Fed Responds to Originator Compensation Delay; Cash Buyers Forego Mortgage Tax Deductions; Warehouse Lending and RESPA
Mark Twain wrote, "The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin."
It is "tax time" for many
in the US, where interest paid on a home mortgage is still tax deductible.
The government seems interested in phasing this out for many (2nd
homes as a start, perhaps gradually lowering the interest dollar level). But
this is a perk that many in the US seem to be foregoing as all-cash
purchases of homes continue to increase (which helps low-end housing but
not the mortgage biz): NoTrashWithAllCash.
In a warped way, just like wars seem to help people learn geography by looking
at maps, and the passage of mortgage-related laws help mortgage bankers
remember their high school government class, so it seems that the comp issue winding
its way through the courts is helping us brush up on law procedure. The US
Court of Appeals has granted a stay on Fed's LO Compensation rule. This
order does not permanently stay or otherwise modify the enforceability of the
rule. Instead, it is a temporary measure to give the Court an opportunity
to review the case and make a final determination. Here is the Fed's latest response: CompStay. And here is some feedback on the Fed's perspective: Voice of Housing
Fannie updated its Selling Guide to include a number of miscellaneous clarifications. SellingUpdates Fannie also is updating the requirements to modify conventional mortgage loans. "Servicers must follow the policies and procedures in this Announcement when they are required to submit a non-delegated modification case through the HomeSaver Solutions Network. The revised requirements must be implemented for all conventional mortgage loans evaluated for a modification on or after April 15." HomeSaver
Very little comes out of Fannie
& Freddie aside from policy or procedure updates like the one above. This
isn't surprising, given the conservatorship. But that doesn't stop others from
opining. "Please explain how the government will shut down the two
entities when they along with HUD represent 95% of all loans being purchased
and securitized on the market? The government has no viable plan
whatsoever in place to shut them down. All you hear is the people in
Congress talking about it but they don't have a clue or plan anywhere near
execution."
Another wrote, "It is curious to me that while the government has
expressed a strong desire to have the private sector replace all or some of
Fannie and Freddie's role in the mortgage marketplace, it continues to roll out
new regulation that will make it more difficult for the private sector to step
in. Regulation only discourages private sector investment, although
it is not hard to see the entrenched, large, private sector players
(i.e., the big banks) attempting to step up and reap the rewards of the
monopolistic pricing power that is being served up to them on a silver
platter."
Thank goodness poverty is not necessarily a permanent condition, according to a report released by the U.S. Census Bureau. While 29 percent of the nation's population was in poverty for at least two months between the start of 2004 and the end of 2006, only 3 percent were poor during the entire period. (And any comments that they are living in condos in "sand states" is incorrect.) In its report, Dynamics of Economic Well-Being: Poverty, 2004-2006, the Census Bureau traces a sample of U.S. residents over that time period. Sociology students may find it of interest. PovertyStudy
Mark Ryan, the first Risk Manager of the FHA and a Freddie vet, will become FHA's Acting Commissioner when Dave Stevens departs. As a bonus, Ryan will also hold the title of Assistant Secretary of the Department of Housing and Urban Development, subject to Senate appointment. He has some good credentials, establishing a new office within FHA to oversee its credit risk management functions, increased its capacity to assess financial and operational risk, perform more sophisticated data analysis, and respond quickly to changes in the market. FULL STORY
Anyone involved in warehouse lending, repos, and RESPA, may be interested in a recent ruling: Warehouse&RESPA
Barclays Capital notes that over the past few months, mortgage REITs have been aggressively raising equity, which should translate into significant demand for MBS. Barclays states that since December 2010, "agency mortgage REITs have raised about $6.6 billion of new capital. Assuming a 6-10x leverage multiplier, this should translate into $40-65 billion of agency MBS demand." A comprehensive analysis of REIT's and their trends is beyond the scope of this commentary, but a few simple notes should be made.
Real Estate Investment Trusts are
simply a corporation or trust that uses the pooled capital of many investors to
purchase and manage property or mortgage loans. They are
traded like stocks, are usually very liquid, and have special tax
considerations - the most notable being they pay no taxes but instead pass
those on to shareholders. Mortgage REIT's are not risk-free, however, since
they take leveraged exposure to agency MBS and are typically exposed to
duration risk, negative convexity risk, mortgage spread widening risk, yield
curve flattening risk, idiosyncratic risk associated with prepayments, and the
risk that short-term funding market could freeze up. Most agency MBS-focused
mortgage REITs took the last three risks (flatter yield curve, idiosyncratic
prepay risk and the risk that repo funding market could dry up) but the
exposure to the first three risks is now more notable because interest rates
are at historically low levels and REITs seem to be buying fixed-rate agency
MBS instead of hybrid ARMs which increases their exposure to negative convexity
and mortgage spread risks.
Historically, Wall Street notes that REIT flows were not large enough because
the agency MBS-focused mortgage REITs had significantly lower level of equity
and they were also more active in less "negatively-convexed" MBS
products like hybrid ARMs. But lately the equity level of REITs has increased
significantly and they have become more active in the fixed-rate agency MBS
market. Thus, analysts expect REITs to continue to gather more attention
from the agency MBS market going forward.
Shedding more light on who is buying mortgage-backed securities, recently the H.8 report (H8DontBeLate) showed that small banks are providing a stronger demand for agency MBS than larger banks. Year-to-date, large domestic bank holdings of agency MBS have declined by $10 billion but agency MBS holdings of small domestic banks have increased by $19 billion. In addition, bank demand for agency MBS has been stronger than the demand for Treasuries, reversing the pattern seen in 2009 and early 2010. But banks' recent share buyback announcements are possibly indicating that banks are viewing share buybacks to provide a better return than leveraging their investments in fixed-income securities (due to lack of loan growth). Are those larger banks saving their money for buybacks, lawsuits, dividends...? Stay tuned!
"You want proof of inflation? A 1998 Honda Accord EX was purchased new for $22,000. A 2011 Honda Accord EX now costs $22,324, with same options, and is a much more refined car. But that 1998 Honda Accord, when purchased, cost $11.50 to fill up and yesterday cost $60 to fill the tank - a 421% price increase!" Aside from that, subdued inflation is one of the components that are helping the US stock market, which is also being helped by low interest rates (the Fed's accommodative policy) and strong corporate earnings. Money is still pouring out of fixed income investments and flowing into equities and hedge funds are using leverage to buy more and more stocks. The big question is what happens to stock investments when the Fed starts increasing rates? But last night Federal Reserve Chairman Ben Bernanke said that the Fed will "respond" if inflation pressures persist, but made clear that is not his expectation.
There was little news yesterday to move rates, and not only did volatility drop, but MBS volumes did as well. At the peak 10-yr notes were up/better by .375, but ended the day +.125 and at a yield of 3.43%. Agency mortgage-backed securities ended the day about where they began: a shade better. And don't look for much change today, with the news consisting of an ISM Non-Manufacturing Index number at 10AM EST, the released of the FOMC meeting minutes at 2PM EST, and various speakers from the FOMC. In early trading the 10-yr's yield is down slightly to 3.41% and MBS prices are roughly unchanged.
A father walks into a restaurant with his young son. He gives the young boy 3 nickels to play with to keep him occupied.
Suddenly, the boy starts choking, going blue in the face.
The father realizes the boy has swallowed the nickels and starts slapping him on the back. The boy coughs up 2 of the nickels, but keeps choking.
Looking at his son, the father is panicking, shouting for help.
A well-dressed, attractive, and serious looking woman in a blue business suit is sitting at the coffee bar reading a newspaper and sipping a cup of coffee.
At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on the counter, gets up from her seat and makes her way, unhurried, across the restaurant. Reaching the boy, the woman carefully drops his pants; takes hold of the boy's' "privates" and starts to squeeze and twist, gently at first and then ever so firmly. After a few seconds the boy convulses violently and coughs up the last nickel, which the woman deftly catches in her free hand. Releasing the boy's testicles, the woman hands the nickel to the father and walks back to her seat at the coffee bar without saying a word.
As soon as he is sure that his son has suffered no ill effects, the father rushes over to the woman and starts thanking her saying, "I've never seen anybody do anything like that before, it was fantastic. Are you a doctor?"
"No," the woman replied, "I'm with Internal Revenue Service".