Archive for March, 2009
The mortgage industry remains squarely in the sights of a series of investigations by the Securities and Exchange Commission, an SEC commissioner said in Congressional testimony last Friday. The regulator continues to investigate lenders, key issuers of subprime MBS, and credit rating agencies for evidence of illegal activity, SEC commissioner Elisse Walter told members of the House Financial Services Committee.
"The SEC is investigating, among other things, improper accounting, disclosure issues, and insider trading," she told committee members. In particular SEC officials are looking into how lenders accounted for loan loss reserves, as well as assessing whether lenders have been or continue to book foreclosed property at inflated values.
The SEC's investigation into all things subprime has been ongoing since march 2007, but Walter's remarks shed new light on directions the regulator is pursuing in its efforts to leave no stone unturned. Among them: an inquiry into possible understatement of mortgage delinquency and default rates.
That angle of investigation stands out, in particular, because there has long been plenty of 'grey area' in terms of how a lender categorizes and reports properties on its books, sources have suggested to HousingWire.
In terms of investment banks, Walter said investigations have centered on material misrepresentation of risk and expsoure, as well as the "possible intentional mispricing of securities and the knowing underwriting of securities based on collateral likely to default." That last part should give industry participants some reason to pause — after all, numerous state attorneys general have gone after large lenders for so-called 'predatory lending' practices over a similar claim.
The SEC has taken nine subprime-related enforcement actions since its investigation into the area began two years ago — hardly a heavy caseload. Walter suggested the SEC needed to beef up its staffing and resources to the House committee.
"The SEC's examination and enforcement resources are inadequate to keep pace with the growth and innovation in our securities markets," she said.
Write to Paul Jackson at paul.jackson@housingwire.com.
Some decent news to start off Tuesday morning came from the Mortgage Bankers Association, which said that it had increased its forecast of mortgage originations in 2009 by over $800 billion, due to a refinancing boom as mortgage rates have headed below the 5 percent mark in some cases. The MBA said it now expects originations to total $2.78 trillion, which would make 2009 the fourth highest originations year on record, behind only 2002, 2003, 2005.
Zillow.com reported Tuesday morning that the weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for thirty-year mortgages fell to 5.06 percent, down from 5.21 percent the week prior. On Monday evening, rates fell slightly further to an average of 5.03 percent, the service said.
"This boost is due entirely to the expected increase in mortgage refinancing activity motivated by the drop in interest rates following last week’s Federal Reserve’s announcement on the Treasury bond and mortgage-backed securities purchases programs and the Fannie Mae and Freddie Mac refinance programs," the mortgage lobbying and trade group said in a press statement. The group lowered slightly, however, its forecast of mortgage originations tied to home purchases.
“While the Fed has not announced that it is targeting specific rates for either 10-year Treasury rates or rates on 30-year fixed-rate mortgages, the effect of having the Fed bid in the market for a sustained period is enough to create a refinance incentive for a tremendous number of homeowners," said Jay Brinkmann, chief economist at the MBA and the group's senior vice president of research and econmics. "The vast majority of mortgages originated before the latter part of 2008 are probably going to have at least a 50 basis point refinance incentive for at least the next several months, with mortgage rates hitting lows not seen since the early 1950s and late 1940s.”
This origination boom, however, will differ from recent years past — while previous record origination years of 2002, 2003 and 2005 had large amounts of subprime loans and jumbo loans, the MBA said it expects 2009 originations to consist almost entirely of conforming and/or FHA-eligible mortgages.
The MBA had forecast refi volume to increase to $1.13 trillion this year, up from an estimated $765 billion in 2008; the MBA's new estimate pegs refi volume at $1.96 trillion. Estimated purchase originations for 2009 were revised down to $821 billion, from an earlier estimate of $851 billion; 2008 purchase mortgage originations totaled $854 billion in 2008, the MBA said.
Brinkmann suggested that the revised forecast would "test the operational capacity of a number of mortgage banking firms," citing the reduced availability of warehouse lines as a chief concern. He also suggested that mortgage servicers would see significant churn on their books as borrowers replaced existing loans with new ones — a trend that could negatively affect the value of mortgage servicing rights as prepayment speeds increase.
Which means that while originators may have something to cheer about, the nation's housing markets may see less to brighten this picture this year. “Even with amazingly low interest rates, lower home prices and the first-time homebuyers tax credit, it is unlikely that we will see an increase in overall home sales until we see some stabilization of employment,” Brinkmann said.
The MBA projected that total existing home sales for 2009 will drop 2.5 percent from 2008 to 4.8 million units, while new home sales will decline a far sharper 39 percent in 2009 to 293,000 units. The group said it expects median prices to post a five or six percent drop this year.
Obviously, good tidings for originators are likely to last only as long as rates remain low; a prospect that depends on overseas investors as much as it does on the government's ability to sop up excess supply in the face of waning global demand for U.S. mortgages. "The effect on rates will largely be determined by whether other investors stay in the market or shy away from Treasuries due to expectations of future inflation and the declining value of the dollar," said Brinkmann.
"If so, the effect on rates will be more short-lived and our revised refinance forecast prove too optimistic."
Write to Paul Jackson at paul.jackson@housingwire.com.
As of Tuesday morning, nine of the top ten bonus recipients at American International Group Inc. (AIG: 25.25 +0.44%) have agreed to relinquish their bonuses in full, according to assessments by New York Attorney General Andrew Cuomo. Of the top 20, 15 employees have agreed to return their bonuses.
"I would like to say this to the individuals who have given the money back – You have done the right thing," said Cuomo in a press statement Tuesday. "You have done what this country now needs and demands. We are living in a new era of corporate and individual responsibility. I thank you…"
Cuomo and his team calculated that employees have agreed to return approximately $50 million of the $165 million dished out in bonuses on March 15. However, 47 percent of the $165 million pool has gone to Americans — about $80 million.
Cuomo said he wanted to make public the names and details of bonus recipients, but felt it was necessary to evaluate the security and privacy of individuals following death threats against some employees.
"Our legal theory is fraudulent conveyance, and we think it is a powerful legal theory," Cuomo told reporters. "But if a person returns the money I don't think it is in the public interest to name them." He noted that those employees who have agreed to hand over their bonuses will immediately and permanently be removed from the list.
An AIG spokeswoman told Bloomberg late Monday that a "handful" of senior executives have resigned from its Financial Products unit — the division largely blamed for the fall of the giant insurer. It was unclear, however, if any of the executives with the top bonuses had resigned. But she suggested that more employees from the unit would likely resign.
Legislative efforts to recover the bonuses in full have been underway since last week. On the same day AIG CEO Edward Liddy testified in a special hearing, lawmakers sought to impose hefty taxes on bonuses paid out to employees of companies receiving federal support. The House voted Thursday in favor of the tax.
But as of Monday, Senate majority leader Harry Reid indicated that further actions on the bill would be delayed. “Republicans have asked for more time to study the legislation, and they’re entitled to that,” he said as he opened the Senate on Monday afternoon.
President Obama seemed apprehensive towards the current legislation, as he said in an interview Sunday on “60 Minutes,” that he had not reached a conclusion. “We can’t govern out of anger,” Obama said.
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.
Bucking other evidence of a pending bust in commercial real estate, the Mortgage Bankers Association said Monday that the level of commercial/multifamily mortgage debt outstanding grew by 0.7 percent in the fourth quarter of 2008, to $3.5 trillion. Based on an analysis of the Federal Reserve Board Flow of Funds data, the group said the total was an increase of $166 billion, or 5 percent from the end of 2007.
The $3.5 trillion in commercial/multifamily mortgage debt outstanding recorded by the Federal Reserve was an increase of $23 billion from the third quarter of 2008. Multifamily mortgage debt outstanding grew to $900 billion, an increase of $5.4 billion or 0.6 percent from the third quarter.
"Counter to what many expected, investors increased their holdings of commercial and multifamily mortgages during the fourth quarter," said Jamie Woodwell, MBA's vice president of commercial real estate research. "Banks, thrifts, Fannie Mae, Freddie Mac, life insurance companies and other lenders extended additional credit to the market during the fourth quarter, lending more in new commercial and multifamily mortgages than they saw paid off or paid down on existing loans."
Commercial banks continue to hold the largest share of commercial/multifamily mortgages at $1.55 trillion, or 44 percent of the total. Many of the commercial mortgage loans reported by commercial banks however, are actually "commercial and industrial" loans to which a piece of commercial property has been pledged as collateral. It is the borrower's business income, and not the income derived from the property's rents and leases that drive the underwriting, pricing and performance of these loans.
An earlier research note from the mortgage banking group found that among the top 10 commercial real estate bank lenders, 48 percent of their aggregate balance of commercial (non-multifamily) real estate loans were related to owner-occupied properties, with 52 percent being income property loans.
CMBS, CDO and other ABS issues are the second largest holders of commercial/multifamily mortgages, holding $746 billion, or 21 percent of the total. Life insurance companies hold $316 billion, or 9 percent of the total, and savings institutions hold $193 billion, or 5.5 percent of the total, the MBA said.
Government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae, hold $189 billion in "whole" loans in their own portfolios and an additional $149 billion in multifamily loans that support the mortgage-backed securities they issue. In total, the GSEs represent 10 percent of the total outstanding commercial/multifamily mortgages.
Write to Paul Jackson at paul.jackson@housingwire.com.
It may not be the Second Great Depression, but it's the most severe economic contraction most of us have seen in our lifetimes. While we haven't experienced the bread lines stretching around the corner or general despondency seen in the Depression-era '30s, we have experienced significant losses of personal wealth, savings, retirement funds, homes, jobs and peace of mind.
Although we here at HousingWire can't diagnose whether we're likely to enter another depression any time soon, we are curious to hear how our readers are responding to the financial stress. Particularly, we want to ask: Where's your money safe? And yes, the double meaning is intended. We want to know your opinions on where you think money should be kept and who's keeping it safe: your local bank savings account, a money market mutual fund, a safe in the basement or the gap under your mattress?
Keep in mind we intend to leave financial advice for qualified advisers, but we are inviting any and all opinions on what you think is the safest place for your money during this prolonged recession. Sound off and give us some answers worth printing. Click here to take our monthly Sounding Board — best answers make it into the May issue of the magazine. Please note that any responses left on the comments tab at the bottom of this post will not be included.
While half of all Americans are concerned they or someone they know will face foreclosure in the next six to 12 months, 23 percent of adults plan to purchase a home in the next five years, and 53.5 percent of them happen to be first time homebuyers, according to a new survey commissioned by Move Inc., released Monday.
The Move survey found the housing downturn, now entering its third year, has created demand for homeownership especially among first-time homebuyers. While 5.8 percent plan to purchase a home in the next 12 months, 12.8 percent of Americans say they plan to buy a home in the next two years and 11 percent plan to purchase a home in two to five years.
However, it's important to remember the majority of Americans — four out of five — do not plan to buy a house in the next five years. And amid housing turmoil, homeowners have revealed changing attitudes towards owning a home. About two-thirds of homeowners now consider their home primarily a place to live as opposed to an investment, the survey said.
The Move survey also found nearly one out of five homeowners plan to take advantage of the administration's new program to help prevent foreclosures. While wading the waters of a severe economic downturn, 21 percent of all homeowners with a mortgage contacted a lender to restructure their loan over the past year.
Unemployment is the driving factor causing many Americans to fear foreclosure, according to Move, Inc.'s findings. Over 27 percent of adults feel they or someone they know may default on their mortgage due to recent unemployment, future unemployment or because they owe more on their home than it's worth.
Determined to remain in their homes, 72 percent of adults reduced spending in the past year in order to make monthly mortgage or rent payments, mostly by cutting discretionary spending such as vacations, entertainment and eating out. Regardless of age, most Americans are cutting spending back from some aspect of their life to pay housing costs, according to the survey.
But "It's not all doom and gloom," said Move, Inc., CEO Steve Berkowitz. "We found Americans are optimistic about homeownership despite concerns. They're doing everything they can, from reducing discretionary spending to pay their mortgages, to planning to take advantage of the administration's new program to stop foreclosures."
The survey found 18.1 percent of homebuyers plan to buy this year in order to take advantage of the $8,000 tax credit granted under the Economic Stimulus Plan. But nearly half said they didn't know about the credit and 29.3 percent said it wasn't large enough for them to act right now. It seemed potential homebuyers with higher incomes are more interested in the tax credit than those in lower income brackets, as 43.4 percent of first-time buyers earning $50,000 or more say they plan to use the tax credit.
Move Inc. said the overall economy is by far the most pressing issue on the domestic agenda in the opinion of Americans, according to their findings. Opinion is split, however, over whether the government is doing enough to stabilize the housing market, with 46.2 percent indicating "yes" and 43.8 percent indicating "no."
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.
Three more banks closed Friday, bringing the total number of banks closed in 2008 thus far to twenty, according to reports by the Federal Deposit Insurance Corp.
Ringing in at number eighteen, the FDIC approved Friday the payout of the insured deposits of FirstCity Bank. The Stockbridge, Georgia bank was closed by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver.
The FDIC will provide payment to insured depositors by mailing checks for their insured funds on Monday, the FDIC said. Direct deposits from the federal government, such as Social Security and Veterans' payments, will be transferred to SunTrust Bank.
As of March 18, 2009, FirstCity had total assets of $297 million and total deposits of $278 million. At the time of closing, the bank had approximately $778,000 in deposits that exceeded the insurance limits; although, the estimate is likely to change once the FDIC obtains additional information from customers. The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $100 million.
Paola, Kansas-based Teambank, was also closed Friday. The Office of the Comptroller of the Currency shut down the bank and appointed the FDIC as receiver. The FDIC then entered into a purchase and assumption agreement with Great Southern Bank, out of Springfield, Missouri, to assume all of the deposits of Teambank. The 17 offices of Teambank reopened as branches of Great Southern Bank Saturday.
As of year-end 2008, Teambank had total assets of $669.8 million and total deposits of $492.8 million. Great Southern will assume $474 million in deposits and the FDIC will pay out $18.8 million directly to the broker. In addition to assuming all of the deposits of the failed bank, Great Southern Bank agreed to purchase approximately $656.5 million in assets at a discount of $100 million, and pay a 1 percent premium on deposits. The FDIC will retain the remaining assets for later disposition.
The FDIC and Great Southern Bank entered into a loss-share transaction, in which the FDIC will share 80/20 percent in the losses with Great Southern Bank on approximately $450 million in assets covered under the agreement. The FDIC estimates that the cost to the Deposit Insurance Fund will be $98 million.
Teambank was affiliated with Colorado National Bank, Colorado Springs, which was also closed Friday by the Office of the Comptroller of the Currency and handed over to the FDIC. The FDIC entered into an agreement with Amarillo, Texas-based Herring Bank, to assume all of Colorado National's deposits. The four offices of Colorado National reopened as branches of Herring Bank on Saturday.
Colorado National had total assets of $123.5 million and total deposits of $82.7 million at the end of 2008. Herring Bank has agreed to purchase approximately $117.3 million in assets at a discount of $4.2 million, and pay a discount of 1.27 percent on deposits. The FDIC will retain the remaining assets for later bestowal.
The FDIC and Herring Bank also entered into a loss-share transaction on approximately $62 million in assets covered under the agreement. The loss-sharing arrangement is projected to maximize returns on the covered assets and minimize disruptions for loan customers. The FDIC is likely to take a $9 million dollar hit on Herring's closing.
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.
Existing-home sales jumped in February, reversing losses in January, according to the National Association of Realtors. Even so, sales activity remains relatively soft, NAR said, reflecting additional layoffs and apprehensive buyers.
Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.1 percent to a seasonally adjusted annual rate of 4.72 million units in February from 4.49 million units in January, which is 4.6 percent below the 4.95 million-unit level in February 2008.
Lawrence Yun, NAR chief economist, said first-time buyers accounted for half of all home sales last month, with activity concentrated in lower price ranges. “Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February,” he said. “Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.”
The national median existing-home price for all housing types was $165,400 in February, down 15.5 percent from a year ago when the median was $195,800, according to NAR. Although, California's median listing price actually started to rise in February for the first time in three years, showing a stronger than expected improvement in the West.
Single-family home sales rose 4.4 percent to a seasonally adjusted annual rate of 4.23 million in February, but are 3.6 percent below the 4.39 million-unit pace at the same time last year. Existing condominium and co-op sales increased 11.4 percent to a seasonally adjusted annual rate of 490,000 units in February. The median existing condo price was $172,200, which is 18.7 percent lower than last year at the same time.
Regionally, existing-home sales in the Northeast climbed 15.6 percent to an annual pace of 740,000 in February, 14.9 percent below February 2008. Existing-home sales in the Midwest increased 1.0 percent to 1.04 million. In the South, existing-home sales rose 6.1 percent to an annual pace of 1.74 million in February, while sales in the West increased 2.6 percent to an annual rate of 1.20 million in February — and remain a whopping 30.4 percent higher than a year ago.
The median price in the Northeast was $251,200, down 4.8 percent from a year ago. The median price was 131,000 in the Midwest, $146,700 in the South, and $204,600 in the West, which is 30.3 percent below February 2008.
Total housing inventory at the end of February rose 5.2 percent to 3.80 million existing homes available for sale, which represents a 9.7-month supply at the current sales pace, unchanged from January. In the six months prior to February, the total number of homes for sale had steadily declined from a record level last July, according to the Associations findings.
Despite the welcomed boost in sales, and the fact that seasonal adjustment factors are more volatile in winter months, sales rates over the past few months still show dampened activity, NAR's report concluded.
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.
Dallas-based MRG Document Technologies announced Monday it had formed an alliance with business information solutions provider Kroll Factual Data. MRG, a mortgage technology service provider to banks, credit unions and other lenders, said the alliance will help its lenders identify fraudulent activity and implement the required identity theft prevention programs through MRG's MIRACLE Online service. The company said its lenders need not set up any additional service other than MIRACLE Online to start taking advantage of the benefits of the Kroll alliance.
"Compliance with federal and state lending regulations is of utmost importance in today's mortgage industry, and lenders need technology partners who can help them meet the demands of the changing regulatory landscape," said MRG senior mortgage consultant Mike O'Leary. For more information, visit www.mrgdocs.com.
Streamlined deposit compliance through Expere IE
Minneapolis-based Wolters Kluwer Financial Services announced Wednesday the release of deposit compliance content within its Expere Integrated Enterprise (Expere IE) technology platform, which will now help financial institutions to document transactions related to mortgage and home equity loans. Expere IE can be integrated with other providers' technology platforms and will allow financial institutions to maintain one compliance document library as opposed to multiple libraries, said Wolters Kluwer's vice president and general manager of banking content, Lisa Fraga.
“That means every time a regulatory compliance change occurs and documents need to be updated, Expere IE will allow the institution to do so much more quickly and cost-effectively,” Fraga said. “It also means they don’t have to invest the time and effort into creating a whole new document library every time they want to begin offering a new product or enter into a new market.” For more information, visit www.wolterskluwerfs.com.
Property Fraud Prevention tracks real-time fraud
Minneapolis-based Property Fraud Prevention LLC on March 12 announced the rolling out of its new PFP Reports software system, which allows lenders and title companies to track real-time activity by running reports that can reveal property fraud schemes occurring at any time in the loan process. The data gathered by the reports is stored in a secure database that subscribers can access without invading each others' databases. The reports potentially can reveal fraud schemes before fraudulent loans are funded; they can identify multiple companies processing separate loans on the same property, duplicate title orders, under-qualified or previously rejected buyers, a single property being sold to multiple buyers, buyers attempting to attain multiple loans and dramatic increases in appraised value. For more information, visit www.propertyfraudprevention.com.
Foreclosed home auctioneer wins bid for domain name
Irvine, Calif.-based REDC, the large real estate auctioneer, announced Wednesday the change of its consumer Web site for lender-foreclosed homes from www.USHomeAuction.com to www.Auction.com. The auctioneer said it had purchased the domain name Auction.com for $1.7 million. "I've wanted this domain for years and I'm thrilled that we were able to acquire this coveted top level domain," chairman Robert Friedman said. "This is a domain we should have had from the beginning…." For more information, visit www.Auction.com.
Response Analytics simplifies modifications
Scottsdale, Ariz.-based Repsonse Analytics Inc. announced Tuesday a new software that will simplify the administration of loan modifications required under the new Making Home Affordable plan unveiled March 4. The financial services optimization company said its software solution comes ready with all eligibility requirements and modification rules inherent in the plan and will help mortgage servicers and insurers streamline the required modifications. "This solution addresses the complexity inherent in the MHA program, providing the necessary speed and flexibility servicers and investors require," said CEO Brent Lippman. For more information, visit www.responseanalytics.com.
Mortgage Cooperative adds administrative providers
Lenders One Mortgage Cooperative on Tuesday touted the addition of two preferred venders to its network: Chase Paymentech and Sam Black Consulting Services. A business unit of JPMorgan Chase & Co. (JPM: 37.21 -0.75%), Chase Paymentech will provide payment processing methods to Lenders One's 135 member lenders, while Sam Black Consulting will assist members with employee assessment tools, sales skills training and customer service training. For more information, visit www.lendersone.com.
BlitzDocs makes FHA submissions one click away
Xerox Mortgage Services announced last week its BlitzDocs Collaboration Suite now offers a "one-click" solution to mortgage lenders submitting closed loan packages to the Federal Housing Administration. The system will allow for "turning loans around faster and easier" through a secure online transmission system that will deliver electric loan documents directly to the Federal Housing Administration, Xerox Mortgage Services said. The company's e-Mortgage Suite also works in concert with the new system by offering a secure online mortgage loan completion service that eliminates the need for signed hard copies of loan documents.
“Today, 30 to 40 percent of new loans are FHA loans,” said Greg Smith, vice president of Xerox Mortgage Services. “Xerox Mortgage Services’ new FHA connector builds on the promise of allowing BlitzDocs’ customers to remain paperless from origination through investor delivery." For more information, visit www.xerox-xms.com.
MCS is government's property preservation provider of choice
Tampa, Fla.-based Mortgage Contracting Services announced Thursday it had been awarded a contract with U.S. General Services Administration and will perform property preservation work for the government. The property preservation and inspection services provider said it would be a "labor-intensive" undertaking and is required to provide documentation supporting its "fiscal responsibility and capacity."
"As the need for pre-foreclosure and REO property preservation continues to grow, MCS wants to be in a position to do as much work as possible to prevent neighborhood blight," said CEO Allan Martin. For more information, visit www.mcsnow.com.
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.
As expected, the U.S. Treasury released details Monday morning before market open of the latest approach to clear toxic loans and securities off of bank's balance sheets. Saying that "the financial system is still working against economic recovery," the Treasury said it will earmark up to $100 billion in funds from the Troubled Asset Relief Program, hoping to attract capital from private investors in order to generate $500 billion in purchasing power to buy legacy assets.
The 'three-pronged' approach put together by Treasury secretary Timothy Geithner has two parts. The first will see the Federal Deposit Insurance Corp. provide a guarantee for debt financing issued by the public-private investment funds to fund so-called 'legacy loan' purchases, while the Federal Reserve will further expand the Term Asset-Backed Securities Facility to to include non-agency RMBS that were originally rated AAA, and outstanding CMBS and ABS that are currently rated AAA.
Read the Treasury white paper outlining the public-private partnership plan.
The $500 billion program could expand to $1 trillion over time, the Treasury said.
The program — whether whole loans or securities — involves significant exposure for the U.S. taxpayer. In the case of whole loans, investors take an equity position in most cases below 10 percent of the investment pool; the example provided by the Treasury shows private investors retaining just $6 in exposure out of an $84 bid on $100 in par value. Likewise, in the case of securities, for every $100 put up by an investor to make a purchase, the government will put up as much as an additional $300 in equity interest, according to a Treasury fact sheet.
"Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Geithner wrote in an op-ed published by the Wall Street Journal. "The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury."
Price discovery
The plan seems to face one key hurdle that bedeviled Geithner's predecessor Henry Paulson: price discovery. Geithner is hanging his hopes on the ability of the private market to properly price the assets — the problem, of course, is that the market already has, according to most investors HousingWire spoke with. But market prices don't just reflect the value of an asset; they also tend to reflect the cost of capital needed to finance the purchase of an asset, distressed or otherwise.
The real effect of Geithner's plan is to reduce the cost of capital to investors, sources told HW on Monday — a gambit that hopes such a reduction in capital costs, along with a de facto transfer of downside risks to the government's balance sheet, can entice would-be buyers to increase their bids to a level banks would be willing to sell at. From that perspective, some investors expressed hope.
"It might be enough," said one investor, who runs a distressed hedge fund in the mortgage space. "We'll see."
"The benefits to us are incredible," said another, who runs a mid-sized fund that specializes in purchasing non-performing mortgages. "Today there is no reasonable financing available for acquistions of these portfolios, either from the sellers themselves, or other institutions."
Geithner does face some problems from would-be investors, however, according to the Wall Street Journal; investors are "leery of working with the government for fear the rules will change midstream," according to the news daily. The legislation that established TARP put some strict restrictions on firms using government money, restrictions that private capital is likely far more leery of given the bonus debacle over at American International Group, Inc. (AIG: 25.25 +0.44%).
The plan's reliance on existing TARP funding also recognizes a key political hurdle as well; the Obama administration likely doesn't have the ability to approach Congress for further funding for Wall Street. Pundits have suggested this reality forced the Treasury to recruit the Fed — whose balance sheet is effectively unlimited — and the FDIC, which some media reports have suggested is an uneasy partner in the new government program.
Regardless, for Geithner, this plan represents a likely last stand for the embattled Treasury chief, who has had a rocky start and already has seen investors strongly question his ability to manage this crisis; more than 70 positions within Treasury remain yet unfilled, a critical shortfall in human capital that critics say is hampering the government's ability to manage the worst financial crisis in seven decades.
President Barack Obama said on CBS's "60 Minutes" Sunday that Geithner's job was safe.
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.
