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Jul. 13, 2011: Debt ceiling chatter; new government proposal with interesting aspects; a few new programs & pricing incentives
Rob Chrisman
I am
smart enough to realize that I am not smart enough to know, “Why the focus is more on the debt ceiling than on
actually reducing our deficit?” To me, it seems like an
artificial waste of time & energy - raising the debt ceiling
has happened 10 times since 2001, and our government spends a
lot of time doing it. In the meantime, our deficit grows. Did
the governments in Greece, Ireland, Spain, etc., spend their
time raising debt limits rather than increasing revenue and
decreasing spending? Okay, I'll get off my soap box.
The budget woes continue. Albert Einstein said,
"The significant problems we face cannot be solved by the same
level of thinking that created them." And a trader asked
yesterday, “Which one gets done first: the NFL agreement of US
budget deal?” The problems in Greece are still unresolved, in
spite of some short term relief, and now it is becoming more
accepted that there will be some sort of Greek default. Not only
that, but fears over Italian solvency and political stability
have now infected European markets and many are questioning the
EU’s ability to handle the damage.
In this country, and
we’ve been through this drill before, the Treasury refuses to
speculate on a contingency plan in the event of a default. A
default would be (technically) a “default on legal obligations”
but most believe that the Treasury would continue to make
interest payments on Treasuries. We went through the same drill
in February of 2010; the Treasury had to use “extraordinary
measures” in June 2002, April/May 2003, and November 2004, and
delayed auctions in May 2003 and November 2004.
What does the
unlikely event of the US government freezing up mean for the
mortgage biz? Banks
do not sell significant services to the government so they do
not significant accounts receivables that may be hurt. But banks
own large amounts of Treasury debt and the value of those could
plunge given the threat of default, and/or, if the US debt is
downgraded, and banks must own AAA-rated securities, it could
cause problems. The inter-bank lending market could be hit if
banks become unwilling to extend each other overnight credit for
fear about losses on Treasury securities. I didn’t check the
numbers, but one August projection from the Bipartisan Policy
Center shows that the U.S. Treasury will take inflows of $172
billion from Aug 3-31 and have $307 billion in outflows for a
$135 billion deficit. Interest on Treasury securities is
expected to be $29B.
At this point it is fairly accepted that the government had a
key part in the housing crisis about ten years ago when it
heavily promoted home ownership (at the expense of underwriting
guidelines.) And recently the Obama administration is ramping up
talks on how to revive the housing market,
which is obviously weighing on the economic recovery. The
article I saw noted, “Policy ideas include having Fannie Mae and
Freddie Mac relax their rules for loans to investors, allowing
those buyers to absorb excess housing inventory easier. In
certain markets, Fannie and Freddie could hold some foreclosed
homes off the market and rent them out to ease the property
glut. Other incentives may be for banks to reduce loan balances
for borrowers who are underwater, or owe more than their homes
are worth.”
Yesterday officials
held a conference call promoting the “Helping
Responsible Homeowners Act of 2011.” Originally introduced
in January, the bill aims to remove the barriers that keep
non-delinquent, existing borrowers from refinancing. Those in
the mortgage business should be interested to know that they are
proposing to eliminate LLPAs and adverse delivery
charges for loans - the GSEs could not charge any
additional upfront fee beyond the standard guarantee for a
qualified mortgage. (In effect, this would lead to only one
standard guarantee fee for all borrowers.) It would remove
LTV limits for underwater borrowers so mortgage
refinancing would not be limited by the LTV of the borrower.
(Currently, borrowers in the HARP program can have a maximum LTV
of 125%. Removing this constraint could allow up to 10-15% of
borrowers in the 2005-07 vintages to be eligible for GSE
refinancing.) It would remove the second-lien
barrier to refinancing so that servicers and creditors
that refuse to have their second liens “resubordinated” in the
refinanced mortgage would be prevented from originating new GSE
loans. And it would ensure that higher LTV
borrowers receive a fair mortgage rate, suggested at no
more than 40 basis points higher than the GSEs’ 60 day
commitment rates.
(Government & housing: The Obama administration is tapping
Carol Galante, a housing official and former affordable housing
developer, as the acting commissioner of the FHA.
She currently serves as deputy assistant secretary for
multifamily housing in the Department of Housing and Urban
Development, which oversees the FHA.)
Anyone who has owned a rental knows the amount of monthly upkeep
that it can cost. How about the monthly cost when one owns
153,000 of them? http://www.npr.org/2011/07/07/137647997/the-cost-of-owning-150-000-foreclosed-homes
At least the commercial market is alive and well. Citigroup,
Deutsche Bank, Goldman Sachs, Wells Fargo and Royal Bank of
Scotland are marketing about $3.7 billion in bonds backed by
mortgages on retail, office, industrial and hotel properties.
Banks hope to sell as much as $10 billion in CMBS this quarter,
according to JPMorgan Chase: http://www.bloomberg.com/news/2011-07-11/goldman-citi-market-1-5-billion-of-commercial-mortgage-bonds.html.
There are a lot of
settlements out there, but Flagstar is having
some difficulty. Late last week a federal judge denied a motion
by Flagstar Bank to dismiss a lawsuit seeking damages for what
is alleged were $900 million in mortgage-backed securities sold
by the bank in 2005 and 2006 that were riddled with fraud and
misrepresentation. Assured Guaranty Municipal Corp. of New York,
which insured the securities, is suing Flagstar, seeking at
least $82.4 million in damages. For those interested, AGM is a
subsidiary of Assured Guaranty Ltd., which lists Wilbur Ross Jr.
as one of its biggest investors. Flagstar is Michigan's biggest
bank, but Ross is the largest shareholder in Michigan's
fastest-growing bank, Troy-based Talmer Bank and Trust.
http://www.crainsdetroit.com/article/20110708/FREE/110709935/flagstar-bank-loses-bid-to-dismiss-fraud-suit-over-mortgage-backed
Down in Cincinnati, Fifth Third Mortgage (#13 in the 1st
quarter in originations) rolled out additional incentives for
homebuyers through the end of August. Specifically, for
fixed-rate purchase mortgages Fifth Third Mortgage is offering
customers a choice of either a 1% interest rate reduction for
the first year of the mortgage or take a 1/8th percent (.125%)
interest rate reduction for the life of the loan. Fifth Third
also is offering an additional 1/2 percent discount point
savings if a customer has the monthly mortgage payment
automatically deducted from a Fifth Third Bank account.
The PMI
Group announced that its subsidiary Homeowner
Reward Co. is launching a pilot program intended to
support sustainable homeownership in certain hard-hit real
estate markets. Homeowner Reward Co. is working with Loan Value Group LLC to offer the RH Reward to a
group of homeowners whose mortgages are insured by PMI Mortgage
Insurance Co. The program puts up an incentive-based program
that offers eligible homeowners (including being underwater and
insured by PMI) cash reward for staying current on their
mortgages at no charge.
Ah rates… few loan
agents are complaining about them as we continue to see the
“flight to quality bid” from the trouble in Europe and the
downgrade of Ireland’s debt to “junk” by Moody’s. Yesterday
morning we had some trade numbers, but more press was garnered
by the 3-year T-note auction that was aggressively bid. If you
bought any of it, you’ll be earning .67% for three years. So in
spite of the end of QE2, there are still buyers out there. We
also had the release of the minutes from the last Fed meeting –
if you care to read the statement you can find it at http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
For the day, the 10-yr was nearly unchanged at 2.91% and MBS
prices ended the day better by about .125 on average volume.
This morning the MBA
reported that for the fourth week in a row mortgage apps fell.
For last week the overall number was down about 5%, with refi’s
down about 6% and purchases down nearly 3%. Later we’ll have Ben
Bernanke's semiannual Monetary Policy Report to the House
Financial Services Committee and the $21 billion 10-year note
auction at 1PM EST. We have also already seen a report on Import
Prices for June (-.5%). In the early going we find the
10-yr at 2.93% and MBS prices worse a shade.
An elderly couple was sitting on the porch.
The aging gent said, "During the last 50 years, whenever I get
mad at you, you never seem to get upset. How have you managed to
control your temper all these years?"
His wife replied, "I just go and clean the toilet."
"How does that help?"
"I use your toothbrush."
If you're interested,
visit my twice-a-month blog at the STRATMOR Group web site
located at
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