MonkeyBusinessBlog

Before You Get Too Excited About Those Housing Numbers.

Like we have always said on this blog, "We'll smile about housing when either Ivy Zelman or www.housingdoom.com tells us it is time to smile."  They are not smiling at Housing Doom.  

There's a whole lot of foreclosures in the pipeline.  Banks and servicers are simply holding them back and praying that Glinda The Good Witch of the North shows up and makes serious delinquent borrowers current again.  Yesterday, it was brought to light by Fitch (via Clusterstock , via Calculated Risk) that cure rates for prime mortgage loans (curing is when a delinquent borrower is able to bring himself current) has fallen from 45% during the period 2000-2006, to 6%!!!!  Prime mortgage delinquencies clocked a rate of approximately 5% in the second quarter.  I have a strong feeling that that percentage has only increased in the third quarter.

Anyway, here's the piece from Housing Doom. Case-Shiller Not Looking As Dismal - For Now  

Hmm. "Leading Indicators" and "Philly Fed" Versus 5.23% of ALL PRIME MORTGAGE LOANS NOW DELINQUENT...IN SECOND QUARTER!!!

Naturally, stocks rallied off of the better than expected Leading Indicators and Philly Fed as opposed to the horrifying mortgage delinquencies (not to mention the news of the FDIC's beggaring and corporate defaults setting new records)!  I swear, when it comes to this market the only comparison that I can make from personal experience is a time from college.  I had to spend a Saturday in the library doing some school work (I guess) and when I came back to my dorm all my buddies had eaten magic mushrooms.  Since I was the only sober one (of course nobody saved anything for me), they picked, or I should say begged, me to drive them to the National Zoo. Imagine walking around with six guys hallucinating on shrooms at the zoo and your the only one who's not high on anything.

Anyway, that is how I felt after seeing these numbers lumped together and watching stockees go up! Here's a great piece of sobering reality (13% of ALL mortgage loans are now either delinquent or in default), after Santelli, from one of the few value added members of CNBC, Diana Olick.  

Uh Oh. People are Leaving Florida

Like I like to say, I'm a big markets guy. All kinds of markets. People deride this country and I tell them, look this country is in truly bad shape when we have an Emigration (leaving here), problem not an Immigration (coming here) problem. I used to say this a bit smugly figuring how in the hell could any country compete with OURS? Now I'm a getting a little concerned. 

The Associated Press just put out a story that the state of Florida's population dropped last year for the first time since 1946. Now I don't know if this is due to immigrants not coming in through Miami or people just leaving to other states. In any event, it probably spells that there are not so many jobs to be had in that state. That's usually the story. No jobs = people leave or certainly don't show up to move there. Gotta hold off on buying more of that Florida real estate eh? This is what we like to call a disturbing trend (technical term). Hope it changes soon.

AIG Keeps the Laughs Going While FHA Keeps the Subprime Loans Flowing!

Last post from me today.  I am taking the family to New Yankee Stadium!  If at some point the money supply dips sharply around 1PM, don't be alarmed. It's just me using my debit card to buy the kids lunch and souvenirs!

What's funnier than this Benmosche Said to Start AIG Tenure With Croatian Trip.  

Robert Benmosche, the chief executive officer ofAmerican International Group Inc., plans to spend part of his first month leading the insurer in Croatia on vacation, according to two people familiar with the situation.

Benmosche, 65, who started yesterday as CEO and president of the bailed-out company, will leave for about two weeks, according to one of the people, who declined to be identified because the plans were private. Mark Herr, an AIG spokesman, said the New York-based firm wouldn’t comment on CEO travel.

“It’s probably not a propitious time for an incoming CEO to begin with a vacation,” said Steven Seiden, president of New York-based executive recruitment firm Seiden Krieger Associates. Seiden said that while the absence won’t hurt the company’s financial position, “from a public relations standpoint it’s probably not the wisest thing to do.”

Benmosche bought a Croatian villa, with 8,000 square feet of living space located along the Adriatic Coast, after visiting Dubrovnik in 1999, according to a 2004 Forbes magazine article. He paid about $1 million for the property, which was built in 1934 for the king of Yugoslavia’s treasurer and included four buildings and 150 feet of waterfront, the magazine said.

“It’s breathtaking -- you couldn’t find anything like this anywhere else,” Benmosche told Forbes. “I’m an hour’s flight to most places in Europe and a ferry ride across the Adriatic to Italy.”

People, I ask you.  Could anybody possibly make this sh*t up?  What were the choices?

1. Another Goldman Sachs Board member or,
2. A tone-deaf Ass-h*le. 

Also, a vital report from the field from our good buddy and real estate mogul Fletch.  Remember yesterday the WSJ The Next Fannie Mae. FHA and GNMA are Becoming $1 trillion Subprime Guarantors.  Fletch reports that the FHA is the only game in town.  His real estate empire sold a property yesterday with the buyer heavily FHA subsidized, ZERO money down!  

How we doin??  Think about this the next "Pending Home Sales" or "Existing Home Sales" number comes out.

Ok, off to get fleeced at the Stadium.  At least they're winning!

  

Housing "Numbers" Scare Me.....Again.

Not to be lazy, but with all the mindless chatter about "green shoots" in this month's "housing numbers" I'm reposting something I wrote a couple of months ago.  Actually, first read this post from one of my favorite blogs www.housingdoom.com.  When these folks and Ivy Zelman tell me that they see "green shoots" I'll listen.  Misplaced Optimism    

And now the lazy repost from May.

It is obvious that since the U.S. housing market was and still is the epicenter of "The Great Recession", we are obsessed with the "housing numbers".  Markets gyrate off of "New Home Sales", "Pending Home Sales", "Foreclosure Rates", "Median Home Prices", "Months of Inventory", etc.  Some people are starting to call a bottom or near bottom for the housing market, others think we still have a long ways to go.  What scares me is how the hell do we arrive at these numbers?

Do we really know what housing inventories are?  I don't think so.  Personally, between bankers and servicers there has to be many, many homes sitting in sort of a shadow default or foreclosure status.  Servicers keep borrowers breathing for a variety of reasons.  It could be that it's less costly to pass through their P&I than to call a default.  They're not supposed to do that but they do.  It could be they are looking to protect their record as a "seller servicer".  It could be that they are just overwhelmed and haven't gotten to thousands of serious delinquent borrowers yet.  Also, lets not forget that with rising unemployment, that serious delinquent pipeline keeps getting reloaded.

The long and short of it, for me anyway, is when it comes to the "key" housing numbers, it's garbage in-garbage out.  I prefer doing what Richie and other friends of ours do, which is go down to foreclosure auctions, or solicit real bids on existing properties.  And even that approach is going to potentially miss the gigantic shadow inventory.  Still, its a hell of a lot better doing that versus what Al Greenspan does, which is look at a bunch of charts and graphs from the National Association of Realtors and call a "bottom".

Finally, I want to leave you with this little anecdote.  A few weeks ago a buddy asked me how the "months of housing inventory" gets calculated.  I told him I really didn't know but I bet the folks atwww.housingdoom.com do.  So I asked them and here was their response;

Both the NAR and the NAHB express inventory as "This month's inventory/This month's sales".  It's not really a realistic approach when sales and inventory are both seasonal numbers.  The NAHB's numbers are understated in down markets.  In their model, when someone signs with a builder to build a house, it is sold.  If the house has begun and the buyer cancels, it remains "sold" and the spec is not considered "inventory".  The other problem with the NAHB is that they do a sampling of their membership.  They are on the honor system and it is up to builders to say what they consider "inventory"- there is no set definition of how far along the house must be.  They do at least give the margin of errorin their reports- not that the MSM understands it.  I've seen the market rally because sales were "up 3%"- but the margin of error was plus or minus 15%!  The 3% rise would also be a result of this month's number vs. last month's revised number.  In short, don't bet serious money on the accuracy of the reports!

 

The NAR says little about its methodology.  They also sample their membership.  There is no central MLS that they can pull the data from.  One of the things I wish that was reported was the reason that existing homes leave inventory.  When the NAR reports inventory, there's no way if this month's reduction was due to cancellations, expirations, foreclosures, or sales.  When sales are low but inventory is diminishing, I assume that the inventory will come back to haunt us at some point.

 

Comforting?

The Housing Doggie Just Peed All Over Our Green Shoots!

Here is the ONLY thing that you should be concerned with right now with regard to your economic outlook.  Delinquencies Double on Least Risky Mortgages

Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

“I’m very concerned about the rise in delinquent mortgages and foreclosure actions,” Comptroller of the Currency John Dugan said in a statement released with the quarterly report. President Barack Obama’s plan to create “sustainable, payment- reducing modifications is a positive step that should show significant benefits in the coming months,” Dugan said.

Obama’s program, unveiled Feb. 18, aims to help as many as 4 million borrowers by modifying loans and calls for Fannie Mae and Freddie Mac to refinance mortgages for as many as 5 million borrowers who owe more than their homes are worth. Foreclosure filings surpassed 300,000 for a third straight month in May, according to RealtyTrac Inc., and the U.S. economy has shed about 6 million jobs since the recession began in 2007.  

President Obama's loan modification plan, the one we fell out of our chairs laughing (and crying) when he said it was going to modify up to 4 million mortgages.....?  Mr. Dugan says we should see significant benefits in the coming months.  I challenge that.  What's been going on the last 4 months?  Bubkis.  If they were even able to modify 50,000 loans under the program you would have heard about it every night on MSNBC every other hour.  The truth is that if they were able to modify 500,000 mortgages in a year it would be a hell of a achievement.  We've written a lot about this on the blog back in February when the plan was first announced.  It takes people, all unified in mind and spirit sitting practically in the same room to accomplish these modifications and none of the major players are unified or in the same room.

Job losses are growing at a alarming rate.  The BLS numbers do not tell half the story.  The stock market and the government may not get it but the people who actually do things in this country, the ones who run companies are cutting headcount, cutting back hours, cutting back benefits and "retooling" for a future where consumer spending, 70% of our GDP is going to change dramatically for the foreseeable future.  Everyone who comes through this disaster will be saving a lot more and spending a lot less.  Additionally, they will be able to borrow a lot less.  Americans disposable incomes will be going down and they will be saving more of that lower disposable income.  That is reality.

You can't modify or refinance a loan when the borrower can't pay....anything.  Maybe in 2006, but not now.  Maybe the lower priced part of the housing market in the bust-boom states is starting to find a bottom.  However, the  middle to upper priced housing delinquency and default disaster is just getting started.  In New York, those type houses are just starting to hit the market and the bid is not exactly "robust". 

Things are gonna get real ugly.....again.  Big bank second quarter earnings (the JPM's and BofA's and Goldman's etc..) are going to post big positive numbers due to underwriting (bonds and equities) and liquid trading volumes.  I think we are going to see a muted reaction to these good numbers and that will be the sign that the party is over.  The regional and smaller banks?  They are going to get clobbered.  Like a sick joke, every Friday after 4pm the FDIC announces the seizure of about 5 banks....EVERY FRIDAY.  Soon that weekly number is going to be a lot more than 5.  Like Richie said earlier, we are getting ready to play the financials from the short side in the third quarter.

James Lockhart Sees Housing Bottom.....Maybe.

From Bloomberg News;

Fannie Mae and Freddie Mac’s federal regulator said home prices may be “bottoming” in the U.S. as government efforts to bolster the market gain traction.

“We’re in a process where we may be seeing some bottoming,” James Lockhart, director of the Federal Housing Finance Agency, said in an interview on CNBC. “Certainly mortgage rates being down where they were, was helpful,” he said. “At 5.4 percent, they’re higher, but they’re still in a range that I think does achieve affordability.”

Fannie Mae and Freddie Mac own or guarantee 56 percent of all residential mortgage loans in the U.S.

Lockhart was head of OFHEO and then the FHFA since June 2006.  Why does this man still have his job?  Between the phony-baloney accounting, the excessive risk taking and the pressure he put on Freddie Mac  this year not to disclose potential HUGE losses they are now taking as part of their new mission to suck up as many freakazoid mortgages as they can with our money (as part of the President's great housing rescue plan) without having to tell us through Congress, shouldn't he be sitting at home by now?  Listening to him talk about housing is a lot like this;

More People Coming to the Party

So my sojourn to the southeast in the southwest of Florida yielded no purchases. Not for a lack of looking. It just seems like everywhere you look down there, you aren't alone when bidding on foreclosed properties or short sales. A recent auction got 20 bidders.

Now it doesn't mean there aren't still problems and won't be future problems when many, many more adjustable rate mortgages adjust in 2010. And the median price of real estate from May of last year to  May of this year went from 314k to 170k! That's over a 45% drop for those scoring at home. Now 314k may have been insane but it looks like the number 170k is getting people off the bench.

I looked at a smattering of areas but the place that really caught my eye was Marco Island. As the old real estate adage goes, "they ain't buildin' no more beaches to put property on". I think there is potential as some of those places on that little island seem to be down 60-70% from the nosebleed top. These are numbers we at monkey business like.

So another trip another doughnut. But that doesn't necessarily give us pessimism. There will be plenty of other opportunities for the "Monkey Business Manor". Its just that in the Ft. Myers/Naples area there looks to be some bottoming out.

And Now a Word About Housing

Eric isn't the only Monkey Business Player that is going away this weekend. Though not as extravagant as Korea, I am headed to the Naples/Fort Myers, Florida area this evening. It's a quick trip. Be back Sunday night. Did you know that the "epicenter" of the housing bubble is pretty much Naples/Fort Myers, Florida? Yep. In just about everybody's "top" 3 is Vegas, California, and Naples/Fort Myers. "Top" meaning the areas that have had the bejesus beatin out of them (technical term) the most.

I'm not going down for any formal auction but I do have a few listings I'd like to check out.  Of course I will let you know how it goes and as we've said before--and this always applies--anyone who wants to partner up with me out there on any purchases I make, I'll be glad to take you on as a colleague. But in good Monkey Business prudent fashion.......your credit is NO GOOD here. You wanna play, you will be comin with pay. So if I buy some palatial mansion on the water that used to sell for like $5mm and I buy it for say $150k, you will be expected to come up with a piece of the downpayment (most likely at least 30k). You catch my drift right?

I think it would be loads of entertainment, not to mention a good learning experience, and OF COURSE a chance to make some real money if we had the "Monkey Business Mansion" or maybe "Monkey Business Manor" like Wayne Manor for Batman. We can tell on these very pages the joys and perils of homeownership (and being a landlord!) and let the fine readers get a good taste of it. Much like the "Monkey Business Roth IRA" we will "open the kimono" and have no secrets about what is going on.

So who is in? I mean you don't have to send your dough now but let me know if you have interest in this venture. We got a nice response in December but alas didn't find anything cheap enough. The 2nd time might be a charm. Let me know.

I May Have Been At the Meeting Where The Credit Crisis Was Born!

A little while ago a colleague asked me, "Who do you think is the number 1 villain in the credit crisis?" I thought about it for a minute and I said, "I think that I would have to go with Countrywide's  Angelo Mozilo.  The reason I named "Orange Angie" was because I used to work at Freddie Mac.  Among the many things Mozilo did, he really bullied the crap out of Fannie and Freddie to loosen underwriting standards for prime loans and get involved guaranteeing subprime and Alt-A garbage.  Mozilo essentially told Fannie and Freddie in the middle of the decade that he didn't need them anymore.  The Wall Street securitzation machine was taking down his product and guaranteeing it for a hell of a lot less than Freddie and Fannie were willing to do it.  Sure, Freddie and Fannie were big boys and they did what they did on their own volition.  Still, Mozilo helped guide them down the road to credit hell and without that trip, the world would be a different place today.

Anyway, this got me thinking about how this whole thing got started.  I started working at Freddie Mac December 1998.  My original job was Director of Risk Management for Freddie Mac's mortgage backed securities dealer "Security Sales & Trading Group."  They were growing the dealer so they brought me down from Wall Street to build the risk management function.  Anyway, I did that job for about a year and then they asked me if I wanted to be the strategist as well.  I figured what the hell so I said yes.  When you think about trade ideas for Freddie and Fannie MBS, one of the most important assumptions is how fast or slow will a portion of the loans pay off.  When interest rates fall, borrowers in the pool of mortgages refinance.  The trick is making an educated guess as to how many would refinance and prepay their existing mortgage, and how fast would they do it.

Sometime in early-2000 I get invited to a meeting.  At the meeting, some of the people who worked at another department in Freddie Mac told us about a new origination program called "Fast Docs".  They told us that the big shops like Countrywide complained bitterly in the last refinancing wave (1998-1999) that Freddie and Fannie's underwriting rules were way too cumbersome for refinancings.  Their biggest beef was;

"If a guy just took out a 7% mortgage eight months ago, and we fully underwrote his loan and you guys (FRE or FNM) guaranteed it, why the hell should we have to fully underwrite him again, less than one year later?  You guys have already took credit risk on him.  As long as the house is still there, there are no other liens on the house in front of us, and the guy isn't asking for a higher loan balance, why do we have to redo all the job and income verification and full appraisal?  We have a big database of home prices, we can do a basic drive-by appraisal, a title search and blast the guy a new loan."

Apparently the big guys were bitching about this all through 1999.  Freddie and Fannie were slowing them down and costing them money.  They made all kinds of threats that they were going to go private label and cut Freddie and Fannie out (which they ended up doing a few years later) unless the GSEs played ball.  They also played one GSE against the other, which they fell for, hook, line and sinker.  Eventually, both GSE's gave in.  It seemed like it made sense.  If I already guaranteed that you were going to pay your $200,000 7% mortgage and you were current on it, it could only help our credit situation if the guy reduced his coupon to 6%.  All else equal, we just improved the guys cashflow situation.  It kind of made sense.  Fast Docs was launched and it became a way of doing business of $trillions of refinancings going forward.

Unfortunately, these lax underwriting standards being done in such size became a way of life.  Big firms like Countrywide got used to this new, easy and fast way of doing business.  They and the rest of the originators were big mortgage factories and like any other factory, its all about getting as many units through the line as quickly and cheaply as possible.  What started as a reasonable operational request in 1999, turned into the "No income, No appraisal" underwriting standard of the 2000's.

That is where I think the great credit crisis of this decade started, back at the GSEs ten years ago!  

Did You Know That Home Mortgage Debt is Nearly 75% of GDP?

The folks at www.housingdoom.com (what a great name!) have a nice little piece out this morning The Housing Price Bubble is Deflating Faster Than the Debt Bubble.  

I feel stupid that I didn't know that, especially since I've had a pretty good handle on the amount of home mortgage debt outstanding and GDP.  I guess I just never put the two side by side and said "Holy Sh*T!!"  What's frightening is we've been at that 75% level since 2006....and at the rate GDP is going into the crapper..Yikes!

From Doom;

To get the mortgage debt-to-GDP ratio down to a more normal level such as the 46% average of the 1990s, Americans would have to cut their mortgage debt to $6.6 trillion from $10.5 trillion at the end of 2008. The last time the national mortgage debt count was below $7 trillion was 2003, according to Federal Reserve data.

We might call this mortgage overhang the $4 trillion elephant in the room for policymakers, who have spent the past year injecting liquidity into the economy - a course of action that will do little to solve the problem of too much debt.

I just got the picture of President Obama, Larry Summers, Tim Geithner and Ben Bernanke looking like little kids building a sand castle on a beach shore-line and wondering why the waves keep knocking it down.

** One of our friends just reminded us, it's only debt if you have to pay it back!

 

Housing "Numbers" Scare Me

It is obvious that since the U.S. housing market was and still is the epicenter of "The Great Recession", we are obsessed with the "housing numbers".  Markets gyrate off of "New Home Sales", "Pending Home Sales", "Foreclosure Rates", "Median Home Prices", "Months of Inventory", etc.  Some people are starting to call a bottom or near bottom for the housing market, others think we still have a long ways to go.  What scares me is how the hell do we arrive at these numbers?

Do we really know what housing inventories are?  I don't think so.  Personally, between bankers and servicers there has to be many, many homes sitting in sort of a shadow default or foreclosure status.  Servicers keep borrowers breathing for a variety of reasons.  It could be that it's less costly to pass through their P&I than to call a default.  They're not supposed to do that but they do.  It could be they are looking to protect their record as a "seller servicer".  It could be that they are just overwhelmed and haven't gotten to thousands of serious delinquent borrowers yet.  Also, lets not forget that with rising unemployment, that serious delinquent pipeline keeps getting reloaded.

The long and short of it, for me anyway, is when it comes to the "key" housing numbers, it's garbage in-garbage out.  I prefer doing what Richie and other friends of ours do, which is go down to foreclosure auctions, or solicit real bids on existing properties.  And even that approach is going to potentially miss the gigantic shadow inventory.  Still, its a hell of a lot better doing that versus what Al Greenspan does, which is look at a bunch of charts and graphs from the National Association of Realtors and call a "bottom".

Finally, I want to leave you with this little anecdote.  A few weeks ago a buddy asked me how the "months of housing inventory" gets calculated.  I told him I really didn't know but I bet the folks at www.housingdoom.com do.  So I asked them and here was their response;

Both the NAR and the NAHB express inventory as "This month's inventory/This month's sales".  It's not really a realistic approach when sales and inventory are both seasonal numbers.  The NAHB's numbers are understated in down markets.  In their model, when someone signs with a builder to build a house, it is sold.  If the house has begun and the buyer cancels, it remains "sold" and the spec is not considered "inventory".  The other problem with the NAHB is that they do a sampling of their membership.  They are on the honor system and it is up to builders to say what they consider "inventory"- there is no set definition of how far along the house must be.  They do at least give the margin of errorin their reports- not that the MSM understands it.  I've seen the market rally because sales were "up 3%"- but the margin of error was plus or minus 15%!  The 3% rise would also be a result of this month's number vs. last month's revised number.  In short, don't bet serious money on the accuracy of the reports!

 

The NAR says little about its methodology.  They also sample their membership.  There is no central MLS that they can pull the data from.  One of the things I wish that was reported was the reason that existing homes leave inventory.  When the NAR reports inventory, there's no way if this month's reduction was due to cancellations, expirations, foreclosures, or sales.  When sales are low but inventory is diminishing, I assume that the inventory will come back to haunt us at some point.

 

Comforting?

"Okay Folks...Pay Careful Attention And Follow the Subprime!"

Ah, it's times like this I wish I had the skills of world famous cartoonist Kenny K (www.kennyk.com  the crackerjack cartoonist who drew Goldman Superheroes as well as some great new stuff coming out soon!) to draw this picture.  It would be a picture of a street hustler, like the ones we have here in NYC, playing a game of three-card-monty.  Except instead of finding the ace of spades you'd be looking for the subprime mortgage!  "Did we hide it under....

• Door Number 1 - Freddie Mac?
• Door Number 2 - Fannie Mae?
• OR Door Number 3 - The FHA?

There is a great piece this morning in HousingDoom.com The Great Housing Bust of 2009. Think The Subprime Bust is Over? Think Again.  Read the piece, very good.  I read Housing Doom everyday, especially whenever we get a piece of housing data that is not apocalyptic (like this mornings rise in pending home sales) and the usual nincompoops begin to rejoice that we have found the bottom.  They keep everything in perspective over there.  When HousingDoom, Ivy Zelman and CNBC's Diana Olick tell me that we've bottomed, then I'll believe it.  Anyway, HousingDooms piece centers around the on coming disaster with the $180 billion of loans guaranteed by the FHA last year; 

Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn’t well known is that a parallel subprime market has emerged over the past year — all made possible by the Federal Housing Administration. This also won’t end happily for taxpayers or the housing market.

Last year banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100% taxpayer guarantee. Many of these have the same characteristics as subprime loans: low downpayment requirements, high-risk borrowers, and in many cases shady mortgage originators. FHA now insures nearly one of every three new mortgages, up from 2% in 2006.

Nice!  HousingDoom states, "Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts." 

We usually take the "Over" on these bets.

Here's One Way To Solve That Pesky "Second Lien Issue".....Bail Them Out Too!

You knew this was coming didn't you?  On Friday I wrote a piece about second lien holders (Banks and Servicers) screwing investors holding bonds backed by first liens through loan modifications that will lean (no pun intended....well, maybe a little) toward helping the second lien position at the expense of the first lien.  Here it is;

Another Great Technical For "Legacy Securities". Those Damn Details Getting In the Way Again.

Nice little piece today in the Financial Times Clash Looms Over US Mortgage Aid.  What's frightening is this is hardly new news.  However, I am going to take a guess that 95% of the people in government who are working on the various goodies to make the world safe for housing financing again are hearing about this for the first time. 

Essentially, the battle that is ready to be joined is the battle of investors who own bonds securitized by first liens, many of them the same bonds that are deemed "legacy assets" by Treasury, and banks who are servicing the loans AND own second lien positions.  The normal order of things would call for the second lien to take all the first credit hits, until exhausted, before the first liens are hit.  That is why one lien is called "first" and the other is called "second".  However, not so fast. In the rush to save the American homeowner through legislation, this little distinction may very well get trammeled.  From the FT;

Investors owning securities backed by people's main mortgages say that banks owning riskier mortgages - so-called second lien - could use the legislation to avoid billions of dollars of losses.

These second lien loans are mostly owned by banks, which also own the mortgage servicers. A "servicer safe harbour" in the legislation would shield servicers from legal action if they change the terms on people's mortgages, many of which back securities.

Investors say this would allow servicers to prioritise the banks that own them, and whose risky mortgages are supposed to take losses first. This could help banks avoid billions of dollars of losses that would instead be taken by investors. "The largest servicers are also the largest holders of second mortgages and home equity lines of credit," said Laurie Goodman, analyst at Amherst Securities. "We do not want to suggest that abuses will occur; it's just that the stage appears to have been perfectly set up for such."

Bank of America, Wells Fargo, JPMorgan Chase and Citibank own more than $400bn of second lien mortgages. The banks also own securities backed by mortgages, but they stand to lose more on those holdings than on the second lien debts. JPMorgan and Citi declined to comment and the others were unavailable.

Hmm, you want to step up to the plate and buy "legacy securities" with little issues like these looming?  Not I said the blind man to the deaf mute.

And now, we have this from Bloomberg News Treasury Announces New Plan to Aid Mortgage Holders.

April 28 (Bloomberg) -- The Obama administration unveiled a new program to help holders of second mortgages avoid foreclosure, offering cash to services, investors and borrowers who modify loan terms.

The goal is to help homeowners gain aid with second liens such as home-equity loans, the Treasury Department said in a statement today from Washington. The administration also announced a plan to revive the Hope for Homeowners program, a mortgage-modification effort that has attracted little interest from lenders and borrowers.

“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system,” Treasury Secretary Timothy Geithner said in the statement.

Ahh, those "responsible homeowners" who used their houses like ATM machines.  Also included as "responsible homeowners" are those who got what we called "piggy-back" seconds, in leiu of putting down any sort of down payment.  That was a neat way for RENTERS to call themselves HOMEOWNERS. You can't be a homeOWNER if you haven't put a dollar of equity into the house. 

This is great.  In one fell swoop the Administration can bail out the banks who made the seconds, the "homeowners" who took the seconds, and screw the first lien investors just a little less than before by screwing the taxpayer. 

What a joke.

Nice little piece today in the Financial Times Clash Looms Over US Mortgage Aid.  What's frightening is this is hardly new news.  However, I am going to take a guess that 95% of the people in government who are working on the various goodies to make the world safe for housing financing again are hearing about this for the first time. 

Essentially, the battle that is ready to be joined is the battle of investors who own bonds securitized by first liens, many of them the same bonds that are deemed "legacy assets" by Treasury, and banks who are servicing the loans AND own second lien positions.  The normal order of things would call for the second lien to take all the first credit hits, until exhausted, before the first liens are hit.  That is why one lien is called "first" and the other is called "second".  However, not so fast. In the rush to save the American homeowner through legislation, this little distinction may very well get trammeled.  From the FT;

Investors owning securities backed by people's main mortgages say that banks owning riskier mortgages - so-called second lien - could use the legislation to avoid billions of dollars of losses.

These second lien loans are mostly owned by banks, which also own the mortgage servicers. A "servicer safe harbour" in the legislation would shield servicers from legal action if they change the terms on people's mortgages, many of which back securities.

Investors say this would allow servicers to prioritise the banks that own them, and whose risky mortgages are supposed to take losses first. This could help banks avoid billions of dollars of losses that would instead be taken by investors. "The largest servicers are also the largest holders of second mortgages and home equity lines of credit," said Laurie Goodman, analyst at Amherst Securities. "We do not want to suggest that abuses will occur; it's just that the stage appears to have been perfectly set up for such."

Bank of America, Wells Fargo, JPMorgan Chase and Citibank own more than $400bn of second lien mortgages. The banks also own securities backed by mortgages, but they stand to lose more on those holdings than on the second lien debts. JPMorgan and Citi declined to comment and the others were unavailable.

Hmm, you want to step up to the plate and buy "legacy securities" with little issues like these looming?  Not I said the blind man to the deaf mute.

And now, we have this from Bloomberg News Treasury Announces New Plan to Aid Mortgage Holders.

April 28 (Bloomberg) -- The Obama administration unveiled a new program to help holders of second mortgages avoid foreclosure, offering cash to services, investors and borrowers who modify loan terms.

The goal is to help homeowners gain aid with second liens such as home-equity loans, the Treasury Department said in a statement today from Washington. The administration also announced a plan to revive the Hope for Homeowners program, a mortgage-modification effort that has attracted little interest from lenders and borrowers.

“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system,” Treasury Secretary Timothy Geithner said in the statement.

Ahh, those "responsible homeowners" who used their houses like ATM machines.  Also included as "responsible homeowners" are those who got what we called "piggy-back" seconds, in leiu of putting down any sort of down payment.  That was a neat way for RENTERS to call themselves HOMEOWNERS. You can't be a homeOWNER if you haven't put a dollar of equity into the house. 

This is great.  In one fell swoop the Administration can bail out the banks who made the seconds, the "homeowners" who took the seconds, and screw the first lien investors just a little less than before by screwing the taxpayer. 

What a joke.

Another Great Technical For "Legacy Securities". Those Damn Details Getting In the Way Again.

Nice little piece today in the Financial Times Clash Looms Over US Mortgage Aid.  What's frightening is this is hardly new news.  However, I am going to take a guess that 95% of the people in government who are working on the various goodies to make the world safe for housing financing again are hearing about this for the first time. 

Essentially, the battle that is ready to be joined is the battle of investors who own bonds securitized by first liens, many of them the same bonds that are deemed "legacy assets" by Treasury, and banks who are servicing the loans AND own second lien positions.  The normal order of things would call for the second lien to take all the first credit hits, until exhausted, before the first liens are hit.  That is why one lien is called "first" and the other is called "second".  However, not so fast. In the rush to save the American homeowner through legislation, this little distinction may very well get trammeled.  From the FT;

Investors owning securities backed by people's main mortgages say that banks owning riskier mortgages - so-called second lien - could use the legislation to avoid billions of dollars of losses.

These second lien loans are mostly owned by banks, which also own the mortgage servicers. A "servicer safe harbour" in the legislation would shield servicers from legal action if they change the terms on people's mortgages, many of which back securities.

Investors say this would allow servicers to prioritise the banks that own them, and whose risky mortgages are supposed to take losses first. This could help banks avoid billions of dollars of losses that would instead be taken by investors. "The largest servicers are also the largest holders of second mortgages and home equity lines of credit," said Laurie Goodman, analyst at Amherst Securities. "We do not want to suggest that abuses will occur; it's just that the stage appears to have been perfectly set up for such."

Bank of America, Wells Fargo, JPMorgan Chase and Citibank own more than $400bn of second lien mortgages. The banks also own securities backed by mortgages, but they stand to lose more on those holdings than on the second lien debts. JPMorgan and Citi declined to comment and the others were unavailable.

Hmm, you want to step up to the plate and buy "legacy securities" with little issues like these looming?  Not I said the blind man to the deaf mute!

Have a nice weekend everybody.  Richie and I are gonna learn the radio business this afternoon! 

Mortgage Refinance Applicants May Be In For a Major Buzz Kill

Remember back in high school when some kid would announce he was having a party?  He and his buddies would get everyone excited, telling them that his parents were out of town, his big brother was getting them two kegs and girls from three different high schools were going to be there.  Then on the big night, you would get there and find that;

1. No beer
2. No girls
3. No party because the kid's parents didn't go out of town!

This is how I feel about the latest surge in mortgage refinance applications, which surged 32% yesterday (a weekly measure by the MBA).  I've been saying this for a while now.  The process that takes a loan application and creates a mortgage loan is very labor intensive.  That is why in the days of yesteryear when we were blowing ourselves to smithereens, no one bothered to do the messy little things like.......UNDERWRITE THE GODDAMN LOAN!  We (big Wall Street mortgage shops) all had mortgage lending conduits that made probably $1 trillion of loans.  The amount of real underwriting, the kind that actually tries to find out the borrowers financial condition as well as the value of the underlying home, was perhaps 5% of that $1 trillion.  I may be being a little generous there too!  Who had the time people or money to actually do their real jobs?  The call came from the structuring desk in New York that "Blue Horse Shoe" loved Pay-Option ARMs, the loan brokers commission grid was adjusted to account for the demand and off they went looking for warm bodies to make those loans to.

Now however, mortgage shops have to underwrite the loans.  Unfortunately, the people that used to work at mortgage origination shops are now unemployed and for all I know writing blogs!  If President Obama would really like to stimulate the economy and provide jobs, finding people who can spell mortgage, know what DTI stands for and be able to read a single family home appraisal would be awesome.  We could probably create 250,000 jobs easy!

There's another problem though.  Mortgage origination shops, other than the big banks, have cashflow timing issues.  They used to borrow money from banks to fund a loan and then they would get the money back when the sold the loan into a Freddie or Fannie mortgage backed security, usually a few weeks later.  We call that type of lending (where the mortgage originator would borrow short term from BofA, fund the loan and then recoup the cash upon final sale of the loan) warehouse lending.  The amount of warehouse lending has been cut dramatically in the last year.  Therefore, even if a mortgage shop can underwrite you they may have a problem with their cashflow timing leaving you S.O.L.  What the government might do however, is look to Freddie and Fannie to make warehouse loans to mortgage originators (they may have to do some fancy footwork around the GSE charter but it's not like anyone really pays attention to stuff like that anymore).  Maybe if someone at the government actually knew how mortgage finance worked they could have headed this "kink in the system" off at the pass a few months ago.  Oh well, Tim...I'm here if you need me!

The Housing Rescue Plan is Here...Again!

Details are coming out on www.financialstability.gov !!

Making Home Affordable Modifications

If you can no longer afford to make your monthly loan payments, either because your interest rate has increased or you have less income or you are experiencing a hardship that has increased your expenses (like medical bills), you may qualify for a loan modification to make your monthly mortgage payment more affordable. Millions of borrowers who are current, but having difficulty making their payments and borrowers who have already missed one or more payments may be eligible.

Do I qualify for a Home Affordable Modification? Answer these questions:

1. Is your home your primary residence?
2. Is the amount you owe on your first mortgage equal to or less than $729,750?
3. Are you having trouble paying your mortgage? For example, have you had a significant increase in your mortgage payment OR reduction in your income since you got your current loan OR have you suffered a hardship that has increased your expenses (like medical bills)?
4. Did you get your current mortgage before January 1, 2009?

If you answered yes to all the above questions then...

What do I do next?

If you answered yes to all of these questions, you may qualify for a Home Affordable Modification. The next step is to gather the information you will need to provide to your lender. This includes:

• Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
• Your most recent income tax return.
• Information about your assets
• Information about any second mortgage on the house.
• Account balances and minimum monthly payments due on all of your credit cards.
• Account balances and monthly payments on all your other debts such as student loans and car loans.
• A letter describing the circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.).

After you have this information, you should call your mortgage servicer and ask to be considered for a Home Affordable Modification. The number is on your monthly mortgage bill or coupon book.

Please be patient
Servicers received the detailed program requirements on March 4, 2009 and it may take some time before they are fully operational. However, Treasury has encouraged servicers to immediately assist delinquent borrowers at the greatest risk of foreclosure.

---

IN THE MEANTIME, MANY LENDERS HAVE MADE A COMMITTMENT TO DELAY FORECLOSURE ON ALL LOANS THAT MEET THE MINIMUM ELIGIBILITY CRITERIA FOR A HOME AFFORDABLE MODIFICATION.

Ummm, this is going to take a while. You can reduce your loan rate to as low as 2%.  I still think affordability is going to come via principal cramdowns.

Clean Up My Mess NOW!!!

It is somehow fitting that as I await the details of President Obama's $75 billion housing plan, an allegorical event took place in my home at 6:30 AM.  I was downstairs when I heard a shriek from our three-year old upstairs.  I ran up the stairs (actually hobbled) to find the lad screaming with toothpaste all over his mouth and standing in a puddle of pee!  Apparently, he decided to go out of order and brush his teeth BEFORE "using the facilities".  At first I thought, "Well at least he was trying to brush his teeth like a big boy and just got confused with the order of things."  It turned out however, that the reason he brushed before peeing was he wanted to use the sink before one of his older brothers.  Not only did he want to beat out his brothers to the sink, but he closed the door on them so he could have the bathroom to himself. Typical last-child three-year old stuff, but still in the grand scheme of things irresponsible.

Anyway, the boy is stomping around demanding that he wants to brush his teeth and spreading the mess everywhere.  The oldest son thinks fast and runs downstairs to use the bathroom and get the hell out of the way, leaving middle son hopping on one leg waiting for a free terlet.  My wife comes in and tries to clean the mess, and she is being VERY understanding of situation.  The little guy however, is still screaming, essentially telling us to clean up this mess NOW so he can get back to brushing his teeth!  While my wife (I lent moral support and took the dirty clothes down to the basement) is cleaning the floor, trying to calm him down and run a bath the little guy keeps the tantrum going, making the mess worse.  Meanwhile, the two older boys, are being tasked with helping in the clean up and are falling behind schedule.  It's total chaos!

Finally, the mess and the boy are cleaned up by Mom and the older boys are now in a mad rush to get themselves ready to get out the door and go to school....with me driving them like a drill sergeant.  The big guys did nothing wrong, in fact they helped with the clean up.  However, they have stupid standardized tests to take in school today and are therefore, getting pushed along and completely inconvenienced by their little brother's "situation".  Mom meanwhile, works like crazy and does her usual awesome job straightening out a rough situation.  What's the little guy doing now in the aftermath of the crisis?  He's joyfully playing with his trains! 

Now, lets think about what the new housing plan will do. 

The plan will allow upside down (loan to housing values greater than 100%) borrowers to refinance at the rate afforded to prime borrowers, and modify mortgages of non-prime borrowers who are "at risk" of defaulting.  For the purposes of this piece, lets just deal with the former part of the plan, the refinancing of Freddie/Fannie eligible mortgages.

Borrowers who normally would not meet Freddie and Fannie underwriting standards because of their high loan to value ratios will be included in the mass refinancing that is supposed to take place under the plan.  The inclusion of all these borrowers will clog up the origination pipeline.  Remember, every loan that is refinanced requires actual humans underwriting each loan application.  While it is true that underwriting standards will be easy (let's not even get into the irony of that), at a minimum, a title search and some sort of verification that the home in question is still standing has to be done.  As applications build up, the originators capacity is strained and finally is overloaded.  As we have said before, it is important to remember that at most mortgage originators, many of the people who performed the underwriting function have been laid off or reassigned to loan servicing and collection. Therefore, the originators underwriting capacity has shrunk by a lot.  Moreover, this clogging of originator capacity deals a unfair blow to real prime borrowers, whose loan to values are much less than 100% because they actually made a sizeable down payment on their home, or didn't suck all the boom-era equity out in a cash-out refi.  These borrowers will be put in the same line as the borrowers with negative equity and will have to wait months to get their loan refinanced to the current, historic low rates.  That sucks if you are a hard working, responsible person that could really use a significant and legitimate reduction in his or her monthly payment in these hard times.  That borrower may have to wait two to four months to get his mortgage refinanced, and will have to pay a rate-lock fee to make sure that the rate doesn't jump on him while he waits in the same line as the upside down borrowers. 

Isn't this a lot like the situation that happened in my house this morning? 

• The irrational little guy makes a huge mess and makes everyone miserable.
• The rational, responsible boys get unfairly rushed along because of their little brothers actions.
• Mom is overworked....by 7:00 AM!
• Everybody stressed out except the little guy who created the problem in the first place!

I'm Gonna Get a Real........ESTATE. NOW!

Hi folks. Thanks Eric for pointing out below what I said about 8 months ago. You know what? That seems to be a common theme here at www.monkeybusinessblog.com . We say stuff and then voila it happens. Well believe it or not I just found a nice new deal. No I'm not going to buy something but I am in the process at this second to moving to a new apartment in NYC. Thats right my pals at Schleppers Moving and Storage are standing right around me and moving the family's belongings in to a truck. Where are we going? Well you remember the Jefferson's from back in the 70s? Well we are "Movin on upppp. To the east side. To a deeeeeeeluxe apartment in the sky-i-iiiii."

Yes we are moving to a building with the same amenities as the one we have now. In a very nice neighborhood. But we are renting. And we are renting for 1 year. The nice people at the new building said hey we'll sign you to a 2 year lease and no change in rent. I said nahhhh I'll take my chances. I think in a year the rent will be even LOWER. So I'll take a 1 year lease thanks. Oh did I tell you what I'm paying versus my old place? 30% less. Like I said just as nice a building maybe even better. So if you are looking at real estate in NYC dont be shy to show some nice lower prices. You might be pleasantly surprised. Oh I didnt find any foreigners trying to outbid me either. I think they have their own issues. So have a good weekend and stay tuned to when I throw a big monkeybusinessblog.com party on my spacious new roofdeck when the weather gets nice. For free.

New York City Real Estate Cratering ? Hmm, I Remember Someone Predicting That A Looooong Time Ago.

It is all the rage now to talk about just how bad real estate is doing in The Big Apple, The City that NEVER Sleeps.....New York City.  In fact a lot of buzz has been created about an article in the New York Times today about folks walking away from $1 million deposits on coops and condo's because it's looking so bleak. Apartment Buyers Abandoning Six Figure Deposits

Well, waaaaay back in July 2008, when everyone was talking about New York City real estate holding its huge 10-year gains because the almighty Euro (remember that?) would have Europeans buying the high end palaces going up all over the City our own Richie Bennett had a different opinion;

You know what I look at a lot of the day? All the construction going on in New York City. Manhattan specifically but its going on in the outer boroughs too. I mean these arent small projects either. Big time high rises. The residential kind. Where you can live. The asking prices? Almost as high as the buildings themselves. The sales results in Manhattan are being looked at very closely every month nowadays. You know what the numbers are saying? Prices are flat to slightly higher in Manhattan. This is after a huge gain for the last 10 years or so. HUGE. Interesting.

Um when we hear these assclown real estate brokers talk about these figures, they always mention how New York City is "different" than other markets due to it being a huge hit with the entire globe's population. They will then drop in the ol' "even if the US buyers arent as aggresive, the FOREIGN buyers are very active in NYC due to the strength of the Euro." That's nice. Its also a bunch of crap.

Look I have some money. I dont have it all and never will. But I can tell you this, 10 years ago when the dollar was really strong and I was looking at investments, I NEVER once said "hey you know what I'd like? A nice pad in London, or Tokyo, or Hong Kong, or Sydney." You know what else? Neither did any of my pals who lived here. Trust me we couldve if we wanted to. This tells me that this "foreign love-in" is gonna stop pretty quickly. You think not? You wanna know who took the NASDAQ market on its last good ride from 4000 to 5000 in about 6 months a few years back? You're damn right. The foreigners. The NASDAQ is at 2265 today. Hiya. They aint been been back since.

So my point is, last year, the financial industry paid about 35% of the wages and salaries in NYC so that they could afford those nice expensive (smallish) apartments. That also doesnt take into account the ancillary (nice word Richie) businesses connected to the financial industry who are now also S.O.L (a technical term meaning in trouble), like printing companies, law firms, computer makers, even the coffee guy. Suffice it to say the number is probably closer to 70% of NYC's wages and salaries tied into the financial industry indirectly or directly.

Now tonight, the legally blind governor of the state of New York, David Paterson, is going to give a type of State of the State address that will be on TV. I got a funny feeling the legally blind Gov. is going to highlight some of these issues like someone who has 20/20 vision. He's gonna come with a big ol' can of whoop-ass ladies and gents. Laying down the cold hard facts. It aint a pretty sight when it comes to things like the budget.

So we have construction out the wazoo, people getting fired left and right from the industry that pays all the bills and is going through a LONG downturn, prices "unchanged" after HUGE gains the last 10 years in Manhattan real estate, and a NYC budget that is a black hole (could mean less cops and other important city services like garbagemen). What does that all spell? We hear at monkeybusinessblog.com think thats a nice SELLING opportunity.

Bad Things Happen When You Kick the Game Board Over.

Not long ago I was watching two of my sons playing a game of chess.  One son (I won't disclose which one did what so I won't get yelled at) was losing and he knew it.  I'm not sure if the "other son" realized how close he was to winning but he sure got pissed off when his brother "accidentally" knocked the board off the bed.  They got into a big fight and the son who knocked the board over finally convinced his brother to play again.  I was nearly incredulous when about twenty-five minutes into the game, the same son knocked the board over AGAIN!  Needless to say they don't play chess anymore.  The kid who invested nearly an hour of his time and got cheated twice won't invest another second playing chess with his brother.

I think about this simple story when I think about what is going on in the mortgage securitization market.  Let's forget about the non-Freddie and Fannie world that sprang up in this decade and at its height, probably financed sixty percent of American home financings.  Let's just deal with Freddie Mac and Fannie Mae mortgage backed securities ("MBS").  The market for these securities was the most liquid in the world.  The reason our trading partners who have tremendous trade surpluses with us (like China and Japan) hold vast quantities of these MBS is because the MBS market was the deepest market in the world.  The Chinese could come in and buy $2-$3 billion in a night and make the mortgage market move, all else equal a quarter of one percent at most?  Now that really sucked if you were short MBS versus Treasuries, but in the grand scheme of things, it was a tiny ripple.  If they tried to do that buying German Bunds or Japanese JGBs.....they would have moved those markets POINTS.  Even the U.S. Treasury market would have moved at least double what the MBS market would move.

Anyway, the market for American mortgages, prime credit mortgages was incredibly efficient.  It had been that way since at least the early 1990's.  Because of this efficiency, banks in the United States did not have to hold all these mortgages that they made on their balance sheet.  They could sell them in the form of MBS to all kinds of investors, foreign and domestic.  In return, American's had fantastic access to "cheap" home financing.  When I say cheap, I'm not talking about the insanity of the last four or five years, I'm talking about the first few years of this decade as well as the 1990's.  If the ten-year U.S. Treasury was at 5%, a thirty-year fixed rate mortgage was between 6% and 7%. This access to home finance was the envy of the world.

The basic premise that allowed for this great deal was that the rule of law would be followed.  One rule was that the collateral backing each loan was the borrower's home.  If the borrower defaulted on his mortgage, the home would serve as the primary vehicle to repay the loan.  The home was not allowed to be included under bankruptcy protection.  This was important because under bankruptcy, a judge could determine that if the loan on the home was higher than the value of the home, the difference could be used to reduce the principal of the loan, exposing the lender or investor to unsecured risk.  This is called "cramdown risk".  Now, due to our severe housing crisis, The White House is a strong proponent of covering borrower's primary residences under bankruptcy protection.  This is what we call in the business a "Game Changer".  Others might call it a "Jam Job"!

The other rule that is currently being messed with in the White House's new housing legislation is Freddie Mac and Fannie Mae's Government Sponsored Enterprise (GSE) charter.  As we reported, Tuesday I believe, the plan to allows the GSEs to buy or guarantee loans that have loan to value's of greater than 100% (105% is the current, new limit).  The problem with that is the GSE charter specifically prohibits the GSEs from buying or guaranteeing loans with LTVs greater than 80% without the borrower buying private mortgage insurance.  The new housing plan, in the interest of letting borrowers take advantage of historically low mortgage rates (manipulated by the government's buying of MBS) certainly isn't going to force them to buy expensive private mortgage insurance.  To get around this charter violation, Freddie and Fannie are calling these refinancings....loan modifications.  The only problem with that is, each existing MBS that the old mortgages are in specifically limit the amount of loan modifications that can be done in any one MBS pool.  Why do they do that?  It's there to protect a buyer of a MBS that has a premium.  For instance, par is 100-00.  Most MBS right now trade at prices greater than 100-00.  For example, if you bought a Fannie Mae 5.5% at 103-00, you paid a 3 point premium.  The bad thing that can happen to you when you buy at a 3 point premium is if many of the loans in the MBS prepay.  That's because you paid $103, but you get back $100.  This is a risk that MBS investors take with regard to prepayments, which are driven primarily by refinancing.  Therefore, while investors know they take prepayment risk and adjust accordingly, they are NOT supposed to be taking large loan modification risk.  They know this because it is in the documents of every MBS you buy.  So, if the GSE's are calling their actions under the new housing plan modifications how can they do this?  Simple!  For security purposes they are calling these refinancings!  Sorry investor...you lose!

This gets me back to the thrilling chess games at my house.  The kid who invests time and energy into two games of chess and then essentially gets the rules changed on him arbitrarily by his brother kicking the board over, isn't going to play anymore.  Similarly, the investor who has had the rule of law changed on him, to his disadvantage, arbitrarily, isn't going to play anymore either.  The result will be the end of housing finance in the country as we knew it.  Nobody is talking much about it but they will when the ten-year U.S. Treasury is at 5% and a 30-year fixed rate prime mortgage is at 8.5% or higher and required money down is 40% or more like the rest of the world.  What is that going to do to the housing recovery?  I don't think Treasury or the Office of Management and Budget are putting this little factor into their bank stress tests and economic growth models. 

Housing Data Continues to Inspire...............Gag Reflex.

From Bloomberg News;

Feb. 25 (Bloomberg) -- Sales of previously owned U.S. homes unexpectedly declined even as falling prices made them more affordable, signaling that the housing slump is further from a bottom than previously estimated.

Purchases fell 5.3 percent to an annual rate of 4.49 million, the fewest since 1997, the National Association of Realtors said today in Washington. The median price dropped 15 percent from a year ago to a six-year low of $170,300. Distressed properties accounted for 45 percent of all sales.

“This is actually a very disappointing set of numbers,” Ethan Harris, co-head of economic research at Barclays Capital Inc., said in a Bloomberg Television interview. “We’re still in this phase of the recession where it’s really kind of a dramatic pulling back” in purchases of big-ticket items, due to a “tremendous loss of confidence in the economy.”

Now when Ethan Harris says "disappointing" that says something because it's not like he's been calling for a robust bounce anytime soon!  You pile this on top of yesterday's 18.5% drop in the S&P/Case-Shiller index, which has accelerated again, and you just want to hide away with your family, your food, your water and your gold coins! 

On a related note, our friend Jim, a real estate mogul in Oregon, tells us that Oregon currently has a 20 month supply of inventory!  That's not one of the sand states (Florida, Arizona, Nevada, California) either.

Housing Plan Running Into Those Pesky Details Again!

Article from Bloomberg News today bringing to light some legal tripwires the Obama housing plan is hitting with regard to Freddie and Fannie's charter. Obama's Mortgage Plan for Freddie, Fannie May Face Legal Snag.  For a group of people (government) that has a heavy overweight in the legal field, they sure do like to ignore the law!  Like Tom Cruise said to Demi Moore in "A Few Good Men", "Oh, that's right..I forgot you were sick the day they taught law in law school!"

The main issue here is that Freddie and Fannie's Government Sponsored Enterprise Charters specifically state that the GSEs will only buy or insure a loan that has a loan to value greater than 80% (meaning the borrower has at least put down 20%) if the borrower obtains private mortgage insurance to resolve the difference.  While the details of the plan have not come out yet (March 4 is the "detail date") it is pretty clear that the plan looks to get around the private mortgage insurance (PMI) issue.  From the Bloomberg article;

The proposal may violate requirements that homeowners put up at least 20 percent of the appraised value of a home or carry mortgage insurance, said U.S. Representative Scott Garrett of New Jersey, the ranking Republican on a panel that oversees the companies.  “I don’t see how that stands in face of what the statute says,” Garrett said in an interview. “It certainly seems as though they need to seek a congressional change, a legislative statutory change.”

The regulators have a plan to avoid this issue.  Here's chief GSE regulator James Lockhart;

Fannie and Freddie’s chief regulator, James Lockhart, has said the changes are exempted from mortgage-insurance rules written into the companies’ charters and won’t require new appraisals. Lockhart said the strategy will make it easier to help struggling homeowners get affordable mortgages.

Regulators will work around that requirement by treating the refinancings as a “modification for charter purposes,” not as new loans, Lockhart, director of the Federal Housing Finance Agency, said in a Feb. 20 letter to a mortgage insurance trade group.   

This is great!  Modification for charter purposes.  They say this because a modification is technically not a new loan.  Therefore, it gets around the charter issue of PMI for loans with LTVs greater than 80%.  However, there's a another problem!  Freddie and Fannie MBS have limits to how many loans can be modified in the pool.  This is there to protect bond holders who pay a premium for a bond and then lose that premium when the bond prepays.  Here's how we get around that;

“The new refinanced loan is treated as a new origination because the old loan is paid off,” said Amy Bonitatibus, a Fannie spokeswoman.

Ahh, so for modification restrictions in existing MBS we call it a refinancing!  Dizzy yet?  Additionally, Freddie and Fannie will not be requiring new appraisals!  Therefore, how will they know if a loan is greater than its new LTV limit of 105%?  They won't!! 

This is going to be a trial lawyers picnic!  Law suits will be flying from every direction.  I know the government is trying to do what they have to do to bring foreclosure relief.  However, shouldn't someone have nipped this in the bud and started working immediately (like back in November) to ready Congress to vote for a amendment to the GSE's charter rather than this ridiculous scheme!

Jeez...I'm telling you I could have done a better job with all this with a few friends, from my house, with all the beer we could drink!

Oh!  Foxnews Strategy Room today 9am-10:30am.  See you there!

Asia to Freddie and Fannie: "That's Nice Kids, Now Please Put Your Uncle Sam on the Phone."

I have to hand it to Asia, they are playing this one beautifully.  Story in Bloomberg today, "Fannie Mae Rescue Hindered as Asians Seek Guarantee."

Feb. 20 (Bloomberg) -- Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.  The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and rebuild the nation’s largest mortgage-finance companies.

Even after President Barack Obamavowed on Feb. 18 to sink as much as $400 billion of capital into Fannie Mae and Freddie Mac, double the original commitment, “there is still a concern that there is no guarantee” from the government, said Shimomura, who oversees $4 billion in non-yen bonds for the arm of Japan’s largest bank.

“Looking at the risk, they’re not so attractive,” he said. “We need a guarantee before we’ll buy.”

The government has been trying like the dickens to avoid having to put the explicit full faith and credit guarantee behind Freddie and Fannie and now the jig is up.  The reason Treasury has been doing, as Gregory Hines would have called it, "The Ethiopian Shim-Sham" is because if the U.S. Government has to explicitly back $1.7 trillion of GSE debt (we haven't even talked about the FHLBs yet) as well as $3.7 trillion of mortgage backed securities we will more than double Treasury's current debt.  Now that Treasury and the Fed, using Freddie and Fannie, are looking to launch the mother of all refinancing waves, Asia is essentially saying, "We'll take the $billions that come to us at par when these securities prepay and put some to work in the markets Treasury or FDIC has extended the full faith and credit of Uncle Sam to, and the rest of the dollars....we'll cross that bridge when we get there."

Asia saying they are not going to play ball with regard to financing Freddie and Fannie, which they are going to need as they grow their retained portfolios, or by buying new, shiny Fannie and Freddie 4% MBS, means President Obama's big housing program has a big problem.  Asia declaring a buyers strike on new MBS purchases, just as we ready to make a few hundred billion new ones (talking gross supply here, net will be smaller because many "new" securities will be the result of refinance driven prepayments of older MBS) is going to put TREMENDOUS pressure on the MBS market and, all else equal, push mortgage rates in the wrong direction.....UP.  What that means is THE BUYER of all these new MBS will be the Federal Reserve and Treasury.  To drive mortgage rates lower they will have to buy at increasingly tighter and tighter levels.  That will end up in a situation technical that fixed income specialists call F.U.B.A.R.  The government will own at least $750 billion of these new MBS right around a price of 100-00.  History has shown us that just when the last forced purchase takes place, interest rates like the ten-year Treasury will go from 2.85% to 5.00%, moving the dollar price of those MBS to a price less than 80-00!  A twenty percent loss on $750 billion is a cool $150 billion.  Hi-ya!

I'd expect Treasury to extend the full faith and credit to GSE debt and MBS by early next week.

Ahh, Those Pain in the Ass Details Always Get in the Way!

Well, its' been exactly twenty-four hours since President Obama's roll out of his housing plan and what usually has been the case since this mess started, a lot of people are walking around scratching their heads trying to figure out how this is going to work.  Let's start with a point we brought up yesterday.  Refinancing CURRENT mortgages is a time consuming process that takes up a lot of human capital.  In the "good old days" when we would have a refinancing boom, mortgage originators would reach their physical capacity to underwrite and process loans to the point that the time from loan application to closed loan would go from 45 days to 90 or even 120 days.  The time period I am talking about here is 2001-2005.  Originators employed hundreds of thousands of people to do this work.

Now it's 2008 and mortgage originators, as well as Freddie, Fannie and the private mortgage insurers are running "a little leaner" (translated: They sh*t-canned an awful lot of people who do the actual work of originating loans.).  Additionally, we are not just talking about normal refinancings.  We are talking, at least in part, about loan modifications.  Loan modifications are going to be extremely time consuming.  A buddy pointed out to me yesterday that it if we were able to fully process 10,000 loans a day, every business day of the year, we wouldn't reach the President's goal of five million homeowners's mortgages being refinanced or modified for nearly two years!  Moreover, I think getting 10,000 done everyday is setting a pretty high bar.  Like we have said before, here is the fantasy scenario;

1. Borrowers around the country who either need to refinance or get their loan modified will show up at the "appointed" place with all their information.
2. At long banquet tables at the appointed place sit the mortgage originator who will instantaneously check employment information and gross monthly income, a representative from the GSE's, the attorney's representing all the possible bond holders that may have to agree on any modification, the member of the government who will pay the servicer $1,000 for each modified loan, the servicer of course and a person from Treasury that will approve the modification and then chip in the required amount to lower the modified borrowers monthly payment.
3. Tap tap tap....Stamp stamp stamp.....Viola! Another satisfied customer and the line keeps moving!

I really don't mean to be Debbie Downer here but who in the hell puts these plans in place without actually knowing how the process really works?  There are already all kinds of questions out there as to who really gets helped by the plan and who gets left out, based on the criteria for refinancing or modification.  This process needs a real plan.  One time I asked a friend who is a officer in the Marine Corps, "Hey, if you had to take a moderately sized town in Iraq, filled with bad guys, how many men would you need?  My friend said, "That's a freaking retarded question.  What are the details, the topography, the entrances and exits, what do the bad guys have, what are the rules of engagement...etc..."  Needless to say I felt like an idiot. 

I can't help but feel that the stupid question that I asked my friend is the way the people in Washington think on a daily basis.  We are dealing with $billions here.  The government isn't just handing out money to homeowners, it's also handing out $billions to loan servicers.  There has to be command and control over the process or sure as Monday follows Sunday, we are going to be watching Steve Kroft on "Sixty Minutes" breaking a story how an understaffed and undereducated goverenment got taken for $billions from con-artists while people who legitimately should have been helped under the program, weren't.

Here Comes the Housing Plan! Don't Know if it Will Work But it Should Create About a Million Jobs!

President Obama will address the nation from Phoenix at 12:15 eastern time to unveil the Administration's new plan to stem foreclosures.  Here are some of the details.

• If you are current on your mortgage, and it is securitized by Freddie and Fannie, but you have been unable to refinance due to a decline in value of your home, now's your chance to refinance into a 15-year or 30-year fixed rate mortgage!
• If you are upside down on your mortgage (your first mortgage has a higher balance than your home's current value) as long as the loan to value is 105% or less, you qualify.  Therefore, you needed to start the game with a loan to value at around 80% or lower. 
• Eligibility details will be out March 4, 2009.  Criteria will include sufficient income to make the new payment and a "acceptable" mortgage payment history.  The program is limited to loans held or securitized by Freddie or Fannie.

• If you have a second mortgage, the second mortgage lien holder must agree to remain in the second position.  That should be interesting.

• Interest rates will be prevailing market rates......so stand by for the Fed to wave in $50 to $100 billion in MBS anytime now!

• All can apply after the details are announced March 4th.  Freddie and Fannie's retained portfolio will be allowed to rise to $900 billion each and the government is doubling the capital commitment to Freddie and Fannie to $400 billion.

• If you are not current on your mortgage, your lender can voluntarily modify your mortgage through interest rate reductions.  The government will be assisting mortgage lenders in interest rate reductions by "matching".  I assume that means a 50-50 split?  Not entirely clear on that.

• It appears that the lender can also reduce principal if LTV is greater than 100%.  I do not see government cost sharing on that option.  Again, this is voluntary on the part of the lender or security holder.

• To assist loan servicers in the cost of modification, the government will pay servicers $1,000 for each loan modified, as well as $1,000 per loan for three years if the borrower stays current.  Additionally, if the borrower stays current for five years he can get a $5,000 bonus!  Not to be a cynic but organized crime is going to have a field day with this.

• To qualify your loan can't exceed Freddie or Fannie loan size limits.  So if your loan is $750,000 in most places you don't qualify.  I bet there will be some wiggle room in that stipulation.  Just a hunch.

• To qualify, your monthly mortgage payment must exceed 31% of your gross income.  So if you are working on the clock....manage that sh*t!

• No second homes or investment properties.

So that's the plan.  The easiest part of this plan has already taken place.....making the plan!  Mortgage originators and servicers have been firing people by the tens of thousands.  This work requires massive amounts of real people, doing real work....and that is just to handle the refinancing.  The modifications and deciding who gets what, who is trying to get over on the system, etc...is going to take an army.  For implementation I hope the government has taken the worst case scenario and multiplied it by three......seriously.

The New Plan is Here!! The New Plan is Here!!!

....well not quite yet but almost.  Word is out that Treasury will use $50 to $100 billion of TARP to reduce monthly mortgage payments for "at risk borrowers".  The plan will be voluntary on the part of the lender and/or investors and will apply, for the first time, to mortgagees not yet delinquent.  It's not clear how they will determine who is at risk.  I am going to assume it will be those who are unemployed and have rapidly depleting savings......Hey that's half of Westchester County!!!  Wall Street is getting bailed out again!!

Seriously though, this is going to be one of those plans where the easiest thing to do is get it into writing.  Implementing it will be a whole other story.  As of right now there is no mention of principal reduction.  All I have heard is rate reduction.  I haven't heard lengthening amortization either.  A calculation will have to be made to show that modification leads to a lower net present value loss than foreclosure.  That's probably the only easy part of this.  We will have to wait and see what else comes forth from Mr. Geithner.

Like A Dog Chasing It's Tail, Fed Can't Figure Out Why Mortgage Rates Aren't Falling.

Article today in the Financial Times, "Fed Home Loan Purchases Fail to Keep Mortgage Rates From Rising."  The article reports that the Fed is frustrated that mortgage rates keep rising, despite their purchase of approximately $82 billion of Freddie and Fannie MBS.  It is true that underlying treasury rates (longer dated issues) have been rising steadily.  However, MBS needed the Fed to come in Friday and catch dealers short to tighten MBS/Treasury spreads.  Long story short, without the Fed, mortgage rates are going back to 6% pretty quick....like in a day!

Anyway, one thing that our leaders in Washington do not realize is that their very actions supporting a move to allow an individual's primary residence to be protected under bankruptcy law are having a LARGE negative effect on mortgage rates.  If you allow a bankruptcy court to reduce a bankrupt borrower's mortgage by $200,000 and cram it down the lender or bondholders throat, that changes the whole game dramatically.  Introducing this new credit risk  causes the mortgage insurers, Freddie Mac and Fannie Mae as well as private mortgage insurers to charge significantly higher rates to insure the mortgages.  That gets passed right on to the homeowner.  Additionally, the bondholders will add on a additional risk premium due to the uncertainty of how the collateral secures the bond they hold.  Here is something I wrote last February (some funny stuff in here showing what a different world it was) about messing with the foreclosure process.  A reader liked it so much that he demanded I be "horse-whipped" for suggesting that the foreclosure process should not be screwed with!  And this was WAY BEFORE the bankruptcy provision was seriously talked about.

Now, let us be clear here at Monkey Business. We take no joy in seeing people tossed out of their houses. However, if you permanently impair the process of seizing collateral underlying a mortgage loan, which these “advocates” are doing, you will destroy the entire $multi trillion mortgage finance structure that has funded the American Dream for the last 30 years. You cannot model state and federal governments declaring moratoriums on foreclosures. You cannot model judges allowing picayune loopholes to take away the mortgage note owners right to foreclose on the property that collateralizes a defaulting borrowers mortgage. Those who think they are standing up for the little guy now are actually going to crush us all a year or two down the line.

And guess what? If you can’t rely on the ability to seize the collateral then you might as well kiss the conventional conforming (the loans that are packaged and guaranteed by Freddie Mac and Fannie Mae) mortgage market goodbye. Because if Freddie and Fannie have to stick in the risk factor that they will not have access to the collateral on a loan that they have guaranteed against default, then they are either not going to guarantee it, or they will charge much, much more to guarantee it. And that big increase in cost will get passed right along to all of us, potentially increasing conventional, conforming mortgage rates by 1% at least (all else held constant). That is huge. Oh, and if you throw this “new reality” at the book of business Freddie and Fannie already have on the books, they are probably failing their capital adequacy tests…..by a lot!

I believe that there is no coincidence that Agency Mortgage Backed Securities or “MBS” (those backed by Fannie and Freddie) have gapped out to historic spreads to Treasury and Swap rates this week. This is a huge, huge deal. Credit risk is now being added to instruments that have always been regarded as having none. They already have lots of interest rate risk. That’s why they trade at a positive spread to Treasury and Swaps. Add credit risk and you might as well write them all down 10 points! You destroy the market for Freddie Mac and Fannie Mae MBS and you might as well say goodbye to the housing market. The only people who will get loans are those who can put 50-60% down on their home. Throw that into your GDP forecast! Mess with the foreclosure process?? It would be cheaper and more responsible to just have Uncle Sam write a $800bb check and pay off all these “at risk borrowers” and then call a do-over.  

New Home Sales............Wait For It.................boom!

From Bloomberg News;

Jan. 29 (Bloomberg) -- Sales of new homes in the U.S. fell in December to the lowest level on record after banks tightened lending and job losses mounted. Purchases dropped a more-than-forecast 15 percent to an annual pace of 331,000, the lowest level since at least 1963, according to a report from the Commerce Department today.

The median price of a new home decreased 9.3 percent from the same month last year to $206,500, the lowest in five years. Sales of new homes were down 45 percent from December 2007.

For the full year, sales fell a record 38 percent to 482,000, the fewest since 1982, Commerce said. The median price fell 7 percent, the most since 1970, to $230,600. The housing report showed builders were unable to trim inventories as fast as sales dropped. The number of homes for sale fell 10 percent to a seasonally adjusted 357,000, the fewest since Sept. 2003.

The supply of homes at the current sales rate jumped to a record 12.9 months' worth. That is more than twice as much as the five-to-six months supply that the National Association of Realtors has said is consistent with a stable market.

Good Lord.  With the tremendous amount of foreclosed inventory just waiting for ANY bid, new homes don't stand in chance in hell.  The Commerce Department should just release this for January;

Ivy Zelman On Housing 2009: "Circular Negative Chaos."

My Lord, CNBC is doing our job today!  Great interview with housing Cassandra Ivy Zelman.  We are big fans of Ms. Zelman.  She has had housing down cold for a long while now and definitely helped us make some good calls and investments in 2008.  Here she is on CNBC predicting a lot more pain, including, "circular negative chaos" for housing.  Ms. Zelman believes this is and will continue to be brought on by a steady flow of distressed properties in major housing markets listed twenty to thirty percent below comparable "non-distressed" listings. 

Like we said a little earlier, the value the Fed is going to get out of their massive mortgage backed security buying spree to lower mortgage rates isn't going to be nearly enough to offset the risk they are taking by putting so much duration on their (our) balance sheet.  It ain't about rates, it's about too many houses, too many distressed borrowers and not enough demand at current price levels.  Sorry Byron.  Here's Ms. Zelman;

http://www.cnbc.com/id/15840232?video=986642567