Next Stop For Housing This Fall – UP or DOWN – A few weeks back the MBS (Mortgage Backed Security Markets) were roiled with rumors of a massive government sponsored refinance program. Investors who owned any securities at 5% or above, containing 30-yr loans with rates of5.25% or above, were wringing their hands, worried that suddenly their holdings would either evaporate or they would be earning 4% instead of 5% every year. The market chewed on this possibility for a few weeks until the end of last week when President Obama, in a speech about jobs, noted his intention to help “responsible homeowners refinance their mortgages at interest rates that are now near four (4.0%) percent.”
This is certainly less extreme than some of the rumors that had been circulating in recent weeks, but it is still something to ponder. The focus is on HARP loans, and in turn on FHFA, who oversees Freddie and Fannie, and then again on the FHFA Director. He pretty much said that any restructuring of HARP would have to strike a balance between benefiting homeowners and preserving current levels of credit risk for Fannie and Freddie. “FHFA is carefully reviewing the mechanics of the HARP program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP. If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program’s intent of assisting borrowers and reducing credit risk for the Enterprises, we will seek to do so.” Perhaps Loan Level Pricing Adjustments would be tweaked, perhaps the current 125% LTV limit would be raised??
MERS is certainly holding its own. It won a ruling upholding dismissal of claims by Arizona borrowers challenging their lending and foreclosure procedures. The federal court in San Francisco ruled last week that a district court properly threw out a lawsuit filed by three borrowers alleging conspiracy and fraud. In addition to MERS, defendants included Bank of America and JPMorgan Chase. “The plaintiffs’ claims that focus on the operation of the MERS system ultimately fail because the plaintiffs have not shown that the alleged illegalities associated with the MERS system injured them or violated state law,” the three-judge appeals panel said.
In a somewhat related matter, HUD came out with a Mortgagee Letter announcing that “FHA approved Holders and Servicers are subject to sanctions for failure to report Mortgage Record Changes (MRC) for mortgage sales, transfers and terminations of mortgage insurance. Mortgagees who fail to comply may be subject to referral to the Mortgagee Review Board (MRB) for administrative actions including but not limited to civil money penalties.
And what is new with the temporary loan limits, set to expire in about 2 1/2weeks Congress, which recently never seems to do much preemptively lately, is being hit up by almost every mortgage lending and real estate trade group in the Country. The latest is a push to take action on a bill that would extend the maximum mortgage loan limits through 2013. A bipartisan bill introduced about a month ago (don’t forget – they were on vacation) would allow the FHA, VA, and Fannie & Freddie to continue insuring homes up to the higher levels for another two years. Watch for news on The Homeownership Affordability Act of 2011. Few politicians want to be seen as hindering any recovery in housing, of course and in a joint letter to Congress several industry organizations warned that failing to extend the limits would delay the housing recovery and make it more difficult for consumers to secure affordable financing. “With tight underwriting already constraining mortgage availability, lowering the loan limits will only further restrict liquidity,” the letter reads in part. “Private lending remains wary of returning to the market with all the current uncertainty. Extending the existing limits at levels appropriate for all parts of the country will provide homeowners and home buyers with safe, affordable financing and help stabilize local housing markets.” On Thursday, a bipartisan group of 37 lawmakers sent a letter to the House Appropriations committee recommending a short-term extension of the current conforming limits. The lawmakers urged the committee to attach the provision to a temporary government funding bill.
But don’t look for anything to sail through. Opponents of retaining the loan limits claim there’s an appetite in private markets for jumbo loans. This brings up two major issues. The first is the recent news out of the SEC that it could close the exemption status real estate investment trusts (REIT’s) have from the Investment Company Act (ICA) when pooling and selling mortgage-backed securities. The SEC said “the mortgage markets have evolved and expanded, and the provision has been used by a wide variety of types of pooled vehicles and other companies unforeseen at the time of enactment,” which include certain MBS issuers and REIT’s. We now are able to comment on it – but the price of REIT’s dropped significantly. There are a lot of clever minds in the REIT business, and alternatives may be found that preserve tax benefits and thus continue their demand for mortgage products. But it should remind everyone in the mortgage business that we cannot rely on the REIT’s demand for MBS’s to save our industry.
The second issue is in the fact that major banks, which are pretty much the same thing as major mortgage originators, investors, and servicers, are now staring down the gun of the Federal Government who is suing them. It will take some very good minds to come up with plans in the future to motivate private investment in mortgages while at the same time convincing these banks to loosen up their purse strings and invest in production. Seventeen (17) banks, dozens of their subsidiaries, and over one hundred (100) bank officers were named as defendants in a lawsuit filed by the Federal Housing Finance Agency (FHFA), conservator of the GSE’s. The civil suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities to the GSE’s.
But wasn’t the FHFA and other large investors, smart enough to analyze the securities and evaluate the risks? That is the argument of course, and one – Ally – was quick to bring that to everyone’s attention. “Ally believes that FHFA’s claims are meritless, and the company intends to defend its position aggressively. Freddie Mac is a sophisticated investor and elected to take certain risks with respect to purchasing securities. The losses Freddie may have sustained related to those securities are a result of market forces, not any alleged errors or omissions by Ally in connection with the securities.”
Speaking of lawsuits with big banks, US banks are in talks with state prosecutors to settle claims of improper mortgage practices. They have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion dollar payment. This focuses on the “robosigner”, workers who signed off on foreclosure documents in mass without reviewing the paperwork. Apparently state prosecutors have proposed effectively releasing the companies from legal liability for allegedly wrongful securitization practices.
Small and regional banks have been busy. Here in California, First Pacific Trust Bancorp will acquire Beach Business Bank, following another recent deal to buy Gateway Business Bank. (After the acquisitions, First Pacific Trust will have about $1.3B in total assets and 18 branches.) My office uses Beach Business Bank and has for several years. This will be the fourth iteration that we have gone through with them. Fun stuff.
Bank of America announced 40,000.00 job cuts or 14% of its workforce this morning. The cuts are expected to be largely centered on retail operations. While B of A has already shuttered 63 of its 750 planned branch closures (13%), these cuts would likely mean more are on the way. B of A states that it has “more cash on hand than at any time in its history and can weather just about anything”. . . ok, well what’s the “just about anything part“?? It appears their CEO can’t quite seem to find a balance with the “massive checkbook” they hold . . .
While last week was a fairly light week for economic data, speeches by President Obama and Fed Chairman Ben Bernanke dominated headlines. Bernanke’s speech offered nothing new. The president outlined a plan that calls for payroll tax cuts and spending initiatives. Although the proposal could boost growth somewhat, most do not believe it fully addresses the core issues of weak consumer demand and structural unemployment. The president called for payroll tax cuts, which accounted for more than half of the plan. He wants an extension of emergency unemployment compensation, infrastructure spending, aid to state and local governments as well as programs that help the issue of long-term unemployment and mortgage-refinancing.
The $447 billion package is equivalent to nearly 3% percent of GDP. If this passes it could provide a badly needed boost to economic growth next year. However, the proposal still needs to be passed by Congress. There is likely to be substantial opposition in Congress over next few weeks, given the varying possibilities for the proposal to be adopted. This primary issue of course will be in how it will impact interest rates in the next 12 months. The market implications of any fiscal stimulus occur through 2 channels: boost (GDP), and how to avoid increasing the Federal deficit. So far Wall Street doesn’t like the plan, and rates seem to be heading lower ahead of any potential fallout. This suggests that the markets do not believe it will help the economy much if any at all.
Either way you slice it we’re in for a very bumpy ride the next few months. The Housing Market is just one the largest “victims” within the serial marketplace turmoil. Even with HISTORICLY low Interest Rates there still is a huge void in refinance, re-sale, and new construction activity. Were I live here in La Costa there is a new development of Single Family Homes just down from us. The homes (MODELS ONLY) were constructed after the builders froze the property after the improved the site for nearly four (4) years. The Models now sit on a partially completed street with Ocean Views. These are large Single Family Homes; you know the kinds that were red-hot during the boom (2003-2007). Well, times have changed. Not only are all four units still for sale, they have all seen numerous price reductions in the past 60 days. So far my wife and I have collectively seen a total reduction of almost 20% percent since they were built 5 month ago . . .OUCH !!
Bottom Line, if you thinking about buying or selling you need to speak to a professional and get up to speed on current matters. For those of you that think that turning a blind eye is going to make life better, you couldn’t be any more wrong. Banks won’t help you. If you’re in foreclosure and think that the Bank is going to help you stay in your home – you’re wrong. Call my office today if you’re starring at foreclosure. There are several, very easy ways out that I can assist you with. I have a 100% success rate with all of my Short Sales, so a quick call to my office is the best insurance you get for your family.