As market observers point toward a perceived bottom to the US housing industry and signs of stabilization — and even recovery — the UK financial sector looks poised to take on heavy losses as it continues to work through its own credit crisis.

UK banks have experienced £110bn ($182.2bn) in loans and securities losses since the credit crisis began in 2007, and could lose an additional £130bn (for a total of $398bn) before the extent of the financial fallout concludes, analysts at Moody’s Investors Services wrote in a recent report.

Economic strains like growing unemployment and high levels of indebtedness, along with the decline in the UK gross domestic product (GDP) will lead to higher loan arrears, affecting bank profitability, Moody’s wrote, and government support and regulation will be essential for UK banks to recovery in the coming years.

The British government has invested more than £1trn through its bank bailout efforts, and the banks themselves have raised £120bn in new capital by the middle of 2009, Moody’s said. 

While Moody’s maintained its negative outlook on UK banks, it said further risk downgrades are unlikely because current ratings already incorporate future risks.

Moody’s also warned that default rates could increase, especially on commercial real estate. Commercial real estate values have dropped 37% since peaking in Q207 and 26% in the last year, Moody’s said, citing the Investment Property Databank (IPD) UK All Property Index. Moody’s said the high proportion of commercial property exposures at UK building societies “remain an area of concern.”

The decline of the securitization markets, the shortening of wholesale funding maturities and increased competition for retail deposits has hurt bank funding. While the government’s efforts have helped, Moody’s wrote, liquidity remains the central challenge to UK banks.

Write to Austin Kilgore.

Marking the one-year anniversary of securities firm Lehman Brothers’ fall and the start of the financial crisis, President Barack Obama said that results from government interventions show signs of a “return to normalcy,” in a speech delivered Monday at the Federal Hall in Manhattan.

After the stumble of the some of the country’s largest financial institutions — including Merrill Lynch, American International Group, Washington Mutual and Wachovia – taxpayers will not escape the crisis unscathed, Obama said.

But, he said, banks have repaid more than $70bn, and taxpayers earned a 17% return on investments made in cases where the government’s stake sold completely.

“Just months ago, many experts from across the ideological spectrum feared that ensuring financial stability would require even more tax dollars,” Obama said. “Instead, we’ve been able to eliminate a $250bn reserve included in our budget because that fear has not been realized.”

The speech echoes the victory calls of US Treasury Department officials as the one-year anniversary of the Troubled Asset Relief Program (TARP) nears.

“Today I believe, because of comprehensive policy actions put in place since then, we are back from the edge of the abyss,” said Treasury secretary Timothy Geithner at a hearing by the TARP Congressional Oversight Panel last week.

Moving forward, the Treasury outlined the next phase in the recovery plan in a report released just before the speech.

The Treasury plans to exit from those emergency programs where the need has receded, such as the $250bn “placeholder” put into the President’s budget to support the $750bn spent to stabilize financial markets.

The Money Market Mutual Fund Guarantee Program, which provides protection for $2.5trn in investments in hopes of preventing a run on money market mutual funds after the fall of Lehman Brothers, will expire on Sept. 18. Since its inception, the program suffered no losses and earned the US government $1.2bn in fees, according to the report.

Also, the Federal Deposit Insurance Corporation (FDIC) will not extend the deadline for its Temporary Liquidity Guarantee Program (TLGP) past Oct. 31. The program provides a guarantee on transaction accounts and senior debt issued by banks.

The report also noted a decreasing reliance on federal support. For example, the monthly issuance of TLGP guaranteed debt fell from $113bn in December 2008 to $5bn in August.

The third part of the next phase includes an expected $50bn in capital repayments over the next 12 to 18 months from banks.

However, some programs will remain in an ongoing role. For example, the Adminstration’s Home Affordable Modification Program (HAMP), which provides cap incentives to servicers for loan modifications, is “just ramping up,” according to the report. According to the latest TARP report, the total number of participating servicers grew to 53 last week.

Despite the initial sounds of victory, and the reports of progress under HAMP, many borrowers continue to default and enter foreclosure. RealtyTrac.com sees foreclosure filings arcing toward record highs, and Moody’s forecasted that collateral performance within the US Securization market will suffer deep into 2011 before recovery.

Write to Jon Prior.

The Irish mortgage market is experiencing its own crisis as the global recession continues to unwind. Ireland's government, in response to the financial fallout, published a second draft bill that would create a national bad bank to take on toxic loans.

Performance of Irish residential mortgage-backed securities (RMBS) worsens, with the rate of 90 plus-day delinquencies rising to 2.3% of the current balance in Q209 from 1% in the year-ago quarter. The weak Irish RMBS market for weeks pressured Ireland's two major banks — Allied Irish Banks and Bank of Ireland — which market observers say may require outside support in the future.

The Irish government may be stepping up efforts soon to help the banks unload bad loans. The new draft bill on the proposed bad bank, which would be called the National Asset Management Agency (NAMA), was published late last week.

“The Bill contains a number of important changes that will allow NAMA to achieve its goal of stabilising the banking sector and restoring the flow of credit to business and consumers while minimizing the risk to the taxpayer," said finance minister Brian Lenihan in a statement.

The bill calls for banks to share a portion of the risk associated with NAMA by receiving part of the payment for loans in the form of subordinated debt, according to the Irish Department of Finance. This structure allows NAMA to suspend certain payments in the event of a loss, and will give incentives to firms that participate in the NAMA process.

“I want to stress that under the Bill, each individual loan will require a separate valuation once the Act has commenced," Lenihan said. "Only after the valuation of each loan will an exact price be determined."

The bill's proposals have been endorsed by the European Central Bank (ECB), the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD), according to Lenihan. The Finance Department is consulting with the European Commission about the legislation and European Union (EU) approval will be necessary before the legislation can be finalized.

Lenihan is expected this week to outline details on how the bad bank will operate.

Write to Diana Golobay.

Ginnie Mae issued $44.73bn in mortgage-backed securities (MBS) in August. While that’s down from $46.1bn in MBS issued in July, Ginnie Mae has provided $297bn in liquidity through the first eight months of 2009, up from $162bn during the same period of 2008.

Ginnie Mae I single-family pools totaled $25.2bn and Ginnie Mae II single-family pools accounted for nearly $19bn. Issuance for single-family homes accounted for more than $44.2bn in August, while multifamily MBS issuance was nearly $518m.

“The importance of Ginnie Mae in the current economic environment cannot be underestimated,” said Ginnie Mae acting executive vice president Thomas Weakland. “The stability provided by a government-backed mortgage-backed security program is critical to bring liquidity to our nation's housing market.”

MBS issued through the Ginnie Mae I pool are backed by loans issued from the same lender, with the same interest rate, must be for the same type of property (i.e. single-family homes) and are federally insured or guaranteed. Ginnie Mae II pools are multiple-issuer pools.

The share of agency MBS issuance — including Ginnie Mae — has swelled since 2006, rising to 97% of the market share in 2008 as private-label issuance dries up. The growing presence of Ginnie Mae securities has the industry and its regulators looking at potential changes to the structure of the government-sponsored entities (GSEs) in the securitization market.

Write to Austin Kilgore.

A year after the collapse of securities firm Lehman Brothers, the mortgage industry is taking a close look at mortgage finance and securitization giants Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A).

A handful of proposed alternatives to the structure of the companies, now in conservatorship, include a network of smaller securitization entities and a massive switch to utility companies. The proposed revamps of Fannie Mae and Freddie Mac pose inherent benefits and risks to taxpayers, the mortgage finance industry and the government-sponsored enterprises (GSEs) themselves, according to a report by the Government Accountability Office (GAO) last week.

The GAO turned a scrutinizing eye on the main alternatives proposed, including a move to reconstitute the GSEs as for-profit corporations with government sponsorship and additional restrictions.

This option would effectively add controls to minimize risk in the system, GAO said. It would eliminate or reduce the GSEs' mortgage portfolios, establish executive compensation limits, or completely convert the GSEs from shareholder-owned corporations to lender-owned firms.

This model is not entirely without risk, however, as investors might be unwilling to invest capital in reconstituted enterprises unless the Treasury Department assumed responsibility for losses incurred during their conservatorship, GAO said. Any transition to a new structure would need to consider the GSEs' dominant position in housing finance and be implemented carefully — and perhaps in phases — to ensure its success.

"Continuing the enterprises as GSEs could present significant safety and soundness concerns as well as systemic risks to the financial system," GAO said in the report. "In particular, the potential that the enterprises would enjoy explicit federal guarantees of their financial obligations, rather than the implied guarantees of the past, might serve as incentives for them to engage in risky business practices to meet profitability objectives."

The GAO also noted a move to turn Fannie Mae and Freddie Mac into securitization utilities, landing them under federal regulation to control the performance of what is becoming a monopoly of sorts. The structure mimics the utility-type regulation enjoyed by electric companies at a state and local level.

It would give regulators greater control over Fannie and Freddie's performance at a time when the share of agency mortgage-backed securities (MBS) issuance — including the GSEs and Ginnie Mae — has swelled since 2006, rising to 97% of the market share in 2008 as private-label issuance dried up.

GAO said, however, "it is not clear that the public utility model is an appropriate regulatory structure because, unlike natural monopolies such as electric utilities, the enterprises have faced significant competition from other providers of mortgage credit over the years."

Having emerged from years of this competition among issuers of MBS, the GSEs may continue to play a prominent role in securitization. Another proposed alternative to their current structure would be to establish the GSEs as government corporations or agencies that focus on purchasing mortgages and issuing MBS.

This move would eliminate Fannie and Freddie's held mortgage portfolios, but would not necessarily motivate risky business practices in light of the overarching government role in their business, according to the GAO. This option may present a complex and challenging business model for a government entity, however. It would also present inherent risk to the government through the entities' role in a mortgage market that has seen significant losses in recent years.

"This risk may be heightened if a government entity were expected to continue purchasing mortgages and issuing MBS during stressful economic periods when the potential for losses may be greater than would otherwise be the case," GAO said.

Another proposed alternative, privatizing or terminating Fannie Mae and Freddie Mac, would disperse the lending and risk management obligations through the private sector.

The mortgage banking sector, led by the Mortgage Bankers Association recently called for a new system of MBS issued by securitization entities, which could be made by resolving Fannie and Freddie and re-purposing their infrastructure.

Write to Diana Golobay.