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Jun. 9, 2011: REIT's gaining in prominence; analyzing mortgage pools in the future; HUD's 2011 limits
Rob Chrisman
“I used
to be indecisive. Now I'm not so sure.” But one thing that I am
sure of is transparency. Sterne Agee released prepayment
information, important to investors and originators alike.
"Primary rates continued to their recent descent in May but
lower rates alone were not enough to incent borrowers to
refinance. Prepayment speeds for Conventional pools fell…Fannie collateral is now prepaying faster than
Freddie."
Now, I am no expert,
but that last sentence was interesting. Why is Fannie faster
than Freddie? I will throw out a few guesses. Perhaps
Freddie has paid less relative to Fannie on guarantee fee buy
ups. Or Fannie's DU Refi Plus plan (for "collateral stressed"
loans) is available for 3rd party lenders, as opposed to
Freddie's, giving a wider range of originators a shot at it.
(Freddie's plan must be refi'd in the name of the servicer. A
broker can refi in the name of the lender, but brokers'
percentage of the origination pie is down significantly. And
larger originators who are refinancing often do so through phone
banks which may have less pull through than the local shop.)
But that is in the past. One thing to note for the future is
the slicing and dicing will make today's look pretty
amateurish, given the amount of transparency with every LO
being licensed, and every loan being tracked, along with its
attributes, and so forth. Every security from every agency or
accumulator will contain loans from various originators, and
every loan will have its licensed originator, its LQI compliant
data, its Uniform Collateral Data Portal compliant appraisal
information... quant jockey's might be able to compare certain
lenders or LO's across various securities based on dates, loan
types, what the LO's credit report looks like, etc., etc.... my
head is spinning. But one can see the future. And maybe somehow
it will help borrowers.
One group for which refinancing is not a slam dunk is the
"underwater borrower." CoreLogic reports that nearly 23% of
all U.S. homeowners were in a negative equity position with
their mortgages at the end of the first quarter of 2011.
Almost 11 million borrowers owe more on their mortgages than
their property is worth, and another 2.5 million borrowers (5%)
were in a near-negative equity position with less than 5%
positive equity. Not only have many areas gone down in value,
but (and why is this a surprise to anyone?) borrowers with
second mortgages on their home were twice as likely to suffer
negative equity as those with only one lien.
HUD has recently
come out with an aggressive training schedule. It is best to go to
HUD’s website for complete details, but upcoming sessions
include “HOPE LoanPort Webinar Training for Housing Counselors”
on June 14th from 2-4PM EST, via Go To Meeting at: https://www3.gotomeeting.com/register/297575518.
(HOPE LoanPort allows counselors to upload fully completed home
retention applications - HAMP, Fannie Mae, Freddie Mac, FHA, VA
and all other investor options - directly to participating
servicers for faster decisions averaging 26 days if the
application is approved.) On June 15th in Chicago,
June 16th in Atlanta, June 21st in
Detroit, and June 23rd in Santa Ana (this sounds like
a rock & roll tour schedule) HUD will be hosting Loss
Mitigation training: https://eclass.hudtulsa.org/.
And if you’ve always wanted to visit Chadron, Nebraska, on June
21 HUD will be presenting a Non-Profit Program update and a
session titled “Keeping Up With FHA” presented by the Denver
Homeownership Center.
HUD also came out
with its FY2011 Median Family Income Limits after it
estimated median family incomes and income limits for 2011. To
access the new limits please visit HUDUser at: http://www.huduser.org/portal/datasets/il/il11/index.html.
Yes, mortgage
production is down, but the demand for mortgage product
continues to be strong among various entities, not the least of
which is from REIT’s. A few years ago, real-estate
investment trusts that bought and sold residential-mortgage
securities were very much “off the radar screen.” a dying breed.
But times change and of nine new REITs that have applied to sell
stock in initial public offerings so far this year, seven are
REITs that will invest in mortgage-backed securities, according
to Dealogic Inc. The value of the offerings totals $2.6 billion.
In recent months Pacific Investment Management Co. has its
shares of Pimco REIT Inc., there was a $500 million deal by
American Capital Mortgage Investment Corp. and a $300 million
offering for Putnam Mortgage Opportunities Co. According to
Barclays, mortgage REITs that principally invest in agency
mortgage-backed securities have raised at least $6.6 billion in
equity since December, and these cater to investors who want to
buy into these kinds of investment vehicles who don't have
access to a large bond fund because the minimum investments are
very high.
But why are they
“hot” now? After all, they’ve been around over 50 years.
Analysts say that the interest reflects perceptions that prices
for current securities, which have been rising in recent months
from the distressed levels reached during the financial crisis,
will continue to move higher in the years ahead. In addition,
interest rates set on new mortgages in the future are expected
to be higher than current levels, whether due to the overall
economic climate pushing rates higher (not right now) or Freddie
& Fannie’s role being reduced and private banks increasing
their share (more likely).
Larger lenders seem
to have some interest in forming them. But as this commentary
has mentioned in the past, forming one isn’t something that is
taken on at the drop of a hat. REIT’s are required
to pay at least 90% of their taxable income out as dividends,
a drawback for some owners, and in recent years these dividends
have been higher than other financial stocks and U.S. Treasury
securities. Dividend yields on residential-mortgage REITs have
been especially large, averaging over 14% compared with 3.5% for
all REIT’s. Mortgage REITs have high dividend yields partly
because the managers use high leverage, which can boost returns.
The REITs use low-rate, short-term debt to finance their bond
purchases. [More on REIT’s tomorrow.]
What is more
important to our debt markets, the weekly or monthly economic
releases, or the news coming from overseas? Smarter minds than
mine will argue that while our economic numbers can have a
short term impact on rates, the news coming out of countries
in Europe and Asia, along with the US debt numbers, impact the
overall trends in rates to a much larger degree. Recently
we’ve had more negative headlines in Europe, problems with the
Greek bailout, concerns out of China, and Moody's, S&P, and
Fitch discussing a possible US and UK debt downgrade. Portugal
is expected to follow Greece, and last week’s $463 billion
Chinese bailout for local governments is getting some airtime.
Here in the US the Jamie Dimon/Ben Bernanke questions are still
being discussed. Regarding banks, as one trader put it, “It’s
sure hard to lend what you have to hold.” Resolving our debt
ceiling has still not been done – gee, why focus on that when
we’re fascinated with Weiner’s problems?
Yesterday’s Fed Beige
Book didn’t have anything too exciting to note, although we had
a strong 10-yr auction which helped push rates lower. The Fed's
Beige Book indicated the road to recovery is uneven and slow:
one-third of the Districts reported deceleration, only one
District - Dallas - was seeing acceleration. 50% of the
Districts saw further home price declines while the rest
indicated no general increase, and credit conditions
remained tight with St. Louis and Boston reporting further
tightening. A comment from the Boston District mostly likely can
be applied to many areas of the country and to the outlook in
housing: "In general, contacts report that potential buyers are
anticipating further price declines and sellers continue to
price homes competitively in order to find a buyer quickly." By
the end of the day 10-year note yields closed at 2.96%, better
by nearly .5 in price, and MBS prices ended better by about
.250.
Today we’ve had
Jobless Claims and some trade balance numbers, with a $13
billion 30-yr auction ahead of us. Initial Claims were predicted
lower to 415k from 422k, and the trade deficit was seen higher
to -$48.8bln from -$48.48bln previously. Jobless Claims came in
at 427k, up 1k, and the trade balance improved to $43.7 billion.
After the news the 10-yr’s yield is down to 2.94% and MBS
prices are better by roughly .125.
There was a man who
worked for the Post Office whose job was to process all the mail
that had illegible addresses. One day, a letter came addressed
in a shaky handwriting to God with no actual address. He thought
he should open it to see what it was about.
The letter read:
"Dear God, I am an 83 year old widow, living on a very small
pension. Yesterday someone stole my purse. It had $100 in it,
which was all the money I had until my next pension payment.
Next Sunday is Christmas, and I had invited two of my friends
over for dinner. Without that money, I have nothing to buy food
with, have no family to turn to, and you are my only hope. Can
you please help me? Sincerely, Edna"
The postal worker was touched. He showed the letter to all the
other workers. Each one dug into his or her wallet and came up
with a few dollars. By the time he made the rounds, he had
collected $96, which they put into an envelope and sent to the
woman.
The rest of the day, all the workers felt a warm glow thinking
of Edna and the dinner she would be able to share with her
friends.
Christmas came and went.
A few days later, another letter came from the same old lady to
God. All the workers gathered around while the letter was
opened.
It read: "Dear God,
How can I ever thank you enough for what you did for me? Because
of your gift of love, I was able to fix a glorious dinner for my
friends. We had a very nice day and I told my friends of your
wonderful gift. By the way, it was $96 so there was $4 missing.
I think it might have been those jerks at the post office.
Sincerely, Edna"
If you’re interested,
visit my twice-a-month blog at the STRATMOR Group web site
located at www.stratmorgroup.com . The current blog
is new and takes a look at the opinions on QRM’s impact on our
industry. If you have both the time and inclination make a
comment on what I have written, or on other comments so that
folks can learn what’s going on out there from the other
readers.
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