Archive for January, 2010
More than 40 U.S. homebuilders have teamed up with private equity firms to acquire and complete unfinished subdivisions as banks cut construction lending.
The investments will pay off for the builders and their investors if the prices are low enough and the locations are in areas where demand is recovering, said Megan McGrath, a home building industry analyst at Barclays Capital Inc. in New York.
“I’ve been getting the question: Why aren’t housing starts at zero?” McGrath asked. “The answer is, they’re probably as close to zero as they’re going to get and in some cases it still makes sense to build.”
It is truly a sad state of affairs when an extension of a housing tax credit, super- low interest rates and the incursion of the Fed balance sheet into the mortgage market all translate into a down housing backdrop. The NAHB index fell for the second month in a row, to 15 in January from 16 in December, 17 in November and the nearby high of 19 in September, which takes the headline down to June 2009 levels. In fact, this is the fourth lowest reading ever. What was really striking was the dip in the ‘prospective buyer traffic’ sub-index to 12 from 13 – the lowest this has been since last March when everyone seemed to think the world was coming to an end.
But up to now, most of what I've read and heard about the upcoming commercial real estate doom had been mostly isolated to smaller, regional banks. They were said to hold greater CRE risk than the bigger banks. While bad news for the FDIC's insurance fund, at least it would imply that the big banks might not need another bailout due to commercial mortgages going bad.
But yesterday, Bair said:
Despite what you may be hearing, CRE credit problems are affecting big and small banks alike. In fact, CRE noncurrent and charge-off rates are higher at banks with over one billion dollars in assets than at community banks. Industry analysts expect CMBS delinquency rates to continue climbing.
That's pretty disturbing. Big banks are actually exposed to uglier commercial mortgages than smaller banks. But what does this mean in a broader context?
Peter Kempf, Chief Operating Officer at American Mortgage Consultants
Peter Kempf is president and chief operating officer of American Mortgage Consultants (AMC). AMC is a full service due diligence and mortgage services company offering mortgage and consumer-related analytics. With over 14 years of secondary mortgage market experience, Kempf was instrumental in the development of AMC’s non-performing and distressed assets due diligence platform. He is responsible for strategic development and corporate vision, and provides executive oversight supporting all core business lines.
Back in October, Standard & Poor's added AMC to its list of firms that meets its criteria for third-party due diligence reviews of US RMBS. How did your approach earn you the distinction?
AMC was able to demonstrate to S&P our independence and competence as a third-party due diligence firm. Utilizing experienced staff in all facets of credit, legal compliance and property valuation assessments, combined with our proprietary systems capabilities, continual staff training, testing and quality assurance policies, AMC met or exceeded S&P’s general criteria for assessing an independent third-party.
What has changed since the start of the credit crisis in terms due diligence for securitization?
First, we have seen increased samples that meet the rating agencies’ target sample size criteria. Also, rating agencies now assess the independence, competency and quality of the third-party review firms utilized. The reporting now entails more loan level data, and increased narratives attesting to the scope, procedures and findings. Finally we have seen tighter credit standards, as to be expected.
Securitization, to many, worsened the fall of the housing market. Does this stance hold water, or is there a need for securitization?
Sales of securities provided banks with immediate cash, which in turn they used to lend more. As lending accelerated, the underwriting standards were stretched. The availability of cheap, easy credit along with low interest rates, GSE demand/support for product, and the introduction of new exotic mortgage products increased the demand for housing and led to inflated housing prices. So yes, the demand among investors for MBS was one of many factors that contributed to the fall of the housing market, and the deflation of the housing market has led to tremendous declines in the values of MBS.
However, in an environment with limited bank lending and capital markets access, and plenty of distressed assets on the balance sheets, securitization is an inherent necessity and vital funding tool supporting the housing market. While over-leveraged ownership is problematic, securitized financing is beneficial and critical to the economy assuming risk is properly accounted for and managed.
Credit agencies take a lot of heat for their role in the crisis. What does the future hold for the big three, Fitch, S&P and Moody's?
Any restart of securitized markets will require substantial rating agency reform to re-instill investor confidence in the ratings. The agencies’ role is important to analyze the risk of the product compared to other debt obligations. However, it is the complexity, non-transparency and illiquidity of some securitized products, along with the lost confidence that needs to be addressed to attract investors in the future. SEC rating agency reform may diminish the future role of ratings, yet I feel restoring their credibility through simplicity and transparency could still be vital for the successful resurrection of securitized product markets. Ideally you would want the investors to hire the rating agencies, not the issuers – although this is unlikely with the big investors.
Write to Jon Prior.
Recently-announced underwriting changes to the Federal Housing Administration's (FHA) mortgage insurance program might be "all bark, little bite" according to commentary Thursday by Barclays Capital (BarCap) researchers.
The FHA changes include increases in the mortgage insurance premium, increased downpayment for low FICO borrowers, reduced ability to roll closing costs into the loan and increased lender recourse to FHA lenders.
“These changes are overdue,” FHA commissioner David Stevens said in a press call, adding the changes should be “significant but not overwhelming” to the lending industry.
A mortgagee letter facilitating the change is now out, directing that FHA loans with case numbers assigned as of April 5, 2010, will be charged an upfront mortgage insurance premium of 2.25%. This applies to all mortgages insured under FHA's single-family insurance programs, except for home equity conversion mortgages and Hope for Homeowners loans.
Absent from the overhaul was the establishment of a minimum FICO score or a higher minimum downpayment than the current 3.5%, BarCap noted. The moderate changes should not lead to any significant reduction in either Ginnie Mae prepayment rates or issuance of securities backed by FHA-insured mortgages, researchers said.
"Overall, the changes announced to FHA underwriting seem to be less restrictive than anticipated, and, in our view, reflect the conscious decision of the FHA to support mortgage credit availability and the housing market at the expense of minimizing losses to the MI fund," BarCap said.
The higher downpayment requirement of 10% for borrowers with FICO less than 580 doesn't look likely to affect a great portion of FHA borrowers, as researchers note only 0.5% of recent FHA purchase loans were given to borrowers with less than 580 FICO (illustrated below), indicating the change may be overall "inconsequential":
FHA is touting initiatives to step up enforcement of FHA standards on lenders and ultimately hold lenders more responsible for loans they originate. BarCap notes, however, that Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) loan repurchases by banks has picked up significantly toward the end of 2009 (illustrated below), causing lenders to tighten credit standards on new government-sponsored enterprises (GSE) originations:
"In our view, repurchase risk has already caused large originators to tighten their underwriting across their lending platforms, including FHA lending," BarCap researchers said. "Consequently, it seems that a lot of the tightening for FHA lending has already occurred."
The FHA also reduced the portion of the house price a seller can provide homebuyers at closing, from 6% to 3%. It will limit more "egregious" cases of sellers providing upfront assistance and inflating the sales price of the house, while still allowing the practice of seller concessions, BarCap said.
Another seller assistance program, the seller-funded down payment assistance program, was terminated over concerns house prices were inflated by sellers that donated to nonprofits, which in turn gave down payment assistance to low-income borrowers to use as a down payment on an FHA loan. Recent moves to restart this program have encountered resistance from FHA as it seeks to strengthen the capital standing of its mortgage insurance program.
Write to Diana Golobay.
Disclaimer: the author holds no relevant investment positions.
Skipton building society has written to thousands of borrowers telling them it is dropping its promise to keep its main mortgage rate within 3% of the Bank of England base rate.
The society said it would be increasing its standard variable rate (SVR) from 3.5% to 4.95% from 1 March, which brokers estimate will add £180 a month to the cost of a £150,000 interest-only mortgage.
The move will immediately affect 29,000 borrowers. A further 35,000 who are currently on fixed and tracker rates could also move on to the higher SVR when their deals come to an end. The move is allowed under an "exceptional circumstances" clause contained in the society's mortgage offer letters, which also include the base rate promise.
The U.S. Federal Housing Administration, facing as much as $14 billion in losses from a down-payment-assistance program terminated in 2008, is seeking to block efforts to bring it back.
A bill introduced by U.S. Representative Al Green, a Texas Democrat, and supported by the U.S. Conference of Mayors, would restart a program that allowed nonprofit groups to donate the 3 percent down payment low-income buyers needed to get FHA-insured mortgages. Sellers, often homebuilders, then contributed that amount, plus a fee, to the nonprofits.
The plan, which funded the purchase of more than 1 million homes over 10 years, was halted by lawmakers concerned about rising defaults and evidence that some buyers were overcharged.
