Mar. 5, 2013: REIT chatter; unbridled financial institution mergers & acquisitions; sticking to the plan with FHFA strategies & securitization platform
Rob Chrisman


“Rob, my partners and I made a little money up here in North Dakota in the oil biz, and we’re thinking about getting back into mortgage banking. Do you know of any companies for sale?” I receive one or two of these a week now – without the North Dakota angle. I guess folks are “getting bulled up” on the mortgage biz, especially with the big bank’s residential market share declining, and in spite of forecasts of lower volumes, tighter margins, lots of inflated seller opinions, and a regulatory environment that would surprise any mortgage banker who has been out of the business for any length of time. Buying a mortgage bank is much easier than starting one. Good luck finding any de novo depository banks that have been started in the last 3 years – here’s an update on the current banking environment that is worth a scan:


Check this out. Our government isn’t the only one that controls residential mortgage underwriting, loan programs, and processing to control the outcomeChina’s all over it! I don’t honestly remember if China is communist or not anymore, but this certainly sounds like a hybrid: And heck, even our fellow Americans – the Peruvians – are making news with their mortgage market:


But while Nero fiddles while Rome burns*, uh, I mean Congress is hard at work tackling difficult problems head-on, Freddie & Fannie decided to form a new securitization company. You know…some folks rearrange their silverware drawers, other throw out their high school notes… the FHFA moves forward with setting up a new framework for issuing residential securities: And if you don’t want to read those prepared remarks directly from Mr. DeMarco, here is what the public is seeing:,0,1401802.story.


(*”Nero fiddling” is a fallacy, especially since the violin wasn’t invented until many hundreds of years after Nero’s death in the year 68. Nero was supposedly quite a tyrant, and was known for having captured Christians to burn them in his garden at night for a source of light.)


The goals are consistent with the FHFA Strategic Plan last year which is focused on reducing the role of the GSEs and building for the future housing market. The main goals for the GSEs in 2013 are 1) target at least $30 billion of risk-sharing transactions; 2) contract the multifamily business by 10%; and 3) sell at least 5% of the less-liquid parts of their retained portfolios, primarily delinquent loans. While not an explicit scorecard item, GSE guarantee fees are expected to increase further. Finally, as noted above, the GSEs have started the process of combining part of the infrastructure of the two companies.


What does this news mean to us common folks? It was expected that the FHFA would put forth a plan for securitization that would provide a mechanism for ALL loans – not just conventional conforming, but also FHA, VA, and jumbo. Okay, so this is simultaneously big stuff and not big stuff – and why wait or rely on Congress to put forth a plan? A couple phrases to note: "The overarching goal is to create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future," and, “He said the new joint venture is not expected to begin securitizing loans next year.” Everyone in the industry has noted that F&F are running themselves, or the FHFA is running them, more as private companies that need to make money, just like everyone else. So don’t look for any changes for quite some time – giving the important securities markets some time to digest and ruminate on this. So we can view this as pretty positive news.


Lenders One is having its conference, and American Mortgage Law Group (“AMLG”), a nationally recognized law firm representing mortgage bankers and financial institutions, especially in their defense of repurchase demands, as well as providing loan originators with compliance and financial litigation services, has just announced its hiring of Gil Klier as an industry consultant. Mr. Klier was employed by Bank of America as its Business Executive over Operations and Senior Vice President of Legacy Asset Servicing.  While at Bank of America, Mr. Klier managed the Loss Mitigation and Repurchase departments that have been and continue to be making repurchase and indemnification demands to the bank’s prior correspondent sellers and AMLG will use him in its efforts to represent loan originators with their buy-back and indemnification issues. I mention this because Mr. Klier, along with James Brody (managing member attorney at AMLG), are scheduled to be panelists at the Lenders’ One Conference on repurchase related issues, as well as discussing the continued progress that is being made by its client, Community Mortgage Lenders of America (“CMLA”), lobbying on behalf of mortgage bankers.  Should anyone wish to speak with AMLG about repurchase related issues, compliance related matters (including CFBP mock audits) and/or general mortgage banking litigation issues, please feel free to contact Mr. Brody at (And no, this is not a paid ad.)


Yes, the government controls both the supply and demand of agency MBS, but on the demand side we are watching the re-emergence of REITs. Last week was a big milestone for mortgage REITs: in an indirect way. The S&P Dow Jones Indices announced in a press release that it was revising its methodology to include Mortgage REITS in the S&P Global and U.S. indices. The revisions will go into effect COB March 15, and changes to the list of constituents should be announced the following Friday. Inclusion into an S&P index will likely be based on market cap more than anything. In the chart below, we have listed some of the largest M REITS by market value.


Before you run out and buy REIT securities, remember that it would be foolish to buy stock in a mortgage REIT if it is selling at much above book value. (As a comparison, many banks trade at about 1x book value; Wells Fargo, with its 2.8% dividend, is trading around 1.3x book.) In calculating the value of a REIT, traders will consider its book value, plus the present value of the tax shield, plus or minus whatever value one wants to assign to the benefit derived from the use of leverage, minus the risk that REITs need continual access to the capital markets (which, as we saw 5 years ago, can close at any time). We all know that if mortgage prices rise, they get refinanced at book which leaves the loss at the REIT level and the gain to the borrower.


We all have to keep up with banking, agency, and MI changes, and here are some relatively recent updates to give a sense of trends out there.


Freddie Mac's net income increased by 55 percent in the fourth quarter of 2012 primarily due to a decrease in newly delinquent loans and an improvement in home prices. Freddie is definitely holding its’ own out there, reporting net income of $4.5 billion compared to $2.9 billion in the third quarter of 2012. Comprehensive net income in the fourth quarter was $5.7 billion compared to $5.6 billion in the third quarter and for the entire year comprehensive net income was $11.0 billion and comprehensive income was $16.0 billion compared to losses of $5.3 billion and $1.2 billion respectively in 2011. Included in the release was verbiage such as, “…returned more than $7 billion to America's taxpayers through dividends…will not require a draw from the U.S. Treasury because it had a positive net worth at quarter's end of $8.8 billion… has not requested a draw from Treasury since the second quarter of 2012.”


KBW weighed in on MGIC’s latest loss, saying, “The GAAP loss includes a previously announced $267.5 million charge associated with the Freddie Mac settlement. Operating EPS also excludes $85.4 million of realized gains and is shown on a pre-tax basis. The operating beat reflected lower incurred losses (ex. the Freddie Mac charge). The combined risk-to-capital ratio increased to 47.8x from 34.1x in 3Q. We would expect a negative reaction in the shares.” MGIC’s losses were less than expected, its loss reserve was increased slightly, and primary delinquencies were down. Of note: MGIC began writing new business through MIC (its recently capitalized insurance underwriter) in jurisdictions where it did not have waivers of capital requirements.


Glacier Bancorp ($7.6B, MT) will buy Wheatland Bankshares ($280mm, WY) for $38mm in cash and stock. New Mexico Educators Federal Credit Union ($1.3B, NM) will acquire New Mexico Energy FCU ($49mm, NM).


Atlantic Coast Financial Corporation, the holding company for Atlantic Coast Bank, announced a definitive merger agreement with Bond Street Holdings, Inc. ("Bond Street") under which the Company will merge into Bond Street, a community-oriented bank holding company with $3.2 billion in total assets that operates 41 community banking branches along both Florida coasts and in the Orlando area. Upon completion of that transaction, Atlantic Coast Bank will merge into Florida Community Bank, N.A., Bond Street's banking subsidiary.


In an unusual expansion move, smaller bank First Scottsdale Bank ($80mm, AZ) will acquire larger bank Commerce Bank of Arizona ($224mm, AZ) for $8.6mm and change its name to Commerce Bank of Arizona. In Texas, credit union EECU ($1.4B, TX) will acquire Forth Worth Telco Federal Credit Union ($50mm), and First Financial Bankshares ($4.4B) will buy Orange Savings Bank for $56mm in cash and stock or about 1.23x book. First Financial is the parent of 11 bank subsidiaries.


Centennial Bank ($77mm, NE) will merge with Omaha State Bank ($272mm, NE), as the family controlling both banks consolidates operations and other activities. KeyCorp ($85B, OH) will sell its broker dealer affiliate (Victory Capital Advisors) to a private equity fund for $246mm in cash and debt. Key is taking the action as it divests non-core business lines and refocuses on businesses that leverage its core banking model.


Bloomberg reported that OneWest Bank ($25.8B, CA) held informal sales talks with UnionBanCal ($87.6B, CA) and U.S. Bancorp ($348B, MN) in the past few weeks, as private equity investors that own it (including billionaires George Soros and John Paulson) begin exploring ways to exit their investment.


The financial institution M&A rolls on. In North Carolina Southern Bancshares ($2.1B) will buy Heritage Bancshares ($272mm) for $4mm in cash and stock. Southern is the parent of Southern Bank and Trust, while Heritage is the parent of The Heritage Bank. In neighboring South Carolina, SCBT Financial ($5.1B) will buy First Financial Holdings ($3.2B) for 302.4mm in stock, creating a major financial shift in the state. SCBT is the parent of SCBT and First Financial is the parent of First Federal Bank. Securant Bank & Trust ($214mm, WI) will sell its trust group to Midland States Bank ($.15B, IL) for an undisclosed sum.


First Scottsdale Bank and Commerce Bank of Arizona, Inc.’s parent company, CBOA Financial, Inc., jointly announced an agreement to merge.  With over $300 million in assets and eight branches stretching from Scottsdale to Tucson the combined company will be the second largest community bank franchise headquartered in the state of Arizona.  As part of the transaction, the combined company will undertake a $10 million common equity offering.


Rates: up a little, down a little. Yesterday was another snoozer, with originations limited (reportedly less than $1.5 billion) and real money demand dominant (the Fed & REITs). I could drone on and on about coupon and security minutiae, but there is little need. The economic calendar today offers only a minor number: at 10AM EST the February Non-manufacturing ISM results, which are expected flat to last month. By the time folks in Chicago headed home to beat the snowstorm Monday evening, the 10-yr was at 1.88%. This morning it is sitting around 1.89% and MBS prices are unchanged.



An Australian, an Irishman and an Englishman are in a bar. They're staring at another man sitting on his own at a table in the corner.
He's so familiar, and not recognizing him is driving them mad.
They stare and stare, until suddenly the Irishman twigs: "Holy smokes, it's Jesus!"
Sure enough, it is Jesus, nursing a pint.
Thrilled, they send him over a pint of Guinness, a pint of Fosters, and a pint of bitter.
Jesus accepts the drinks, smiles over at the three men, and drinks the pints slowly, one after another.
After he's finished the drinks, Jesus approaches the trio.
He reaches for the hand of the Irishman and shakes it, thanking him for the Guinness.
When he lets go, the Irishman gives a cry of amazement: "My God! The arthritis I've had for 30 years is gone. It’s a miracle!"
Jesus then shakes the Aussie's hand, thanking him for the lager.
As he lets go, the man's eyes widen in shock. "Strewth mate, the bad back I've had all my life is completely gone! It's A Miracle."
Jesus then approaches the Brit who says, "Back off, mate, I'm on disability benefit."


If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at The current blog is how "Basel III Could be a Game Changer for Lenders and Servicers." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.


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