Archive for October, 2009
The House Financial Services Committee on Tuesday took several major steps toward financial regulatory reform legislation.
The Committee, along with the US Treasury Department, released a draft version of legislation designed to address systemic risk and the issue of "too big to fail" institutions.
The "Financial Stability Improvement Act of 2009" sets up the Financial Services Oversight Council to monitor systemic risks and gives significant authority to the Federal Reserve to step in where regulators fail to quickly address developing problems among firms that pose systemic risk.
The legislation also provides for orderly winding-down of failed firms and puts an end to "too big to fail," according to a Committee statement. A new system for unwinding failing firms would replace traditional bankruptcy situations where complex interrelationships between large firms are unsettled, endangering broader financial stability.
Under the legislation, the costs involved in resolving a failing firm would be repaid first from the assets of the failed firm at shareholders' and creditors' expense. If any costs remain after that, they would be repaid from assessments on all large financial firms.
Large institutions with assets of $10bn or more would essentially pay for winding down of failing firms through a resolution fund, which would provide for a flexible repayment period to avoid potential pro-cyclical effect of assessments on large firms.
"In this instance we follow the 'polluter pays' model where the financial industry has to pay for their mistakes — not taxpayers," the Committee said.
The legislation also directs federal banking regulators and the Securities and Exchange Commission (SEC) to establish rules to require creditors to retain 10% or more of credit risk associated with loans transferred or sold for securitization. Regulators could adjust the level of risk retention either above or below the 10% mark, but no lower than 5%. When assets not originated by creditors are securitized, the securitizer must retain the credit risk.
Similar capital requirements the European Union (EU) is beginning to enforce are dragging down stocks in the sector, according to industry reports, although they don't specify the mechanisms behind the action.
The Financial Stability Improvement draft legislation is not the only bill the Committee considered on Tuesday.
The Committee also approved HR 3818, the Private Fund Investment Advisers Registration Act, by a 67-1 vote. The bill would force many financial providers to register with the SEC.
The bill aims to give regulators greater understanding of the operations and potential threats posed by private advisers. By enforcing new record-keeping and disclosure requirements on private advisers, the bill gives regulators authority to oversee a segment of the market previously exempt from "any meaningful regulation," according to a Committee statement. The bill also allows regulators to examine records of investment advisers whose actions were previously secretive.
“The past year has shown that the deregulation or in many cases, lack of regulation, of financial firms is an idea of the past," said Rep. E. Kanjorski (D-Pa.) in a statement. "Advisors to financial firms must receive government oversight and we must understand the assets of financial firms, including for hedge funds, private equity firms, and other private pools of capital. Under this legislation, private investment funds would become subject to more scrutiny by the SEC and take more responsibility for their actions."
Now that the bill passed the important hurdle of a Committee vote, it moves to the House floor for a vote.
Write to Diana Golobay.
Mortgage applications declined for the second week in two national surveys.
For the week ending October 23, the Mortgage Bankers Association (MBA) weekly survey of gross applications decreased 12.3% on a seasonally adjusted basis compared to one-week prior.
Mortgage Maxx’s weekly survey, a measure of mortgage applications adjusted to reflect the number of households that applied for loans, was down 2% in the same time period.
MBA’s refinance index decreased 16.2% and the purchase index decreased 5.2%. Refinance mortgages took a 62.3% share of all applications, down from 65% the previous week. Adjustable-rate mortgages accounted for 6.9% of all applications, up from 6.4%.
“Mortgage applications may be commencing their final deceleration of 2009,” Mortgage Maxx wrote in its report. “The holiday effect [the decline in home buying activity during the November-December holiday season] is a few short weeks away while mortgage rates are moving higher and the window on the $8000 first time buyer incentive is quickly closing."
Write to Austin Kilgore.
Appropriations committees in the House and Senate are proposing to extend the temporary limits for conforming jumbo loans either insured by the Federal Housing Administration (FHA) or purchased by the government-sponsored enterprises (GSE) Freddie Mac (FRE: 0.00 N/A) and Fannie Mae (FNM: 0.00 N/A).
The proposed extension of the conforming minimum of $729,750 for mortgages in higher-priced markets would run through the end of 2010.
“While those loan limits aren’t scheduled to go down to $625,500 until January 1, if not maintained at the higher level now, the mortgage industry will begin to plan for loans at the lower amount,” according to a joint press release by the chairs of the appropriations committees in both houses of Congress, Sen. Daniel Inouye (D-HI) and Rep. David Obey (D-WI).
Inouye and Obey added: "This could result in major disruptions in the mortgage origination market for large loan sizes as early as November."
The proposal is included in a continuing resolution that will keep the federal government operating through Dec. 18, 2009. The resolution is attached to an appropriations bill to fund the federal government’s interior and environment initiatives.
The appropriations bill, including the resolution, still face votes in both the House and Senate. Currently, the temporarily extended conforming limits for loans Fannie and Freddie are allowed to purchase are set to expire at the end of the year. The extension would also apply to conforming loans and reverse mortgages — or home equity conversion mortgages (HECM) — insured by the FHA.
In anticipation of the expiration, HousingWire sources have indicated that some lenders are setting deadlines as early as next week for rate locks on jumbo conforming loans.
Write to Austin Kilgore.
Total delinquencies for first-lien residential mortgages grew to an estimated 11% during Q309, according a report from California-based real estate market consulting firm Foresight Analytics.
The final figures for the third quarter are not due until the end of November, but Foresight’s report bases its data on earnings reports and call report filings from banks.
Residential delinquencies increased from 10.2% in Q209 and from 6.4% from the second quarter of 2008, according to the report. Except for a two-percentage point jump in Q408, the delinquency rate rose approximately 1% every quarter since the Q108.
“We have been expecting the rate of increase to slow, but clearly this has not yet occurred,” according to the report.
Nonaccrual rates for residential mortgages also jumped to 4.7% in Q309 from 3.8% in the previous quarter – a record high since 1992 when Foresight began reporting on the data. The increase represents a reclassification of serious delinquencies as nonaccrual, according to the report. A previous surge in 90 plus day delinquencies came in Q408 and in Q109 as lenders delayed the nonaccrual categorization in favor of working with borrowers on loan modifications and other cures, according to the report.
Delinquencies in commercial mortgages also ballooned for the quarter. The rate hiked to 4.7% in Q309 from 4.1% in the previous quarter and more than doubled the 2.1% rate a year ago, according to the report.
“The delinquency rate has been increasing at an accelerated rate since Lehman Brothers’ collapse in September 2008 and the ensuing severe credit crunch and economic downturn,” according to the report.
The delinquency rate in commercial loans is still well below the 8% delinquency rate in the third quarter of 1991, but the rate still worries analysts in light of a weak economy, constricted credit availability and a large number of commercial mortgages coming due the next few years.
Write to Jon Prior.
The rate of new home sales dropped 3.6% from August to September, according to the latest data released jointly by the Department of Housing and Urban Development (HUD) and the Census Bureau.
Sales of new single-family houses in September 2009 were at a seasonally adjusted rate of 402,000, down from the revised August rate of 417,000 and down 7.8% from the September 2008 rate of 436,000.
The median sales price for new homes in September was $204,800, up from $195,200 the previous month. The average was $282,600, up from $256,800 in August.
The seasonally adjusted estimate of new houses for sale at the end of September was 251,000, representing a 7.5-month supply of homes at the current monthly sales rate. In August, the national inventory was 262,000, a supply of 7.3 months at last month's sales rate.
Write to Austin Kilgore.
Overall September home sales in Las Vegas reached a higher level than in August, a feat unseen in 15 years, according to San Diego-based mortgage information provider MDA DataQuick.
The median sales price held at $130,000 for the third consecutive month as the market continued to work through foreclosures. The median fell by 36.6% from $205,000 a year earlier, according to the report.
In September, 67.1% of resold homes in Las Vegas had foreclosed in the previous 12 months. The foreclosure portion of the market dropped from 68.4% in August, but stayed above 63.1% in September 2008. REO sales spiked in April of this year at 73.7%, DataQuick said.
A total of 5,014 new and resale houses and condos closed escrow in September, a 6.3% jump from August and a 17.3% hike from last year. It was the highest sales total for a September since 2006 when 6,088 homes sold, according to the report.
The sales gain in September, which followed a sharp and unusual drop from July to August, is likely caused from three factors. Short sales are growing in popularity, but they take longer to close escrow. That means the deals struck in the middle of the summer closed in September when more traditional sales would have closed in August, according to DataQuick.
The report added that low mortgage rates and buyers scrambling to take advantage of the federal tax credit for first-time buyers also explains the strong finish to the summer.
Write to Jon Prior.
As coverage continues this week in the wake of a New York court ruling that presented a negative credit event for commercial mortgage-backed securities (CMBS) involving the Peter Cooper Village/Stuy Town mortgage, at least one market observer warns the speculation over current value may lead to greater losses.
Widely-published reports on the value of the property backing the Stuy Town loan may make a CMBS loss more likely to occur, according to Malay Bansal, a managing director at NewOak Capital, a Manhattan-based asset management, advisory, and capital markets firm.
In market commentary Tuesday, Bansal indicated the sprawling multifamily property, which was bought in 2006 for $5.4bn, is now estimated to be worth less than $2bn.
"Normally the low estimates do not matter," Bansal said. "What really matters is the highest bid or the price one — just one — buyer is willing to pay. Valuation of properties like this is not totally a science, and it is entirely possible for one buyer to put a higher valuation on it than others based on their view of possible upside."
In the case of the Stuy Town property, Bansal noted, the wide speculation on a $1.8bn to $1.9bn current value may hinder buyers from placing a higher valuation on it.
Moody’s Investors Service said this week it continues to monitor 85 classes of CMBS transactions that contain pieces of the $3bn mortgage on the Stuy Town properties. The interest reserve is $24m, which Moody’s does not expect will last through 2009.
"With reserves running out, special servicer may not be too keen on taking over the properties," Bansal said. "That will make it more likely that they will end up accepting losses on the $3bn senior loan, included in five different CMBS deals, and modifying it for whoever emerges as the new owner.”
Write to Diana Golobay.
RioCan Real Estate Investment Trust (REIT), will make a move into the US market through an alliance with Port Washington, NY-based REIT Cedar Shopping Centers (CDR: 5.13 -1.16%).
The Canadian REIT owns and manages Canada's largest portfolio of shopping centers with interests in a portfolio of 247 retail properties, with more than 59m square feet of leasing space. Cedar’s business is primarily in the ownership, operation, development and redevelopment of “bread and butter” supermarket-anchored shopping centers in coastal mid-Atlantic and New England states, owning and operating 13.2m square feet of leasing space at 124 shopping centers.
As part of the arrangement, RioCan will make a capital investment in Cedar through a stock purchase and the two firms will create a joint venture.
RioCan intends to purchase more than 6.6m shares of Cedar for $40m, with warrants good for two years to purchase an additional 1.4 shares worth $10m.
RioCan will own an 80% interest in the joint venture, which will own seven supermarket-anchored properties with a combined more than 1.1m square feet Cedar currently owns. About 50,000 square feet are currently unoccupied.
"We believe that this transaction with Cedar presents an excellent opportunity for RioCan to make a cautious introduction into the United States and to build a defensive portfolio which includes the potential to achieve greater returns not only from organic rent growth but through the leasing of vacant space over the next 12-24 months,” said RioCan president and CEO Edward Sonshine.
During the next two years, a second joint venture between the two REITs will invest as much as $500m in supermarket-anchored shopping centers in the northeastern US.
As part of the stock purchase, RioCan will designate one director to Cedar’s board. If RioCan exercises its rights on the second stock purchase, the REIT will own a 15% stack in Cedar, but the companies also made a “standstill” agreement that prohibits RioCan from making any additional stock purchases with the consent of the Cedar board of directors.
“We expect the great financial strength of RioCan and its commitment to our Company to be beneficial for both companies in the coming years,” said Cedar CEO Leo Ullman. “We believe that this important investment in our Company will lead to the creation of meaningful added value for the benefit of shareholders as we move forward. We have been impressed by RioCan and its management team led by Ed Sonshine."
Ullman added: "Through many meetings and a great deal of time spent by RioCan with us in its due diligence process, we have come to recognize great symmetry in our conservative approaches to our respective property portfolios at every level of our respective operations.”
Write to Austin Kilgore.
Principia Partners, a solution provider for structured finance portfolio management and administration, launched an updated version of Principia Structured Finance Platform.
The new version includes a standard interface that automates the processing of external data from independent performance data providers or bond trustees. The interface integrates data from multiple sources into a single platform that can display on-demand performance metrics.
The upgraded platform facilitates monitoring of collateral pool performance within fixed-income assets including asset-backed securitizations (ABS), residential mortgage-backed securitizations (RMBS), commercial mortgage-backed securitizations (CMBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs) and covered bonds.
It allows portfolio managers risk analysts and compliance staff to monitor, analyze and report on loan-to-value ratios and cumulative deal-level losses as well as view collateral pool delinquency rates across various stratifications.
“We are seeing a growing demand from financial institutions and investment managers looking to reduce the inefficiencies and risks associated with managing and integrating multiple databases and data sources for different structured finance deals,” said Douglas Long, executive vice president of business strategy. “Policy makers are making sure that organizations with long term investment goals involving securitized assets have a robust operational framework in place to really understand their investments on an ongoing basis.”
Write to Diana Golobay.
Since the introduction of legislation outlining the creation of the Consumer Financial Protection Agency (CFPA), the House Financial Services Committee made significant changes to the Administration's proposals before voting last week in approval of House Resolution 3126 (HR 3126).
One change present in the approved bill is the clarification of what entities would fall under CFPA oversight, according to an analysis by global law firm K&L Gates.
When introduced, HR 3126 included entities that provide financial products and services to consumers, except for entities regulated by the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC). This led to an outcry, including a media campaign by the US Chamber of Commerce, that the CFPA would hurt small businesses that offered lines of credit to customers.
As amended, HR 3126 exempts retailers, insurers and other non-financial businesses from CFPA oversight. Consumer reporting agencies, however, would be subject to CFPA oversight, and if made law, would remove them from Federal Trade Commission (FTC) oversight. Auto dealers that make loans and hold them on their books would be subject to oversight, but dealerships that don’t keep the loans would not.
K&L Gates also wrote community banks with less than $10bn in assets and credit unions with less than $1.5bn in assets will be subject to oversight by their primarily regulator rather than the CFPA, in an amendment passed in mid-October. However, the CFPA will be empowered to send examiners along with the primary regulator to observe examinations.
One item not covered in the original legislation, but added later, is a provision that requires the CFPA to “prescribe regulations regarding registration requirements for non-depository covered persons,” K&L Gates said.
The board and structure of the CFPA was also changed. As written, the legislation calls for a Senate-confirmed single director appointed by the president for a five-year term. Two boards, a consumer advisory board and a consumer financial protection oversight board, will advise the director. These boards will be staffed by a number of heads of the federal government’s financial oversight entities, and the director will appoint five additional members from various fields.
K&L Gates said it’s likely the House Financial Services Committee will continue to markup other financial regulatory reform legislation over the next few weeks and the full House of Representatives could consider the legislation before the Thanksgiving recess. Senate consideration of similar legislation isn’t expected until next year.
Write to Austin Kilgore.
