Archive for February, 2009
The latest data from the Federal Reserve, released late Tuesday, paints an interesting contradiction for residential real estate lending: banks are continuing to pull back on credit, despite infusions of fresh capital via the U.S. Treasury's Capital Purchase Program. And loan officers suggested the demand for residential mortgages is waning, despite a veritable flood of interest in refinancing activity as of late among borrowers.
The Fed's survey of loan officers reported tighter lending standards at a "smaller, though still substantial, fractions" of U.S. lenders for residential mortgages. 45 percent of U.S. banks indicated they had tightened prime lending standards; and nearly 50 percent of the 25 banks that originated nontraditional mortgages said they'd tightened credit.
None of this should surprise, given deteriorating asset quality and the issue of whether or not a secured interest is indeed really all that secure in the current banking environment.
But oddly enough — what should perhaps surprise — is that about 10 percent of domestic respondents reported weaker demand, on net, for prime residential mortgage loans over the past three months. While that's a significantly lower fraction than the roughly 50 percent that so reported in the October survey, it's still interesting that anyone in this market would see demand for prime product falling.
Demand continued to slip in January for nontraditional mortgages, with about 65 percent of respondents reportedly experiencing weaker demand. Part of that may be due to the fact that anyone making "subprime" loans in this market is doing FHA, which isn't captured as such in the Fed's data; only four banks reported making subprime mortgage loans over the past three months, as a result.
HELOCs continued to see underwriting criteria tightened as well, with 60 percent of U.S. respondents reporting that lending criteria for home equity loans and lines of credit had tightened over the past three months.
The full survey is available here.
Write to Paul Jackson at paul.jackson@housingwire.com.
GMAC Financial Services — the captive financing arm of General Motors Corp. (GM: 24.37 -1.42%) — on Tuesday reported a $7.5 billion quarterly net income for all of its businesses. The earnings statement comes weeks after the close of a volatile December, when outlook about the company ranged from doubt in its sustainability outside of bankruptcy, to a glimmer of hope as GMAC received approval to become a bank holding company, to a bit more certainty as the Treasury Department stepped in and agreed to invest $5 billion in the financing giant, "as part of a broader program to assist the domestic automotive industry."
GMAC reported a $1.9 billion full-year net income, affected by "significant losses at Residential Capital, LLC (ResCap) as adverse mortgage and housing market conditions domestically and internationally continued to persist." The company reported $22 billion in assets at the mortgage division, where these adverse market conditions contributed to a quarterly net loss of $981 at ResCap, compared with the $921 million loss in the year-ago period. "ResCap's U.S. residential finance business was negatively affected by lower mortgage production due to tight underwriting and the closing of certain retail and wholesale lending channels, and lower net servicing fees," the company said in its earnings statement.
In the fourth quarter, GMAC contributed $1.67 billion of equity to ResCap, which included $690 million of debt forgiveness on the mortgage servicing rights credit line and $976 million of ResCap bonds that were contributed and subsequently retired. The company reported that, due to these interventions, ResCap remained in compliance with its tangible net worth covenant at Dec. 31, 2008.
"In the past 45 days, GMAC received approval from the U.S. Federal Reserve to become a bank holding company, successfully completed the largest debt exchange in U.S. corporate history, received a TARP investment, and completed a rights offering," CEO Alvaro de Molina said in the statement. "Today, GMAC has a stronger capital base and is positioned to be more competitive over the long-term. Our work is just beginning, however, to enhance management practices, while also operating through this difficult economic cycle and transitioning and diversifying the company."
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.
The Federal Reserve has selected JP Morgan Chase & Co. (JPM: 37.21 -0.75%) as custodian for its mortgage-backed securities purchase program, the New York-based bank said in a press statement Tuesday morning. The program, which began on January 5, 2009, will purchase up to $500 billion in MBS that are backed by Fannie Mae (FNM: 0.00 N/A), Freddie Mac (FRE: 0.00 N/A) and Ginnie Mae (GNM: 0.00 N/A), in an effort to maintain liquidity in a vital section of the U.S. mortgage market.
Through the end of January, the Fed had purchased about $69.5 billion in various MBS under the program, just less than 14 percent of its total $500 billion purchasing power. See earlier story.
Via a competitive process, the Federal Reserve had earlier selected four investment managers – BlackRock Financial Management, Inc., Goldman Sachs Asset Management, L.P., Pacific Investment Management Company LLC (PIMCO), and Wellington Management Company, LLP. JPM's appointment as custodian means it will oversee the purchase activities of each of the four firms.
"We are proud to have been selected by the Federal Reserve for this important initiative," said Conrad Kozak, CEO of J.P. Morgan Worldwide Securities Services. "We are pleased to be able to support the efficient operation of the MBS program, while at the same time minimizing operational and financial risks."
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held various put option contracts on JPM when this story was published; no other relevant direct holdings. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Pending home sales in December rose 6.3 percent the National Association of Realtors said Tuesday, with big gains in the South and Midwest offsetting modest declines in other regions. This jump in pending sales likely came on the heels of surging REO inventories, as more buyers took advantage of improved affordability conditions.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, reached 87.7 from 82.5 in November, sitting 2.1 percent higher than its December 2007 reading of 85.9.
“The monthly gain in pending home sales, spurred by buyers responding to lower home prices and mortgage interest rates, more than offset an index decline in the previous month,” said Lawrence Yun, NAR chief economist. “The biggest gains were in areas with the biggest improvements in affordability."
But what Yun didn't say is the areas that saw "big improvements in affordability," likely also posted sky-high foreclosure rates. In a report Tuesday morning, Zillow.com found that distressed real estate transactions represented more than 30 percent of all resales recorded last year — and 10.9 percent of those transactions were short sales. Buyer's Market eh? No question. Consider NAR's Housing Affordability index. It rose 10.9 percent in December to 158.8, the highest reading on record since the group began tracking affordability in 1970.
The idea here is that pending sales are rising, but much of that isn't likely to be "organic" sales activity in the sense that traditional retail resales are moving. What's more likely to move is fire-sale property slashed by banks.
In the Midwest, the pending home sales index moved significantly, jumping 12.8 percent to 83.7. Similarly, the index in the South surged 13.0 percent to 96.8 in December, 1.6 percent above year-ago levels. Pending home sales in the Northeast, however, slipped 1.7 percent to 62.1, while the West's index fell 3.7 percent to 97.5.
Write to Kelly Curran at kelly.curran@housingwire.com.
Citigroup Inc. (C: 30.87 +1.61%), the recipient of $45 billion through the Treasury Department's Troubled Asset Relief Program, on Tuesday released a progress report detailing the usage of government bailout funds through the fourth quarter 2008. The distribution of some $36.5 billion so far has been made through various lending capacities, "to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets; and support the recovery of the U.S. economy," according to Citi's press release regarding the report.
"Our responsibility is to put TARP capital to work quickly, prudently, and transparently to support U.S. consumers, businesses and our communities during these challenging times," said CEO Vikram Pandit. "We have already approved $36.5 billion in initiatives backed by TARP capital that are consistent with the objectives and spirit of the Treasury program."
Citi reported it has dedicated $25.7 billion for residential mortgage originations and the purchase of prime residential mortgages as well as mortgage-backed securities. The bank also reserved $2.5 billion for personal and business loans, $1 for student loans, $5.8 billion for credit card lending and $1.5 billion for corporate lending. The bank said in the report that no TARP funds will go toward compensation or bonuses, dividend payments, lobbying "or any activities related to marketing, advertising and corporate sponsorship." Instead, Citi has said it will "continue to focus on supporting the U.S. housing market." It is also working to adopt a streamlined modification program for post-delinquency loans like the one employed by the Federal Deposit Insurance Corp., and touted that even in 2008, it kept an average four of five distressed borrowers with Citi-serviced mortgages in their homes.
The bank reported that, under the TARP-funded residential mortgage initiative, it is investing $10 billion in mortgage-backed securities guaranteed by Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A): $5 billion in 15-year fixed-rate mortgage and the remaining $5 billion divided between various adjustable-rate mortgages. The move is expected to free up liquidity for "lenders who need to replenish funds so that they can continue to originate mortgage loans."
Citi is also purchasing $7.5 billion in prime residential mortgages from the secondary markets — mortgages, the bank said, that were made to qualified borrowers capable to meet monthly payments. Finally, Citi is promising $8.2 billion in non-conforming mortgage loan originations — by definition higher in value than the limits set for government-sponsored loans, which Citi estimated between $417,000 and $625,500 — because, according to the bank, the interest rates are typically higher, carry a higher risk than conforming mortgages and have therefore fallen more sharply in origination in the past year then conforming loans.
Citi also promised to release quarterly reports on the distribution of the $45 billion it has received through the TARP and continue to use the special TARP committee it set up in early November to review and approve the uses of TARP capital. "The Government, on behalf of American taxpayers, has invested in Citi," Pandit said in the report. "We have an obligation to repay that confidence in ways that go well beyond the $3.41 billion that Citi will pay the Government each year in dividends associated with its TARP investment and a separate loss sharing agreement."
On Oct. 28 Citi received $25 billion through the capital purchase program and then on Dec. 31 received a second infusion through the sale of an additional $20 billion in preferred stock through the — at the time — brand new targeted investment program. Then on Jan. 16, the Treasury finalized the details of a government loss-sharing initiative with Citi, with the Treasury's TARP-funded share of the guarantee coming to $5 billion. With the asset guarantee — admittedly not a capital infusion, but a promise of TARP funds, nonetheless — Citi boasts the most bailout funds even over close second Bank of America Corp. (BAC: 7.29 -0.14%), whose initial $15 billion coupled with the $10 billion it received after the closing of the Merrill Lynch merger as well as the $20 billion targeted investment brings BofA's total infusions to $45 billion. The only institution coming close after BofA is American International Group (AIG: 25.25 +0.44%), which received $40 billion on Nov. 25 on account of its status as a "systemically significant failing institution," according to Treasury reports.
Read Citi's TARP progress 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.
Am I the only one that thinks a partnership between Neighborhood Assistance Corp. of America and Fannie Mae is a little, well, odd? This story at the WSJ has been bubbling in the back of my head since I saw it last week:
Fannie Mae has reached an agreement to work with one of its former critics, Neighborhood Assistance Corp. of America, to prevent foreclosures by reworking home mortgages to make them easier to afford.
… The agreement with Fannie hasn't been announced but was confirmed by the company and by Bruce Marks, chief executive of the NACA, a Boston nonprofit with a history of holding protests to pressure banks into cooperating with its efforts to provide mortgages on what it considers fair terms.
Here's the thing about Marks and his crusade for long-term affordable loans, irrespective of any personal opinion on the man; he doesn't much care about the original terms of the lending. If a borrower can't afford the terms, the terms aren't any good and represent the lender's outright gouging and mistreatment of the borrower. Any loan is therefore only as good as the borrowers' ability to afford it, and if the borrower's circumstances change, so too should the terms of the note. Such goes the mantra here.
Philanthropist or not, Marks clearly makes money off of this process — he's able to collect Federal grants in the millions from the likes of NeighborWorks America on one hand, while also making money by being the originator of the "affordable" loans to troubled borrowers, on the other. Perhaps he is providing a valuable social service, a point many will surely argue.
But his approach is clearly a strategy that allows money to be made on both the left and right hands, non-profit or not. And I'll admit upfront that I'm a hardened skeptic on the preferential tax-treatment given many non-profit entities.
Data released Tuesday by the Commerce Dept. shows that the nation's homeownership rate slid to 67.5 percent during the fourth quarter, levels last seen when our calendars flipped over to 2001.
In other words, the much-touted homeownership gains of the entire previous Bush regime are now history. Gone. It's amply clear now that the gains of the past eight years were illusory and temporary, created through unsustainable lending practices.
The vacancy rate for owner-occupied homes rose to 2.9 percent in the fourth quarter of 2008, as well, up from 2.8 percent in the linked quarter and year-ago period — matching the all-time high during the first quarter last year.
Rental vacancies rose to 10.1 percent, meaning 2008 saw three quarters with rental vacancies in double digits; the only other time since 1995 that has been observed was in 2004, when all four quarters recorded 10 percent or greater rental vacancies.
Prior to Q4 2005, the nation's homeowner vacancy rate had never been above 2.0 percent; it has now been above that level for 13 straight quarters.
Sidenotes: The Calculated Risk blog has a good overview of the numbers and an assessment of excess housing inventory spanning rentals, existing residential and new homes, and arrives at a number we think is close to correct: there are 1.87 million excess housing units in the U.S. that need to be absorbed, not accounting for shadow inventory of REO and other properties that are likely to add to those totals.
The full dataset is available here.
Write to Paul Jackson at paul.jackson@housingwire.com.
PNC Financial Services Group, Inc. (PNC: 59.08 +0.31%) reported Tuesday morning a loss of $248 million, or $.77 per diluted share, for the fourth quarter of 2008 — driven by costs tied to its takeover of ailed Cleveland-based National City Corp. — compared with a net income of $178 million in the fourth quarter of 2007, or $.52 per diluted share.
PNC's reported loss includes the costs related to its acquisition of National City, which was completed on December 31, 2008, and made PNC the fifth largest bank in the United States. Integration costs, which included conforming provisions for credit losses for acquisitions, primarily National City, according to the report, were $380 million for the fourth quarter and $422 million for full year 2008. Despite acquisition costs, for the longer term, the acquisition is expected to be a "home run" said RBC Capital Markets analyst Gerard Cassidy in a note to investors at the end of January.
Year-end income at PNC rang in at $882 million — $2.46 per share — compared with a significantly higher income of $1.47 billion, or $4.35 per share, in 2007, but an income nonetheless.
The firm "successfully executed its business strategies in 2008 and delivered solid results during a time of unprecedented markets and a weakening economy," said PNC CEO James Rohr. "During the year we strengthened our capital, liquidity and loan loss reserve coverage. The acquisition of National City provided us with a unique opportunity to grow our franchise, doubling our assets and customers. Our two-year integration plan is underway…"
Retail banking came out of fourth quarter with $15 million in earnings, $196 million shy of last year's fourth-quarter earnings and $64 million less than the linked quarter — a decline that's primarily due to an increase in the provision for credit losses, PNC said. Corporate and Institutional Banking earned $17 million in Q4. Results were strong for all sectors except real estate, according to the report
The commercial mortgage servicing portfolio on a combined basis with National City was $286 billion as of December 31, 2008. Of that total, PNC Corporate & Institutional Banking commercial mortgage servicing portfolio was $249 billion compared with $243 billion at December 31, 2007 and $247 billion at September 30, 2008. Servicing portfolio additions have been modest since the third quarter of 2007, PNC said, due to the declining volumes in the commercial mortgage securitization 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.
Ouch. U.S. homeowners lost a cumulative $3.3 trillion in home equity during 2008, with $1.4 trillion of that loss coming in the fourth quarter of last year alone, according to real estate information web site Zillow.com. The company's estimate of U.S. home values fell 11.6 percent during 2008 to an estimated $192,119, the company said Tuesday morning.
Fourth quarters decline in home prices is the eighth consecutive quarter of recorded declines. Homeowners have lost $6.1 trillion in home equity since the market's peak in 2006, by Zillow's estimate.
Perhaps more troubling than the declines that we've already seen, is evidence that there may yet be further to fall — with more defaults in the pipeline. At the end of last year, Zillow estimates that one in six (17.6 percent) of all homeowners had negative equity; a number up from 14.3 percent at the end of Q3 2008.
Borrowers without equity in their homes are a high risk for future defaults, as we've covered extensively here on HousingWire in the past.
"A witch's brew of economic insecurity, foreclosures and tightened lending standards are helping to keep hard-hit markets down and to widen the scope of markets showing declines in home values," said Dr. Stan Humphries, Zillow vice president of data and analytics.
"As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing, with more value wiped out in the fourth quarter of 2008 than was eliminated in all of 2007. The fourth quarter is the first in which we were able to see the effects of the mounting economic insecurity that picked up steam in the fall of last year."
Foreclosures and short sales
Foreclosures made up nearly one in five (19.9 percent) of all transactions in 2008, Zillow said; plenty of data has been suggesting for months now that is many of the nation's worst housing markets, foreclosures represent the vast majority of resale transactions. The hard-hit Central Valley in California continued to lead the nation in foreclosures, according to Zillow's study, as more than half of all sales in the Madera, Merced and Stockton metropolitan statistical areas were foreclosures. The New York City metro area and the Grand Junction, Colo., had the lowest rates of foreclosure in the country, both at 3.9 percent.
Add in short sales, and distressed real estate transactions represented more than 30 percent of all resales recorded last year — 10.9 percent of all real estate transactions in 2008 were short sales. And here's the odd winner: the Lincoln, Neb., MSA led the country in the rate of short sales, with 14.1 percent of all transactions.
Just 21 of 161 markets tracked by Zillow are not feeling the pinch of declining home values. Home values in the Pittsburgh MSA were flat (-0.1 percent) in 2008; a relative victory in a housing market that is quickly receding to 2002/2003 levels. And in the Fayetteville, N.C. MSA, home values actually increased 6.9 percent in 2008; the Yakima, Wash., MSA was not far behind, with home values increasing 6.2 percent during the year.
But by far, the overwhelming picture painted for 2008 was one to forget for housing. And if Zillow's estimates of the number of underwater borrowers are correct — First American CoreLogic has estimated that 7.6 million U.S. households were underwater on their mortgages as of Oct. of last year — we have much further to go to complete a correction in many of the nation's key housing markets.
Write to Paul Jackson at paul.jackson@housingwire.com.
Experienced servicing executives are in high demand during the current cycle, and for large vendors such as the First American Corp. (FAF: 14.98 +0.07%), the experience of seasoned professionals is a critical part of competing in the suddenly-super-hot default servicing sector. The real estate information and services giant's information and outsourcing solutions segment said Tuesday that it had brought former JP Morgan Chase & Co. (JPM: 37.21 -0.75%) managing director James Miller on board as managing director of operations for all of the segment's default-related businesses.
Miller will manage the operations of First American Outsourcing and Technology Solution’s seven businesses, which include National Default Outsourcing, National Claims Outsourcing, Loss Mitigation Services, Loan Production Solutions, Real Estate Owned (REO) Servicing, Default Technologies and Global Offshore Services, the company said in a press statement Tuesday morning.
Miller is a well-known industry executive, and has spent 25 years in the servicing sector. He most recently managed default operations for JP Morgan Chase’s Mortgage Servicing Division for the past three years, and oversaw the integration of servicing operations after the merger between Chase and Bank One. He also is an experienced loss mitigation manager, and led the development of Chase's "The Way Forward" loss mitigation program.
JP Morgan had not announced Miller's departure, so his arrival at First American came as a surprise to a few sources that spoke with HousingWire Tuesday morning. Calls to JPM to determine who is now managing the banking giant's servicing operations were not immediately returned.
For First American, the arrival of Miller signals a shift in default services strategy at the company towards solutions that can work with troubled borrowers; like many competitors, First American has been refocusing much of its services around loss mitigation and analytics that can help streamline the servicing process.
“Servicers are facing massive and complex challenges in the areas of loss mitigation, loan modification and foreclosure prevention,” said Miller. “At the same time, they are under enormous pressure from regulators, state governments, investors, bankruptcy courts and advocacy groups."
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held various put option contracts on JPM when this story was published; no other relevant direct holdings. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
