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Monday Morning Cup of Coffee: JPM expects 'more active' FHFA

Change afoot with new leadership anticipated

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Monday Morning Cup of Coffee takes a look at news coming across HousingWire's weekend desk, with more coverage to come on bigger issues.

Analysts at JPMorgan (JPM) sent an email to clients reporting that the recent Fed minutes helped shift their taper expectations into January.  Tapering, for those who may not know, is a reduction of the amount of mortgage-backed securities the Federal Reserve buys monthly to help indirectly keep interest rates artificially suppressed.

But this isn't the only trepidation for mortgage bond investors. Uncertainty regarding the Fed and FHFA leadership has also driven neutral basis positions to the highest levels in years, based on JPM investor survey results.

"Rep. Mel Watt is set to be confirmed as the new FHFA Director," the analysts note. "We can expect more policy changes and a more active FHFA going forward."

Theses policy changes include more broad principal forgiveness, a broader credit box, affordable lending, and a preservation of much of the existing government-sponsored enterprise infrastructure.

So what does this preservation look like? Take current activity and assume little will change.

For example, the GSEs only have $6.2 billion left to sell at the end of Q3 to meet their 5% portfolio reduction target.

"We expect them to sell another $32 billion in 2014 if they target another 5% of portfolio reduction. Existing home sales came in as expected at 5.12 million, down 3.2%," the analysts concluded.

The idea of a January taper, as mentioned above, will not be without wider economic consequences according to an article in eFXnews. Since the unified Euro currency first came on stage, it's operated largely in correlation with the dollar.

Bank of America Merrill Lynch analysts are quoted as reporting that the year 2014 may challenge this historical pattern, with BofA's economists still looking for a January taper and additional accommodation from the ECB in the first quarter.

"This raises interesting questions about where we see Europe trade vs the US, and how we expect different European bond markets to balance these conflicting forces," the article states.

"In short, we expect another year of outperformance of Bunds vs Treasuries, and another year of underperformance of semi-core names vs the Bund-credit barbell," BofA projects.

Coverage of green housing dominated the Internet over the weekend. "Lenders should recognize the net savings that energy improvements provide to property owners and take them into account when they underwrite and set the fees for mortgages," said the ubiquitous article, here in the Boston Herald. "Appraisers should also recognize the added value."

So just factor those savings in to the debt-to-income ratio and recognize the added value it brings to a property. "This might permit larger mortgage amounts for energy-efficient homes and help qualify more first-time buyers for loans," the article, written by Kenneth Harney and syndicated on several local news platforms, said.

Harney's arguments are somewhat logical but fail to mention who or what could possibly make such widespread green practices obtainable to private homeowners. That's OK, because HousingWire can. The solution is available in one word: Securitization.

The first securitization of distributed solar energy assets, priced and closed recently.

SolarCity completed a private placement in the amount of $54.4 million with an interest rate of 4.8% and a scheduled maturity date of December 2026.  

Honestly, it was all the bond market could talk about recently, as the possibility of securitizing these assets have been formulated and dreamed about for years. Harney should be pleased.

"This transaction is a breakthrough and will pave the way for others, but its greater significance is the validation of the quality of SolarCity's assets," said Bob Kelly, SolarCity's chief financial officer. "SolarCity lowers what is typically the highest operating cost for households and gives them long-term control over that cost. Customers highly value those attributes, and that's why these assets perform so well."

SolarCity's pool of solar contracts received an investment grade rating of BBB+ from Standard & Poor's. Distributed solar is one of the first new asset classes to achieve an investment grade rating in the asset back securities markets in the past several years.

"Securitization gives us access to a new source of capital at a lower cost, and it allows us to more closely align our assets and liabilities," continued Kelly.  

The Federal Insurance Deposit Corp. closed no banks on Friday, keeping the total number of seized assets in November at zero. The FDIC closed only one bank in October, and two in September.

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