Archive for February, 2010
John Healey, the Housing Minister at the Department of Communities and Local Government in the UK, said on a radio program that foreclosures are the “best thing” for distressed borrowers, according to a report from the Telegraph.
When asked why repossessions – the British term for foreclosures – reached a record high in 2009, Healey replied: “In some cases there is no way round that and in some cases it is the best thing for the people who are struggling with these mortgages."
Louis Amaya is the president of xplair Technology and chief operating officer of National Asset Direct (NAD). Prior to co-founding NAD, Amaya was the director of the Servicing Capital Group (SCG) at GMAC RFC. Amaya created the SCG and through its platform, managed the risk and disposition of GMAC RFC's multi-billion dollar non-performing mortgage portfolio. He has over 20 years of subprime mortgage banking experience in various roles, including portfolio management, capital markets, operations and origination. For this episode of In This Corner, he talks about how the recent financial crisis spurred financial institutions to find new ways of doing things.
How would you describe the mortgage industry's overall evolution in terms of technology over the past few years?
Historically, money flowed to the capital markets and the origination part of the business as that's where the money was made. Little money was allocated for improving risk management in servicing shops because servicing, oftentimes, was considered a cost of doing business. In the past few years, servicing has become increasingly important and is being noticed by investors as a key component of success when investing in real estate backed assets. Therefore, products developed by xplair such as iMS, our portfolio management software, increases transparency between investors and servicers and is being met in the market place with open arms.
Looking at the industry as a whole, what percentage is losing capital it doesn't have to lose because of ancient operating systems?
Large legacy servicers are not in a position to invest the money needed to effectively manage in this environment. Antiquated systems, fee structures and culture puts the larger players at a disadvantage in producing the most effective platforms and technology innovations. Smaller players who are nimble, creative and not bogged down by legacy have the upper hand in producing the right products. iMS was developed in this environment for this environment, by investors who focus on holding real estate backed asset for investment.
Has the financial crisis actually sparked some much needed innovation and streamlining?
Yes, in today’s economy, not only is it critical that investors know what their servicing and REO providers are doing, but it is how investors must manage their portfolios to be successful. To keep risks controlled and assure invested dollars are being managed, investors must assess their assets at a granular, interactive level. They want to touch each asset and expect their vendors to provide them the technology, workflow and methodologies to manage in this new environment. Understanding portfolio trends has seldom been as critical as it is now.
The industry is seeing a lot of condensing. Your platform links up investors, servicers and REO asset managers. What sort of benefits do one of these users see with these open lines of communications?
Transparency. There is no way for a service provider to hide performance, good or bad. Our iMS system allows the investor to drive strategy through data analysis and workflow. The user communicates directly with the individual managing the asset, and all communication happens in the system allowing accountability. This is real time portfolio management capability for the investor, and essentially everyone involved with the asset.
The East Bay Municipal Utility District, which provides water to 1.3 million customers around Berkeley and Oakland in California, will lead municipal borrowers today with a $400 million Build America bond sale.
The utility, which plans to offer 30-year bonds, is rated Aa2 by Moody’s Investors Service and AA by Fitch Ratings, each the third-highest rank, and AAA by Standard & Poor’s, the top grade. Hawaii and the Las Vegas airport previously this week sold almost $1 billion in Build America Bonds, whose taxable interest costs are 35 percent federally subsidized.
Now this is a good story.
Mortgage bankers have not been terribly sympathetic these past few years to the plight of struggling homeowners.
Those who have tried to do the right thing, and sell their homes in short sales instead of simply walking away, have too often found themselves caught in a web of corporate red tape.
And for frustrated homeowners who opt to walk away, well let's just say there's been absolutely no mercy at all.
"What about the message they will send to their family and their kids and their friends?" John Courson, chief executive of the Mortgage Bankers Association, recently asked.
Well now we can ask the same question about the Mortgage Bankers Association's own, spectacularly foolish real estate activities.
Real estate investment trusts Mack-Cali Realty Corp and Alexandria Real Estate Equities Inc reported higher quarterly funds from operations (FFO), helped largely by increased rental rental revenue and lower operating costs, but projected 2010 FFO below consensus view.
For 2010, Mack-Cali forecast fiscal 2010 FFO of $2.70 to $2.90 a share, below Wall Street expectations of $2.93 a share.
Separately, Pasadena, California-based Alexandria Real Estate Equities expects full-year FFO of $4.42 cents a share, missing market expectations by 4 cents a share.
At the height of the boom, the Dursts, the Rudins, the Roses, the LeFraks and other members of New York’s royal real estate families were treated like slow-moving dinosaurs on the verge of extinction.
Although they had spent more than five decades carving their names into the New York skyline, the families were outbid and sometimes outmaneuvered by the newer, flashier speculators and investors who swaggered down Manhattan streets buying one skyscraper after another at record-setting prices.
But now that some of the record-breakers are desperately trying to fend off lenders or teetering at the edge of bankruptcy, these families are looking like wise veterans. They are in relatively healthy financial shape and eager to do deals. They do not necessarily take pleasure in the downfall of the upstarts, but they do relish the fact that, as one scion said with a bit of exaggeration, “Now, we’re the only ones breathing.”
Yesterday, both Freddie and Fannie announced their schedules for buying seriously delinquent loans out of their guaranteed securities. The buyouts have been anticipated by the marketplace since the economic consequences of implementing FAS 166/167 as of this month became clear last fall. Freddie's plan takes substantially all out this month; Fannies takes an unspecified amount out over a period of a few months starting next month.
(Again, the accounting treatment for loan purchases is not the same as that for loans held on the GSEs balance sheet subsequent to FAS 166/167 consolidation. The GSE is required, under its guarantee, to pay out par to investors: prior to consolidation that bought out loan was booked at fair value, for an instant 40-60 point hit to capital; the newly consolidated loans came on balance sheet at par and are subject to standard methods of measuring allowances for loan losses, in effect spreading the loss over time and conserving capital – something taxpayers should prefer.)
Given the significant impact bulk buyouts would have on the investment performance of securities with high concentrations of delinquencies (especially 30-year 6s, 6.5s and 7s issued in 2006-8) market has been watching for any sign the buyouts were underway. It has been scrutinizing in debt issuance (which would fund buyouts) and prepayment reports, but it clearly did not expect a straightforward announcement and most were taken by surprise (add that New York, where most broker/dealer MBS analysts are located, was finally getting a real share of the snowpocalypse).
When I posted commentary on the announcements yesterday afternoon only one firm, off the path of yesterday's storm, had gotten out comments and prepayment projections based on Freddie's announcement. By morning, however, several thoughtful examinations of both enterprises announcements had arrived in the email. So thoughtful, I wanted to update my comments yesterday with their observations.
The announcements are a relief. Analysts at Credit Suisse led by Mahesh Swaminathan say the positive development for the market "removes a substantial amount of prepayment uncertainty and injects potential reinvestment demand of around $60B in March and as much as $115B over the next few months." However, they also noted that the GSEs own a substantial amount of MBS in their portfolios, which could limit pay outs to other investors by 10-15%.
Vipul Jain at Bank of America/Merrill Lynch notes that the buyouts can actually cause a decline in net issuance, because the paydowns are driven by credit events not refinancings, and hence don't result in creation of new securities. New MBS supply can only follow if the delinquent loans are foreclosed and underlying properties liquidated or the delinquent loans cure and are resecuritized.
I suggested yesterday that the market should react more positively to Freddie's approach. Laurie Goodman at Amherst Securities spells out why: "Freddie's buyout program was implemented in a way to be minimally disruptive to the market. The February settlement date has passed, and the Feb/March roll is no longer trading." Investors who hold mortgages this month will suffer an unavoidable one time loss, but going forward, pools settling Freddie trades will be much cleaner.
By contrast, Goodman notes Fannies announcement "will make trading more difficult" because it is not clear which securities will be bought out in which order." She suggests that Fannie offer a clear program – will buyouts proceed by degree of delinquency, coupon, issue year, or some other measurable?
Goodman gets a fine point too – the difference between the programs is governed by a clear operational difference between the two enterprises. Freddie can buy directly out of a pool, but Fannie has to ask the servicer to do so. "Thus, the additional month delay is to allow servicers to gear up for this, and the few month timeframe is meant to allow for servicer capacity constraints and other operational issues." Given those constraints, she says Fannie is implementing buyouts as quickly as possible.
Portfolio implications are different for the two enterprises as well: Goodman expects Freddie's purchases to bring it close to its $810 billion cap, but prepayments and liquidations through the year will naturally increase freeboard. This is important – me talking now – to allow Freddie to step in with a backstop bid for MBS after the Fed departs.
Fannie, on the other hand, will, in Goodman's words, be "far more constrained." Fannie announced that it had $127 billion of loans four or more months delinquent, but it only has about $37 billion of clearance currently under its 2010 limit ($810 billion, same as Freddie). In other words, they need the portfolio to run off to allow them to complete anticipated buyouts. Goodman's math suggests they'll squeak through, but may not be back as quickly as Freddie to buyout future 120+ delinquencies or may have to sell securities to accommodate additional buyouts.
Analysts all have different views on how the two will fund their purchases. Swaminathan at CS estimates 70% of buyouts will be funded through short term debt issuance and the remainder through Treasury preferred capital, but taxpayer dollars don't figure in other discussions. Goodman expects both to fund through debentures. FTN Financial agency analyst Jim Vogel thinks Freddie has prefunded most of its February buydowns, but Fannie will have to ramp up issuance. RBS agency analysts worked through current liquidity position at Freddie, recent issuance, likely runoff and liquidation cash flow to estimate Freddie would need to issue just $600 million more this month to cover buyout-related funding needs.
Differences between the two plans were reflected in price action in yesterday's trading. Vipul Jain, publishing after the market close noted price spreads between Freddie and Fannie 30-years rallied significantly (in market parlance Gold/Fannie swaps, for example better by 17 ticks in 6.5s in Freddie's favor). Color from Market News International's widely followed FI Bullet service indicated that Fannies came under pressure after the Freddie announcement, with some decent selling of higher coupons by real and fast money and some fleeing into the safety of Ginnies.
NOTE: Linda Lowell writes a regular column, called Kitchen Sink, for HousingWire magazine.
Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.
Posted in Commentary, Linda Lowell, Slider, Top Stories, Voices | 1 Comment »