Archive for August, 2009
The yield on many non-Agency residential mortgage-backed securities (RMBS) may be considerably lower than most market participants believe they are receiving, according to mortgage insight this week by Amherst Securities Group.
Amherst called for market participants to "do their homework" and sell securities mis-evaluated by the marketplace, according to the insight report authored by MBS strategists Laurie Goodman, Roger Ashworth, Brian Landy and Ke Yin.
"Despite the run-up in prices, many market participants remain very positive about the fundamental value in non-Agency securities. We believe that this positive stance stems from three common mistakes made in valuing these securities," the Amherst strategists said in the report. "Once those errors are corrected, the yield on many non-Agency RMBS securities is much less than most market participants are expecting."
The report adds, "That is not to say that these securities cannot run up in price further on technical grounds – but the upside is limited."
One of the major discrepancies between the way most investors gauge the market and the way Amherst looks at it, the group says, is a particular form of forecasting. Amherst studies the transition rate of loans moving into the non-performing bucket, instead of the liquidation rate of loans moving out of the non-performing bucket — the latter of which most investors look at.
"Many investors look at the remittance reports and use that monthly default rate as a proxy for how quickly the loans are going delinquent," the strategists say. "In point of fact – the monthly remittance reports measures how quickly the loans are being liquidated."
Transition rates, on the other hand, are often higher than the current liquidation rate and provide a more representative, long-term forecast. But Amherst does not disregard liquidation rates altogether, according to the insight report. Instead, Amherst keeps an eye on the overall liquidation pipeline, realizing that loans are spending longer periods in foreclosure/liquidation. Simply noting how long the liquidated loans remain in the pipeline presents a selection bias, Amherst says.
"In fact, looking at the length of time that loans spent in the liquidation pipeline will underestimate the pace of liquidations," the strategists say. "That’s because difficult-to-liquidate loans can spend a disproportionate amount of time in the liquidation pipeline. Thus, measuring the time liquidated loans spent in the pipeline contains a selection bias, which is exaggerated due to the growing pipeline."
Lastly, Amherst divides each deal into loan buckets to form a better understanding of how different types of loans will likely behave; loans with better credit characteristics usually prepay more quickly and default more slowly than "lesser quality" loans. Investors that assume all performing loans in a pool behave identically, Amherst says, will overstate the yield on most securities.
"Securities should not be valued in a generic fashion, with little attention to collateral characteristics or recent transition rates," the strategists say. "We have also seen some bonds where the collateral is much better than generic, yet the market is not rewarding that; so such bonds can often look attractive. For the most part, however, when evaluated properly, many securities in the non-Agency MBS market look fully priced, so this is an excellent time for investors to comb through holdings."
Write to Diana Golobay.
As the Federal Open Market Committee met this week and determined it would begin slowing down its Treasury purchases, an emerging consensus within the securitization industry is instead calling for an extension rather than an easing of a particular liquidity program.
The Federal Reserve initiated the Term Asset-Backed Loan Facility (TALF) program to stimulate lending by allowing private investors to purchase securities with a matching government investment. The reach of the program into commercial mortgage-backed securities (CMBS) aimed to aid price discovery and provide liquidity for the commercial mortgage market, which faces a credit crisis of its own.
The TALF facility set up for legacy CMBS received bids for nearly $670m in July, but the new-issue CMBS TALF facility experienced a slower start. Industry sources agree there will be a growing emphasis on whether the Fed will extend the legacy and new-issue CMBS TALF facilities into 2010.
Craig Lieberman, managing director at NewOak Capital and a co-head of commercial real estate there, says the new issue branch will need the extension.
"With no news of conduit origination and only single borrower deals in the pipeline, it appears to me that the deadline for TALF-eligible new issue CMBS is going to have to be extended in order for it to have any positive impact," Lieberman says in market commentary. "Given that most banks have yet to staff back up and the time that it takes to originate, underwrite and securitize a commercial mortgage loan, I think that it's unlikely that we'll see any traditional new issue fusion transaction come to market before next year."
He adds, "In order for the program to achieve its desired outcome, it should be extended into next year, and should probably be done sooner rather than later."
Lisa Pendergast, a managing director at Jefferies & Co., agrees it's ikely the Fed will extend the new issuance TALF program for CMBS, which is newer, hasn’t seen as much traction yet and addresses the credit fundamental concerns in the market. She tells HousingWire the legacy CMBS program, on the other hand, has already improved the standing of holders of CMBS securities as it has tightened spreads in the secondary CMBS market dramatically.
“The legacy program is creating transparency as to where new-issue CMBS bonds may clear," she says. "Moreover, it certainly stabilized spreads at tighter levels and more importantly helped the balance sheets of CMBS investors who bought these bonds new issue at substantially tighter spreads. In some cases, these bonds were purchased at par, fell to a dollar price of $50, and have rebounded since to $90."
The tightening in CMBS spreads has improved the performance of CMBS portfolios, which ultimately positions CMBS investors to better support a new-issue CMBS market when it arrives.
“The challenge to the Federal Reserve," Pendergast concludes, "is to try to stimulate the origination of commercial mortgages, keeping in mind the many challenges posed by the sector, including a lending environment in which credit fundamentals continue to deteriorate and the almost impossible task of efficiently hedging a pool of commercial mortgages during the aggregation stage prior to securitization."
Pendergast also says the Fed may see the way that spreads have tightened so far and decide it has done its job and should allocate resources to where there’s more pain to address, such as new commercial real estate lending. The risk in such a scenario, of course, is spreads may gap back out in the absence of a legacy CMBS TALF facility.
Write to Diana Golobay.
Jefferies and Co., the principal operating subsidiary of Jefferies Group (JEF: 15.81 -2.41%), made eight executive level personnel hires in the global investment bank’s mortgage-and asset-backed securities (MBS/ABS) group, part of Jeffries' fixed income division.
In Jeffries’ London office, Steven Hulett and Craig Tipping join as managing directors and co-heads of the group. Marc Allison, Dennis Hollands, Jason O'Brien, Marion Guilbert and Edward Tunstall also join the London office as senior vice presidents for MBS/ABS sales.
Hulett comes to Jeffries from the Royal Bank of Scotland (RBS: 8.71 +1.16%), where he was a managing director and co-head of the structured product and solutions credit group. Previously, Hulett was a managing director at Lehman Brothers.
Tipping joins from Nomura where he was an executive director and head of ABS trading, and previously worked at Lehman Brothers.
Allison, Hollands and O’Brien join Jeffries from the Royal Bank of Scotland, where they were directors in the structured product and solutions credit group. Guilbert was most recently at Lehman Brothers where she was a senior vice president for the securitized product sales group.
Tunstall joins from Nomura where he was a senior vice president for the securitized product sales group and previously worked at Lehman Brothers.
In Jeffries’ Tokoyo office, Hitoshi Masumizu joins as a managing director and head of Jefferies' Asia MBS/ABS group. He joins from Potomac Capital Limited, where he was head of investment banking, and previously worked at Countrywide Capital Markets Asia where he headed the financial product division for the Asia Pacific region.
Write to Austin Kilgore.
First American Flood Data Services launched FAFlood.com, a Web site geared to provide lenders with current flood information, products and services.
The site, provided through a member of The First American Corp. (FAF: 14.98 +0.07%), introduces streamlined navigation, event schedules, legislative updates and forthcoming map revisions to keep lenders up-to-date on developments within the flood risk management industry.
“The new site allows us to better communicate with our customers and provides an entry point to our online FloodCert application,” said Vicki Chenault, senior vice president and general manager of First American Flood Data Services.
“While FloodCert.com will continue to be our online application for managing flood determinations, FAFlood.com will act as our communications portal for product information, industry news and customer updates,” she added.
Write to Diana Golobay.
San Diego-based Cogent Road upgraded its Funding Suite credit report management software with “digital document delivery” — a streamlined method for distributing and organizing mortgage origination documents.
The software lets originators submit borrower documents to credit reporting agencies in four ways — PC upload, electronic faxing via a bar-coded fax cover sheet, virtual printing and scanning — eliminating the need for traditional fax machine-based communications.
By reducing the paper transactions with electronic communications, Cogent said the origination process is faster. After a loan is originated, the documents are securely stored for retrieval, when needed.
“Instead of originators wondering if their faxes were correctly sent or worrying that processors overlooked e-mail attachments, D3 gives originators more control during the credit verification process because necessary documents such as bankruptcy filings and summary judgments are electronically attached to the order automatically,” Cogent managing partner William DiPaolo said in a statement.
Write to Austin Kilgore.
[Update 1: Adds comments from former Verification Bureau president]
Jacksonville-Fla.-based Lender Processing Services (LPS: 16.78 +1.39%) acquired Verification Bureau, a developer of fraud prevention and Web-based automated income, identity and employment verification systems.
The Verification Bureau platform provides automated and paperless Internal Revenue Service (IRS) and Social Security Administration data verification.
Verification Bureau president and co-founder Esteban Reyes told HousingWire the deal took nearly a year to complete. Reyes will serve as managing director of Verification Bureau, which will be rebranded as the fraud solutions business unit of LPS’ applied analytics division, part of the firm’s portfolio solutions department.
Reyes declined to disclose financial terms of the deal, but said after building Verification Bureau from the group up since 2001, he and his two partners are excited about the prospect of their “baby” evolve and grow as an LPS unit.
LPS plans to integrate Verification Bureau into its existing collateral risk tools to increase its users ability to manage risk and avoid falling victim to mortgage fraud.
“Mortgage fraud is complex and evolves constantly,” Greg Whitworth, president of LPS’ Loan Portfolio Solutions division, said in a statement. “LPS is proud to expand its risk management offerings to include the most comprehensive, agile fraud solution set in the industry.”
Write to Austin Kilgore.
Existing home sales rose 3.8% in Q209, pushing the seasonally adjusted annual rate to 4.76m units from 4.58m units in Q109, although median prices remain well below last year's levels.
The current sales rate came in 2.9% below Q208's annualized rate of 4.9m units, according to the quarterly survey by the National Association of Realtors (NAR).
Interest rates near recent lows, combined with higher affordability as prices decline, will continue to drive sales, which present a "hopeful sign" to the broader economy, says Lawrence Yun, NAR's chief economist, in a statement on the survey.
“Given the need for related goods and services, each home sale pumps an additional $63,000 into the economy – that’s how the housing engine traditionally pulls us out of recession," Yun says. "In addition, sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy.”
Foreclosures and short sales accounted for 36% of Q209's transactions, which NAR said weighed down median prices. Foreclosures tend to sell at 15% to 20% below non-distressed sales.
Median single-family prices across the US ranged from $55,700 in the Saginaw-Saginaw Township North area of Michigan to $569,500 in Honolulu during Q209.
The median price in the Northeast slipped 9.7% to $246,000 from the year-ago quarter, while the median price in the Midwest slipped 8.6% from last year. The South saw a 10.3% dive from last year's median price, and the West plummeted 26.6%.
Write to Diana Golobay.
ING Group (ING: 9.23 +0.22%) posted a EUR 71m ($100.9m) profit in Q209 after three consecutive quarters of losses, despite a decrease in the value and performance of its residential mortgage-backed securities (RMBS) portfolio.
“While we begin to see signs of recovery in financial markets, economic conditions are expected to remain challenging for some time,” ING CEO Jan Hommen said in the company’s quarterly report.
ING said delinquencies in Alt-A mortgages underlying its mortgage portfolio increased from 17.2% to 20.9% in the quarter. Pre-payments and redemptions of the underlying mortgages drove ING’s Alt-A RMBS portfolio down from EUR 3.8n to EUR 3.1bn during Q209
For the Alt-A mortgages left in the RMBS portfolio, rising unemployment and the continued weakness of the US housing market created “significant impairments,” ING said. It has increased staff to handle loan modifications and restructurings and continues to adhere to strict underwriting policies, it added.
The share of ING’s US loans considered non-performing, or over 90 days past due, rose to 4.1% in Q209, up from 3.7% in Q109. Despite the increase, ING said its mortgage portfolio is performing better than its portfolio of prime adjustable rate mortgages (ARMs), which was 13.7% non-performing at the end of May 2009.
Gains in the insurance division and EUR 525m in cost cutting offset a loss in ING’s banking division. ING increased its projection for cost cutting to EUR 1.3bn from EUR 1bn.
Write to Austin Kilgore.
Disclaimer: The author held no relevant investments when this story was published.
FHA lender Taylor, Bean & Whitaker (TBW) might be done for, but its Ginnie Mae securities portfolio has already found a new servicer.
According to a US Department of Housing and Urban Development (HUD) spokesperson, Ginnie took back the securities portfolio, worth about $26.5bn, from TBW after HUD suspended its FHA approval.
Bank of America (BAC: 7.29 -0.14%) will service those loans within the securities as Ginnie Mae’s master sub-servicer because of a 2003 bidding process won by Countrywide, which merged with BofA in July of 2008. BofA will service that portfolio until the contract expires.
The assignment of TBW's portfolio to BofA as servicer comes as the latest blow to the Ocala, Fla.-based mortgage lender after it said on August 5 it would cease all origination operations in cooperation with HUD and Ginnie.
"Regrettably, TBW will not be able to close or fund any mortgage loans currently pending in its pipeline," the lender said in a statement. "TBW is cooperating with each of the agencies with respect to its servicing operations and expects to continue to service mortgage loans as it restructures its business in the wake of these events."
In the days after issuing the statement, however, it not only became clear BofA would take on the servicing responsibilities, but doubts also circulated the industry regarding TBW's solvency as an operating company.
In court papers filed August 6, TBW said that “bankruptcy filing was imminent,” according to industry reports. Lawyers from Steptoe & Johnson made the filing on TBW's behalf in hopes of halting HUD's and Ginnie's actions against it, halting all origination and underwriting of new FHA-insured mortgages.
Representatives for TBW and Steptoe & Johnson were not available for comment.
Write to Jon Prior.
[Update: 46% of pre-HAMP modifications done in the third quarter of 2008 were 60 or more days delinquent]
For several years Edward Fay, CEO and Founder of Fay Financial, recognized the deviation of affordability metrics in the US housing market relative to historical averages. Fay Financial was created in 2008 specifically to address the growing dislocation in the housing market.
For this episode of In This Corner, Ed discusses the Home Affordable Modification Program (HAMP) and how his firm tackles the obstacles in today's servicing industry.
HW: Is the Home Affordability Modification Program (HAMP) encouraging servicers to do the wrong thing?
Ed: "The government had to develop a modification program to allow safe harbor on mortgage-backed securities as their covenants restricted servicers’ ability to modify loans and opened them up to litigation risk from bondholders. For the remaining 40% of mortgages that are fully-owned by the lender, it’s just one of many tools that servicers should be using to prevent foreclosure.
"I don’t think that HAMP is encouraging servicers to do the wrong thing but it is discouraging them from considering other workout strategies. Because servicers usually have more flexibility with whole loans, there may often be other workout strategies that are better for both the borrower and lender. For example, using a full suite of workout strategies which include, among other things, temporary and permanent modifications we’ve been able to get 83% of the loans that were in foreclosure when we started servicing them out of foreclosure.
"Additionally, HAMP is a permanent modification when some borrowers may actually need a more aggressive but shorter-term restructure to make their payment affordable and keep them out of foreclosure. For example, payment forgiveness may be better solution for a borrower who is temporarily unemployed and more economical for the investor than a permanent modification."
HW: There was a time when the TARP transaction reports were a page long. Now, they bulge to twenty. Is the HAMP program growing too big too fast?
Ed: "I think we should be cautious about ramping up the program until we know that servicers are using it effectively and preventing foreclosure. In June, the OCC and OTS reported that 46% of pre-HAMP modifications done in the third quarter of 2008 were 60 or more days delinquent after six months. It shows there’s no silver bullet and that there’s still a lot of opportunity to design better workout strategies. Although we modify loans according to HAMP guidelines for our clients who need us to do so, we do not take government incentives. We want to have the flexibility to do other types of modifications when they’re in the best interest of the borrower and our clients. By retaining that flexibility, we’ve been able to keep our re-default rate under 10% and still generate excellent yields for the lender. I’m worried that servicers will be heavily focused on increasing the volume of HAMP modifications rather than focusing on finding a solution that’s mutually beneficial for the borrower and investor – not to mention the taxpayers who are paying the incentives."
HW: What adjustments would you like to see HAMP make in trying to increase the volume of processed loan modifications?
Ed: "We think adjustments should focus on improving the quality of modifications, not the quantity. Modifications should be based more on true home affordability and maximizing loan value, both of which will help benefit the lender and the borrower more evenly. Under the current program, servicers adjust the loan terms so that the monthly payment is as close to 31% of the borrower’s gross monthly income (i.e. front-end DTI) without going under. This approach does not always account work. Consider the following example: Two individuals with the same monthly gross income and expenses except that one of them has additional child care, transportation costs, and medical expenses of $1,400 per month. For the latter, the difference in the back-end ratio is almost double (59% vs. 31%) which probably won’t work in the long run. In fact, the recently announced FHA-HAMP guidelines are an indication that HAMP modifications won’t work when the back-end DTI is too high because the guidelines don’t allow a HAMP modification when it’s over 55%."
HW: How does Fay Servicing address the challenges facing traditional servicing operations in today's US housing market?
Ed: "The greatest challenge facing a traditional servicing operation is that they were essentially set up to be low-cost and high-volume bill collectors. However, today you need high-quality problem solvers who understand the complexity of each loan and that makes the one-size-fits-all approaches insufficient.
"To address this reality, we focused on hiring the best people and our staff has been the most important factor in our success. We don’t segment the roles in an assembly line style for customers with low paid employees that specialize in one function. Instead we take experienced, talented, college-educated professionals who understand affordability metrics, customer service and our process from cradle to grave to assist our customers. This is what allows us to have contact rates in the high 90’s, obtain significant drops in delinquencies for every portfolio we have taken over and have sub-10% recidivism rates. We pay much higher rates for our staff but it is worth the price."
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