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Pricing as of 4:02 PM EST |
Even so, the only reason this analysis should matter to you is if you’re locking something today and notice that one of two things are happening before receiving a reprice for the better:
1. prices fall below 101-12 in Fannie 3.5’s
2. you have reason to believe based on instinct or discussion in the dashboard chat that the lender in question could be getting enough lock volume for a pipeline-control reprice for the worse.
Failing those two things, it is possible that a few other lenders could offer a reprice for the better if prices stay high and stable.
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Building on Friday’s strength, Mortgage Rates have experienced an almost complete reversal of fortune versus the weakness that surrounded the EU Summit. Movements. We can clearly consider “The Wall” at 4.25% discussed last week to have held firm despite coming frighteningly close to breaking it on Thursday.
Ironically, rates are much less frightening on Halloween as Best-Execution moved decisively lower to straddle 4.0% and 4.125% today.
Today’s Rates:
Today’s Guidance: Locking and Floating remains the same kind of game it has been… Rates in the low 4’s, locking is the default guidance. If you happened to move down TWO eighths today in rate, we’d lean even more heavily toward locking that in. On Friday, we said “if you picked up an extra eighth of a point in rate today, it’s worth considering that each additional eighth will be harder to get until after next week’s events.” And now having moved down another eighth, possibly more, further gains get tougher and tougher. It’s not for nothing that the picture we keep posting to represent the range of rates over the past few months starts to more noticeably shift colors around the 4.0% mark. We’re not saying rates might not improve more, just that we’re darn close to being firmly at a 4.0% best-ex and repeated visits to these levels suggest more risk than reward for all but the best-timed locks.
(Keep in mind, if a scenario is anything other than flawless in every way, a note rate can certainly be over 4.25% these days. Read the disclaimer at the bottom of the post if you need more clarification).
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Several reports now of lenders repricing for the better in the Live Chat section of the MBS Live Dashboard. The two traditionally early-to-reprice lenders are now being joined by others as MBS have not only been holding their gains, but have done so in incredibly stable fashion, hugging an important intermediate trendline. Here’s a clip from the Dashboard showing the long term resistance that’s been guiding the MBS rally so far today as well as the Live Pricing table for a quick look at current levels.
(NOTE: the prices and chart seen below update in real time throughout the day as well as the custom analysis on the chart. These are just two of the windows on the MBS Live Dashboard. To learn more about the other features or start a risk-free trial, click here…)
Here’s what the long term support and resistance lines look like in the bigger picture. The trend channel has been quite consistent, with only one violation on the failed break lower following the EU-Summit sell-off:
Treasuries are in something of a similar trend pattern, although trendlines in the 10yr Note are more likely CONVERGING as opposed to moving in parallel like MBS seen above. We took this chart back a bit further in order to show the 2 major “flight to safety” rallies that allowed MBS prices to get to such heady levels. Absent that sort of panic (panic that was driving demand for fixed-income US debt), MBS are essentially at the very best end of their recent range. That’s why we think 3.5’s are grinding against the upper trendline with such regularity today. “Something Else” needs to happen to shift these trends. Between the FOMC Announcement, Bernanke Press Conference, and NFP this week, it’s likely that 10yr yields will be moving outside one of the yellow lines seen below by the end of this week. The direction of that breakout should roughly coincide with Fannie 3.5 MBS being able to break out of their trend channel.
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Pricing as of 11:02 AM EST |
-EMPLOYMENT highest in 6-months
-NEW ORDERS erased half of September’s gain
-ORDER BACKLOGS recovered from a 2 month contraction
Selected comments from survey respondents:
– Global econ issues controlling commodity prices
– market volatility pushing us to lower inventory levels
– Business strong now, but 2012 looks weak
– Suppliers are trying for price increases
– Easing oil/gas prices will help the overall picture
But it is still the chairman who determines whether the central bank should expand its campaign to stimulate growth for the third time since August, and lately Mr. Bernanke has been focused on an old theme: communicating the benefits of existing policies in order to increase their impact.
– An article earlier this weekend citing China’s Xinhua as saying China could not be Europe’s “savior.”
– The Bank of Japan is embarking on aggressive measures to lower the value of the Yen
– MF Global general malaise seen dragging down “risk-on” sentiment overnight as well. They also got suspended by the NY Fed as a Primary dealer (a status only recently granted)
-And a whole slew of mildly bearish economic headlines out of Europe, including how recent EU Economic Data indicates a tough road ahead.
Cap all of the above off with the fact that it’s the last day of the month and bonds might get a boost from more index buying (although some was certainly seen on Friday), and the day is shaping up well so far. 10yr yields are impressively back down to 2.22% and Fannie 3.5’s are back at “what EFSF bailout?” price levels at 101-14, almost half a point better than Friday’s close.
The key at this point is assessing the stability of this shift. If volume stays high enough to validate the price action, and the price action stays stable enough, not only should rate sheets be much improved this morning, but the near term outlook would seem on firmer footing and more ready to digest the upcoming economic events of the week. Today brings only Chicago PMI at 945am, a release that is several orders of magnitude less significant that FOMC and NFP, but a potential mover nonetheless.
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This mornings Live Market Update from MBS Live! (levels updated):
“MBS Beginning The Week in Much Better Shape. FOMC, NFP Loom 8:44 AM
With the FOMC announcement and Non-Farm Payrolls not happening until Wednesday and Friday respectively, markets have been free to trade the ongoing shift back towards “risk-off.” Volume and price action were progressively better for bonds since nocturnal markets began trading at 5pm yesterday. Stock futures mirrored the move in TSY Futures prices. Some of the headline drivers:
– An article earlier this weekend citing China’s state-run news agency Xinhua as saying China could not be Europe’s “savior.”
– The Bank of Japan is embarking on aggressive measures to lower the value of the Yen
– MF Global general malaise seen dragging down “risk-on” sentiment overnight as well. They also got suspended by the NY Fed as a Primary dealer (a status only recently granted)
– And a whole slew of mildly bearish economic headlines out of Europe, including how recent EU Economic Data indicates a tough road ahead.
Cap all of the above off with the fact that it’s the last day of the month and bonds might get a boost from more index buying (although some was certainly seen on Friday), and the day is shaping up well so far. 10yr yields are impressively back down to 2.21% and Fannie 3.5’s are back at “what EFSF bailout?” price levels at 101-17, half a point better than Friday’s close.
The key at this point is assessing the stability of this shift. If volume stays high enough to validate the price action, and the price action stays stable enough, not only should rate sheets be much improved this morning, but the near term outlook would seem on firmer footing and more ready to digest the upcoming economic events of the week. Today brings only Chicago PMI at 945am, a release that is several orders of magnitude less significant that FOMC and NFP, but a potential mover nonetheless.”
Here are a few charts for perspective on where today’s improvements bring us in the intermediate and longer terms. Let’s first take a look at what a 101-17 price on Fannie 3.5’s means in the context of most of October. In short, it’s good:
In a broader context the “scary” dip down to 100-16 closing level on Thursday fits into a bigger picture of where the lowest limits of fear exist for Fannie 3.5’s. Combined with the ceiling bounce when prices first hit 100-16, this makes a really good case for a last line of defense in MBS prices. Falling much lower than this suggests a shift back toward 4.0 production and 4.375% or higher in terms of Best-Ex rates.
Moving on to MBS’s benchmark big brother, 10yr notes aren’t anywhere close to their best levels since 10/7, but at least are back inside their range:
If 10’s have a tough time making it much lower, we’d be hoping again to see supportive ceiling’s emerge around 2.35. Although things got as bad as 2.40+ intraday, it’s been 2.358 that’s emerged as the highest 3pm closing yield since 8/8/11. That’s pretty darn interesting considering that the exact same level marked the lowest yield of 2010.
While we’re not in a rush to be overly dismissive of the recent trauma in bond markets, we’re slowly gathering pieces of supportive data in the hopes of confirming that as a ceiling. Certainly though, it seems that this would rely on this week’s FOMC and NFP, Wednesday and Friday respectively. Things are fairly calm for today. Chicago PMI had little effect and nothing else on the scheduled econ calendar stands out.
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Welcome to Halloween. On this day every year Ops managers across the nation struggle between month-end funding and shipping more loans, or in judging the various department’s Halloween decorating contests and sampling the potluck fare in the lunch room. Good luck!
Here’s something for those Bank of America and MetLife folks who are keeping their ears open. Caliber Funding, a Dallas-based lender licensed in 44 states with wholesale, retail, and mini-correspondent channels, is aggressively growing nationwide. Carolyn Poppe, formerly with TMBG and Indymac has recently relocated to Dallas and joined Caliber’s management team as SVP of Operations. Carolyn is looking for Senior Op’s Professionals in credit risk and operational fulfillment that are located in Dallas or willing to relocate. Caliber is also hiring experienced underwriters, wholesale account executives, and retail loan officers nationwide. Resumes should go to Phil Shoemaker at phil.shoemaker@caliberfunding.com.
(I don’t know Illinois’ All American Bank’s personnel situation, but perhaps Caliber will receive some calls from its folks. All American was closed Friday by the FDIC, and now its deposits are part of Bank of Chicago.)
I doomed my future in “social media” when I promised my kids I would never go on Facebook… Lord only knows the photos that they have on their pages. But many LO’s use tools like that, and the MBA knows it. The MBA is holding an online workshop titled, “Social Media Marketing for Loan Officers” on November 15th from 2-3:30. “This workshop presents a unique opportunity to get the training your staff needs without incurring travel costs…a 90-minute program discussing how loan officers can use social media tools for their marketing and business development strategies.” It is not free, but to check prices and register here.
There is no doubt that servicing is a hot topic, for a variety of reasons: investors have backed off their servicing pricing lately (an understatement?), community banks and credit unions want to service the loans of their customers, capital requirements many years in the future are making people nervous, whatever. BuckleySandler is hosting a free Webinar titled, “Mortgage Servicing Update: Understanding and Complying with the New and Evolving Rules and Regulations in Light of Recent OCC and CFPB Activity.” It will focus on, The new CFPB Servicing Supervision and Examination Manual published in October 2011, OCC Bulletin 2011-29 and other bank regulator guidance on servicing, Compliance with the “rules” and expectations that stem from new examination procedures, recent regulatory guidance, and enforcement actions related to mortgage servicing.” So if you’re not doing anything this Wednesday, 2-3:15 EST, go to https://www1.gotomeeting.com/register/257198081.
Speaking of free, AllRegs is offering a free online FHA handbook. “In response to FHA’s announcement of its online handbooks being unavailable, AllRegs is making its online FHA Handbooks immediately accessible to the industry at no charge. This access will be made available for a limited time. All FHA Handbooks and archival copies of FHA Guides, including linked Mortgagee Letters, are available through this offer from AllRegs. Additionally, full search capabilities, topic outline, alphabetical index and other tools are being made available to respond to this industry challenge.” Go here.
With MI companies coming and going, who can keep track? Try this (Thank you to Kyra Kizirian – President of Kizirian & Associates in Lafayette, CA.)
MERS can’t seem to catch a break. Delaware Attorney General Beau Biden (does that name ring a bell?) has filed suit against the company alleging it repeatedly violated the state of Delaware’s Deceptive Trade Practices Act. Biden feels that MERS engaged, and continues to engage, in deceptive trade practices that cause confusion among homeowners, investors and other stakeholders in the mortgage finance system, seriously damaging the integrity of the land records that are central to Delaware’s real property system, and leading to improper foreclosure practices. These “deceptive” trade practices fall into three broad categories. The first is that “MERS, through its private mortgage registry, knowingly obscures important information from borrowers and the information that MERS does provide to borrowers is frequently inaccurate. The opacity of MERS’ mortgage registration database makes it difficult for consumers to know of or challenge inaccuracies in the MERS System. The second is that MERS often acts as an agent without authority from its proper principal. Because the MERS System was both unreliable and frequently inaccurate, MERS often does not know the identity of its proper principal. Where the name of the owner of the mortgage loan recorded in the MERS System does not reflect the true owner, any action MERS takes on behalf of the purported owner is without authority. The third is that MERS is effectively a “front” organization that has created a systemically important mortgage registry, but fails to properly oversee that registry or enforce its own rules on its members that participate in the registry. Rather than maintaining an adequate staff to provide MERS’ services, MERS operates through a network of over 20,000 deputized non-employee corporate officers who cause MERS to act without any meaningful oversight from anyone who works at MERS.”
ViewPoint Financial Group, the holding company for ViewPoint Bank, announced its latest quarterly financial results. Detailed results can be seen in its Form 10-Q which can be found at http://www.viewpointbank.com and http://www.viewpointfinancialgroup.com. Suffice it to say, due to the refinance and seasonal activity, ViewPoint’s gross loan activity saw a $290 million increase. The warehouse side of that picked up $259 million. The provision for loan losses decreased by $1.0 million (28%) during the nine months ended September 30, 2011, compared to the same period last year.
GMAC Bank clients were given some good news late last week, as GMACB extended “the FICO >720 through the month of November. The site condo adjustment for LTV >70% is decreasing from -.500 to -.250. We will be implementing a +.250 adjustment for purchase loans with LTV <=75 for both Fixed and ARM products.” The company also tweaked the series of price adjustments based on jumbo loan amounts, FICO’s, and LTV – see the bulletin for exact details.
Bank of America issued a reminder for two new state laws. In Montana, new legislation related to notary law requirements became effective October 1 – clients should review the legislation (Montana S.B. 337) for complete details. In Washington, new legislation related to notary law requirements became effective October 22, 2011. Clients should review the legislation (Washington S.B. 5023) for complete details.
SunTrust reminded clients to confirm their Appraiser and Appraisal Company are eligible (check with the SunTrust lists), updated the guidelines for employment-related assets used as qualifying income (on one-unit primary or second home transactions). The correspondent division revised its Purchase Review and Pended Loan policies to specifically state that missing approval documents and AUS findings may result in a pended loan file. And check that address: “In lieu of sending closed loan/underwriting packages back to lenders SunTrust Mortgage will begin assessing a courier fee of $250.00 at time of funding for each package with the incorrect mailing address.”
In a similar fashion, Flagstar got the word out to its brokers on changes to its “Reserve Requirements for Second Homes and Investment Properties” – the Conventional Underwriting Guidelines should be consulted for full details.
Chase clarified it’s “Non-Agency product guides define documentation requirements as Full/Alt Doc. While the industry has moved almost exclusively to the use of alternative documentation like paystubs, W-2 forms and bank statements as documentation standards, the use of Full Documentation like written Verifications of Deposit and Employment are permissible under Non-Agency policy. While all credit documentation must be carefully analyzed, even closer attention should be applied to the review of written verification forms.”
Roiling the markets this morning is the news that the Federal Reserve Bank of New York has informed MF Global Inc. that it has been suspended from conducting new business with the New York Fed. This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy.
Today we have the Chicago Purchasing Manager’s Survey. Tomorrow is Construction Spending and an ISM number, along with the start of the FOMC’s two day meeting. (Did someone pick up Danish? Ok, whose turn was it?) Wednesday brings us the ADP employment data, always of questionable predictive ability for non-farm payroll, and the end of the FOMC meeting. (Don’t look for any change in rates, but we’ll all be watching the verbiage.) Thursday is a productivity number, and on Friday the always-important NFP report on Friday. (Remember: jobs and housing, housing and jobs!) As a proxy, the 10-yr T-note closed Friday around 2.30% but this morning the yield has dropped to 2.21%, MBS prices are better by roughly 0.50.
An old man is walking home alone late one foggy night when behind him he hears, “Bump….BUMP…BUMP….”
Walking faster, he looks back and through the fog he makes out the image of an upright casket banging its way down the middle of the street toward him. “BUMP…BUMP…BUMP…”
Terrified, the man begins to run toward his home, the casket bouncing quickly behind him,
FASTER…FASTER…BUMP…BUMP…BUMP…
He runs up to his door, fumbles with his keys, opens the door, rushes in, slams and locks the door behind him.
However, the casket crashes through his door, with the lid of the casket clapping, “Clappity-BUMP…clappity-BUMP…clappity-BUMP…clappity-BUMP…clappity-BUMP…”
On his heels, the terrified man runs.
Rushing upstairs to the bathroom, the man locks himself in. His heart is pounding; his head is reeling; his breath is coming in sobbing gasps.
With a loud CRASH the casket breaks down the door, bumping and clapping toward him.
The man screams and reaches for something, anything, but all he can find is a bottle of cough syrup!
Desperate, he throws the cough syrup at the casket…and, the coffin stops.
If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at http://www.stratmorgroup.com. The current blog takes a look at Fannie & Freddie & the FHFA, and the changes they have in the hopper. 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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A changing mood on the final day of October – I’m doing my best not to say spooky – is threatening to eat away from what looks to be a 14% gain in the stock markets, a.k.a. the best month in equities since 1974.
S&P 500 futures are 13.9 points lower (-1.09%) at 1,267 and Dow futures are off 99 points at 12,069.
“Following last week’s euphoria over the European Summit plan, investors are in a more skeptical mood this week,” said BMO Capital Markets. “In our view, while the plan will help contain the risk of a European banking crisis and financial contagion to other countries, it falls well short of resolving the crisis.”
They noted it leaves Greece with too-much debt (120% of GDP), keeps the EFSF guarantee at a low threshold, and sees European banks raising capital to the bare minimum of what is deemed sufficient.
Moreover, implementation risks are high “as any backsliding on Greece’s or Italy’s austerity measures, or pushback from private investors (read: China) in funding the broader EFSF, could deflate investor hopes of a resolution to the crisis.”
Safe-heaven Treasuries are stronger across the curve. The 10-year and 30-year Treasury yields are eleven and thirteen basis points lower in early trading at 2.21% and 3.25%. The two-year yield is two basis points firmer at 0.28%.
Light crude oil is down 1.35% at $92.69 per barrel and gold prices are 0.55% lower at $1,738.10.
Key Events This Week:
Monday:
9:45 – The week should kick off with the Chicago Business Barometer slowing down a bit in October but remaining at robust growth levels. The median forecast is 58.0 – eight points above the growth threshold – compared with 60.4 in September.
“The Chicago business gauge has outperformed the national ISM index consistently since the recovery began, probably reflecting the upswing in Chicago area production of motor vehicle supplies and parts,” said Citigroup. “And while we expect a small drop off in October, our forecast would still indicate healthy growth.”
One concern, they note, is order backlogs. That component fell from 60.5 to 51.9 last month – the lowest since the early stages of recovery. “If firms’ order books continue to shrink, it could erode activity growth in this region. This same pattern has been evident in the national ISM manufacturing survey.”
Tuesday:
10:00 – The ISM Manufacturing Index slowed down in July and August, managed to avoid entering contraction, and now appears on a modest upswing. Economists are projecting a score of 52 in October, a 0.4-point uptick from September and 1.6 points better than in August (a two-year low).
“The evidence coming in from regional surveys has been a bit stronger than last month, suggesting that the pace of manufacturing growth is picking up slightly,” said IHS Global Insight.
Janney Capital Markets said last month’s index “affirmed hopes that the global crisis of confidence wasn’t flowing through into what had been the most consistent post-recession source of output, the US factory sector.”
Their outlook beyond this month is mixed, however.
“The industry often serves as an effective leading indicator of overall economic trends, yet the fact that manufacturing so far outpaced consumer and other elements of output growth in the last two years suggests that a period of underperformance is in order going forward.”
10:00 – Cutbacks to the public sector should weigh on or pull down Construction Spending in September. Total spending is expected to see a modest decline of 0.3% in the month – following a 1.4% boost in August – but according to Citigroup the only negative component will be the public sector, which saw an inexplicable 3.1% jump in August.
“A gain in residential investment may be hampered by a dip in improvements, and public spending likely tailed off after a surprising jump in August,” said Citigroup, noting that construction spending gained traction in the third quarter despite weaker residential investment, a trend they attributed to higher spending on nonresidential projects. “The pickup in nonresidential investment in the quarter was broad-based.”
Wednesday:
8:15 – Private job growth is expected to improve vaguely in October’s ADP Employment Report. Estimates range from 38k to 150k, with the median settling at 100k. The September report showed an expansion of 91k new jobs. (However, that 91k growth was an understatement compared to the Bureau of Labor Statistics’ number of 134k.)
“ADP data will guide market expectations for October private payrolls,” said Nomura Global Economics, who forecast 135k new private jobs. Last month, Nomura noted that over the past year, the ADP headline figure has been within 50k of the BLS figure just five times and it has missed by 100k or more five times, too.
12:30 – Little fanfare is anticipated for this FOMC Meeting Announcement. The last one was major as the Fed announced Operation Twist in an effort to pull down the yield curve, but economists say if a new injection of quantitative easing is on the way, it won’t be this meeting.
“The Fed’s last decision point in September left plenty of opportunity to enact policy; this one, well, not so much,” said Janney Capital Markets. “With the Fed having announced plans for Operation Twist in mid-September and only begun their asset purchases in mid-October, the economic effects of the program have yet to hit Main Street. In our view, those effects will be minimal, however the Fed policymakers which hope that Op-Twist will have an impact nonetheless need to wait before enacting any follow-up policy.”
IHS Global Insight note that opinions at the Fed are highly divided on whether to do more, but the recent improvement in economic data has made a decision less urgent.
Fed Chairman Ben Bernanke will say more about the state of monetary policy when he holds a press conference at 2:15.
Thursday:
8:30 – The recent trend of Initial Jobless Claims hasn’t been scary or volatile, but nor has it been a harbinger of optimism. The four-week average is currently 406k, down from 418k a month ago, but weekly figures haven’t been able to break through the 400k level. No improvement is anticipated for the final week of October: economists predict 410k new claims – 10k more than the prior week.
“Continuing claims” – the rally of people still receiving benefits – “likely continued its saw-toothed pattern, rising by 44,000 after an outsize plunge,” said Citigroup. “This figure, as well as the insured rate, has been little changed for nearly seven months.”
8:30 – Dennis Lockhart, president of the Atlanta Fed, gives opening remarks at a conference on “What Should We Really Expect from Monetary Policy,” in Atlanta.
10:00 – The ISM Non-Manufacturing Index, which covers the services, construction, and financial sectors, is anticipated to see few changes in October. The consensus forecast is a slightly-improved score of 53.6 (vs. 53 last month), indicating “moderate but steady” growth, in the words of Citigroup.
“Readings near 53 are marginal gains, and that is about all the economy can muster,” added IHS Global Insight.
Of particular interest will be the employment component; it fell into contraction last month, falling to 48.7 from 51.6.
Friday:
8:30 – Growth in October’s Employment Situation report is, alas, expected to be slower than in September. Part of the reason is that September received a boost from 45,000 striking workers returning to Verizon. But that’s a weak excuse. Fact is, the economy just isn’t creating jobs or exhibiting a shapely V recovery. Estimates for job growth range from 50k to 150k; the median is 95k, down from 103k in September.
“After what looked to be a dismal couple of months ended up in some positive revisions, and with the sizable effects of striking Verizon workers skewing the month-to-month comparisons, employment trends are now moving into a state of stagnation,” said Janney Capital Markets. “We anticipate job growth will hover in the 100 – 150 thousand payroll range for the foreseeable future, just barely enough to absorb the workers coming online via graduation or plain old population growth.”
“The fundamentals in the labor market remain tepid, but there doesn’t seem to be any deterioration either,” said Citigroup. “Private payroll gains have been averaging about 150,000 per month thus far this year and closer to 120,000 per month in the past three months. Our October forecast is right in this range.”
One consistent pullback is state and local government jobs, which have been averaging a loss of about 20,000 jobs per month, Citigroup said, noting that pace is accelerating lately.
“The labor market is creating jobs, but not rapidly enough to bring down unemployment,” said IHS Global Insight. “We expect employment growth to ease to 75,000 in October – private up 100,000; government down 25,000 – from 103,000 in September. But since September’s total would have been just 58,000 but for the return of 45,000 striking Verizon workers, October’s 75,000 would still represent a small underlying improvement.”
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The Federal Housing Finance Agency (FHFA) with the assistance of the two government sponsored enterprises (GSEs) for which it has oversight, has updated projections for the additional funds Freddie Mac and Fannie Mae will require from the U.S. Treasury. Since the GSEs were placed in conservatorship under FHFA in August 2008 Freddie Mac has drawn $65 billion and Fannie Mae $104 billion from Treasury under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs) among the three parties. Under terms of that agreement the GSEs, while drawing funds from Treasury, also pay regular dividends. To date Freddie Mac has paid $13 billion and Fannie Mae $15 billion while, at the same time, drawing on additional support.
The new projections are more optimistic than those made one year ago which estimated cumulative Treasury draws (including dividends) at the end of 2013 would range from $221 billion to $363 billion. The new projections are for cumulative draws to range from $220 billion to $311 billion. The change can be attributed primarily to the fact that actual results for the first year of the earlier projection were substantially better than expected.
The range of projections is arrived at through the use of three different scenarios. These scenarios use identical assumptions except for the basis used for house prices. Experience has shown that changes in house prices have had the largest impact on the GSEs financial results. The three house price assumptions are:
As can be seen from the chart, actual and forecasted house price paths for Scenarios 1 and 2 used in the current projections are worse than those used last year. The path in Scenario 3 in October 2011 is better through the second quarter of 2012 than the corresponding paths used one year ago and then worse thereafter.
The remaining assumptions, used in all three scenarios are:
There are only small changes in the cumulative financial results for either GSE under Scenarios 1 and 2, but substantial differences in the bottom line projections under Scenario 3, the scenario using the “Deeper Recession” price path. The differences, however, are almost totally attributable to increased provision for credit losses and other credit related expenses. Freddie Mac’s credit-related expenses increase $23 billion from Scenario 1 to Scenario 3 and Fannie Mae’s increase $57 billion. Thus, $80 billion of the projected $92 billion difference in Treasury draws across the scenarios is directly related to credit-related expense projections.
Here are the projected draws including dividends for Freddie Mac and Fannie Mae using each of the three scenarios:
GSE |
Draw through 6/30/11 |
Scenario 1 |
Scenario 2 |
Scenario 3 |
Fannie Mae |
104 |
86 |
93 |
176 |
Freddie Mac |
65 |
36 |
37 |
57 |
Total |
$169 |
$122 |
130 |
233 |
All figures in $billions
However, when the dividends required of the GSEs are broken out of the various scenarios, the financial situation they face becomes much less severe; in fact, in Scenarios 1 and 2 dividend payments to Treasury exceed additional Treasury draws. Under the PSPA, preferred stock accrues dividends at 10 percent per year. FHFA has periodically asked that the dividend requirement be dropped which would substantially reduce the need for Treasury funds and could improve the public perception of the GSEs.
GSE |
Draw through 6/30/11 |
Scenario 1 |
Scenario 2 |
Scenario 3 |
||||
Div. |
Draw-Div |
Div. |
Draw-Div. |
Div. |
Draw-Div. |
Div. |
Draw-Div. |
|
Fannie Mae |
15 |
89 |
45 |
41 |
46 |
47 |
115 |
61 |
Freddie Mac |
13 |
52 |
26 |
10 |
26 |
11 |
30 |
27 |
Total |
$28 |
$141 |
$71 |
$51 |
$73 |
$57 |
$91 |
$142 |
When the current projections are compared with those from October 2010, the following differences were noted.
The differences in the projection pattern of financial results were driven by:
FHFA stresses that the projections reported in their current document are not expected outcomes but modeled projections in response to “what if” exercises based on assumptions about GSE operations, loan performance, house prices, and other factors. They do not define the full range of possible outcomes.
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