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Apr. 5, 2011: REIT demand for MBS increasing - a primer; Fannie & Freddie comments from the trenches; a stay granted in comp case
Rob Chrisman
Mark
Twain wrote, "The only difference between a tax man and a
taxidermist is that the taxidermist leaves the skin." It is "tax
time" for many in the US, where interest paid on a
home mortgage is still tax deductible. The government
seems interested in phasing this out for many (2nd
homes as a start, perhaps gradually lowering the interest dollar
level). But this is a perk that many in the US seem to be
foregoing as all-cash purchases of homes continue
to increase (which helps low-end housing but not the
mortgage biz): http://www.bloomberg.com/news/2011-03-29/cash-paying-vultures-feast-on-u-s-housing-as-mortgages-dry-up.html.
In a warped way, just like wars seem to help people learn
geography by looking at maps, and the passage of
mortgage-related laws help mortgage bankers remember Government
from high school, so it seems that the comp issue winding its
way through the courts is helping us brush up on law procedure.
The US Court of Appeals has granted a stay on Fed's
LO Compensation rule. This order does not permanently stay
or otherwise modify the enforceability of the rule. Instead, it
is a temporary measure to give the Court an opportunity to
review the case and make a final determination. http://usloans.com/Fedappealbrief.pdf.
Fannie updated its
Selling Guide to
include a number of miscellaneous clarifications. https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/sel1103.pdf. Fannie also is
updating the requirements to modify conventional mortgage loans.
“Servicers must follow the policies and procedures in this
Announcement when they are required to submit a non-delegated
modification case through the HomeSaver Solutions Network. The
revised requirements must be implemented for all conventional
mortgage loans evaluated for a modification on or after April
15.” https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/svc1103.pdf
Very little comes
out of Fannie & Freddie aside from policy or procedure
updates like the one above.
This isn’t surprising, given the conservatorship. But that
doesn’t stop others from opining. “Please explain how the
government will shut down the two entities when they along with
HUD represent 95% of all loans being purchased and securitized
on the market? The government has no viable plan whatsoever in
place to shut them down. All you hear is the people in Congress
talking about it but they don’t have a clue or plan anywhere
near execution."
Another wrote, "It is curious to me that while the
government has expressed a strong desire to have the private
sector replace all or some of Fannie and Freddie’s role in the
mortgage marketplace, it continues to roll out new regulation
that will make it more difficult for the private sector to
step in. Regulation only discourages private sector
investment, although it is not hard to see the entrenched,
large, private sector players (i.e., the big banks) attempting
to step up and reap the rewards of the monopolistic pricing
power that is being served up to them on a silver platter."
Thank goodness poverty is not necessarily a permanent condition,
according to a report released by the U.S. Census Bureau. While
29 percent of the nation’s population was in poverty for at
least two months between the start of 2004 and the end of 2006,
only 3 percent were poor during the entire period. (And any
comments that they are living in condos in “sand states” is
incorrect.) In its report, Dynamics of Economic Well-Being:
Poverty, 2004-2006, the Census Bureau traces a sample of U.S.
residents over that time period. Sociology students may find it
of interest. http://www.census.gov/newsroom/releases/archives/income_wealth/cb10-144.html.
Mark Ryan, the first
Risk Manager of the FHA and a Freddie vet, will become FHA’s
Acting Commissioner when Dave Stevens departs. As a bonus, Ryan
will also hold the title of Assistant Secretary of the
Department of Housing and Urban Development, subject to Senate
appointment. He has some good credentials, establishing a new
office within FHA to oversee its credit risk management
functions, increased its capacity to assess financial and
operational risk, perform more sophisticated data analysis, and
respond quickly to changes in the market.
Anyone involved in warehouse lending, repos, and RESPA, may be
interested in a recent ruling:
http://www.buckleysandler.com/infobytes/news/hud_clarifies_legal_guidance_related_to_warehouse_lending_in_response_to_bu/.
Barclays Capital
notes that over the past few months, mortgage REITs
have been aggressively raising equity, which should translate
into significant demand for MBS. Barclays states that
since December 2010, “agency mortgage REITs have raised about
$6.6 billion of new capital. Assuming a 6-10x leverage
multiplier, this should translate into $40-65 billion of agency
MBS demand.” A comprehensive analysis of REIT’s and their trends
is beyond the scope of this commentary, but a few simple notes
should be made.
Real Estate
Investment Trusts are simply a corporation or trust that uses
the pooled capital of many investors to purchase and manage
property or mortgage loans.
They are traded like stocks, are usually very liquid, and have
special tax considerations – the most notable being they pay no
taxes but instead pass those on to shareholders. Mortgage REIT’s
are not risk-free, however, since they take leveraged exposure
to agency MBS and are typically exposed to duration risk,
negative convexity risk, mortgage spread widening risk, yield
curve flattening risk, idiosyncratic risk associated with
prepayments, and the risk that short-term funding market could
freeze up. Most agency MBS-focused mortgage REITs took the last
three risks (flatter yield curve, idiosyncratic prepay risk and
the risk that repo funding market could dry up) but the exposure
to the first three risks is now more notable because interest
rates are at historically low levels and REITs seem to be buying
fixed-rate agency MBS instead of hybrid ARMs which increases
their exposure to negative convexity and mortgage spread risks.
Historically, Wall Street notes that REIT flows were not large
enough because the agency MBS-focused mortgage REITs had
significantly lower level of equity and they were also more
active in less “negatively-convexed” MBS products like hybrid
ARMs. But lately the equity level of REITs has increased
significantly and they have become more active in the fixed-rate
agency MBS market. Thus, analysts expect REITs to
continue to gather more attention from the agency MBS market
going forward.
Shedding more light
on who is buying mortgage-backed securities, recently the H.8
report (http://www.federalreserve.gov/releases/h8/current/)
showed that small banks are providing a stronger
demand for agency MBS than larger banks. Year-to-date,
large domestic bank holdings of agency MBS have declined by $10
billion but agency MBS holdings of small domestic banks have
increased by $19 billion. In addition, bank demand for agency
MBS has been stronger than the demand for Treasuries, reversing
the pattern seen in 2009 and early 2010. But banks’ recent share
buyback announcements are possibly indicating that banks are
viewing share buybacks to provide a better return than
leveraging their investments in fixed-income securities (due to
lack of loan growth). Are those larger banks saving their money
for buybacks, lawsuits, dividends…? Stay tuned!
“You want proof of
inflation? A 1998 Honda Accord EX was purchased new for $22,000.
A 2011 Honda Accord EX now costs $22,324, with same options, and
is a much more refined car. But that 1998 Honda Accord, when
purchased, cost $11.50 to fill up and yesterday cost $60 to fill
the tank – a 421% price increase!” Aside from that, subdued
inflation is one of the components that are helping the US stock
market, which is also being helped by low interest rates (the
Fed’s accommodative policy) and strong corporate earnings. Money
is still pouring out of fixed income investments and flowing
into equities and hedge funds are using leverage to buy more and
more stocks. The big question is what happens to stock
investments when the Fed starts increasing rates? But last night
Federal Reserve Chairman Ben Bernanke said that the Fed will
"respond" if inflation pressures persist, but made clear that is
not his expectation.
There was little
news yesterday to move rates,
and not only did volatility drop, but MBS volumes did as well.
At the peak 10-yr notes were up/better by .375, but ended the
day +.125 and at a yield of 3.43%. Agency mortgage-backed
securities ended the day about where they began: a shade better.
And don’t look for much change today, with the
news consisting of an ISM Non-Manufacturing Index number at 8AM
MST, the released of the FOMC meeting minutes at 2PM EST, and
various speakers from the FOMC. In early trading
the 10-yr’s yield is down slightly to 3.41% and MBS prices are
roughly unchanged.
A father walks into a restaurant with his young son. He gives
the young boy 3 nickels to play with to keep him occupied.
Suddenly, the boy starts choking, going blue in the face.
The father realizes the boy has swallowed the nickels and starts
slapping him on the back. The boy coughs up 2 of the nickels,
but keeps choking.
Looking at his son, the father is panicking, shouting for help.
A well-dressed, attractive, and serious looking woman in a blue
business suit is sitting at the coffee bar reading a newspaper
and sipping a cup of coffee.
At the sound of the commotion, she looks up, puts her coffee cup
down, neatly folds the newspaper and places it on the counter,
gets up from her seat and makes her way, unhurried, across the
restaurant. Reaching the boy, the woman carefully drops his
pants; takes hold of the boy's' “privates” and starts to squeeze
and twist, gently at first and then ever so firmly. After a few
seconds the boy convulses violently and coughs up the last
nickel, which the woman deftly catches in her free hand.
Releasing the boy's testicles, the woman hands the nickel to the
father and walks back to her seat at the coffee bar without
saying a word.
As soon as he is sure
that his son has suffered no ill effects, the father rushes over
to the woman and starts thanking her saying, "I've never seen
anybody do anything like that before, it was fantastic. Are you
a doctor?”
"No," the woman
replied, "I'm with Internal Revenue Service".
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