Archive for June, 2009
The standards for underwriting in the European residential market in regards to debt-to-income (DTI) ratios may lead to poorer performance among adjustable-rate mortgages.
This applies especially to any loans being approved in the current era of traditionally low interest rates on the continent, according to a report from Fitch Ratings.
DTI is a contentious sticking point among mortgage providers in the space. On the one side some banks say high DTIs are necessary to get first time buyers on the property ladder. Others, such as HousingWire's sources at lender Investec, say the risk is too great as job stability is virtually nonexistent in large swaths of Europe, primarily in the areas hardest hit by the recession.
With all things considered, Fitch assumes higher default probabilities for adjustable-rate loans originated during periods of low interest rates, thus the results of the current research.
The DTI is one a major drivers behind mortgage underwriting in Europe. with adjustable-rate loans, the DTI becomes more of a variable, according to each lender, as the applicant's debt service commitments on the requested loan are subject to changing interest rate levels.
Fitch's analysis reveals that the process of employing "forward-looking" DTI modeling is woefully inadequate at this stage.
"In those countries where the bulk of mortgage originations consisted of [adjustable-rate] products, such as Italy, Spain,Portugal and Greece, the limited use of forward-looking DTI ratios was one of the main factors that contributed to the wave of delinquencies and defaults experienced in 2007 and 2008 by [adjustable-rate] loans originated between 2003 and 2005," says Milan-based Michele Cuneo, a researcher on Fitch's European structured finance team.
As an example, Fitch states that, Euribor-linked (The European interbank rate) loans originated between 2003 and 2005 had an initial DTI ratio based on interest rates of around 2%.
As such, when Euribor moved to around 4% in 2007-2008, the affordability of these mortgages was significantly affected, especially for loans that were originally approved with high DTI ratios.
Write to Jacob Gaffney.
Mortgage services with any volume to manage in the Golden State face a new law today that restricts the foreclosure actions they can take on defaulted borrowers.
The California Foreclosure Prevention Act, signed in February, took effect Monday. The act forces a 90-day foreclosure moratorium on servicers that have not implemented sufficient loan modification programs.
Any servicer that pursues regular, legal foreclosure proceedings on a mortgage collateralized by a borrower's primary residence in California without such modification program in place is in violation of state law.
"California is facing an unprecedented threat to its state and local economies due to skyrocketing residential property foreclosure rates in California," the state legislature said, regarding the act. "Those high foreclosure rates have adversely affected property values in California, and will have even greater adverse consequences as foreclosure rates continue to rise."
State lawmakers' response to the situation comes in the form of a forced foreclosure freeze among servicers without a modification program, to give borrowers more time to pursue modifications. The act applies to loans on primary residencies recorded from Jan. 1, 2003 through Jan. 1, 2008. It remains in effect until Jan. 1, 2011.
To qualify for exemption from the mandatory freeze, the servicer's modification program must target California residents with the goal of a 38% housing-related debt-to-gross income ratio. The program must include some combination of the following: an interest rate reduction for at least five years, an extension of the amortization period, a deferral of some portion of the principal amount of the unpaid principal balance until maturity of the loan, a reduction of principal and/or compliance with a federally mandated loan modification program.
Critics of the act say the government intervention and forced modification spells trouble for first lien holders, who after the modification process get back a much riskier loan.
"Over time — a year or less — most of the mods will re-default but at this point, house prices are likely to be even lower," says Field Check Group's Mark Hanson. "And because the homeowner is essentially a renter, the asset itself will be in much worse condition and who knows what new laws will be in place to prevent the lien holder from getting paid in a year."
Write to Diana Golobay.
(Update 1; adds clarifications)
In what's affectionately being called "Obama Wednesday" in some quarters, details of what's being billed by a breathless press as "the most sweeping financial reform proposal since the 1930s" are not surprisingly already beginning to leak out. But what's being leaked thus far isn't really breathtaking, or even new-ish. The latest details, leaked via the U.S. Treasury early this week, show that part of the financial reform package will include a so-called 'skin-in-the-game' requirement for issuers in the structured assets space, including particularly mortgages.
The idea here is that issuers would be required to hold onto 5% of the risk of any asset-backed deal (mortgages, or otherwise); further, issuers would not be allowed to hedge their exposure on that particular piece of risk.
Never mind the odd business of suggesting some weird sort of approach to hedging here — effectively hedging against some risks, where regulators allow it, while leaving other risks exposed to the wilderness, to fend for themselves. (How that's supposed to be possible, I won't claim to know.) And never mind, too, the even odder business of suggesting that banks and other regulated financial institutions actually increase their exposure to risk by not hedging their positions. (Aren't banks already under duress for a lack of regulatory capital?)
None of that matters, because this is hardly a new idea; and the previous objections to the idea have already been put on the record. House Financial Services Committee chairman Barney Frank (D-MA) originally included the idea in recently-proposed legislation this past April that is among a spate of efforts from inside the Beltway designed to put the regulatory screws to a badly-misbehaving mortgage market — that legislation, HR 1728, or the Mortgage Reform and Anti-Predatory Lending Act, was itself a revamp of an earlier proposal put forth by Frank, Rep. Mel Watt (D-NC) and Rep. Brad Miller (D-NC) that had cleared the House in 2007 but stalled in the Senate.
So, let's at least step back, take a deep breath, and actually think about what's being proposed, based on the trial balloons out there in the press at the moment. The first thing that should be coming to any market participant's head when they hear about this so-called 'skin-in-the-game' rule is this: isn't skin in the game what has literally crippled once-proud institutions like Citigroup Inc. (C: 30.87 +1.61%)? Isn't skin in the game what put Lehman and Bear Stearns into history books as former Wall Street firms, too?
Show me some skin
Let's take a trip down Securitization 101 lane, both for a quick refresher and to drive home a point. Most structured securities — at least of the non-agency variety, for discussion's sake — make use of subordinated cash flows, or "tranching," as a means of internal credit enhancement. The idea is that the pooled cash flow from a bunch of mortgages, for example, can be split up any number of different ways such that junior bond positions absorb credit losses first, helping protect the cash flow allocated to senior bondholders, and allowing those senior and super senior bonds to attain that all-important AAA-rating from a rating authority. As a result, the capital structure of most private-party RMBS deals — think subprime and Alt-A here — include a so-called equity tranche (sometimes referred to as a residual, or junior subordinated note, depending on exactly what's being done).
Residuals are/were typically held by the issuing entity, designed as a sort of 'skin in the game' piece — and these so-called subordinate tranches typically commanded higher yield premiums, too, given their first-loss position in the capital structure (which in turn fueled the CDO craze, but we'll stay away from discussing the real roots of the credit crisis in too much depth here).
Regardless, the above overly simplistic discussion should make it amply clear that — if anything — the problems at Citibank and elsewhere aren't because the banks had too little skin in the game. It's because they had too much. Which brings us fill circle back to the leaked proposal at the Treasury, the one that would require issuing entities to hold 5 pct of a given deal (in the form of a residual, perhaps?): it doesn't really matter, and it certainly does little to change the outlook for securitization as an industry.
Baby, meet bathwater
Perhaps much more damning is the stance among some in the regulatory community that seem content to throw out the baby with the bathwater, damning securitization as a process for causing this mess. Remarks such as this, from a June 15 Washington Post op-ed penned by Timothy Geithner and Lawrence Summers, should scare anyone involved in the securitization industry:
In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.
The fact that this dreck is coming from the head of Treasury (and from Lawrence Summers, too) scares the living snot out of me, because it demonstrates a fundamental misunderstanding of securitization. A lack of some much-needed oversight into structured finance by federal officials is now being used as an excuse by those same officials to toss cold water on the entire concept?
Now, to be fair, I've seen nothing yet in the Geithner/Summers op-ed, or in the financial press, that suggests a plan to suck the atmosphere out of the securitized products market; the 5-percent rule is hardly Earth-shattering, for example, as we've already covered. But the idea that any of the proposals put forth from this point on will emanate from such a misguided ethic?
Scary as hell, for one thing, and also unlikely to either a) promote a market recovery or b) prevent such a mess from taking place again. If the goal is to help credit markets recover, a blanket damnation for securitization seems more to me like a nail in the coffin than a jumper cable.
And to be sure, there are more complex and fruitful debates that should be had over regulation and its place in and around securitized products: credit default swaps come immediately to mind here, as colleague Christopher Whalen over at Institutional Risk Analytics has long railed about. Such a debate is at least centered around the realization that the real problem facing many Wall Street firms isn't a lack of skin in the game — it's too much of it.
Paul Jackson is the editor-in-chief of Housingwire.com and HousingWire Magazine.
The Mortgage Bankers Association (MBA) on Monday declared its support for a Senate bill, S 1230 or the Homebuyer Tax Credit Act of 2009, which expands the current first-time home buyer tax credit from $8,000 to $15,000.
The bill also makes the tax credit available to anyone who purchases a principal residence in the year following the enactment of the bill. The MBA is already calling for monetization of the credit at the closing table on the grounds that more consumers will become home buyers if they don't have to struggle to put away a substantial down payment.
“The current $8,000 credit for first-time buyers has had a positive effect on the housing market this year," said MBA chairman David Kittle in a media statement. "Increasing the amount and expanding the benefit to include all home buyers will have an even larger impact in spurring the housing market and stabilizing the economy."
The percent of the purchase price eligible for the tax credit stays at 10% under the bill, but the broadening of the dollar limitation expands the potential for the tax credit to reach higher-end housing. The bill eliminates the earnings caps of $75,000 for an individual and $150,000 for a joint-filing couple.
Sen. Johnny Isakson, D-Ga., the bill's sponsor, says these targeted, demand-side solutions aim to increase consumer participation in the housing market, to stimulate natural home price recovery over foreclosure and short sales and to broaden the tax credit's reach across all tiers of home buyers.
“The first-time homebuyer tax credit has made a difference," Isakson said in a media statement. "First-time home buyers used it and the market stabilized, but we don't have a recession in first-time home buyers. We have a recession in the move-up market."
“One of the biggest problems facing the American people today," he added, "is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can.”
The bill went to a Senate finance committee last week, where it awaits further action.
Critics of the bill and similar efforts to subsidize a housing market recovery argue that these incentives may only falsely exaggerate the current level of housing demand, making any stabilization seen an unreliable indicator of recovery. But the efforts are gaining traction among lawmakers, with a separate House bill also calling for a broadening of the credit.
HR 2801, or the Home Ownership Moves the Economy Act, was introduced late last week and calls for the current $8,000 tax credit to apply to all who purchase a primary residence through the end of 2010. The House bill also awaits further action.
Write to Diana Golobay.
As delinquency and default continue to cycle through the securitization market,Fitch Ratings is taking action on 146 classes of Bayview Financial Trading Group's mortgage pass-through trust transactions.
Ratings downgrades accounted for 44% — or 64 — of the 146 actions. Fitch also affirmed 70 pass-through trust transactions, while 12 ended up on rating watch negative.
Bayview Financial either originated or acquired all of the mortgage loans in the transactions. The mortgage loans consist of fixed- and adjustable-rate, fully amortizing and balloon loans secured by senior liens on single-family, commercial, multifamily and mixed-use properties, according to Fitch.
Of the '05 vintages, some faced downgrades from single- and double-A to double-and triple-B status. Fitch slashed two '05-vintage pass-through trust transactions previously placed on rating watch negative to double-C from triple-B and to single-D from double-B.
Of the '06 vintages, many of the pass-throughs involved moved from double-A to triple-B, and from triple-B to triple-C. Several '07 pass-throughs fell all the way to triple-C from triple-A.
There was a bit of good news, as the ratings agency said in a media statement that Bayview's earlier vintage transactions perform better than later vintages. For example, Fitch confirmed ratings of all of the '03 and '04 vintage classes, whereas affirmations account for 61%, 26% and 17% of the '05, '06 and '07 vintages, respectively.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
The founder and CEO of private servicer Safeguard Properties received the 2009 Ernst & Young Northeast Ohio Region Entrepreneur of the Year Award.
The recognition is for demonstrating excellence and success in the areas of innovation, financial performance and personal commitment to their businesses and communities.
Robert Klein received the award on June 10th at a dedicated evening gala awards ceremony at Playhouse Square in Cleveland, Ohio.
As the 23rd annual award winner, Klein was selected by a panel of independent judges, including leaders from civic organizations, academic institutions and local business owners, many of whom are previous winners of the award.
Safeguard conducts more than 1 million property inspections and maintenance orders on defaulted and foreclosed properties nationally for mortgage service companies, banks, financial institutions and major investors.
Summer comes early tomorrow as the Northeast will see its housing market heat up over a series of real estate-owned (REO) auctions.
Auctioneer Hudson & Marshall of Texas is poised to launch a series of REO auctions throughout the Northeast. More than 200 bank-owned homes valued from $20,000 to more than $500,000 apiece sit on the auction line-up from June 16th through June 21st.
So-called "distressed" or foreclosed homes typically fetch around 20% less than non-foreclosure sales, pushing down home prices and — say some of HousingWire's sources — helping the housing market along toward bottom.
And with owner-occupant buyers — as opposed to investors — accounting for around 57% of individuals attending Hudson & Marshall's (H&M's) bank-owned auctions, it's clear REO auctions are a hot tool for getting homeowners back in vacant, foreclosed homes.
"The rise in foreclosures across the county has pushed average home prices back to 2002 levels," said Dave Webb, principal at H&M, in a media statement. "Foreclosure purchases are rising because people like buying property at a discount and in a good or bad, this will never change."
Of course, with the discount comes a disclaimer: H&M says all auctioned properties are buyer-beware, meaning some conditional deterioration may have occurred and the auctioneer cannot vouch for move-in conditions. But for prospective buyers that view the property beforehand and know what they're getting into, H&M offers an online pre-sale option through which bidders can submit offers before the property goes to the auction floor.
As much as 30% to 40% of H&M's homes sell through this channel before auction, Webb tells HousingWire in an earlier interview.
Write to Diana Golobay.
For an in-depth look into the REO auction space, see HousingWire coverage in the upcoming July magazine issue. Subscribe here to get the story first.
Mortgage giant Freddie Mac (FRE: 0.00 N/A) today opened a tender offer for the purchase of a targeted group of euro reference note securities this week.
The four securities in question bear combined principal amounts outstanding of €8.13bn (US$11.19bn) of reference notes due within five years. The offer expires Friday at 12 p.m. EST.
Freddie will offer cash to buy back the securities from investors through Goldman Sachs International, the lead dealer manager on the offers, and managers Barclays Bank and Deutsche Bank.
Freddie several weeks ago bought back $18.04bn of its securities in attempt to reduce the GSE’s effective short-term debt and move toward larger, longer-term deals with lower rates.
"We’re buying back these contractually maturing securities, and over time we’ll be issuing longer maturities,” said Mohit Sudhakar, senior director of debt portfolio management, according to recent media reports. “It’s just a simple liability management trade.”
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Commercial mortgage-backed securities (CMBS) experienced a 2.07% delinquency rate in May as multifamily and retail properties showed weaker performance, driving loan defaults.
It marks the highest CMBS delinquency rate ever recorded by Fitch Ratings since beginning its loan delinquency index in 2001.
"Defaults on larger loans continue to drive delinquency increases because later vintage transactions have larger loans, many underwritten with now unrealized proforma income, as well as now-depleted debt service reserves and high leverage," says US CMBS group head Susan Merrick in a media statement today.
One of the largest delinquent loans included in the index, Mansions Multifamily Portfolio, was added in the month, accounting for some of the jump from 1.78% at the end of April. The portfolio, worth $160m, consists of four cross-collateralized and cross-defaulted loans, according to the rating agency.
Fitch says declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties are highly susceptible to default in CMBS during the current economic downturn, according to the rating agency.
Write to Diana Golobay.
For an in-depth look at CMBS, please see the July 2009 issue of HousingWire magazine.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Home sales remained weak in May even as prices declined, according to a survey of more than 300 home building executives conducted by John Burns Real Estate Consulting.
The survey represented 2,221 new home communities in 95 metro areas. The consulting firm says the month's commentary marks the most optimistic month in the survey's year-long history, as many builders believe the market is approaching bottom.
Average net sales per community, however, slipped to 1.6 nationally. Tax credit availability and competitive low-end pricing drove the sales, according to the survey. The home buyer tax credit monetization toward closing costs on FHA loans, announced by the US Department of Housing and Urban Development, may contribute to driving sales in coming reports, as 36% of respondents expect a boost of 11% to 25% more sales per month in response to the credit monetization.
New home starts remained pressured, with 69% of respondents reported having started between one and four homes in May, and 25% reporting no starts.
“Builder contacts in a few locations are telling us that traffic and sales are off in the first weeks of June, and they suspect the end of the spring selling season may be near,” says vice president Jody Kahn.
Summer months ahead are expected to bring "escalating" foreclosure and real estate-owned pressures, the research team notes. Pricing net of incentives continued to decline in May, though at a slower rate than before, indicating a trend toward flat rather than declining overall prices.
“We’re also being told more often that appraisals are not supporting the home price. That’s a significant additional challenge,” Kahn adds.
Write to Diana Golobay.
