Archive for March, 2009
My gut reaction to today's better-than-expected housing start figures? Indicative of supply inertia moreso than any real demand, esp. in terms of permits. At least one well-known analyst seems to have agreed with me:
So why are permits up? Well, says building analyst Ivy Zelman, "This is supply. It is not indicative of demand.” She notes that builders, and the banks funding them, have money in the ground already, in finished lots. “You have to put a house on it. Vertical construction continues even though demand is not strong.” If you don’t put a house on it, the land is a total loss. If you put a small, cheap house on it, maybe you can recoup at least the cost.
CNBC's Diana Olick has much more in her post that's worth reading on this. But the starts number here might not be all that it seems; be careful reading too much into it.
As largely expected, the Board of Directors of the Federal Deposit Insurance Corporation on Tuesday voted to extend the debt guarantee portion of the highly-successful Temporary Liquidity Guarantee Program from June 30, 2009 through October 31, 2009. The FDIC also said in a press statement that it would begin to impose a surcharge on debt issued with a maturity of one-year or more beginning in the second quarter, in an effort to gradually phase-out the program.
By making debt issuance under the TGLP more costly, the hope is that banks will choose to fund their operations through alternative means.
"The TLGP has been effective in improving short-term and intermediate-term funding for banking organizations, but liquidity in the financial markets has not returned to pre-crisis levels," said FDIC chairman Sheila Bair. "The extension will reduce the potential for market disruption when the TLGP ends and should provide a gradual phase-out period as institutions return to reliance on the private, non-guaranteed debt markets."
The surcharge for debt issued after April 1 runs from 10 basis points to as much as 50 basis points, depending on issuing date, maturity date and issuing entity, the FDIC said. Debt issued under the TGLP by a non-insured depository institution after June 30, for example, will carry the 50 basis point surcharge. Surcharges will be will be in addition to current fees for guaranteed debt and deposited into the Deposit Insurance Fund, instead of being set aside to cover potential TLG program losses, the FDIC said.
"The surcharges recognize that a relatively small portion of the industry is actively using the debt guarantee, but all insured depository institutions ultimately bear the risks associated with this program," Bair said. "Putting the surcharges in the DIF will bolster the reserves that support our regular insurance program."
Bair also said that the surcharges "should enable the FDIC to meaningfully reduce the 20 basis point special assessment proposed by the board on February 27th." That special assessment has been met with stiff resistance from the banking lobby at the American Bankers Association.
Write to Paul Jackson at paul.jackson@housingwire.com.
All 12 Federal Home Loan Banks have now reported their earnings for the fourth quarter of 2008, and the results aren't exactly pretty: a combined net loss of $672 million for the quarter, compared to net earnings of $846 million in the year-ago period. The culprit? Private-label MBS, which many FHLBs used in recent year to juice reported yields; many of these securities, even AAA-rated material, have seen a significant drop in value as the nation's housing and credit mess has rolled onward.
When banks take loans from a Home Loan bank, besides paying interest, they also have to buy a percentage of FHLB-restricted and non-public stock, based on how much they borrowed and the credit quality of the collateral they posted. The system was set up as a way to basically help support the FHLBs’ capital as banks borrow against it. When a member first signs on, the Home Loan bank sets up a clearing account that works like a check book; when member banks borrow money, the FHLB takes cash out of this account and in return gives the borrowing bank stock that pays a dividend. As a bank pays off the loan, the FHLB credits back their cash account by repurchasing the stock.
But as the value of MBS holdings have plummeted, some Home Loan banks have said that they will not pay dividends and will stop buying back the excess FHLB stock members hold. HousingWire's Teri Buhl broke the story on this issue in early January. Read the coverage here.
Moody’s Investors Service has said that the Federal Home Loan Bank System’s $76.2 billion private-label MBS portfolio contained $13.5 billion in unrealized losses by the end of Q3; values have likely fallen further since that time. The FHLBs held total capital of $51.4 billion as of Dec. 31, in aggregate, according to their reported results.
Demand for FHLB advances has fallen, as the Home Loan banks have had to charge more to offer the advances and the Federal Deposit Insurance Corp. has said it will look to charge higher deposit insurance fees to those banks that rely heavily on the FHLB to meet funding needs. FHLB advances outstanding fell to $929 billion in Q4, after reaching above $1 trillion in Q3.
Write to Paul Jackson at paul.jackson@housingwire.com.
After dropping almost 17 percent in January, housing starts surged 22 percent in February to a seasonally-adjusted annual rate of 583,000 — although still 47.3 percent below the revised February 2008 rate — due in large part to the 82 percent increase in the construction of apartment buildings, the Commerce Department said Tuesday.
February's jump in housing starts marked the first increase in eight months and largest percentage gain in 19 years. "We're inclined to write this off as a weather-related fluke for now," wrote economists for Wrightson ICAP, according to a Market Watch report. "If the permits series can hold onto its gains in next month's March report, though, we'll take it as a sign that new construction has finally found a floor."
The number of single-family housing starts — which excludes apartment buildings — climbed 1.1 percent nationwide from January to February, reaching 357,000. The South lead the way, starting construction on 204,000 single-family homes, while the Northeast started just 37,000 homes. However, the Northeast saw the biggest jump in new home starts from January to February. The West was the only region that experienced a decline, dropping from 83,000 starts in January to 63,000 in February.
Building permits, which are less volatile than construction starts, rose 3 percent nationwide in February to a 547,000 annual rate. Permits for single-family homes increased 11 percent to a rate of 373,000 — which is actually the largest percentage gain in 18 years.
But despite February's gain, housing starts are down 47 percent from a year ago and 74 percent from the peak in early 2006. Permits are down 44 percent in the past year. As of March, builder confidence remained unchanged as economic woes continued to take their toll on potential buyers, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released Monday. The HMI held steady at 9 in March, marking a fifth consecutive month of single-digit readings.
“Home builders are hopeful that the recent economic stimulus package, and particularly the first-time home buyer tax credit that it included, will have a positive impact on consumer behavior and home sales as the prime home buying season gets underway,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “But it’s still too soon to tell how much of an impact that will be, especially as builders find potential buyers are reluctant because of uncertainty about their future job security and the overall economic outlook.”
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
Treasury secretary Tim Geithner on Saturday commended the Group of Twenty (G-20) global financial advisers for supporting the U.S. movement for increased emergency International Monetary Fund resources and expanded G-20 membership. The road to stabilizing the global economy still has a long way to go, according to Geithner, and global finance regulators must now turn their attention to stabilizing financial institutions and reforming the way globally significant banks do business. "Risk does not respect national borders," he said at the G-20 meeting in Horsham, England. "We must establish a much stronger form of oversight and clear rules of the game…. This will require comprehensive changes both at the national and international levels."
He used U.S. regulators as an example of model tactics others might follow, saying the U.S. will soon outline a plan to use "market mechanisms" to clean up bad assets and bring in private capital to bank balance sheets. The country will also soon release a comprehensive regulatory overhaul, a strategy Geithner said will show U.S. "commitment to encourage a race to the top rather than a race to the bottom; a global move to higher standards."
Geithner urged significant institutions to "come within a much stronger framework of oversight," and for markets "including the derivatives markets" to be subject to a set of standards and a framework for disclosure. He also said the United States should implement better stability going forward to ensure capital and accounting requirements are being upheld, and should "promote financial market integrity."
"Alongside these actions must come a clear commitment, when recovery is firmly established, to return to fiscal sustainability and to unwind the extraordinary policy actions needed to restore economic growth and solve the financial crisis," Geithner said.
The G-20 as a whole voiced its support for sweeping action to restore lending, and even released a framework of financial repair and recovery efforts it may use going forward. "We are committed to taking decisive action, where needed, and to use all available tools to restore the full functioning of financial markets, and in particular to underpin the flow of credit, both domestically and globally," the G-20 members said in a published statement. While they said the key priority now is to address the value of assets held on banks' balance sheets — which are significantly constraining banks' ability to lend — other actions to restore the financial markets include providing liquidity support, pledging government guarantees to financial institutions' liabilities, injecting capital and protecting savings and deposits.
G-20 members authored a list of a dozen principals they said should help guide efforts on impaired assets, beginning with the necessary international cooperation, "given the interconnectedness of the global financial system." They also advised any programs formed to combat impaired assets "should be appropriate to the characteristics of the banking, legislative and fiscal frameworks." Eligibility of assets for participation in the programs should remain flexible to account for differing conditions in balance sheets, countries of origin and the size and type of impaired asset in question.
"If risk is to be transferred from the banking sector to governments, it should be at a fair price, including through fees, with appropriate risk sharing, to limit the cost to the government as well as prevent moral hazard, provide the right incentives to the participating institutions and maintain a level playing field across financial institutions, both nationally and internationally," the G-20 members said. They also called for "full and transparent disclosure" of impairments on balance sheets and for transparent and consistent valuation methods across the various asset resolution programs.
When firms finally receive government support, their responsibility only increases, G-20 members said, calling for continued "business principles" after the receipt of aid, to ensure credit allocation isn't distorted. Any restructurings that occur within such institutions should focus on maximizing the effectiveness of government support and should be priced on expected losses and the bank's ability to withstand such losses. The interest of taxpayers must be foremost among banks that participate in asset support programs, and such banks must be subject to close monitoring, G-20 members said. Finally, government support should be temporary, defined with clear exit strategies and a working part of a "sustainable medium-term fiscal strategy."
"Government support is a privilege and must come with strong conditions, such as a commitment to continue providing credit to appropriately meet demands according to commercial criteria, improving governance, dividend policy restrictions and executive remuneration caps," the G-20 members said.
Read the G-20 plan for restoring lending.
Write to Diana Golobay at diana.golobay@housingwire.com.
Mortgage insurer PMI Group Inc. (PMI: 0.00 N/A) said Thursday in a filing with the Securities and Exchange Commission that it was exploring alternatives to enhance liquidity and capital, as the U.S. mortgage insurance business continues to be a significant drag on the company's assets.
"Unless we raise capital to support PMI, its policyholders position will likely continue to decline and its risk-to-capital ratio will likely increase beyond levels necessary to meet regulatory capital adequacy requirements," the company said in its regulatory filing. The insurer said it is looking at raising private capital, as well as considering potential options for government support under the U.S. Treasury’s Financial Stability Plan, which includes the Troubled Asset Relief Program. The company also said it was actively in discussions with creditors to amend terms to prevent its default.
Shares initially surged Monday on the news, but later retrenched much of their earlier gains; PMI shares were up 6.43 percent in early trading Tuesday morning, when this story was published, at $0.48/share.
The insurer said it had sufficient liquidity to repay $200 million outstanding under a revolving credit facility, but that it did not have sufficient liquidity to repay the facility and balances on its outstanding senior notes; an event of default involving the company's credit facility, if not cured within 30 days, would trigger repayment obligations on PMI's senior notes.
"We'll continue as an industry and as a company to look at various federal initiatives, a TARP type or TARP or TARP-like program, or looking at the public-private investment fund under the new initiatives that have been implemented by the administration," said L. Stephen Smith, PMI's CEO, in a conference call with analysts. "There are also a host of reinsurance-type proposals that we are looking at, either with private companies or potentially restructurings with the GSEs. So there are a number of initiatives that are in place that would come under the area of capital."
Earlier Monday, PMI reported a $181 million fourth quarter loss for 2008, compared with a third-quarter loss of $149.3 million. Read earlier coverage.
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.
We can't make this stuff up. Outrage over $165 million in bonus payments paid to traders for the bailed out American International Group, Inc. (AIG: 25.25 +0.44%) reached a boiling point with the White House and lawmakers yesterday — but the most over-the-top statement came courtesy of Sen. Charles Grassley (R-IA), who said that executives at the troubled insurer should resign or kill themselves.
In a comment aired on WMT, an Iowa radio station, Grassley said the following: “The first thing that would make me feel a little bit better towards them if they’d follow the Japanese model and come before the American people and take that deep bow and say 'I’m sorry,' and then either do one of two things: resign, or go commit suicide.”
Grassley's camp was sent into damage control mode immediately, with spokesperson Jill Gerber saying that “clearly he was speaking rhetorically," according to a report published at POLITICO.
“Point being, U.S. corporate executives are unapologetic about running their companies adrift, accepting billions of tax dollars to help, and then spending those tax dollars on travel, huge bonuses, etc,” she told the news service.
Of course, Grassley wasn't the only lawmaker or government official livid at news of the bonuses yesterday. President Obama weighed in on the matter, as well, with the White House saying it would seek to block the bonus payments. Obama himself said it was "hard to understand" how a company kept afloat at the expense of the U.S. taxpayer was doling out hundreds of millions in bonuses to employees.
"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" Obama said.
"In the last six months, AIG has received substantial sums from the U.S. Treasury, and I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole.
"I want — I want everybody to be clear that Secretary Geithner has been on the case."
Oh, good. Geithner's on the case. We can all rest easy now. Obama did note in his speech that he felt regulatory reach was lacking in the case of non-bank financial institutions, such as AIG, and that lack of reach was limited the U.S. government's power to control the insurer's actions.
AIG isn't alone here, according to a Friday report in the Wall Street Journal, which said that officials at Morgan Stanley (MS: 18.56 +2.26%) and Citigroup, Inc. (C: 30.87 +1.61%) were looking at ways to get around tough new federal regulations on compensation. Part of those plans include increasing base salaries for top executives, the newspaper reported.
"The trend is to increase the base pay in light of the reduced bonuses," Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, told the WSJ, who said the firms wouldn't be able to survive without paying top performers.
Bottom line: look for the debate over compensation at key financial firms to intensify in coming weeks.
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 National Association of Mortgage Brokers is mad as hell, and they're not going to take it anymore. At least, that's the message that NAMB president Marc Savitt sent last week in responding to comments made by JP Morgan Chase & Co. (JPM: 37.21 -0.75%) CEO Jamie Dimon after the well-known banking CEO appeared to denigrate broker-based mortgage originations in a speech last week.
In a speech before the U.S. Chamber of Commerce 3rd Annual Capital Markets Summit, Dimon stated that his failure to terminate the company’s mortgage broker business was the “biggest mistake” of his career. The third-party origination channel has largely been decimated by the current credit crisis, as numerous banking officials have suggested in the past 18 months that broker-originated loans have performed significantly worse than retail originations.
“It is disappointing to once again refute senseless attacks on the mortgage brokerage industry based on misinformation," said NAMB's Savitt. "Mr. Dimon’s comments clearly reflect his poor understanding of the mortgage industry and the role of the mortgage broker."
Savitt argued that "mortgage brokers do not create loan products, do not determine the automated underwriting systems used to qualify borrowers, do not underwrite the loans, and do not approve borrowers for those loans — Wall Street investment banks ‘who are now out of business’ did that.”
It's an argument sure to resonate with NAMB's constituency, but more than a few investors that spoke with HousingWire expressed strong criticism of Savitt's views. Some were in an audience a few weeks ago, when Savitt took his "brokers aren't to blame" message to an executive housing summit in Park City, Utah; that conference's audience was primarily investors.
"It's like he's saying [brokers] didn't do anything in the transaction, we just took orders," said one investor, a well-known hedge fund manager. "Well, then why were brokers getting paid at such a ridiculous level? They took no risk in the transaction, had no skin in the game. That's the problem."
Another source, a senior executive at a large bank that asked not to be named in this story, agreed. "I don't know that the TPO business is a bad one inherently, but it's one where compensation and incentives are often misaligned relative to any long-term interest on behalf of the borrower," he said. "Brokers have an inherent incentive to game the system, to find a way to get a loan approved, and he's saying it's our fault for a failure to catch that when it happens. That's only partly true."
For his part, Savitt argues that brokers "add value to the process for both consumers and lenders by serving areas that are typically underserved by banks and other lending institutions," and "by providing goods, facilities, and services with quantifiable value, including a customer base and goodwill."
For all the criticism the mortgage brokerage business has taken as of late, however, it's worth noting that not all banks have come out roaring in protest against the origination channel. Union Bank of California senior vice president Craig Cole, for example, told the Orange County Register recently that “most lenders mismanage the broker channel by not being disciplined about who they work with and offering products indiscriminately through that channel.”
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held various put option contracts on JPM when this story was published, and no other relevant positions. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
New home sales rose again in February, according to a survey released Monday by John Burns Real Estate Consulting, which accounted for 218 public and private builder executives around the country, representing over 1,600 new home communities in 80 major metropolitan areas.
“We have seen a very minor improvement in sales for the third month in a row, which is attributable to more than just seasonality” said John Burns, CEO of Irvine, Calif.-based John Burns Real Estate Consulting. “That being said, conditions are still horrible, especially for the builders whose financial condition won’t allow them to drop prices further. Most concerning is that the traffic of prospective buyers declined in February, and prices continue to fall in every region of the country.”
About half of builders expect the $8,000 Federal home buyer tax credit, a key measure in Obama's economic stimulus legislation, to provide a minor boost to sales, while the other half think there will be no increase in sales at all.“We interpret this feedback to mean that sales will not improve substantially,” said Burns. "It will take far more stimulus to get buyers to return to the market."
Starts per community averaged 1 unit nationally last month, versus a typical level of 4, and 41 percent of survey participants reported zero starts. Nonetheless, the survey still reported a minor improvement in new home sales, as the rating of expected sales also improved slightly.
The survey also found home prices net of incentives continued to decline as competition from foreclosures priced below the cost to build continued to exacerbate pricing problems. And Unsold, finished inventory showed little change. Communities had 4.2 units of standing inventory on average.
John Burns noted that “the NAHB’s Housing Market Index has not been showing the same improvement as we have, which is likely due to the fact that our survey participants are more inclined to still be building, while the typical NAHB member has shut down operations.”
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
Reported incidents of mortgage fraud in the U.S. are at an all-time high, increasing 26 percent from 2007 to 2008, according to a new report released Monday by the Mortgage Asset Research Institute (MARI). For the first time, Rhode Island lead the way, ranking first in the country for mortgage fraud with more than three times the expected amount in relation to its origination volume. Florida, which ranked first in 2007 and 2006, dropped to second place, followed by Illinois, Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.
“With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud,” said Denise James, LexisNexis Risk & Information Analytics Group director of Residential Mortgage Solutions. “Not only are we seeing traditional fraud trends, such as application fraud, but we are also seeing new types of emerging fraud
occur.”
The top fraud incident type in 2008, representing 61 percent of all reported frauds, was application fraud, according to MARI. Frauds related to tax returns and financial statements were the second most common incident type, accounting for 28 percent of reported frauds in 2008 — a whopping 60 percent increase from 2007 — followed by appraisal or valuations fraud. The report also recorded frauds related to verifications of deposit, verifications of employment, escrow or closing costs, and credit reports. Mortgage fraud also takes the form of foreclosure prevention schemes by supposedly "knowledgeable foreclosure specialists," identity theft against elderly and immigrants, and a so-called "builder bail-out" form of fraud in which investors are urged to buy into condo conversion or planned community development projects.
Despite the emerging types of fraud being reported and the record-setting figures reported for 2008, the cloud may have a silver lining: James, the report's co-author, said MARI believes some of the increase in incident reports resulted from a heightened awareness on the part of lenders. The second author of the MARI report, Jennifer Butts, encouraged further education on the part of lenders to catch even more incidents of fraud. Although it may lead to larger numbers of fraud suspicion reports, it would also effectively lead to a long-term reduction the the number of fraudulent mortgages.
"Lenders can start utilizing technology and information to verify the verify the very earliest stages to see if anything looks wrong," Butts said in a conference call about the report. "Maybe there needs to be some additional due diligence at the end" of the process, she said, although she acknowledged the mortgage industry is no different than other industries. "We're all about speediness," she said. "It lends an opportunity for insiders…who take advantage of that…. Fraud will most certainly erupt where there are vulnerabilities."
A chief means of combating this vulnerability is to simplify the mortgage process, since "fraud enjoys confusion" and there are plenty of opportunities for confusion amidst all the fine print and paperwork involved, said John Courson, president and chief executive officer of the Mortgage Bankers Association. He said instances of appraisal-related fraud should decline in coming months after the revised Home Valuation Code of Conduct goes into place May 1, enacting various "firewalls" on the process.
To a media inquiry following the conference call, Courson said "I must reject the premise that it was the loan that caused the fraud." Instead of blaming the various products available through mortgage bankers, he encouraged the creation of systems designed to "root out the fraud" during the application process, as well as increased funding to the FBI and Department of Justice specifically to pursue perpetrators of mortgage fraud, whether they be consumers intent on maintaining a certain standard of living regardless of ability to pay, or profit-seeking mortgage industry "insiders" looking to swindle the system.
“MARI data shows that mortgage fraud is more prevalent today than it was at the height of the boom in mortgage loan originations,” Courson said. “This report is essential reading for mortgage bankers who need to understand where mortgage fraud is coming from, what to watch for and how to protect our companies and communities.”
And it appears many subjects of mortgage fraud are likely to be exploiting not just the mortgage sector, but a range of financial institutions. The Financial Crimes Enforcement Network (FinCEN) released Thursday a report that revealed subjects reported for suspected mortgage loan fraud may also be involved in other financial crimes such as check fraud, money laundering, stock manipulation, structuring to avoid currency transaction reporting requirements and others.
From depository institution Suspicious Activity Reports (SARs), FinCEN identified approximately 156,000 mortgage fraud subjects, and found that 2,360 were reported for suspicious activity in 3,680 of the other SAR types.
“The interconnected nature of suspicious activity across multiple financial sectors covered by FinCEN’s Bank Secrecy Act regulations underscores the immense value of combining insights from the different sectors for the purpose of detecting and thwarting criminal activity” said FinCEN Director James H. Freis, Jr.
Kelly Curran contributed to this report.
Write to Diana Golobay at diana.golobay@housingwire.com and to Kelly Curran at kelly.curran@housingwire.com.
