Case-Shiller Erosion; Freddie’s PR Nightmare

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Jan 31, 2012 2:58PM

Case-Shiller Reports Continued Erosion in Home Prices

Home prices continued to fall in November according to the S&P/Case-Shiller Home Price Indices released this morning. Both the 10-City and the 20-City Indices were down 1.3 percent in November compared to the previous month and for the second month in a row19 of the cities also saw their prices inch lower. Phoenix was the only one of the 20 to post a gain in November. The year-over-year price declines in November widened from those in October. The 10-City and 20-City Composites were down 3.6…

Jan 31, 2012 9:52AM

Freddie’s PR Nightmare; Servicing’s Negative Earnings Impact; More on MetLife’s Fade

Do you think it takes a long time to have a loan purchased by Wells or MetLife? Try running the world’s longest lab experiment , begun in the 1920’s. Fortunately finding a job in mortgage banking doesn’t take eighty years. In Toms River, New Jersey, Glendenning Mortgage currently has an opening for a DE Underwriter to join its team. Business has been too good for Glendenning, which has found itself outsourcing a portion of its underwriting needs – it would like to bring that back in-house entirely…

Micro News

4:10 PM:

Fannie Mae December 2011 Volume Summary

2:33 PM:

Agencies Issue Guidance on Junior Lien Loan Loss Allowances

12:27 PM:

Potential Price Improvements as MBS Hit Highs

11:27 AM:

ECON: Consumer Confidence Much Lower Than Expected

9:53 AM:

ECON: Chicago PMI Misses Consensus. Index Lowest Since August

9:03 AM:

S&P/Case-Shiller: Home Prices Drop for 3rd Straight Month

8:55 AM:

MBS Inch Back Into Positive Territory, Uninterested in Econ Data

8:39 AM:

ECON: Employment Cost Index In Line With Expectations

Around the Web

Video News

U.S. Housing Market `Still a Rocky Road’, Case Says

90 Seconds with Art Cashin: Markets Lose Momentum

Home Prices Fall Third Straight Month

Today’s Comments

Steve Dalia

“Reducing the FHA monthly mortgtage insurance would asssit greatly, as well. Homeowners could afford higher purchase prices if the government asssited to…”

Frank Ceizyk

“You could also allow borrowers with more than 4 financed properties to cash out existing free & clear properties. Most of these investors have over…”

Frank Ceizyk

“And Ray J–I know you were joking, but the truth is, the government will intervene if as an industry we continue to just ridicule their efforts or just…”

Today’s Q&A

“Should I pay down my mortgage when my property has depreciated in value?”

“Foreclose during bankruptcy or after?”

“Can a commercial property be sold to a person who is not a US citizen if he pays cash!”

<!–

Today’s Forum Discussions

John Cramer

“Loan Scenario View All Post A Scenario Loan State: California Loan County: San Diego Loan Type: Purchase Loan Amount: $112,000 Property Value: $140,000…”

CU Lender

“An email just arrived in my inbox that was forwarded from my borrowers RE Agent. This is a purchase of a short sale property and Wells Fargo is the 1st…”

Joshua

“I work with a financial adviser who has several clients with option arms that are underwater. Curious if anyone knows of any product currently available…”

–>

[MBS Commentary] – MBS RECAP: 1/31/2012

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MBS RECAP: 1/31/2012

Posted to: MBS Commentary
Tuesday, January 31, 2012 4:15 PM

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MBS Live: MBS RECAP
Open MBS Live Dashboard
FNMA 3.5
103-27 : +0-05
FNMA 4.0
105-22 : +0-03
FNMA 4.5
106-26 : +0-01
FNMA 5.0
107-30 : -0-02
GNMA 3.5
105-07 : +0-05
GNMA 4.0
107-26 : +0-04
GNMA 4.5
109-05 : +0-00
GNMA 5.0
110-24 : +0-01
FHLMC 3.5
103-22 : +0-06
FHLMC 4.0
105-13 : +0-03
FHLMC 4.5
106-12 : +0-02
FHLMC 5.0
107-19 : -0-02
Pricing as of 4:00 PM EST
Afternoon Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.
12:27PM  :  ALERT: Potential Price Improvements as MBS Hit Highs

With Fannie 3.5’s up 6 ticks on the day now to 103-28, MBS prices are high enough that we could see the characteristically early-to-reprice lenders coming out with improved rate sheets. Gains would have to hold current levels or make continued progress for more than just a small handful to reprice. Either way, we’re not feeling like locking at the moment, even if it was our intention to do so by today’s cut-off.

10’s are down to 1.807, hitting their lowest yields since mid-December. Volume isn’t especially huge into this rally, but is on the healthier side of average on the day.

11:27AM  :  ECON: Consumer Confidence Much Lower Than Expected

RTRS – US JANUARY CONSUMER CONFIDENCE INDEX 61.1 VS DECEMBER REVISED 64.8 (PREVIOUS 64.5) – CONFERENCE BOARD

RTRS – CONSUMER CONFIDENCE INDEX MEDIAN FORECAST FROM REUTERS FOR JANUARY WAS 68.0

The Conference Board Consumer Confidence Index®, which had increased in December, retreated in January. The Index now stands at 61.1 (1985=100), down from 64.8 in December. The Present Situation Index declined to 38.4 from 46.5. The Expectations Index edged down to 76.2 from 77.0 in December.

The monthly Consumer Confidence Survey®, based on a probability-design random sample, is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch. The cutoff date for the preliminary results was January 19.

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer Confidence retreated in January, after large back-to-back gains in the final two months of 2011. Consumers’ assessment of current business and labor market conditions turned more downbeat and is back to November 2011 levels. Regarding the short-term outlook, consumers are more upbeat about employment, but less optimistic about business conditions and their income prospects. Recent increases in gasoline prices may have consumers feeling a little less confident this month.”

Consumers’ appraisal of current conditions was less favorable in January. Those claiming business conditions are “good” decreased to 13.3 percent from 16.3 percent, while those stating business conditions are “bad” increased to 38.7 percent from 33.5 percent. Consumers’ assessment of the labor market was also less positive. Those saying jobs are “plentiful” decreased to 6.1 percent from 6.6 percent, while those claiming jobs are “hard to get” increased to 43.5 percent from 41.6 percent.

Featured Market Discussion
A recap of the featured comments from the Live Discussion on the MBS Live Dashboard.
Adam Quinones  :  “Which is who has been hedging …Wells Chase BofA, Citi, Ally, PHH, Quicken USBank have all sold a decent amount today.”
Adam Quinones  :  “But then I got into convo with two hedging consultants who told me the big boys have been holding out. “
Adam Quinones  :  “i got into it with a few traders over it. I called BS because most desks were hedging over the last two weeks…and they havent delivered that production yet. “
Adam Quinones  :  “MG you already talk about orig today?”
Victor Burek  :  REPRICE: 3:01 PM – Nexbank Better
Bryan LaFlamme  :  REPRICE: 2:40 PM – Flagstar Better
Eric Franson  :  REPRICE: 2:09 PM – Wells Fargo Better
Michael Tadros  :  REPRICE: 1:18 PM – Provident Funding Better
Michael Tadros  :  REPRICE: 1:16 PM – Interbank Better

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[Mortgage Rate Watch] – Mortgage Rates Slightly Higher Despite Bond Market Improvements

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Mortgage Rates Slightly Higher Despite Bond Market Improvements

Posted to: Mortgage Rate Watch
Tuesday, January 31, 2012 2:33 PM

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After setting new record lows yesterday, Mortgages Rates rose slightly today, though 3.875% best-execution remains intact.  Rather than affect the prevailing rates being quoted, today’s weakness is most likely to be seen in the form of slightly higher borrowing/closing costs for the same rates quoted yesterday (learn more about how we calculate Best-Execution in THIS POST).  The increases run counter to today’s market movements as well.  

Treasury yields are lower again today, and MBS (the “mortgage-backed-securities” that most directly govern interest rates) are slightly improved as well.  One reason that loan pricing hasn’t adjusted to match that fact is that MBS weakened late in the trading session yesterday.  Not all lenders priced that in by issuing adjusted rate sheets, instead reflecting the changes in this morning’s rates.  The MBS market was indeed weaker this morning, so if we’re comparing the time of day that most lenders put out their first rate sheets, today was indeed worse than yesterday.  Beyond that objective explanation, we also have to consider the fact that continued rate improvements from all-time lows are going to continue to be slow and hard-fought.  Lenders have little incentive to offer lower rates if current offerings are generating more-than-sufficient demand.  (read more on this topic in this previous post)

Finally, and although it’s not the only other potential factor, this Friday’s Employment Situation Report (aka “jobs report,” or “NFP”) represents a high-risk situation, ESPECIALLY with mortgage rates at or near all-time lows.  NFP, which stands for the the reports chief component “Non-Farm-Payrolls” is generally regarded as the single most important piece of economic data each month.  Even against the current backdrop of European headlines exerting more and more influence on domestic markets, it’s immensely important.  Based on where markets sit right now, we think that rates are somewhat vulnerable if the report is better-than expected.  In other words, there’s a certain natural level of “push-back” at current rate levels anyway, and a bullish jobs report would probably accelerate that. 

This, of course, is contingent on the report coming in with better-than-expected results.  If the opposite happens, rates could still improve.  It’s just that those improvements would likely be slower and smaller than the losses would be in the opposite scenario.  It’s also very much contingent on rates not moving much between now and Thursday afternoon, which may or may not be the case.

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  3.875% mostly, with a few lenders on either side of this
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.25%, some lenders venturing lower, some completely stuck at 3.25%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floating
  • But that will always be the case when rates operating near historic lows
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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[MND NewsWire] – Case-Shiller Reports Continued Erosion in Home Prices

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Case-Shiller Reports Continued Erosion in Home Prices

Posted to: MND NewsWire
Tuesday, January 31, 2012 2:42 PM

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Home prices continued to fall in November according to the S&P/Case-Shiller Home Price Indices released this morning.  Both the 10-City and the 20-City Indices were down 1.3 percent in November compared to the previous month and for the second month in a row19 of the cities also saw their prices inch lower.   Phoenix was the only one of the 20 to post a gain in November.

The year-over-year price declines in November widened from those in October.  The 10-City and 20-City Composites were down 3.6 percent and 3.7 percent respectively from November 2010 to November 2011 compared to the -3.2 percent and -3.4 percent annual rate of change in October.  Thirteen of the cities in the larger index also saw a large drop in annual prices than they had in October. 

Atlanta had the worst performance with its annual return down 11.8 percent.  Atlanta’s prices fell 2.5 percent in November following a 5.0 percent decline in October, 5.9 percent drop in September and 2.4 percent loss in August.  As was the case in October, only two cities, Detroit and Washington, DC saw an improved annual rate, but in both cases that annual increase was lower than their October number.

David Blizer, Chairman of the Index Committee at S&P Indices said, “Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall.  Annual rates were little better as 18 cities and both Composites were negative.  Nationally, home prices are lower than a year ago.  The trend is down and there are few, if any signs in the numbers that a turning point is close at hand.”

The 10-City Composite is now about 1.0 percent above its crisis low reached in April 2009 and the 20-City is 0.6 percent above the low it reached in March 2011.  Both Composites are close to 33 percent off of their 2006 peak levels.  As of November average home prices across the U.S. are back to mid-2003 levels.

“It’s not telling us much we don’t know. A lot of people fell into the trap of looking at the upturn in housing starts at the end of the year and mistaking that for a turnaround in the housing market. That’s absolutely premature.” – Andrew Wilkinson, Chief Economic Strategist, Miller Tabak & Co., New York.

 

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[MBS Commentary] – MBS Improve After Morning Data, But Underperforming Vs. Treasuries

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MBS Improve After Morning Data, But Underperforming Vs. Treasuries

Posted to: MBS Commentary
Tuesday, January 31, 2012 11:29 AM

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With the 10:00 AM print of this month’s Consumer Confidence report, the morning’s economic data is done. Stocks and bonds hadn’t been too well connected until then, but the general movement since then has been in favor of lower yields and lower stock prices. S&P futures are down to 1305 at the moment after being as high as 1317 earlier this morning.  10yr yields are trading just below 1.83, and thus have recaptured most of yesterday’s gains.

 MBS are a different story.  Whereas 10yr TSYs have merely experienced a measured little move beyond yesterday afternoon’s weakest levels, MBS fell all the way to Friday afternoon’s prices.  Although MBS prices are certainly making gains with the rest of the bond market, prices are not yet back into yesterday morning’s very tight range whereas Treasury yields are.  This can be seen in the following chart.  We’ve inverted 10yr yields and overlaid them with MBS prices (inverting 10yr y-axis means that the line will generally move in the same direction as MBS since MBS are displayed in Price and TSYs in Yield):

There are all sorts of explanations for the differences in performance between MBS and Treasuries, not to mention the most popular and always the most likely candidate when bond markets are rallying: Treasuries simply tend to outperform into rallies and underperform into sell-offs.  There are other factors at play in the current scenario and all deserve a look.  

From a simple price perspective, MBS hit their all time highs yesterday and have been nudging the upper limits of a trend channel.  Both of these technical factors could add to the sense of resistance at current levels.  It’s interesting to note that MBS prices fell far enough yesterday afternoon to get back inside the ongoing trend channel, thus getting daily resistance there while using the horizontal line at all-time highs as intraday resistance.  Both lines are included in the chart below:

Then there’s the matter of recent MBS performance vs Treasuries.  Beginning with the inclusion of MBS in the September 21st FOMC Announcement (first mention of “twist”), spreads between MBS current coupons and Treasuries have been getting narrower (MBS yields closer to Treasury yields).  These fires were fueled right through to the new year by speculation of MBS-related QE3’s as well as the old cliche “more buyers than sellers.”  Seriously though… In this environment with such low Treasury yields, who wouldn’t want an almost equally risk-free return?  Demand for MBS has simply been quite strong, and production wasn’t able to meet that demand.  So prices rose faster than benchmarks.  Here’s a look at the long term spread between Fannie Current Coupons and 10yr Treasuries:

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[Pipeline Press] – Freddie’s PR Nightmare; Servicing’s Negative Earnings Impact; More on MetLife’s Fade

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Freddie’s PR Nightmare; Servicing’s Negative Earnings Impact; More on MetLife’s Fade

Posted to: Pipeline Press
Tuesday, January 31, 2012 8:17 AM

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Do you think it takes a long time to have a loan purchased by Wells or MetLife? Try running the world’s longest lab experiment, begun in the 1920’s.

Fortunately finding a job in mortgage banking doesn’t take eighty years. In Toms River, New Jersey, Glendenning Mortgage currently has an opening for a DE Underwriter to join its team. Business has been too good for Glendenning, which has found itself outsourcing a portion of its underwriting needs – it would like to bring that back in-house entirely. The successful candidate should be highly experienced in FHA, VA, USDA and Conventional underwriting guidelines and will join a firm that has built a reputation for service excellence since its inception in 1989. Interested candidates may contact the firm’s president, James Anzano, for details visit its website at: http://www.glendenning.com.

And for job seekers on the West Coast, an expanding Orange County, California mortgage banker is seeking a Senior VP of Credit Policy.  “The candidate must have experience in the areas of credit policy formulation, product development and implementation, investor relations including Fannie/Freddie/Ginnie direct, multi-channel originations, and management of the Underwriting Department Team Leaders.” Products include conventional and FHA/VA and USDA.  To be considered for this role please email your resume to me at rchrisman@robchrisman.com. Any inquiries will remain confidential. (I will be heading to Austin today, and then to Miami on Thursday, so there may be a slight delay in responding – but I will.)

For more company news, in Illinois Town and Country Bank will buy a branch in Quincy from Associated. (Associated had announced late last year that it planned to close 21 branches in total with 3 in Illinois.) And Walton family-owned Arvest Bank Group is acquiring Union Bank, therefore tripling its footprint in the Kansas City area by increasing to 20 branches and $633 million in deposits. It’s an all cash deal with bank level P&A acquisition with an earn-out mechanism. Union Bank has approximately $458.7 million in total assets, a 3.82% leverage ratio, and 25.6% NPAs/Assets. Most importantly, the merger removes the last sizeable troubled institution in the Kansas City market from the potential FDIC-assisted deal pipeline.

Someone had better get the PR department on the phone. Has Freddie Mac been betting against homeowners? There was a lot of chatter yesterday about how Freddie has sold off the principal on loans into mortgage-backed securities and is only retaining the interest of the loan for revenue, and how they are betting on borrowers inabilities to refinance to lower coupons, thereby mitigating that return on higher existing margin loans.

The FHFA did respond late Monday afternoon.  FHFA Answers Conflict of Interest Charges against Freddie Mac

I’ve always wanted to start my own rating agency, and now might be my chance because Fitch is going to “open its kimono“.

Last week the commentary mentioned a statement that “the Democrats rejected a 5% rule that would require a minimum down payment on home loans from federal agencies.  Senator Chris Dodd (D-Conn) is quoted as saying that his reasons saying that ‘passage of such a requirement would restrict home ownership to only those who can afford it.'” Thank you to Leslie H., who pointed me toward TruthorFiction’s statement that “Senator Chris Dodd did not make that remark. The source for this eRumor is an article by satirist John Semmens who writes a weekly Semi-News feature for the Arizona Conservative. Semmens wrote about a proposed amendment that failed in the Wall Street Reform Bill, which Senator Bob Corker (R-Tenn)  proposed to raise the minimum down payment to 5% for federally assisted home loans.” Here is the story.

There has also been a lot of news on the foreclosure front (a possible settlement happening but without California and without a broad legal release for banks), refinancings (Obama promises to send a proposal to Congress although most think it will be limited only to non-agency mortgages), and modifications (an expanded HAMP was unveiled Friday and joins the expanded HARP announced a few weeks back). But few in the industry believe that any of these mortgage plans will be game changing. The “new” refinancing plan outlined by President Barack Obama a week ago was short on details – and given Congress’ inability to break its gridlock few expect anything to happen (especially during an election year). Congressional Republicans are opposed to additional intervention in the mortgage market and are philosophically opposed to a bank tax. Taking this slightly farther, the fact that the president is seeking congressional approval could be interpreted as a sign that the administration has taken its own refinancing efforts as far as it can without legislation. And investors don’t like being subjected to policy changes (“policy risk”), so pricing could become an issue.

Turning our eye to servicing, the recent bank results were not great. High servicing expenses are expected to be a drag on the top banks for some time to come. JPMorgan Chase’s mortgage servicing expenses totaled $925 million in the fourth quarter, down 4% from a year earlier, but the CFO said that servicing costs will continue to be high in the first half of 2012 – 75% of which is due to costs for defaulted loans and foreclosures. (JPMorgan Chase posted a $258 million loss in its mortgage unit, compared with a profit of $330 million a year earlier.) Some of the biggest hits in the 4th quarter came from mortgage repurchase requests, which show few signs of ending. Wells took a $404 million provision for mortgage loan repurchase losses; JPMorgan Chase took a $390 million provision; B of A set aside $263 million for repurchases and Citigroup took a $200 million hit. Meanwhile, SunTrust Banks Inc. said Friday it had to increase reserves for mortgage repurchases to $320 million. Attorneys are quick to point out that Fannie Mae and Freddie Mac are being very aggressive in pursuing repurchase claims because they have a statute of limitations of between four to six years to do so.

The jungle drums continue to beat about MetLife’s fade into the sunset of forward mortgage originations. I received this note: “I am a quality control auditor currently employed with MetLife Home Loans. I can’t really speak for the wholesale side, but if it’s anything like us here in retail, we ARE funding loans but everything is bottlenecked in a QA/QC process. Once the decision was made to dissolve the company rather than sell it we immediately went to a 100% QA audit environment. Previously, auditors in the branches were doing 100% but the audits were quick. QA based out of MetLife’s headquarters does full-file re-underwrites; they were only pulling 50% or less of files, so now to go to 100% has been utter hell. We do our reviews in the branch once a loan is ready to doc out, but then we wait a day for a purchase, up to 5 days for a refi to get thru QA. It feels like they didn’t sufficiently staff the QA department before making the decision and got completely overwhelmed. They’ve been bringing on more bodies but it’s out of control. By the way, the official announcement was that we are funding thru April 30th. Originations have obviously ceased, however, and a lot of ops staff was given their 60-day notices yesterday but there will still be a skeleton crew until the end. I’m very sad MLHL is closing, and it very frustrating for the over 4,000 of us who had hoped to have a future here.”

And a MetLife AE sent out a note to clients, “All loan files must be delivered by January 31st (and must be locked). All expired locks will result in file cancellation.”

Through this all, rates continue to be good. Yesterday U.S. rates dropped, with the reason attributed to continued fears associated with the European debt crisis. Heck that will be going on for years! Our 10-yr T-note improved by about .5 in price (closing at 1.84%).

In MBS-land, selling volume picked up, but these lofty price levels are causing a little concern among investors. If mortgage rates drop, will current production refi again? The low rate environment anticipated through late 2014, the strong supply/demand dynamics, and increased odds for QE3 all make for an interesting environment. But borrowers are still faced with higher fees, stagnant values, and documentation requirements that many view as extreme – all these serve to limit refinancing. Yesterday MBS prices improved by about .125.

Today for news in this country we’ll have the Employment Cost Index (ECI) for the fourth quarter, the S&P Case-Shiller House Price Index, the Chicago Purchasing Manager’s Survey, and Consumer Confidence for January. But when countries are caving in Europe, is what a purchasing manager did last month in Chicagoland critical? Tomorrow is the ADP employment numbers, ISM Index, and Construction Spending. Thursday is Initial Jobless Claims and unit labor costs. And on Friday is “the big daddy” here in the United States: the monthly employment data. In the early going we find the 10-yr at 1.83%, and MBS prices pretty much unchanged from Monday’s close.

Two rules for success in life:
1) Don’t tell people everything you know.
2)

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 discusses residential lending and mortgage programs around the world. 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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[MND NewsWire] – FHFA Answers Conflict of Interest Charges against Freddie Mac

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FHFA Answers Conflict of Interest Charges against Freddie Mac

Posted to: MND NewsWire
Tuesday, January 31, 2012 9:32 AM

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The Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a story from ProPublic and NPR that a complicated investment strategy utilized by Freddie Mac had influenced it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using Collateralized Mortgage Obligations (CMOs) exist but said they did not impact refinancing decisions and that their use has ended.

Freddie Mac’s charter calls for it to make home loans more accessible, both to purchase and refinance their homes but the ProPublica story, written by Jesse Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades “give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.”

Here, in a nutshell, is what the story (we are quoting from an “updated” version) says Freddie has been doing.  

Freddie creates a security (MBS) backed by mortgages it guarantees which was divided into two parts.  The larger portion, backed by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest payments on the mortgages, was riskier, and paid a higher return determined by the interest rates on the underlying loans.  This portion, called an inverse floater, was retained by Freddie Mac.

In 2010 and 2011 Freddie Mac’s purchase (retention) of these inverse floaters rose dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had interest rates of 6.5 to 7 percent.

In structuring these transactions, Freddie Mac sells off most of the value of the MBS but does not reduce its risk because it still guarantees the underlying mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of the underlying principal, are also now harder and possibly more expensive to sell, and as Freddie gets paid the difference between the interest rates on the loans and the current interest rate, if rates rise, the value of the floaters falls. 

While Freddie, under its agreement with the Treasury Department, has reduced the size of its portfolio by 6 percent between 2010 and 2011, “that $43 billion drop in the portfolio overstates the risk reduction because the company retained risk through the inverse floaters.”

Since the real value of the floater is the high rate of interest being paid by the mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried to deter prospective refinancers by tightening its underwriting guidelines and raising prices.  It cites, as its sole example of tightened standards that in October 2010 the company changed a rule that had prohibited financing for persons who had engaged in some short sales to prohibiting financing for persons who had engaged in any short sale, but it also quotes critics who charge that the Home Affordable Refinance Program (HARP) could be reaching “millions more people if Fannie (Mae) and Freddie implemented the program more effectively.”

It has discouraged refinancing by raising fees.  During Thanksgiving week in 2010, the article contends, Freddie quietly announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the GSEs were eliminating or reducing some fees but the Federal Reserve said that “more might be done.”

If Freddie Mac has limited refinancing, the article says, it also affected the whole economy which might benefit from billions of dollars of discretionary income generated through lower mortgage payments.  Refinancing might also reduce foreclosures and limit the losses the GSEs suffer through defaults of their guaranteed loans.

The authors say there is no evidence that decisions about trades and decisions about refinancing were coordinated.  “The company is a key gatekeeper for home loans but says its traders are “walled off” from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.”

ProPublica/NPR says that the floater trades “raise questions about the FHFA’s oversight of Fannie and Freddie” as a regulator but, as conservator it also acts as the board of directors and shareholders and has emphasized that its main goal is to limit taxpayer losses.  This has frustrated the administration because FHFA has made preserving the companies’ assets a priority over helping homeowners.  The President tried to replace acting director Edward J. DeMarco, but Congress refused to confirm his nominee. 

The authors conclude by saying that FHFA knew about the inverse floater trades before they were approached about the story but officials declined to comment on whether the FHFA knew about them as Freddie was conducting them or whether the FHFA had explicitly approved them.”

The FHFA statement said that Freddie Mac has historically used CMOs as a tool to manage its retained portfolio and to address issues associated with security performance.  The inverse floaters were used to finance mortgages sold to Freddie through its cash window and to sell mortgages out of its portfolio “in response to market demand and to shrink its own portfolio.”  The inverse floater essentially leaves Freddie with a portion of the risk exposure it would have had if it had kept the entire mortgage on its balance sheet and also results in a more complex financing structure that requires specialized risk management processes.

The agency said that for several reasons Freddie’s retention of inverse floaters ended in 2011 and only $5 billion is held in the company’s $650 billion retained portfolio.  Later that year FHFA staff identified concerns about the floaters and the company agreed that these transactions would not resume pending completing of the agency examination.

These investments FHFA said did not have any impact on the recent changes to HARP.  In evaluating changes, FHFA specifically directed both Freddie and Fannie not to consider changes in their own investment income in the HARP evaluation process and now that the HARP changes are in place the refinance process is between borrowers and loan originators and servicers, not Freddie Mac.

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[MBS Commentary] – The Day Ahead: Economic Data Ramps Up, But Impact Questionable

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The Day Ahead: Economic Data Ramps Up, But Impact Questionable

Posted to: MBS Commentary
Tuesday, January 31, 2012 8:05 AM

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Shortly after domestic markets closed on Monday, Greece’s PM Lucas Papademos told reporters that hoped to conclude debt negotiations by the end of the week.  In case that time frame makes you wonder whether or not these are the same debt negotiations that officials “hoped would be resolved by the end of the weekend,” they are indeed!  Markets appear all Greeced-out, however, as the news failed to motivate much, if any price action swings and/or volume.  Timing likely plays a part in this, but much more important is the burgeoning sense that markets could seem to care less about more of the same songs and dances.  It’s almost as if “Troika” is the hypnotist’s trigger word to make all of us fall into an apathetic slumber.

(Reuters) “Significant progress has been made in talks about private sector involvement,” Papademos told reporters early on Tuesday following a meeting with senior officials from the European Central Bank and the EU after an EU leaders’ summit.  “We are seeking to conclude negotiations with the troika by the end of the week,” he said, referring to the team of analysts from the ECB, the European Commission and the International Monetary Fund who are responsible for monitoring Greece’s progress in meeting budget deficit targets.  Papademos said the major sticking points to be agreed with the troika were on deeper spending cuts and labour market reforms.

If domestic economic data stands a better chance than Greece-related newswires to stir the hearts and minds of market participants, you wouldn’t have known it from Monday’s flat and flavorless session (incidentally, we’ll accept flat/flavorless sessions that contain MBS calmly trading at all-time highs).  But Tuesday has a more robust schedule, including Q4 Employement costs, Case Shiller Home Prices, Chicago PMI (Purchasing Manager’s Index) and January Consumer Confidence.  The other consideration with respect to economic data that fails to inspire much of a market reaction is that markets could naturally be waiting to react to Friday’s jobs data.

Until then, we may merely see more ebbs and flows inside a range with Monday effectively constituting a resistance bounce (floor) for 10yr yield.  10’s are up slightly this morning at 1.858 and MBS are getting the day started 2/32nds weaker at 103-21. S&P futures up about 6 points.

Period

Unit

Actual

Forecast

Prior

Monday, January 30

 

08:30

Personal consump real mm

Dec

%

-0.1

+0.1

+0.1

08:30

Personal income mm

Dec

%

+0.5

+0.4

+0.1

08:30

Consumption, adjusted mm

Dec

%

0.0

+0.2

08:30

PCE price index mm

Dec

%

+0.1

0.0

08:30

Core PCE price index mm

Dec

%

+0.2

+0.1

+0.1

08:30

Midwest manufacturing

Dec

87.4

85.8

Tuesday, January 31

 

08:30

Employment costs

Q4

%

0.4

0.3

09:00

CaseShiller 20 mm nsa

Dec

%

-0.9

-1.2

09:00

CaseShiller 20 yy

Dec

%

-3.3

-3.4

09:00

CaseShiller 20 mm SA

Dec

%

-0.5

-0.6

09:45

Chicago PMI Employment

Jan

58.6

09:45

Chicago PMI Production

Jan

66.2

09:45

Chicago PMI Prices Paid

Jan

65.7

09:45

Chicago PMI New Orders

Jan

68.0

09:45

Chicago PMI*

Jan

63.0

62.5

10:00

Consumer confidence

Jan

68.0

64.5

Wednesday, February 01

 

07:00

Mortgage market index

w/e

775.6

07:00

Mortgage market: change

w/e

%

-5.0

07:00

MBA Purchase Index

w/e

184.8

07:00

Mortgage refinance index

w/e

4265.3

07:00

Refinancing: change

w/e

%

-5.2

07:00

MBA Purchase: change

w/e

%

-5.4

07:00

MBA 30-yr mortgage rate

w/e

%

4.11

07:15

ADP National Employment

Jan

k

185

325

10:00

Construction spending

Dec

%

0.7

1.2

10:00

ISM Manufacturing PMI

Jan

54.4

53.9

10:00

ISM Mfg Prices Paid

Jan

49.0

47.5

Thursday, February 02

 

07:30

Challenger layoffs

Jan

k

41.7k

08:30

Initial Jobless Claims

w/e

k

370

377

08:30

Continued jobless claims

w/e

ml

3.56

3.554

Friday, February 03

 

08:30

Non-farm payrolls*

Jan

k

150

200

08:30

Manufacturing payrolls

Jan

k

13

23

08:30

Private Payrolls

Jan

k

175

212

08:30

Unemployment rate mm

Jan

%

8.5

8.5

08:30

Average workweek hrs

Jan

hr

34.4

34.4

10:00

Factory Orders

Dec

%

1.5

1.8

10:00

ISM N-Mfg Bus Act

Jan

56.0

56.2

10:00

ISM N-Mfg PMI

Jan

53.0

56.2

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Mortgage Rates Hit New All-Time Lows!

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Jan 30, 2012 2:15PM

Mortgage Rates Hit New All-Time Lows!

It’s happened before and it happened again today: Mortgages Rates hit new all time lows today. Please note, that the actual interest rate you would have been quoted last week and this week may not have changed, but based on raw data from more than 20 leading lenders as well as feedback from the MBS Live community, the average Best-Execution rate, before rounding to the nearest eighth, hit its lowest level on record, 3.81%. Although 3.81% is closer to 3.75% than 3.875%, we won’t declare 3.75% to be…

Jan 30, 2012 1:19PM

HAMP Changes: Treasury Increases Incentives for Principal Reduction

The Federal Housing Finance Agency announced on Friday that it was extending the Home Affordable Modification Program ( HAMP ) for another year – through December 13, 2013 – and that Freddie Mac and Fannie Mae would continue as financial agents for Treasury in implementing the changes it then announced. The press release also said the two GSEs would “extend their use of HAMP Tier 1 as the first modification option through 2013” and that they were already in alignment with HAMP Tier 2 and no further…

Micro News

5:19 PM:

FHFA Statement on Freddie Mac Refinance Story

3:41 PM:

After “Pin Drop Quiet” Day, MBS Weaken Slightly. Infinitesimal Reprice Risk

2:23 PM:

NY Fed Research: House Price Booms, Current Account Deficits, and Low Interest Rates

11:47 AM:

Eerily Stable, Given Price Levels

8:54 AM:

MBS Continue at All-Time Highs After Consumer Spending Report

8:41 AM:

ECON: Consumers Earned More, Spent Less in December

2:28 PM:

MBS Hit Day’s Highs, Underperforming TSYs in Low Volume

10:15 AM:

Fed’s Dovish Dudley Says Recovery to Slow in 2012

Around the Web

Video News

More Money for GSEs

Philly Fed President Plosser on U.S. Recovery

Freddie Mac Bets Against Homeowners

Today’s Comments

Frank Ceizyk

“You could also allow borrowers with more than 4 financed properties to cash out existing free & clear properties. Most of these investors have over…”

Frank Ceizyk

“And Ray J–I know you were joking, but the truth is, the government will intervene if as an industry we continue to just ridicule their efforts or just…”

Frank Ceizyk

“Ray J–if that is true then how can we truly call housing an investment for buyers? Vacant neighbhorhoods, rational defaults, credit histories destroyed…”

Today’s Q&A

“Should I pay down my mortgage when my property has depreciated in value?”

“Foreclose during bankruptcy or after?”

“Can a commercial property be sold to a person who is not a US citizen if he pays cash!”

<!–

Today’s Forum Discussions

CU Lender

“An email just arrived in my inbox that was forwarded from my borrowers RE Agent. This is a purchase of a short sale property and Wells Fargo is the 1st…”

Joshua

“I work with a financial adviser who has several clients with option arms that are underwater. Curious if anyone knows of any product currently available…”

Spaghets

“Started loan processing on a VA streamline back around Thanksgiving. The originator kept dragging his feet. I had all documents to him by 5 December and…”

–>

[MBS Commentary] – MBS RECAP: 1/30/2012

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MBS RECAP: 1/30/2012

Posted to: MBS Commentary
Monday, January 30, 2012 4:21 PM

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MBS Live: MBS RECAP
Open MBS Live Dashboard
FNMA 3.5
103-22 : +0-00
FNMA 4.0
105-19 : +0-00
FNMA 4.5
106-26 : +0-02
FNMA 5.0
108-00 : +0-01
GNMA 3.5
105-02 : -0-01
GNMA 4.0
107-22 : -0-01
GNMA 4.5
109-05 : -0-02
GNMA 5.0
110-24 : +0-00
FHLMC 3.5
103-16 : +0-00
FHLMC 4.0
105-10 : -0-01
FHLMC 4.5
106-10 : +0-03
FHLMC 5.0
107-20 : +0-05
Pricing as of 4:00 PM EST
Afternoon Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.
3:41PM  :  ALERT: After "Pin Drop Quiet" Day, MBS Weaken Slightly. Infinitesimal Reprice Risk

It’s almost as if markets slept in for the next 4 days of the week after the morning alarm indicated that Greece’s bond-swap negotiations were still in limbo. We could well imagine the potentially interested bond trader saying “wake me up when it’s over.” In this case the “it” would refer to just one of the many phases in the ridiculous parade of “maybes,” “yeah buts,” and “it’s unclear whether or nots” that have come to define the Greek “situation.”

Perhaps there’s some sort of script at work here…. Risks are called out, markets fear Greek withdrawal, trade accordingly, then the counterpoint comes in, then it’s shot down, then new news about some program/initiative/meeting/phone call/negotiation/summit/etc… takes markets back to the other side of the ping pong table, then fails to pan out as planned, leading back to the same initial questions that sparked the panic. Vicious cycle x 10.

But fool me 17-18 times, shame on me! Market participants are starting to simply not react to the wolf cries, instead waiting for meatier details to emerge. And so it is that days like today happen… Bond markets fly in quite bullish holding patterns, ready to break the range or bounce within it, but not fully committing to either one of those moves until more conviction is inspired.

On a side note, we’d almost completely disregard the late day price declines in MBS. Most of the weakness hit right at the 3pm close as volumes in benchmarks picked up for the first noticeable time since Friday morning, a clear indication that tradeflows were pushing MBS lower in illiquid, after-hours trading conditions (as opposed to MBS experiencing weakness for some fundamental reason). Most lenders will not think twice about this weakness, but one or two might see justification for a negative reprice.

2:23PM  :  NY Fed Research: House Price Booms, Current Account Deficits, and Low Interest Rates

One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only in the United States but also in other countries that have subsequently experienced the highest degree of financial turmoil. A progressive relaxation of credit standards can rationalize this empirical observation. Lower collateral requirements facilitate access to external funding and drive up house prices. The current account turns negative because households borrow from the rest of the world. At the same time, however, the world real interest rate counterfactually increases. Nominal interest rates departing from a standard monetary policy rule in leveraged economies, as well as foreign exchange rate pegs in saving countries, help reconcile a demand-based explanation of house price booms and current account deficits with the evidence on real interest rates…

11:47AM  :  Eerily Stable, Given Price Levels

For being at all-time highs, MBS have been trading in a range so narrow that it borders on silliness. This is partly a factor of organic resistance and partly a factor of broader bond markets simply trading narrow ranges this morning.

If 10’s were to break much above 1.85, then the supportive pivot seen on the MBS chart (around 103-25) could be at risk. Even then, we’re talking about a price level that is less than eighth away from where we are now!

Moral of this short story is that not much is going on at the moment. Volume has been even-keeled and there’s a fair bit of it, but everything is driving sideways sideways sideways for now.

follow link contains some longer term charts:

Featured Market Discussion
A recap of the featured comments from the Live Discussion on the MBS Live Dashboard.
Andrea Wine  :  “radian goes off AU approval up to 50”
Ira Selwin  :  “50 is available as well”
Ira Selwin  :  “*not always KC”
Ken Crute  :  “45”
Caroline Roy  :  “max dti on PMI these days?”
Andrew Horowitz  :  “interesting article , we all knew Freddie and fannie were making life more difficult, this helps explain Why http://www.propublica.org/article/freddy-mac-mortgage-eisinger-arnold&#8221;
Ira Selwin  :  “John – I think it’s hard to see with the market improvement right now. Had the market been flat since the gfee announcements, you definitely would have seen more of an impact.”
Chip Harris  :  “John, I think that the gains we have seen have offset the gfee. “
John Paunan  :  “I just remember a bunch of announcements from lenders, particularly Interbank, that today was going to be much worse because the g-fee was going to be assessed. Their current ratesheet is killer, without a hint of an adjuster on their extended locks. Not that i’m complaining, but I would have held off locking last week, that’s for sure!”
Eric Krumplitsch  :  “You can always refi from an arm to a fixed and the 5% doesn’t matter.”

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