Ellie Mae (ELLI) keeps on rising

We recently argued that the emerging bear case for Ellie Mae (ELLI) was way overdone. This bear case seemed to have been produced by a report from analyst house William Blair, arguing that the company would not be able to sustain its conversion rate in users of self-hosted software (mainly Encompass) to Ellie Mae hosted software as a service (SAAS).

Another element of the bear thesis (or Blair thesis, if one wishes) is that for this year, there is a good deal of headwind in the mortgage origination numbers. That might be somewhat surprising when we hear soundbites about a recovery in the housing market, but it isn't as it's based on prognostications from Freddie Mac (FMCC.OB), Fannie Mae (FNMA.OB) and the Mortgage Bankers Association.

These organizations produce monthly forecasts and assume the fall in the number of refinancing existing mortgages will trump the number of new mortgages by some considerable number, the latest forecast is a 17% decline in overall origination.

We argued in the earlier article that these predictions are old news, so we could not fathom why this would cause a sudden 30%+ drop in the Ellie Mae share price in less than two weeks. That should have been in the price for some time, as we pointed out that in the Q3 conference call, the company itself assumed a 20% headwind in the market for this year. Even then it expected a 25% revenue increase in 2013 over 2012. [Read on here]

Well, ELLI is on sale while they keep raking in expectations defying quarterly numbers and new customers:

Ellie Mae^® (NYSE: ELLI), a leading provider of enterprise-level, on-demand automated solutions for the residential mortgage industry, today announced that New American Funding, Tustin, Calif., has selected Encompass360^® as its mortgage management solution.

New American Funding is a retail and wholesale mortgage lender operating in 22 states and funding approximately $400 million a month in loans. It became an approved servicer for both Fannie Mae and Freddie Mac in 2012 and is currently servicing a portfolio of approximately $2 billion.

New American Funding is utilizing Encompass360 and its integrated Encompass Compliance Service™ under Ellie Mae’s Success-Based Pricing model, which allows them to pay for Encompass360 based on the number of loans they close every month, Ellie Mae said.

“Having compliance totally integrated with our LOS was a major driver in our selection process,” said Erin Forbes, CMB, Director of Compliance/Servicing at New American Funding. “We looked at a number of different LOSs, but none were as robust as Encompass360.”

New American Funding is still in the early days of implementation and customizing the solution for its needs, Ms. Forbes says. “With Encompass360, we’re far more efficient and expect to go paperless by the end of this quarter.”

“Today, depending on where you are originating, there are approximately 350 different federal, state and local regulations that could come into play,” said Jonathan Corr, Ellie Mae’s president and chief operating officer. “Prudent, forward-looking lenders like New American Funding understand the value of automated compliance and the economic advantages of Ellie Mae’s SaaS business model.”

Ellie Mae, Inc. (NYSE: ELLI) is a leading provider of on-demand automation solutions for the mortgage industry. The Company offers an end-to-end solution, delivered using a Software-as-a-Service model that serves as the core operating system for mortgage originators and spans customer relationship management, loan origination and business management. The Company also hosts the Ellie Mae Network™ that allows Encompass^® users to electronically conduct business transactions with the lenders and settlement service providers they work with to process and fund loans. The Company’s offerings include the Encompass, Encompass360^® and DataTrac^® mortgage management software systems.

Ellie Mae was founded in 1997 and is based in Pleasanton, California. To learn more about Ellie Mae, visit www.EllieMae.com or call 877.355.4362.

Borrowers who lost homes to foreclosure during the housing bust are starting to buy again.

Since the housing bubble burst, 4.8 million borrowers have lost their homes to foreclosure, and another 2.2 million gave them up in short sales, according to RealtyTrac. While many are still struggling to recover financially, a growing number are starting to bounce back -- and they are looking for a new place to call home.

Susan Edwards and her husband, Dave, lost their Palmdale, Calif., home in 2010 after Susan's severe arthritis made it impossible for her to work her medical device sales job.

The medical bills soon piled up and the couple could no longer afford their $2,300 monthly mortgage payment. In addition, their home's value had plunged 40% below the $325,000 mortgage balance.

"We were living under such pressure," she said. "We looked at the numbers and knew we had to default."

After the foreclosure, Susan's credit score had taken a 70-point hit; Dave's score fell even further.

By paying all of the bills on time, they nursed their credit scores back to health. And in December, two years after they lost their old home, the couple was able to buy a new home with a loan backed by the Veteran's Administration. VA-insured loans can be obtained just two years after a foreclosure, according to the Mike Frueh, director of the VA's Loan Guaranty Program.

The new house is a lot like the Edwards' old one, with one big improvement: The mortgage payment is $1,150 a month -- roughly half the amount they used to pay.

"[After bankruptcy], foreclosure is one of the things that hits your credit score the hardest," said Anthony Sprauve, a spokesman for FICO.

Foreclosures and short sales usually knock about 85 to 160 points off a credit score. Scores suffer less if you pay at least the minimum on all your other bills on time and only allow your mortgage payments to go unpaid, said Jon Maddux, the CEO of YouWalkAway.com, which offers advice to defaulting mortgage borrowers.

Once the damage is done, it can take three to seven years for a score to fully recover. But some lenders are willing to work with borrowers earlier than that.

Mortgage giants Fannie Mae and Freddie Mac, for example, require defaulters to wait five years -- and have a minimum credit score of 680 and put 10% down -- before they can purchase a home again. If they don't meet that criteria the wait is seven years, at which point the foreclosure is expunged from a person's credit report.

If defaulters show that extenuating circumstances caused the foreclosure -- such as a health issue that prevented them from working, a layoff, a divorce or other one-time event -- the wait may be reduced to three years.

The Federal Housing Administration allows banks to issue FHA-insured loans to borrowers three years after a foreclosure or a short sale in which the borrower was in default.

Tony and Ginger Read, who live with their three kids outside of Boise, Idaho, took four years to rebuild their credit after they sold their home in a 2008 short sale. Tony had been laid off and the couple had already sold their camper and other valuables in a fruitless effort to keep their home. Eventually, a broker convinced them to sell.

"It was the hardest thing we ever had to do but we couldn't afford the payments," said Ginger.

Tony now has a job supervising a sand and water pumping crew for the fracking industry and the couple's credit score has regained more than half of what it lost.

In January, they were approved for a 4% interest FHA loan on a $280,000 house in Fruitvale, Idaho. They close April 12.

Mike Edgar, the broker who worked with the Reads to sell their home and buy a new one, has worked with several clients to help them repair their credit and, when they're ready, buy new homes.

In 2012, he worked with 15 "boomerang" buyers, about a quarter of his sales. He expects that number to double in 2013.

Tim Duy, a business manager in Verrado, Ariz., and his wife Christina, lost their house in April 2011. They're eager to become homeowners again, but for now they're concentrating on repairing their credit. The foreclosure, which knocked Duy's credit score down 200 points to below 600, has since rebounded to 730.

Meanwhile, the couple window shops. "We're in the penalty box for another year, maybe," said Duy. "I see houses just what we want selling for $185,000. I would jump all over that if I could."

The shares are now back above the 200 day moving average, that's a pretty good sign..

Rising rates put pressure on the shares of ELLI, but perhaps this is overdone, although the slow-down in refinancing isn't good for ELLI, see Bloomberg article below:

Housing Seen Shrugging Off Loan Rate Rise as Banks Loosen

By Prashant Gopal, Kathleen M. Howley & John Gittelsohn - Jun 21, 2013 2:15 PM GMT+0200

Derrick Bulaich locked in a home-loan rate of 4.6 percent last week, prompted by a surge in borrowing costs as investors speculated the Federal Reserve would pull back from bond buying. Bulaich, who said he wishes he’d acted sooner, still plans to complete the purchase today of the four-bedroom Sacramento home because values in the city remain 42 percent below their 2005 peak despite recent gains.

“I was hoping rates would come back down and then I realized they weren’t going to,” said Bulaich, 24, who works for a bank. “Homes are still affordable, so that takes some of the sting” out of it.

While rising costs make purchasing real estate more expensive, the upshot for homebuyers is that banks will need to respond by improving credit availability that has been holding back the market for the past five years. Photographer: Daniel Acker/Bloomberg

Fed Chairman Ben S. Bernanke said this week that the central bank may scale back its unprecedented stimulus program this year as the economy and housing improve, ending the era of record-low mortgage rates and marking the first test for the year-old housing recovery. While rising costs make purchasing real estate more expensive, the upshot for homebuyers is that banks will need to respond by improving credit availability that has been holding back the market for the past five years.

“If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.”

Rates Jump

Mortgage rates in the U.S., after increasing at the fastest pace in a decade, have jumped after Bernanke confirmed on June 19 that the central bank is ready to slow its purchases amid signs of an improving economy and housing market. Wells Fargo & Co. (WFC), the largest mortgage lender, increased the rate on a 30-year mortgage to 4.5 percent yesterday from 4.13 percent on June 18 and 3.88 percent last month.

The average rate for a 30-year fixed loan climbed to 3.93 percent earlier this week from 3.35 percent last month and the record low 3.31 percent reached in November, according to Freddie Mac.

The prospects of higher rates and the ending of the bond-buying program have sent stock markets plunging around the world. U.S. homebuilders fell 7.1 percent yesterday after a 3.3 percent drop the prior day, the biggest two-day plunge in more than a year. PulteGroup Inc. (PHM), the largest homebuilder by market value, declined 9.1 percent yesterday.

Market Surging

Higher borrowing costs so far haven’t held back the housing market, which is surging after the worst downturn since the 1930s. Sales (ETSLTOTL) of previously owned U.S. homes climbed more than forecast in May to the highest level since November 2009 and the median price jumped 15.4 percent from a year earlier to the highest in almost five years, the National Association of Realtors said yesterday.

Home prices are still 28 percent below the 2006 peak, and mortgage rates, still near historic lows, are down from 6.8 percent in 2006 and more than 10 percent in 1990. That’s spurring buyers like Bulaich, who is closing today on the $158,000, 1,300-square-foot (121-square-meter) stucco home.

“All these people are flooding out there to buy a house right when the rates are going up, but it’s still pretty affordable,” Bulaich said.

The rebound has helped rebuild household wealth, which jumped to a record in the first quarter, after falling in 2007 when the housing crash plunged the U.S. into the longest recession since the 1930s.

Credit Pendulum

The credit pendulum swung from irresponsibly loose during the middle of the last decade when lenders granted mortgages even to people with no income, no job or assets -- known as Ninja loans -- to extremely tight after the 2007-2009 recession. Even as Bernanke resorted to unprecedented measures, including holding borrowing costs near zero, the central banker said at the start of last year that housing was being held back partly by tight credit.

It’s now tilted closer to the averages seen in the late 1990s based on a combination of factors, such as loan-to-value, debt-to-income and credit scores, CoreLogic Inc. Chief Economist Mark Fleming said.

While credit may be opening, the process of getting a new or refinanced mortgage remains frustrating, because lenders are making more meticulous demands for evidence of borrowers’ finances, Fleming said.

That didn’t matter much to lenders last year as reduced competition and low mortgage rates allowed them to charge high prices for selling home loans into mortgage pools. Loan originations totaled $1.75 trillion in 2012 and the four biggest bank lenders reported more than $24 billion of revenue from originations as homeowners replaced their loans to cut costs.

Refinancing Slows

Rising rates have already quashed refinancing, which has fallen to 68.7 percent of the market from 76 percent at the start of May, according to the Mortgage Bankers Association.

Further increases will flatten the wave of refinancing and force lenders to compete more aggressively for homebuyers, said Doug Duncan, chief economist at Washington-based Fannie Mae. In addition to easing underwriting standards, banks will also have to consider layoffs to cut costs and lowering margins to make up for lost refinancing revenue, Duncan said.

Lenders will see their refinance business fall to 45 percent of originations in the second half of this year and 35 percent next year, according to a Mortgage Bankers Association forecast.

“Companies, if they want to stay in business, they’re going to compete,” Duncan said.

Adding Staff

Bank of America, which has hired 1,000 loan officers during the past year, plans to continue adding staff to aggressively go after home-purchase business as refinances slow, said spokesman Terry Francisco.

The company is doing more lower-down-payment originations because mortgage insurers are getting more comfortable with them as home prices rise, he said. The company is considering lowering its down-payment requirement for jumbo loans to 15 percent from 20 percent, he said.

“We would never change credit conditions due to market pressures,” he said. “Any changes would be based on economic factors.”

Vickee Adams, a Wells Fargo spokeswoman, said there are “lots of opportunities for refinancing and purchasing activity. The most important thing for prospective borrowers is to work with an experienced mortgage professional to identify their best loan option.”

Citigroup spokesman Mark Rodgers declined to comment. Tom Kelly, a spokesman for JPMorgan Chase & Co. (JPM), couldn’t be reached for comment.

Higher Standards

Lenders raised standards after the housing crash compelled the government to rescue Fannie Mae and Freddie Mac and bondholders forced them to buy back faulty loans. In all, poorly underwritten mortgages have cost five banks -- Wells Fargo, Bank of America, JPMorgan Chase, Citigroup Inc. © and Ally Financial Inc. (ALLY) -- at least $94 billion in the six years ending 2012.

Mortgage originators remain concerned that the government-supported mortgage guarantors will force them to repurchase loans if they make underwriting mistakes.

“What we’ve seen in the last three or four years is that lenders were so skittish about doing something wrong,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. “They said let’s do the safest loans on earth. What’s prodding them away from that is being more comfortable with the quality of loans and also the fact of life that unless they start being more flexible, volumes will go down.”

While underwriting standards are far more restrictive than they were during the real estate boom, lenders are becoming more flexible, said Cecala. They’re dialing back documentation requirements for jumbo loans for pricier properties and allowing lower down payments even for conventional mortgages, he said.

Down Payments

Zillow Mortgage Marketplace, an online comparison shopping site for home loans, saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments of 3.5 percent to 5 percent in March 2013 compared with two years earlier, said Erin Lantz, director of the site, which received 15 million loan requests during the past 12 months.

“More lenders are willing to lend to borrowers with lower down payments -- it’s an indication that they are able to extend credit more broadly,” Lantz said.

More buyers are also getting low down-payment loans backed by government sponsored mortgage enterprises, Fannie Mae and Freddie Mac, said Credit Suisse Group AG mortgage strategists Mahesh Swaminathan and Vikram Rao.

In May, 20 percent of purchase mortgages in the U.S. were Fannie Mae or Freddie Mac loans requiring private mortgage insurance, up from 9 percent two years earlier. The share of Federal Housing Administration and Veterans Administration mortgages remained at about 40 percent in May from May 2011.

Market Opening

Rising home prices have made mortgage insurers more willing to take on loans with lower down payments.

“Otherwise creditworthy borrowers who wanted to buy homes with lower down payments were largely left out of the market a couple of years ago,” Rao said. “Now some of those people are able to come into the market and buy. The market has opened for them.”

Even amid rising interest rates, more people are refinancing their mortgages because rising prices have helped them gain equity, which makes loan approval easier, according to Jeff Lazerson, president of Mortgage Grader Inc., an independent mortgage broker in Laguna Niguel, California.

Piggy-Back Loans

In another sign of loosening credit, Lazerson began this year offering piggy-back loans to allow borrowers to refinance as much as 90 percent of the value of their property. A 10 percent piggy-back mortgage plus an 80 percent prime mortgage on a $700,000 home can cost about $3,100 a month at today’s rates, compared with about $3,575 for a 90 percent loan with mortgage insurance on the same property, Lazerson said.

“That $475 a month adds up over time,” he said in a telephone interview. “And I don’t perceive it as being high risk.”

Piggy-back loans became common during the credit bubble before the housing crash, when lenders offered first loans worth 80 percent of a home along with 20 percent second mortgages, enabling purchases with no down payment, even for borrowers with low credit scores. Those types of loans became rarer when home prices plunged and lenders in the second position faced mounting losses.

‘Sellers’ Market’

When it comes to purchases, buyers offering low down payments still are locked out of the market in California, the only state where Lazerson is licensed to offer loans, because appraisals haven’t been keeping pace with price increases and other bidders can offer more reliable financing, he said.

“Listing agents aren’t willing to accept buyers with low down payments,” Lazerson said. “It’s a sellers’ market and every house has five or 10 offers if it’s priced right.”

For those who can find a property, rates are low enough that it won’t “crimp people’s ability to buy,” said Credit Suisse’s Swaminathan.

“It’s much more dependent on jobs growth, sentiment and outlook on where things are going and as long as that remains solid then even a 5 percent mortgage rate is not the end of the world,” he said.

Well, ELLI has now officially joined the SHU double club, from the $15 were we advised to buy last year to $30+ now:

Stuck in the mid 20s and suffering from rising mortgage rates which have decreased refinancing quite a bit, it's still useful to remember that:

Ellie Mae's Shares Have Nowhere To Go But Up

Boomerang buyers return to market after foreclosure