Archive for January, 2010
U.S. President Barack Obama is expected to announce an outline of what he'd like to see happen to mortgage companies Fannie Mae and Freddie Mac when he releases his fiscal 2011 budget proposal, likely early next month.
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Following are some scenarios, gleaned from comments by policy-makers, analysts and the GAO report.
FULL NATIONALIZATION
This might be the easiest option and would return the companies to their origins as a government tool to nurture the housing market. Some analysts see the Obama administration's Christmas eve move as a signal this is the direction they are leaning, but top White House economic adviser Lawrence Summers told the Wall Street Journal in late December "that certainly would not be the direction I would expect."
As the government looks set to reap a windfall from the bailout, the Obama Administration may be after more…
A report from The Hill:
President Barack Obama intends to raise $90 billion over the next decade through a special fee on the largest financial firms.
The administration is proposing the fee on the largest firms, not all of which received direct emergency money, to make up the losses on the government’s bailout efforts during the financial crisis.
“The fee that is put forward here is in many ways a minimum of what is owed back for the significant costs that are borne by the taxpayers,” a senior administration official told reporters on Wednesday night. The administration is calling the new policy a "financial crisis responsibility fee."
About one-quarter of Americans who have mortgages are underwater, meaning 11 million to 15 million people owe more money than their homes are worth. Let me introduce you to one of them: me.
When the housing crisis started to break in 2007, I felt pretty safe. I was newly separated and had refinanced my home in the Denver suburbs with a run-of-the-mill, 30-year fixed-rate mortgage. I lived in a nice cul-de-sac where adults took pride in their homes and kids and dogs ran in the streets.
THERE are many ways to decide whether to repay your debts but a national referendum is surely a first. That is what is going to happen in Iceland after its president refused to sign a bill paying €3.8 billion ($5.5 billion) to the British and Dutch governments over 15 years.
Given that a quarter of the Icelandic population has signed a petition opposing such payments, it is not difficult to imagine how such a poll will turn out.
MBS investors received an early present on Christmas Eve when the US Treasury announced an amendment to the GSE Preferred Stock Purchase Program (PSPA). Although the announcement was greatly appreciated, it was also widely expected and market reaction was muted. There are two main elements to the amendment.
First, prior to the announcement, under the PSPAs the retained portfolios of each firm were capped at $900 billion, and each firm was required to reduce the size of their portfolios by 10% per year beginning in 2010. Now, the requirement to reduce their portfolios by 10% per year applies to the portfolio caps rather than to the actual size of the portfolios. Fannie and Freddie's portfolios each total approximately $770 billion, so this change affords each firm greater flexibility and time to meet the portfolio reduction requirement. Second, prior to the announcement, under the PSPAs the Treasury had committed to provide up to $200 billion in funding to each institution in order for them to maintain positive net worth. Although neither of the two Agencies is expected to need more than the original commitment of $200 billion per institution (total funding to-date provided under these agreements had been just $51 billion to Freddie Mac and $60 billion to Fannie Mae), now the cap on Treasury's funding commitment for each company essentially has been raised to $200 billion plus all cumulative losses incurred over the next three years.
Who would've thought we'd have come so far, so fast.
As described in this Bloomberg article, the U.S. Department of the Treasury is now officially looking at ways to force a portion of every 401k/IRA account—or some other as-yet-nonexistent, government-mandated employee benefit account—into "fixed payment annuities", which in plain English, means that most of the money would be channeled into long-term Treasury bonds.
Officially this is all about "retirement security" (sounds nice), but it would also constitute a de facto seizure of private assets in order to fund government deficits at negligible interest rates—a stealthier version of what recently happened in Argentina.
Shares of Toll Brothers Inc. and Lennar Corp. were moving in opposite directions Thursday after Barclays Capital shuffled its ratings on the home builders.
In a research note Thursday, analyst Megan McGrath cut her rating on luxury builder Toll to equal weight from overweight and upgraded Lennar to overweight from equal weight.
Dan Reynolds, director at Colorado-based Lenders Asset Management (LAMCO)
Borrower defaults have become a proverbial 'pig in the python', and for Reynolds, who leads the default and REO service provider's strategic planning efforts, understanding where the market is headed is critical. Jon Prior takes some time with the LAMCO's director, putting a number on the amount of hidden REO inventory out there, and just where in the pipeline it may be.
You recently launched a new REO liquidation system. Are these free-market solutions more effective in dealing with foreclosed properties than government-incentive programs that slow down foreclosures?
Our unique REO Liquidation Management Process is designed to enhance the ability to manage the REO disposition process with the targeted results aimed at reduction of holding costs, legal and media risk mitigation and the increased speed of liquidation for our clients.
We assist our clients in streamlining their default and REO processes to avoid the slow down you speak to. Fortunate or unfortunate, the design of “slowing things down” is aimed at allowing the institutions that hold foreclosures the ability to get their arms around the mounting problem. LAMCO’s solution is in place to facilitate the liquidation process as timely and safely as possible once the REO asset has passed through the “incentive bottleneck.”
You have a good perspective on the size of the foreclosure inventory. How big is it, and is there enough market demand for discounted homes to burn through the inventory?
Our resources shed light on a shadow inventory of 7m homes nationally, and the10.9m homes that carry an average negative equity of $68,000. All of these numbers are poised to increase as the negative equity (primary driver), high unemployment, as well as foreclosure holding times increase from 18 months headed towards 24 months. Government incentives and other measures that slow the process down just delay the inevitable. The demand or appetite of acquiring distressed assets today is currently coming from small or independent investors, an opinion that’s validated by the types of liquidation processes that are prominent today, traditional sales and auctions.
About how much of the pie do the independent investors make up?
One auction company told us that 90 percent of all of its sales are from independent speculative investors acquiring one or two homes at a time, as we experience the same type of buyer from a traditional sales perspective. This type of liquidation alone will not make a dent in the looming inventory. This raises the assumption of additional outlets for liquidation, such as a “bulk acquisition” model that can move inventory at a much more rapid pace. However, bulk acquisition only moves the problem from the banking institutions plate over to the “investment house” plate with the problem still needing to be addressed. It’s a problem that could then worsen as “dumping” properties quickly would lead to further property value depreciation and will drive increased negative equity, which leads to even greater foreclosures. We truly have a problem here.
REO supply is going up, but housing prices seem to be recovering and gaining ground. How is this possible?
The coloration of REO supply and housing price increases must be looked at very carefully. The supply of REO, as noted in opinions of a shadow inventory of 7 million homes that have not hit the market, should be a significantly weighted factor as to what is to come and the effect it will have on home prices when that occurs. There are many factors that need to be considered, such as the impact of realized balance sheet losses, compensation structures, legal risk, moral hazard and others that skew the reality of a housing price increase. A word to the wise would be to do your homework thoroughly if you are planning to acquire REO property as an investment.
Where is it toughest to sell REOs due to regulations or a lack of supply?
All states have their problems when it comes to REO. Increasing compliance regulations in all states create hurdles for the REO holding entity, fines, registration; lawsuits have everyone “on their toes” at this point. Example, selling REO properties at a significant discount could lead to a municipality creating a lawsuit based around an REO discount sale that devalues a neighborhood or county, with the finger pointed at “bad lending practices.” All entities liquidating REO property should consider these risks and approach methods of liquidation with caution. All states are equal from this perspective.
How will an REO service company like LAMCO adapt to a market that will eventually burn through this enormous stockpile of bank-owned property?
LAMCO has been in business for 20 years and has endured many real estate cycles. This one is no different, just much larger. Being there to help our clients and positively impact the economic recovery by expediting the REO process has always created a long term and loyal customer base. REO is not something that just goes away; it will always be here and so will LAMCO. Best practices in operational management, business diversification and quality maturity systems keep a company alive, not just a good product and being in the “right place at time.” Entities holding REO should evaluate their outsourced business partners by more than just what services are offered, but by the fundamental and proven business practices that are in place to keep the REO holding entity out of harm’s way and limit financial risk.
Write to Jon Prior.
