Archive for November, 2010
Bank of America Corp. Chief Executive Officer Brian T. Moynihan said resolving investor demands for refunds over faulty mortgages is a battle that will last at least several more quarters.
“It’s a day-to-day, hand-to-hand combat,” Moynihan said today during an investor conference held by the lender in New York. “It’s manageable in the context of who we are, but we’re not going to spend your money unwisely.”
The chairmen of the president's deficit commission skewered a number of sacred cows in their widely discussed, and widely criticized, report. But few ideas have received more outrage than the plan to limit the mortgage interest deduction — the costliest tax giveaway in the United States. What is the mortgage interest deduction and why should we want to reduce it?
Here's the rule: Every year, most homeowners are still paying interest on their house. But the IRS helps them out by letting them keep an amount equal to their mortgage interest multiplied by their tax rate. This amount is "deducted" or subtracted from their taxable income, reducing their tax bill.
With this benefit in 2012, the federal government will give homeowners more than $130 billion — more than two and a half times the entire Department of Housing and Urban Development.
Further traumas on this deleveraging side of the long cycle lie ahead. Another sovereign debt crisis in Europe may be in the cards with Ireland replacing Greece as the focus. A further 20% drop in U.S. house prices due to huge excess inventories of over two million and foreclosure delays may push underwater homeowners from 23% of mortgagors to 40% and precipitate a self-feeding spiral of walkaway homeowners and nosedive in consumer spending.
Other roadblocks on the deleveraging highway may include a crisis in U.S. commercial real estate (Chart 5) that could exceed the earlier one in housing. Then there’s a possible hard landing in China that exceeds the 2008 weakness (Chart 6) as the government’s measures to cool the red hot property market and economy in general take hold. A slow-motion train wreck in Japan will probably occur sooner or later as her all-important exports fall along with weakening U.S. consumer willingness to buy them, and as her already subdued domestic sector suffers from her rapidly aging population.
The Federal Housing Administration reported today that its capital reserve ratio will return to the 2% level mandated by Congress in 2015.
The FHA capital reserve account is a secondary cushion to absorb any unexpected claim expenses. Its financing account is the primary reserve, used to manage forecasted claim expenses on the amount of current insurance in force for the next 30 years. According to an actuarial review conducted by IHS Global Insight, the ratio remains positive at 0.50%, down from 0.53% a year ago as the FHA has taken more market share.
According to the review, the capital reserve ratio will hit 1.99% at the end of 2014 and pass it the following year.
FHA's Growing Role
While the economic value of those loans has increased 28% from a year ago to $4.7 billion, the amount of insurance in force increased 36% to $931 billion, according to the review.
FHA Commissioner David Stevens said its role in the housing market is larger than expected but vital to the recovery.
"There is absolutely no question that FHA's role is larger than we expected it to be. We are in a most unique environment today. Without the FHA, the recovery would have clearly been delayed," Stevens said in a briefing to reporters Tuesday.
In 2010, the FHA insured $319 billion in single-family mortgages, second only to previous year. It funded 40% of purchase mortgages in 2010, including 60% of all loans for African-American and Latino homebuyers.
Moody's Forecast
The dollar amount of capital resources reached its highest level ever in 2010 to $33.3 billion, up by $1.5 billion from a year ago, and insurance claims were 21% below the expected level in 2009.
For the review, Moody's Investors Service forecasted future house prices, which Stevens called "considerably more pessimistic" but has a significant impact on the value of the fund.
Even in Moody's worst-case scenario, the amount of capital reserves will never reach below $9.9 billion. In 2009's review, the fund would fall negative if house prices were to drop to those depths.
But at houses prices' current baseline, the fund could improve to roughly $45 billion in capital reserves. If prices were to drop again, as both Fiserv's report and Standard & Poor's recent forecast expect, the reserve could drop back to the $25 billion range.
"This," Stevens said, "would delay the fund's recovery to 2%."
HECM's Drain on the Fund
The review broke down which segments of the FHA fund are contributing to the capital reserves. The capital reserve ratio for single-family loans was 0.42% and 3.17% for the newly introduced Home Equity Conversion Mortgage program, or reverse mortgages. Combined, the two portfolios held the 0.53% ratio reported in 2009.
In 2010, the capital reserve ratio improved for single-family mortgages to 0.59%, and the HECM reserve ratio "declined significantly" to a negative 0.98%, pulling the overall ratio to 0.50%, according to this latest review.
Stevens said the HECM program is relatively new, and the FHA has increased HECM premiums and introduced the HECM Saver option for 2011 in order to improve the capital reserve ratio for this individual segment.
In 2009, the FHA transferred $1.7 billion in capital resources from the single-family portfolio to the HECM one. Taking this transfer out, the single-family capital reserve ratio would have reached 0.79% in 2010, nearly 30 basis points above the 0.50% reported Tuesday.
Going Forward
"We've done considerable work on new policy guidelines, credit scores, downpayments, monitoring the lender performance, loan level reviews, servicer reviews, many actions taken with lenders not complying with the program, and new proposals to continue to keep up with the quality of the book," FHA Chief Risk Officer Bob Ryan said.
Loans insured before 2009 are responsible for 70% expected single-family loan losses at FHA, according to the review. Those mortgages insured between 2007 and 2008 have accounted for $9.7 billion in losses to the fund.
Both Stevens and Ryan pointed to the improved FICO scores of incoming borrowers. In the 2009 review, 8.4% of all borrowers with FHA mortgages had credit scores below 600. That percentage fell to 1.3% in just one year.
The FHA expected 45.1% of borrowers to have credit scores above 680, but according to the 2010 review, 57.2% held scores that high.
Stricter measures have called into question the FHA's mission to fund mortgages to those who otherwise may be shut out of the market, but Stevens pointed out that the FHA is committed to providing "sustainable" homeownership that does not put taxpayers at further risk.
"Not everybody should have owned a home is one thing we learned in the last period," Stevens said.
Write to Jon Prior.
Mortgage-bond issuers and investors moved to quell questions about whether banks properly assigned loans made during the securitization boom, arguing that such transfers are valid even if the loan's owner isn't identified in certain records.
The American Securitization Forum, a trade group for the securitization industry, is set to release on Tuesday a 28-page defense of widely used practices for bundling mortgages into securities. The securitization process and foreclosure-documentation practices are likely to face criticism from lawmakers at a Senate Banking Committee hearing Tuesday.
A separate report from the Congressional Oversight Panel, also being released Tuesday, raises questions about whether improper document transfers could create additional liabilities for the biggest U.S. banks. The consequences could be "severe," the report said, "if documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages."
Brokers are frustrating efforts by regulators to bring transparency to the $2.7 trillion market for federal agency debt, keeping bond investors in the dark.
The second-largest underwriter of debt from issuers such as Fannie Mae, First Horizon National Corp., of Memphis, Tennessee, is among firms that don’t report trades through the Financial Industry Regulatory Authority. Finra, the non-governmental regulator for almost 4,700 brokerages in the U.S., began requiring eight months ago that brokers post transactions through its bond-price reporting system within 15 minutes.
About a dozen banks aren’t participating in Finra’s plan, said Mike Nicholas, chief executive officer of the Bond Dealers of America. They may undercut expanding the Trade Compliance and Reporting Engine, or Trace, to more types of debt, including the $5.3 trillion market for mortgage bonds guaranteed by Fannie Mae and Freddie Mac or federal agency Ginnie Mae, which provide more than 90 percent of the funds for U.S. home lending, according to industry newsletter Inside Mortgage Finance.
The Financial Services Authority (FSA) has today outlined proposals which focus on enhancing the mortgage sales process, the role of intermediaries and improving disclosure of information for customers.
The consultation builds on the FSA’s Mortgage Market Review to date, and a key element is requiring that those selling mortgages ensure that each one sold is ‘appropriate’ for the customer’s needs and circumstances, therefore clarifying the role of the mortgage seller (both intermediary and branch based).
This follows earlier proposals by the FSA which looked at responsible lending and the role of the lender and the customer, and which set out that the responsibility to assess whether a customer can afford a mortgage ultimately lies with the lender.
In addition key proposals include:
* Replacing the obligation to issue an Initial Disclosure Document to the customer with requirements to clearly and prominently disclose key information about how the intermediary will be paid and the service they offer;
* Changing the trigger points for providing the Key Facts Illustration to minimise information overload on consumers and reduce burdens on firms;
* A requirement for all individuals that sell mortgages to hold a relevant mortgage qualification ensuring appropriate professional standards across all sales;
* Replacing the existing labels used to describe the firm’s service with the Retail Distribution Review’s ‘independent’ and ‘restricted’ labels; and
* Requiring firms to disclose to customers whether they will consider deals that can only be obtained directly from a lender.
Sheila Nicoll, the FSA’s director of conduct policy, said:
"This next step of the Mortgage Market Review recognises the importance of the intermediary and ensuring the quality of every mortgage sale. It also indicates how the intermediary and other sales staff fit into our vision of a sustainable mortgage market that works well for consumers.
By clarifying the role and responsibility of mortgage sellers, we are removing the blurring that could take place between the role of seller and lender."
