April 13, 2011

Mortgage insurance fee hikes. Mortgage stats from JP Morgan earnings

April 13, 2011

Mortgage insurance fee hikes. Mortgage stats from JP Morgan earnings

Yesterday I mentioned FHA mortgage insurance increases coming this Monday, and had the following explanation of private mortgage insurance, which was then clarified (also below) by an account rep from a big mortgage insurance provider.

“Usually MI covers mortgage payments for periods of between 12 months and 5 years, though terms between three and five years are increasingly difficult to find. Insurance usually kicks in when the borrower is unable to meet their mortgage payment obligations because of sickness, injury or unemployment – MI does not cover fraud.”

A National Accounts rep for an MI company clarified,

“What you describe is more like ‘Involuntary Unemployment Insurance’ which does kick in if a borrower loses their job. Some MI companies offer ‘IUI.’ PMI (Private Mtg. Insurance) protects lenders if a mortgage loan goes into default on LTVs above 80%. By helping mitigate the lender’s risk, borrowers can get into homes with lower down payments.”

With the MI increase Monday, FHA’s market share is expected to drop. It is interesting to note the difference of how people in the industry look at the same FHA/VA loans. Originators look at them one way, which is generally a high LTV loan with decent rates but being hurt by higher MIP fees. But when you pool FHA/VA loans, how do investors look at them? The outstanding balance of GNMA MBS’s has risen significantly over the past three years and is now more than $1 trillion. The $1 trillion is in CMO’s (collateralized mortgage obligations) – $300 billion, owned by the Fed – $96 billion, banks and savings institutions, overseas accounts – $250 billion, and others. And there is $80-90 billion of current production that is liquid.

The $80-90 billion of “trade-able” securities are divided between two different markets: “Ginnie I’s” and “Ginnie II’s.” And then each has 3-4 coupons, or buckets that the loans go into, with buy down loans or odd coupons historically going into Ginnie II’s. And it is further divided into 15-year securities, as well as ARM pools. $80-90 billion sounds like a lot, but Wall Street traders, and hedging firms, do their best not to be caught short any of this product. For example, only $5 billion of Ginnie 3.5′s (containing 4% mortgages) were issued – not very liquid at all. And the increase in MIP fees leads to a drop in production. With liquidity an issue, even when you’re talking billions and trillions, companies often use Fannie or Freddie securities to hedge FHA/VA production, which then leads to closely monitoring the spread between Ginnie & Fannie security prices.

JP Morgan Earnings Summary
JPMorgan Chase’s stock is pointing to a higher opening this morning after reporting its 1st quarter numbers that beat expectations. JPM said profit rose 67% to a record with 1st quarter net income climbed to $5.56 billion.

The announcement is full of various metrics and numbers that are best seen by looking at the actual announcement, but focusing on some of them are worthwhile and indicative of large bank’s current mortgage division performance.

JPM reported a $1.1 billion pretax loss from mortgage servicing rights asset adjustment for increased costs, and a $650 million pretax expense for estimated costs of foreclosure-related matters.

“While delinquency trends and net charge-offs improved compared with both prior periods, the current-quarter provision continued to reflect elevated losses in the mortgage and home equity portfolios.”

“Mortgage banking net revenue was a loss of $114 million, compared with net revenue of $962 million in the prior year, and included $271 million of net interest income and $104 million of other noninterest revenue, offset by a loss of $489 million for mortgage fees and related income. Mortgage fees and related income comprised $259 million of net production revenue, $489 million of servicing operating revenue and a $1.2 billion MSR risk management loss. Production revenue, excluding repurchase losses, was $679 million, an increase of $246 million, reflecting higher mortgage origination volumes and wider margins. Total production revenue was reduced by $420 million of repurchase losses, compared with repurchase losses of $432 million in the prior year. Servicing operating revenue declined 3% from the prior year. MSR risk management revenue declined by $1.4 billion from the prior year, reflecting a $1.1 billion decrease in the fair value of the MSR asset for the estimated impact of increased servicing costs.”