In a move that at least one market expert has been suggesting was needed for months, the Federal Deposit Insurance Corp. suggested late Friday that it would look to expand a key debt guarantee program to accommodate covered bond issuances; the move represents the latest and most significant effort yet to bring in fresh liquidity to an ailing national mortgage market.

In a Friday statement announcing further aid to Bank of America Corp. (BAC: 7.29 -0.14%), the FDIC also said that "it will soon propose rule changes" to its Temporary Liquidity Guarantee Program, extending the maturity of the current guarantee from three to up to 10 years and changing the program to cover all debt issuances backed by collateral.

Linda Lowell, a veteran ABS/MBS researcher, had suggested in the January/February issue of HousingWire Magazine that such a move was clearly needed. An excerpt from that story:

"There is a step the government can take now to accelerate development of this market [covered bonds]. The FDIC could extend the TLGP facility to include covered bonds issued in accordance with its regulations and the Treasury’s Best Practices. A foreseeable objection would be that covered bonds increase risk to the insurance fund to a degree, by allowing covered bond investors a priority claim over the cover pool assets (thereby reducing assets available to satisfy depositors). Current FDIC policy already addresses this risk by restricting a bank’s covered bond issuance to a maximum of 4 percent of its total liabilities. Furthermore, banks in the TLGP pay an insurance fee for the guarantee—couldn’t the FDIC resolve an appropriate fee to reflect the risk in guaranteeing covered bonds?

Another step the FDIC could take to encourage the development of a covered bond market sooner rather than later would be to authorize inclusion of other assets. U.S. regulators have already moved to support consumer-asset-backed securities—simply expanding covered bond collateral to include credit card receivables, auto loans and student loans would be another step in the same direction. Other commentators have recommended adding loans to public sector borrowers, a step that would increase liquidity available to strapped local governments."

FDIC spokesman Andrew Gray confirmed to Bloomberg News on Friday that the decision to expand the TGLP is largely centered on paving the way for covered bonds, which typically have maturities that outrun the three-year guarantee originally put into place via the program.

In contrast to off-balance-sheet securitization vehicles, covered bonds are essentially debt secured by assets that remain on the issuer’s balance sheet — and while they’re being touted by some as a new financial instrument, nothing could be further from the truth. Covered bonds have recently been as large as a $3 trillion market in Europe; use of the bonds dates back to the 1770s in Prussia, as well.

Outgoing Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke have since spring of last year been talking up the prospects of a covered bonds market in U.S., as a viable method for replacing the private-party securitization market that has largely imploded in the wake of a historic credit crisis. But since the program was first announced last July, and four of the nation's largest commercial banks pledged to issue the bonds, nothing has been done.

At least part of the hold-up, according to market sources, has been the FDIC's TGLP, which offers banks a superior source of funding; also on the list is the cheap availability of advances via the Federal Home Loan Bank system.

“As a form of mortgage funding, covered bonds are unlikely to be very competitive versus the alternatives of equity capital from the Treasury and 3-year FDIC-guaranteed senior unsecured bank debt,” analysts at Bank of America said in a late October research report. Of course, that was before the FDIC signaled that it might make the TGLP the vehicle to drive the covered bond market into existence.

That said, don't expect such a market to emerge overnight. On-balance sheet financing of any form — covered bonds included — is going to remain scarce so long as banks need further capital infusions to cushion against further losses in existing loan books; covered bonds use capital, after all, rather than releasing it. And investors will closely scrutinize the capital position of any issuing bank, given that covered bonds provide recourse to the issuing entity.

Nonetheless, the news from the FDIC comes as serious cracks are beginning to show in the nation's FHLB system, and the future of Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) continues to be debated. See an earlier HW report that broke news of trouble at the FHLBs.

In other words, the GSE market as we have long known it is more than likely to go through a dramatic shake-up all its own over the course of the next year or two. Something is going to have to fill the funding void, and that may be true of more than just the currently-frozen non-conforming mortgage space.

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 Senate voted 52 to 42 Thursday against a measure that would have barred the release of the remaining funds under the Troubled Asset Relief Program, essentially releasing the last $350 billion, some of which Treasury Department secretary Henry Paulson has already spent. Within hours of the vote, the Treasury announced an additional $20 billion in TARP aid to — troubled? — banking giant Bank of America Corp. (BAC: 7.29 -0.14%), which had already received $25 billion in capital purchases through the TARP. The move suggested Paulson has not given up his position on focusing TARP funds toward providing capital for banks and non-bank entities, rather than pursue the program's original intent of purchasing mortgage-backed securities and assisting everyday home owners.

Even as Congress considers legislation authored by Barney Frank, D-Mass. that will impose restrictions on the use of remaining TARP funds, increase the oversight of the program and require at least $50 billion for mortgage modifications, Paulson publicly stands by his strategy to pour billions of dollars into financial institutions. "At least in my judgment, a good portion of the TARP resources has to be used for capital programs," Paulson told reporters Friday in his final press conference as Treasury secretary, according to a MarketWatch bulletin.

His comments come amid increasing criticism over TARP oversight and the transparency of tracking of TARP funds that banks have already received. The National Legal and Policy Center (NLPC) on Thursday announced it had filed a complaint over some charitable donations contributed by BofA and Citigroup Inc. (C: 30.87 +1.61%), which have now received $45 billion each from the Treasury through TARP (BofA's latest $20 billion infusion was announced Friday). According to the NLPC's complaint, the banks were listed as "Silver" and "Gold" sponsors with respective $30,000 and $50,000 contributions to the Rainbow/PUSH Wall Street Conference taking place in New York City. The Rainbow/PUSH Coalition would not return requests for comment on the alleged contributions before the time this story was published.

The NLPC is requesting the TARP inspector general to investigate the legitimacy of such donations when both banks have received so much federal aid to bolster their capital positions in the marketplace. “When the TARP was presented to Congress, secretary Henry Paulson and others argued that the situation was dire, and that the failure of major financial institutions posed a systemic risk to our economy," the complaint reads, in part. "The stated goal was to unfreeze credit so that banks can make loans to businesses and individuals. It was never contemplated that banks use their capital to make donations" to charitable organizations.

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.

First Horizon National Corp. (FHN: 8.79 +0.69%) on Friday reported a $55.7 million net loss — 27 cents per share — for the fourth quarter 2008, less than half the loss reported the previous quarter. After reporting heavy losses in mid- and late-2008 and receiving a $866,540,000 injection from the TARP as a transaction under the Capital Purchase Program on Nov. 14, 2008, the company's balance sheet appears to be stabilizing somewhat. Despite continued economic weakness, average deposits remained flat for the quarter, signaling First Horizon may have weathered some of the worst economic decline of 2008.

"Our early decisions to raise capital, sell assets and exit our lending businesses outside our banking region put us in a stronger position by the end of one of the worst years the financial services industry has faced," said CEO Bryan Jordan. "We're leveraging the money we received from the government's TARP program to facilitate lending to our consumer, small business and commercial customers. The TARP funds contributed to our ability to originate more than $900 million in new loans in the fourth quarter."

But its mortgage business, as expected, was bleak. First Horizon reported lower origination income in the fourth quarter due to the completion of the sale of its mortgage servicing platform and origination offices outside of Tennessee in August. It also reported a $22 million quarterly provision due to "deterioration in permanent mortgage portfolios" as well as a $16.5 million expenditure for reinsurance due to increased mortgage default and a $1.8 million provision for foreclosure losses. It reported $6.4 million in fourth-quarter restructuring charges around its mortgage banking business. Total loan loss allowance for its mortgage banking business came to $28 million in the quarter. The corporation saw just $489,000 in warehouse assets on its mortgage banking balance sheet. It reported a negative $14.4 million in total mortgage origination income and $99.4 million in total mortgage servicing income.

"Additionally, pre-tax earnings for third quarter were negatively affected by $14.4 million related to the adoption of new accounting standards, including the prospective election of fair value accounting for mortgage warehouse loans," the earnings statement read, in part. "Increased deterioration in the permanent mortgage portfolio resulted in higher provision expense in comparison to third quarter. Noninterest expense declined due to effects of the divestiture which were partially offset by increasing reinsurance reserves for increased defaults on insured mortgages."

Read the full report.

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.

Redwood Trust (RWT: 11.63 -0.17%) has officially jumped back into the game. In a prospectus filing with the Securities and Exchange Commission earlier this week, the company announced that it was launching a 17 million share offering to finance the acquisition of additional residential and commercial mortgages. During the fourth quarter, the company purchased $50 million in RMBS for 64 cents on the dollar and continued its investment strategy into 2009, purchasing another $17 million during the first week of January.

In the prospectus, the company noted that its GAAP book value fell to just $9.02/share, while the non-GAAP economic book value dropped to $11.10/share. Despite Redwood’s aggressive re-entry to the market, the preliminary fourth-quarter results and the ire of dilution took its toll on Redwood shares regard;ess, which fell 16 percent following the announcement of the secondary offering.

Truth in tax treatment

It’s that time of the year when the mortgage REITs announce the tax treatment of their dividends, which provides much insight into the “real” dividend coverage. BRT Realty Trust (BRT: 6.60 -0.45%) disclosed that $1.73/share of its $2.57/share in 2008 dividends were related to capital gains, primarily from sales of its shares in Entertainment Properties Trust (EPR: 44.70 +0.45%). Just 32 percent of the dividends were covered by ordinary taxable income, confirming BRT’s decision to suspend its unsustainable dividend going forward.

Meanwhile, investors can now fully comprehend the extent of taxable losses from the Macklowe mess at Capital Trust (CT: 2.52 +0.80%). CT disclosed that $1.91/share of its $2.20/share in 2008 dividends was nothing more than a return of capital. The company earned just $0.29/share in 2008 taxable income, well below its previous quarterly dividend of $0.80/share. Capital Trust has also suspended its dividend for the time being; it remains to be seen if the company will be to reinstate the dividend in 2009. Don't hold your breath.

CDOs continue cracking

Fitch Ratings dropped the hammer this week on $10B in CDOs secured by REIT trust preferred securities; all the affected deals belonged to Cohen-controlled entities Resource America (REXI: 5.55 -0.18%) and RAIT Financial Trust (RAS: 5.72 -1.04%). Eleven deals that RAIT inherited from its ill-fated merger with Taberna Realty Finance were downgraded; all the AAA securities were cut to the bare minimum investment grade category. Most of the junior tranches, including some originally given AA ratings, have failed the overcollateralization tests, causing cash to be diverted to the senior tranches. It’s yet more pressure on RAIT, which is struggling to maintain operating earnings high enough to support its $0.35/share quarterly payout.

Editor’s note: Patrick Harden is a Certified Public Accountant with three years of experience in auditing publicly-traded real estate investment trusts. For the past few years, he has been involved in the mortgage finance industry as a member of the financial reporting group at a publicly-traded mortgage bank. His column covering mortgage REITs runs every Friday.

Disclosure: The author was long shares of RAS and held no other relevant positions when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Citigroup Inc. (C: 30.87 +1.61%) announced Friday it would reorganize itself into two businesses, Citicorp and Citi Holdings, to tune its focus to its core business. Going forward, Citicorp will be a "relationship-focused" global and regional business and consumer bank, while Citi Holdings will take on non-core businesses of brokerage and asset management, local consumer finance, and a special asset pool that will manage the assets covered by the loss-sharing agreement struck with the Treasury Department, the Federal Deposit Insurance Corporation and the Federal Reserve Bank of New York. These non-core businesses "do not sufficiently enhance the capabilities of Citi's core business, and in many ways compete for its resources," officials said in a press statement.

"Given the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses," said CEO Vikram Pandit. "This will help in our ongoing efforts to reduce our balance sheet and simplify our organization, which will enable us to better serve our clients and customers in both businesses without disruption."

Citigroup's split into two entities effectively undoes the '98 merger between Citicorp and Travelers Group, which brought together two massive conglomerates of worldwide banking, financial, brokerage and insurance businesses. With The Travelers Companies Inc. (TRV: 58.05 -1.11%) having spun off of the massive company in 2002, taking the insurance underwriting business with it, all that was left was a giant banking entity. Some critics argue this corporation became too large to manage. Considering the massive fourth-quarter losses reported Friday, those fears don't seem entirely unfounded.

Citi reported a net loss of $8.29 billion — or $1.72 per share — for the fourth quarter and an $18.72 billion — $3.88 per share — net loss for all of 2008. A 47 percent decline in investment sales and lower mortgage servicing revenue were chiefly at the helm of declining consumer banking. Cit also reported securities and banking revenues were negative $10.6 billion due to substantial write-downs and losses. Subprime-related direct exposures led to 44.6 billion in net write-downs, and Alt-A mortgage write-downs, net of hedges, came to $1.3 billion. Cit reported its expenses were down 12 percent due to a "significant decrease" in salary and compensation because of head count reductions.

But the earnings statement was not all gloomy. Citi reported a reduction in risk and a lowered regulatory capital requirement will result from the loss sharing program with the government, which closed on Thursday and which "provides protection against the possibility of unusually large losses on an asset pool of approximately $301 billion in loans and securities backed by residential and commercial real estate," according to a statement released by the Treasury. Citi also announced it had closed on the issuance of $7.1 billion of liquidation preference perpetual preferred stock and warrants to the Treasury and FDIC. The company reported an expected pre-tax gain of $9.5 billion with the closing of the Morgan Stanley Smith Barney joint venture later in 2009.

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.