Archive for March, 2010
The share of recent loans backed by the Federal Housing Administration that are seriously delinquent fell in February to the lowest point since last summer, reversing an alarming increase in the agency's default rate.
About 4.8% of FHA-backed loans made in the two years ended February 28 were at least three months late, down from 5% in the two-year period ended January 31, according to the agency's most recent public data. About 154,000 loans were seriously behind and another 8,500 had gone bad, requiring the agency to pay claims to lenders.
The agency's default and claims rate climbed April through November before leveling off in December and January and starting to decline in February, the data show.
The FHA played a critical role in propping up the housing market by insuring lenders it works with against losses after the mortgage market unraveled. But the agency's default rate shot up as its loan volume expanded, depleting its cash reserves to dangerously low levels and raising concerns about a possible taxpayer-funded bailout.
A long-awaited renovation of mortgage companies Fannie Mae and Freddie Mac could start to take shape this year, Treasury secretary Tim Geithner told Congress Tuesday.
The Obama administration hopes to propose legislation to fix the nation's housing finance system within months, Geithner told the House Financial Services Committee. The government currently finances almost all home mortgages, thanks to its 2008 takeover of Fannie and Freddie.
Geithner acknowledged that devising a new system to finance US house purchases would be a "complicated, consequential" process. He emphasized that he hasn't "seen an ideal model" to replace the current arrangement, which is widely viewed as undesirable because of its role in inflating the housing bubble and the conflict between Fannie and Freddie's profit-seeking and public policy missions.
Top-rated bonds backed by commercial real estate loans are rising at a “torrid” rate as investors snap up the safest debt in the class amid climbing delinquencies, according to Barclays Capital.
“The CMBS rally continued its torrid pace, led by the senior portion of the capital structure,” Barclays analysts led by Aaron Bryson said in a March 19 report.
Yields on top-ranked securities backed by skyscraper, hotel and shopping-mall loans fell 0.31 percentage point to 3.5 percentage points more than benchmark swap rates last week, the lowest in six months, according to BarCap.
The Financial Services Authority (FSA) has met with a divided response from the UK mortgage industry over its proposals to ban loans that require no proof of income.
The City regulator last October proposed a ban on “self-certification” loans, which have allowed 1m borrowers to take mortgages without proving their income. Self-cert loans were intended to help the self-employed buy homes by taking their word about what they earned.
On Tuesday, it published a 34-page Mortgage Market Review feedback statement in response to a discussion paper on the proposals.
But the FSA said its proposal to make income verification a requirement for all mortgages generated a polarized reaction from those in the mortgage industry.
Mortgages should be made less attractive. That’s one lesson of the recent housing bubble and bust. As long as borrowing seems like the easy road to riches, people will do too much of it. But right now in the United States, the tax code encourages many people to take out big mortgages. That’s why it’s a good idea to put the elimination of the tax deductibility of mortgage interest on the political agenda.
American homeowners can for tax purposes deduct interest on mortgages of up to $1 million. It’s a politically popular arrangement, and the lure of paying a bit less to the government has been an incentive to stretch housing budgets up to, or past, the limit. Even extra cash borrowed under home equity loans can share in the tax largess, whether or not the funds go to home improvement.
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The high income needed to take advantage of this tax benefit undercuts the claims of supporters that tax deductibility of mortgage interest promotes home ownership, which almost all Americans seem to assume is a good thing. In fact, it is a distortion in favor of those who need the least help.
The tax logic also encourages families to borrow rather than save. When the personal savings rate is a paltry 3% and policy makers are wringing their hands about global imbalances, this is the wrong message to send. Moreover, potential investment is skewed toward housing rather than, say, infrastructure, manufacturing and education.
Things are changing in America. We asked for it. Now all we have to do is keep up with it.
Of course, that may be problematic when we're dealing with new bills passed without even being read by Congress and signed into law alongside executive orders that may or may not change the letter of the law. This, all piled on top of a regulatory system that has proven inadequate for policing the laws we already have on the books—even if they were given additional budget for enforcement, which they are not. Fun times.
Unless you're a mortgage lender, that is. Then it's what we call a compliance nightmare.
Lenders thought they had it bad when multiple jurisdictions could layer on multiple anti-predatory lending laws, all using different formulas, and expect the lender to do business without violating any of them. That was a lot of hoops to jump through, back in the day. Of course, any lender can handle that now. It's all locked into the computer. The automatic audits will scan the deal, slap it up against all the different formulas and come back with a list of possible problems, nicely sorted by jurisdiction. Naw, that stuff's easy today.
What's hard is knowing what impact a new regulation may have on your business when you're not sure if the agency that is handing down the regulation even has jurisdiction over your institution (which may not even matter if it allies with a mission-critical player, like a GSE) or, if it does, how it may impact your partners, your technology requirements and ultimately your costs of doing business.
Compliance costs are skyrocketing for lenders and it will get much worse before it gets any better. Lenders can't afford not to have professional legal support for every deal they originate because buying back a $250,000 loan that they make a couple of basis points on is like a spike through the heart. The more muddled the compliance landscape gets, i.e. the more the government tries to fix things by putting laws in books instead of enforcement officers on the street, the more lenders will be forced to spend on compliance attorneys to stay in business.
And they'd better hire the best ones out there, because it won't be long before that's just one more metric they'll be measured against. When non-government-owned investors come back into the mortgage secondary market, they'll want to know three things: whether the institution that originated the loan has the capital to buy it back if required to, whether the technology is in place to give the investor full visibility into the loan pool for as long as they own it, and what kind of compliance protection the originator had when they closed the loans.
I wouldn't be surprised if we ended up with some kind of lender score investors use that's analogous to the FICO score for consumers. A measure of how well they meet all the real needs of tomorrow's investors. Those lenders with a higher score will either make more money on every loan they sell into the secondary market or be the only ones selling loans into the market.
But the biggest part of the score will likely be related to the lender's ability to never fall out of compliance with any law or regulator or investor requirement. How well will they be able to stay within the lines when new lines are being drawn all over the map all the time?
We've seen some big changes over the last year or so in our financial services regulatory environment, but nothing like what health care has seen. The health care industry doesn't even know yet what it's going to see because no one has read the law they passed yet, but it will be significant. And painful for many.
Lenders who think they can avoid the same fate in a political environment like the one we're living in today will need more than good compliance protection. They'll need to think again.
Michael Prieskorn changed his plea to "guilty" today on federal charges, admitting he ran a massive mortgage fraud scheme that targeted dozens of residential properties in Minnesota and Wisconsin.
Prieskorn, 35, pleaded guilty to one count of conspiracy to commit wire fraud and a second charge for sending $225,000 in proceeds from the fraud to a bank account he controlled.
Sentencing guidelines for those crimes range from just over 11 years up to 14 years. Prieskorn has agreed to cooperate with investigators against other people involved in the conspiracy, which could allow a judge to take his sentence below the guideline level.
He appeared before US District Court Judge Paul Magnuson this morning in St. Paul. Prieskorn answered "yes" to repeated questions about the scheme. He admitted that he and others intended to defraud mortgage lenders by lining up "straw" buyers for residential properties, putting money in their accounts to make them qualified buyers, and promising the straw buyers that they wouldn't have to make mortgage payments.
Australia's biggest credit union has launched an assault on the nation's A$860bn (US$789bn) mortgage market, cutting its standard variable interest rate by 25 basis points (bps) to 6.37%.
The move puts Credit Union Australia's new standard variable rate about 50bps below the average rate of the big four Australian banks.
The cut is in stark contrast to the rising rates offered by the major banks, which have sometimes increased their rates well ahead of the Reserve Bank of Australia's interest-rate adjustments.
"There has been talk in recent weeks about the need for competition in financial services," CUA group general manager Andrew Hadley said. "This is an opportunity to step to the mark and do something about it."
The real estate arm of global fund manager Invesco has launched a fourth fund investing European institutional capital in repriced US commercial property, after raising $120m.
The Luxembourg-domiciled fund raised the equity from four institutional investors, including two investors from Germany's MEAG Munich ERGO AssetManagement gmbh (MEAG). A first acquisition is expected shortly, Invesco said.
With a maximum gearing of up to 60%, the initial investment provides Invesco with about $275m of purchasing power.
The company is seeking to raise an additional $380m before a second closing of the fund in second-half 2010.
