I have been going over the new rulings of the CFPB pertaining to the mortgage lending requirements as outlined for lending institutions and banks, such as Bank of America (BAC). As we all know, the mortgage rates have been under pressure since the Fed decided to buy mortgage backed securities to the tune of $40 billion/month PLUS the Treasury purchases of longer-term bonds at $45 billion/month.
The new rules could actually cause an increase in mortgage rates.
Given the law of supply and demand. More folks want them, less are written, rates could slowly pick up, in spite of the Fed actions. The new CFPB rules could actually help Annaly Capital (NLY) regain its footing.
The Key Rules And How They Could Help Annaly Capital
The key takeaways from this framework are:
- The debt-to-income ratio cannot exceed 43% to qualify for an FHA mortgage.
- Qualified mortgages would not have interest-only features, nor balloon payment "trip-ups."
- There would be a 3.5% cap on loan origination fees.
- Banks that conform to these standards will be shielded from future litigation.
"The Consumer Financial Protection Bureau (Bureau) is issuing a final rule to implement laws requiring mortgage lenders to consider consumers' ability to repay home loans before extending them credit. The rule will take effect on January 10, 2014."
The entire framework can be viewed in this report directly from the CFPB.
I believe that since the banks will both profit, and be held to higher lending standards, with stricter guidelines for consumers as well, it could benefit Annaly and other mREITs in the sector.
Here is why:
- Once the banks begin embracing the new guidelines, they will seek to offer more mortgage loans via the FHA requirements.
- Annaly is a very conservative agency mREIT with a track record of lower leverage, having opted for tighter spreads with less inherent risk, rather than wider ones. If there is stability, there is profitability.
- If the banks approve mortgages with these higher standards, the risk of pre-payments could drop significantly going forward.
- As the demand for these "premium" mortgages increase, and the mortgage rates stabilize and rise, with less pre payment or default risks, the profit stability should then come back to the sector, especially Annaly. They employ a lower risk approach and they would clearly be helped by this.
That being said, I am not ready to give an all clear signal on NLY. However this does seem to be very positive for it and other conservative agency mREITs.
The 30-year mortgage rate has had a decent move up of late, and since this is the most popular yardstick it is worth taking a look at:
In about one month, the rate has gone from about 3.30% to 3.40%, which of course widens the spread. This might not be too telling, but as long as ZIRP (zero interest rate policy) is in place by the Fed, we just might see an entry point on NLY.
I will still need to see more confirmation of my thesis, but I think that the new rules and steady mortgage rates could help NLY now.
Keep an eye open!