TheMReport — News and strategies for the evolving mortgage marketplace.
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the latest or ig i nat ion ORIGINATION se r v ic i ng Weak Q3 Results Expected for Mortgage Banks Analysts at FBR Capital Markets say purchase volume won't be enough to offset the decline in refinances. I S e c on da r y M a r k e t a na ly t ic s nvestment bank FBR Capital Markets released its preview of third-quarter earnings for major U.S. banks recently, with a cloudy outlook for mortgage banking. In general, bank stocks have underperformed the broader market by about 2 percent over the third quarter; and zeroing in on the mortgage market, FBR is not optimistic about Q 3 results. "We believe mortgage banking results will be weak, with volumes coming in low," FBR stated. FBR's third-quarter mortgage originations estimate is $349 billion, a 29 percent decline over the quarter. The abating refinance market is a major drag on the mortgage industry, and, "[w]e do not believe that there will be a strong enough increase in the purchase market this quarter to offset the loss in refi volume," FBR stated. FBR estimates a 46 percent decline in refinances in the third quarter and a 2 percent rise in purchase originations. Rising interest rates have made refinancing less attractive for homeowners, even after a recent drop of almost 40 basis points. Looking ahead, FBR expects declines in purchase originations over the following two quarters before a significant uptick in the third quarter of 2014. 36 | The M Report While rising rates have cut into gain-on-sale margins, FBR noted a recent uptick in margins after the Federal Reserve's announcement that it will not soon scale back its bond purchases. Mortgage servicing portfolios benefited from the rising interest rates but not enough to counteract meager originations and low gain-on-sale margins, FBR said. FBR expects special servicers have fared best in the recent quarter, naming Nationstar Mortgage Holdings, Walter Investment Management Corp., and HomeStreet as high performers for the quarter. While FBR does expect an increase in real estate investment trusts (REITs) this quarter, it says REITs "may underwhelm expectations." FBR expects governmentsupported REITs to increase 2 percent and hybrid REITs to increase about 1.5 percent. "However, we are concerned that the increase in book value may not come in as high as our estimates suggest," FBR stated. "Our book value estimates assume relatively static portfolios, but for most names, portfolios are anything but that." Portfolio hedging will detract from some of the recent strength in the mortgagebacked securities market, according to FBR. Temperatures Cool in Hottest Markets Asking price gains slow among Trulia's top markets. T rulia is the latest company to report a monthly slowdown in home prices—and trends indicate yearly gains may soon cool as well. The company released recently its Price and Rent monitors for the month of September. The indices are based on for-sale homes and rentals listed on Trulia's website. Nationally, Trulia reported asking home prices were up 3 percent quarter-over-quarter in September, the smallest quarterly change since February. At the metro level, 89 of the 100 largest markets experienced quarter-overquarter price increases—down from 97 in June—and many of those metros reported smaller quarterly gains than before. "Asking home prices give us the first look at where home sale prices are headed, and they point to a slowdown," said Trulia chief economist Jed Kolko. "After rising rapidly in the first half of 2013, asking prices in two-thirds of the largest metros are cooling. In fact, asking prices are falling— not just rising more slowly—in 11 of the 100 largest metros, the most markets to see prices slip in six months." The trend was most apparent in California, home to Sacramento, Oakland, Orange County, and Los Angeles—all markets that saw asking price gains slow by 2 percent or more (though prices were up in those metros by at least 20 percent year-over-year). Nationally, asking prices were up in September 2 percent monthover-month and 11.5 percent yearover-year. Trulia says those yearly improvements will likely shrink in the coming months as mortgage rates rise, inventory expands, and investor activity fades—and then there's the impact of what's currently happening (or not happening) in Washington.