Archive for June, 2009
As the Federal Reserve prepared its first monthly report on liquidity programs, the central bank continued buying up agency mortgage-backed securities (MBS) in an effort to promote the mortgage market from the secondary side down.
The Fed bought up $54.67bn of MBS in the week ending June 10, up nearly 100% from last week's $27.68bn in gross purchases. The Fed bought $12.35bn of MBS from government-sponsored enterprise Freddie Mac (FRE: 0.00 N/A), $40.69bn from Fannie Mae (FNM: 0.00 N/A) and $1.63bn from Ginnie Mae.
After selling $31.67bn — more than half of the gross purchases — the Fed's net purchases totaled $23.01bn. The week's purchases favored 30-year MBS at 5.5% coupons, with $30.66 settling this month. The Fed also bought $15.8bn of 30-year 4.5% coupons with $8bn to settle in June and the remaining $7.8bn settling in July.
The Fed listed sales of $29.87bn in 30-year MBS at 5.5% coupons, which settle in July. The dollar amount and settlement month disparity between weekly purchases and sales might make weekly transactions appear unbalanced, but statements out of the Fed suggest a longer-term outlook puts the figures into perspective.
“The Federal Reserve determined that supporting the mortgage-backed security ‘dollar roll’ market promotes the goals of the mortgage-backed securities purchase program,” Fed officials said earlier this week in the report on its liquidity programs.
Dollar rolls are where the seller — here the agencies — sells the MBS now under an agreement to buy it back in the future at a lower price.
“Dollar roll transactions,” the Fed added, “which consist of a purchase of securities combined with an agreement to sell securities in the future, provide short-term financing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also has some uninvested cash associated with the mortgage-backed securities purchase program.”
Despite the disparity between sales and purchases at times, the Fed's balance sheet tends to adjust. This week, for example, the MBS sales were more than half the dollar amount of purchases. The Fed's balance sheet is down $40.53bn from last week, regardless of the differing settlement months of the sales and purchases.
The balance sheet now totals $2.02trn in the week ending June 10. It's up $1.5trn from the year-ago week ending June 11, 2008. The Fed holds a total $427.42bn of MBS.
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.
Perhaps the best story this week (outside of the coverage you'll see here at HW, of course) involves a mortgage-related trading strategy pulled off successfully by Austin-based Amherst Securities Group LP, a fixed-income specialist focusing on mortgage-related investments. Imagine taking the big boys at JP Morgan Chase & Co. (JPM: 37.21 -0.75%) and Goldman Sachs Group Inc. (GS: 111.77 +2.96%) for a ride, using the most simple of economic observations: when too many people go left, it can become very profitable to turn to the right.
According to the Wall Street Journal, which broke the story Thursday, that's exactly what Austin, Tex.-based Amherst Securities recently did.
In this case, clients of the Austin-based firm had sold credit default swaps — essentially, an insurance contract — on bonds backed by pools of subprime mortgages in California. The original loan pool in question here was $335m of mostly 2005-vintage loans, and that pool had fallen to just $29m in par by March 2009, thanks to (what else?) a surge of borrower defaults. Trading desks at JPM and elsewhere, looking to hedge what they saw as certain losses, bought CDS contracts from Amherst's clients for 80 to 90 cents on the dollar. The idea among Wall Street traders at the time was simple: with half of the $29m remaining already in default, they were sure to gain an even-dollar payout from the CDS seller when the bonds fell even further. Great hedge, right?
Not exactly. The value of the payouts, called the notional value — the CDS contracts outstanding — ended up far exceeding the actual value of the assets the CDS contracts were written against. The WSJ reports that on that little $29m subprime mortgage pool, more than $130m in CDS were outstanding at one point in time, as everyone looked to hedge their positions.
So little Amherst went ahead and asked the servicer on the loans — in this case, Aurora Loan Services — to purchase the remaining $29m in loans and pay off existing bondholders at par. (Servicers can purchase out a pool of loans when UPB falls to 10% of the original pool). The stunning, yet elegantly simple, result is thus: every single one of the CDS contracts outstanding became instantly worthless.
Amherst executives told the WSJ that they merely saw an opportunity to protect client interests, and jumped on it after getting a thumbs up from legal. But, according to the Journal, JPM and Goldman aren't exactly content to sit on their laurels about the issue, and have brought their concerns to both SIFMA and the American Securitization Forum. And if you think their concerns are limited merely to a couple of hundred of millions of dollars worth of exposure, it's time you started to think again.
Wall Street's lead dogs likely now see just how badly they might have been had, because nearly every major player in the mortgage bond market has run headlong into CDS in the past 18 months in an effort to hedge their quickly-souring subprime mortgage bond exposures (and Alt-A, too, among other asset classes). There are CDS contracts out there that involve pools of mortgages far greater than $29m in par — and you'd better believe JPM, Goldman and others know it, and are now suddenly all-too-aware of their potentially precarious position.
The Journal reports that Deutsche Bank (DB: 44.44 +2.40%), for example, has sent a list to clients of other mortgage pools that are potentially exposed to the same sort of trade. You can bet there are other lists circulating elsewhere, and now being feverishly compiled.
Write to Paul Jackson.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
One in every 398 US household units received a foreclosure filing in May, according to data from RealtyTrac released Thursday.
That's a 6% decrease in foreclosure activity — which includes default notices, scheduled auctions and bank repossessions — from April, but still up nearly 18% from last year at this time.
May foreclosure activity is actually the third highest month on record, and marks the third straight month where the total number of properties with foreclosure filings exceeded 300,000, RealtyTrac says.
"While defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions were up two percent thanks largely to substantial increases in several states, including Michigan, Arizona, Washington, Nevada, Oregon and New York," says James Saccacio, CEO of RealtyTrac.
Nevada continued to post the highest overall foreclosure rate, with one in every 64 housing units receiving a foreclosure filing during the month — one in every 64! California recorded the nation's second highest state foreclosure rate, despite a 4% decrease in foreclosure activity from the prior month. And Florida came in third, with one in every 148 housing units receiving a foreclosure filing. Rounding out the top ten states are Arizona, Michigan, Ohio, Illinois, Georgia, Texas and Virginia.
Foreclosure activity remains somewhat concentrated, with these 10 states accounting for almost 77% of total US foreclosure activity.
As for metropolitan areas, Nevada's Las Vegas has been slammed by the foreclosure crisis, as filings were reported on 14,861 of its properties in May. That's one in every 54 housing units. Of the top ten hardest hit metropolitan areas, California cities accounted for six and Florida accounted for three.
In a separate report today, the Federal Reserve reported the net worth of households fell by a whopping $1.3trn during first-quarter 2009, further inhibiting homeowners attempting to stay afloat on their mortgages.
Write to Kelly Curran.
[Update 1 clarifies details around Punch Taverns' effort to pursue a REIT structure.]
Newly-organized real estate investment trust (REIT) Two Harbors Investment Corp. today unveiled plans to acquire public investment vehicle Capitol Acquisition Corp. (CLA: 0.00 N/A).
The new REIT will focus on residential mortgage-backed securities (RMBS) and will operate under the management of PRCM Advisers, a subsidiary of Pine River Capital Management. The transaction's completion is expected by the end of the third quarter.
"We are excited to partner with Pine River and their veteran team with a proven track record of investing in residential mortgage backed securities," says Capitol CEO Mark Ein — who becomes vice chairman of the new REIT — in a media statement today.
"We believe that Two Harbors," he adds, "as a newly formed REIT, created at or near book value with no legacy assets, will be well positioned to generate attractive risk-adjusted returns."
REITS in the US RMBS space might be expanding and merging like Two Harbors' situation, but such is not the global case. The commercial REITs space in England, for example, is tight as commercial firms face liquidity constraints.
Punch Taverns, a group that owns thousands of pubs, said in September 2008 it received clearance to pursue a REIT structure, but it would prioritize maintaining its balance sheets while any reorganizational steps are considered. This year, it means selling assets.
Punch Taverns on Tuesday agreed to sell 11 of its pubs to Greene King for £30.4m ($50.37m). The transaction should close July 1, putting the pubs — located in central London, southeast of England and Scotland — in Greene King's hands.
“This transaction is in line with our stated strategy of increasing free cash flow and reducing the overall level of our debt, whilst seeking to maintain investment in our high-quality pub estate," chief executive of Punch Taverns Giles Thorley said in a media statement on the disposition.
Punch Taverns in late March sold six pubs to Fuller's for $29.77m.
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.
Economic conditions remained sluggish from mid-April through May, according to reports today from the US Federal Reserve in its periodic "Beige Book" report.
However, some Federal Reserve districts say the economy's downward spiral is showing signs of moderating. And though they do not see a "substantial increase" in economic activity through the end of the year, the Fed's forward-looking expectations have improved.
A number of Districts — eight out of 12 — reported an uptick in home sales, both pending and existing. And many said new home construction appeared to have stabilized at very low levels. Home inventories were trending down in big metros such as Philadelphia, Richmond, Atlanta, Kansas City, and Dallas, according to the anecdotal report, which is published eight times a year.
The US Census Bureau and the Department of Housing and Urban Development (HUD) said at the end of May new home sales increased 0.3% over the month as inventories steadily decreased. January ended with 12.4 months of supply at the sales rate recorded that month, HUD said, while February ended with 10.8 months of supply, and March closed with a 10.6-month supply.
Still, many markets vital to the economy's well-being, are struggling. Manufacturing activity declined or remained at a low levels across most Districts, the Beige Book reported.
Retail spending remained conservative as consumers focused on purchasing the necessities and opted out of most luxury goods — including those associated with luxury traveling, which sent travel and tourism activity downward. New car purchases remained depressed as well — surprise! — with several Districts indicating that tight credit conditions were hampering auto sales.
And as residential markets showed signs of improvement, commercial properties proved to be a drag on the real estate market. Vacancy rates for commercial properties were on the rise in many parts of the country during April and May, as developers found financing for new commercial projects increasingly difficult to obtain, due to tight credit conditions.
Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories.
The labor market, a closely monitored factor for determining an economic turn-around, continued to report weak conditions across the country. Wages generally remaining flat or falling, the Fed said. Places such as Kansas City, Dallas, and San Francisco reported that businesses were cutting or freezing wages.
Write to Kelly Curran.
The Fed continues to purchase large volumes of mortgage-backed securities (MBS) from government-sponsored enterprises.
The move is a response to improved financial market conditions in recent weeks, culminating with the release of the stress test results calculated under the Supervisory Capital Assessment Program, according to the Federal Reserve, which then reduced efforts to extend credit under its liquidity programs.
The Fed now holds $428bn in MBS on its books as of May 27 since it started buying the securities the first week of the year. The Fed lists its purchases with settlement dates up to several months in the future, staggering the effect on its balance sheet, according to the Fed's first monthly report on credit and liquidity programs and its balance sheet, released Wednesday.
"The Federal Reserve determined that supporting the mortgage-backed security 'dollar roll' market promotes the goals of the mortgage-backed securities purchase program," Fed officials said in the report.
"Dollar roll transactions," the Fed added, "which consist of a purchase of securities combined with an agreement to sell securities in the future, provide short-term financing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also has some uninvested cash associated with the mortgage-backed securities purchase program."
According to one Bank of America (BAC: 7.29 -0.14%) analyst, the Fed's MBS purchasing power still has room to grow.
Under a scenario with higher rates (10-year Treasury yield at 4.5%), mortgage spreads would widen unless the Fed purchases more than 50% of all new MBS issuance, says the analyst. By the same token, under a scenario with lower rates (10-year Treasury yield at 3.25%), agency MBS would perform "extremely well" if the Fed were to buy 50% of all new agency MBS issuance.
Such analysts adjust outlooks as goals and expectations of the Fed's MBS purchase program change. The BofA analyst pointed toward comments from Federal Reserve Bank of New York president William Dudley that indicate the Fed's ultimate goal of the program.
"With MBS, our goal is to be a significant portion, say more than 50%, but less than 100%," Dudley told the Economist.com. "To the extent yields back up and mortgage origination slows, we might want to slow our purchase programme because we don't want to be 150% of the private market. We would displace all the private-sector players…and we'd become the market."
The statement marks a departure from a wide-held belief among analysts that the Fed's goal was only to keep mortgage rates low for most of 2009, says the BofA analyst. It also illustrates the Fed, while actively engaged in buying up billions of dollars in agency MBS, has no intentions to take over the market.
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.
For the third consecutive week, mortgage rates climbed, driven again by an increase in bond yields, according to Freddie Mac's (FRE: 0.00 N/A) Primary Mortgage Market Survey.
30-year fixed-rate mortgages increased from 5.29% to an average 5.59% with an average 0.7 point for the week ending June 11, marking the highest rate recorded since the end of November, 2008.
The 15-year fixed-rate mortgage averaged 5.06 this week, up from last week's 4.79% average, but still well below the 5.93% average last year at this time.
Freddie Mac's vice president and chief economist says higher mortgage rates are slowing refinancing activity; however, the demand for home purchases hasn't eased.
Adjustable-rate mortgages are also on the rise, now sitting above five percent. Five-year ARMs averaged 5.17% this week, compared to last week's 4.85% average. One-year ARMs rose from 4.81% to 5.04% this week.
A little over two weeks ago, lots of borrowers could get mortgages at less than 5 percent by paying a discount point — prepaid interest equal to 1 percent of the loan amount. Now some borrowers have to pay discount points just to get below 6 percent, explains Bankrate's Holden Lewis.
For all those borrowers banking on rates to fall even farther than they did during April and May, may have missed their window of opportunity.
Bankrate.com, which conducts a separate rates survey, posted findings similar to Freddie Mac's, showing a sharp uptick in rates. The benchmark 30-year fixed-rate mortgage rose 30 basis points to 5.95%, according to Bankrate.com, while the 15-year fixed-rate rose 31 basis points to 5.37%.
Write to Kelly Curran.
The Southern region of the United States posted the strongest quarter-over-quarter price returns in a new quarterly housing market report launched Wednesday by Clear Capital.
The bad news: The region still posted an overall decline of 1.7%. But the (relatively) good news is the South posted the smallest overall decline of the four regions, according to Clear Capital's report.
The South also posted half the decline of the national rate, 3.4%.
The data and solution provider for real estate asset valuation, investment and risk assessment launched the new report as a way to track pricing conditions in real time. The July report considers data compiled through May 25.
Birmingham and Cleveland had the top rolling quarter-over quarter price gains of 8.9% and 6.7%, respectively, while Phoenix and Las Vegas posted the greatest losses at -17% and -15.5%.
All US regions showed a seasonal improvement in the rate of price declines during the spring selling season, with the Midwest and the South regions posting the greatest lift after a weak home price season in the winter.
Certain local markets showed isolated success stories. A segment of the Cleveland market, for example, posted the first quarter-over-quarter gain since its downturn started in mid-2005. This signals "very specific investment activity" in the area, according to Clear Capital.
"It's a relief to see some local stabilization this month in at least a few of the worst hit markets," said Clear Capital president Kevin Marshall in the report. "We expect to see this type of recovery on a neighborhood-by-neighborhood basis as savvy investors are taking a more surgical approach to due diligence and looking at micro-markets very carefully."
Write to Diana Golobay.
The Federal Housing Administration (FHA) program that insures lenders against default-related losses on Wednesday saw another three approved lenders get the boot.
The US Department of Housing and Urban Development suspended three FHA lenders suspected of "serious violations" of HUD's regulations, marking the first action to clean up the ranks of FHA lenders since taking the ax to more than 100 approvals in late May.
The three lenders — Golden First Mortgage Corp., Great County Mortgage Bankers and Beneficial Mortgage Corp. — are now prohibited from originating FHA-insured mortgages until HUD completes its investigation. HUD took the action "to protect the financial soundness of FHA's insurance fund," according to a media statement.
HUD alleges that Golden First failed to notify it of an investigation by the Office of Thrift Supervision (OTS) into the business practices of Golden First's president. HUD took action against the San Juan-based Beneficial, claiming it failed to notify HUD or FHA of sanctions imposed by the Puerto Rico Financial Institutions' Commissioner's Office related to mortgage servicing practices.
Great Country faces suspension over a body of evidence gathered by HUD that the lender violated multiple HUD/FHA requirements, including failure to implement a quality control plan, to disclose business affiliations with real estate and title service providers and to verify credit information in 55 FHA mortgage loans reviewed by HUD.
HUD's actions against the three lenders represent the latest effort to reform mortgage lending. The suspensions come in the wake of news out of the department that consumers filed a record 10,552 fair housing discrimination complaints in fiscal year 2008. In light of new legislation, HUD might bring more action against lenders in such cases.
FHA also enjoys a bit more authority since President Obama signed the Helping Families Save Their Homes Act, which gives the program the enforcement tools to better police FHA lenders suspected of misleading tactics or fraudulent practices.
Write to Diana Golobay.
Despite an uptick in the state of the residential market, the commercial sector — which includes the multifamily market — continues to wane.
The combination of lower rental rates and rising vacancy rates is causing values to decrease, resulting in losses for holders of multifamily debt and equity.
"The situation will continue to worsen long after the recession ends and is predicted by some to persist until 2015," said Caldera Asset Management.
In response to the growing need for experts who specialize in the complex multifamily market, Caldera Asset Management launched an Independent Asset Management Company for multifamily lenders, owners and equity providers.
"Multifamily is a specialized asset class which requires extensive experience to successfully manage turnaround situations. Transactions are increasing in size, complexity and cost," says Mike Kelly, president and co-founder of Caldera Asset Management.
Kelly says in order for property lenders, owners and equity investors to make good decisions, they need to fully understand the issues with the underlying operations, sponsors, markets and financing options in such a fast-shifting environment.
Write to Kelly Curran.
