Archive for November, 2009
The Bank of England (BoE) on Thursday voted to inject another £25bn (US$41.4bn) into its asset-purchase program, bringing the total size of the program to £200bn as financial conditions remain "fragile" both across Europe and internationally.
The BoE monetary policy committee also decided to keep the official bank rate paid on commercial bank reserves at 0.5% to facilitate access to credit at continued low interest rates.
So far, the asset purchases helped boost asset prices and improve access to capital markets, BoE said. The need for banks to continue repairing balance sheets will likely limit the availability of credit, however, while high debt levels of will weigh on spending. BoE sees the prospect for a slow economic recovery with resources remaining under-used.
"The world economy has shown signs of recovery, with a number of emerging market economies experiencing a strong rebound in growth, although global activity as a whole remains significantly depressed," BoE said. "Asset prices have risen internationally since the spring, reflecting both the gradual improvement in the economic climate and accommodative monetary policies. And banks’ funding conditions have improved, though financial conditions remain fragile."
The vote to expand the asset-purchase program arrive within hours of the Federal Open Market Committee (FOMC)'s announcement it would keep the federal funds rate at 0 to 0.25%. The FOMC also scaled back a debt-purchase program, limiting the scale from $200bn to $175bn for purchases of agency debt from Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A).
Write to Diana Golobay.
The Senate voted today to pass an extension of the first-time homebuyer tax credit until April 2010.
In all, 98 Senators voted in favor of H.R. 3548, with zero votes against (two Senators did not vote). H.R. 3548 is a bill is primarily purposed with extending unemployment benefits.
The bill is currently amended to include the extension of an $8,000 tax credit for those buying their first homes as well as an $6,500 tax credit for some borrowers buying a home for a second time.
The move comes as no surprise, as HousingWire reported last week. The bill now requires President Obama's signature into law.
Business Roundtable, an association of CEOs of leading U.S. companies, with nearly $6trn in annual revenues and more than 12m employees, commended the vote in a statement.
"This critical program has already enabled hundreds of thousands of Americans to become first-time homebuyers," they report.
"Encouraging additional home purchases will create a cascade effect, not only boosting the housing sector, but also creating jobs and hastening broad recovery of the U.S. economy – more than 20 percent of which is tied to residential real estate and housing-related industries."
Passed as an amendment, the tax credit can still be removed from the final wording of the bill, if placed under further review. However given recent lobbying efforts in the industry and a feeling of presidential support, this remains unlikely.
Write to Jacob Gaffney.
HousingWire readers have already been reminded on a number of occasions that the Federal Reserve dominates the agency/GSE MBS market (and has since the purchase plan was announced almost a year ago) and that banks and would-be mortgage borrowers are first in line to be whacked when the Fed exits the MBS market.
So I was thrilled yesterday when celebrated bank analyst Meredith Whitney put out an industry note that zeroes in on the Fed’s MBS purchase program; She calls the “Great Exit” the biggest market and bank risk over the next four months.
I’d qualify that – I’d say let’s hope it emerges into the public view over the next four months, because it could be – if the Fed exits as planned at the end of first quarter 2010 – the biggest kick in the stomach housing and financial markets have gotten since surviving the near total shut down of credit last fall.
Here’s what I wrote in July 2009: “When mortgage spreads were in virtual free fall last autumn, the Fed stepped in,” pulling spreads to historic tights. When the Fed leaves, “U.S. banks – as the single largest private institutional investor sector after the GSEs – have the most to lose. Or should we say, if the Fed leaves, the banks have the most tangible capital to lose (their MBS are largely carried as available for sale, with changes in fair value reflected in shareholder equity).”
I picked up the discussion again last month, featuring the comments of professional MBS analysts on the likely impact of the Fed’s departure. Many hesitate to put a number on the potential widening, but a couple brave analysts have published that option-adjusted spreads (these are spreads to Treasury rates or LIBOR that deduct an expected cost, to maturity, of the prepayment options held by borrowers) could widen 20 to 25 basis points after the Fed.
I’ve long thought it might be worse than that. When I wrote about this topic in September in my HousingWire Magazine column, “After the Fed the Abyss,” I wondered if mortgage rates might not just give back the 125 basis points of tightening versus comparable Treasury yields Fed demand achieved. Which means that, in addition to any change in Treasury yields (say under the pressure of relentless supply, increasingly shifted to longer maturities), mortgage rates could increase by 1.25% without the Fed.
That’s possibly too gloomy. MBS investors – whose demand translates into mortgage rates – are likely to be more cheerful about buying than they were a year ago. The MBS pros believe that at some point, hard to gauge in advance, other traditional MBS investors, crowded out by the Fed, will find MBS yields attractive and step up their demand. But that is not going to make mortgage loans as attractive as would be borrowers or pols and policy makers would like.
Whitney’s gloomier than that. It’s not clear to her that there is another buyer to replace the Fed on the margin. (At this point, I always like to point out that the GSEs used to perform this role, putting a floor on mortgage prices during periods of sharp rate movements or exploding supply.) Which means that “prices will go down meaningfully and rates will go up meaningfully.” The consequence: “banks could stand to take write downs and it will be far more expensive for consumers to secure mortgages.”
Here here. If only more cable-ready analysts would follow Whitney into this discussion. The Fed is in a pickle – it can’t continue to support the mortgage market indefinitely (certainly the size of its balance sheet has already rattled nerves in some sectors). And the risks to investors (including, via mutual funds, individuals), home buyers, home owners in need of affordable refinancing, if it does stop supporting the market are significant.
Maybe if more high profile analysts start to wave the flag, the pols and policy makers will get down to business and face up to the looming question: the fate of the $5 trillion Ginnie Mae and GSE MBS market. It’s time for hard thinking about the government’s proper role in housing, given the hard facts of $5 trillion securities outstanding and the only viable source of housing finance still, after two years and counting, is government sponsored securitization. Replacing GSEs with smaller, tamer entities or none at all and counting on private lenders and private securitization (try to build that market with minimum retention standards!) as the “ideological” foes of government-sponsored entities would have it, will orphan a vast amount of widely held securities and choke off the flow of capital market funding to U.S. housing.
Leonard Ryan is founder and president of Laguna Hills, Calif.-based QuestSoft Corp., a provider of automated compliance review software to the mortgage industry. Ryan oversees day-to-day efforts for the company including, but not limited to, business and software development, strategic partnerships, sales and pricing.
For this episode of In This Corner, Leonard discusses the major obstacles of Real Estate Settlement Procedures Act (RESPA) and how lenders can cut costs with automation.
HW: What law or regulation is giving lenders the most headaches and why?
Leonard: In any other year this would be an easy question. But in our view, all of the 2009 changes cause problems, and for different reasons.
Mortgage Disclosure Improvement Act (MDIA) is causing issues because most loan software products keep track of only the latest disclosure dates due to the complexity of the calculations. S.A.F.E. Act is causing the most internal personnel problems due to education and registration requirements that differ from state to state. Higher Priced Mortgage Loans (HPML) with the Home Mortgage Disclosure Act (HMDA) changes as of October 1 are becoming an out and out nightmare without automation because every time an Annual Percentage Rate (APR) changes or the note rate adjusts, the loan must be completely recalculated and possibly re-underwritten.
Home Valuation Code of Conduct (HVCC) issues have been widely reported, but the industry is slowing adapting to more calming comments from the regulators. There is substantial anxiety over upcoming RESPA rules to the point that lenders are being forced to consider on many loans whether they will violate Truth in Lending Act (TILA) or RESPA because of rule conflicts. Finally, there are more than 40 states that have changed or are in the process of changing their state high cost and consumer protection rules to far more stringent parameters due to the MDIA and HPML changes.
HW: How do HPMLs affect lenders? Have they slipped under the radar?
Leonard: Higher Priced Mortgage Loans (HPML) which is often referred to as the HMDA Rate Spread, is much more serious than most people believe. Since 2004, the HMDA Rate Spread calculations have been used to provide a general dividing line to determine subprime lending. However, other than HMDA reporting and possible fair lending implications, there was little that was affected before now. In addition, the indices changed monthly so the possibility of an error was far more remote.
However, with the new rules, there is a built-in trigger for stricter underwriting, and almost all states are changing their high-cost laws to match the new HPML benchmarks. The Note Rate and APR triggers are potentially different as Note Rate determines the week of the index and then APR determines the qualification. So if a borrower asks for a last-minute adjustment in the note rate, without any change in the APR, a lender could be in violation of a high-cost rule by simply helping the borrower secure a more appropriate loan. As a result, I don’t see how lenders in the future fund loans without constantly rechecking HPML throughout the entire loan process.
HW: When someone, such as a lender, switches to automation software, on what time line can they anticipate a change to their bottom line?
Leonard: The vast majority of our customers report back that sometime within the first two months of use, they have identified and prevented enough errors, obtained favorable pricing or saved enough in training time to justify the entire set of provided services for a full year. This does not include unknowns in terms of buybacks, fines or litigation expense a lender might have received from funding a non-compliance loan.
Automation software produces both substantial direct and indirect savings. We have found direct savings especially in reduction of training that would have been necessary without automation. This can amount to two to three additional staff members depending on the size of the institution. Direct savings are those from reduced hiring. Lenders are hiring more compliance and training staff today to cover the myriad of new regulations of this past year. Whereas in the past, a 10% standard was acceptable, today you must review 100% of the loans due to investor push backs and more stringent requirements. Automation software allows this to be done without any additional staff and also pushes “on the job” training while doing it.
You review all loans and the underwriters and compliance personnel are alerted to loans that have potential problems rather than needing to sift through loans randomly. In addition, staff training is far easier because a system like Compliance EAGLE both identifies a violation and provides the cure. Indirect savings are fines, penalties, press, reputation, litigation and buybacks that would be there if an error was not detected and corrected before funding. Our customers typically find about 15% of loans in violation of a rule pre-underwriting. The first-time reviews we run post underwriting show 3-5% rates. Reviews we run compared to competitive systems typically catch 1-2% of loans with additional violations. Our systems are completely paid for if only half of 1% of loans have errors. Therefore, the return on investment is tremendous with an automated compliance software product.
HW: How are you helping lenders gear up for RESPA? What are the major obstacles?
Leonard: QuestSoft is helping lenders with RESPA in three ways. First, we are checking the fees between disclosures to detect any violations of the rules where fees have no variance and others that have a strict 10% variance even through a third party provider. Second, we provide a database of vendors nationwide that are willing to lock in their fees to lenders to ensure they do not violate the provisions of the law. Lastly, we also allow lenders to more easily comply with the alternative vendor listings and provisions to reduce the possibility that the lender will be responsible for extra fees just for trying to comply with the intent of the new disclosures.
The major obstacles of the new form are the sections that list multiple alternatives and the comparable program area at the end of the form. But, perhaps that largest obstacle is that lenders are very scared because the TILA and RESPA rules do not align and many are worried that they may be fined, penalized or have borrowers use legal representation to use these conflicts of the new regulation to create an unprofitable lending environment for honest lenders.
Despite conflicts of interest presented when originators acquire structured finance notes through the central bank repo system present in the UK, the likelihood of rating actions on notes used as repo collateral remains low, according to Moody's Investors Service.
The London-based structured finance division of Moody's indicated in a statement Wednesday it is common in current market conditions for notes issued by a structured finance issuer to be acquired by the related originator under a central bank repo.
An originator that also acts as the sole noteholder can waive breaches of transaction documents or consent to the modification of transaction documents.
This ultimately represents a conflict of interest, Moody's said, as originators typically act as parties to various transaction documents, influencing the adoption of favorable noteholder resolutions that might also be prejudicial to the credit quality of the notes.
Despite the obvious conflict of interest, the fact that notes used in bank repo transactions are required to maintain a minimum rating makes it unlikely that any originator would want to procure a waiver or amendment that would have a negative rating effect on the notes, Moody's said.
In other words, as long as notes are expected to be used as repo collateral, a rating impact due to conflicts of interest is unlikely in cases where the acquiring party is also the originator.
"For example, Moody's recently became aware of a noteholder resolution directing the issuer and trustee to waive certain rating trigger breaches relating to the originator," the ratings agency said. "[F]ollowing discussions with Moody's, the originator amended the relevant resolution so as to avoid a rating action."
Write to Diana Golobay.
A survey of gross mortgage applications increased, while a second survey measuring household activity declined last week.
The Mortgage Bankers Association (MBA) survey of gross applications increased 8.2% for the week ending October 30, compared to the previous week.
Mortgage Maxx’s survey, which adjusts gross mortgage volume to account for the number of households submitting applications, decreased 6%.
MBA’s refinance index increased 14.5% from the previous week and the purchase index decreased 1.8%. Refinance mortgages took a 66.1% share of total applications, the MBA said, up from 62.3% the previous week.
Adjustable-rate mortgages (ARMs) decreased to 6.1% from 6.9%.
Write to Austin Kilgore.
The Federal Reserve’s Federal Open Market Committee (FOMC) said it won’t purchase as much agency debt as it previously announced.
The $175bn of agency debt purchases is less than the previously announced $200bn, but the FOMC said the amount “is consistent with the recent path of purchases and reflects the limited availability of agency debt.”
The Fed will continue its planned purchase of $1.25trn of agency mortgage-backed securitizaties (MBS) from Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A). In a statement released Wednesday from its September meeting, the FOMC said the purchases of both agency debt and MBS will gradually wind down by the end of Q110.
The committee agreed to maintain the target range for the federal funds rate at 0 to 0.25% and said economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations will keep the rates low for an extended period.
The committee noted that economic activity continues to pick up, including activity in the housing sector, while the conditions in financial markets remain roughly unchanged, on balance, from its previous meeting. Household spending also appears to be expanding, but is restricted by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit, the committee added.
Write to Austin Kilgore.
Moody’s Investors Service improved its outlook for Australia's real-estate investment trusts (A-REITs) from negative to stable, citing its belief that credit conditions for the sector will firm over the next 12-18 months.
“There are clear signs that the business conditions for the A-REIT sector are stabilizing, with Australia's economy outperforming expectations of earlier in the year, and avoiding a recession,” said Clement Chong, a Moody's vice president.
Moody’s expects unemployment to peak at 7%, below the previously projected 10% for other Organization for Economic Cooperation and Development (OECD) nations, and it appears Australia’s economy, which is outperforming expectations, will avoid going into recession.
As a result, major tenants are rehiring and retailers are gradually resuming their plans for expansion, Moody’s said, and those developments will need additional retail space and support from warehouse and distribution facilities, which should help commercial REITs.
“But, demand is still fragile and recovering from a low trough,” Chong said. “Despite that, we do not expect vacancy rates to deteriorate materially, and we believe that asset values are nearing the end of their declines.”
Supply and demand are expected to balance out, as the supply of office, retail, and industrial space remains low because credit constraints have stifled new development, Moody’s said. Improved demand will lessen the likelihood of a future rise in vacancies.
Write to Austin Kilgore.
Delinquencies in commercial mortgage-backed securities (CMBS) accelerated in October, according to a report from Barclays Capital (BarCap).
The 30-plus day delinquency rate jumped 41bps to 5.5% in October as current loans deteriorated and transferred to special servicers. For the past three months, delinquencies have grown an average of 34bps, and BarCap analysts expect the pace to increase through 2009 and into 2010.
Younger vintages are falling into delinquency at a more severe rate than older ones, analysts noted. The 30-plus day delinquency rate on post-2005 vintages jumped 47bps to 5.63% in October, while pre-2005 vintages increased 27bps to 5.17%.
The delinquency rate for post-2007 vintages leaped 69bps in October to 5.32%, according to the report.
Hotels continued to lead the delinquent march. A total of $974m in loans backed by hotels fell delinquent in October, and the hotel delinquency rate grew 152bps to 7.81%. The 2007 vintage registered a 10.71% 30-plus day delinquency rate, the largest being the $150m Hyatt Regency – Jacksonville loan.
BarCap analysts pointed to a lack of demand and a failure to sustain a boost at summer’s end driving the delinquencies.
“Without the ‘protection’ of built-in leases, this points to more delinquencies in future months,” according to the report.
Write to Jon Prior.
Pulte Homes (PHM: 7.79 -0.13%) lost $361.4m, or $1.15 per share, in Q309, compared to $280.4m, or $1.11 per share, in Q308.
Results were impacted by $86.7m in charges and transaction costs associated with Pulte’s merger with Centex Corporation, and $163.8m in inventory impairments and other land-related charges.
“Beyond the impact of the merger, Pulte’s Q3 results reflect a homebuilding industry that continues its transition toward more stable market conditions as lower prices and historically low mortgage rates are helping to support homebuyer demand,” said Pulte CEO Richard Dugas Jr. “Challenges remain, however, as economic weakness, foreclosures, rising unemployment and recent uncertainty over the expiration of the federal tax credit continue to influence buyer behavior.”
Home sale closings totaled $1.1bn in Q309, down from $1.5bn in Q308. The decreased revenue was attributed to a decline in homes sold, 4,166, down 23% from Q308, and a 10% decrease in average selling price to $253,000. Revenue and closings for Q309 include Centex operations for the last six weeks of the quarter.
Year-to-date through the end of September, Pulte’s net loss was $1.1bn, or $3.88 per share, compared to a net loss of $1.1bn, or $4.48 per share, during the same period of 2008.
Write to Austin Kilgore.
