Archive for November, 2009
A House Financial Services Committee amendment that passed this week would empower federal regulators to dismantle financial firms considered “too big to fail.”
The amendment, authored by House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises chair Paul Kanjorski (D-PA), was included to the Financial Stability Improvement Act with a vote of 38-29.
The amendment would allow the dismantling of large firms whose collapse would put the US economy in risk, even if those firms appear to be well capitalized and healthy.
“Today’s passage of my amendment marks a crucial step for the American people and for the protection of our financial system,” Kanjorski said in a statement. “I remember the dire situation we faced last fall, and we want to do everything we can to avoid such a situation in the future."
Kanjorski added: "Looking forward, we have the capabilities to try to act in a preventative manner for the sake of every American and our economy. Most of us yearn for the day when the phrase ‘too big to fail’ is no longer a part of our vocabulary. Through responsible action advocated in this amendment, we can make that a reality.”
The Financial Services Oversight Council would have oversight of any dismantling and would be responsible for evaluating firms. The council could not dismantle a firm without first consulting with the president.
In other actions, a measure that would call for the first-ever audit of the Federal Reserve monetary policy passed the committee. HR 1207, authored by Reps. Ron Paul (R-TX) and Alan Grayson (D-FL), passed by a vote of 43-26. It removes the blanket restrictions of Government Accountability Office (GAO) audits of the Fed, but retains limited audit exemption on unreleased transcripts and minutes. It also sets a 180-day time lag before details of Fed's market actions may be released.
“This is a major victory for Federal Reserve transparency and government accountability," Paul said in a statement.
Write to Austin Kilgore.
The Federal Reserve Bank of New York bought another $16bn of agency mortgage-backed securities (MBS) in the week ending November 18.
The Fed's gross weekly purchases totaled $17.2bn. The Fed bought $5.9bn from Freddie Mac (FRE: 0.00 N/A), $4.55bn from Fannie Mae (FNM: 0.00 N/A) and $6.77bn from Ginnie Mae.
The Fed also sold $1.23bn of agency MBS — $800m of Fannie and $425m of Ginnie MBS — the same week, bringing net purchases to $16bn.
The weekly purchases push the Fed's net purchases to $1.02trn, according to weekly commentary by Barclays Capital (BarCap). Most of the Fed's net purchases (58%) were issued by Fannie, while Freddie accounts for 33% of net purchases and Ginnie accounts for 9%.
Write to Diana Golobay.
Total US asset-backed commercial paper (ABCP) outstandings were at $455bn as of November 4, a 35% decline from the beginning of 2009, according to market commentary by Fitch Ratings.
The fall in ABCP outstandings comes at a time when the industry is anticipating financial accountancy changes in January and the effect of global risk management regulations that will change the way financial markets operate. In their weekly outlook report, ABCP traders at Credit Suisse report that "investors have plenty of cash to invest, but with customer pay downs and few new deals getting done, issuers have been unable to satisfy investor demand."
"We expect to continue to see the same strong interest throughout the week.," they said (in reference to this week's trading).
Fitch's credit outlook for ABCP for the rest of 2009 remains negative, along with the outlook for US financial institutions ahead of significant accountancy changes to take place at the beginning of the year with the implementation of Financial Accounting Standards (FAS) 166 and 167. These accounting rules will bring conduit portfolios onto institutions' balance sheets, straining cash reserves at a time when credit remains frozen.
The November report on the ABCP market (available to download here) covers Basel II guidelines, a set of risk management regulations that are globally gaining steam — and criticism — and that Fitch indicates will have significant bearing on the ABCP market.
Fitch concluded from a recent study of Basel II guidelines that new rules largely eliminate regulatory capital advantages for conduit sponsors of setting up off-balance-sheet ABCP platforms, according to the report.
"Both multi-seller and securities-arbitrage conduit sponsors are likely to face higher capital charges under the new Basel II guidelines, particularly for any program-wide credit enhancement (PWCE) facilities they provide," the report reads. "The new Basel II guidelines are likely to have a much larger impact on securities arbitrage conduits because of the greater likelihood that both the liquidity and PWCE facilities are considered re-securitization exposures (which face higher capital charges than normal securitization exposures)."
Fitch said it expects the winding-down of some ABCP conduits under the new Basel II guidelines, while other conduits attempt to restructure to achieve compliance and survive under the guidelines.
The ratings agency also indicated enhancements to the Basel II guidelines will not likely have ratings impacts on Fitch-rated conduits.
Fitch also indicated in the ABCP market commentary a positive outlook on global recovery despite recent projections by French investment bank Société Générale that 2010 might end in “global economic collapse" under a worst-case bearish economic scenario. Signs of green shoots in financial markets are gaining steam, Fitch said, although determining a timeline for the bottoming of company defaults is difficult to project.
"Historically, data indicates that defaults will peak some two quarters after economic contraction formally ends," the Fitch report said. "The question of timing of defaults in the current recession is complex, due to the prolonged trough, with some elements arguing for an earlier peak and others for a later peak."
Write to Diana Golobay.
[Update 1: clarifies time line of the new guidelines]
In a letter to lenders, the Federal Housing Agency (FHA) produced new guidelines that would constrict financing for condominiums. Since then, brokers and condo owners report that FHA financing for condos is going from a flood to a trickle.
In a letter released Nov. 6, the FHA provided temporary guidance effective for all case numbers assigned on or after Dec. 7, 2009 through Dec. 31, 2009. The FHA provided the letter to address current housing market conditions.
The spot approval process will be eliminated for all case numbers on or after Feb. 1, 2010 under the new guidelines. The FHA created the process, allowing consumers to purchase a unit in a non-approved condominium project that has limited FHA involvement.
All current condominium project approvals will be invalid, except for projects approved on or after Oct. 1, 2008. Projects must be re-approved under the new options FHA provided and must be recertified every two years.
The new guidelines outline the HUD Review and Approval Process (HRAP) and the Direct Endorsement Lender Review and Approval Process (DELRAP). DELRAP is only available to lenders who have unconditional direct endorsement authority and staff with experience in reviewing and approving projects.
The project eligibility requirements changed as well – turning the wave of FHA financing on condo projects to a trickle, according to a letter from Candice Farthing of Essential Mortgage Company to clients.
According to the letter, one investor may own no more than 10% of units. For two and three unit projects, no single investor may own more than one unit.
No more than 15% of the total units can be more than 30 days past due on their condominium association fee payment. At least 50% of the units must be sold before any mortgage on a unit can be endorsed. However, the FHA will temporarily reduce the pre-sale requirement to 30%.
The letter also states that the FHA will cap concentration. Projects of three or less units cannot have more the one FHA-insured unit, and projects of more than four cannot have more than 30% of total units insured by FHA. But temporarily, the FHA will increase its concentration requirement to 100% through the end of the year if the project meets all standards.
“Getting projects back on the approved list will be a long and slow process. And until a project is approved, FHA financing is not an option,” according to the letter from Farthing.
Case in point, one condo owner in Metairie, Louisiana, had a buyer for her condo committed. The condo survived the ravages of Katrina, but under the new guidelines, the condo must be reappraised for hurricane damage risk. An FHA appraiser is not available to reassess the condo for several months. The buyer walked, unable to qualify for another mortgage product. The owner plans to re-enter the condo into the rental market.
Write to Jon Prior.
Housing activity was mixed in September, with existing sales up sharply, new sales down modestly, and starts about unchanged, PMI Group (PMI: 0.00 N/A) said in its monthly housing report.
“We continue to project modest increases in home sales over the course of this year and next in response to high levels of affordability, investors and first-time buyers taking advantage of distressed sales, improving demographics, a pickup in the economy and the renewal and modest expansion of the first-time homebuyer tax credit,” PMI Group said.
The seasonally adjusted rate of new home sales decreased for the first time in six months, down 3.6% to 402,000. PMI Group said this decline was due in part to concerns the first-time homebuyer tax credit would expire.
The seasonally adjusted rate of existing home sales increased 9.4% to 5.57m, the highest level in more than two years. PMI Group said the supply of new homes is dwindling, and more buyers are turning to existing homes.
PMI Group said median existing prices to fall 12% this year, including seasonally declines during the winter months.
Next year, PMI Group expects sales to increase, particularly during the second half of the year, bolstered by an improvement in unemployment. PMI expects existing sales to increase 10.4% and new sales up 28.4%. Prices will stabilize next year, PMI said, but won’t increase during 2010.
Write to Austin Kilgore.
The combined loan to values (CLTVs) on current loans are worse than many realize, according to a study by Equifax Capital Markets.
Equifax provides borrower and property value information to lenders and investors.
The average CLTV, a ratio used to determine the risk of default when more than one loan is used, for current Alt-A loans ballooned from 75% in July 2005 to 107% in July 2009, according to the study. Home price declines and an increase in the popularity and size of second liens caused the rise, analysts reported.
The percentage of borrowers holding a second lien with a current Alt-A loan increased to 25% in July 2009 from 10% in July 2005, according to the study.
While home prices have gained the spotlight, the increased prevalence of second liens has quietly grown. As a result, mortgage market investors are still concerned about the impact of borrower equity as home price depreciation eases, according to the report.
Researches also found that Alt-A and prime borrowers have caught up to subprime borrowers in the utilization of their revolving credit lines. In July 2009, 22% of Alt-A borrowers with a current mortgage loan put to use 80% or more of their total credit, up from 10% in July 2005.
HELOCs, or a home equity line of credit, represented a significant portion of the borrowers’ revolving debt, according to the data. Specifically, 45% of prime borrowers and 33% of Alt-A borrowers with current and securitized mortgage loans had a HELOC in July.
Equifax analyzed the health of borrowers with non-agency securitized mortgages from Q305 to Q309 by studying borrower credit information, home price data from the Federal Housing Finance Agency (FHFA) and loan-level data. After isolating the population of non-agency securitized mortgages, Equifax statisticians studied the performance of the loans across vital default risk trends.
"As home prices moderate, comprehensive and up-to-date information on second liens, including whether they exist as well as their balance and payment status, will become more critical for investors to know in order to accurately value non-agency mortgage-backed securities and whole loans," said Steve Albert, vice president of Equifax Capital Markets.
Write to Jon Prior.
Families earning the national median income could afford 70.1% of the new and existing homes sold in Q309, according to the National Association of Home Builders (NAHB) and Wells Fargo (WFC: 29.60 +1.89%) Housing Opportunity Index (HOI).
The index measures housing affordability and Q309’s index was down slightly from the affordability index of 72.3% in Q209 and up from 56.1% in Q308. Low prices and interest rates continue to contribute to increased affordability, NAHB said.
NAHB chairman Joe Robson, a Tulsa, Okla.-based homebuilder, credited the first-time homebuyer tax credit for the high level of affordability.
“With interest rates now lower than last quarter, the tax credit will encourage even more home buyers to enter the market and help stabilize housing and the economy by creating new jobs, stimulating home sales, reducing foreclosures, cutting excess inventories and stabilizing home prices,” Robson said.
For the 17th consecutive quarter, Indianapolis was the most affordable major housing market in the country in Q309. Nearly 95% of all homes were affordable to households earning the area’s median family income of $68,100. Other affordable markets include Youngstown-Warren-Boardman, Ohio-Pa., the Michigan markets of Detroit-Livonia-Dearborn and Warren-Troy-Farmington Hills, as well as Grand Rapids Wyo.
The least affordable market was New York-White Plains-Wayne in New York and New Jersey, where more than 19% of all homes sold during Q309 were affordable to those earning the New York’s median income of $64,800. Other markets on the bottom of the scale include San Francisco, Honolulu, Santa Ana-Anaheim-Irvine, Calif. and Nassau-Suffolk, N.Y.
Write to Austin Kilgore.
National home prices declined 9.8% year-over-year in September, according to First American CoreLogic’s home price index (HPI).
In August, the year-over-year decline was 11.1% and on a month-over-month basis prices declined 0.4%, ending a five-month run of consecutive monthly price increases.
When distressed sales are removed from the equation, year-over-year national prices declined only 6% in September. But in some local markets, distressed sales helped prices improve. In the Dallas market, September year-over-year prices were up 0.24%. When distressed sales are removed, prices were down 1.98%.
Looking to next year, First American CoreLogic said it expects prices to continue to decline in the next six months, and begin to rebound in the spring. Short-term factors that will affect the market include above-average levels of foreclosures, inventories and unemployment will continue to take their toll in many major metropolitan markets in the short term, the real estate research firm said.
“We have now seen a return of more traditional seasonal patterns with the slight decrease in our month-over-month HPI for September,” said First American CoreLogic chief economist Mark Fleming. “While the improvement in the year-over-year decline is encouraging, high foreclosure rates and increasing distressed sales are likely to continue to hold prices down.”
Nevada continues to lead the worst performing states, with 25.5% year-over-year price declines in September, followed by Arizona (20.3% decline), Florida (17.7% decline), Michigan (15.1% decline) and Idaho (14.9% decline).
First American CoreLogic’s HPI is down 29.9% from its April 2006 peak. Excluding distressed sales, it’s down 20.9%.
Write to Austin Kilgore.
The California Assembly is considering AB 1588, which would implement the Monitored Mortgage Workout (MMW) Program.
MMW would provide for state-appointed monitors to guarantee homeowners a chance at working out a plan with their lender to avoid foreclosure.
The bill was introduced recently by Karen Bass, the California assembly speaker, and announced by Antonio Villaraigosa, the mayor of Los Angeles.
Any borrower who receives a notice of default (NOD) would be eligible to participate in the MMW Program, which would be administered by the California Housing Finance Authority (CHFA). But the borrower would have to notify the CHFA his or her intention to participate in the program within 30 days of the NOD.
Once the borrower participates in the program, a state monitor oversees the loan modification process and no further steps can be taken toward foreclosure until the MMW program has been completed.
According to an announcement from Bass, the state monitor would assist in assessing the affordability of any loan modification and would analyze the net present value effect on the lender. If a modification isn’t reached, the monitor would form a proposal that fits the guidelines of the Home Affordable Modification Program (HAMP).
Through HAMP, the US Treasury Department allocates capped incentives for the modifications of loans on the verge of foreclosure.
If the lender rejects the proposal or if the monitor determines that the lender acted in bad faith during the negotiations, the borrower can try to enforce the monitor’s proposed HAMP modification in an expedited court action.
“Finding alternatives to foreclosure that homeowners and banks can agree to will keep our neighborhoods intact and help turn California’s economy around,” Bass said.
At the end of October, the bill reached an Assembly committee.
Write to Jon Prior.
If it wasn’t bad enough that the 2008 class of associates at Lehman Brothers worked a mere six weeks before the financial services firm collapsed, a year later, many of those same employees may be on the hook for repaying their $40,000 signing bonuses.
According to a report on a British financial employment Web site, a number of 2008 associates received letters demanding the former employees pay back their signing bonuses.
PriceWaterhouseCoopers, who is administering Lehman’s UK estate, sent the letters, not just asking for repayment of the bonuses, but also accrued interest and an increment for the depreciation of the British pound.
The bonuses were paid as a forgivable loan. If the employee stayed with the firm for a year and didn’t quit or get fired, it did not have to be repaid. But since the employees only worked for six weeks before the company collapsed, it’s uncertain how the wording of the bonus contracts addresses the employees’ involuntary unemployment.
Given the state of the market, that these fresh-out-of-business-school associates may have spent bonus money on repaying student loans and making ends meet while looking for a new job. It’s unclear what portion, if any, of the funds many of these former Lehman associates would be able to repay.
Write to Austin Kilgore.
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