Archive for June, 2009
The administration faces a tough task following its proposal for sweeping regulatory reform.
In the first of what will undoubtedly become a series of hearings, Treasury Department secretary Tim Geithner testified today before a US Senate banking committee, pleading the case for passage of the legislation and defending specific initiatives within the brief 85-page "white sheet" on the reform.
"The critical test of our reforms will be whether we make this system strong enough to withstand the stress of future recessions and the failure of large institutions," he said, according to prepared remarks. "That's our basic objective; we want to make it safe for failure."
Geithner backed one of the most significant proposals, the consolidation of consumer protection powers from multiple existing agencies into one Consumer Financial Protection Agency that will look out for the interests of consumers in regards to what financial products are sold and how they are sold. He said the formation of this agency will ensure transparency, fairness financial soundness of loan and credit producst sold to consumers, not only for their own good but for the good of the whole system.
Geithner also defended a proposal within the plan that has already seen criticism among industry players. He said the Federal Reserve is best equipped to play an emergency response role in financial crises seen among the largest, most complex and interconnected institutions and therefore must be allowed the broader authority posed in the plan.
Increased authority for the Fed is already a key point of contention and will likely see more discussion as the Senate banking hearing unfolds.
But strengthening the Fed should be done cautiously, according to John Taylor, president and CEO of the National Community Reinvestment Coalition (NCRC), a consumer group devoted to the creation of affordable housing and promotion of access to banking services for working US families.
"The regulatory failure of the Federal Reserve was the most significant of all the agencies," Taylor said in a statement. "[The Fed] had the power to regulate unfair and deceptive practices, and with that power wipe away much of the reckless and irresponsible lending that led to the subprime crisis, but they chose not to do so for years."
"Countless warning from consumer advocates over a period of years fell on deaf ears," Taylor added. "The agency often acted as if their primary duty was to the banks, not to the taxpayer."
But another proposal within the plan, increased regulation of mortgage products, does look out for the taxpayer and the everyday homeowner, according to other groups. An industry group, the Mortgage Bankers Association, issued a statement supporting the reform proposal and the mortgage banking regulation.
MBA chairman David Kittle called the proposal a "launching point" for discussion of a much-needed regulator for non-depository independent mortgage banks and mortgage brokers.
"[A]ll participants in the mortgage origination process should have a financial interest in making sure a borrower has a sustainable mortgage payment, without putting certain business models at a competitive disadvantage,” Kittle said.
Write to Diana Golobay.
As the administration prepared to officially announce its proposed financial regulation overhaul, one credit rating agency had a critical eye trained on 22 US banks.
Standard & Poor's on Wednesday lowered ratings on 18 banks and revised its outlooks on four others, illustrating expectations of fallout over increased regulatory oversight and lower profitability from volatile financial markets.
"We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions," said Rodrigo Quintanilla, an S&P credit analyst, in the media statement. "Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality. Such a transition period justifies lower ratings as industry players implement changes."
The rating agency lowered BB&T's (MSDXP: 26.9501 -2.28%) counterparty credit rating to single-A from single-A plus and revised the outlook from watch negative to stable. It lowered Capital One Finance (COF: 46.05 +0.96%) to triple-B from triple-B plus, pushed Citizens Republic Bancorp (CRBC: 12.97 +2.05%) to double-B minus from triple-B minus and downgraded Comerica (COM: 0.00 N/A) to single-A minus from single-A.
S&P slashed Fifth Third Bancorp (FITB: 13.23 +1.15%) to triple-B from single-A minus, lowered Huntington Bancshares (HBAN: 5.70 +1.06%) to double-B plus from triple-B and lowered US Bancorp (USB: 27.86 +0.25%) to single-A plus from double-A. It also lowered Wells Fargo's (WFC: 29.60 +1.89%) rating to double-A minus from double-A and raised its outlook on PNC Financial Services Group (PNC: 59.08 +0.31%) to stable from negative watch.
"We believe some firms may be better able to weather the risks ahead than others," Quintanilla added. "In the long term, we could foresee ourselves raising ratings if lower earnings and reduced risk are accompanied by stronger risk-adjusted capital and effective governance."
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.
Moody's Investors Service on Wednesday downgraded 37 tranches of '07-vintage residential mortgage-backed securities (RMBS) issued by Credit Suisse and worth a combined $761m.
Increasing delinquencies, slower prepayments and mounting losses in underlying collateral drove the downgrades, Moody's said in a statement. The rating agency recently adjusted its loss expectation on ALt-A pools as a result of continuing deterioration of the housing market, and many loans backing the collateral in the Credit Suisse transactions are Alt-A mortgages.
Of 31 "Aaa" tranches, Moody's dropped three to "Aa3" and one to "A1," and slashed one to "Baa3," two to "Ba2," 20 to "B3" and four to "Caa1." All of these were previously placed under review for possible downgrade in October except for one of the tranches slashed to "B3," which had only been assigned its "Aaa" rating in March 2007.
The other six tranches involved in the actions slipped from "Aa1"; Moody's downgraded one to "B3," one to "Caa1" and four to "Ca." All six of these had been placed under review for possible downgrade in October.
The rating agency said it would continue its ongoing review of the tranches' expected losses as the performance of underlying Alt-A mortgages changes.
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.
Thump, thump. Thump, thump. Listen closely, and you just might hear a faint heartbeat in the jumbo mortgage market in Southern California, almost two years after the market for higher-end homes lost its pulse amid the implosion of the non-conforming mortgage market.
Shifting sales activity away from a heavily-discounted glut of foreclosures in the Southland and a re-emergence of at least some sales activity among homes in the $500,000-plus range helped push the median price of a Southern California home upward in May for the first time since July 2007, according to data released Wednesday by San Diego-based MDA DataQuick.
SoCal home sales volume rose for the 11th consecutive month in May, the highest total for May since 2006, as foreclosures continued to fuel the market for sales. MDA DataQuick said that a total of 20,775 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month. That was up 1.3 percent from 20,514 in April and up 22.8 percent from 16,917 a year ago.
Before calling a bottom in SoCal, however, MDA DataQuick cautioned that sales volume for May was still 21.2 percent below the average May sales total since 1988, when the company's statistics begin. And homes sold in May that had been foreclosed on in the prior 12 months still accounted for 50.2 of all Southland resales, the company noted. That was down from 53.5 percent in April and from a peak of 56.7 percent in February, but still represents half of all sales activity in the region.
The median price paid for all new and resale houses and condos sold in the six-county Southland last month was $249,000, up 0.8 percent from $247,000 in April — but down 32.7 percent from $370,000 a year ago. While the median price hadn’t risen from one month to the next since July 2007, last month’s median was the second-lowest for any month since it was $242,000 in February 2002.
Prices in SoCal now stand 50.7 percent below the peak $505,000 median reached in spring and summer of 2007.
Prices were bound to slow their freefall at some point, clearly. The remarkably sharp declines in the Southland’s median sale price over the past year have been exacerbated by a shift toward an above-average number of sales occurring in lower-cost inland markets rife with discounted foreclosures, MDA DataQuick officials said. The shift in sales mix away from REO and foreclosed inventory helped push median prices upwards in SoCal — a trend that may prove temporary, in light of the various foreclosure moratoria that went into effect at the end of last year.
“We appear to be in the early stages of the market gradually tilting back toward a more normal balance of sales across the home price spectrum. As more sellers get realistic, more buyers get off the fence and more lenders offer reasonable terms for high-end purchase financing, we’ll see a more normal share of sales in the more established, higher-cost areas that have been nearly comatose,” said John Walsh, MDA DataQuick president.
“Let’s not forget we’re into the traditional home buying season right now,” he continued, “meaning more people are purchasing for all of the normal reasons, such as a new job or to get settled before school starts. Many are concerned with finding the right home in the right area, not just the most deeply discounted home.”
Investors continue to make their presence felt in SoCal, as well, according to DataQuick statistics. Absentee buyers, including investors who will have their property tax bills sent to a different address, bought 19.4 percent of the Southland homes sold last month. That’s up from 16.9 percent a year ago, and 18.6 percent in April. The monthly average since 2000: 15 percent.
Write to Paul Jackson.
The refinancing boomlet that hit the mortgage industry in the early part of 2009, thanks in large part to Federally-supported low primary mortgage rates, has helped at least one regional bank ramp up its mortgage lending in a big way. Bentonville, Ark.-based Arvest Bank said Wednesday that its Arvest Mortgage Company had originated more than $1bn through June 15 — nearly double the mortgage volume booked one year earlier.
The Southeastern bank, which operates 200+ branches in Arkansas, Oklahoma, southern Missouri and southeast Kansas, has touted the fact that it will not seek funding from the Treasury's TARP. It also retains servicing on nearly all of the residential loans it originates.
While mortgage refinancing accounted for seventy-five percent of that six-month volume total, the mix between refinances and new mortgage loan applications has changed significantly in the last three months, Arvest officials say.
Refinancing now accounts for just 60 percent of the overall origination mix at the bank — the bank says this shift is evidence of increased homebuying activity in the markets it serves, despite waning interest among consumers in refinancing existing mortgages.
"Record low interest rates and more affordable housing contributed to the substantial increase in our mortgage numbers, but we're beginning to see a shift in the type of loan applications we're receiving, from refinances to new mortgage loans. We are also encouraged that the first-time homebuyer tax credit is stimulating that interest," Todd White, Arvest Mortgage senior vice president, said.
White said Arvest is pushing its message of localized loan servicing out to consumers aggressively — a point of differentiation he says makes the bank able to connect with consumer's needs.
"As more and more people realize that Arvest retains servicing on 99 percent of the loans we make," he said, "they appreciate the benefits that come with local service and having a bank that will be with them from the application process on their very first home to their last payment."
Arvest's banking operations hold total assets of over $9.7 billion, and the company employs nearly 4,500.
Write to Paul Jackson.
The Federal Reserve Bank of New York on Tuesday selected New York City firm Trepp as a collateral manager on the Term Asset-Backed Securities Loan Facilitiy (TALF), a program designed to put billions of dollars into the hands of institutional investors to buy up new asset-backed securities within certain categories, in turn encouraging more lending and securitization, which regulators say will keep credit flowing.
The commercial mortgage-backed securities (CMBS) and commercial real estate information provider will assist the NY Fed by providing valuation, modeling, analytics and reporting, as well as advising services. Trepp said it will not set policies on the Fed's participation in the program or make decisions on accepting or rejecting a CMBS as collateral for a TALF loan.
Instead, Trepp will use the analytics and forecasting services of its subcontractor and sister company, Property and Portfolio Research, to serve in an advising role.
"This contract recognizes Trepp's ability to provide in-depth information and analysis on CMBS," said CEO Annemarie DiCola in a media statement. "As Collateral Monitor, we look forward to working closely with the Federal Reserve Bank of New York to facilitate the success of TALF."
Write to Diana Golobay.
President Barack Obama in a speech today unveils his administration's proposals for sweeping regulatory reform including allowing increased authority for the Federal Reserve, dismantling the Office of Thrift Supervision and regulating certain aspects of mortgage lending.
The proposed regulatory overhaul aims to keep financial institutions honest, transparent and healthy while protecting consumers and the national economy.
"That's our goal," he says, according to prepared remarks. "To restore markets in which we reward hard work and responsibility, not recklessness and greed — in which honest, vigorous competition in the system is prized, and those who game the system are thwarted."
He proposes the creation of new agency to look out for consumers, impose regulations on what kinds of loan products can be offered and how they're presented. A regulator keeping an eye on the mortgage lending space would be able to hold mortgage brokers to higher standards, stamp out exotic mortgages with hidden, exploding costs, enforce reasonable disclosure of terms, and hold non-bank originators to the same standards.
The proposed overhaul includes sweeping changes to promote free and fair markets and close gaps and overlaps in the regulatory system within and between nations. These changes would bring the operation of financial firms within regulation, dismantle the OTS and require hedge fund advisers to register with the Securities Exchange Commission. They would also mean raised capital requirements among financial firms, regulation of credit default swaps and other derivatives and a requirement that loan originators retain an economic interest in the loans they sell.
The administration also proposes granting the Fed new authority to regulate bank holding companies and firms that pose systemic risk and to require these institutions to adhere to stronger capital and liquidity requirements. The proposals inlcude the creation of an oversight council composed of regulators from across the markets that will coordinate to identify gaps in regulation. The overhaul creates a "resolution authority" similar to what the Federal Deposit Insurance Corp. exercises in the insured banking sector.
Financial regulators missed the forest for the trees, so to speak, in focusing on individual firms outside the context of the whole system. As a result, some institutions grew so large and significant as to signal far-reaching shockwaves through the system if one firm were to fail. Obama proposes requiring regulators to consider the stability of the whole financial system when addressing individual institutions.
"We should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution or to support the company with taxpayer money," Obama says. "That is unacceptable. There is too much at stake."
Write to Diana Golobay.
The Attorney General of Connecticut, Richard Blumenthal, is asking Fannie Mae and Freddie Mac to turn over documents regarding the foreclosure and default servicing practices of the GSEs in the state, according to letters he sent to the firms earlier this month.
The letters are dated June 4 and give a deadline of compliance by June 19. Other than that, at this moment, none of the parties involved are commenting on the requests for information.
Assistant Attorney General Jon Blake, who is working the case, could only acknowledge and validate the inquiry at this point, but would not say if the firms were expected to meet the deadline.
In the letters, Blumenthal notes that his office is receiving complaints that "consumers are not receiving proper foreclosure notices and are being charged excessive fees in connection with foreclosure actions."
Blumenthal states these complaints may reveal a system of favoritism, where only a few select law firms and state troopers are assigned to deal with actions the GSEs are taking on the borrowers.
A source for HousingWire however, states that this "concentration of resources" is a common practice in default and foreclosure servicing and not unique to GSEs.
Fannie, Freddie, and the Federal Housing Finance Agency (which regulates the GSEs, and is currently their conservator) are not commenting on the state AG's inquiry at this time.
The AG requested by the aforementioned deadline 10 points of data, including disclosure of the law firms employed in the last two years, as well as the criteria for selecting these entities and copies of all contracts with law firms the GSEs work with to manage borrower defaults. The office also want all fees paid to these business identified and itemized before being sent over. The AG also requested disclosure of services provided to lenders. Additionally, Blumenthal wants to see all complaints Fannie and Freddie recently received concerning foreclosure actions.
Write to Jacob Gaffney.
Rep. Scott Garrett (R-NJ) and Rep. Paul Kanjorski (D-PA) on Tuesday introduced the Equal Treatment for Covered Bonds Act, which urges the same legal protections and considerations for covered bonds as for other financial products.
The legislation aims to make greater stability and permanence for covered bonds as a liquidity-providing investment tool. Covered bonds are distinct from securitization in many ways. The dual recourse feature, where issuers cover loses on the bonds, is more expensive and the use of bullet redemptions are not historically to the taste of American investors.
That may be changing as covered bonds are considered a safer bet than investing in securitization. The rating of covered bonds is pegged to the bank, therefore, as long as the banks are 'good for it,' the covered bonds will not be downgraded.
“Covered bonds have the potential to aid in returning liquidity to the mortgage market and reduce borrowing costs for homeowners by providing an alternative to securitization,” Garret said in a media statement Tuesday. “If we want to truly level the playing field and foster the growth of covered bonds in the US, we need to develop a legislative structure for covered bonds.”
Kanjorski agreed, adding the bill may open a new structured finance market in the US, where there are currently only two dollar-denominated covered bond platforms. One of which, it must be noted, is being book-runned at one of JP Morgan's City of London offices.
"As a result of the financial crisis, the private securitization markets have dried up, and we must explore new ways to oil the gears and get consumer credit flowing again,” he said.
The bill amends the Federal Deposit Insurance Act to provide the same treatment for covered bonds as other qualified financial contracts, defines a covered bond as a non-deposit recourse debt obligation of an insured depository institution and allows a minimum one-year maturation term for a covered bond and sets no maximum term.
The bill also allows for a wide variety of asset classes to be eligible as collateral in the cover pool, adds a clause ensuring a bank failure will not impair the covered bonds' value and provides for joint rule-making authority to major regulators for any new regulations affecting covered bonds.
Government regulation of covered bonds would not be a situation unique to the US.
Covered bonds are hot in Europe. In fact, the European Central Bank developed a plan to buy up as much as €60bn (US$83.19bn) of covered bonds, in a deal that is proving successful, sources say.
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.
Gordon Jardin, CEO of Franklin Credit Management recently stopped by HousingWire's offices.
Here is a partial transcript of that conversation:
HW: How has Franklin Credit reinvented itself?
Gordon: "Franklin hasn't as much reinvented itself as it has returned to its roots. Our expertise for over 20 years has been in valuing and servicing mortgage loans of distressed borrowers. It is here where we will focus and add value. Sub servicing requires collection and recovery activities and reporting that are unique for each client. Current market conditions have dictated an increased emphasis on loss mitigation, skip tracing, bankruptcy and home retention initiatives.
This is what we do and do well.
We are also adding value by introducing new initiatives where and when necessary. One example is our face-to-face home solutions division, a nationwide service which will seek to talk directly to borrowers at their residencies when it has become impossible to reach them via phone or mail.
"While our infrastructure and operational procedures were already in place, marketing these services to third parties has presented some challenges due to the balance sheet dominated by mortgage assets we had purchased prior in a different economic environment. Now that we have walled off our servicing and services operation, clients can again feel comfortable with our financial picture.
"We also offer due diligence and forensic underwriting services to review seasoned loan products. We reconstruct borrower profiles from information provided at origination, pay history, servicing collector comments, current credit reports and current values of collateral securing the loans, supplemented by various Internet and third-party vendor search providers to determine the prospects for future payments and recovery expectations. Our clients are potential purchasers and current holders of loans as well as holders who want forensic reviews for fraud and underwriting and broker misrepresentation purposes."
HW: So, what's different about the firm now as compared to pre-credit crisis?
Gordon: "Franklin Credit Management no longer has mortgage assets on its balance sheet. We are a premier third-party servicer and service provider for companies that own or are looking to purchase or sell distressed or discounted mortgage loans and REO.
"It is possible that Franklin will participate in a joint venture created to purchase mortgage assets given the right circumstances and partners. What we bring to such a partnership is the ability to assess risk in a mortgage portfolio and design and implement servicing strategies to maximize returns for investors. We believe an independent portfolio review is valuable to each investor, seller or holder. Our independence means we can give an honest assessment, whether good or bad."
HW: One of your methods for management involves physically traveling to distressed properties for intel. What other methods do you employ that make you stand out in the current market?
Gordon: "Good question. I think each servicer has to challenge every technique they use because this market is so different from even a couple years ago. We tested our face-to-face concept for over a year once it became apparent that borrowers were becoming very reluctant to answer their phones. We want to help our borrowers remain in their homes, or when that is not possible, we want to give them a financial head start and a financial cushion as they move to a new residence. We will not stop looking for new ways to assist our borrowers."
HW: What advice would you have for firms looking to weather the storm?
Gordon: "My advice would be to figure out what your firm does well, where you add value, and focus on that area of your operation. Too often businesses try to do all things even though they know they are weak in some areas, rather than use partner companies who have core competencies in those areas."
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