Friday, February 29, 2008
Andrew Horowitz, The Disciplined Investor
The Federal Reserve and the financial powers have thus far been classified as "creative" in their handling of the credit crisis.
During this week's testimony from Federal Reserve Chairman Bernanke, a news item flashed across the wire: The Office of Federal Housing Enterprise Oversight (OFHEO) will be relaxing some of its operating restrictions for
In particular, OFHEO said that it would remove caps on mortgage-portfolio growth and will gradually reduce its current requirement that both enterprises maintain capital reserves 30% above statutory minimums.
These capital requirements, initiated in 2004, are in place for good reason. Back then, it was found that these companies were not keeping their financial records in order while their executives were making millions.
This move, essentially, will allow for additional money and credit to flow into the economy, but the timing of the OFHEO announcement is, at best, suspicious and very worrisome. It comes too close to the discussion by the Fed regarding their understanding of the current housing problem and the additional problems that lie ahead.
Sure, there is clearly a need for additional capital directed toward consumers who are in a credit stranglehold. Yet this seems to be more of a desperate move--and a gamble on the future security of the credit markets. Remember, the reason why there were caps in the first place was that there was a significant breakdown in the way Freddie Mac and Fannie Mae were handling their financials. The penalty was a much greater capital requirement for each enterprise.
"Since agreements reached in early 2004, OFHEO has had an ongoing requirement on each enterprise to maintain a capital level at least 30% above the statutory minimum capital requirement, because of the financial and operational uncertainties associated with their past problems," writes OFHEO Director James B. Lockhart in a statement. "In retrospect, this OFHEO-directed capital requirement, coupled with their large preferred-stock offerings means that they are in a much better capital position to deal with today's difficult and volatile market conditions and their significant losses."
Excuse me, but a release of the cap will help to keep their problems in check? Surely there are different problems now--and the 30% cushion helps to keep the stability of the quasi-agency companies during times when write-offs and write-downs are growing. Think of this cushion as analogous to the loan-to-value minimum homeowners are required to meet to qualify for a mortgage.
One of the problems that helped to enhance the mess that we find ourselves in today was the lack of a belief that old-fashioned loan and risk management procedures were of no consequence. Bad assumptions were, and are, standard operating procedure and we now know that it was not the best way to operate.
So don't be upset when you see a continuation of massive losses at Fannie and Freddie. Rest assured they will continue to flow like a raging river for some time to come.
The fact that
Freddie Mac is also reporting the average current, adjusted loan-to-value ratio for its single-family home portfolio has been increasing steadily over the past few years. It's now 60%, up from a low of 56% in 2005.
Even so, Freddie Mac holds 16% of subprime adjustable-rate mortgages 90 days or more delinquent or now in foreclosure. This is a far greater percentage of these types of loans in trouble this soon than at any time over the past 10 years. ARMs are considered hybrid mortgages, and as this category currently makes up such a large portion of Freddie's portfolio, there is reason to be cautious.
As housing prices continue to decline, loan-to-value ratios will continue to suffer. This is just one more part of the larger concern that investors will have to ingest as they are asked to commit more funds in the form of debt and preferred stock offerings. In the face of a credit-rating panic, it will be interesting to see how they adjust their portfolio strategy to ensure that investors see the highest rating available in order to efficiently peddle their debt at the lowest cost.
Either way, FRE and FNM will surely have a higher cost of operations as they move forward. Everything points to lower net earnings and higher investor anxiety.
Chronic borrowers will be excited as there will, in theory, be more of the credit "drug" available to help get them deeper into their debt hole. But do not make the mistake as an investor that it may be time to jump in. This move will have a negative effect and eventually weaken FNM and FRE.
Simply using debt-to-equity ratios as a proxy for loan-to-value will show that this is more of a creative mechanism for credit to flow that will have the near-term effect of throwing these two companies under the bus. We continue to warn investors that this type of gamble may lead to further solvency issues rather than balance sheet stability for Fannie and Freddie.
Any downgrade (hard to fathom?) will also create a greater problem, as the cost for asset-backed credit will eventually be need to be paid b ... you and me! These will take the form of a tax burden that will be left to be cleaned up by the "winners" of the upcoming election.
The bottom line: Freddie and Fannie are being thrown under the bus in order to help the housing markets and in an effort to protect the credit markets. The removal of the mandatory cap is a dangerous gamble by regulators. In the end, there needs to be a sacrifice to save the rest of us. Freddie and Fannie may well be the burnt offerings to appease the credit gods.
NEW YORK (AP) -- Investors in the bond insurance industry could be forgiven for being confused on Friday.
In the course of a few hours, investor Wilbur Ross pumped $1 billion into Assured Guaranty Ltd., MBIA Inc. warned it will have to take more write-downs and Moody's said Ambac Financial Group Inc. has almost raised enough capital to keep its rating -- but not quite enough yet.
"We've gotten a lot of conflicting information this week and don't know how things will turn out," said Bob Nelson, a municipal market analyst at Thomson Financial.
Earlier this week MBIA saw its crucial "AAA" rating affirmed by Moody's, and Standard & Poor's affirmed both MBIA and Ambac's ratings. But many investors questioned whether the bond insurers actually have adequate capital, given their heavy exposure to subprime debt and the likelihood of new defaults on it.
"It looks like the ratings agencies just put their stamp of approval on MBIA and Ambac to give them more time to hunt for bailout money," said Mirko Mikelic, fixed-income portfolio manager at Fifth Third Asset Management.
Throughout the week investors kept their eyes on a joint public-private effort led by New York State Insurance Superintendent Eric Dinallo to secure billions of dollars for MBIA and Ambac. Hopes for a bailout announcement early in the week spurred some robust stock market rallies, as a rescue of the insurers would help banks and investors also exposed to subprime debt. But by week's end there was no rescue plan.
"I would give the bailout plan a 50 percent chance at this point," said Mikelic. "The devil is always in the details. And the problem is that the possible investors in it all have different agendas. How can they agree on how to make it work?"
Global banks involved in the talks like Citigroup Inc. and HSBC may merely aspire to protect their own capital adequacy by avoiding more subprime write-downs, he said. On the other hand, private investors generally invest only in ventures likely to earn them double-digits returns. It would be hard to structure an investment opportunity for investors with such divergent goals.
Meanwhile, deep-pockets investors like Ross and Warren Buffett so far appear interested mainly in the desirable municipal bond business. After announcing the Assured Guaranty investment Friday, Ross said that he would continue to participate in Dinallo's efforts to find capital for the insurers.
For his part, Buffett in January opened his own bond insurance company. That firm already has done insurance deals for municipal bonds in New York State and is seeking credentials to operate in other states.
Earlier in the year Buffett made an offer that would essentially have let him buy the desirable municipal bond insurance divisions of Ambac and MBIA while sticking them with their high-risk structured instruments side. Neither company leapt at an offer to let go of their traditional cash cow.
High levels of anxiety over the fate of the insurers led to numerous failures for short-term auction rate securities sales in February and drove municipal borrowing rates up to unheard-of levels. The damage even filtered into longer-term municipal bonds and corporate debt, stalwart asset classes generally held in high esteem by pension funds and other careful investors.
All this has investors longing of their usual savior, the government.
"It is hard to imagine a nongovernment entity having deep enough pocks to save the structured business," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "And at this point I am not sure how you get out of this without a government bailout. I guess the government might step in yet, but they haven't yet."
NEW YORK (AP) -- Continued deterioration in the credit markets in January will likely lead to further write-downs at bond insurer MBIA Inc., the company said in a regulatory filing Friday.
Not only will write-downs hinder first-quarter earnings at MBIA, but the company is booking less business as well, it said in the filing with the Securities and Exchange Commission.
"The demand for our product is the lowest it has been and we are writing very little new business," MBIA said.
Subprime mortgages are loans given to customers with poor credit history, while CDOs are complex financial instruments that combine various slices of debt and often include bonds backed by mortgages.
MBIA said it was still unsure how large January write-downs would be based on deterioration in the markets during the month. The company said the write-downs stemmed from accounting adjustments to the value of insured credit positions.
During the fourth quarter, MBIA reduced the value of its credit portfolios by $3.4 billion.
Bond insurers have struggled mightily in recent months. Ratings agencies and investors fear a spike in mortgage defaults will cause an increase in defaults on bonds backed by the troubled loans and insured by companies like MBIA.
Ratings agencies have worried that so many bonds will default that the insurers will not have enough cash to pay claims. That led them to cut the ratings of some insurers from their critical "AAA" level. "AAA" ratings are essentially needed to book new business.
MBIA has been able to raise more than $2 billion in recent months to hold in reserve to protect itself from a possible spike in claims. That has enabled it to maintain its "AAA."
The one benefit to booking less business is that MBIA's total insured portfolio value is declining as old premiums are paid off and not replaced by new ones. That in turn frees up capital reserves.
|Hear Me Now |
Having neither the will nor the means to confront our major economic challenges, Washington is instead hanging its hopes on words alone. This week, despite the clearest signs yet that the dollar is in critical condition, President Bush and Treasury Secretary Paulson tried to provide reassurance by once again invoking the name of the mythical “strong dollar policy”. Meanwhile across town, with the latest crop of inflation figures pointing to the greatest price surges in a generation, Fed Chairman Ben Bernanke tried to do the Administration one better by insisting that inflation expectations remained “well anchored”, and that stagflation was nowhere in sight.
The truth is that Bernanke’s view that inflation expectations are “anchored” should be afforded as much respect as his prior pronouncements that the subprime mortgage problems were “contained”. With official inflation numbers, such as PPI, CPI, and import prices showing unacceptably high levels of inflation, the dollar hitting new all-time lows, and market indicators, such gold, silver, oil and agricultural commodities all heading straight up, the Fed Chairman risks losing what’s left of his credibility.
Bernanke contends that the source of our inflation is rising commodity prices, which he attributes to strong global demand. This is Bernanke’s attempt to shift the blame for inflation to external factors beyond his control. This of course completely misses the point that increased global demand is a direct result of the rapid increase in global money supply, the source of which is Bernanke himself. This Alfred E. Newman routine is obviously wearing thin as the dollar seems to tick down and gold ticks up every time Bernanke completes a sentence.
The biggest factor pumping up demand around the globe is the Fed’s excessive money creation and irresponsible monetary easing, which requires foreign central banks to follow suit to keep their own currencies in relative alignment with the dollar. Of course, some increased demand is genuine, but that demand is being met by increased supply. It is only the artificial demand created by inflation that is pushing up prices.
Amazingly, Bernanke feels that rising food and energy prices themselves do not present a problem as long as the increases are contained in those areas. In other words, as long as these costs can be excluded from the officially messaged PCE deflator, Bernanke doesn’t care if American families have to pay more to feed their families, heat their homes, and drive to work. But if these basic costs continue to rise, it doesn’t matter what happens to prices of other goods as few people will have any money left to buy them.
Bernanke also seem to think that if the economy does somehow slip into recession, that inflation will subside as a consequence. This is pure nonsense, as diminished demand here at home will be offset by enhanced demand abroad. As a weak dollar forces Americans to cut back on their consumption, strengthening foreign currencies will give foreigners added purchasing power to consume more. Therefore fewer foreign made products will be imported while more domestic made, or in most cases grown, products will be exported. The result will be reduced domestic supply putting additional upward pressure on prices.
Equally naïve is the concept that the Fed can stabilize the economy now by slashing interest rates while holding out the hope that future inflation could be reined in through aggressive rate hikes in the future. Even if a recession could be avoided by easing, our economy is so dependent on cheap debt, that as soon as Bernanke reaches for his hawk mask, the economy would immediately destabilize, necessitating a fresh round of rate cuts and still more inflation. If Bernanke really were serious about fighting inflation he would do it right now. By postponing the cure he simply allows the disease to get that much worse.
Of course Bernanke is not the only one in denial. Wall Street’s brain trust has recently devised many explanations that rationalize the inflation problem. For example, some argue that falling housing prices are deflationary, and negate the impact of other prices that happen to be rising. While it may be true that home prices are falling, the costs associated with home ownership itself are rising. Most homeowners are not only facing rising mortgage payments, but higher insurance, maintenance, utilities and taxes. In addition to those costs, potential home buyers also face higher down payments and tighter lending standards as well! Also, when home prices were rising few considered it an inflation problem, so why should those very people consider the reverse deflation?
Others talk about “food inflation” or “energy inflation” as if there were different kinds. There is only one type of inflation, which is an expansion of the supply of money and credit. Prices do not inflate; they merely rise and fall. When people refer to rising food prices as being “food inflation”, they are shifting the blame for inflation to rising food prices, rather than attributing the rise in food prices to inflation itself.
I have heard others maintain that rising commodity prices are merely a supply problem. However, tight supply is a function of the artificial demand created by inflation. If the government handed out million-dollar bills there would be a shortage of Ferrari’s as everyone would want to buy one.
Of course one of the most problematic turn of events is the way some of the Fed’s biggest cheerleaders have turned critics. For example, CNBC’s Larry Kudlow, who just months ago was calling for “Shock and Awe” rate cuts to boost the dollar and revive our “goldilocks economy”, now blames those very rate cuts for pummeling the dollar and the economy. If the Fed cannot instill confidence among its biggest boosters, imagine how this show is playing to a more skeptical audience overseas.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
Perhaps I was asleep at the switch, or daydreaming about a business media that did not portray every last CEO as a cross between Midas and Winston Churchill and every last GDP revision as a revelation, but I missed Thursday's rendition of what I'll call the "Charlie Chronicles."
Of course, there is the slim chance that it actually did not happen yesterday. That -- be still my beating heart -- CNBC's Charlie Gasparino did not take to the air at the appointed 3:30 p.m. EDT to declare an impending deal to bail out AmbacABK, everyone's favorite failing bond insurer.
Breaking news? Broken record news might be more like it.
I half expect Charlie to interrupt this Business Press Maven report with more news of an impending deal, oops here it is:
Intoned Charlie at 7:42 a.m. this very morning:
"The bailout of troubled bond insurer Ambac has hit a significant snag, after rating agencies demanded more capital from the consortium of banks involved in the bailout effort, CNBC has learned.
People close to the deal are confident that it will still happen, because the banks and the rating agencies are aware that, if it collapses, there will be a huge decline in the stock market."
So apparently, the rescue deal (whichever one we are talking about now) hit snags. But guess what? It might still happen, so let's revisit just how often he's oversold this story.
I'll have to move quickly before his next report, but where to start? The options are voluminous. We can either go through his reports chronologically and get bogged down halfway through, crushed under the weight of it all. Or we can hit some high (uh, low) lights. Do remember that the number of reports here sets a new standard. We were once highly critical of a Barron's columnist for (re)writing three major bull calls on MicrosoftMSFT returning to growth stock status, without mentioning his repetitive track record in the third report.
But Good Time Charlie makes Barron's look like a piker. Of course, Charlie might be right eventually. It's entirely possible that sometime between now and the end of time, we might get a bailout. But, and we had the same issue with Barron's, how long do you sell the same story before you need to inform investors right up top: "I've been a broken record on this one." And the following record shows just how many skips this one has.
This dispatch from Charlie on Feb. 22 had deja vu written all over it:
"Bankers working on the deal to bail out troubled bond insurer Ambac say progress is being made on a recapitalization plan that could save the bond insurer's triple-A rating. The consortium of banks, which includes Citigroup and Wachovia could announce the deal as early as Monday or Tuesday. Although the structure of the deal is still uncertain, sources indicated the deal could include both equity infusions and lines of credit."
As best as I can tell (and I had to wade through a lot of material), Charlie might have started talking about a "possible bailout" at the end of January. By Feb. 4, we were treated to a dispatch about how "new details are emerging about a possible bank bailout of insurer Ambac."
And we sat through maybe about a dozen more reports, from a "plan in the works" on Feb. 5 to "a new development in the possible bailout" on Feb. 8. "A New Plan From an Unlikely Source," was a headline from Feb. 20, a "big weekend" on the 25th, the same day that stocks were popping on "news of an impending cash injection."
On Feb. 27 we were treated to "Latest on the Ambac Bailout," which included news that New York State and sovereign wealth funds "may be involved." Also that day, we had a report that included a scroll item that MBIA'sMBI CEO had the goal of restoring his company's obscene market value. Now that's a plan! I guess, considering, it's as good as any.
On the 28th day, he rested, to the best of my knowledge, but as noted above, Charlie got right back on the horse this morning.
I'll just end it here, though there is a lot more out there, because I hate to pile on Charlie's pile-on.
So dear readers, beware. And be aware. That way you can judge for yourself whether ol' Charlie is right on the bailout, which would have implications for MBIA among others, or is maybe possibly being played like a fiddle by some longs, or is just overreaching for a scoop.
Ambac (ABK) and MBIA (MBI) sank along with the broader market Friday, after the investors in the bond insurers got hit with a bevy of bad news. First, billionaire vulture investor Wilbur Ross said he would sink as much as $1 billion into rival Assured Guaranty (AGO), bolstering the company’s capital position and giving it a chance to benefit from the uncertainty surrounding MBIA and Ambac. Then CNBC reported that talks regarding a $2.5 billion capital-raising effort for Ambac have hit a snag, with ratings agencies apparently demanding a bigger infusion, though the channel stressed that discussions continue. Last but not least, MBIA - which took some $4 billion in mark-to-market losses in its fourth quarter to account for declines in the market value of its derivatives portfolios - said on page 28 of its annual report that it expects further mark-to-market writedowns in January. Approaching midday, Assured Guaranty was up 12% and MBIA and Ambac were each down 5%. But recent history shows that if Ambac is able to work out a deal with its bankers Friday afternoon, shares of it and MBIA - as well as the big market indexes - could reverse course in a big way.
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free
Mike "Mish" Shedlock
Facing Default, Some Walk Out on New Homes
When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.
In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.
Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.
Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.
For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.
“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.
In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.
Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.
“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”
The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.
Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.
But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.
The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”
Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”
For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.
Consumer advocates and others question the value of You Walk Away’s service.
“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”
Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.
“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”
Mr. Zulueta said he felt he had let down the lender, himself, and his family.
“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”
Thursday, February 28, 2008
The National Association of Home Builders had hoped that as many as 29 metropolitan areas would qualify for the new $729,725 ceiling. But according to a staff member at the group's convention in Orlando last week, it now appears that less than 10 will make it.
But with just 15 counties moving to the maximum, and most of those in Southern California, it's possible only half that number of houses will qualify.
NAHB officials also expressed concern that Fannie and Freddie's safety and soundness regulator, the Office of Federal Housing Enterprise Oversight, will drag its feet in approving the GSEs' programs to buy the higher-limit conforming loans.
During a Housing Finance Committee meeting, past NAHB presidents Bobby Rayburn and Kent Conine repeatedly hammered at an OFHEO officer that speed is of the essence, especially since the cut-off for Fannie and Freddie to buy the larger loans is Dec. 31.
The good news, according to Federal Housing Administration Director Joanne Kuczma, is that the median price of houses in 85% of the country's 3,300-plus counties is high enough to qualify for a higher ceiling on FHA loans, as also set forth in the stimulus package signed by President Bush last week.
The measure boosts the limit on loans that can be insured by the FHA to the same $729,750 in high-cost areas and raises the floor on government-insured loans from 95% of an area's median to 125%.
Under the new floor, the FHA limit would be $271,050, regardless of an area's median home price. But that's still substantially below the current Fannie-Freddie lid of $417,000.
The law requires the FHA to calculate the ceilings and put them in place within 30 days after the President signs the stimulus legislation. It also requires Fannie Mae and Freddie Mac to operate under those calculations.
Kuczma told the NAHB last week that a mortgagee letter notifying lenders of the new limits already has been written and will be sent within a few weeks. Until then, no one knows for certain what the ceilings will be for any particular market.
In a separate session, both GSE chairmen vowed to move as quickly as possible to implement the higher loan limits. Freddie Mac's Richard Syron told the group's board of directors that "we will find a way to get this done." And his counterpart at Fannie Mae, Daniel Mudd, said his company already is working with lenders "to get them up to speed."
But the NAHB is worried, as are some Fannie and Freddie officers, that OFHEO will have to be dragged, kicking and screaming, into giving the GSEs the green light.
Although he has vowed to work with the GSEs, OFHEO Director James Lockhart is on record as opposing the temporary increase in the conforming loan limit. And the concern is that OFHEO will set such high capital requirements and set the bar so high for qualifying for a jumbo conforming mortgage that only a relative handful of loans will be made.
At the convention, Edward DeMarco, OFHEO's deputy director, said his agency is "committed" to carrying out the intent of Congress. And he stressed that the internal review processes that must be undertaken are those of Fannie and Freddie, not OFHEO.
"We're asking them to operate their businesses is a safe and sound manner," DeMarco said. "We're not trying to impede them. We're right there with them, making sure they understand the added risk they are undertaking."
But in a late January statement, Lockhart indicated his agency would have a large presence in the process, saying it wants to be certain the GSEs have the "appropriate risk management policies and capital in place."
Hence, the fear that OFHEO will make Fannie and Freddie "jump through hoops."
The upward rate movements are a reversal of what was seen in January, when rates had dropped significantly enough to inspire a surge in refinancing.
Just three weeks ago the benchmark loan averaged 5.67%, meaning it has jumped more than half a percentage point since then, a significant move given that mortgage rates have not been volatile in the last few years and that the Federal Reserve has been cutting interest rates aggressively.
The 15-year fixed-rate mortgage averaged 5.72% this week, up from last week's 5.64%. The mortgage averaged 5.92% a year ago.
Meanwhile, 5-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.43% this week, up from last week's 5.37% average. The ARM averaged 5.93% a year ago.
To obtain the rates, the 30-year and 15-year fixed-rate mortgages required payment of an average 0.5 point. The 5-year ARM required payment of an average 0.4 point, and the 1-year ARM required an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest.
The rise in rates will probably curtail the refinance activity seen in past weeks, said Frank Nothaft, Freddie Mac chief economist.
"Refinancing activities, which had surged to a 12-month high in January, according to Freddie Mac's monthly refi share report, are likely to ebb following this recent rise in rates," he said.
Why the sharp rise?
The volatility in mortgage rates isn't completely unexpected, and issues in the credit markets are likely to cause more mortgage rate volatility this year, said Greg McBride, senior financial analyst with Bankrate.com.
"When mortgage rates move down very sharply, they tend to rebound equally sharply, McBride said. "However, there's usually one catalyst that sparks that rebound, and this time around there wasn't one single precursor."
For one, concern about inflation is putting upward pressure on long-term rates, he said. That's because inflation erodes the buying power of future payments that a bond holder receives, he added. Rates rise to compensate.
Inflation worries will continue to influence rates over the next several months, and continued Fed rate cuts could stoke those worries even more, McBride said.
Overall, a general concern about the U.S. economy -- from inflation concerns to the weakness of the dollar -- has prompted the rate rise, said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. If more investors want to buy U.S. Treasury bonds, the rates go down, taking mortgage rates with them; when they're less willing to buy the rates tend to go up, he
"The world is concerned about investing in the U.S. overall," he said. "The currency stinks, the economy stinks, and they're requiring a higher return to make an investment."
The rise in limits could inspire holders of jumbo loans to refinance into conforming loans with lower rates, which would reduce the return that mortgage investors receive, he said. Banks have to offer higher returns to keep getting them to invest, he added.
Housing market effect
As the lower rates seen in past weeks might have caught the attention of those thinking of making a home purchase, the sudden turnaround might now give them pause.
Mortgage interest rates are one closely watched factor when people are deciding whether to buy a home, Cecala said. Coupled with tougher lending standards, home buyers might hold off on plans to make a purchase.
That said, the long-term commitment to buy a home often doesn't hang on half a percentage point, McBride said.
"Lower mortgage rates do give home buyers additional buying power. But it doesn't make the decision on whether or not to buy a house any more than you decide to get married because there is a sale at the bridal shop," McBride said. "If mortgage rates move enough to take you out of the ball game, you probably weren't completely ready to take the plunge."
While the "sticker shock" of rate hikes might spook would-be buyers, they need to take into account their bottom line, considering both interest rates as well as price, Fears said. And with prices coming down in many markets, affordability is increasing.
"What is critical is the monthly payment," he said. "It's the monthly payment that decides whether you can buy or not."
Mortgages as Prices Drop
February 29, 2008
As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.
The vast majority of borrowers who turn in their keys are typically those who have run into financial trouble or those who need to relocate but can't sell their homes. But mortgage-industry executives and consumer counselors say they are starting to see people who aren't in dire financial straits defaulting on their mortgages because they don't want to pay for properties that have negative equity.
Some are speculators who had planned to quickly flip the home, but others appear to be homeowners who had second thoughts about their purchase.
"It may not be a big thing yet, and hopefully it won't be," says David Berson, chief economist for mortgage insurer PMI Mortgage Group Inc., of Walnut Creek, Calif. But if it turns out to be a significant trend, he says, it means that "delinquencies and defaults could be higher than the industry is estimating."
Some borrowers feel they have no good alternative. A tight credit market has made it tough for would-be sellers to find buyers or for borrowers looking to lower their mortgage costs to refinance.
Other borrowers are walking away in frustration because they can't arrange a workout with their lenders, says D.J. Enga, director of outreach services for Auriton Solutions, which counsels homeowners nationwide. Mr. Enga expects that 10% to 15% of the roughly 4,000 callers counseled this month by Auriton, of St. Paul, Minn., will walk away from their mortgages.
A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income. And even then, the number of people who walked away was relatively small. During the oil bust in the Houston area during the 1980s and in California during the early 1990s, for instance, there was a brief spate of people sending in their keys to their lenders.
What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School. He also notes that new homeowners may not have strong ties to the community.
Some borrowers, says Mary Kelsch, senior director at Fitch Inc., are less willing to make the sacrifices needed to stay in their homes, given the current environment. "It's a change of mind-set" she says. They are "looking more at their home as an investment that has lost its appreciation potential and don't really want to continue to pay."
Some in the industry want to toughen the consequences for borrowers who walk away. Executives at Fannie Mae say they are working to create harsher penalties for people who walk away from mortgages, and they plan to pursue some borrowers in court. They also want to extend the amount of time between when borrowers default and when they become eligible again for a Fannie Mae-backed loan.
"Of course, we will make exceptions for extenuating circumstances, like divorce or death," says Mike Quinn, a Fannie Mae executive. "But who we are trying to get are the people who can afford to make payments but have decided not to."
Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country's outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and alt-A -- a category between prime and subprime -- will be attached to negative equity.
"The focus has been on the [interest rate] resets," said Goldman Sachs economist Andrew Tilton. "But if you're in a deep enough negative-equity position, defaulting has its own kind of logic."
Some financial advisers are even encouraging homeowners who are upside down to consider foreclosure, which they see as a purely financial decision with limited negative consequences. YouWalkAway.com, a Web site started in January that offers foreclosure counseling to homeowners, advises that borrowers who default on one mortgage can typically get another mortgage between two and four years after a foreclosure. Then, "before you know it, you will have this behind you and a fresh start!" the site says.
A foreclosure will stay as a "strong negative" on your credit report for as long as seven years, though the impact on a borrower's credit score declines over time, says Mike Campbell, chief operating officer of Fair Isaac Corp., maker of the popular FICO credit score.
"Every single person we talk to either owes 100% [of their equity] or is upside down anywhere from $10,000 to $300,000," says John Maddux, co-founder of Youwalkaway.com, which charges borrowers about $1,000 for advice. Mr. Maddux says the site has received more than 190,000 visits and about 20% of their clients are investors.
Wednesday, February 27, 2008
February 28, 2008
"The widespread use of the FHLB system to provide liquidity — but more clearly bail out insolvent mortgage lenders — has been outright reckless. Countrywide alone — the poster child of the last decade of reckless and predatory lending practices — received a $51 billion loan from this semi-public system; in the absence of this public bailout Countrywide would have ended up where it should, i.e. into outright bankruptcy. And the largesse of the FHLB system does not stop at Countrywide. A system that usually provides a lending stock of about $150 billion has forked out loans amounting to over $750 billion in the last year with very little oversight of such staggering lending. The risk that this stealth bailout of many insolvent mortgage lenders will end up costing massive amounts of public money is now rising."
Link to the full text
|Voltron says: just as Fannie posts massive losses, the government is allowing them to lend more money to re-inflate housing. I'm no bleeding heart, but how does this help make housing affordable? |
February 27, 2008 11:27 a.m. EST
Ofheo Lifts Freddie, Fannie Limits
Fannie Mae Records a Steep Loss,
Shaken by Credit-Market Malaise
By MICHAEL R. CRITTENDEN and ANDREW EDWARDS
February 27, 2008 11:27 a.m.
WASHINGTON -- The regulator for mortgage-finance giants Fannie Mae and Freddie Mac said Wednesday it would lift a cap on the two companies' investment portfolios on March 1.
The announcement from the Office of Federal Housing Enterprise Oversight came just hours after Fannie Mae was able to successfully file its 2007 financial statements on time Wednesday morning. Freddie Mac is expected to report its full-year 2007 results Thursday.
Shares of both Fannie and Freddie surged on the news. In late morning trading, Fannie shares were up $3.14, or 12%, to $30.11, while Freddie was up $2.14, or 8.5%, to $27.35, both on the New York Stock Exchange.
The inability of both firms to file their audited financial statements in a timely fashion was one of the major reasons Ofheo had placed a cap on the companies' retained mortgage portfolios. Now that Fannie Mae and Freddie Mac are able to successfully file on time, the caps are no longer necessary, Ofheo Director James Lockhart said in a statement. (See the statement.1)
Though the portfolio caps are being lifted, Ofheo said a 30% capital surcharge required of both firms will stay in place for the time being. Mr. Lockhart's statement said Ofheo is discussing with the management of each company how to gradually decrease the capital requirement, which is in addition to statutory capital requirements both firms must also meet.
Any easing, Mr. Lockhart said, will depend on Fannie Mae and Freddie Mac's financial condition and current market conditions.
The announcement marks a change in the relationship between Ofheo and the two firms, which has been strained since both experienced accounting problems that forced them to restate years of earnings. Those accounting issues, which resulted in the ouster of the firms' management teams, led to in increased scrutiny from Ofheo.
Mr. Lockhart said Wednesday that both companies have made "substantial progress" in fixing their internal controls and accounting systems. Ofheo plans to work with the companies to review and test the new systems, and could lift the consent orders currently in place for Fannie and Freddie.
Ofheo's assessment of the firms' progress was echoed by Fannie in its earnings release Wednesday. "We have completed the 81 requirements of the consent order, and we are in ongoing discussions with [Ofheo] regarding the 30% capital-surplus requirement," Chief Financial Officer Stephen Swad said in the release.
Fannie Posts Deep Quarterly Loss
In its earnings report, Fannie Mae reported it swung to a deep fourth-quarter loss and reported a sharp rise in late payments on loans, a sign damage from the U.S. housing slump is spreading beyond subprime mortgages.
Fannie Mae, which buys mortgages and repackages them into bonds it guarantees, said in its earnings report that it doesn't see any relief coming. Serious delinquencies will continue to mount this year, the company said, as housing markets continue to deteriorate, particularly in states like Florida and California.
"We expect the housing market to continue to deteriorate and home prices to continue to decline in these states and on a national basis," Fannie said in its annual report. "Accordingly, we expect our single-family serious delinquency rate to continue to increase in 2008."
The poor results gave a boost to U.S. Treasurys, which see buying when investors worry about the quality of other debt, and hurt the value of debt issued by Fannie and Freddie.
The mortgage lending giant reported a net loss of $3.56 billion, or $3.80 a share, compared with year-earlier net income of $604 million, a turnaround driven by $3.22 billion in losses on derivatives. The company recorded negative revenue, including derivative and investment losses, of $2.25 billion. Year-earlier revenue was $1.75 billion.
The results came in well below the forecast of analysts polled by Thomson Financial, who were expecting a loss of $1.24 a share on revenue of $1.33 billion.
Credit costs continued to rise as the company posted a $2.79 billion provision for loan losses, compared with $221 million a year earlier. The company also recorded $1.13 billion in investment losses compared with a year-earlier gain of $75 million. Derivative losses ballooned from $668 million.
UBS analyst Eric Wasserstrom said Fannie Mae saw strong growth in fees for guaranteeing debt, but felt that bright spot would be overwhelmed by credit-related expenses.
Fannie said its "serious delinquency rate" as of Dec. 31 climbed to 0.98% from 0.65% a year earlier, with the serious delinquency rate in Florida nearly quadrupling to 1.59%. Nonperforming loans rose 43% to $10.1 billion.
Fannie said delinquency rates were highest for borrowers with low credit scores or high loan balances relative to the value of their homes, with fast rises in delinquencies among loans with less than full documentation, adjustable rates, and interest-only or variable payment features, many of them made in 2006 and early 2007. Loans used to buy condominiums and second mortgages also saw delinquencies rise rapidly, and Florida was a particular trouble spot, with serious delinquencies there nearly quadrupling.
Fannie Mae finally issued long-awaited results for the first three quarters of 2007 in November, and the picture it painted was of a company hammered by credit-market woes. At the time, Fannie said it was in the middle of "one of the most challenging mortgage and housing markets in recent history."
The company, chartered by Congress in 1938 to insure a steady supply of funding for home mortgages, is also under investigation by the New York Attorney General over its behavior in the run-up of the housing bubble.
Fannie said it expects the credit crunch "to continue to affect our ability to meet our housing goals and subgoals in 2008."
Tuesday, February 26, 2008
The default rate on Municipal bonds is at 100 times lower than corporates over the past 25 years. Over the past 10 years the rate of default is .005 percent or so. So MBIA and AMBAC collect premiums but never payout claims. That is why the profit margins are astronomical for an insurance company. S&P and Moody’s are complicit in this scheme because they under rate muni bonds. The losers of this are the municipalities that have to pay fees. Its no wonder Buffett wants to enter this lucrative aspect of the business. The insurance business on structured products is for dolts like Mr. Brown who thought with without any insight that other types of bonds with similar ratings would merit similar returns. Little did he know that his idiotic rating agency friends didn’t get that right also. AAA in CDOs really meant junk. Brown is the joke and not Ackman, who like any opportunist is trying to make a buck. Brown on ther hand is raising the cost of financing for municipalities and taking away funds for education, transportation and healthcare despite his pronouncement he’s for increasing employment. The banks are in cahoots with Brown because if MBIA get downgraded then the banks will have additionally writedowns and may have to bring additional assets on to their balance sheet. The simplest stopgap measure is for the banks to provide capital to MBIA so the can maintain their AAA rating. But eventually market forces will catch up and the overwhelming increase in housing foreclosure, mortgage writedowns and defaults will lead to further losses in CDOs. It will also lead to losses in credit derivatives against assets like CDOs. So Brown is only deluding himself and shareholder and potential investors of MBIA. Why do you think Buffer only wants the muni insurance business and not the shitty structured stuff Brown had his people add?
Voltron says: cry me a river, MBIA
MBIA (MBI) is going on the attack. The bond insurer on Monday eliminated its quarterly dividend and sketched out a plan to split its lucrative municipal bond operations from its structured finance side, which handles the increasingly perilous business of insuring mortgage-related securities. The moves came just hours after rating agency S&P affirmed MBIA’s triple-A rating, lifting a bit of the sense of siege that has descended on MBIA in recent months. Shares of MBIA and rival Ambac (ABK) surged as much as 20 percent in trading Monday afternoon.
Good news from the bond insurers has been well received on Wall Street in recent days, which could point to another rise when trading opens Tuesday. On Friday, blue-chip stocks rallied on reports Ambac was close to wrapping up a deal to raise new equity. Monday brought another late-day marketwide rally after S&P announced its decision not to downgrade MBIA. Tuesday could well bring confirmation of a possible capital infusion that could clear the way for Ambac to pursue a split as well.
But under new chief Jay Brown, MBIA appears to be positioning itself for a bigger stage - the one in Washington, D.C. A message to shareholders published late Monday promised that the company will take a responsible position on executive pay, with Brown noting that he has been a buyer of the company’s stock, not a seller like so many U.S. execs. He also returned to a theme hinted at in last Thursday’s surprise announcement that MBIA was dropping out of a key financial-insurance trade group: Brown believes the off-shore insurance industry, based in Bermuda, isn’t paying its fair share, and he’s here to do something about it.
“In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes,” Brown wrote in his Monday evening letter to owners. “After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient!”
And paying more isn’t the only action MBIA is ready to take. Brown threatens that if lawmakers don’t act, he’ll move MBIA from Armonk, N.Y., to Bermuda, because it’s so important to him that MBIA keep its cost of capital down. “I still don’t look good in Bermuda shorts,” he writes, “but we will eventually have to move the company if the U.S. tax code is not modified.”
Brown certainly has chutzpah. Though the company has raised $2.6 billion in new capital and appears all but certain to keep its triple-A rating intact, at least for now, MBIA is still struggling to find its footing amid a financial storm. Indeed, the company warned in Monday’s letter that it expects to take another mark-to-market writedown of its insurance portfolio in the first quarter. Picking up where former CEO Gary Dunton left off, Brown also accused short-seller Bill Ackman of trying to “destroy our franchise and our industry.”
With those sorts of challenges looming, now seems like an odd time to be devoting scarce management time to changing the tax code, of all things. But as Brown says, “Yes, we’re following our own course, but this shouldn’t surprise anyone.” True enough. By now, no one can be surprised by anything coming out of MBIA.