low rates and high demand will continue to boost profitability in the mortgage banking sector in 2013. In a research report released recently, FBR notes that average rates on outstanding mortgages hover between 4.5 percent and 5 percent—well above today's historically low rates. According to the firm, this means there is a "large portion of loans with an economic incentive to refinance." While some may point to recent drops in the Mortgage Bankers Association's (MBA) Refinance Index as proof that the refinance boom is already coming to a close, FBR says otherwise. "Instead, we argue that there are likely $1 trillion of refinances in an estimated $1.7 trillion to $2 trillion overall market this year, and we predict a corresponding bounce in the MBA index," the report reads. "Additionally, assuming rates remain around current levels, we believe that purchase volumes should rise, offsetting any weakness in the refi index." FBR estimates there are between $2 trillion and $2.5 trillion in mortgages left to refinance, while current refinance capacity stands at $1.2 trillion to $1.3 trillion, leaving the market constrained. As such, rates must move 75 basis points or more to have a significant impact on mortgage banking profitability. Additionally, FBR expects that despite increased origination capabilities at big players such as Bank of America and smaller firms such as Nationstar, Flagstar, and PHH Corporation, "capacity will remain constrained as larger originators, like Wells Fargo, slowly decrease their market share." "Accounting for market share gains almost across the board for smaller players, we estimate that the incremental capacity coming into the market will only make up for what Wells Fargo (and other large originators) is shedding," the report says. Given "robust purchase volumes, the pipeline of possible refinancings, and limited market capacity," FBR expects gain-on-sale margins will remain elevated through this year, supporting ongoing profitability going forward. While there is the risk that dramatic increases in interest rates could crash gain-on-sale margins and origination volumes, the investment bank considers the probability of such an event to be "largely unlikely given today's lackluster economic environment" and therefore did not factor the possibility into its models. The M Report | 39 se c on da r y m a r k e t ortgage debt for U.S. households was roughly unchanged quarter-over-quarter, according to the Federal Reserve Bank of New York's Household Debt and Credit report. Mortgage debt stood at $8.03 trillion in Q 4, making up the largest component of household debt. At the same time, overall consumer debt increased by $31 billion to $11.34 trillion, a slight 0.3 percent bump from the third quarter. The increase is mostly due to "a rise in non-housing debt and the stabilization of mortgage debt," the New York Fed stated. Non-housing debt increased 1.3 percent to $2.75 trillion. The rise in consumer debt also breaks a downward trend that first began in Q 4 2008, according to the report. Despite the growth, the report noted consumer debt has still seen a significant decline after peaking at $12.68 trillion. "Since the third quarter of 2008, its peak, household debt has fallen by $1.3 trillion—about 10 percent—mostly because of declining mortgage balances," said James McAndrews, EVP and director of research at the New York Fed, in a speech. Study Touts Market Sustainability Amid Doubt a na ly t ic s Consumer debt increased at the end of 2012 while mortgage debt remained flat, showing that consumers are beginning to believe the recovery is real. s e r v ic i ng The Curious Case of the Comfortable Consumer

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