Monday Morning Cup of Coffee

A look at the stories on HousingWire’s weekend desk… with more coverage to come on bigger issues. Researchers at Barclays Capital offered some guidance after the major disruptions in the bond market last week:

“Agency MBS sharply underperformed as rich valuations trumped Fed support. We remain underweight the basis due to tight OASs and potential Treasury purchases. CMBS sold off on S&P downgrade fears, and we stay neutral despite our belief that the Fed will immunize TALF 2.0 from rating agency revisions. A strong turn-out for TALF 1.0 supports our tactical overweight on ABS cards, but downside risks point to selectivity in non-agency MBS.”

Treasury Secretary Tim Geithner is giving a speech at Peking University in Beijing. The speech, titled “The United States and China, Cooperating for Recovery and Growth,” is scheduled for later today. An excerpt:

“The United States is committed to a strong and stable international financial system. The Obama Administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home. As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary governmental support that we have put in place to overcome the crisis, we will continue to preserve the openness of our economy, and we will resolutely maintain the policy framework necessary for durable and lasting sustained non-inflationary growth. In China, the challenge is fundamentally different, and at least as complex. Critical to the success of your efforts to shift future growth to domestic demand are measures to raise household incomes and to reduce the need that households feel to save large amounts for precautionary reasons or to pay for major expenditures like education.  This involves strengthening the social safety net with health care reform and more complete public retirement systems, enacting financial reforms to help expand access to credit for households, and providing products that allow households to insure against risk.  These efforts can be funded through the increased collection of dividends from state-owned enterprises.”

Fitch Ratings announced it holds a negative outlook on California’s single-A credit rating. England’s credit rating may be downgraded, and there are market rumors the United States is not immune to such a possibility. However, a report from Reuters states investors may not be driven away from such downgrades, should it happen. Credit rating agency Moody’s Investors Service downgraded a swath of synthetics. Again, issues of definition come to the fore with ARMs rated triple-A initially. The move shows that synthetics, where no asset changes hands, are as exposed as the ‘real deal:’

Moody’s Investors Service has downgraded ratings on 56 tranches on 10 deals from Real Estate Synthetic Investment (RESI) Securities, synthetic transactions that provide the owner of a sizable pool of mortgages credit protection through a credit default swap with the issuer of the notes. Through this agreement, the Protection Buyer pays a fee in return for the transfer of a portion of the reference portfolio credit risk. Investors in the notes have an interest in the holdings of the issuer, which include highly rated investment instruments, a forward delivery agreement and fee collections on the agreement with the Protection Buyer. Investors are exposed to losses from the reference portfolio but benefit only indirectly from cash flows from these assets. Depending on the class of notes held, investors have credit protection from subordination. The reference portfolios of these transactions include prime conforming and nonconforming fixed-rate and adjustable-rate mortgages purchased from various originators. The actions are triggered by the quickly deteriorating performance of the reference portfolios — marked by rising delinquencies and loss severities, along with concerns about the continuing drop in housing prices nationwide and the rising unemployment levels.

According to Tampa Bay online, hedge funds are now focusing on acquisitions in the Florida real estate market. The article questions if this is ultimately a positive development for the state’s embattled housing industry. Write to Jacob Gaffney.

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