Posts Tagged ‘mortgage-backed securities’

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.”

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.

The Fed’s 2010 Profit? A Cool $81.7 Billion

Tuesday, April 5th, 2011

The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities.  The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009.  The Fed’s previous record high earnings was $53.4 billion.

In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets.  Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet.  The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses.  So far the Fed’s crisis-lending programs have earned handsome profits.  The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market.  As of last week, the Fed held a virtually identical quantity of such securities.

The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities.  Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis.  To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.

Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG).  The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering.  ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng.  The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds.  Maybe the Fed can do better in the marketplace.”

Goodbye to Fannie and Freddie

Wednesday, February 23rd, 2011

The Obama administration and the Treasury Department have decided that Fannie Mae and Freddie Mac — the public-private housing finance model in place for the past four decades – will come to an end, although they pledged to continue backing the agencies’ existing obligations. “The GSE (government-sponsored enterprise) model is dead,” an Obama administration official said.  The Treasury Department is currently working on three broad options for overhauling the mortgage lending system, but will let Congress make the final decision.  The government bailouts of Fannie and Freddie have cost taxpayers nearly $150 billion.

Obama administration officials have emphasized areas of agreement with Republicans, stressing that they favor a system that is less dependent on government support.  Approximately 90 percent of new mortgages are currently backed by Fannie, Freddie or other federal agencies.  The move pleased Republicans, who have long criticized the mortgage companies. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” Representative Scott Garrett (R — NJ) said.  Garrett heads the House Financial Services subcommittee, which oversees Fannie and Freddie.  Representative Randy Neugebauer (R – TX), said he was pleasantly surprised by the focus on restoring the mortgage-backed securities market issued without the government’s guarantee.  Debate over the future of the mortgage giants is often contentious on Capitol Hill.  Republicans consistently criticized last year’s Dodd-Frank financial-overhaul bill for not addressing the fate of Fannie and Freddie.  Treasury Secretary Timothy Geithner said that winding down Fannie and Freddie and creating an alternative won’t happen overnight.  “Realistically, this is going to take five to seven years,” he said.  “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market.”

The Treasury Department report suggests that Fannie and Freddie purchase loans with smaller outstanding balances, reducing their risk.  The report also recommends phasing in a requirement that Fannie and Freddie borrowers make larger downpayments — at least 10 percent.  Lastly, the government wants Fannie and Freddie to wind down their own mortgage investment portfolios.  In their heyday, Fannie and Freddie were public companies that encouraged home ownership thanks to a Congressional mandate.  The companies buy home loans from lenders, which use the money to offer new loans to consumers.

The bad news is that mortgage costs could increase a bit once Fannie and Freddie are phased out. “Over the long run, the cost of a mortgage will rise modestly for the average American homeowner,” Geithner said.  “We think it’s very important for the government to continue to play a role, a targeted role” to make certain that “Americans who need help to find a home, to rent a home, or own a home get that help.”

Nor will the process of replacing Fannie and Freddie be easy.  Writing in the Wall Street Journal, David Reilly points out that “A return of private capital requires the revival of securitization markets for mortgages not backed by the government since bank balance sheets aren’t big enough to fill the gap”.  But 30-year loans in their current form aren’t attractive to investors without a government guarantee. The Treasury implicitly acknowledges the conflict, noting that the less government backing there is for housing finance, the less feasible the 30-year mortgage becomes.  It also admits the reward for losing that benefit, and largely removing government from mortgage markets, would be a reduced incentive to invest in housing so that ‘more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets.’  That should be the clear goal of any housing-finance revamp.”

The Fed Is Sending Big Banks Back to the Virtual Treadmill

Thursday, December 2nd, 2010

The Fed Is Sending Big Banks Back to the Virtual Treadmill

The Federal Reserve is going to subject the nation’s 19 largest banks to a new round of stress tests to determine if they are healthy enough to pay dividends to their shareholders again.   The Fed plans to use a conservative approach, applied with an even hand, on the nation’s largest and most complex banks.  The tests also will determine if the Fed needs to repurchase shares or take other actions to protect the banks’ cushions against possible future losses.

The planned tests are a lower profile version of the 2009 round, when regulators determined exactly how much capital big banks needed to survive worst-case economic conditions.  According to Fed officials, those stress tests were an excellent lesson about how to regulate banks in a way the mirrors events taking place in the broader economy.  The Fed plans to apply those lessons to the new stress tests.

“We anticipate that some firms with high capital levels that have been retaining solid earnings for several quarters will be interested in increasing or resuming dividends,” said Fed Governor Daniel Tarullo.  “We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized.”

Although the big banks appear to be significantly healthier than they were two years ago, several risks remain.  Other than the possibility of another economic downturn, banks face potential court challenges from investors who own mortgage-backed securities.  Some believe the banks should bear responsibility for loans that went south because they used improper procedures on these “put backs”.

Uninsured Americans Rose 9.4 Percent of the Population in 2009

Tuesday, October 26th, 2010

Interest rate on a 30-year fixed mortgage at record low 4.27 percent. Mortgage rates have hit a record low.  According to Freddie Mac, rates for 30-year mortgages fell to 4.27 percent from 4.32 percent in just one week.  At the same time, safe-haven government debt is more appealing to investors than ever, according to a Freddie Mac survey. The low rates may be a sign that housing sales will pick up since they slumped after the first-time homebuyer tax credit expired last spring.  Rates for 15-year fixed mortgages averaged 3.72 percent, the lowest level since Freddie Mac began tracking these loans in 1971.  In another bit of news, home prices rose 3.2 percent in July from the previous month, the smallest gain since March, according to a report from S&P/Case-Shiller.

“The 12-month growth rate in the core price index for personal consumption, which the Federal Reserve closely tracks, has been drifting lower over the past six months ending in August and suggests inflation is running at a tepid pace at best,” Frank Nothaft, Freddie Mac vice president and chief economist, said.  “This allowed mortgage rates to ease to new or near record lows this week,” he said.

Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch, believes that potential homebuyers are staying on the sidelines despite enhanced affordability resulting from record low mortgage rates.  “The missing link is confidence — consumers are still worried about future income prospects given high unemployment rates and many believe home prices will fall further,” she said.  “In addition, credit conditions remain tight, making it difficult to get financing.  Mortgage rates are only one input into the decision to purchase a home, and seemingly subordinate to current and expected income.”

Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, FL, offers another perspective.  “You’re going to get some people enticed to buy new homes,” he said.  “But people are still a bit shell-shocked by the downturn in prices and they’re going to be a lot more careful than they were before.”

Real Estate Bonds More Attractive to Investors

Wednesday, September 1st, 2010

The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20.  Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles.  Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments.  According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns.  There’s a lot of guys clamoring for these returns.”

Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher.  According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk.  It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.  The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence.  So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.

Bernanke Report to Congress: Signs of Stabilization

Friday, July 24th, 2009

In his semi-annual testimony before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said that although the economy is exhibiting “tentative signs of stabilization,he plans to maintain a “highly accommodative” monetary policy for the time being.  According to Bernanke, “The pace of decline appears to have slowed significantly.  In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”

A Fed report related to Bernanke’s testimony notes that policy will be “tightened” as the labor market improves, as the economic recovery begins and as pressures limiting inflation “diminish”.  Bernanke also defended the central bank’s moves to restore financial stability and urged lawmakers to make plans to rein in the deficit.  The Federal Open Market Committee is keeping interest rates “exceptionally low”, with the benchmark lending rate in the zero to 0.25 percent range.

bernankefaithThe Fed is planning to purchase as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt by the end of 2009, and $300 billion in long-term Treasuries by September.  Bernanke believes that some of these assets may remain on the Fed’s books for an undetermined period of time.

“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” Bernanke noted. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.”

Bernanke’s comments point to the enormous influence of the Fed worldwide, not least of which is countries pegged to the U.S. dollar – like Kuwait – or that claim the dollar as their currency – like Panama.

Homeowners Rush to Refinance While Interest Rates Are Low

Wednesday, February 18th, 2009

What recession?

A recent conversation with a friend revealed the unexpected nugget that at least one segment of the credit industry is alive and extremely well. The friend’s mortgage broker daughter is taking a leave of absence from law school to concentrate her energies on processing all the refinance applications coming her way – a torrent so great that she is currently earning commissions well into the five-figure range every week.

The downside is that this window of opportunity does absolutely nothing for people who desperately need help keeping their homes. Something needs to be done for them, too.

new_american_gothicThis rush to refinance is thanks to the Federal Reserve’s commitment to buy large blocks of mortgage-backed securities and other debt from Fannie Mae and Freddie Mac in its efforts to restart the mortgage market. Because of the Fed’s cash infusion, the benchmark 30-year fixed-rate loan fell to below five percent recently, even as low as 4.89 percent. Mortgage rates haven’t been at levels like this since the 1950s. GMAC Mortgage reports that refinance applications soared more than 75 percent in January when compared with November.

Not surprisingly, the homeowners qualifying for refinance loans aren’t struggling; they are able to pay their mortgages and see a way to save some money. According to Scott Stern, chief executive of Lenders One, “The refinance boom is mostly impacting the people who need help the least. These are people who already have conforming fixed-rate loans or government financing.”

How Low Can the Fed Go?

Tuesday, December 30th, 2008

The Federal Reserve is pulling out most – if not all — of the stops to thaw credit.  The central bank has cut its federal funds rate for overnight borrowing to just 0.25 percent, the lowest level ever.  But the move is likely too little, too late because the problem is not the lack of capital — but a lack of confidence.  Marginal rate cuts won’t help commercial real estate.  Rather, the buy-back of real estate securities and extending credit are needed to fuel recovery.

The Fed’s Open Market Committee had been expected to cut the fed funds rate to 0.50 percent, so the drop was a bit of a surprise.  “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the statement said.  Possibilities are the ongoing purchase of agency debt and mortgage-backed securities, as well as the “potential benefits of purchasing longer-term Treasury securities.”

http://www.nytimes.com/2008/12/17/business/economy/17fed.html