Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Memetrics
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1315.7 | 7.5 | 0.57% |
| Eurostoxx Index | 2457.8 | 41.1 | 1.70% |
| Oil (WTI) | 98.79 | 0.3 | 0.31% |
| LIBOR | 0.5371 | -0.005 | -0.97% |
| US Dollar Index (DXY) | 78.801 | -0.477 | -0.60% |
| 10 Year Govt Bond Yield | 1.80% | 0.01% |
Markets are rallying this morning on no real news. Portuguese yields are again lower and have retraced the big spike from Monday. Amazon.com stunk up the joint last night with a miss on the top line and disappointing guidance.
In economic data, mortgage applications were down in January. The ADP report suggests 170k jobs were added in January. The bulk of the jobs were added in small business and services. The January number was lower than expected. December was also revised downward from 325k to 292k. The takeaway is that the labor market is improving, albeit slowly.
The rumors are true: Obama plans to do a no-questions-asked refi program for anyone who is current in their mortgage. The program will be financed with a fee on banks with $50 billion in assets. The details have yet to be released, but the fee is probably going to act as a poison pill. As I have said before, the flaw in the plan is the originator. By definition, underwater loans are non-conforming (i.e. in contravention of FHA lending standards) and the government has the right to force the originator to buy it back. Originators are not going to take that put-back risk for no compensation, especially when there are plenty of good quality mortgages to underwrite. At any rate, banks are especially stingy with their warehouse lines these days, so originators are unable to make as many loans as they would like. Nobody is going to tie up precious warehouse capacity with non-conforming loans that can end up back in their lap.
It raises the question whether Obama understands this problem. My sense is that he does – that is why the poison pill bank fee was put in. This is just so much political theater – a chance to make an election year point. “See, I wanted to lower your mortgage payment, but those 1% bankster defending, do-nothing Republicans wouldn’t let me.”
Obama did roll out a pilot program on REO-to-rentals. FHA will sell foreclosed properties in bulk sales to investors who will turn them into rentals. It is an interesting idea. The rub will be pricing and scalability. The Cleveland Fed has already weighed in on the idea for its area and admitted it probably won’t work in the Rust Belt, where population loss is driving up vacancy rates and properties are spread out. This plan could work in dense places like South Florida and Las Vegas perhaps. Pricing will be problem as well. Currently, foreclosures are trading around 85% of Broker Price Opinion. Professional investors are probably going to need larger discounts to generate the returns necessary to attract capital. Since the government isn’t going to allow Wall Street Wiseguys to flip this stuff, they will require a multi-year holding period. No pension fund or endowment is going to tie up capital for 3 years at a high single-digit rate of return.
Filed under: Morning Report |
All Things in Moderation 
Agree with you Brent, as described, the program makes no sense. There is x percentage of mortgages that the government actually owns which they can modify without recourse to a lender. Otherwise, hard to see how the banks get forced to do this.
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Also, the concentration of foreclosures geographically speaking militates against a high subsciption rate. You can get bites on Florida and California but who will want Michigan or Nevada?
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I’m interested in the program that is intended to attract larger investors into buying the distressed properties and then profiting from their rentals.
As someone who owns and has dealt with small rental properties, 8 units or less, I’m not sure how this can be done at the scale imagined. Although I am very bullish on the concept of buying houses for rentals at these prices. In addition I think more and more folks have simply soured on the concept of home ownership and prefer the freedom of renting.
Again it will be the old battle between economies of scale and leverage, versus the inefficiency created by a large bureaucracy. IE Somebody like me or my clients putting up with the hassles of rental and cutting corners and being very judicious about expense, prospective tenants etc, is hard to replace with simple property managers. Not that it can’t be done, just that it’s an additional 10% many small property owners do not face. And 10% might be generous, don’t know how much additional expense is included for a major investor (pension funds etc) to ramp up a property management dept. or to subcontract to existing managers.
My basic point is one made to me by a dentist who owned quite a few properties at one time, from warehouses and other commercial products to houses and apartment buildings. He ended up specializing in medium size apartment buildings, 20 units or so. He told me his rationale…the commercial products were the easiest to manage but they often sat vacant for long periods of time…houses were too labor intense..apartments were the best of all worlds…reasonably consistent occupancy and his major point…only one roof to deal with…one set of vendors..insurance..taxes..all far more simple when owning a 20 unit apartment building as opposed to 20 houses.
I’m just curious as to how the larger investors plan to manage what will be thousands of small properties in their portfolio.
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Fannie Mae doesn’t underwrite files. They don’t originate loans. They buy loans that have already been originated from their correspondent lenders like GMAC or Wells Fargo and securitize them. GMAC and Wells Fargo purchase individual mortgages from a network of originators and sell them in bulk to the agencies. The actual loan origination is done by hundreds of lenders – everyone from the small “Mom and Pop” local mortgage banker to the local bank to the giants like Wells Fargo.
So “the government” can’t refi these loans without a lender actually doing it. And nobody is going to do that right now, given that they make about 2 points on an 80 LTV mortgage and about 2 points on a 120 LTV mortgage. Why underwrite a 120 LTV loan when there are tons of 80 LTV loans you would love to underwrite but can’t because your warehouse lines are maxed out?
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ruk
so are we all
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So, what is the likelihood that Congress will actually do anything about Obama’s refi plan?
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@ MIke,
The refinance plan won’t work for reasons that have nothing to do with politics. It doesn’t pass the “real-world” test.
So Congress is the least of the problem.
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Is the refi plan only availble to underwater mortgages? Is there a more detailed explanation of the plan that someone can link or are the details still pretty cloudy?
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ash
http://www.cnbc.com/id/46218849
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Brent:
Sure, you’ve gone over the reasons that the plan won’t work in the real world. But when has reality stopped Congress from passing legislation?
As you say, it is just political theater. So, I guess my question is more a political question than an economic one. Will Congress feel the necessity to act on this in an election year, even with the poison pill? How good a political ploy is it? Certainly, the average American isn’t really going to know much about the economics of loan underwriting.
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From banned’s link: “To be eligible, borrowers would have to be current on their mortgages, not having missed a payment in at least six months”
I wonder if that will change. I found out over the weekend that a relative stopped paying her mortgage almost 2 years ago. the bank has yet to contact her.
[edited: fixed typo]
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nova:
Smart woman!
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The pros and the cons of the working group and Schneiderman. Bill Black sees a few positives from the supposed new terms of the agreement, doubting of course that the banks will accept it now, but also recognizes that there is still no will, or even process, to bring “origination” fraud to either the investigation or prosecution level. He’s not a fan of Holder btw.
The working group will not “investigate … abusive lending” and it will not “hold accountable those who broke the law … [by defrauding] homeowners.” It will not “speed assistance to homeowners.” It will not “turn the page on an era of recklessness” – and fraud, not “recklessness” is what prosecutors should prosecute. The name of the working group makes its crippling limitations clear: the Residential Mortgage-Backed Securities Working Group. Attorney General Holder’s memorandum about the working group makes clear that the name is not misleading. The working group will deal only with mortgage backed securities (MBS) – not the fraudulent mortgage origination that drove the crisis (the only exception is federally insured mortgages).
Fraudulent mortgage originators engaged in fraudulent sales of the mortgages, mostly to Wall Street and, eventually, Fannie and Freddie. As I stressed earlier, the administration is continuing to grant de facto immunity to CEOs at the large lenders whose massive mortgage origination frauds drove the crisis. The working group’s mandate helps confirm the administration’s continued refusal to prosecute elite mortgage origination fraud.
Fair Warning!!!! – it’s a really long piece.
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If there is a fee attached that will make it less attractive to mortgage holders who can refi conventionally. So the target market is people who have underwater above-market rate mortgages. Basically, the FHA is going into the 100%+ LTV market.
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Mike,
Republicans are going to be loath to raise fees on the banks in order to implement a policy that has zero chance of working in the real world. So, it is DOA.
obama is just playing politics – if the plan doesn’t go through, he can demagogue Republicans for “standing with the 1% bankster, plutocrats who refuse to “pay their fair share” and won’t let you pay a “fair rate” on a mortgage” If it goes through, he can claim he “did something” and he gets a surtax on banks to boot. So for him, it is a win-win.
Republicans are in a tough spot on this. They should raise the originator question and force obama to insert language in the bill that indemnifies originators from the put back risk for this program. Which is a nonstarter – the government is not going to give originators a blank check. Even if obama calls their bluff (because rules can always be changed retroactively) Republicans can turn around and demagogue obama for “trying to take us back to the bad old days of NINJA loans, and liar loans.”
This is all about politics. Nothing more.
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lms:
A couple of indictments of former Credit Suisse people this morning;
“Federal prosecutors are expected to charge four former Credit Suisse brokers with criminal fraud for misleading investors by inflating the value of subprime mortgage derivatives to increase their own bonuses, reports the Wall Street Journal. In addition, the Securities and Exchange Commission is expected to file civil charges related to the case.
The charges are related to an incident in February 2008, when Credit Suisse suspended a group of traders for their role in a $2.85 billion overvaluation of asset-backed securities, which caused the bank to take a $1 billion hit in its first-quarter earnings that year. The banking giant itself reportedly won’t be charged.”
They went after the easy pickings that had already been booted to the curb by their own employer years ago, but they got a headline!
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ISM numbers look good:
“Manufacturing grew in January at the fastest pace in seven months, boosted by a rise in new orders. The report bolsters other data showing the U.S. economy started the year strong.
The Institute for Supply Management, a trade group of purchasing managers, says its manufacturing index rose last month to 54.1 from 53.1 in December. Readings above 50 indicate expansion.”
Slow and steady is better than flashy for growth.
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Thanks, Brent.
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Domestically owned GM and Ford sales were up last month, but less than expected, around 7%. Meanwhile foreign owned Chrysler was up 44%.
HOWEVER, Chrysler did business by selling their bigger gas guzzling environmentally damaging vehicles while sales of the tiny Fiat 500 were in the toilet.
GM on the other hand sold more of it’s eco-friendly smaller cars than big vehicles, however it disclosed that about 18% of it’s supposed world leading vehicle sales last year, were actually sales of a Chinese automaker in China, which GM owns a minority stake in.
In other words, it’s hard to figure out who is the hero and who is the villain in this story.
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If there is a fee attached that will make it less attractive to mortgage holders who can refi conventionally.
Good point, yelo. All the more reason why this is just political theater.
Banned- Thanks for the link.
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In other words, it’s hard to figure out who is the hero and who is the villain in this story.
Either way the answer is Obama, right? 😉
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Found a better source, 12% not 18% on GM
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ash;
I used to think this was going to be a campaign issue, but I think the war on the banks and taxes have now left it in the dust.
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No, I’m not the ghost writer for Bill Gross, why do you ask?
“Fed’s Low Rates Killing Credit, Slowing Recovery: Gross”
http://www.cnbc.com/id/46220487
Key Point:
“In the current environment, though, near-zero rates mean less room for appreciation either way — from a steepening yield curve or in price gains that would accompany lower yields. Gross said that’s holding back lending and thus preventing a more aggressive economic recovery, particularly in housing.
“Zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly,” Gross wrote on the Pimco Web site. “It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”
A must read, and not just because I agree.
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See what I did at PL after the glitch?
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Yeah, now it’s not even the losers, but the system itself. LOL
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mark:
Thanks to you, I now have the first twice deleted post in PL history! LOL
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banned,
All zero tolerance policies ultimately inconvenience the rule followers far more than the intended targets. This pendulum will swing back the other way eventually.
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Banned:
What did you do to get deleted?
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I put up the Bill Gros post that you see here.
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One thought about today’s refi annoucement that I haven’t seen elsewhere. How are they going to to register the supposed hundreds of thousands of refis, without a fucntioning MERS? What are the rules? Without a settlement of the bank case, nobody knows!
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Amongst other things, the new moderation rules are going hard against link spamming, with a copious quote and a url being the telltale.
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Where’s our bond guys today:
“Treasury Considers Going Negative on T-Bills”
http://www.cnbc.com/id/46223259
thoughts?
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banned:
I don’t understand this claim from the article:
Longer dated Treasury bonds have negative yields in the secondary market all the way out to the ten-year.
Huh?
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I don’t follow Treasuries that much, just the nominal rates, so if you can’t explain it, don’t look at me.
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I think they meant to say “negative real yields”, which makes sense if the Fed is going to hold inflation at 2%.
I believe TIPS have negative yields right now.
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Brent:
I think they meant to say “negative real yields”, which makes sense if the Fed is going to hold inflation at 2%.
Yes, that must be it. But I’m not sure the writer of the article knows that that’s what he means. In context, it clearly suggests outright yields, which is crazy.
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A deal between Greece and the private lenders may be near.
http://online.wsj.com/article/BT-CO-20120201-713243.html
But the European Central Bank isn’t showing its hand yet.
http://www.businessweek.com/news/2012-02-01/ecb-may-hold-out-on-greek-debt-swap-until-investors-reach-deal.html
So are we really closer to a resolution, or is this theatre?
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