The Magnitude of the 2nd Mortgage Problem; Numerous Investor Bulletins; Banks and Hedge Funds Buying; SATO
My clock radio went dead, so I was faced with the usual question, "Do I pay to have it repaired, or do I buy a new one?" I went to a local repair shop, and on the door was a sign that said, "WE CAN REPAIR ANYTHING. (PLEASE KNOCK - THE BELL DOESN'T WORK!)" Needless to say, I have a new clock radio.
It is also going to be hard to fix the potential problem with 2nd mortgages. There are roughly $1.1 trillion in second-lien mortgages out there.
A research firm in New York believes that Bank of America, Chase, and Wells, who combined own about 40% of them, may have to set aside an additional $30 billion (matching their expected profits for all of 2010!) to cover possible losses on home-equity loans. (Home equity loans are often open-ended, as opposed to closed-end 2nds.) But of course banks have already set aside billions to cover bad loans - will it be enough? Of course second-lien loans are a hurdle when modifying first loans since first mortgages usually can't be modified or written down because lien priority dictates that junior loans be erased first. As mentioned above, analysts are arguing whether or not the billions held in reserves will be enough. Bank of America holds $138 billion of home-equity loans with $112 billion of second liens. Wells Fargo holds $123 billion of home-equity loans, with about $103.7 billion in a junior-lien position, while CitiGroup's portfolio is "only" about $49 billion. HERE is the complete story
Distressed home sales are once again approaching a one third share of the real estate market for existing homes, depressing home price trends and indicating that the housing market is not yet out of the woods. According to a report issued by First American CoreLogic, the sale of homes that could be considered distressed accounted for 29% of all home re-sales in January. This was the second highest share recorded for these sales, exceeded only by the peak of 32% reached a year ago, and compared to periods prior to the fourth quarter of 2007 when distressed sales constituted less than 5% of the resale market. READ THE FULL STORY
Say it ain't so: GMAC out of... Europe? Residential Capital unit had agreed to sell its European mortgage assets and businesses to affiliates of hedge fund and private equity firm Fortress Investment Group. The deal represents about 10% of ResCap's total assets. GMAC has hired Goldman Sachs and Citigroup to advise it. Remember that we, the taxpayer, own about 56% of GMAC and private equity firm Cerberus Capital Management owns about 15% of the company.
If you have an old version of the GFE in a loan file, don't send it to any investors. For example, Franklin American told clients that after 4/15 "if the old version of the Good Faith Estimate form is included in the file, it will not be eligible for sale to FAMC. It is not acceptable to include both the old form and new form. Only the new form must be included in the file." Any questions?
CitiMortgage alerted clients that as of April 24th it will no longer accept Interest Only loans that have been submitted or processed via Loan Prospector or for its MyCommunityMortgage program. Agency Interest Only loans submitted and processed through Desktop Underwriter, however, will continue to be acceptable. Loans need to be purchased by June 23rd.
Citi is also eliminating its Streamline Refinance Documentation Process for conventional loans as of the 24th. On the process side, starting on the 17th, for new and existing loans submitted or resubmitted to DU on and after April 17, 2010, the DU findings will indicate if the Social Security Number appears to be invalid. "If the DU message indicates the SSN may be invalid, and the correct SSN was entered into DU, then the lender must verify the SSN directly with the Social Security Administration (SSA) using Form SSA-89." And "the DTI for all CitiQuik, Standard and Agency Jumbo Full Doc process type loans will be lowered from 45% to 40%. This change does not impact loans decisioned via DU/LP (including Refi Plus and Relief Refi), FHA, VA, or Community Lending loans." And lastly, starting on the 24th, for Standard Documentation Process loans the minimum FICO score for 3-4 Unit Primary Residence Purchase and Rate/Term Refinances is 660.
SunTrust, after May 1, will require correspondent clients to "review and warrant ALL Agency and Non-Agency transactions secured by attached PUDs." The difference between a PUD and a condo is that for a PUD each unit owner holds title to a lot and the improvements on the lot and all common facilities within the project are owned by the master homeowners' association. This differs from condominium ownership in that the owner holds title to the unit along with an undivided ownership interest in the project's Common Elements. "Agency and Non-Agency transactions secured by attached PUDs that are underwritten by SunTrust Mortgage regardless of delegation level must be submitted to the SunTrust Mortgage Condominium/PUD Department for review and must be deemed warrantable prior to closing in order to be eligible for purchase."
SunTrust also adjusted its fraud prevention certifications in its processing of the 4506-T forms. "The requirements for documentation to request via the 4506-T to validate the income documentation for salaried borrowers and borrowers who receive pension/Social Security/Disability have been reduced." The procedure depends on the type of income, and it best to check SunTrust's announcement for specific details.
The Fannie & Freddie buyout program continues to give investors (not so much originators) something to talk about. Of course the delinquent buyouts are increasing prepayment speeds for older pools of mortgages, but limited, if any, impact on the projections on prepayments for new pools of mortgages. I was informed by one of the folks at MIAC that SATO ("Spread at the Time of Origination") is often useful in estimating credit risk: a higher SATO normally meant that the borrower was more credit impaired or at a higher risk of default. Of course, subprime loans always had a higher spread, due to the higher risk, but loans that qualify under Freddie & Fannie guidelines do so for a variety of reasons. In the past, built into the prepayment projections on premium TBA's would be some degree of additive default/buyout speed estimates resulting from the fact of higher buyout probabilities and thus higher baseline speeds baked into the prepayment projections: weaker borrowers lead to higher delinquencies and default probabilities. "The market has since moved more towards looking at current LTV's in combination with such collateral attributes as FICO, documentation, and product type with SATO becoming more of a lagging indicator."
Both the stock and bond markets improved yesterday, especially mortgages. Treasury securities, like the 10-yr note, would improve slightly, and mortgages not only followed but improved more. With low volatility, tighter spreads, and supply (origination) heading down, no wonder! Remember predictions of mortgage Armageddon when the Fed stopped buying after 15 months? Of course, with stocks over 11,000, a $50 billion Greek rescue plan in place, and continued positive economic information one would think the bond market wouldn't be rallying... but it is. (Speaking of Greece, the country's cost of financing is heading higher. Any investor that bought Grecian debt lately is sitting on a loss - rates are higher - and we know that throwing money at a debt crisis simply turns a short-term crisis into a long-term deficit. Greece just sold $1.6 billion of short term bills, adding to the deficit, and may lead to more uncertainty in domestic banks and may hasten the intervention plan announced March 26th.)
Originators and investors who sold mortgage pools, but didn't have them yet, are buying back their hedge positions, and outright buying by hedge funds, money managers, and investors is pushing mortgage rates lower. According to TradeWeb, banks and hedge funds currently account for over 40% of the MBS trading volume, a recent peak. It appears, through antidotal evidence, that locks are picking up: investors' phones are ringing, and the move in rates appears to have pushed some fence-sitting borrowers into locking. The upcoming economic data for March should show decent growth and low inflation. Retail Sales are expected +1.1%, Industrial Production 0.7% higher, the CPI should be flat overall and up 0.1% for the core. Fed Chairman Bernanke may not have much new to say, but testifies before the Joint Economic Committee, and the Fed releases its beige book. Today's Trade figures ($39.7 billion deficit) don't normally push rates too much and after the 5:30AM number the 10-yr is at 3.81% and mortgage prices are better by about .375.
"It's just too hot to wear clothes today," Jack says as he stepped out of the shower. "Honey, what do you think the neighbors would think if I mowed the lawn like this?"
"Probably that I married you for your money," she replied.