Uncategorized

An office building in Washington, DC.Andrew Harrer/Bloomberg (Bloomberg) --As delinquencies on multifamily mortgages pile up, lenders who had bundled those borrowings into securitizations known as commercial real estate collateralized loan obligations are racing to stave off trouble. To keep the share of bad loans from spiking too high — a development that would cut the issuers off from the fees they collect on the CRE CLOs — they've been furiously buying them back. The lenders acquired $520 million of delinquent credit in the first quarter, a 210% increase on the same period last year, according to estimates by JPMorgan Chase.It's the latest sign of strain among the $79 billion of loans packaged into CRE CLOs, a market which grew in prominence in recent years as Wall Street financed syndicators who bought up apartment complexes with the intention of renovating them and boosting rents. When interest rates surged, many borrowers whose floating-rate loans were bundled into the securitizations were caught off guard and began falling behind on their payments.To buy the defaulted loans, some lenders have been borrowing the money from banks and other third parties using what are known as warehouse lines, a type of revolving credit facility. It's surprising they haven't had more trouble accessing that debt given how quickly loans seemed to be deteriorating in quality heading into this year, said JPMorgan strategist Chong Sin."The reason these managers are engaged in buyouts is to limit delinquencies," he said. "The wild card here is, how long will financing costs remain low enough for them to do that?"One reason they have is that risk premiums, or spreads, on commercial real estate loans have tightened materially since last November. As a result, even with a more hawkish tone on the path of rates, the all-in cost of financing is still lower than where it was late last year. Still, there's no guarantee it will remain that way."If the outlook for the Fed shifts materially to hikes or no rate cuts for a while, that might lead to a sharp increase in delinquencies, which can stifle issuers' ability to buy out loans," said Anuj Jain, a strategist at Barclays Plc, who expects buyouts to continue as distress increases in the sector.Market SurgeCRE CLO issuance surged to $45 billion in 2021, a 137% increase from two years earlier, when buyers of apartment blocks sought to profit from the wave of workers moving to the Sun Belt from big cities. Three-year loans would give them time to complete upgrades and refinance, the thinking went.Fast forward to today and the debt underpinning many of the bonds is coming due for repayment at a time when there's less appetite for real estate lending, insurance costs have skyrocketed and monetary policy remains tight. Hedges against borrowing cost increases are also expiring and cost significantly more to purchase now.Those blows helped increase multifamily assets classed as distressed to almost $10 billion at the end of March, a 33% rise since the end of September, according to data compiled by MSCI Real Assets. "There was so much capital flowing into that space to real estate operators and developers, and that led to a lot of reckless lending," said Vik Uppal, chief executive officer at commercial real estate lender Mavik Capital Management., who avoided the space.The pain is now filtering through to the CRE CLO market. The distress rate for loans that were bundled into these bonds rose past 10% at the end of March, according to CRED iQ, compared with 1.7% in July last year. The firm defines distress as any loan that's been moved to a special servicer or is 30 days or more delinquent. Some other data providers prefer to wait until payments are 60 days or more overdue before using that classification.Short SellersThe outlook for the sector has caused short sellers, who borrow stock and sell it with the intention of buying it back at a lower price, to target lenders who used CRE CLOs. That's because the issuers own the equity portion of the securities, so take the first losses when loans sour.Short interest in Arbor Realty Trust stood above 37% on Monday, the highest level on record, according to data compiled by S&P Global Market Intelligence. "The multifamily CRE CLO market was not prepared for rate volatility," said Fraser Perring, the founder of Viceroy Research, which is betting against Arbor. "The result is significant distress." Arbor Realty declined to comment. Reached by phone on Tuesday, billionaire Leon Cooperman said that Arbor founder Ivan Kaufman has been "a good steward of my capital" and had correctly seen the need to position the company defensively more than a year ago.CRE CLOs appealed to some investors because the issuers tend to have more skin in the game than issuers of commercial mortgage-backed securities. Critics argue the products contain loans of lower quality than you'd find in a CMBS, where loans are typically fixed rate so are, in theory at least, less exposed to interest rate hikes."These vehicles are a way for borrowers that need speculative financing that they often can't get from elsewhere," said Andrew Park, an analyst at nonprofit group Americans for Financial Reform. "CRE CLOs package the reject loans from CMBS."

A historically high share of first-time buyer loans bolstered Freddie Mac's purchases in the challenging initial quarter of the year compared to the same period in 2023, but its volume and earnings came in lower than in the final three months of last year.Freddie's results contrasted competitor Fannie Mae's, which showed the latter's loan volume hit a multi-decade low during the quarter. However, Fannie still eked out an earnings gain on both the quarter and the year due to guarantee fee increases and other offsetting business strengths.Freddie, which is the smaller of the two influential government-sponsored enterprises, earned $2.8 billion during the first three months of 2024, down slightly compared to $2.9 billion the previous quarter but up 39% from $2 billion a year earlier.It generated $62 billion in new single-family business activity during the quarter, compared to $73 billion the previous fiscal period and $59 billion 12 months prior.The equivalent numbers in multifamily were $9 billion in the first quarter compared to $16 billion in the final fiscal period of 2023 and just $6 billion in the initial three months of last year.Chris Lown, Freddie Mac's chief financial officer said in an earnings call on Wednesday that entry-level home purchasers accounted for the bulk of its new loan volume during the period, and a record for first-time home buyers indicates a strength the enterprise plans to build on in the future."First-time homebuyers represented 52% of new single-family home purchase loans. That's a new high for us. We are working to extend these opportunities to more borrowers," he said.Fannie Mae's entry-level purchaser share for the quarter was 45%. Fannie officials said in a call Tuesday that they're working to focus more on a particularly underserved subset of that group, first-generation buyers, as part of its version of a plan both GSEs must draw up to with the aim of reducing racial inequities.Freddie's adjustments related to credit were a little less favorable than Fannie's during the quarter. While Fannie recorded a $180 million benefit for credit losses in the period, Freddie reported a nearly equal provision for them."Our provision for credit losses was $181 million for this quarter, driven by modest credit reserve bills in both business segments, compared to a higher provision expense of $395 million for the prior year quarter, which was primarily attributable to new acquisitions in that period," Lown said. Freddie noted that while delinquency rates overall remain historically low, they have been inching up in multifamily, rising to 34 basis points from 28 the previous quarter and 13 a year earlier."This increase was primarily driven by delinquency and our floating rate loans and small business loans portfolio. Ninety-four percent of these delinquent loans had credit enhancement coverage," Lown said.Efforts are underway to improve underwriting discipline in Freddie's multifamily unit, he added."We recently announced multifamily policy and process changes, including enhanced property inspection requirements and appraisal reviews that further strengthen our underwriting due diligence and risk mitigation," said Lown.Echoing Fannie, Freddie also touted initiatives around building value for its mortgage-backed securities through features aimed at attracting buyers in the environmental, social and governance market, and closing cost aid for borrowers making 50% of the area median.

Loan application volumes fell for the second week in row, as persistently elevated interest rates put a lid on borrower interest, the Mortgage Bankers Association said.The MBA's Market Composite Index, a measure of weekly application activity based on surveys of the trade group's members, declined a seasonally adjusted 2.3% for the seven-day period ending April 26. The index continued its downward momentum after a 2.7% fall a week earlier. On a year-over-year basis, application volumes also finished 10.4% lower. "Application volume for both purchase and refinances declined over the week and remain well below last year's pace," said Mike Fratantoni, MBA senior vice president and chief economist, in a press release."Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer. No doubt, this is a headwind for the housing and mortgage markets," he added.The average contract 30-year fixed rate for conforming balances, which make them eligible for sale to Fannie Mae and Freddie Mac, rose for the fourth week in a row to its highest mark since last November, Fratantoni said. The average climbed up 5 basis points to 7.29% from 7.24%, while points used to buy down the rate decreased to 0.65 from 0.66 for 80% loan-to-value ratio applications.Incoming economic data has led most economists to pivot from early-year forecasts of falling rates this summer to the higher-for-longer outlook. Previous expectations of as many as six reductions in the federal funds rates in 2024 are also now falling by the wayside, as central bank officials meet this week. The Federal Open Market Committee is expected to hold the federal funds rate at current levels until at least its next meeting. Rates and high home prices helped lead the MBA's seasonally adjusted Purchase Index down 1.7% from the prior survey period. The latest application levels are also 14.5% below year-ago volumes. As rates turned up this year, home prices, similarly, continued their upward climb over the winter, according to the latest S&P CoreLogic Case-Shiller index.Meanwhile, the Refinance Index took a drop of 3.3% week over week but saw a smaller annual decline of 1%. The refinance share relative to overall volumes also pulled back to 30.2% from 30.8%.Overall volumes fell for both conventional and government lending. The Government Index pulled back a seasonally adjusted 3.8% from the previous week, while the share of federally backed activity decreased in tandem. Federal Housing Administration-sponsored applications made up 12.7% of activity compared to 12.8% in the prior survey. The share of Department of Veterans Affairs-backed mortgages declined to 11.3% from 11.7%, while applications from the U.S. Department of Agriculture accounted for the same 0.4% of volume as seven days earlier. "One notable trend is that the ARM share has reached its highest level for the year at 7.8%," Fratantoni said. Adjustable-rate mortgage volumes typically grow when fixed averages surge. But even while nabbing a larger share, total activity was flat, with the ARM Index registering an 0.3% week over week decrease.  Still, while the conforming rate increased last week, other fixed averages moved in different directions. The fixed contract rate for 30-year jumbo mortgages slid down 6 basis points to 7.39% from 7.45%. Borrowers used 0.46 in points compared to 0.56 seven days earlier. On the other hand, the contract 30-year fixed rate for FHA mortgages averaged 7.09%, jumping 8 basis points from 7.01%. Points increased to 0.98 from 0.94 for 80% LTV-ratio loans.The contract average of the 15-year fixed mortgage inched down to 6.74% from 6.75% in the prior weekly survey. Points also edged downward by 1 basis point to 0.63 from 0.64.The mean contract rate of the 5/1 ARM, which starts fixed for a 60-month term, declined to 6.6% from 6.4% week over week. Borrower points averaged 0.75 compared to 0.87 in the previous survey period.

Minority mortgage applicants suing Wells Fargo for "digital redlining" are moving to certify a class of 119,100 plaintiffs in a complaint their attorney is calling a serious civil rights matter.Parties are disputing the bank's underwriting system that allegedly wrongfully denied, or gave higher interest rates to Asian, Black and Hispanic borrowers during the refinance boom. While total damages in the suit are uncertain, loan rejections and higher rates cost the potential class billions of dollars, said Dennis S. Ellis, partner at Ellis George LLP. "It's an important case in many respects for the individual Wells Fargo customers, but it would be a landmark case for customers, to try to prevent mortgage discrimination on a large scale," the interim lead class counsel told National Mortgage News.The motion for class certification filed last week in a California federal court includes expert witness research on behalf of plaintiffs, finding Wells' underwriting system disproportionately impacted minorities. The bank is still using the system in question today, Ellis said and plaintiffs will seek an injunction to take it offline.Wells Fargo in a statement Monday evening strongly disputed the accusations of fair housing and lending violations and said it did not discriminate against any of the eight named lead plaintiffs. "Wells Fargo does not tolerate discrimination in any part of our business," the bank's statement began. "These unfounded allegations stand in stark contrast to our significant and long-term commitment to closing the minority homeownership gap."The bank did not address a question as to whether the alleged discriminatory underwriting system was still in use, but it stated that plaintiffs mischaracterized how its systems work, and that it's confident in its own reviews of its systems. Wells Fargo also said it was the largest originator of mortgages for minority customers for many years, including the 2018 to 2022 period specified by the class. Ellis in an additional filing last week said Rocket Mortgage and Loandepot were more prolific lenders to Black Americans over that time, according to a review of Home Mortgage Disclosure Act data performed by his colleagues. An attorney for Wells Fargo didn't respond to a request for comment.The system in question, according to the motion, is Wells' Enhanced Credit Scoring, which is part of its underwriting technology. The ECS assigns applicants to credit risk classes. It allegedly began showing deficiencies because of COVID forbearances and a lack of late payment reports.Average months in file, recent inquiries and major derogatories were drivers of disparities that would eventually impact specific borrowers, the motion claims. An expert witness retained by plaintiffs said the ECS model is a supervised machine learning model capable of showing "algorithmic bias."The lawsuit stems from a February 2022 complaint, in which plaintiff Christopher Williams sued the bank for denying him a prime interest rate despite being well qualified. A second lawsuit followed, shortly after a Bloomberg report revealed research finding Wells had the largest lending disparity between Whites and minorities among major lending institutions at the height of the refi boom. The lawsuit so far has included reviews of over 160,000 documents and the deposition of 42 witnesses between the parties. Plaintiffs have also accrued at least $3 million in legal expenses in hiring experts.A hearing on the class certification motion is scheduled for June 27 in a San Francisco courtroom. A jury trial is also scheduled to begin this December. The major financial institution faces other mortgage-related lawsuits, including a complaint filed last month over the fallout of the bank's prior loan modification errors. It also recently renewed its push to dismiss a separate complaint in California regarding refunds the bank issued in the past decade over wrongfully-administered rate lock extension fees. Wells Fargo announced its exit from correspondent lending and a reduction of its mortgage servicing portfolio early last year.

Mortgage operations at Rithm Capital propelled the company to a profitable start in 2024, as leaders emphasized the segment's significant role in overall business strategy in its latest earnings call. The New York-based real estate investment trust posted net income of $261.6 million, equivalent to 54 cents per share in the first quarter. The bottom line represented a turnaround from a fourth-quarter loss of $87.5 million, which had largely been driven by decreases in the fair value of mortgage servicing rights. Year-over-year, profits grew by 281% from $68.9 million in the first quarter of 2023.The mortgage originations and servicing segment at Rithm, the parent company of Newrez, brought in $311.9 million in net income during the quarter as loan production and fair value of MSRs both improved.While a mortgage-unit spinoff, which was considered almost exactly a year ago, remains on the table as the REIT pursues expansion in other lines of business, any new emerging residential home lending entity was described by CEO Michael Nierenberg as currently a "work in progress.""If you think about the power of our franchise, the earnings from our overall investment business, including the mortgage company, creates significant advantages for us to be able to make investments and other things that we may want to do that are nonmortgage related," Nierenberg said. "To give that up today, we're not sure that's the right thing, but we continue to evaluate that and work with our advisors on which way we're going to go with it."Both originations and servicing at Newrez provided some momentum to company earnings after a period of struggle for many lenders last year. While still muted, total funded production volume between January and March increased 21.3% quarter-over-quarter to $10.8 billion from $8.9 billion and improved by 54.3% from $7 billion compared to a year earlier. Both production as well as margins increased mostly thanks to the business' correspondent channel, said Newrez President Baron Silverstein. "We have strong momentum in our nonagency products, originating over $185 million of non-QM loans in the first quarter, almost back to levels we were seeing in 2022," Silverstein added. Gain on sale margins increased to 129 basis points, up from 123 in the fourth quarter. But margins shrank from 161 basis points a year earlier.Mortgage volume increased, even as the company sought to pull back from retail operations over the past several months, a retreat that has brought it into legal conflict with former loan officers and a new competitor.             Unpaid servicing balance within Newrez came out to $577.5 billion. The number includes totals from Specialized Loan Servicing, a pending acquisition from 2023 and grew by 1.7% from $568 billion at the end of 2023, and 14.6% from $504 billion 12 months prior. Total servicing revenue during the quarter was $490.8 million. Across the entire servicing portfolio at Rithm Capital, unpaid balance stood at $857 billion. Within servicing, the company anticipates current trends to bring further growth, including increased wallet share from its existing third-party customer base, as it also continues to evaluate other opportunities, Silverstein said. It should also see a boost after its acquisition of SLS closes later this year. "We continue to evaluate MSR bulk packages, but there's also other strategic acquisitions that we look at as well," Silverstein said. "Overall, the consumer also performs well with muted prepayment speeds and historically low delinquencies across it all." Rithm also touted success in some of its other subsidiaries, notably its real estate investor financing platform, Genesis Capital, following industry upheaval in 2023. "With the regional banks retreating, our Genesis business had a record quarter and they're on target to do about $3 billion in origination. When we first started the platform, I think we were around $2 billion," Nierenberg said.Rithm earnings exceeded the average consensus estimates from analysts, according to Yahoo Finance. Quarterly results led its stock to open at $11.26 on Tuesday morning after closing at $11.22 the previous day. It rose to $11.31 toward midday.

A number of announcements related to M&A in recent days may signal that buyers are more confident about securing regulatory approval for transactions.Adobe Stock, Daniel Wolfe The melding of increased regulatory challenges and fallout from high interest rates has cast a pall over bank merger-and-acquisition activity in 2023 and at the start of this year. But deal talks are on the rise, driven by a pursuit of scale and diversification. Key deal announcements in recent days may signal that fresh momentum could mount.Most notably, UMB Financial in Kansas City, Missouri, said Monday it struck a deal to buy Heartland Financial USA in Denver in an all-stock transaction valued at $2 billion. The acquisition, slated to close in the first quarter of 2025, marks the largest bank deal announced since 2021. The $45.3 billion-asset would-be acquirer said it was confident in its ability to secure regulatory approvals to absorb the $19.4 billion-asset Heartland — the major hurdle standing in the way of larger deals over the past couple of years."We have been keeping our prudential regulators and other agencies engaged throughout our due diligence business, and because of the feedback we have received, we're excited to move forward," UMB Chairman and CEO J. Mariner Kemper told analysts during a call on Monday.In the wake of elevated regulatory scrutiny ordered by President Biden in 2021, several acquisitions were delayed and a few were nixed entirely. This discouraged some deal discussion, with acquisitive banks growing reluctant to commit to a deal that might get mired in a protracted, expensive regulatory process.  "Regulatory scrutiny is an ever-present risk to M&A transactions in today's climate," D.A Davidson analyst Jeff Rulis said after UMB announced its bid for Heartland, which does business as HTLF. But UMB's confidence and strategic rationale make a case for M&A that regulators appears to recognize.Rulis noted UMB inked the deal in pursuit of business line and geographic diversity, aiming to expand in major markets throughout the Midwest, South and West. "Scale and metro market density were stated strategic drivers of the combination" as well as a "diversified business model," Rulis said.What's more, the $21.2 billion-asset Eastern Bankshares in Boston said it now expects to get regulatory approvals for its delayed acquisition of in-state peer Cambridge Bancorp during the second quarter and close the transaction shortly thereafter. Eastern valued the proposed acquisition of the $5.4 billion-asset Cambridge at $528 million when it was announced last September. The all-stock deal was initially scheduled to close in the first quarter, but it was delayed because of drawn-out regulatory reviews."We expect those approvals later this quarter, and we expect to close the merger in early July," Eastern Chief Financial Officer James Fitzgerald said during the company's first-quarter earnings call on Friday. Regulators were "very clear that they want to support us, I think, and they know our timelines for this and have communicated that they believe they will put us in a position to meet them."Also on Monday, the $18 billion-asset Hope Bancorp in Los Angeles said it would buy the $2.2 billion-asset Territorial Bancorp in Hawaii for $78.6 million. It followed news last Friday that the $27.6 billion-asset Fulton Financial's bank in Lancaster, Pennsylvania, would acquire most of the $6 billion of assets from the failed Republic First Bank in Philadelphia.While the latter deal involved a failure, it was nevertheless a bid for diversification and greater size, said John Mackerey, an analyst at Morningstar DBRS. "In recent years, Fulton has been expanding its presence in larger metropolitan areas, including Philadelphia, and this transaction accelerates that strategy," he said. Of note, a pair of Illinois community banks also agreed to combine on Monday. Monmouth-based Western Illinois Bancshares and Princeville-based Main Street Bancorp agreed to merge in an all-stock transaction expected to close late this year. The merged bank would have about $800 million of assets. Financial terms were not disclosed.Earlier this month, Wintrust Financial in Rosemont, Illinois, inked a $510.3 million all-stock deal to buy Macatawa Bank Corp. in Holland, Michigan. It marked the second-largest deal of this year. The $2.7 billion-asset seller would join the $56 billion-asset Wintrust's lineup of 15 community banks in the Midwest should the deal close as planned in the second half of this year.While a few deals do not make a trend, the spate of activity to close out April was welcomed by bankers at a Piper Sandler conference this week, said Stephen Scouten, an analyst at the firm. The announcements were "mildly encouraging to most in attendance," he said.Scouten said M&A activity still has much ground to regain this year, "but conversations remain prevalent and deal volume could pick up from 2023 lows."In addition to the regulatory headwinds, a surge in interest rates over the past two years spurred worry about an economic downturn and curbed some buyers' appetites. Recessions often hinder borrowers' ability to repay loans, causing higher credit losses for banks. This includes possible sellers; as a result, many would-be buyers tapped the brakes on M&A plans.U.S. banks announced 100 acquisitions in 2023 with a total deal value of $4.2 billion, according to updated S&P Global Market Intelligence data. Both measures were markedly lower than the previous year, when banks announced 157 deals with a total deal value of $9 billion. And 2022 was a relatively slow year compared to 2021, when 202 deals valued at $76.7 billion were announced.During the first quarter, 26 banks announced plans to sell. Those deals carried an aggregate deal value of $1.1 billion, according to S&P Global. That represented a substantial advance from the year-earlier quarter, when there were 20 bank deals worth a total of $433 million.

Representative French Hill, a Republican from Arkansas, sits on the House Financial Services Committee.Al Drago/Bloomberg WASHINGTON — Rep. French Hill, R-Ark., the vice chairman of the House Financial Services Committee, criticized a range of proposals by Biden administration regulators, notably those related to technology, including bank-fintech partnerships and digital assets, in a speech Tuesday.Hill, who also serves as the chairman of the House Financial Services subcommittee on digital assets and is in the running to take the top Republican spot on the full committee next Congress, told a room full of community bankers that his and other House Republicans' focus for the remainder of the Biden administration is pushing back on regulators' policies, as well as introducing some legislation to "lead us in the right direction." He spoke at a conference organized by the Independent Community Bankers of America.In particular, Hill criticized a move by the Federal Reserve in August that outlined how the central bank would oversee "novel activities," including technology-driven partnerships with nonbanks, and activities that include cryptocurrencies and blockchain technology.Hill and many other Republicans interpret steps being taken by banking regulators to address fintech and crypto policy as effectively shutting out banks from those businesses. Hill argued that the Fed's action in August "basically says that if you want to partner with a fintech company in any aspect of your business, somebody has to get preapproval for that.'"I told Vice Chairman [Michael] Barr, that's not the way we work in banking," he added.Hill said that regulators should instead look at these partnerships and activities at banks individually through the examination process. "We have records, we have risk management policies and compliance departments," he said. "We document all that, then we'll go over it with an exam. I thought that was a serious overreach." Hill said that one of his goals in the next year is to show regulators and Congress that fintech "can benefit banks." He's also interested in the use of artificial intelligence in the financial sector."We're bringing in the regulators, asking them how they're using AI in their own practice and their own services to you, and how they're looking at AI from a supervisory perspective," he said. Hill also referenced an off-the-record session at the ICBA conference the previous day with Consumer Financial Protection Bureau Director Rohit Chopra. Hill, like other congressional Republicans, has repeatedly criticized Chopra's rulemakings and enforcement actions."I don't think any CFPB director has ever made a small business loan," Hill said. "You got to hear from one of the slickest guys in town yesterday."  Hill promised to continue pushing back on the CFPB's small-business lending data collection rule, which has faced litigation from the banking industry as well as an ultimately unsuccessful Congressional Review Act challenge. 

The world of finance always fascinated me growing up in the early 2000s. With two parents who worked on Wall Street — a father attached at the hip to his BlackBerry PDA and a mother who gave up her day job as a bond broker to raise two boys — I bombarded them each day with questions about the ins and outs of stocks, bonds and what it was like to launch their careers during the economic boom of the 1980s. My hunger for the basics of how deals were structured, what exchanges did and other fundamental concepts continued through college and into adulthood, pushing me in the direction of business journalism. "Why not work in finance outright and just do what your parents did?" asked many concerned friends and family members wondering if I made the wrong choice.  For one simple reason: It's learning about the form and function of the deals that I always loved, not being the architect. A mix of a desire to continue my education and general intrigue led me to Michael Lewis' "Liar's Poker." It's the book that launched Lewis' writing career and is celebrating its 35th anniversary this year. "Liar's Poker" is an oft-recommended dive into the highs and lows of Salomon Brothers, one of the most profitable investment banks of the time. Lewis' firsthand account of his time as a bond salesman for Salomon from 1985 until he left in 1988 holds your hand through a period of relative inexperience as a trainee to entry-level salesman to multimillion-dollar dealmaker. Despite the book's age, "Liar's Poker" retains its status as a must-read for anyone interested in the inner workings of Wall Street. The lessons it teaches about the true costs of success and the methods behind building an entity as dominating as Salomon once was remain true today. Many know the fate of Salomon — it was plagued by a scheme related to buying Treasury bonds and eventually sold to Travelers Group. The book ends before this period is covered but it still serves as a stark reminder that even seemingly indestructible companies can, in fact, be toppled, a lesson the industry can't afford to forget. (Note the banking crisis last year.) Outside of a master's degree in economics from the London School of Economics, Lewis' major in art history combined with his experiences of bartending and skydiving left him at a disadvantage during a mass surge of students studying finance. But like many who landed jobs in the field, connections proved to be the high hand over pure experience. A chance encounter with the wife of a senior Salomon Brothers managing director turned into breakfast with the firm's former head of recruiting Leo Corbett and, eventually, a seat in the training class of 1985. "Oddly enough, I didn't really imagine I was going to work, more as if I was going to collect lottery winnings," Lewis writes.But with the paycheck came an ingratiation period into the culture that proliferated at Salomon and other firms of the era. After three months had passed, trainees spent the remainder of the program patrolling the trading floor to see how the company functioned and commence with selecting their "jungle guide," or the veteran who would take them under their wing. Thus began the "Great Divide" between those throwing themselves at the mercy of managing directors in the hopes of a desirable landing, and those playing hard to get. Doing so garnered no relief, however. When it came time for job placement, managing directors became talent scouts, trading trainees based on appearance, individual merits and — once again — connections. The first few chapters that recount Lewis' training, reflective of the firm's desire to brainwash its inductees into willing converts, are interesting enough, but it's the anecdotes of miniature finance lessons nestled between the tales of jilted clients and warring executives that really give the book its gravitas. For someone whose day-to-day life doesn't directly involve bonds or mortgages (if yours does, see our sister publications), the walk through the rise and fall of the mortgage bond market would normally lead me to aimlessly thumb through the pages until I returned to Lewis' perspective. But given that his lens is through bond options and futures sales, this lookback into Salomon's mortgage business involves the man responsible for its growth — Lewis Ranieri. Before earning his title as the "father of mortgage-backed securities," and his inadvertent hand in the 2008 financial crisis, Ranieri worked his way through Salomon's mailroom into a position trading public utility bonds. It was then, in 1978, that he was nominated by industry pioneer Robert Dall to become the newly created department's prime trader. Over the next several chapters, Lewis uses the "loudmouthed and brash" Ranieri to provide an overview of the birth of the mortgage-backed securities industry and Salomon's role in its creation and subsequent domination for some time. In addition to the historical significance of Ranieri's tenure, he's also representative of the hunger that allowed mostly men to succeed on Wall Street during that time. When the book's main narrative begins, in 1985, the barrier that was erected between the back and front office required traders to have a resume, graduate from college and most importantly "look like an investment banker," writes Lewis. Equally interesting, and telling of the time, is the disparity in which jobs women were allowed to hold. The popularity of bonds in the '80s pushed many trainees toward the trading desks, but Salomon's "ordering of the sexes" dictated that within the firm, "men traded, [and] women sold." "The immediate consequence of the prohibition of women in trading was clear to all: It kept women farther from power," Lewis writes. The banking industry has progressed since then. But there's still measurable work to be done given the dearth of women in the C-suite and other traditionally male-dominated jobs. I parted ways with the book a bit wearier, albeit smarter, and was left thinking about all the stories my parents told me about their experiences. After what they've gone through to get me where I am in life, the least I can do is give them a temporary reprieve from my bombardment of questions.

Two Harbors Investment Corp., riding a first quarter profit, is close to locking mortgage loans through a direct-to-consumer channel. The effort, an attempt to hedge against faster-than-expected prepayment speeds when there's a refinance environment, will begin operating in the second quarter, executives said Tuesday in an earnings conference call. "Though [a refi environment] may seem distant, we intend to offer ancillary products, including second lien loans to our customers in the meantime," said William Greenberg, president and CEO of the firm. The announcement follows a first-quarter result of $192.4 million in net income over the prior quarter's $444.7 million net loss. Two Harbors' comprehensive income of $89.4 million was also a quarterly improvement from the prior period's $38.9 million. Company leaders cited mortgage servicing rights values increasing on higher mortgage rates and spreads tightening. A decline in residential mortgage-backed securities values meanwhile was offset, the firm said, by gains in swaps and futures. Two Harbors' $14.7 billion portfolio included $3.1 billion in MSR holdings and $8.2 billion in RMBS at the end of the quarter. The company added a new subservicing client in the first quarter, which will onboard around 17,000 loans to its newly acquired RoundPoint platform. That acquisition is nearly complete, with approximately 52,000 loans set to transfer in June in a final "clean up," Greenberg said.New participants and low supply are driving a brisk pace of activity in MSR markets, executives said. The $160 billion in unpaid principal balance up for bid in the first quarter was lower than years past because of slow originations and much low-coupon servicing already trading hands, said Nicholas Letica, vice president and chief investment officer. "This lower supply combined with a growing investor base should keep MSR values well supported," he said. Although prepayments are expected to rise, Two Harbors said it is insulated given that over 80% of its balances have loans 250 basis points below current mortgage rates. The firm's MSRs have a weighted average coupon of 3.47%, nearly unchanged from the end of 2023.Two Harbors' share price opened the day 9 cents higher after its earnings release Monday evening, when it closed at $12.61. The stock hovered around that price at mid-morning Tuesday.

Fannie Mae struggled with single-family loan purchase volume in the seasonally weak first quarter, when it fell to depths not seen since the third quarter of 2000, but other strengths netted it a small gain.The influential government-related mortgage investor purchased $62 billion single-family loans during the first three months of the year, down from $70 billion the previous quarter and $68 billion a year earlier, when the number also was near a two-decade low."Continued high interest rates, housing affordability constraints, and limited supply resulted in low refinance volume and put downward pressure on the volume of purchase loans we acquired," said Chryssa Halley, chief financial officer, in an earnings call.However, other offsetting strengths increased earnings slightly to $4.3 billion during the first quarter, compared with $3.9 billion the previous fiscal period and $3.8 billion a year ago; and executives said Fannie is taking steps to sustainably finance more borrowers."Our first quarter revenues remain strong, with $7 billion of net interest income thanks to healthy guarantee fees," Halley said. While g-fees were down from $7.7 billion the previous quarter they were up from $6.8 billion a year earlier.Fannie also saw a benefit for credit losses this quarter of $180 million as opposed to a provision of $116 million the prior quarter."This was driven by a release in reserves due to increases in forecasted single-family home prices partially offset by an increase in reserves for multifamily," said Halley. "The multifamily increase is due primarily to declining actual near-term projected property values, as well as increases in actual and projected interest rates compared to the company's prior forecast."Multifamily loan purchases also have been slower and fell to the lowest they've been since the fourth quarter of 2015 at $10.2 billion, down slightly from around $11.2 billion the previous fiscal period and $10.2 billion a year ago.The circumstance suggests the future strength of Fannie's earnings rests largely on continued strength in single-family home prices, the economy and consumer sentiment.Indicators show consumer homebuying interest is persisting with some adjustment to current interest rates even though affordability hurdles are a challenge, CEO Priscilla Almodovar said during the earnings call."Despite these pressures, consumers seem to be adjusting their expectations on mortgage rates and the home price environment," she said.Also, Fannie has been adding measures to address economic hurdles to buying, Almodovar said.One step Fannie took Monday to extend more loans to the market was to initiate an effort to draw up a standard definition for a "first-generation homebuyer" in line with its latest Equitable Housing Plan, which is aimed at closing the racial gap in the residential market."We hope that the standard definition will allow the industry to understand and explore new ways of addressing this disparity," she said.Another has been a temporary change Fannie made to its Homeready low-downpayment program, which allows borrowers in areas making no more than the 50% of the median income to put $2,500 toward closing costs. (Its competitor, Freddie Mac, has a similar program.)"We're also creatively using our role in the capital markets to support our mission," Almodovar added. "This past quarter, we launched our enhanced single-family mission index disclosures, which helped interested mortgage-backed security investors allocate their capital in support of affordable housing."During the quarter, Fannie was the second largest single-family issuer of MBS with a 27% market share, compared to 38% for government guarantor Ginnie Mae, 26% for competitor Freddie Mac, and 9% for the private-label market.