Archive for January, 2009
The Federal Reserve Bank of New York wasted no time after announcing Monday morning that it had begun buying mortgage-backed securities guaranteed by Fannie Mae (FNM: 0.00 N/A), Freddie Mac (FRE: 0.00 N/A) and Ginnie Mae. By just Wednesday, the Fed had purchased a whopping $10.2 billion in illiquid mortgage-backed securities from the agencies, according to a statement released Thursday.
The Fed has not, although, disclosed the particular financial institutions from which it purchased these assets.
The purchases were part of a $500 billion program introduced late-November, in which the Fed said it would purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by the agencies in an effort to replace waning demand from foreign and other more traditional buyers of mortgage bonds.
The New York Fed program was launched after the Treasury Department shifted gears in its usage of bailout funds, opting to buy large minority stakes in financial institutions. Lawmakers had initially expected the fund to be used to buy illiquid mortgage backed securities.
In a late-December announcement, the Fed suggested its purchase program would run through the second quarter — a surprise to most analysts who had expected the program to last several quarters, though the end of 2009. "Obviously, this change in language indicates a lot stronger short-term support to the agency MBS market than originally assumed," analysts at Bank of America said in a recent research note.
Under the program, only fixed-rate agency MBS securities are eligible assets for the program, including 30-year, 20-year and 15-year securities. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents, a program information sheet said; the Fed will trade in specified pools, TBA transactions, and in the dollar roll market.
The Fed said it would continue to provide weekly updates regarding purchases every Thursday. (Which means we'll be covering purchase activity every Thursday/Friday.)
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The Treasury Department's implementation of TARP funds came under fire from multiple directions Friday as regulators criticized the lack of transparency and oversight. The Congressional Oversight Panel in its first report since issuing a list of questions Dec. 10 — many of which went unanswered — on Friday called for increased bank accountability in the use of TARP funds, transparency and asset evaluation, increased efforts to prevent foreclosures, and a clearly defined strategy.
"The Panel’s initial concerns about the TARP have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury," read an executive summary from the panel. "It is not enough to say that the goal is the stabilization of the financial markets and the broader economy. That goal is widely accepted. The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards."
The panel called for the Treasury to clarify exactly the types of institutions are deemed eligible and ineligible to receive funds, and to clarify the use of TARP funds. It had previously sent a list of questions to the Treasury on Dec. 10 asking for such clarifications, which it did not receive. The Treasury's response answered few of the questions and ignored others entirely, according to the panel. "To ease the burden on Treasury and to make it clear precisely which questions remain to be answered, the Panel has constructed a grid with its original questions and Treasury’s responses," it said in its report Friday.
In addition to criticizing the Treasury's failure to answer questions it posed on Dec. 10, the panel also drew attention to the TARP's ineffectual use in preventing foreclosures and the "significant gaps" in the ability of the Treasury to track the vast amounts of taxpayer money injected into financial institutions. "Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what 'help' means," the panel said.
Read the panel's accountability report here.
Interim assistant secretary Neel Kashkari on Thursday gave an update on TARP funds issued so far. His statements echoed the tranche report given to Congress the same day — as required each time TARP spending reaches another $50 billion landmark — which detailed the purchases made under the Capital Purchase Program and other programs the Treasury has added in response to the failing automotive industry and the need to give Citigroup Inc. (C: 30.87 +1.61%) an additional $20 billion injection on Dec. 31 after it had already received $25 billion through the CPP.
"Healthy banks are in the best position to support their communities by extending credit," he said. "A dollar invested in a healthy bank is far more likely to be used to promote lending to creditworthy borrowers than a dollar invested in a failing bank, which would more likely use it to stay afloat." It has been the Treasury's position in the past that the purpose of the TARP is to stimulate lending. Kashkari stated in his speech that increased lending cannot be tracked yet, in part due to the fact that not all of the funds have been allocated.
"It is important to note that almost $75 of the $250 billion CPP has yet to be received by the banks," and those funds are subject to application approval by the Treasury, he said. The statement echoes the defense circulating around the TARP that secretary Henry Paulson has not yet allocated the total $350 billion authorized so far under the TARP, but merely promised more than he has in his coin purse. It's reasonable to say the Treasury has received enough applications to account for all of the funds reserved for the CPP, since Paulson has in the past confirmed he has effectively allocated all of the funds currently allowed and must seek Congressional release of the additional $350 billion to honor his promises. With the $250 billion reserved under the CPP, the total amount of TARP funds promised so far comes to $354.4 billion.
It's this lack of transparency that led President-elect Barack Obama to tell CNBC he wants to see the rest of the TARP money spent wisely, as well as increased oversight and transparency in the Treasury's role in implementing those funds. He has told CNBC he plans to revamp the rescue plan to include job creation, increased spending, a fixed economy and reduced taxes. It was uncertain at the time this story was published whether these plans were strictly for Obama's forthcoming stimulus package or a revamp of the existing TARP, which has a second $350 billion in funds waiting to be released when Obama takes office Jan. 20.
But Obama's team is reportedly looking into reforming TARP; sources told the Washington Post that Obama and the new secretary nominee Timothy Geithner — who will take the reigns when Paulson steps down — are in discussions to overhaul the $700 billion financial rescue program.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
We've been tossing around the idea of starting up a BS-Tracker here at HousingWire, and Jerry Howard, the CEO of the National Association of Home Builders, just might push us into making it happen after his remarks yesterday. The builders' lobbying group has long been pushing for stimulus directly targeted to its ailing membership, and began its latest push yesterday as Congress reconvened on Capitol Hill, via its "Save Housing First" initiative.
But what stood out in the latest push for federal dollars is a blatant attempt by the NAHB to rewrite recent history. Howard argued — presumably with a straight face — that builders aren't the source of the bloated inventories in the nation's housing markets.
“The excess housing inventory in today’s market is the result of unprecedented foreclosures, not overbuilding," he said Thursday. "That’s why we support Sheila Bair’s foreclosure relief plan and any common-sense proposal to alleviate the foreclosure problem."
Come again? Supporting Bair's proposal is one thing. Suggesting in the same breath that the residential property inventory overhang isn't the result of overbuilding by builders borders on the certifiably insane and represents dangerous logic for any public policy.
The NAHB is lobbying for an expanded home buyer tax credit that the group says is needed to reduce excess inventory and encourage fence sitters to enter the market. The builders want to make the current $7,500 home buyer tax credit much bigger, eliminating its current recapture provision and making it available to all purchasers, and have called for a credit amounting to 10 percent of the home’s price, capped at 3.5 percent of local FHA loan limits. This would effectively push the tax credit into a handout of as much as $22,000 on the purchase of a new home.
Which seems like a great way to lower home prices without having to actually lower home prices, doesn't it?
The group also wants Congress to enact a stimulus plan that would reduce mortgage interest rates to as low as 2.99 percent on 30-year fixed-rate conventional loans purchased between Jan. 1, 2009 and June 30, 2009; that rate would then rise to 3.99 percent for contracts that close between July 1, 2009 and Dec. 31, 2009, the NAHB said.
Paying attention to lobbying efforts at the NAHB and the NAR is critical, because both are among the most powerful lobbying influences in Washington, and both routinely are in the top 10 of annual rankings in lobbyist spending — in other words, even if the proposals are short-sighted and narrowly focused on their own constituency, never underestimate the power of the dollar to bend Congressional ears.
Even when the CEO of the NAHB is making statements that deserve to get laughed at.
Write to Paul Jackson at paul.jackson@housingwire.com.
December brought falling prices and decreased inventory to the housing market, according to the Altos 10-City Composite Price Index released Wednesday by Altos Research and Real IQ. Housing prices fell 0.4 percent in December — bringing the overall fourth quarter decline to 1.2 percent — as inventory levels also dropped in 25 of the 26 analyzed markets.
Asking prices fell at the fastest rate in Las Vegas – down 3.6 percent during December – and 6.8 percent during the fourth quarter. This marks the ninth consecutive month that Sin City has posted the fastest rate of declining prices among major markets. Listing prices rose at the fastest rate in Salt Lake City – up 1.0 percent in December. Charlotte, Dallas and Houston were the only markets that posted three months of sequential price increases.
“Prices continue to fall in most major markets but the rate of decline was substantially slower in the fourth quarter than it was during the third quarter,” said Stephen Bedikian, partner and research director for Real IQ. “The Altos 10-City Composite Price Index declined 2.9 percent during the third quarter but only 1.2 percent during the fourth quarter of 2008.”
Detroit was the only major market in which inventory levels did not decline in December. Across the 10-City Composite Index markets, inventory declined by 6.6 percent in December and 11.4 percent during the fourth quarter. Inventory fell by the largest amounts in Boston and San Francisco.
“Inventory levels have fallen consistently in virtually all markets since the summer of 2008 which is consistent with traditional industry seasonality,” said Michael Simonsen, CEO and co-founder of Altos Research. “The big question is whether inventory will continue on this declining trend and bring supply and demand back into balance or whether we will see inventory balloon during the spring selling season.”
A sign of the treacherous seller's market, the index also found that the median days-on-market rose in all analyzed areas during December, reaching 100 or more days in every major market. By far, the market with the slowest rate of inventory turnover was Miami at a median of over six months on-market. San Francisco saw the fastest rate of turnover with 100 median days-on-market.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
For those of you not entirely familiar with Gary Varvel at the IndyStar, some great cartoons for you:
Be sure to visit garyvarvel.com for more.
The national unemployment rate rose from 6.8 to 7.2 percent in December, according to data released Friday by the Bureau of Labor Statistics of the U.S. Department of Labor. The 2008 job losses reached 2.6 million — with 1.9 jobs shed in only the last four months of the year. December payroll employment fell by 524,000, bringing the total four-month payroll employment down by 1.9 million.
"The only major private industry sector that continued to add a significant number of jobs was health care," BLS commissioner Keith Hall said in a media statement Friday. "Employment in this industry rose by 32,000 over the month [of December] and by 372,000 over the past 12 months."
In all of 2008, the jobless rate rose by 2.3 percentage points, and the number of unemployed increased by 3.6 million across all demographic groups, according to the economic data. The unemployment rate rose to 7.2 percent for adult men, to 5.9 percent for adult women, and to 6.6 for all whites in December. Unemployment rates remained essentially unchanged during the month for blacks — at 11.9 percent unemployed — and Hispanics — at 9.2 percent unemployed — according to the data.
"The number of persons experiencing long spells of unemployment also has risen," the employment situation report's author wrote. According to the data, the number of "discouraged workers" — those persons not actively seeking employment "because they believe no jobs are available" — rose by 279,000 from a year earlier to a total of 642,000 in December.
Although the unemployment rate has climbed, claims for unemployment benefits have been declining in recent weeks. First-time applications for state unemployment benefits dropped 24,000 to a seasonally adjusted 467,000 in the week ending Jan. 3, the Labor Department said Thursday. This report marked the third consecutive week of declines, a trend that appeared to be foreshadowing an unexpected sign of stability in the economy, as Dow Jones Newswires expected claims would actually climb 63,000.
With the data released Friday that shows the climbing unemployment, the appearance is now one of an increasingly unemployed sector with fewer individuals seeking benefits. It's unclear now whether these figures indicate lowered morale — with unemployed persons simply giving up — or a brightened outlook — with unemployed persons declining to pursue collecting benefits because they see, perhaps, a bit of light at the end of the tunnel.
Write to Diana Golobay at diana.golobay@housingwire.com.
In a move that clearly caught much of the financial and mortgage markets by surprise late Thursday, Citigroup, Inc. (C: 30.87 +1.61%) agreed with key legislators on a plan that would allow bankruptcy judges to modify the terms of mortgages during debt restructuring. The move is a surprising break from the financial industry's long-standing and strong stance against allowing so-called mortgage debt cram-downs.
As HousingWire reported on Jan. 5, the stimulus plan set to be proposed by President-elect Barack Obama will include the long-contested cram-down proposal; Obama has made the proposal central to his platform's mortgage assistance plan, a source on Capitol Hill told HW in December.
Key Senate Democrats have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called ‘debt cram-down’ proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers, and swell the ranks of borrowers filing for bankruptcy protection.
Sen. Richard Durbin (D-IL) in November re-introduced legislation to reform bankruptcy law in order to allow for cram-downs, called the Helping Families Save Their Homes in Bankruptcy Act. Citi's agreement to support the proposal likely signals that the proposal will face lesser headwinds in being passed by legislators, and it certainly curried favor for the financial giant — which has taken dollars from the government — in the eyes of Congressional leaders.
"Citigroup's decision to support this proposal brings us one step closer to helping millions of homeowners save their homes and putting our flagging economy back on track," Durbin said at a Thursday press conference. "The support of one of the county's biggest lenders will hopefully spur other lenders to act. I applaud Citigroup for supporting what is in the interests of their customers as well as their own best interests as a financial institution, and I hope others will quickly follow in their footsteps. We can't end the economic crisis until we address its root cause: the massive housing crisis facing our nation."
Chuck Schumer (D-NY) was approached by Citigroup in December to signal its openness to endorsing the legislation, his office said in a press statement. Schumer, an original co-sponsor of the Durbin bill, indicated that he had heard from other major financial institutions interested in discussing how they might lend their support to the legislation.
“Citigroup’s support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly,” Schumer said. “Other banks are already lining up to find out how they can jump on the bandwagon."
That's not to say the opposition has broken. The Mortgage Bankers Association signaled that they still intend to oppose the legislation.
“We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market," both John Courson, president and CEO, and David Kittle, chairman at the MBA, said in a statement. "We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed."
Courson and Kittle said the program should only apply to subprime mortgages, be temporary, and needs to "protect FHA and VA guarantee programs." The MBA has suggested in previous Congressional testimony that wide-scale cramdowns could add as much as 2 full points to mortgage rates.
Breaking with the pack
It's certainly interesting timing for Citi to break with the pack; the bank has received $52 billion in bailout funding from the government, more than its peers. It's also got a loss-sharing agreement in place covering $306 billion of its loans and securties, as the Wall Street Journal noted in a story Friday morning.
In other words, to the extent that any cram-down push leads to higher loan losses, Citi may actually be somewhat sheltered from those losses — meaning taxpayers could end up picking up the tab. The Journal suggested that other banks are likely to line up behind Citi to support the bill, but will look to obtain similar loss-sharing arrangement in exchange for their support.
A lobbyist on Capitol Hill, however, said that the banks likely face a "fat chance" of getting such concessions from lawmakers, were they to push for it. "With Citi's support, it doesn't matter what the MBA says on this issue as much," said the lobbyist. "A break in the ranks of financiers puts Congress in a power play."
All of which underscores just how good it may have been to be first in the government handout line through this mess; critics have long suggested that the government relief efforts to the financial sector have singled out clear winners and losers. The cram-down agreement reached yesterday may be the first of a growing set of evidence to support that argument.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Wells Fargo & Co. (WFC: 29.60 +1.89%), as of this week, has suspended non-conforming mortgage product offerings through its wholesale channel, due to "low market demand and higher risks," according to a statement from the banking giant Thursday. The decision is temporary, the bank said, although it wouldn't specify when it might resume future jumbo wholesale funding.
"Wells Fargo has long been the nation’s No. 1 retail mortgage lender and a leading third-party lender because we assess and respond to evolving market trends in a proactive, judicious manner," a statement to the press said. "This includes continuously reviewing our real estate lending product mix and underwriting practices to ensure they prudently align with marketplace risk."
Risk is indeed on the rise amid continued housing turmoil. In some ways, it's not surprising that Wells is pulling back on warehouse funding — many of its competitors, including Bank of America Corp. (BAC: 7.29 -0.14%), have exited the channel altogether. But the decision to exit jumbo warehouse funding underscores the dearth of non-conforming mortgage funding now available in the mortgage market, particularly for third-party originators that rely on the wholesale origination channel.
For would-be non-conforming borrowers, the lack of funding options is likely to be a larger problem now than at the end of last year. Effective Jan. 1, 2009, Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) saw their conforming limit in certain high-cost local markets dropped to $625,500 via the terms of the Emergency Economic Stimulus Act of 2008; the high-cost nonconforming limit had temporarily been boosted to $729,750 through the end of last year by other, earlier legislation.
That's not to say all jumbo funding is disappearing, even at Wells Fargo. A spokesman for the bank stressed that the decision to exit jumbo funding was limited to wholesale channels, and did not affect correspondent or retail origination channels; the program change also won't affect staffing levels, the spokesman said. All of which means consumers in the jumbo mortgage market will want to work with a more direct lender in assessing their mortgage options.
But that sort of new reality likely comes as little comfort to a dwindling number of brokers in the market.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
It turns out that, for now at least, acquiring ailing financial institutions will carry some ratings risk — Moody's Investors Service on Thursday said it had downgraded key credit ratings at both Bank of America Corp. (BAC: 7.29 -0.14%) and Wells Fargo & Co. (WFC: 29.60 +1.89%), after both banks completed sizable acquisitions in recent weeks. Ratings cuts affected debt ratings, as well as financial strength ratings at the lead banks.
Bank of America completed its acquisition of Merrill Lynch & Co., Inc. on Jan. 1, while Wells completed its own acquisition of Wachovia Corp. this week; both Merrill and Wachovia maintained significant exposure to the nation's ailing mortgage markets.
"Bank of America has taken a number of steps recently to bolster its capital position," said Moody's senior vice president David Fanger, "but we believe that its pro forma tangible common equity position remains relatively weak, leaving a modest cushion to absorb unexpected losses."
Moody's analysts noted that as of Sept. 30, BofA's aggregate exposure to credit cards and residential mortgages was roughly $660 billion, and said that the combined company also remains exposed to potential further write-downs in legacy structured assets from both predecessors. Resultant weak earnings, along with still-sizeable dividend payments, are expected to constrain BofA's ability to reduce leverage, the ratings agency said.
And in an environment where de-leveraging is the new black, that certainly poses some challenges. Moody's also expressed some concern over BofA's ability to successfully integrate Merrill with its own operations.
"Investment banking and wealth management businesses are heavily reliant on their personnel and their client relationships. This increases the risk of customer defections and franchise impairment as a result of a poor integration," Fanger said. Read Moody's statement.
BAC shares were at $13.47, down 1.75 percent, when this story was published.
Wachovia to drag on Wells
Similar to BofA, Moody's also expressed concern that leverage will not improve at Wells Fargo before 2010 because the company will need to sustain high loan-loss provisions in the wake of its acquisition of Wachovia — and said its downgrades would have been even steeper without its assumption of "a very high probability of systemic support from the U.S. government."
Moody's cited "asset quality concerns" in lowering the bank's financial strength rating to B from a previous rating of A, and said it believes that after the acquisition, Wells Fargo's Tier I ratio and its adjusted tangible equity to risk weighted assets ratio will be noticeably lower than their levels at the end of Q3.
"The fall in Wells Fargo's tangible equity ratio results from the fact that the equity it raised was low in comparison to the amount and quality of the Wachovia assets it acquired," said Moody'ssenior vice president, Sean Jones.
Portfolios where Moody's said it believes higher provisions will need to be taken include Wells Fargo's $153.5 billion residential mortgage book, its $64 billion commercial real estate portfolio, its $27 billion auto finance book, and its $20 billion credit card portfolio. Read the full statement.
Shares in WFC were at $25.52, down 1.35 percent, when this story was published.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The U.S. Department of Housing and Urban Development will be delaying implementation of the "required use" provision of the final Real Estate Settlement and Procedures Act (RESPA) rule, which was to take effect on Jan. 16 and will prevent home builders from offering incentives or discounts to buyers that use specific settlement services providers, like brokers or lenders. American Banker broke the story Wednesday after unnamed sources leaked the information, according to HUD spokesman Brian Sullivan. The delay comes after the National Association of Home Builders (NAHB) filed a petition for a preliminary injunction against the rule in late December.
"We could have argued the preliminary injunction," Sullivan told HousingWire. "What we've done is, instead of contesting a preliminary injunction, we decided that we would simply agree to delay the implementation of the new 'required use' provision for 90 days while we could produce the administrative record and get our legal ducks in a row to mount a vigorous defense of our position on the merits of the case."
The delay of the "required use" provision, originally slated to take effect Jan. 16, doesn't necessarily mean the rule will not go into effect — or even that HUD is reconsidering its relevance — but is tied to the NAHB lawsuit and will give HUD some time to form a case for reforming the "required use" definition, according to Sullivan. "Builders are not settlement service providers — a very important legal distinction that makes them unique," he said. "They're feeling singled out because they are not settlement service providers."
The RESPA has always established that it's a violation of law for a settlement service provider to require the use of an affiliate, according to Sullivan. Such a practice "puts the consumer in an impossible situation and is tantamount to required use," he said. Borrowers were urged into expensive loans provided by brokers and lenders with higher rates simply because they didn't understand the fine print. "We were getting complaints from consumers who, after they got their house and their new granite counter tops or their new framed-in sun room — or whatever the incentive was — and they started to do the arithmetic saw that the loan they were put in was appreciatively more expensive than they could otherwise qualify for and so it wasn't a true discount," Sullivan said.
Other provisions within the final RESPA rule — like the new good faith estimate — will still go into effect at the scheduled date of Jan. 1, 2010, according to Sullivan. "We're trying to allow time for the industry to ramp up, train its staff and incorporate those forms into their working models and business practices," he said.
This marks the second lawsuit filed against HUD since the announcement of the final RESPA rule. The first came from the National Association of Mortgage Brokers (NAMB), "which challenged the yield spread premium disclosure requirement," according to Sullivan. "Brokers are saying we're creating a situation that's too transparent, and we just don't think that's possible," he said. "We're mystified why anyone would stand in the way of transparency, especially in today's marketplace."
Write to Diana Golobay at diana.golobay@housingwire.com.
