"I used to be indecisive. Now I'm not so sure." But one thing that I am sure of is transparency. Sterne Agee released prepayment information, important to investors and originators alike. "Primary rates continued to their recent descent in May but lower rates alone were not enough to incent borrowers to refinance. Prepayment speeds for Conventional pools fell...Fannie collateral is now prepaying faster than Freddie."
Now, I am no expert, but that last sentence
was interesting. Why are Fannie loans paying off faster than Freddie loans? I will throw out a
few guesses. Perhaps Freddie has paid less relative to Fannie on guarantee fee
buy ups. Or Fannie's DU Refi Plus plan (for "collateral stressed"
loans) is available for 3rd party lenders, as opposed to Freddie's, giving a
wider range of originators a shot at it. (Freddie's plan must be refi'd in the
name of the servicer. A broker can refi in the name of the lender, but brokers'
percentage of the origination pie is down significantly. And larger originators
who are refinancing often do so through phone banks which may have less pull
through than the local shop.)
But that is in the past. One thing to note for the future is the slicing and dicing will make today's look pretty amateurish, given the amount of transparency with every LO being licensed, and every loan being tracked, along with its attributes, and so forth. Every security from every agency or accumulator will contain loans from various originators, and every loan will have its licensed originator, its LQI compliant data, its Uniform Collateral Data Portal compliant appraisal information... quant jockey's might be able to compare certain lenders or LO's across various securities based on dates, loan types, what the LO's credit report looks like, etc., etc.... my head is spinning. But one can see the future. And maybe somehow it will help borrowers.
One group for which refinancing is not a slam dunk is the "underwater borrower." CoreLogic reports that nearly 23% of all U.S. homeowners were in a negative equity position with their mortgages at the end of the first quarter of 2011. Almost 11 million borrowers owe more on their mortgages than their property is worth, and another 2.5 million borrowers (5%) were in a near-negative equity position with less than 5% positive equity. Not only have many areas gone down in value, but (and why is this a surprise to anyone?) borrowers with second mortgages on their home were twice as likely to suffer negative equity as those with only one lien. FULL STORY AND CHARTS
HUD has recently come out with an aggressive training schedule. It is best to go to HUD's website for complete details, but upcoming sessions include "HOPE LoanPort Webinar Training for Housing Counselors" on June 14th from 2-4PM EST, via Go To Meeting at: HOPETraining. (HOPE LoanPort allows counselors to upload fully completed home retention applications - HAMP, Fannie Mae, Freddie Mac, FHA, VA and all other investor options - directly to participating servicers for faster decisions averaging 26 days if the application is approved.) On June 15th in Chicago, June 16th in Atlanta, June 21st in Detroit, and June 23rd in Santa Ana (this sounds like a rock & roll tour schedule) HUD will be hosting Loss Mitigation training: LossMit. And if you've always wanted to visit Chadron, Nebraska, on June 21 HUD will be presenting a Non-Profit Program update and a session titled "Keeping Up With FHA" presented by the Denver Homeownership Center.
HUD also came out with its FY2011 Median Family Income Limits after it estimated median family incomes and income limits for 2011. To access the new limits please visit HUDUser at: HUD2011Limits.
Yes, mortgage production is down, but the demand for mortgage product continues to be strong among various entities, not the least of which is from REIT's. A few years ago, real-estate investment trusts that bought and sold residential-mortgage securities were very much "off the radar screen." a dying breed. But times change and of nine new REITs that have applied to sell stock in initial public offerings so far this year, seven are REITs that will invest in mortgage-backed securities, according to Dealogic Inc. The value of the offerings totals $2.6 billion. In recent months Pacific Investment Management Co. has its shares of Pimco REIT Inc., there was a $500 million deal by American Capital Mortgage Investment Corp. and a $300 million offering for Putnam Mortgage Opportunities Co. According to Barclays, mortgage REITs that principally invest in agency mortgage-backed securities have raised at least $6.6 billion in equity since December, and these cater to investors who want to buy into these kinds of investment vehicles who don't have access to a large bond fund because the minimum investments are very high.
But why are they "hot" now? After all, they've been around over 50 years. Analysts say that the interest reflects perceptions that prices for current securities, which have been rising in recent months from the distressed levels reached during the financial crisis, will continue to move higher in the years ahead. In addition, interest rates set on new mortgages in the future are expected to be higher than current levels, whether due to the overall economic climate pushing rates higher (not right now) or Freddie & Fannie's role being reduced and private banks increasing their share (more likely).
Larger lenders seem to have some interest in forming them. But as this commentary has mentioned in the past, forming one isn't something that is taken on at the drop of a hat. REIT's are required to pay at least 90% of their taxable income out as dividends, a drawback for some owners, and in recent years these dividends have been higher than other financial stocks and U.S. Treasury securities. Dividend yields on residential-mortgage REITs have been especially large, averaging over 14% compared with 3.5% for all REIT's. Mortgage REITs have high dividend yields partly because the managers use high leverage, which can boost returns. The REITs use low-rate, short-term debt to finance their bond purchases. [More on REIT's tomorrow.]
What is more important to our debt markets, the weekly or monthly economic releases, or the news coming from overseas? Smarter minds than mine will argue that while our economic numbers can have a short term impact on rates, the news coming out of countries in Europe and Asia, along with the US debt numbers, impact the overall trends in rates to a much larger degree. Recently we've had more negative headlines in Europe, problems with the Greek bailout, concerns out of China, and Moody's, S&P, and Fitch discussing a possible US and UK debt downgrade. Portugal is expected to follow Greece, and last week's $463 billion Chinese bailout for local governments is getting some airtime. Here in the US the Jamie Dimon/Ben Bernanke questions are still being discussed. Regarding banks, as one trader put it, "It's sure hard to lend what you have to hold." Resolving our debt ceiling has still not been done - gee, why focus on that when we're fascinated with Weiner's problems?
Yesterday's Fed Beige Book didn't have anything too exciting to note, although we had a strong 10-yr auction which helped push rates lower. The Fed's Beige Book indicated the road to recovery is uneven and slow: one-third of the Districts reported deceleration, only one District - Dallas - was seeing acceleration. 50% of the Districts saw further home price declines while the rest indicated no general increase, and credit conditions remained tight with St. Louis and Boston reporting further tightening. A comment from the Boston District mostly likely can be applied to many areas of the country and to the outlook in housing: "In general, contacts report that potential buyers are anticipating further price declines and sellers continue to price homes competitively in order to find a buyer quickly." By the end of the day 10-year note yields closed at 2.96%, better by nearly .5 in price, and MBS prices ended better by about .250.
There was a man who worked for the Post Office whose job was to process all the mail that had illegible addresses. One day, a letter came addressed in a shaky handwriting to God with no actual address. He thought he should open it to see what it was about.
The letter read: "Dear God, I am an 83 year old widow, living on a very small pension. Yesterday someone stole my purse. It had $100 in it, which was all the money I had until my next pension payment. Next Sunday is Christmas, and I had invited two of my friends over for dinner. Without that money, I have nothing to buy food with, have no family to turn to, and you are my only hope. Can you please help me? Sincerely, Edna"
The postal worker was touched. He showed the letter to all the other workers. Each one dug into his or her wallet and came up with a few dollars. By the time he made the rounds, he had collected $96, which they put into an envelope and sent to the woman.
The rest of the day, all the workers felt a warm glow thinking of Edna and the dinner she would be able to share with her friends.
Christmas came and went.
A few days later, another letter came from the same old lady to God. All the workers gathered around while the letter was opened.
It read: "Dear God, How can I ever thank you enough for what you did for me? Because of your gift of love, I was able to fix a glorious dinner for my friends. We had a very nice day and I told my friends of your wonderful gift. By the way, it was $96 so there was $4 missing. I think it might have been those jerks at the post office. Sincerely, Edna"
If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog is new and takes a look at the opinions on QRM's impact on our industry. 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.