The Fed, and Record Rates (again)

from HSH Associates Financial News Blog by Tim Manni

According to the latest issue of HSH’s Market Trends Newsletter, “The Fed, and Record Rates (again),” the conclusion of the Fed’s two-day FOMC meeting sent conforming mortgage rates down once again to historically-low levels.

“Without usual policy tools at its disposal, the Fed again weighed heavily into mortgage and bond markets. At the close of its meeting Wednesday, The Fed announced an extension of its plan to buy up Fannie and Freddie-issued debt and mortgage-backed securities offered by the GSEs as well as Ginnie Mae (FHA-backed product) and detailed a long-rumored plan to start purchasing certain Treasury securities.”

“Conforming mortgage rates moved into record territory again this week. After falling to a new daily low average rate of 4.94% on Thursday, HSH’s weekly average for 30-year FRM conforming money also managed a 13-basis point dip to 5.07% + 0.28 points, while the overall average for fixed-rate mortgage money (expressed as HSH’s Fixed-Rate Mortgage Indicator) slipped back by seven basis points, landing at 5.62%. The FRMI’s 5/1 Hybrid counterpart moved backward by six basis points to 5.36%, while Federally-unsupported jumbo 30-year FRMs remained steady for the week.”

“The Fed originally announced a $600 billion mortgage support plan back in November 2008, with $100 billion available for GSE debt and $500 billion for MBS purchases. The plan kicked in in early January, and since then the Fed has been accumulating MBS at about $4 billion per day, with estimates that they have used up about $200 billion of the original $500 billion commitment. At such a pace, it’s easy to plot on a calendar just when that original commitment would come to a close — somewhere in May or June. At about $100 billion per month, and with an initial expiry in a month or two, we believe that the Fed’s new $750 billion represents an enduring commitment to this program at least until the end of the year and perhaps slightly beyond. The total of $1.25 trillion may very well mean that virtually all MBS originated this year will find a ready buyer, financial market stress or not.”

“While there was some anticipation that mortgage rates would fall sharply as a result of the program, we note that the Fed didn’t say that they were going to pick up the velocity of their purchases (although they well could). Rather, we think that they wished to signal to the bond market and consumers that rates would remain low and stable for the foreseeable future, and that there will be an entity that will support the good-credit quality mortgage markets.”

What We’re Hearing

December 26, 2008

By Paul Muolo

Want to Help a Struggling Mortgagor? Give Him a Job

Plenty of ink has been spilled in the trade press about loan modifications. And plenty more will be spilled throughout 2009 and then some. Do loan mods work? Should the government spend taxpayer money to restructure thousands, if not hundreds of thousands of delinquent mortgages? Good questions one and all.

The devil, as always, is in the details. Loan mods can be tricky and complicated because of the legal ramifications. First, off, what type of loan mod plan are we talking about? If a lender/servicer holds a troubled mortgage in portfolio and the note has not been securitized it’s then up to that lender/servicer to make a decision on a loan mod. But if a mortgage has been securitized and resides in a legal “trust” that’s where matters get complicated.

Some investors (fearing lost income) will not grant permission to modify a note. They fear that they will lose money on not only delinquent loans but that it sets a precedent. They worry that if they grant permission on nonperforming loans what’s next: subperforming and current mortgages that could go delinquent?

There’s an easy solution to getting around investor concerns. The Treasury Department can use some of the $700 billion of TARP money to purchase MBS backed by delinquent subprime loans. Once these securities and trusts are in the hands of Uncle Sam they can break apart the ABS/MBS into whole loans and do what they like with them. (That’s how one mortgage bottom fisher explained it to me.)

The “buy ‘em and break ‘em” concept sounds promising but then again, Treasury has nixed the idea of purchasing MBS and ABS as part of the $700 billion bailout. Of course, that was the Bush Treasury Department. By the time you read this the Obama team will be just about in place and they can do what they want with the remaining $350 billion, that is, if Henry Paulson doesn’t spend it all before Jan. 20.

It’s sort of funny. What started out as a mortgage crisis has now grown into a pan-business crisis affecting homebuilding, insurance, automobile companies and the list goes on and on. And it all started with the little old 30-year mortgage, the “subprime” of the species. The “virus” has infected the entire mortgage body and then some.

But getting back to loan modifications. I remember interviewing Faith Schwartz of the Hope Now alliance back in the summer. The alliance was marveling at what a wonderful job its members (lenders and servicers mostly) had been doing on helping hundreds of thousands avoid foreclosure. It all sounded wonderful but then I asked her if Hope Now knew how many of its two million in modified loans had gone south again? Her reply: we don’t know.

At press time, the Office of the Comptroller of the Currency had just released a study showing that modified loans restructured in 1Q 2008 had a 36% delinquency rate in the 30-plus-day category and 53% in the 60-plus-day category. The 2Q loan mod numbers were about the same: not good. These figures do not take into account the much ballyhooed IndyMac loan mod program which became operative late this summer when the FDIC took control of that once high flying alt-A lender. Who knows, maybe the IndyMac rewrites will be better. (Agency chief Sheila Bair is counting on it.)

For the mortgage industry and government loan modifications boil down to this: Does it make financial sense to rewrite thousands upon thousands of loans if they wind up going bad eventually? It’s a fair question. Consumers do not go belly-up just because their house becomes “under water.” The payments stop when they lose their jobs. One solution might be to get more Americans back to work, which is a tall task given that the unemployment rate is just shy of 7%.

Any veteran mortgage executive knows there are two basic ingredients driving loan demand (and delinquencies): employment and interest rates. Mortgage rates are starting to fall but without blue- and white-collar industries creating new jobs all the loan modification ideas in the world won’t save the industry, or the nation.

MTG Benchmark – 12/17

FNMA – 30 Year 4.5% Sale 102.12 19bp

Reaction to yesterday’s huge gains in Mortgage Backed Securities has been underwhelming this morning. It could be that today represents a reversal of sorts on the gains that have been made by floating to this point.

I am in a locking bias today – watch for my next post on the outcome.

What We’re Hearing Daily

By Paul Muolo

It’s official: we’re in a recession! (Twelve months and running, apparently.) Historically, recessions usually spell good news for mortgage bankers because the Federal Reserve (in an attempt to work the nation out of the economic morass) usually cuts short-term rates drastically, which is what we saw earlier in the decade under Alan “The Maestro” Greenspan. But short term rates are already at 1% and the mortgage and housing markets (as we all painfully know) are hardly booming. The question on everyone’s mind is this: when will home values stop falling? The key to answering that question is the unemployment rate, not interest rates. This Friday the new monthly employment figures come out, and based on the headlines of the past four weeks don’t be surprised to see the figure north of 7%. As for interest rates, look for the Fed to cut another 50 basis points off the overnight borrowing rate at its next FOMC meeting…