How Debt Ceiling Issues Impact Fannie Mae and Freddie Mac; Bankruptcy Mortgage Project; Chance to Buy REITs?

Heard on the NPR radio show "Wait, Wait, Don't Tell Me" from Michael Feldman: "If the US defaults on their debt and our rating is downgraded and the US becomes a Third World Nation, will Nike finally open a plant here?"

"Rob, I can't figure out where the government is going with Fannie & Freddie. Just look at the recent headline stories, like, 'High-ranking members of the House Financial Services Committee have introduced a bipartisan bill that encourages banks, Fannie Mae and Freddie Mac to rent foreclosed properties as a way to reduce REO sales and stabilize house prices and communities,' and, 'Fannie Mae flushed the multifamily MBS market with liquidity in the first half by issuing $10.3 billion in commercial mortgage-backed securities supported by new multifamily purchases.' On the one hand, some elected officials are asking the agencies to become landlords, and on the other hand, down the hall, other elected officials are figuring out how to phase them out. It sure seems obvious that nothing is going to be decided for another 16 months, if even then." READ MORE: Politicians Overlook Role of Housing in Economic Recovery

The inability of the government to come up with a plan for the debt ceiling and the deficit has forced analysts to ask what may happen to the agencies when "push comes to shove." From the agency MBS and debt markets perspective, under the Housing and Economic Recovery Act of 2008, if an Enterprise's liabilities exceed its assets under GAAP the Treasury provides sufficient capital to eliminate that deficit in exchange for senior preferred stock. As we all know, both Fannie and Freddie have received capital from the Treasury under this agreement over the past several quarters - but what happens if one or both lose money in the 2nd quarter, and request more money and we don't have a higher debt ceiling?

As a few Wall Street research departments point out, HERA 2008 has a "mandatory receivership" clause for Fannie and Freddie which takes them out of conservatorship if certain conditions are met concerning assets versus obligations and lack of ability to pay debts. Fannie's 10-Q for the first quarter states, "FHFA has an obligation to place us into receivership if the Director of FHFA makes a written determination that our assets are less than our obligations for a period of 60 days after the filing deadline for our Form 10-K or Form 10-Q with the SEC." It is highly unlikely that the debt ceiling will not be raised before the possibility of Fannie & Freddie moving from conservatorship to receivership becomes an issue. But every day that the government fails to put forth a plan, concerns such as this one will arise, making investors a little more leery.

Others are saying, though, "Without some sort of serious entitlement reform, we're likely to lose our AAA rating. Does that really matter? Is there anywhere else for investors to go?" And thus equity and fixed income investors are pondering and worrying instead of trading. Traders report that liquidity is very light, and dealers are struggling to handle both sides of the risk.

Meanwhile, Fannie alerted clients of updates to its seller guide on the Uniform Appraisal Dataset (UAD) and Uniform Collateral Data Portal requirements, Qualified participants policy change, Performing modified loans policy update, Nonstandard payment collection options clarification, Housing Goals data update, and other miscellaneous updates. Read all about it at SellerGuide .

Fannie also updated its forbearance plan requirements, revised borrower income eligibility guidelines for mortgage modifications, and reinforced the availability of Home Affordable Modification Program (HAMP) for FHA-insured mortgage loans: Forbearance. In addition, with the rollout of the new DU in August, the new median area incomes will be updated: DUMAI .   

Mortgage REITs have seen their prices improve in 2011, and have been viewed as a powerful force in buying mortgage-backed securities. But their stock prices have come under pressure this week due to the potential downgrade of U.S. government debt. For example, two of the most prominent stocks in the group, American Capital Agency and Annaly Capital Management, fell as much as 2.5% on Monday alone. Perhaps this represents a good buying opportunity, especially with the dividends that some of them pay - around 19% in the case of AGNC. (They accomplish this through leveraging a strong balance sheet to buy a portfolio of government-sponsored housing agency paper on margin.) But if Ginnie, Fannie, and Freddie securities are downgraded, their prices will drop and yields rise - not good for the REIT. It may find that it needs to put up more money to replace the value (like a margin call), and "collateral haircuts" have increased for U.S. Treasuries, agency paper and foreign sovereign debt.

Mortgages...bankruptcies... are the two of them intertwined? You bet. The National Consumer Law Center has launched a useful new resource for the bankruptcy community called the Bankruptcy Mortgage Project. Those likely to find it handy include judges, consumers, trustees, mortgage servicers, attorneys, and academics. It collects all sorts of documents related to mortgage issues in consumer bankruptcy cases and provides easy, free access to various local rules, forms, general orders, and court opinions: Bankruptcy&Mortgages .

Real estate and mortgage fraud - don't do it. They'll hunt you down. And take ugly mug shots. Huh?WhereAMI? 

It has been a while since MERS has been in the mainstream news. But in the last week MERS (a unit of Merscorp and owned by the agencies and several large mortgage investors) forbade members to file any more foreclosure actions in MERS's name. It also required mortgage servicers to obtain mortgage assignments and record them with county clerks before beginning foreclosures. Details can be found here: MERS .

SIFMA provided comments to the Board of Governors of the Federal Reserve System on proposals relating to amendments to Reg. Z (TIL) that would implement changes to the TILA made by the Dodd-Frank Act: SIFMAComments .

Loan servicer Ocwen Financial announced the rollout to 33 states of a new loan modification program for borrowers with underwater mortgages. Its "Shared Appreciation Modification" (SAM) program, writes down an underwater borrower's principal balance to 95% LTV, thereby creating home equity. Then, over three years, the written-down portion is forgiven in one-third increments, so long as the homeowner stays current on mortgage payments. Later, when the house is either sold or refinanced, the borrower must share 25% of the appreciation with the investor of the loan. Ocwen believes this approach won't reward borrower delinquency, which is always a concern when offering a loan modification.

In Maryland, WEI Mortgage Corporation announced the creation of "custom term mortgages that are tailored for each borrower's unique needs. This is a unique option for qualified borrowers that have already paid a significant number of years on their existing mortgage and allows the borrowers to refinance into a lower interest rate without unnecessarily adding additional term. For example, if a borrower has a 30 year fixed mortgage and has paid it for 8 years, WEI is able to help the borrower take advantage of the current low interest rate environment and refinance the remaining 22 years into a custom 22 year term mortgage. This custom option positions the borrower to pay off the new mortgage in the same time frame as the original mortgage." Check it out at www.weicorp.com.

Stocks and bonds both went in the same direction Wednesday, both impacted by the uncertainty of the budget and the prospect of a ratings downgrade. Gold prices rose to another record, the DOW was down about 200 points, the 10-yr T-note down .250 (2.98%), and MBS prices were down/worse about .250-.375. (It is unusual for MBS prices to move as much as, or more than, Treasury prices.) "US obligations are not a pristine a credit as they use to be, but they are the 'Best Looking Horse in the Glue Factory'", said strategist Jeffrey Ho. That is a good quote. But wait - let's not forget Europe!

Yesterday afternoon's released of the Fed's Beige Book wasn't much cause for excitement, saying that economic activity is continuing to grow but at a slower pace. "Most residential real estate activity was little changed and remained weak," and home prices were flat or declining for Districts that reported this information.

While the markets are focused on the US debt negotiations, we still have some economic news out today along with a $29 billion 7-year note auction. (Yesterday's auction did not go so well.) We've already had Initial Jobless Claims; later we have Pending Home Sales. We find the 10-yr nearly unchanged at 2.97% and MBS prices are quiet as well.

There was a major league player in the 1930's named Mel Famey. He was a dominating pitcher but unfortunately he also had a severe drinking problem. On good days, he was unhittable but on bad days...not so much.
I can't remember what team he was on, but I know they were in series contention for the pennant, and the race went right down to the wire. Back in those days, of course, relief pitchers were uncommon, and a pitcher was expected to go the distance.

As the game went along, Mel's team held a one run lead until the bottom of the 9th. Mel had, unfortunately, been downing beer between innings and was clearly not as sharp as he'd started out.

In the 9^th the first batter he faced hit a home run, and the score was tied. That definitely sobered him up, some, and he got the next two batters out on sloppy blooper hits that his middle infielders caught, realizing he was inebriated and stepping up their game. Two outs - but then he walked the next three batters. His coach was fuming; the crowd was silent. Bases loaded, he refocused his bleary eyes and managed to throw a few strikes. Finally, the count was 3-2. Mel came set and threw a wobbly pitch that went wide - ball 4, the winning run walked in, the game and season over. As the jubilant winning team walked off the field, they passed the dugout and saw evidence of Mel's drinking, as beer cans were piled on the bench and scattered on the ground.

One player shook his head in amazement and pointed the debris out to his teammates: "Check it out - there's the beer that made Mel Famey walk us."