Archive for November, 2009
Certain hedging shortfalls on residential mortgage-backed security (RMBS) transactions in Europe, the Middle East and Africa (EMEA) may lead to reduced levels of credit enhancements that protect investors, according to a report this week by Moody's Investors Service.
Cases where the hedging agreements fail to mitigate interest rate risk in RMBS transactions include imperfect hedges, basis risks and swap bands, Moody's said. These shortfalls may lead to greater rating volatility in stressed interest rate environments.
With imperfect hedges, Moody's said, there's a mismatch between the swap notional amount and the outstanding pool balance. Sometimes the amount to be paid under the swap might exceed the amounts to be received from the pool.
With basis risk, floating-rate loans in the pool and coupon on the issued notes are linked to different indices and therefore have different reset dates. In extreme scenarios, an issuer's payments on the notes may exceed those received from the pool and the difference must be covered from other sources like the excess spread and/or reserve fund. This reduces the credit enhancement available to the note holders, Moody's said.
In the swap band structure, minimum and maximum levels are in place for the notional amount of the swap. The interest rate risk is not covered outside the upper and lower bands of this range.
Moody's report author Stanislav Nastassine, a structured finance analyst, tells HousingWire the goal of the swap band structure is for the swap counterparty to make swaps as simple as possible. The swap band structure reduces the risk from the side of the counterparty against the movement of the notional within the upper and lower level bands, he said.
"For swaps in general for securitisation, one of the challenges is determining over which notional you want to hedge," said Moody's report contributor Christophe de Noaillat. "It's not like a normal bullet bond with a fixed amount. You have a pool that amortizes based on some parameters such as prepayments."
de Noaillat added: "By having these bands, the swap counterparty is trying in essence to minimize the amount which he would have to hedge, which has the downside for the transaction that if ever the notional of the pool were to go outside the bands' confines, it wouldn't be protected."
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PMI Group (PMI: 0.00 N/A) expanded its eligibility and underwriting guidelines for a number of loan products it insures, in many cases increasing maximum loan to value (LTV) thresholds.
Condominium mortgages can now by insured in non-distressed markets to a maximum 95% LTV. Previously, the maximum LTV was 90%. This new limit does not apply to attached housing in Florida. In distressed markets, the LTV maximum is 90%, up from 85%.
The changes come as part of an ongoing review process or eligibility and standards, A PMI Group spokesperson told HousingWire.
High-balance loans can now be insured in distressed markets to a maximum 90% LTV with a 740 credit score. Previously, the LTV was 85%. For non-distressed markets, high-balance loans can be insured with a credit score of 700. The score minimum was previously 740.
A number of loan products the companies previously insured, but pulled from eligibility are once again eligible for insurance include cash-out refinance loans, second home loans, construction-to-permanent loans and high-balance loans.
Cash-out refinance loans can be originated in non-distressed markets to a maximum 85% LTV with a 720 credit score, PMI said. Second homes are eligible in non-distressed markets to a maximum 90% LTV with a 720 credit score.
Construction to permanent loans, used to fund the construction of a home and paid off while the owner occupies it, are eligible in non-distressed markets with a maximum 95% LTV with a principal limit of $417,000 for borrowers with a 680 credit score, and 90% LTV to $625,500 with a 700 credit score.
High-balance loans for properties in a number of states hit hardest by the housing downturn, including Arizona, California, Florida, Hawaii, Maryland, Michigan, Nevada and Rhode Island are now eligible at a maximum 85% LTV with a 740 borrower credit score.
The company also announced clarified and enhanced underwriting guidelines that take effect January 1, 2010, but the company said its encouraging customers to implement them immediately. These guidelines range from allowing borrowers to use a credit card to pay closing costs outside of escrow to a 90-day ownership requirement and a requirement that borrowers complete credit counseling and establish a minimum of three current, active and open credit accounts with a minimum 12-month history and no late payments.
PMI Group generally relies on guidelines set by the government-sponsored enterprises, but when the two entities have differing rules, or when PMI Group wants to clarify a regulation, it will occasionally issue or amend guidelines, the spokesperson said.
Write to Austin Kilgore.
Ocwen Financial Corp. (OCN: 13.96 +1.53%) pushed 66% of its Home Affordable Modification Program (HAMP) trial modifications through to permanency, Paul Koches, a vice president at Ocwen told HousingWire.
Since HAMP launched in March 2009, the US Treasury Department allocates capped incentives to participating servicers for the modification of loans on the verge of foreclosure. According to the latest Troubled Asset Relief Program’s transaction report, Ocwen receives a potential $655m in capped incentives under HAMP.
Through October, Ocwen started three-month HAMP trial modifications on 11% of its eligible portfolio. Of the 67,912 loans in that portfolio, Ocwen has 7,636 active trial modifications.
“The trials that have been in progress long enough to be able to be converted into permanent mods, i.e. we collect the first month’s payment and you have to give another two months in order to give the probation, of those we have converted 66% thus far and that number is only going to go up,” Koches said.
Koches added that, from what he could tell, the conversion rate for the rest of the industry is in the single digits. A report from the Congressional Oversight Panel (COP), which reviews and reports on actions taken by the Treasury, questioned the permanence of HAMP modifications and stated that of the 500,000 trial modifications started as of October, 1,711 made it to permanency.
A spokesperson at JPMorgan Chase (JPM: 37.21 -0.75%), which started HAMP trials on 32% of its eligible portfolio through October, according the Treasury progress report, told HousingWire the company could not yet release numbers on its permanent conversions.
A spokesperson for the Treasury told HousingWire that it will begin including permanent conversions in its December HAMP progress report.
“It’s so low because so many trial mods are going off on verbals without the proper documentation,” the executive said. “It’s about sustainability. You can’t just throw spaghetti against the wall and hope something sticks. It’s about getting down to the nitty-gritty.”
Write to Jon Prior.
The rate of housing starts declined 10.6% from September to October, but the rate of housing completions for single-family homes jumped 10.7%, according to a joint release by the Census Bureau and the Department of Housing and Urban Development (HUD).
The seasonally adjusted annual rate of private-owned housing starts was 529,000 in October, down 10.6% from the revised September estimate of 592,000 and 30.7% below the October 2008 rate of 763,000.
The rate of single-family housing starts was 476,000, down 6.8% below the revised September figure of 511,000. The October rate for buildings with five or more units was 48,000, down 38% from the September rate of 78,000.
The rate of building permits also declined month-over-month. The rate of permits in October was 552,000, down 4% from September’s 575,000 and 24.3% below October 2008 estimate of 729,000. Single-family building permits were at a rate of 451,000, down 0.2% below September’s rate of 452,000.
The rate of housing completions was 740,000 in October, up 1.9% from September’s rate of 726,000 and 29.9% below October’s rate of 1,055,000. The rate of single-family completions was 528,000, up 10.7% from September’s rate of 477,000. The rate of multi-family completions was 200,000 in October, down from 210,000 in September.
Write to Austin Kilgore.
Mortgage insurer Genworth Financial (GNW: 7.83 +0.38%) kept $2.3bn worth of mortgages from foreclosure from October 2008 through September 2009, according its quarterly foreclosure prevention report.
Genworth worked out 17,810 loans during that time frame — 15% of the 115,000 delinquent loans in its portfolio as of Q309, a Genworth spokesperson told HousingWire.
In Florida, Genworth kept $245m in mortgages from foreclosure. Texas borrowers received the second most successful workouts, totaling $165m in mortgages, followed by $144m worth of mortgages in California.
Across the country, 80% of the workouts received a “cure” status, meaning the borrower became current on the mortgage. Loan modifications made up 44% of the workout types. Homeowners on a repayment plan accounted for 23%, short sales equaled 16% and 2% received a deed-in-lieu of foreclosure.
Chris Antonello, the senior vice president of marketing for Genworth’s US mortgage insurance business said that foreclosures unsettled communities, where people could not anticipate a national economic recession.
“What’s important now, however, is how the entire mortgage lending industry is responding, increasing efforts to help these homebuyers remain homeowners," he said. "It’s great that we could work with our servicer partners to help so many delinquent households nationwide resolve their mortgage problems.”
Write to Jon Prior.
Office of the Comptroller of the Currency (OCC) head John Dugan urged regulators to establish minimum underwriting standards for mortgage origination.
Dugan told a group of regulators from a number of countries that mandating underwriting standards “would be the true minimums that we believe must be observed to keep lenders from risking too much loss to both themselves and their customers,” during a speech in Tokyo on international banking and finance sponsored by the Japan Financial News Company.
Noting that every country’s economic condition is different, Dugan said each country’s underwriting standards should vary.
“Each country has its own unique credit culture and different approaches to mortgage financing, and what works well in one might not work well in another,” Dugan said. “What I am suggesting, though, is that each country should articulate what those standards are for their lenders, and should report periodically on how well those standards are working.”
For the US, Dugan called for three mandatory standards — verification of income and assets, meaningful down payments and qualifying borrowers based on their current ability to pay the later, higher payments of an adjustable-rate or other mortgage product with a payment structure that increases over time.
Dugan said income and asset verification standards reduce fraud, delinquency, default and foreclosure. He warned regulators this verification practice should be limited to circumstances "where it clearly can be justified.”
OCC data shows borrowers are less likely to walk away from a mortgage if they have invested some of their own money in the purchase of the property, Dugan said. He added there must be a balance between creating a meaningful down payment requirement and creating one so stringent that creditworthy borrowers are unable to purchase a home.
Borrowers with mortgages payment structures that increase over time historically relied on house price appreciation as the ultimate source of repaying the loans, “and as we have learned all too painfully in the last two years, house prices can certainly go down as well as up,” Dugan said. He also called for the abolition of negative amortization mortgages, which he said allow borrowers to dig themselves further into debt.
“These standards would not dictate every underwriting feature of a mortgage product; instead, they would focus on core practices of sound underwriting on which there is the broadest consensus,” he added.
Dugan said industry-wide underwriting standards level the playing field for all originators and foster an environment of responsible lending.
While he said he prefers markets regulate themselves and underwriting standards develop between willing lenders and willing borrowers, “when underwriting standards get so out of balance that they cause widespread damage to borrowers and lenders alike, it becomes necessary for regulators to act more prescriptively.”
Dugan added: “If ever there was a demonstrated need for such intervention, the searing US mortgage market experience of the last several years fits the bill.”
Write to Austin Kilgore.
Mortgage applications fell in two weekly surveys this week.
The Mortgage Bankers Association’s (MBA) survey of gross mortgage applications decreased 2.5% on a seasonally adjusted basis for the week ending Nov. 13 compared to the previous week.
MBA said its refinance index decreased 1.4% from the previous week and the purchase index was down 4.7%. It’s the sixth straight week that the purchase index declined and now sits at its November 1997 level. Refinance applications took a 72.9% share of total applications, MBA said, up from 71.5% in the previous week. The share of refinance applications is at its highest point since May 15, 2009. Adjustable-rate mortgages took a 5.4% share of activity, down from 5.5% in the previous week.
Mortgage Maxx’s survey of applications that’s adjusted to reflect the number of households initiating applications decreased 0.3% for the week ending Nov. 13. The firm warned increased foreclosures and the impending holiday period could further decline applications.
“Given the commercial woes poised to crush balance sheets and the outsized and soon to be overwhelming foreclosure/delinquency problem, objects in mirror may be closer than they appear,” Mortgage Maxx said. “300,000 foreclose filings for eight months in a row. Think T-Rex in Jurassic Park."
Write to Austin Kilgore.
The National Association of Insurance Commissioners (NAIC) selected global investment management firm PIMCO to aid in an assessment on residential mortgage-backed securities (RMBS) as part of an effort that will determine risk-based capital requirements.
PIMCO will assist NAIC in forming a model — established under a recent proposal — that will produce expected losses at the RMBS security level for insurers to map their holdings to the appropriate risk-based capital requirements.
PIMCO will develop a set of price ranges for six designations insurers will use to calculate risk-based capital charges for each security. These designations will apply only to year-end 2009 reporting, NAIC said.
“Creating this new assessment process is an important step toward providing more transparency about these complex securities,” said Roger Sevigny, NAIC president and New Hampshire insurance commissioner, in a statement Tuesday. “This unique treatment of [RMBS] distinguishes the NAIC as the only regulator to analyze these securities and require capital based upon the expected loss amount for a particular company.”
Write to Diana Golobay.
The New York Federal Reserve Bank received requests for nearly $72.25m of federal loans to purchase new issuance commercial mortgage-backed securities (CMBS).
The requests arrived under the Term Asset-Backed Securities Loan Facility (TALF) for new CMBS. The first round of bids submitted for new CMBS confirms industry reports that new issuance would see a revival through the program this month.
The legacy CMBS TALF program also received loan requests this week, as prospective investors asked for nearly $1.42bn of loans to buy up legacy CMBS. It marks a slight drop from last month's facility, which brought in $2.12bn of requests.
The Federal Reserve initiated the TALF program to stimulate lending by allowing private investors to purchase securities with a matching government investment. The reach of the program into legacy CMBS aimed to aid price discovery and provide liquidity for the commercial mortgage market, which faces a credit crisis of its own.
For months, the new issue CMBS-eligible TALF program was expected to stir up activity on the new issuance side, but November marks the first month the NY Fed received requests for loans to invest in both new and legacy CMBS.
Write to Diana Golobay.
While the threat of the first-time homebuyer tax credit’s expiration kept the housing market down in October, the tax credit’s extension and expansion should help the market further improve, according to John Burns Real Estate Consulting's November survey of homebuilders.
Average net sales per community held at 1.6 nationally, down from 2.0 in September. Net sales experienced gains in Texas, Northern Florida and Southern California. Northern California and the Northwest also experienced gains, but they were offset by declines in the Southern Florida, Southeast and Northeast regions, the research firm said.
The survey gauges the perspective of 265 home building industry executives from public and private companies, reflecting the results in 91 metropolitan statistical areas (MSAs) and 1,768 communities.
The lowest prices were in the Southeast and Northwest and lower-cost homes are selling better than higher-priced properties, due to an increase in Federal Housing Administration (FHA) lending and the tax credit.
Builders reported having an average 2.8 units of unsold, finished inventory per community. But that number could increase, as some larger builders are getting back into speculative building, especially in larger metro areas.
The survey also showed only 51% of builder sales were to homebuyers who qualified for the tax credit. The remaining nearly half of buyers purchased move-up homes, the same buyer that will now benefit from a $6,500 tax credit.
“Most builders were anxious to see this critical legislation pass,” said CEO John Burns. “Especially those focused on move-up or active adult/retiree product. Now, those builders can anticipate a boost in sales. The looming question is whether the incentive is enough to motivate consumers to buy during the seasonally slow year end.”
Write to Austin Kilgore.
