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Weekly Wrap: Mortgage originations to top $4T for the first time ever

Annual mortgage originations are likely to top $4.1 trillion for the first time ever, as there will be more refinancings this year than total loans produced in 2019, Fannie Mae said.

Fannie Mae's latest forecast calls for $2.6 trillion in refinance originations in 2020, along with $1.5 trillion in purchase volume. Last year, originations totaled $2.46 trillion, with $1.3 trillion coming from home purchase activity and $1.1 trillion from refis.

The previous best year on record was in 2003, with total volume of $3.7 trillion, according to Fannie Mae's data.

But 2020 will not be a record year for either refis or purchases, although it will come close in both categories. There were $2.7 trillion of refis in 2003, while 2005 was the best year for purchases at $1.51 trillion.

In its September forecast, Fannie Mae predicted $3.87 trillion of total volume for the year, with $2.4 trillion in refis and $1.4 trillion in purchase volume.

Earlier this week, Freddie Mac predicted $3.6 trillion in volume for 2020. The Mortgage Bankers Association will release its October forecast at its convention next week. Its September forecast was more conservative than Fannie Mae's, calling for $3.14 trillion this year.

A portion of 2020's predicted refinance activity has been moved up from 2021, so Fannie Mae cut its refi forecast for next year by $20 billion to $1.058 trillion.

But it raised the overall forecast for 2021 to $2.62 trillion from $2.57 trillion on increased strength in the purchase market, even as the inventory shortage is expected to continue.

Fannie Mae did raise its mortgage rate forecast for next year slightly, calling for an average of 2.8% for the 30-year fixed loan; last month it predicted a 2.7% rate by the end of 2021.

"Housing continues its multi-year theme of historic supply constraints," Fannie Mae Chief Economist Doug Duncan said in a press release. "Strong demand-side drivers, including low mortgage rates and a surge of millennials looking to purchase homes, are contributing to significant home price appreciation, particularly as many older homeowners continue to age in place and other would-be home-sellers adopt a more conservative posture due to COVID-19 concerns, further limiting supply."

If anything, current homeowners are playing a game of "housing musical chairs" by selling their properties to each other, which is affecting the market dynamics, Mark Fleming, chief economist for First American Financial, said in the company's September Potential Home Sales Model press release.

"Rapid house price appreciation and its impacts on existing and first-time homebuyers will persist until the supply and demand imbalance begins to improve," Fleming said. "In the game of housing musical chairs, it's clear the housing market needs more chairs."

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The General Motors Co. (GM) 2019 GMC Sierra Denali truck is unveiled during an event at Russell Industrial Complex in Detroit, Michigan, U.S., on Thursday, March 1, 2018. The redesigned Sierra will also offer a Denali model when it hits showrooms later this year. General Motors hasn't yet released pricing information, but heavy-duty Sierra pickups with the Denali name sold for about $65,000 last year. Photographer: Jeff Kowalsky/Bloomberg

GMF comes to market with a repeat of September’s floorplan deal

Completing in September its first floorplan ABS deal for 2020, GM Financial (GMF) is approaching the market again, this time with a $924.9 million deal that carries an identical structure and credit enhancement to the earlier transaction.

The deal’s Class A tranche of $675.2 million carries initial hard credit enhancement of 27.9%, followed by a $46.2 million Class B piece with 22.9% enhancement, a $41.6 million portion with 18.4% enhancement, and a $37 million portion with 14.45 enhancement. The transaction is overcollateralized by $124.9 million.

In the September transaction, according to Finsight, the Class A portion priced at swaps plus 45 basis points, for a coupon of 0.68%; the B Class bonds priced at swaps plus 80 basis points, for a coupon of 1.03%; and the C Class bonds priced at swaps plus 125 basis points for a coupon of 1.48%.

The first credit challenge addressed by Moody’s Investors Service in an Oct. 15 presale report is the potential for the Covid-19 pandemic to negatively impact pool performance.

“Specifically, for floorplan ABS, failure of an OEM (original equipment manufacturer) can negatively impact consumer demand for the vehicles, lead to reduced recovery proceeds upon liquidation and negatively impact the dealerships financial health, causing a deterioration in performance of the floorplan assets,” Moody’s says.

Moody’s also notes that while its dealership base has continued to grow since GMF’s last three sponsored floor plan transactions, including September’s, increasing active dealer accounts as well as GMF’s penetration rate, the latter is lower than its peers.

In addition, Moody’s says, dealers in the trust pay a floating base rate that may fall, or GMF may change the payment terms, an combined with a substantial representation of fixed-rate liabilities of the trust, the excess spread may lessen or even become negative. For such a negative excess spread to occur, however, there would have to be a succession of unlikely events.

“These include the base rate falling below current historical lows, GMF pricing floorplan loans without considering its funding cost, and a large reduction in overcollateralization,” Moody’s says.

On the plus side, Moody’s says, the credit quality of the auto-dealer floorplan receivables and the underlying collateral securing the floorplan loans is high, and General Motors commits to repurchase unsold new vehicle inventory. In addition, the deal’s Class A note enhancements include 13.50% subordinated notes, overcollateralization of 13.50%, a non-declining reserve fund of 0.86% of the initial pool balance, and excess spread.

- John Hintze
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Ocwen settles final state action over its servicing practices

Ocwen Financial has wrapped up the series of 30 cases filed by state regulators and/or attorneys general over its mortgage servicing escrow practices, entering into a settlement with officials in Florida.

"Ocwen believes that it has sound legal and factual defenses to all of the State of Florida's claims, but concluded that it is in the best interest of its stakeholders to resolve this matter without admitting liability in order to avoid the further distraction and expense of litigation," a statement from the West Palm Beach, Fla.-based company said.

A press release from the Florida Attorney General's office, which was working in tandem with the state's Office of Financial Regulation pegged the settlement at over $11 million, while Ocwen said it was paying almost $5.2 million. It is also liable for an additional $1 million in two years if certain loan modification-related obligations are not met.

The disparity between those two amounts is attributed to the company waiving approximately $5.5 million in late fees that have been assessed but not yet collected, an Ocwen spokesperson said.

"This represents an additional direct monetary benefit to thousands of Florida borrowers. We do not expect the waiving of late fees will have a material adverse effect on our financial results or our ability to achieve our financial objectives," the spokesperson said.

Florida, in conjunction with the Consumer Financial Protection Bureau, was the first state to act against Ocwen in April 2017. Separately at the same time, a group of 20 states — which later grew to 30 states — filed their own lawsuit over the same allegations regarding the company's escrow practices.

As part of those initial regulatory settlements, Ocwen had to move its servicing portfolio to Black Knight's platform from the Altisource Portfolio Services technology it had been using. Ocwen and Altisource were once corporate siblings under the management ofWilliam Erbey.

The transition was one of the reasons behind Ocwen's February 2018 agreement to purchase PHH Mortgage, since PHH's systems allowed the company to migrate over to Black Knight's platform more easily.

The Florida settlement came a year after Ocwen won a partial dismissal of Florida's case by Federal District Court Judge Kenneth Marra. In September 2019, the same judge dismissed the CFPB's Ocwen case in its entirety, but did so without prejudice, giving the agency the opportunity to refile. The CFPB case is active again, and the Bureau and Ocwen are scheduled to enter into mediation on Oct. 23.

Many of those other state settlements did not require Ocwen to pay financial penalties. But the Massachusetts Attorney General's office, which pursued its own action separate from the state's mortgage regulator, required Ocwen to pay $2 million to settle its allegations over the servicing practices in April 2019.

- Brad Finkelstein
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The two California ballot measures that worry commercial lenders


The federal elections have far-reaching implications for the mortgage industry this year, but some state election issues also are concerning for lenders.

Examples singled out by industry groups include two California ballot initiatives, one of which could change how commercial property is taxed, the other of which would change rent control policies.

Both the Mortgage Bankers Association and the California MBA worry these ballot measures could complicate property ownership in ways that could have a negative impact on loan performance and access to credit.

While California policies can be idiosyncratic, such issues take on national importance because the state is influential within the mortgage industry as a policymaking trendsetter.

"Think of a major lender in this country, and I imagine nearly every single one of them has a presence in California," said Mike Flood, a senior vice president in the MBA’s commercial and multifamily division. "Also, what happens in California can happen in other states."

This election season, Californians will vote on Prop. 21, which would roll back a 1995 law that put rent control in the state's hands, thereby allowing it to revert to municipal oversight. Proponents such as Sen. Bernie Sanders, I-Vt., and the California Democratic Party argue that this measure would increase the availability of rent-controlled units, while opponents, including the CMBA, MBA, the state's Democratic Gov. Gavin Newsom, the Republican Party of California and several real estate companies argue that it will likely make property ownership more expensive and discourage construction in a state that has a chronic housing shortage. The MBAs also say the passage of Prop. 21 could result in complexity that could discourage lending.

"We have 482 cities in our state, so lenders looking at financing rental properties here would certainly have a lot to consider when they were making decisions," said Susan Milazzo, CEO of the California MBA.

Prop. 15, which would subject commercial property owners to regular tax assessments rather than assessments based on purchase price, could strain struggling businesses and hurt loan performance, Milazzo said.

"Especially if you are talking about a business that has owned its property for 30 years, that business is going to see a significant increase in taxes," said Milazzo. "In an environment where we are not even starting a recovery from a global pandemic, this would be devastating to our state."

Of the two ballot measures, Prop. 15 is likely the more difficult of the two to defeat, especially given that in 2018, a similar measure to Prop 21, Prop. 10, which also aimed to return power to local municipalities regarding rent control measures, was rejected by 59% of California voters.

Almost $3.7 million has been raised in support of Prop. 21 by advocates of locally determined rent-control policies, whereas opponents have donated nearly $12.5 million, according to the nonpartisan National Institute on Money and Politics.

By contrast, Prop. 15 opponents were being outspent by proponents, who are billing the proposal primarily as a means to fund education in the state.

Nearly $11.5 million in political donations support it, compared to almost $3.4 million donated by those opposed, according to the National Institute on Money and Politics’ analysis of more than 73% of available records.

Proponents of the both ballot measures have alleged in a lawsuit that there have been improprieties in political fundraising and statements made by opponents. Opponents have refuted these claims.

The preponderance of Democrats support Prop. 15, including Gov. Newsom. Former Los Angeles Mayor Antonio Villaraigosa, a Democrat, and the Republican Party of California oppose it.

Another factor that may play a role in whether or not Prop. 15 passes is the fact that it splits the tax rolls, leaving residential properties exempt from the reform. That means it could have a mixed impact on real estate overall, according to a recent report by the Urban Institute's Housing Finance Policy Center.

Higher commercial tax bills are a concern for commercial lenders in Prop. 15, but there also could be a "very, very marginal" positive impact on housing supply, said Laurie Goodman, vice president of housing policy at the institute and one of the authors of the report.

Prop. 15 could create tax revenue incentives to rezone residential areas as commercial but it also could encourage conversions to residential use to lower tax burdens. The study finds the former will likely carry more weight because the apportionment to schools limits other tax revenue opportunities.

"It's more likely to increase housing supply than to hurt housing supply. It also pretty clearly shows that it's not going to make a significant dent in the housing shortage in California," said Patrick Spauster, a research assistant at the institute, who also contributed to the report.

If Prop. 15 does pass, the one silver lining that commercial lenders may want to look for is the opportunity to finance conversions, said Goodman.

"In this whole debate, the role of developers who hold commercial properties that could convert to residential has been largely overlooked," she said. "I think that could be an opportunity."

- Bonnie Sinnock

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