Posts Tagged ‘Freddie Mac’

« Older Entries
Newer Entries »

A Lifeline for Underwater Homeowners?

Wednesday, October 26th, 2011

Federal officials and some of the nation’s largest banks are collaborating on a plan that would make refinancing available to some borrowers whose houses are worth less than their loans, with the caveat that they must be up-to-date on mortgage payments.  Typically, these borrowers can’t refinance because they don’t have enough equity in their homes.  The plan would apply only to bank-owned mortgages.

Federal officials have been trying to negotiate a deal with the five largest mortgage servicers – Ally Financial, Inc, Bank of America, Citigroup Inc, J.P. Morgan Chase and Wells Fargo & Co.  Officials favor a plan that would break a legal impasse with big banks over alleged foreclosure abuses such as robo signing and ease problems in the housing market.  Discussions are still underway and the final outcome is not yet known.

Pressure is building in Washington, D.C., to help underwater homeowners with a generous refinance plan.  President Barack Obama told Congress that he wants to help “responsible homeowners” refinance, saying it would “give a lift to an economy still burdened by the drop in housing prices.”  A bipartisan coalition of 16 senators wrote to the administration urging swift action on a refinance plan.

“A huge floodgate would open up” if underwater refinancing were broadly available, said Fif Ghobadian, a broker at Guarantee Mortgage in San Francisco.  “It would provide the help that lowering interest rates cannot do alone.  Someone who’s been making payments at 7.5 percent religiously but cannot qualify to refi – boy, would that four percent make a huge difference in their life.”

A program has existed for some time that provides guidelines to lenders for refinancing some Fannie Mae- and Freddie Mac-backed underwater mortgages.  The program is called HARP (Home Affordable Refinance Program), it’s two years old and has resulted in approximately 800,000 refinances, far short of the five million originally envisioned.  Only a fraction of those homeowners were deeply underwater.  HARP’s main impediment has been the lenders themselves.  Concerns about issues such as being forced to take responsibility for refinances that default (known in the industry as “buybacks”) has made lenders reluctant to issue HARP mortgages.  The proposed new plan would likely expand HARP to make it more acceptable to lenders and more usable by a broader swath of homeowners.  “Changes (being contemplated) would address several HARP obstacles,” said Erin Lantz, director of the mortgage marketplace for Zillow.  “The industry now makes it hard for people to qualify.  The process would be more streamlined.”

According to a recent Harvard study, approximately 11 million homeowners with mortgages are underwater.  This accounts for roughly one-fourth of all homes with mortgages in the nation.  An additional five percent have near-negative equity (<five percent home equity).

Writing for Reuters, Felix Salmon doesn’t think much of the potential mortgage plan.  “It’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.  It’s worth remembering, at this point, that mortgages are by their nature pre-payable.  When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance.  The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.  As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off.  But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment.  Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

“It’s not inconceivable at all.  In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the Congressional Budget Office (CBO) has been costing it in various ways.  At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.  But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks.  For one thing, it’s downright unfair and invidious to allow 20 percent of underwater homeowners to refinance while ignoring the other 80 percent.  More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank.  It’s not some kind of gruesome punishment.”

Tags: , , , , , , , , , , , , , , , , ,
Posted in Economics, Financing, General, Residential | No Comments »

Foreclosures Appear to Be Stabilizing

Monday, August 29th, 2011

Foreclosure filings fell a dramatic 35 percent in July to the lowest level in nearly four years as lenders and state and federal agencies ramped up their efforts to keep delinquent borrowers in their homes, according to RealtyTrac Inc.  A total of 212,764 properties received default, auction or repossession notices, the lowest number in 44 months.  Filings declined on a year- over-year basis for the 10th consecutive month, and were down four percent when compared with June.  One in every 611 households across the country received a notice.  “The downward trend in foreclosure activity has now taken on a life of its own,” RealtyTrac Chief Executive Officer James J. Saccacio said.  “Unfortunately, the fall-off in foreclosures is not based on a robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond.  It appears that processing delays, combined with the smorgasbord of national and state-level foreclosure prevention efforts, may be allowing more distressed homeowners to stave off foreclosure.” 

Nevada leads the nation with the highest foreclosure rate of any state, one filing for every 115 homes.  California, with one foreclosure for every 239 homes came in second, while Arizona, with one in every 273 homes, was third.  Las Vegas continued to record the nation’s highest foreclosure rate, with one in every 99 homes getting a foreclosure filing in July. 

Foreclosure auctions, the final step in the agonizing foreclosure process were also scheduled on five percent fewer properties in July.  The month’s auction total hit a three-year low and was nearly half (46 percent) below the March, 2010, peak.  An estimated four million vacant homes not yet accounted for by lenders constitute an immense inventory of residential properties, approximately 2.2-million of which are in default and have not yet been formally foreclosed known as the “shadow inventory” weigh down the marketplace. 

The Obama administration is proactively seeking ways to dispose of foreclosed homes that are under government control.  The goal is to “bring stability and liquidity” to the housing market, Edward J. DeMarco, acting director of the Federal Housing Finance Agency (FHFA), said.  The FHFA regulates Fannie Mae and Freddie Mac, which guarantee approximately 90 percent of American mortgages.  President Obama has proposed a program to encourage the rental of foreclosed homes owned by the Federal Housing Administration, Fannie Mae, and Freddie Mac.  Banks could adopt similar programs and offer homes at steep discounts to get residential real estate off their books.  Financial institutions typically get lucrative write-offs from these and so might prefer to rent some properties.  Other federal attempts to prop up the housing market have not been successful to date.  The Making Home Affordable Program operation was launched in March of 2009 with the main component the Home Affordable Modification Program.  This was created to cut mortgage payments for families who couldn’t afford them, but wanted to keep their houses.  A Congressional Oversight Panel report said the programs had failed and fell far short of its goal to modify mortgages for three million to four million homes.  The new Obama plan to rent foreclosed homes has the potential to positively impact home prices.

Writing on MSNBC, John W. Schoen says that “A sharp slowdown in the pace of home foreclosures may help ease the financial burden on bankers by helping them unload a glut of repossessed homes more slowly and delay booking losses from the sale of distressed properties.  But it will do little to help millions of Americans families at risk of being tossed from their homes in the next few years.  The slowdown follows a wave of legal challenges by homeowners that has all but shut down the machinery of bank repossession in some states.  Some homeowners are disputing the widespread practice of ‘robo-signing’, in which lenders process batches of foreclosure fillings with little or no formal review.  Other homeowners have successfully halted repossessions by questioning shoddy paperwork or broken paper trails that don’t establish clear title to a property.  The slowdown has left millions of American households in legal limbo, prolonged the housing market’s four-year recession and delayed hopes for a broader economic recovery.” 

“The process has more or less ground to a halt in a lot of states that do foreclosures through the court system,” said Rick Sharga, a senior vice president at RealtyTrac.

Tags: , , , , , , , , , , , , , , , ,
Posted in Economics, Financing, General, Residential | No Comments »

Contract Cancellations Sour Home Sales

Wednesday, August 24th, 2011

A new phenomenon has emerged that is depressing the sales of existing homes. Contract cancellations are surging, dashing hopes that the distressed housing market is showing signs of improvement.  According to the National Association of Realtors (NAR), sales fell 0.8 percent in June compared with May to an annual rate of just 4.77 million units, the lowest since November, and falling for the third consecutive month.  Economists had expected sales to climb to a 4.90 million-unit yearly pace.  “Buyers and sellers are increasingly running up against conservative appraisals, which often cause deals to fall through or be delayed,” said Mark Vitner, senior economist at Wells Fargo Securities.  In fact, the market is unlikely to improve in the near term, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“A variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” NAR chief economist Lawrence Yun said.  Fully 16 percent of NAR members reported a sales contract was cancelled in June, up from four percent in May.  “The underlying reason for elevated cancellations is unclear,” Yun said, suggesting possible problems like tight credit for buyers and low home appraisals.

Writing for the Wall Street Pit, Dirk van Dijk says that “Regionally sales were down on the month in two of the four Census regions.  All four regions were down year over year.  The Northeast fared the worst, with sales down 5.2 percent for the month and down 17.0 percent from a year ago.  The West had a month to month decrease, with sales falling 1.7 percent, down 2.6 percent from a year ago.  In the Midwest, sales rose one percent for the month but are down 14.0 percent year over year.  The South, the largest of the four regions, saw a 0.5percent rise on the month, but a 5.6 percent year-over-year decline.  After all, it is better to simply sell the house and get something for it, rather than let the bank take it and get nothing for it.  The more people under water, and the deeper they are, the higher foreclosures and strategic defaults are going to be.  A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective.  If you have a house that could only sell for $150,000 in the current environment, and you owe $200,000 on the mortgage, in effect you have the option of ‘selling’ the house to the bank for $200,000 simply by not writing the checks.  Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of a tarnish on your Fico score.  If the difference is only $5000, then the hit to your credit score makes less sense, and there are lots of non economic factors (a house is after all a home, not just an investment) that come into play.”

Despite the disappointing existing house data, homebuilders appear to have more confidence than buyers, because May housing starts climbed to a five-month high, according to the Department of Commerce.  The month was the first time in five years that more homes were started than completed.  A majority of the buyers were investors, with 29 percent of the transactions being all cash.

Writing for The Hill, Vicki Needham says that “Distressed homes — foreclosures and short sales generally sold at deep discounts — accounted for 30 percent of sales in June, compared with 31 percent in May and 32 percent in June 2010.  Foreclosures have flooded the market, providing good deals for some potential homebuyers but hindering new construction.  Mortgage rates for a 30-year, conventional, fixed-rate mortgage were 4.51 percent in June, down from 4.64 percent in May.  The rate was 4.74 percent in June 2010, according to Freddie Mac.”

“With record high housing affordability conditions thus far in 2011, we’d normally expect to see stronger home sales,” said NAR President Ron Phipps.  “Even with job creation below expectations, excessively tight loan standards are keeping many buyers from completing deals.  Although proposals being considered in Washington could effectively put more restrictions on lending, some banking executives have hinted that credit may return to more normal, safe standards in the not-too-distant future, but the tardiness of this process is holding back the recovery.

Phipps noted that lower mortgage loan limits, which are scheduled to go into effect October 1, already are having an effect.  “Some lenders are placing lower loan limits on current contracts in anticipation they may not close before the end of September,” he said.  “As a result, some contracts may be getting canceled because certain buyers are unwilling or unable to obtain a more costly jumbo mortgage.”

Tags: , , , , , , , , , , , , , ,
Posted in Economics, Financing, Residential | No Comments »

Fannie and Freddie to Marry?

Tuesday, August 2nd, 2011

Mortgage finance giants Fannie Mae and Freddie Mac might find themselves merged into a single government-run entity.  Representative Gary Miller (R-CA) is set to unveil a bill that would create a utility-like entity and phase out government-controlled Fannie Mae and Freddie Mac.  The new company would buy mortgages and repackage them as government-backed securities.  The major difference from Fannie and Freddie lies in the fact that it would not have shareholder investors.  The National Association of Homebuilders and the National Association of Realtors are expected to support the proposal, which reflects concerns by the industry, consumer groups and some policymakers that a complete withdrawal of government support for home lending could make the housing recession go further downhill.

A competing proposal by Representatives Gary Peters (D-MI) and John Campbell (R-CA) would create a minimum of five private companies to replace the two co-called government-sponsored enterprises, or GSEs.  The point of contention for many lawmakers is whether to provide a government backstop for mortgages and on what terms to provide the guarantee.  House Financial Services Committee Chairman Spencer Bachus (R-AL) is trying to forge a consensus among Republican members.  Any bill that is generated by Bachus’ committee and is passed by the Republican-led House would likely still be in jeopardy once it reaches the Democratic-controlled Senate.

“There was the idea that people were so tired of taxpayer losses related to housing that the traditional housing lobby would not be able to retaliate effectively,” said Jim Vogel, chief of agency debt research at Memphis-based FTN Financial. “It’s time to start waving the housing flag again.”

That would represent a sea change from February, when the Treasury Department recommended selling off Fannie Mae and Freddie Mac holdings within 10 years; Jeb Hensarling (R-TX) wanted to do it in half that time.  Since then, homebuilders, real estate agents, investment banks, civil rights leaders and consumer advocates have lobbied to retain a government role — including the unspoken federal guarantee behind Fannie Mae and Freddie Mac.  Congress created the programs as private companies to expand home ownership.

Already, the government is slowing its efforts to prop up the housing market.  Beginning this fall, the cap on Fannie and Freddie-backed mortgages — loans where taxpayers are on the hook if borrowers don’t pay — will decline in some regions.  At the height of the housing crisis, Congress raised the cap to $729,750 in areas where homes are most expensive.  After October, that will fall to $625,500.  The limit varies by county.  Mortgages that are too expensive to get backing from Fannie and Freddie are called jumbo loans and usually have higher interest rates and require larger downpayments.  That maximum was set by Congress in 2008 in an attempt to ensure that borrowers could continue to obtain loans in particularly expensive housing markets during the credit crunch, especially in prime real estate locations, such as New York, Los Angeles and Washington, D.C.

The Deal Book column in the New York Times thinks that the idea of merging Fannie and Freddie is not as outrageous as it may at first seem.  “Consider the math: For the first six months of this year, both companies spent $1.825 billion in overhead costs combined; on an annualized basis, that means the companies are spending about $3.65 billion.  Given that the companies do pretty much the same thing – buying mortgages from banks, insuring them and creating mortgage-backed securities – there might be opportunities for savings if many of their managers and staff are, to put it politely, redundant.  Conservatively, a combined Fannie and Freddie could probably cut a third of its overhead and staff, saving some $1.2 billion annually.  The way Wall Street values companies, that means – presto – billions more in value, perhaps as much as $18 billion or $19 billion, could be created overnight.”

“It would instill a huge amount of confidence. The market will know that both entities combined will have much more consistent, stable margins,” John Lekas, chief executive of Leader Capital, an investment firm, said on CNBC last week. He added that it “doesn’t cost taxpayers one nickel.”

Additionally, Fannie and Freddie are on track in 2011 to spend about $1.8 billion on what is known as “foreclosure costs,” which means maintaining and selling thousands of homes that became part of their ownership portfolios after the owners were unable to pay the mortgage.  The costs are staggering, given that Fannie and Freddie together own approximately 153,000 foreclosed homes. “This is just one of the costs that Fannie and the rest of us will pay to dig out of a very big hole,” says Karen Petrou, of Federal Financial Analytics.  When she says “the rest of us,” she is telling the truth.  Fannie Mae’s tab to American taxpayers is up to $86 billion since September 2008 when it was taken into government conservatorship.  During the 1st quarter of 2011, Fannie racked up $488 million in foreclosure-related expenses, including holding costs (insurance, taxes and maintenance); valuation adjustments for changes in market value; gains/loss when the property is sold; legal fees; eviction costs; weatherization costs to prevent pipes from bursting; costs to secure the property; and repair costs.

“We want to make sure that we’re comparable with the market or with the neighborhood,” said Elonda Crocket, a Fannie Mae executives who is part of the management team of its massive portfolio of foreclosed properties.  The goal is to stabilize the neighborhoods where there are foreclosed homes and get the properties to a condition where first-time homebuyers want to purchase them.  “We want to make sure that we can maximize our return on the investment,” she said.  In 2010, Fannie Mae repaired 87,000 foreclosed homes.

“It makes them — I think — indisputably the largest purchaser of paint and general appliances for these homes they’re fixing up,” said Guy Cecala, publisher of Inside Mortgage Finance.  “If they don’t maintain the houses, then the neighborhoods go downhill, other people are put at risk and the housing crisis gets worse because you have still more downward pressure on overall house prices,” Petrou said.

Tags: , , , , , , , , , , , , , , , , , , , , ,
Posted in Development, Financing, Residential | No Comments »

Reinventing Fannie and Freddie

Thursday, June 2nd, 2011

The initial steps to dismantle Fannie Mae and Freddie Mac are underway with the introduction of a bipartisan bill in the House of Representatives that would replace the mortgage giants with a minimum of five companies that would issue mortgage-backed securities with significant federal regulation.  The compromise legislation proposed by Representative John Campbell (R-CA) and Representative Gary Peters (D-MI) is likely to be the only plan that will attract sufficient support from both parties on a politically volatile subject, especially at a time when gridlock looms over issues such as how to curb federal spending.  The bailout of the two companies has cost taxpayers upwards of $100 billion.

According to Representative Campbell, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law.  The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”  Other policymakers, such as Treasury Secretary Timothy Geithner, have discussed the merits of a limited but unambiguous government guarantee of securities backed by certain types of mortgages.  The new entities – similar to Fannie and Freddie — would be limited to purchasing loans that meet certain standards, including size caps.  The difference would be that the firms would be required to hold much more capital than Fannie and Freddie.  Only the mortgage-backed securities that they issue –not the companies themselves — would enjoy federal guarantees.  The companies would operate similarly to public utilities and likely will not have exchange-listed shares.

Critics say the proposal risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that harmed taxpayers.  “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley.   Government insurance programs, he says, inevitably lead to “a catastrophe.”  Advocates argue that taxpayers will be less exposed to losses because borrowers will have to make significant downpayments.  Additionally, the new firms will have to hold more capital.  Additionally, the firms will be required pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corporation levies fees and handles bank failures.

The mortgage and housing industry support a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The agencies are still hemorrhaging money.  For example, Fannie Mae reported a loss of $8.7 billion for the 1st quarter of 2011, which included a $2.2 billion dividend payment to the Treasury Department.  The loss was significantly less than the $13 billion reported one year ago.  “We need to manage our credit book — our old legacy book very vigorously,” said Fannie Mae President and CEO Michael Williams.  But that is not in conflict with helping distressed homeowners.  “Helping people to avoid foreclosure is a good thing,” Williams said.

Action must be taken to keep the mortgage market afloat and provide securitization for investments.  According to a Washington Post editorial,  “The housing market is still in deep trouble.  Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again.  The resulting hit to household wealth may hinder the recovery, which is already sluggish.  Small wonder that various advocates for housing are once again asking Washington for help.  But in at least one area, the prescription would be worse than the disease.  We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control.  Congress ‘temporarily’ raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September.  At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.  But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie.  The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end.  Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.”

Tags: , , , , , , , , , , , ,
Posted in Economics, Financing, Residential | No Comments »

Many Americans Spend Half of Their Income on Housing

Wednesday, May 25th, 2011

American renters who pay more than 50 percent of their income on housing has peaked at the highest level in 50 years, according to a report from the Harvard Joint Center for Housing Studies. Approximately 26 percent of renters – that’s more than 10 million people – are spending more than 50 percent of their pre-tax income on rent and utilities because salaries have fallen significantly amid rising rents.  An analysis conducted by the Washington Post found that rents in the nation’s capital, for example, had risen 22 percent in 2009 over the past 10 years.

“It’s a real squeeze for the lower-income and moderate-income families, and we’re even starting to see it affecting middle-income families, too,” according to Erick Belsky, managing director of Harvard’s Joint Center for Housing Studies.  “The prospects for improvement any time soon are dim.”  In other words, finding an affordable house or apartment to rent can be difficult.

When the economy went south in 2008, developers stopped building new apartments at a time when foreclosures were pushing many Americans into the rental market.  Because supply and demand were at odds with each other, rental rates climbed and are expected to remain high for the foreseeable future.  “In real terms, it means more people have less money to spend on household necessities such as food, healthcare, or savings,” Belsky, said.  Households that spend half or more of their income on rent also spend almost 40 percent less on food and more than 50 percent less on healthcare than households with more affordable rent.  “In the last decade, rental housing affordability problems went through the roof,” Belsky said.  “And these affordability problems are marching up the income scale.”

The report notes that – in a perfect world – renters should not have to pay more than 30 percent of their income on housing.  Over the last 10 years, low-income renters have experienced difficulty staying within that limit.  In 2009, 7.5 percent of moderate-income renters had to spend more than 50 percent of their salaries on rent, double the number reported in 2001.

According to the report, 28.6 percent of metropolitan Chicago renters are severely burdened by their rental costs.  Ten years ago, only 20.4 percent of area renters paid that high a percentage of their incomes.

With the number of renters growing, the Low Income Housing Coalition says it’s time for policymakers to put more money into rental assistance and affordable housing.  Throughout the housing crisis and recession, lawmakers have placed resources primarily on helping troubled homeowners avoid foreclosure; but approximately 40 percent of foreclosures also displace renter households.  The coalition has asked Congress to fund the National Housing Trust Fund, which creates a permanent funding source to construct, renovate and preserve 1.5 million units of rental housing for low-income families over the next 10 years.  Although the trust fund legislation passed in 2008, Congress hasn’t funded it because of the economic downturn.  The fund will not increase government spending or taxes because it was designed to be funded through contributions from Fannie Mae, Freddie Mac and the Federal Housing Administration.

Sheila Crowley, the president of the coalition, said now was the time to act.  “Providing $1 billion for the National Housing Trust Fund will help address the growing shortage of affordable housing, which is one of the most serious economic problems facing the country,” she said.  Crowley expects the House of Representatives to begin debating the Section 8 Voucher Reform Act, which passed the House Financial Services Committee last summer.  “We are very much hoping that the Senate will take it up as well,” she said.  The bill would provide rent subsidies for 150,000 low-income families, , and the coalition is seeking another 2 million Section 8 housing vouchers over the next decade, doubling the current number.

Tags: , , , , , , , , , , , , , , , ,
Posted in Economics, General, Residential | No Comments »

11 Percent Rise In New-Home Sales

Thursday, May 12th, 2011

New home sales rose in March, with the number of properties on the market at its lowest since the 1960s.  Additional gains will be stymied by competition from the market’s glut of previously owned houses.  Single-family home sales rose 11.1 percent to a seasonally adjusted 300,000 unit annual rate, according to the Department of Commerce, during a month when economists had expected a 280,000-unit pace.  Even with the March uptick, new home sales are just bouncing along the bottom.  Despite the good news, the number of houses sold still is 21.88 percent less than the level achieved one year ago.  The news was released by the U.S. Census in its monthly New Residential Home Sales Report for March.

“Investors continue to drive the market and were about 22 percent of the purchasers in March, up from 19 percent a year ago,” said economist Joel Naroff, of Naroff Economic Advisors, in Holland, PA.  Investors typically look for foreclosures or short sales.  “They love those cheap distressed homes, which now make up 40 percent of the market,” Naroff said.  “Given the tight lending standards cash buyers are more than welcome.  To get a Fannie or Freddie loan, which are the only games in town, a borrower has to have a credit score of about 760.  Before anyone gets excited and thinks housing is on the rebound, understand that we need to more than double the March sales pace to reach decent sales levels,” Naroff said.  “Prices remain soft and are down by about five percent over the year.”

According to Dirk van Dijk of the Wall Street Pit, “The March level was substantially better than the expected rate of 280,000.  The 11 lowest months on record (back to 1963) for new home sales have all been in the last 11 months.  We are down sharply from a year ago, and it is not like a year ago was a great time in the homebuilding industry either.  Relative to the peak of the housing bubble (July ’05, 1.389 million) new home sales are down 78.4 percent.  Inventories of new homes were down 1.1 percent on the month and are down 19.7 percent from a year ago.  Supply is at 7.3 months, down from 8.0 months in February, but up from 7.1 months a year ago.  While that is well off the peak of 12.0 months, it is still above normal.  A healthy market has about a six month supply of new houses and during the bubble, four months was the norm.”

The median price of new houses sold in March was $213,800, according to the Census Bureau.  “It’s a decent start to the spring selling season, but we’re coming off all-time lows here, so we’re not going to get too excited,” said Brett Ryan, economist with Deutsche Bank Securities.  “The overhang of foreclosures drags on new home sales.  Builders are waiting for a clearing process to take place.”

The housing market was either “little changed from low levels” or weaker across the country, the Federal Reserve said in its most recent Beige Book report.  The absence of a continued housing rebound is one of the reasons why policymakers will complete their $600 billion asset purchase plan and keep borrowing costs at nearly zero to encourage growth.

Last year was the fifth consecutive year of declining new-home sales. According to economists, it could take years before sales return to a healthy pace.  Slow new-home sales add up to fewer jobs in construction, which normally powers economic recoveries following recessions.  Each new home creates an average of three jobs for a year and adds $90,000 to the local tax base, according to the National Association of Home Builders.

Tags: , , , , , , , , , , , , , , , ,
Posted in Economics, General, Residential | No Comments »

Want to Buy a Toxic Asset? The Treasury Department Is Selling Them

Monday, April 18th, 2011

The Treasury Department is planning to sell $142 billion worth of toxic assets that it acquired during the financial crisis.  According to Treasury, it wants to sell approximately $10 million worth of assets every month, depending on market conditions and hopes to end the program next year.  Treasury acquired the securities — primarily 30-year, fixed-rate mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac –between October, 2008 and December, 2009 to stabilize the home loan market.

The Treasury has decided to sell the securities now because the market has “notably improved.”  According to Treasury officials, the sale could net $15 billion to $20 billion in profits for taxpayers.  The sale will have a negligible impact on the U.S. debt limit but could delay the ceiling’s arrival by a few days.  In early March, Treasury estimated the U.S. would hit the $14.294 trillion ceiling between April 15 and May 31.  The Treasury in 2008 retained State Street Global Advisors, a leading institutional asset manager, to acquire, manage and dispose of the mortgage-backed securities portfolio.

“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,“ Mary Miller, assistant secretary for financial markets, said.  “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort.”

Congress gave Treasury the authority to buy securities guaranteed by Fannie Mae and Freddie Mac.  The value of these mortgage-backed securities declined significantly after the housing bubble burst, prompting fears that write-downs could drag down individual banks and further plunge the financial system into panic.  The Treasury said that three years after the worst point of the crisis, the market for asset-backed derivatives is now much more robust.

The government bought $221 billion of these bonds, as part of the Housing and Economic Recovery Act of 2008.  Treasury announced that it would buy the bonds on the day the government took over Fannie and Freddie.  “The primary objectives of this portfolio will be to promote market stability, ensure mortgage availability, and protect the taxpayer,” Treasury said at the time.  The portfolio is now just $142 billion.  The Congressional Oversight Panel, which supervised the Troubled Asset Relief Program, said that as of February of 2011, Treasury had received $84 billion in principal repayments and $16.7 billion in interest on the securities it holds.

“It was a bit of a surprise, though will likely be easy to digest,” said Tom Tucci, head of government bond trading at Capital Markets in New York.  “We spent a year and a half at levels that were unsustainable because they weren’t based on economic fundamentals, they were based on fear.  “Now some of the fundamentals are starting to come back into place.”

Republicans are asking for deeper cuts in government spending before they will agree to raise the debt limit.  Treasury Secretary Timothy Geithner has cautioned that failure to raise the borrowing limit would cause an unparalleled default by the government on the national debt.  Without question, this would drive up the government’s cost of borrowing money.

Tags: , , , , , , , , , , , , , , , , ,
Posted in Economics, Financing, General | No Comments »

CMBS Stages a Comeback

Monday, March 14th, 2011

CMBS activity came back strongly during February with more than $6.5 billion in new securitization reported. Additionally, Freddie Mac brought two multifamily-backed offerings totaling $1.86 billion to market.  February’s level of activity is almost two-thirds of all CMBS deals offered in 2010.  The level resembles 2007, when commercial mortgage-backed securities offerings were at their peak.  Because of CMBS’ resurgence, the commercial real estate market is both bullish and fretful.  The rising volume in CMBS loan origination is a welcome sign that liquidity is returning to the markets.  The fact that a relatively large amount was created during the year’s shortest month is raising worries that the still delicate condition of commercial real estate is being sustained by too-eager lenders.

“I think it is clear that CMBS is coming back — something that is probably positive in the short-term as far as jump-starting the investment marketplace and helping to establish a new baseline for pricing while, hopefully, alleviating some of the distress issues out there. But is it a good thing in the long run?” asks Garrick Brown, Northern California research director of Cassidy Turley BT Commercial asked.

“As the number of participants in CMBS lending continues to increase, the competition to originate loans eligible for new CMBS deals will be fierce,” said John O’Callahan, capital markets strategist for CoStar Group.  “Insurance companies, GSEs (government-sponsored enterprises), and even the healthier large banks will lend on the best properties in desirable markets, while CMBS originators will compete among themselves for the leftovers. They will have to cast a wider net across all markets to garner the volumes anticipated in 2011.”

Just 15 months after the initial CMBS issuance, structural, leverage and issuance amount trends have quickly changed, according to Standard & Poor’s. The ‘CMBS 2.0′ market started with the pricing of three single-borrower transactions with relatively simple structures in late 2009; more recent deals have been more complex, more highly leveraged and with significantly higher opening balances.  “Most recently, three $1.2 billion plus conduit/fusion deals were issued this month, each of which included an average of 10 principal and interest bonds and two interest-only classes.  Compared with late-2009 issuances, the newer multi-borrower deals have higher leverage, less debt service coverage and somewhat looser underwriting,” says Standard & Poor’s analyst James Manzi.

Despite the good news from February, Trepp LLC, a provider of commercial mortgage-backed securities (CMBS) and commercial mortgage information, analytics and technology to the global securities and investment management industry, found that the CMBS delinquency rate rose 9.34 percent in January. The value of delinquent loans exceeds $61.4 billion.  “While the rate continues to head higher, optimists can point to the fact that the rate of increase is significantly smaller than it was in the prior two months,” said Manus Clancy, managing director of Trepp LLC.  “Pessimists can counter that the jump comes despite the fact that new issues continue to make their way into the calculation and servicers continue to resolve troubled loans.”

The re-emergence of CMBS does not mean a return to the go-go years of 2004-2007. If $35 billion is issued in 2011, it will total just 15 percent of the peak.  Additionally, the revised underwriting criteria are far more conservative and issuances are smaller and geared toward low-risk assets.  Significantly, originators are more frequently required to retain stakes in the offering.  The CMBS market is expected to steadily climb this year and could see additional issuance in 2012, perhaps rising to $100 billion by 2013.  This would still be less than half the peak level of 2007, but a substantial amount, bringing desirable liquidity to the commercial real estate market.

Tags: , , , , , , , , , , , , , ,
Posted in Development, Economics, Financing | No Comments »

Goodbye to Fannie and Freddie

Wednesday, February 23rd, 2011

The Obama administration and the Treasury Department have decided that Fannie Mae and Freddie Mac — the public-private housing finance model in place for the past four decades – will come to an end, although they pledged to continue backing the agencies’ existing obligations. “The GSE (government-sponsored enterprise) model is dead,” an Obama administration official said.  The Treasury Department is currently working on three broad options for overhauling the mortgage lending system, but will let Congress make the final decision.  The government bailouts of Fannie and Freddie have cost taxpayers nearly $150 billion.

Obama administration officials have emphasized areas of agreement with Republicans, stressing that they favor a system that is less dependent on government support.  Approximately 90 percent of new mortgages are currently backed by Fannie, Freddie or other federal agencies.  The move pleased Republicans, who have long criticized the mortgage companies. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” Representative Scott Garrett (R — NJ) said.  Garrett heads the House Financial Services subcommittee, which oversees Fannie and Freddie.  Representative Randy Neugebauer (R – TX), said he was pleasantly surprised by the focus on restoring the mortgage-backed securities market issued without the government’s guarantee.  Debate over the future of the mortgage giants is often contentious on Capitol Hill.  Republicans consistently criticized last year’s Dodd-Frank financial-overhaul bill for not addressing the fate of Fannie and Freddie.  Treasury Secretary Timothy Geithner said that winding down Fannie and Freddie and creating an alternative won’t happen overnight.  “Realistically, this is going to take five to seven years,” he said.  “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market.”

The Treasury Department report suggests that Fannie and Freddie purchase loans with smaller outstanding balances, reducing their risk.  The report also recommends phasing in a requirement that Fannie and Freddie borrowers make larger downpayments — at least 10 percent.  Lastly, the government wants Fannie and Freddie to wind down their own mortgage investment portfolios.  In their heyday, Fannie and Freddie were public companies that encouraged home ownership thanks to a Congressional mandate.  The companies buy home loans from lenders, which use the money to offer new loans to consumers.

The bad news is that mortgage costs could increase a bit once Fannie and Freddie are phased out. “Over the long run, the cost of a mortgage will rise modestly for the average American homeowner,” Geithner said.  “We think it’s very important for the government to continue to play a role, a targeted role” to make certain that “Americans who need help to find a home, to rent a home, or own a home get that help.”

Nor will the process of replacing Fannie and Freddie be easy.  Writing in the Wall Street Journal, David Reilly points out that “A return of private capital requires the revival of securitization markets for mortgages not backed by the government since bank balance sheets aren’t big enough to fill the gap”.  But 30-year loans in their current form aren’t attractive to investors without a government guarantee. The Treasury implicitly acknowledges the conflict, noting that the less government backing there is for housing finance, the less feasible the 30-year mortgage becomes.  It also admits the reward for losing that benefit, and largely removing government from mortgage markets, would be a reduced incentive to invest in housing so that ‘more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets.’  That should be the clear goal of any housing-finance revamp.”

Tags: , , , , , , , , , , , , , , , ,
Posted in Economics, Financing, General, Residential | No Comments »

« Older Entries
Newer Entries »