Archive for December, 2009
While a covered bonds market in the US could create a new asset class, attract private liquidity and aid in the origination of new loans, the system would require a sound legal framework to give investors certainty, expert witnesses told lawmakers Tuesday at a House Financial Services Committee Hearing.
The discussion comes as the House considers legislation establishing a groundwork for legal treatment of covered bonds — debt instruments covered by a pool of loans that remains on the issuer’s balance sheet. An attempt was made in mid-2008 to get a US covered bonds market off the ground, but the worsening liquidity crisis in following months prevented any substantial efforts to facilitate the market.
Pioneered as Europe’s pfandbriefe in the 1700s, covered bonds offer investors dual recourse in both the assets used as collateral and the underlying institution. This dual recourse system where the issuer maintains all the risk, along with the high underwriting standards of the loans in the covered bond pool, give investors confidence and can provide for liquidity in the US mortgage market, according to Rep. Scott Garrett (R-NJ), who recently introduced an amendment to establish a legal framework for a US covered bonds market.
Garrett added to comments he made in a teleconference Monday by noting the prospect for modifications under a covered bonds structure are favorable to the securitization process, where loans are not held by the issuer. Modification of loans within securitizations is complicated by conflicts of interest held by multiple note holders. With covered bonds, the loans remain with the issuer, who has an interest in keeping the loans performing.
Garret's previously introduced amendment would create a detailed statutory framework to facilitate the use of covered bonds in the US. This would give investors surety in recourse, he said in the hearing Tuesay. His amendment defines asset classes that could participate in covered bonds — not only residential mortgages but others like commercial mortgages and auto loans. The Treasury Department would act as covered bond regulator.
Witnesses at the hearing indicated a legal framework for the facilitation and oversight of US covered bonds would return Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) to a competitive market by creating a new channel for private liquidity.
Alan Boyce, CEO of Absalon, George Soros' joint venture with the Danish financial system to organize a standard mortgage-backed securities (MBS) market in Mexico, recommended that any US covered bonds market keep the interest of the issuing institution better aligned with those of the borrowers and investors. He said in cases where the institutions must pull nonperforming loans from covered pools, cash should be the only substitute.
Bert Ely, a principal at financial institutions and monetary policy consulting firm Ely & Co., said covered bonds offer better credit risk management through 100 risk retention, since firms keep loans on their balance sheets. He said covered bonds offer borrower protection, as lenders keep the loans they make. He added lower interest rates are attainable through covered bonds, as transaction costs are lower to lenders. Finally, a substantial new supply of high-quality debt attracts international investors.
Wesley Phoa, senior vice president of Capital International Research, agreed that covered bonds are an attractive investment. Asset management firms currently investing mainly in Government bonds sacrifice diversity and make investments more sensitive to policy changes, he said. Investing in covered bonds would provide a private sector alternative, as "safety comes from good collateral, not government support," Phoa said.
"Investors can live with economic uncertainty," he said. "That’s our job. But uncertainty about institutions and policies is problematic. Sound investment analysis relies on a clearly defined framework of rights and duties. That’s a critical element of investor confidence."
He called for fundamental soundness and liquidity in a US covered bond market. He also noted the importance of adequate returns for investors, good oversight of the system and legal and policy certainty to secure a broad investor base.
Scott Stengel, partner at Orrick, Herrington & Sutcliffe on behalf of the US Covered Bond Council, noted that institutions participating in covered bonds keep 100 percent "skin in the game" by keeping loans on their balance sheets. He recommended any legislation on covered bonds in the US define eligible asset classes to include not only residential mortgages, but home equity loans, commercial and multi-family loans, public sector, auto and student loans, credit or charge cards and small business loans.
Christopher Hoeffel, managing director at Investcorp International Inc. on behalf of the Commercial Mortgage Securities Association (CMSA), said covered bonds could aid in the tightening of credit felt in commercial real estate (CRE) and commercial mortgage-backed securities (CMBS).
"While covered bonds should not and cannot replace CMBS as a capital source for the CRE mortgage market, facilitating a commercial covered bond market will be additive," Hoeffel said.
Write to Diana Golobay.
President Obama called on financial institutions, especially the ones that benefited from federal bailout money, to increase efforts to help the economy recover.
“The way I see it, having recovered with the help of the American government and the American taxpayers, our banks now have a greater obligation to the goal of a wider recovery, a more stable system, and more broadly shared prosperity,” Obama said in a prepared statement after meeting with the CEOs of 12 of the nation's largest financial institutions Monday.
Obama said the CEOs committed to originating business loans for creditworthy small and medium-sized firms. In addition, Obama called on the banking industry to not fight efforts at reforming the financial system to increase transparency, accountability and consumer protections. Obama noted the bank CEOs said they were committed to reform; lobbyists and industry group efforts are hindering progress.
“I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people,” he said. “If they wish to fight common-sense consumer protections, that's a fight I'm more than willing to have.”
Obama said after Citigroup (C: 30.87 +1.61%) repays the $20bn it received through the Troubled Asset Relief Program (TARP), the federal government will recoup 60% of the loaned funds distributed, with interest. “[W]e are determined to recover every last dime for the American taxpayers,” he said.
Write to Austin Kilgore.
Mortgage software developer Cogent Road added a tool to its Funding Suite credit report management software that provides users with new search and report generating features.
The tool, called Client Insight, allows users to pull data from the credit reports of mortgage buyers to create client profiles of typical customers, with additional features to show results based on geographic parameters.
A third report feature allows the user to identify potential borrowers that did not complete an application because their credit score was incorrectly calculated. If the potential borrower’s credit score could be improved, the borrower could potentially return to an active origination file, the company said.
“We developed Client Insight because there is tremendous value hidden in the aggregated credit reporting data ordered for previous mortgage loan applicants but it is usually unused,” said Cogent Road CEO William DiPaolo.
“Every credit report purchased strengthens the client’s market database. Client Insight can improve marketing results, increase the numbers of new customers, help make it easier to reach out to them later and engage them as a repeat customer,” DiPaolo added.
Write to Austin Kilgore.
The number of servicers participating in the Home Affordable Modification Program (HAMP) grew to 88, according to the latest report from the US Treasury Department.
Under HAMP, the Treasury allocates capped incentives for the modification of loans on the verge of foreclosure. Currently, the 88 servicers could receive a potential $27.4bn in capped incentives, but the details of the program make room for $50bn.
Of the newcomers, Phoenix-based Marix Servicing earns the highest cap at $20.3m. The Idaho Housing and Financing Association, based in Boise, receives a $9.4m in capped incentives. In third place is the Golden 1 Credit Union, based in Sacramento, earning $6.1m in capped incentives.
Fidelity Homestead Savings Bank, based in New Orleans, receives $2.9m in capped incentives. Based out of Spokane, Wash., Sterling Savings Bank earned a $2.2m cap. Silver State Schools Credit Union, out of Las Vegas, received a $1.8m cap.
American Eagle Federal Credit Union, based in East Hartford, Conn., can receive $1.5m in incentives. First Keystone Bank from Media, Penn. receives up to $1.2m in incentives.
Community Bank & Trust Company from Clarks Summit, Penn. received $380,000 in incentives. Spirit of Alaska Credit Union, based in Fairbanks, received $360,000. And both Home Financing Center in Coral Gables, Fla. and Bay Gulf Credit Union of Tampa earned $230,000.
Recently, the Treasury reported 30,000 permanent modifications under the program through November. Over 1m trial modifications have been extended. The low conversion rate has spurred some to call HAMP “destined to fail.”
Write to Jon Prior.
The demand for building materials will continue to be low in 2010, resulting in reduced pricing power and profitability for most of next year, Moody’s Investors Service wrote in a new report.
Demand for cement, aggregates and ready-mixed concrete will continue to decline, hurting revenue and cash flow for materials industry companies. The decline in demand will come primarily from nonresidential construction, which is projected to decline nearly 9% said Moody's senior vice president Glenn Eckert. Although the falloff in nonresidential construction could start to let up in 2011, the recovery in building-materials shipments will be slow and painful, he added.
However, public construction and infrastructure projects, primarily those funded by government stimulus programs will be a boost for the materials industry. After four years of steep declines, residential construction will enter a period of weak but stabilizing activity.
“Foreclosures and high unemployment will weigh on demand for newly built homes, suppressing any substantial up tick in demand for building materials from this sector for much of next year,” Eckert said.
Write to Austin Kilgore.
Commercial real estate lender Capmark Financial Group on Friday unveiled the completed sale of its North American servicing and mortgage banking business to Berkadia Commercial Mortgage.
The completed sale comes after Capmark in late November received approval from the US Bankruptcy Court to sell the unit. Capmark initially proposed to the bankruptcy court it would sell the business for $515m, a transaction expected to close by the end of the year.
Capmark previously entered an agreement regarding the sale to Berkadia, a newly formed entity owned by Berkshire Hathaway and Leucadia National Corp. Under the terms of the agreement, Capmark had 60 days from the date of its Chapter 11 bankruptcy filing to exercise the put option. The sale was subject to approval by the bankruptcy court.
The bankruptcy filing was part of a larger restructuring effort at Capmark and certain subsidiaries — not including Capmark Bank, which was excluded from the filing. Capmark Bank received $600m of new equity from Capmark and should continue its business unaffected by the bankruptcy proceedings
Write to Diana Golobay.
As the global economy emerges from the recession and shows continued signs of improvement, the Federal Reserve is likely to execute its exit strategy for winding down the period of extraordinarily low interest rates used to stabilize the economy as early as the summer of 2010, according to a BBVA Compass analyst.
“In Q409, it is clear that the worst of the recession has passed; the economy expanded in the third quarter, financial conditions are stabilizing, residential investment grew for the first time since 2005, consumer spending is picking up and business inventories are more in line with sales,” BBVA research department’s chief US economist Nathaniel Karp wrote in a fourth quarter outlook report (download here).
Industry players surveyed eight weeks ago expected the Fed’s low interest rates to rise as early as February 2010. A survey conducted within the past two weeks showed now rates aren’t expected to rise until June 2010, Karp said in a conference call Monday. Inflation pressures will remain low “in the foreseeable future,” enabling the Fed to keep interest rates low.
“Given the slack in the economy, the Fed is expected to gradually wind down the monetary stimulus. The strategy is anticipated to focus first on the withdrawal of quantitative easing and then on raising rates,” Karp wrote.
Crucial to the wind-down will be a transparent and gradual process that will include not only increasing rates, but also the wind-down of short-term lending, paying interest on reserves, time deposits for depository institutions, reverse purchase agreements and runoffs and asset sales.
In residential real estate, low prices, attractive mortgage rates and the extension of the homebuyers’ tax credit will support demand, which will prompt more construction, Karp wrote, adding that commercial real estate (CRE) will continue to suffer from a lack of available credit. The strains in commercial real estate are larger in office space and “milder” in apartments.
Write to Austin Kilgore.
Laurie Goodman, veteran MBS analyst and now a senior managing director at Amherst Securities, served up painful facts about mortgage defaults at a House Financial Services Committee hearing last week concerning "The Private Sector and Government Response to the Mortgage Foreclosure Crisis," Available here.
An ace HousingWire reporter already scooped this story, but I've been itching to comment since I watched the hearing. Goodman brought facts and a spirit of inquiry to the policy discussion that bear celebrating. As a matter of fact, when the Committee released the names of witnesses the night before the Hearing, I'd felt the kind of hope for Congress I hadn't felt in months. Someone without a political or corporate agenda, having detailed data on mortgages and years of professional experience interpreting it, was going to testify. Psych!
Goodman is a real mortgage analyst. Not an staff economist for a regulator justifying its performance (or existence) or a university professor opining from 30,000 feet (typically with an ideological predilection for the right or the left side of the issue), but someone who had their arms up to the elbow in actual loan level performance, who knew how to look in the weeds for evidence of borrower motives, servicer performance, the determinants of trends.
It's not just Goodman (though for years she has been recognized by investor surveys etc. as a premier analyst and strategist). There's a number of other disciplined and creative analysts on both the buy and sell sides of the MBS and ABS markets that the Congress and the Administration ought to have been listening to while dreaming up their schemes to heal the mortgage and housing markets, save financial markets from themselves, and put financial institutions back on the straight and narrow. So indulge my enthusiasm and let me highlight some key points in her testimony.
First, Goodman demonstrates how strong a driver of defaults negative equity is. Her testimony is based on a study of loans that were 30 days delinquent 6 months earlier. Then, Goodman looked forward 6 months, for loans that had gone on to be at least 60 days delinquent. Out of prime borrowers originally 30 days delinquent with 20% equity, 38% were 60 or more days delinquent. Borrowers with less equity performed worse. For example, a full 75% of the prime borrowers originally 30 days delinquent with significant negative equity (141% – 150% loan to value) were 60+ days delinquent.
Why does Goodman study borrowers 30 days delinquent (rather than currrent, for instance)? To demonstrate how important a factor negative equity is in the borrower's decision to default. In addition, this approach keys on the fact that cure rates are much lower and transition rates into successively worse delinquency rates are much higher than in previous credit downturns.
Here's how Goodman narrates current events: "Most borrowers do not default because of negative equity alone. Generally a borrower experiences a change in financial circumstances, misses a payment on their mortgage and then re-evaluates … If the home has substantial negative equity, they chose to walk."
By focusing on the transition from 30 days delinquent to seriously delinquent, the testimony underscores something else Goodman and her fellow MBS analysts have pointed out for a while: time is on the side of defaults, and waiting for a delinquent mortgage to self cure in this housing market is a losing game.
Goodman also took on the widespread, but mistaken notion that unemployment is the primary driver of delinquency, default and home loss. (Indeed, a committee member set her up for a dunk ball, by stating "there is no better foreclosure mitigation plan than a job." I should clarify, he was using his three minutes to grandstand against the Administration's stimulus, spending and tax programs as "job crushing" disincentives to job providers, not demonstrating his – or even his staff's – understanding of the dimensions of the foreclosure crisis.)
Drawing on her recent report, "Negative Equity Trumps Unemployment in Predicting Defaults," (covered by HousingWire.com at publication: Read here), Goodman made three key points:
1. The total ratio of mortgage debt to home value (CLTV) is critical. In areas with low unemployment, defaults rates of Prime and Alt-A loans were at least 4 times greater for borrowers underwater by 20% than for borrowers with at least 20% equity in their homes.
2. Comparing loan performance and unemployment rates at the local level (as can be done with loan level data), Goodman found all borrowers with positive equity performed similarly regardless of the local rate of unemployment.
3. When borrowers have negative equity – as measured by CLTV, to include second mortgages – unemployment plays a role, but a minor one compared to negative equity. For example, borrowers with CLTV greater than 120%, default rates were 50% to 100% higher in a high unemployment area than in a low unemployment area.
Summing it up, unemployment may be a catalyst, but it is not a driver of defaults.
Based on this research and a lot more like it, Goodman is comfortable telling the government that if they want to improve the success of HAMP, they need to move principal reduction higher in the modification waterfall and relax the focus on payment reduction.
Furthermore, to design a successful principal reduction program, "the Administration has to address the second lien problem head on" and provide for extinguishing the second lien. A couple of approaches could work, including "paying an extinguishment fee" or allowing banks holding second liens to take the loss over time rather than all at once.
Let me explain. The second lien is an obstacle to modification because it jumps to first position when the first mortgage is modified. This is a disincentive for the second lien holder to cooperate with the first lien holder in a modification and agree to re-subordinate their loan or reduce the principal amount and re-subordinate. The HAMP second lien program, 2MP, introduced in August, addresses some of these problems but does not yet seem to be operational. Unfortunately, as Goodman pointed out in her testimony, when it does come online, "it will merely make the second lien pari passu to the first lien."
This obstacle is not reduced by the fact that the four largest servicers (BofA, Wells Fargo, Chase and Citi) are also the largest holders of second lien residential loans. According to data compiled by Goodman last March, they own $94 billion closed-end seconds, $397 billion home equity lines of credit, and about $653 billion in first lien loans. (The report wasn't cited in testimony, but I relied on it in my November 2009 Housingwire Magazine article, "Modify Me: A Review of Loan Modification Efforts.")
At first glance, these concentrations seem to raise the odds that the first lien servicer is owned by the bank that holds the second lien. However, in March Goodman calculated that, even if every first lien was accompanied by a 25% second lien, only about $163 billion of the top servicing banks' second liens would be accounted for.
Last Word
Goodman acknowledged that her testimony had been focused exclusively on mortgage modifications. But she offered to return to work with the committee on mortgage modification as well as the broader set of measures that must be taken if the capital markets are to function efficiently again.
That was a good offer, one other congressional committees noodling the financial markets debacle should take up as well. And if they do, they should invite investment analysts and strategists from other investment firms. Having come up through the ranks of mortgage research myself, I am willing to vouch they are far less likely than the usual suspects at hearings to serve up a dish of cant and self-justification.
(Important disclosures: Linda Lowell is a stakeholder in the US housing market and a taxpayer. She worked for Laurie Goodman more than once in her decades as a security analyst, and may have been biased by that experience.)
A handful of companies are launching Websites into the real estate owned (REO) space as demand increases for foreclosed properties.
Lenders Asset Management Corp. (LAMCO), a default asset management company, released its new site, which offers more information to lenders on how to meet REO default management needs.
The site also introduces users to the LAMCO REO Liquidation Management Process, a system developed to mange and liquidate default properties. Complimenting the site is the LAMCOnetwork, which connects institutions that do not partner with an REO asset management companies with REO agents, appraisers, contractors and others.
LAMCO is launching into a space that is seeing increasing competition. For example, Heavy Hammer, an online real estate marketing company, holds a string of sites that provide free foreclosure resounces. USHUD.com and its sister sites grant access to more than 500,000 home buyers to foreclosure information every month. They also connect with real estate professionals to discern between good REO deals and bad ones.
Write to Jon Prior.
Real Estate Disposition (REDC), a real estate services company and auction platform, signed a definitive agreement with Pulte Homes (PHM: 7.79 -0.13%) to acquire Commerce Title retail title insurance agency platform.
Included in the sale are Commerce Title’s brand, its retail branch network and some additional assets. The sale is expected to close in Q110 pending regulatory and licensing approvals.
REDC is partly-owned by Stone Point Capital, a private equity firm helping to expand REDC internationally.
“REDC is excited about its entry into the title insurance agency segment,” said Jeffrey Frieden, CEO of REDC. “The Commerce Title retail platform, with its seasoned and successful team, is a great launching pad for our expansion into this market and will complement our other businesses nicely. We’re very excited about the opportunities ahead.”
Roughly 130 Commerce Title retail employees will transition with the sale. Its headquarters will be located in Dallas, Texas. Pulte will keep the portion of Commerce Title operations that supports its new home sales. Before merging with Pulte in August, Centex Corporation owned Commerce Title.
“This is a good transaction for both companies as it allows Pulte to focus on its builder title operations while providing new growth opportunities for the Commerce Title retail team,” said Debra Still, who oversees Pulte’s financial services operations.
Write to Jon Prior.
