"Big money goes around the world,
Big money underground.
Big money got a mighty voice,
Big money make no sound."
The world is watching Olympics (medal count: China 18, US 18, France 9; both Greece and Spain borrowed 3 from the ECB), but that certainly doesn't stop "big money" flowing into U.S. real estate from overseas. In the second quarter, per Jones Lang LaSalle in its most recent Global Capital Flows Report, global transactional volumes rose to $108 billion in Q2 2012, up 24% from the 1st quarter. The Americas posted the most activity, contributing $47 billion to the second quarter's overall total. New York, San Francisco, and Washington, D.C. continued to top the list of U.S. cities most targeted by foreign investors, followed by volumes of "cross-border purchases" purchases in Los Angeles, Chicago, Miami, Minneapolis, and Phoenix. "Core U.S. real estate throughout primary and many secondary cities remained very attractive to both domestic and foreign investors, based on absolute initial yields on offer, and their spread over record-low Treasury rates," said Josh Gelormini, VP of Americas Research, Jones Lang LaSalle. "The U.S. is also benefitting from a safe haven strategy, as other global markets appear on shakier ground, particularly given the ongoing Eurozone crisis."
Some firms are continuing to expand and look for talent. Mountain West Financial is seeking a VP of Compliance to manage all compliance and Quality Assurance for both Retail and Wholesale operations. The position is in the Redlands, CA, headquarters. Mountain West is a GNMA, FNMA, and FHLMC Direct Seller/Servicer presently retaining a majority of current production. It is an industry leader in Affordable Housing Solutions, and will fund well over $1 billion this year. For more information on the company, visit www.mwfinc .com and to submit your resume, email HR@mwfinc .com.
Yesterday the commentary made an observation regarding the type of borrower currently refinancing, and I received this note from Jerry S. with Signature Homes Group. "It is so true that most of the recent refinance activity is from the same people who refinanced last year. Unwilling spectators to this now 2nd wave of refinancing are the HARP-ready post June 1, 2009, crowd. For no other reason than a 'HARP Redlined' prior closing date (a particularly cruel 'overlay' and the logic of which lacks relevance now) they sit idly by while their neighbors refinance multiple times. True the multi-refinancers have equity, though there is a huge pool of HARP-ready post 6-1-9ers that would now enjoy huge savings in today's market as many of them are sitting on the 4.75%-5.25% loans that were prevalent during the third quarter of 2009. If only they'd closed a little sooner..."
After ruminating on the issue for several months, the Federal Housing Finance Agency (FHFA) gave Congress and the Treasury "the Heisman" (think arm outstretched warding off an opponent) and announced that Fannie Mae and Freddie Mac will not lower the amount some homeowners owe on their mortgages. The FHFA said its analysis found that principal reduction does not prevent foreclosures while saving taxpayers money. "FHFA has concluded that the anticipated benefits do not outweigh the costs and risks," said Edward DeMarco, the agency's acting director. Here is the FHFA's letter. Read: Tensions Escalate as DeMarco, Geithner Argue Merits of Principal Reduction
But the saga continued with Treasury Secretary Tim Geithner sending, publicly, an eight-page letter to DeMarco urging him to change his mind. In it, Geithner argued that allowing principal reduction would ultimately save taxpayers as much as $1 billion. "I do not believe it is the best decision for the country," Geithner wrote. "You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis." Here is Geithner's letter.
What does this mean for Joe LO? At this point the HAMP news doesn't mean much. The Obama administration sweetened the pot earlier this year by offering Fannie and Freddie incentive payments of up to 63 cents per dollar of principal forgiven, but to no avail. Fannie and Freddie are under constant pressure due to past losses, a good portion of which occurred (arguably) due to HUD and other government pressure to back loans to borrowers who wouldn't have qualified under traditional agency guidelines. In fact, DeMarco said that his prime directive is to minimize taxpayer bailouts of Fannie and Freddie, which have already received more than $188 billion. Reducing principal would likely increase that amount because it would lock in losses on their portfolios. DeMarco said that principal reduction would only help a maximum of 248,000 homeowners, very few given the time and money developing and implementing such a program, and that principal forgiveness could prompt many borrowers who are current with their payments to fall behind. Why would an investor buy, at a reasonable price, a pool of mortgages that had the possibility of having its principal reduced?
But the agencies weren't done making news yesterday. Freddie Mac, created in 1970, spread the word about HARP 2.0 yesterday, and turned some heads. Read: Freddie To Align With Fannie On Lower LTV HARP Guidelines
Freddie's announcement boiled down to it opening up refinance
opportunities to borrowers who are not underwater on their existing Freddie Mac
mortgages. Under the company's Relief Refinance Mortgage Program which
includes the Home Affordable Refinance Program (HARP 2.0) the requirements for
refinancing mortgages with loan-to-value ratios at or under 80% will be brought
in line with those with LTVs over 80%, the target audience for HARP 2.0 loans.
This is much more in line with Fannie's program, although details won't be
available until mid-September and go into effect in January.
The alignment will involve eliminating many of the representation and warranty requirements that exist on the mortgages being refinanced. It is hoped this will act as an incentive to lenders to promote the loans. Freddie Mac said it is further evaluating the Relief Refinance program, specifically looking at the Open Access offering to determine the best way to reach eligible borrowers and assist lenders in managing capacity. Open Access is designed to promote competition so that borrowers can obtain Relief Refinance Mortgages including HARP 2.0 from lenders other the one associated with their existing servicer. Open Access is the cross-servicer streamline refinancing program within Freddie Mac's HARP streamline refinancing offering.
Investors are keenly interested in this, as you can imagine. The proposed HARP 2.0 changes by Freddie could boost pre-HARP prepayment speeds. And no one wants to pay 105 for a loan and then have it pay off at 100. The changes will most likely involve some form of easing of cross-servicer reps and warranty requirements, potentially bringing them in line with those for same servicer. The same-servicer Relief Refinance program eliminates most rep and warranties for same servicer refi's of loans with LTV's greater than 80%, but originators point out there are three key hurdles to cross servicer HARP refi's: 1) different rep and warranties from same servicer refi's, 2) capacity constraints and 3) slightly adverse economics for such refi's. Whereas the latter two will remain unchanged, making reps and warranties similar should still result in an increase in cross servicer refi's, impacting investor's appetites for pools.
In addition, Freddie Mac also announced that it would align requirements for less than 80% LTV loans with those for greater than 80% LTV loans. This would include aligning rep and warranty guidelines, a notable change given that greater-than-80% LTV refi's currently enjoy significant rep and warranty waivers. Additionally, it is also likely that the LLPA (loan level price adjustment) caps that currently exist for higher LTV loans will be extended to less than 80% LTV loans. But perhaps it is much ado about nothing - Fannie Mae already has uniform rep and warranty waiver guidelines across LTV's, and analysts have not seen much difference in prepayment speeds between Freddie and Fannie pre-HARP less than 80% LTV loans. Most of the HARP 2.0 refi's have been in the very high LTV range.
Other things for originators to watch for is that in September the FHFA intends to release new standards requiring greater scrutiny of performing loans near the time of origination, thereby removing the risk of repurchasing the loan later. That would be a big plus. But on the minus side, and as noted earlier this week in this commentary, by the end of this another set of "gradual" adjustments in g-fee pricing will probably be announced for later this year. This was expected as part of the directive from Congress to FHFA to continue raising g-fees to a point that eventually brings in private capital.
This point bears repeating. According to the FHFA, GSE guarantee-fee pricing is not reflective of what could be expected in a competitive private market. In the FHFA's view, the risk in various types of collateral is also not reflected in pricing, resulting in significant cross-subsidization. To rectify the mispricing, the FHFA proposed to raise overall, as well as collateral-specific, g-fees in a phased manner. But we all remember the Congressionally-mandated 10 basis point g-fee hike implemented in March this year (to fund a temporary payroll tax cut). It may have thrown the FHFA's proposed hikes somewhat off schedule but now the hikes seem to be back on track. Given that mortgage rates are at all-time lows and the increase is likely to be phased in, investors think that the immediate effect on prepayments is unlikely to be significant.
These costs, of course, will be passed on to new borrowers. Borrowers in lower coupons are understandably likely to be more affected by this incremental rate hurdle. Additionally, credit impaired borrowers (high LTV, low FICO etc.) are likely to see larger hikes relative to cleaner credit borrowers. FHFA's earlier analysis showed that these borrowers were being significantly cross-subsidized. Originators are likely to ramp up loan closings before the fee hike. Thank goodness for the low rates that help hide these price hits.
Buybacks, in the past and in the future, continue to plague the industry. What is nearly as bad is the uncertainty surrounding the criteria agencies, and aggregators, use in asking loans to be bought back. Everywhere I go in the nation I hear stories of ridiculous minutiae triggering buyback requests, and lenders say that potential buyback risks are one of the key hurdles to more lending. Clearer rep and warranty guidelines are one component of the revised underwriting platform that FHFA has proposed. The existing process evaluates loans for putbacks once they have turned delinquent. The proposed standard increases scrutiny of loans at origination to detect defects. Subsequently, loans that perform successfully for some period of time will be safe from putbacks, but for very limited reasons. This would be beneficial to lenders.
There's hardly enough room left to talk about the markets! Yesterday's spate of economic news was a mixed bag, and resulted in not much of a change in mortgage rates. Personal income increased 0.5% in June as Personal consumption expenditures (PCE) decreased less than 0.1%. The S&P/Case-Shiller, with its two-month lag, showed that home prices continued to rise in May with average home prices increasing by 2.2% in May over April for both the 10- and 20-City Composites. The Employment Cost Index increased 0.5% during the 2nd quarter, and the Conference Board's Consumer Confidence Index increased slightly after four straight months of declines. "Despite this month's improvement in confidence, the overall Index remains at historically low levels." By the time the dust settled, 10-yr notes closed nearly unchanged at 1.49% and agency MBS prices were better by about .125. Thomson Reuters reported that "mortgage banker supply was less than $1.5 billion which is barely enough to cover the Fed's appetite of a $1.3 billion per day average."
Today we've already seen the weekly MBA applications index (+.2% last week with refi's hitting their highest level since April 2009 at 81%; adjustable rate mortgages are down to 4.1%), and the ADP private payrolls number (ADP reported +163k workers, stronger than expected but of questionable predictive ability for Friday's number). Later we will have the Treasury's announcement of next week's 3, 10, and 30-yr auctions, and an ISM Manufacturing number, but more importantly will be the FOMC's policy statement at 2:15PM EST. The consensus is that it will be at the September meeting in which QE3 (with MBS purchases) will be announced and that this meeting's statement won't result in any earth-shaking news. (The stock market may not like that very much.) Early on the 10-yr is nearly unchanged at 1.49% and MBS prices are worse by about .125.