Posts Tagged ‘Fannie Mae’

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

Treasury Makes $25 Billion in Successful MBS Sale

Wednesday, April 4th, 2012

The Treasury Department just raked in a cool $25 billion for the American taxpayer. It sold the agency-backed mortgage-backed securities (MBS) that it bought during the financial crisis.  “The successful sale of these securities marks another important milestone in the wind-down of the government’s emergency financial crisis response efforts,” said Mary Miller, Treasury assistant secretary for financial markets.  The Treasury’s mortgage purchases were one part of the government’s support for banks and the financial markets.  The associated takeover of Fannie Mae and Freddie Mac cost another $151 billion.

Treasury bought the mortgage debt in an attempt to stabilize the housing industry, with funds approved by the Housing and Recovery Act of 2008.  Critics claim that it did more to prop up Wall Street than Main Street.  Anti-bailout anger fueled both the conservative Tea Party movement and Occupy Wall Street on the left.  Treasury Secretary Timothy Geithner argues that the government’s action helped prevent a deeper economic downturn.  TARP funds enabled the government to purchase preferred stock in banks, other financial firms and some automakers in return for the public investment.  Some of the preferred stock ultimately was converted to common stock.  According to a Treasury official, to date $331 billion has been repaid, including dividends and interest earned on the preferred shares.  While TARP currently is $83 billion in debt, Treasury projects losses will eventually number about $68 billion.  The nonpartisan Congressional Budget Office forecasts a lower loss of just $34 billion.

The Obama administration has stressed the TARP bank program’s performance, which has returned about $259 billion, more than the $245 billion lenders received.  At present. there are 361 banks remaining in TARP.

In all, Treasury bought $225 billion worth of mortgage-backed securities during the depths of the financial crisis between October of 2008 and December of 2009.  Some of those securities were backing loans believed to be worthless, according to some financial analysts at the time.  Treasury’s portfolio, however, was comprised mostly of 30-year fixed-rate mortgage-backed securities and were guaranteed by Fannie Mae or Freddie Mac, enhancing their value.  Congress authorized $700 billion for TARP, but Treasury only paid out $414 billion.  Of that, $331 billion has been paid back, including profits, interest and dividends made from investments.

Writing for The Hill, Peter Schroeder notes that “Now, with markets surging and the financial crisis in the rearview mirror — and with the presidential campaign rapidly approaching — the government is backing away from its outsized presence in the markets.  The move marks the latest in a series of steps by the government to exit its crisis-driven investments.  In July, the Treasury announced it was no longer invested in Chrysler, ending with a roughly $1.3 billion loss.  However, the government has fared better with investments in the banking sector.  The Treasury announced roughly one year ago that it had officially turned a profit on that portion of the bailout, and ultimately estimates it will turn a $20 billion profit on the $245 billion that was pumped into banks.”

All industry analysts are not as optimistic. Economist Douglas Lee, of the advisory firm Economics from Washington, said it is inevitable that the government will end up with “substantial losses” on the bailout, but that it was appropriate to try to reap gains where possible.  “A lot of these assets that were acquired were distressed at the time that they were bought so the chance of coming out ahead in selected areas is quite good,” Lee said.  For the long term, however, the effort to rebuild a reliable housing finance system means that costs for subsidizing operations of firms like Fannie Mae and Freddie Mac will continue to be expensive.  Investments in insurer AIG and in automakers might prove hard to recoup 100 percent.  Recently, Treasury said it was selling 206.9 million shares of AIG, which would reduce the government’s stake in the company to 70 percent from 77 percent.  “You have to say that these programs have worked in the sense that it’s restored a sense of stability that we sought,” Lee said, “but now it is right to have the government back out and let the private sector get on with their job.”

Fannie Mae Asks Uncle Sam For More Money

Wednesday, March 21st, 2012

In an attempt to dig itself out of a deepening hole, Fannie Mae has requested $4.6 billion in additional federal aid. “We think that we have reserved for and recognized substantially all of the credit losses associated with the legacy book,” Chief Financial Officer Susan McFarland said.  “We’re very focused on returning to profitability so we don’t have to draw (from Treasury) to cover operating losses.”

Although the nation’s banks seem to be recovering nicely, the same cannot be said for mortgage giants Fannie Mae and Freddie Mac.  Writing in Forbes, Steve Schaefer notes that “The mortgage finance giants have taken on a greater share of supporting the U.S. housing market as private players pared back their exposure in recent years, and the result has been billions of losses on the taxpayer dime.  Fannie Mae reported booking a $16.9 billion 2011 loss capped off by the loss of $2.4 billion in the 4th quarter.  Fannie Mae’s losses are still coming largely from its legacy book of business (from before 2009), which led to $5.5 billion in credit-related expenses tied to declining home prices.

“The black holes of Fannie and Freddie – Fannie’s Q4 report shows it has requested to draw $116.2 billion since being placed under conservatorship Sept. 6, 2008 while paying back $19.9 billion in preferred stock dividends – are the biggest black eyes of the 2008 bailouts.  Plenty of critics of the Troubled Asset Relief Program (TARP) have made their voices heard over the years, but at least most of the banks that received TARP injections – the biggest of which went to Bank of America and Citigroup – have paid back the government’s loans and are back to making profits, if modest ones. Even American Intl Group and the automakers  that received bailouts – General Motors and Chrysler – have moved beyond needing additional government dollars.  Fannie and Freddie, on the other hand, show few signs of becoming anything resembling productive companies until the housing market turns around or the pre-2009 assets are completely wiped off the books or new policies are necessary to encourage new refinancing beyond those currently in place that have had limited impact.”

“While economic factors such as falling home prices and high unemployment produced strong headwinds for our business again in 2011, we continued to grow a very strong new book of business as we have since 2009, “said CEO Michael Williams, who handed in his resignation in January but is still on board while the government-sponsored enterprise (GSE) looks for his replacement.

Bank of America last week announced that it had stopped selling some mortgages to Fannie Mae because of a dispute over requests from the government-run company to buy back defective loans.  “If Fannie Mae collects less than the amount it expects from Bank of America, Fannie Mae may be required to seek additional funds from Treasury,” the company said.

Fannie Mae blamed its loss primarily on pre-2009 loans and falling home prices, which pushed up the company’s credit-related expenses.  In the 4th quarter of 2010, Fannie Mae posted a slight profit to end a streak of 13 consecutive quarterly losses, though the company was back in the red in the following quarter and each since.  The net cost to taxpayers for bailing out Fannie and Freddie stands at more than $152 billion.

During the 4th quarter, Fannie Mae acquired 47,256 single family homes through foreclosure compared with 45,194 in the 3rd quarter.  The company disposed of 51,344 REO properties in the quarter, down from 58,297 in the 3rd quarter.  As of the end of 2011, Fannie Mae was holding 118,528 REO properties, a reduction from the 122,616 at the end of September and 162,489 on December 31, 2010.  The value of the single-family REO was $9.7 billion compared with $11.0 billion at the end of the 3rd quarter and $15.0 billion at the end of 2010.  The single family foreclosure rate in the 3rd quarter was 1.13 percent annualized compared with 1.15 for the first three quarters of the year and 1.46 percent for 2010.

Meanwhile, the federal government wants to sell approximately 2,500 distressed properties in eight locations to investors who buy them in bulk and rent them out for a predetermined period.  The properties, located in Atlanta, Phoenix, Las Vegas, Los Angeles/Riverside, and three Florida regions, include single-family homes and co-op apartment buildings.  “This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” said Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae.

Pending Home Sales Rose Two Percent in January

Monday, March 12th, 2012

The Pending Home Sales Index grew by two percent during January from the previous month to 97.0 — considerably above the 1.1 percent growth forecast by economists.  The index has risen eight percent when compared with one year ago.  Relaxed mortgage lending criteria, historically low interest rates and an improving labor market contributed to this growth in pending home sales, said Ian Shepherdson, High Frequency Economics‘ chief U.S. economist.  The index measures the quantity of sales contracts signed on existing home sales.  Created by the National Association of Realtors (NAR), it’s considered a leading indicator that predicts growth throughout the broader residential market.

“Given more favorable housing market conditions, the trend in contract activity implies we are on track for a more meaningful sales gain this year,” said NAR chief economist, Lawrence Yun.  “With a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”  Pending home sales rose impressively in the Northeast and South, but declined in the Midwest and West.

“Housing demand has bottomed, and we should see some gradual improvement in sales,” said Yelena Shulyatyeva, an economist at BNP Paribas, who predicted a two percent gain in pending sales.  “The dark side of the story is still the oversupply and the expected pickup in foreclosures.  That’s what policymakers really need to think about.”  On the downside, lower appraisals and rejected mortgage applications have broken down more deals.  In January, one-third of Realtors said they experienced contract failures, an increase when compared with the nine percent who said so one year ago, according to the association.

Existing home sales rose to 4.57 million a year in January.  While it was the best report since May of 2010, distressed properties constituted the largest portion of all purchases since April.  Additionally, the median price fell two percent when compared with January of 2011.  “We’re optimistic,” Doug Yearley, CEO at Horsham, PA-based Toll Brothers, said.  “We have orders that are up significantly.  We’re seeing deposits up, we’re seeing traffic up.”

Borrowing costs are still affordably low. The average rate on a 30-year fixed loan was little changed at 4.09 percent in mid-February, , according to the Mortgage Bankers Association. It averaged 4.05 percent the week of February 3, its lowest reading on record since 1990.

Another reason why home sales may be on the rise is because of an April deadline for higher mortgage application fees for Fannie Mae and Freddie Mac-backed home loans.  The government-controlled mortgage buyers own or guarantee approximately 50 percent of all U.S. mortgages and 90 percent of new loans and have been telling customers to submit their applications now.  Even with the good news, analysts warn that the damage from the housing bust is deep and the industry is years away from full recovery.

According to Paul Dales, senior U.S. economist at Capital Economics, prices are unlikely to stop falling until the second half of 2012, having dropped 34 per cent over the last five years.  This, and the decline in the supply of homes on the market, which fell last month to the lowest since January 2006, will provide support to the housing recovery.

Jafer Hasnain: The Housing Crisis: Where Do We Stand?

Tuesday, March 6th, 2012

With home sales increasing in six of the last nine months and prices still 30 percent below the peak, the housing market is quite confounding.  That’s the opinion of Jafer Hasnain, Principal and co-founder of Lifeline Assets, a private equity firm that invests in single-family homes.

In a recent interview for the Alter NOW Podcasts, Hasnain said that the nation has 10 million homes whose mortgages are seriously delinquent or even in foreclosure.  According to Hasnain, this is the shadow inventory, which consists of mortgages that are either 90 days late, in foreclosure or bank owned.  If you look at the next four or five years, that number will add up to between six to 10 to maybe 11 million homes.

When asked why President Obama’s Home Affordable Modification Plan (HAMP) didn’t work as intended – a program meant to help five million homeowners that saw only 800,000 sign up – Hasnain quoted the truism “The road to hell is paved with good intentions.”  As Hasnain sees it, the obstruction was in HAMP’s implementation.  Although HAMP brought down interest rates to as low as two percent, the real problem for many is that they had lost so much equity, participation simply was not worthwhile.  Because HAMP had no impact on the principal owed, homeowners still owed the same amount of money – which typically was significantly more than the house was worth in today’s market.  Many concluded that it made more sense to let the bank foreclose – a process that takes 700 or more days – live in the house for free, save money so they ultimately could pay the bank a fraction of what they really owed.

Hasnain pointed out that approximately half of all existing mortgages could no be re-underwritten today because of stricter lending standards.  In other words, half of all mortgages are potentially distressed, a fact that distresses Hasnain.  “That reflects society, and that reflects the potential to really crimp consumer spending.  I think housing is the number one, two and three issue right now.”  Part of the trauma is caused because, at one time, most people were convinced that they could always rely on the value of their home.  In the last few years, that balloon has been deflated to the point where we are now witnessing a failure in confidence.  This is a fairly unique problem that most people have never faced, one that calls for creative solutions — whether they come from the government or the private sector.

To listen to Jafer Hasnain’s full interview on where we currently stand on the housing crisis, click here for the podcast.

 

As Foreclosures Decline, Federal Government Makes Deal With 49 States

Tuesday, February 21st, 2012

In good news for beleaguered homeowners, the Obama administration announced a $26 billion mortgage settlement, which 49 out of 50 state attorneys general signed on to.  The deal won praise from such groups as the Mortgage Bankers Association, the industry trade group for lenders, and the Center for Responsible Lending, a public interest group advocating for borrowers.

Conservatives suggested that the Obama administration is overreaching, and that the agreement rewards homeowners who haven’t been paying their mortgages.  On the other side, some liberal groups say it falls far short of providing the needed level of help to troubled homeowners hurt by the housing bubble, problems they blame on Wall Street banks and investors.  They would prefer additional relief for homeowners who are underwater on their mortgages.

“It’s a big check with narrow immunity,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and currently an analyst with FBR Capital Markets in Arlington, VA.  “You get the state attorneys general off your back, but you’re not getting immunity from securitizations, which could come with their own steep cost down the road.”

Regulators are “aggressive” on pursuing securities claims and have set up a task force to do so, said Department of Housing and Urban Development Secretary Shaun Donovan.  The $26 billion deal doesn’t protect banks from claims related to faulty loans sold to government-owned Fannie Mae and Freddie Mac, he said.  “It wasn’t the servicing practices that created the bubble, nor caused its collapse,” Donovan said.  “It was the origination and securitization of these horrendous products.”

Writing on Salon, Matt Stoller says that the deal lets the banks down relatively easily.  “Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations.  So what exactly is that framework?  It is, as Damon Silvers of the Congressional Oversight Panel which monitored the bailouts, once put it, to preserve the capital structures of the largest banks.  ‘We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,’ said Silvers in October, 2010.  “’We can’t do both.’  Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.  This policy framework isn’t obvious, because it isn’t admissible in polite company.  Nonetheless, it occasionally gets out.  Back in August 2010, at an ‘on background’ briefing of financial bloggers, Treasury officials admitted that the point of its housing programs were to space out foreclosures so that banks could absorb smaller shocks to their balance sheets.  This is consistent with the president’s own words a few months later.”

Very gradually, the foreclosure crisis seems to be easing. The number of homes in foreclosure declined by 130,000, or 8.4 percent last year to 830,000, according to a report from CoreLogic, an economic research firm.  That compares with 1.1 million homes foreclosed in 2010.  These are homes whose owners had fallen far behind on payments, forcing lenders to put them into the foreclosure process.  The homes remain in the foreclosure inventory until they’re sold — either at auction or in a short sale, which is when a home is sold for less than the mortgage value — or until homeowners are current again on payments

There are two reasons for the decline in the foreclosure inventory, according to Mark Fleming, CoreLogic’s chief economist.  “The pace at which properties are entering foreclosure is slowing,” he said.  “And servicers nationwide stepped up the rate at which they were able to process distressed assets.”

In the last few years, homes have entered foreclosure more slowly because lenders carefully scrutinized applicants; only low-risk borrowers are granted loans.  Along with a measured improvement in the economy, this equals fewer borrowers getting into trouble.  Even borrowers in default are avoiding foreclosure in many instance and are being held up by judicial and regulatory constraints, according to Fleming.

The practice of robo-signing, in which banks filed slapdash and sometimes improper paperwork, made lenders more cautious about getting their paperwork in order before foreclosing.  When a bank does put a home into foreclosure, they are trying to speed the process.  One way they’ve done that is by encouraging short sales.  Another is that they’ve stepped up their foreclosure prevention efforts — often with the aid of government programs such as Home Affordable Modification Program (HAMP), which the government says has helped nearly one million Americans stay in their homes.

After foreclosures are completed and the homes are back in the lenders’ hands, they sell quickly.  “This is the first time in a year that REO sales (those of bank-owned properties) have outpaced completed foreclosures,” Fleming said.  In December, there were 103 sales of bank-owned homes for every 100 homes in the foreclosure inventory.  That was a significant increase from November of 2010, when there were only 94 REO sales for every 100 homes in the foreclosure process.

As of December of 2011, Florida still topped the nation’s foreclosure inventory at 11.9 percent, followed by New Jersey with 6.4 percent and Illinois 5.4 percent.  Nevada, consistently the number one foreclosure state in the nation, has fallen to fourth place with 5.3 percent.

Government Wants to Sell Foreclosed Properties in Bulk as Rentals

Tuesday, January 24th, 2012

The Obama administration plans to work closely with federal regulators, Fannie Mae and Freddie Mac to start a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There currently are approximately 250,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are expected.  Last year’s foreclosure processing delays created an enormous backlog of properties yet to be processed and are just now being restarted. One of the program’s initiatives is for the federal government to mitigate and manage new foreclosures.  Late-stage delinquencies still number close to two million, according to a report from Lending Processing Services (LPS).  Foreclosure starts are double foreclosure sales and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the 1st quarter of 2011, appears to have halted,” according to LPS.

“I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale,” said Laurie Goodman of Amherst Securities. “But that means they have to build out a rental organization; it means they build out a management company, because if you’re accumulating a hundred homes in Dallas that’s very different than running a multifamily building.”

This is good advice. The recession began with housing, and is one of the main things holding back the recovery.   The most recent unemployment numbers — which showed that non-farm payrolls grew by 200,000 in December, and the jobless rate declined to 8.5 percent from 8.7 percent  — join other cautious signs of an improving economy, although the housing situation is worsening.  There’s still a serious risk it might put a halt to and not just delay expansion.

“Foreclosed homes are a complex problem. We need some creative thinking and new processes to solve the problem of so many distressed homeowners.  I would love to see the market handle it on its own but what makes sense for a single home is likely to destroy confidence in the housing market in aggregate,” said Jafer Hasnain, Partner at Lifeline Assets.  “Housing distress needs a Michael Dell to think about streamlining process details, and a Steve Jobs to make it elegant and human.”

House prices fell again in October, according to the S&P/Case-Shiller index.  The pipeline of delinquencies and future foreclosures is full, which continues to dim the prospects of a quick recovery.  Efforts so far, such as the Home Affordable Modification Program (HAMP), have helped, but less than hoped.

According to the Federal Reserve, there are no simple answers, but it makes several suggestions that Congress should examine.  One is to encourage conversions from owner-occupied to rental because that market has strengthened in recent months: Rents have risen and vacancies have declined.  A faster conversion rate would hold down rents and ease the pressure of unsold homes on house prices. Fannie, Freddie and the Federal Housing Administration account for about 50 percent of the inventory of foreclosed properties.  Many of these are viable as rentals.  A government-sponsored foreclosure-to-rental program to clear away regulatory hurdles would make a big difference.

A second suggestion is to encourage refinancings.  The administration tweaked the existing HAMP program in October, easing some of the earlier restrictions on eligibility.  Even more could be done, according to the Fed.  One possibility involves the fees that lenders pay to Fannie and Freddie for assuming new risks when loans to distressed borrowers are refinanced. These charges could be cut or eliminated, even though Congress just voted to increase them to help pay for the payroll-tax extension.

Some institutional investors have shown interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing.  That has been one of the biggest barriers to deals already in the works between hedge funds and the major banks.  There is plenty of cash to buy properties, but creating a management structure for the rentals is costly, and some investors are finding the math doesn’t add up to make it worth their while.

Larger investors want to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets. That’s why the government is looking to test several different approaches.  Fannie Mae did a $50 million sale in June, although that was on the small side. Officials are evaluating what larger asset sales would look like.

“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize (home) prices.”

Federal Regulators Floating the Idea of 20 Percent Downpayment Mortgages

Thursday, November 10th, 2011

Is a 20 percent downpayment on a house or condominium on the horizon?  If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate.  Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.

Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers.  If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule.  John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”  According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing.  “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees.  “Properly aligned economic incentives are the best check against lax underwriting,” she said.  The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement.  The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks.  One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.

Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand.  “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said.  Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall.  “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.

Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.”  An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.  “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.

Obama Bypasses Congress to Boost Housing

Monday, October 31st, 2011

President Barack Obama executed an end run around Congress when he announced a significant retooling of a plan designed to help homeowners who are paying their mortgages, but still underwater, refinance their loans at a more affordable interest rate.  Administration officials said the changes will streamline the government’s Home Affordable Refinance Program (HARP) and could dramatically increase the number of borrowers who have refinanced their loans under the program past the current 894,000.  They did not specify how many borrowers might be eligible or likely to participate.  The program, which is voluntary to lenders, will be available only to homeowners whose mortgages were sold to Fannie Mae and Freddie Mac on or before May 31, 2009, and who have a loan-to-value ratio above 80 percent.

The downside is that hundreds of thousands more could not qualify — primarily because of the previous 125 percent loan-to-value limit on the program or because banks refused to take on the risk.  Raising the loan-to-value restrictions may help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.’s Washington Research Group, which analyzes public policy for institutional investors.  The difficulty is that mortgage holders still must be up-to-date on their payments for the past six months — with no more than one missed payment in the past year.  Additionally, they also must qualify for a new loan.

Qualifying homeowners will be able to refinance their mortgages at the current low rates, which are currently near four percent. Obama’s move comes at a time when there is a fast-growing consensus that the nation’s declining housing market is negatively impacting the economic recovery.  Home values are at eight-year lows; and more than 10 million people are underwater, meaning that they owe more than their homes are worth.  “It’s a painful burden for middle-class families,” Obama said.  “And it’s a drag on our economy.”  The administration’s proposal underscores the scale of the problem, as well as the limits of public policy in resolving it.  By cutting monthly payments, the Obama administration hopes to make cash available for consumers to spend elsewhere.

According to housing regulators, one million borrowers might be eligible to participate in the program.  Unfortunately, that is just 10 percent of the number of homeowners who need help.  Although the Obama administration’s estimates say the average homeowner could save $2,500 per year, other projections said savings would be in the range of $312 annually.  This depends on the upfront fees the borrower pays, which can include thousands of dollars in closing costs.

Obama promoted the plan under his “We Can’t Wait” campaign, in which he will use the executive branch’s existing tools to improve the economy while Congress debates further legislation.  “We can’t wait for an increasingly dysfunctional Congress to do its job,” he said.  “Where they won’t act, I will.”

“We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. The program expires at the end of 2013.  “We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said.  “Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said.  The HARP revamp is part of multiple efforts the government is making to boost home prices and consumer spending.  “It’s the equivalent of a tax cut for these families,” HUD’s Donovan said.

Mortgage lenders are “particularly gratified” at the revised plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association.  “These changes alone should encourage lenders to more actively participate.”

Writing in The Atlantic, Daniel Indiviglio believes that the revised program has potential.  “The administration appears to have accounted for all of the major obstacles to refinancing and eliminated them.  A home’s value no longer matters.  The cost should be less prohibitive to borrowers.  Much legal red tape has been cut.  Other loans tied to the home won’t stand in the way.  Ample time to refinance is provided.  This should help to allow at least a million Americans to refinance who haven’t had the opportunity to do so in the past.  If this works as hoped, then those consumers will have more money in their pockets each month.  Borrowers who see their mortgage interest rates drop from five percent or six percent to near four percent will often have a few hundred dollars more per month to spend or save.  If they spend that money, then it will stimulate the economy and create jobs.  If they save it or pay down their current debt, then their personal balance sheets will be healthier sooner and their spending will rise sooner than it would have otherwise.  The effort may even prevent some strategic defaults, as underwater borrowers won’t feel as bad about their mortgages if their payment is reduced significantly,” Indiviglio said.

Felix Salmon, writing in Reuters, could not disagree more. “For many reasons, it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program.  Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.  First, by the end of 2013?  Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?  Secondly, the current pace of HARP refinancing is pathetic.  We’ve been managing to do less than 30,000 HARP refinancing a month.  And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancing, which works out to about 32,000 per month.  The FHFA is projecting that the pace of HARP refinancing won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.”

A Lifeline for Underwater Homeowners?

Wednesday, October 26th, 2011

Federal officials and some of the nation’s largest banks are collaborating on a plan that would make refinancing available to some borrowers whose houses are worth less than their loans, with the caveat that they must be up-to-date on mortgage payments.  Typically, these borrowers can’t refinance because they don’t have enough equity in their homes.  The plan would apply only to bank-owned mortgages.

Federal officials have been trying to negotiate a deal with the five largest mortgage servicers – Ally Financial, Inc, Bank of America, Citigroup Inc, J.P. Morgan Chase and Wells Fargo & Co.  Officials favor a plan that would break a legal impasse with big banks over alleged foreclosure abuses such as robo signing and ease problems in the housing market.  Discussions are still underway and the final outcome is not yet known.

Pressure is building in Washington, D.C., to help underwater homeowners with a generous refinance plan.  President Barack Obama told Congress that he wants to help “responsible homeowners” refinance, saying it would “give a lift to an economy still burdened by the drop in housing prices.”  A bipartisan coalition of 16 senators wrote to the administration urging swift action on a refinance plan.

“A huge floodgate would open up” if underwater refinancing were broadly available, said Fif Ghobadian, a broker at Guarantee Mortgage in San Francisco.  “It would provide the help that lowering interest rates cannot do alone.  Someone who’s been making payments at 7.5 percent religiously but cannot qualify to refi – boy, would that four percent make a huge difference in their life.”

A program has existed for some time that provides guidelines to lenders for refinancing some Fannie Mae- and Freddie Mac-backed underwater mortgages.  The program is called HARP (Home Affordable Refinance Program), it’s two years old and has resulted in approximately 800,000 refinances, far short of the five million originally envisioned.  Only a fraction of those homeowners were deeply underwater.  HARP’s main impediment has been the lenders themselves.  Concerns about issues such as being forced to take responsibility for refinances that default (known in the industry as “buybacks”) has made lenders reluctant to issue HARP mortgages.  The proposed new plan would likely expand HARP to make it more acceptable to lenders and more usable by a broader swath of homeowners.  “Changes (being contemplated) would address several HARP obstacles,” said Erin Lantz, director of the mortgage marketplace for Zillow.  “The industry now makes it hard for people to qualify.  The process would be more streamlined.”

According to a recent Harvard study, approximately 11 million homeowners with mortgages are underwater.  This accounts for roughly one-fourth of all homes with mortgages in the nation.  An additional five percent have near-negative equity (<five percent home equity).

Writing for Reuters, Felix Salmon doesn’t think much of the potential mortgage plan.  “It’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.  It’s worth remembering, at this point, that mortgages are by their nature pre-payable.  When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance.  The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.  As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off.  But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment.  Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

“It’s not inconceivable at all.  In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the Congressional Budget Office (CBO) has been costing it in various ways.  At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.  But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks.  For one thing, it’s downright unfair and invidious to allow 20 percent of underwater homeowners to refinance while ignoring the other 80 percent.  More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank.  It’s not some kind of gruesome punishment.”