July 5, 2017

Giving ‘Too Big To Fail’ An Exit Strategy

A report from Bloomberg. “Wells Fargo & Co. surprised investors this week by withholding more than $90 million due to buyers of pre-crisis residential mortgage-backed securities. The bank said it invoked its right as trustee to hold back funds to cover legal costs. The 20 transactions had a principal balance of $540 million and are among more than 2,000 deals involved in a lawsuit brought by bondholders in 2014 to recover losses from the financial crisis. It’s only the second time that proceeds from bonds involved in that litigation have been withheld from investors. Wells Fargo’s move caused losses for some bondholders and sent others scrambling to assess risks for similar deals in a market still recovering from the bursting of the housing bubble in 2008.”

“HSBC Holdings Plc put $2 million in a reserve account when a deal was called in September 2015 and 10 other called deals were paid in full, according to Webbs Hill. ‘This has happened before, but not with so many deals at once,’ said Jasraj Vaidya, a director at Amherst Capital Management and a former mortgage bond analyst at Barclays Plc. ‘It’s definitely a problem for those investors.’”

From CNBC. “News of a bipartisan effort underway in the U.S. Senate to reform the housing finance industry is a welcome development, but the devil is in the details. Almost a decade after the financial crisis, in addition to repairing damage caused by the flawed Dodd-Frank law, policymakers must work swiftly to wind-down Fannie Mae and Freddie Mac, the two institutions at the heart of the last financial crisis.”

“Because of the GSEs’ large market share, low- and moderate-income level lending targets – first set at 30 percent – had immediate nation-wide impact: in 1989 just 7 percent of mortgages were made with a down payment below 10 percent, but by 1994, the share of low down payment mortgages had grown to 29 percent. The Department of Housing and Urban Development steadily increased the targets to 55 percent through 2007, causing underwriting standards to concurrently fall along the way. By 2007, two in five loans acquired by the GSEs were made with down payments below 3 percent.”

“In a 2010 CNBC interview then-Representative Barney Frank expressed hope for substantial GSE reform: ‘I hope by next year we’ll have abolished Fannie and Freddie…it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.’”

“Two major changes in the mortgage market go into effect this month, and both could help millions more borrowers qualify for a home loan. The changes will also add more risk to the mortgage market. First, the nation’s three major credit rating agencies, Equifax, TransUnion and Experian, will drop tax liens and civil judgments from some consumers’ profiles if the information isn’t complete. With these hits to their credit removed, their scores could go up by as much as 20 points, according to a study by credit rating firm Fair Isaac Corp. (FICO).”

“In addition to the FICO changes, mortgage giants Fannie Mae and Freddie Mac are allowing borrowers to have higher levels of debt and still qualify for a home loan. The two are raising their debt-to-income ratio limit to 50 percent of pretax income from 45 percent. That is designed to help those with high levels of student debt. That means consumers could be saddled with even more debt, heightening the risk of default, but the argument for it appears to be that risk in the market now is unnecessarily low.”

“‘In this case, we’re changing the underwriting criteria, and we think the additional increment of risk for making that change is very small,’ said Doug Duncan, Fannie Mae’s chief economist. ‘Given how pristine credit has been post-crisis, we don’t feel that is an unreasonable risk to take.’”

The San Francisco Chronicle. “Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees. ‘If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,’ said Greg McBride, chief financial analyst with Bankrate.com.”

“Of course, spending no more than 28 percent of income on housing is not realistic for many people in the Bay Area. According to the California Association of Realtors, only 25 percent of people here had enough monthly income ($13,362) to make the monthly payment including taxes and insurance ($4,010) on a median-priced single-family home ($780,3330), in the first-quarter. Many buyers are afraid to go that high. ‘We have buyers balk at going to 45 percent, much less 50 percent,’ said Jay Vorhees, a mortgage broker in Walnut Creek. This is especially true with Millennials.”

“Borrowers who are refinancing a mortgage and taking cash out to pay off other debt may be tempted to go up to 50 percent, especially if they are already spending at least 50 percent of income on debt. This move seems appealing, because interest on home-equity debt is deductible — up to a limit — whereas interest on other debt is not.”

“‘If this is data-driven as Fannie says, I guess it’s OK,’ said David Reiss, who teaches real estate finance at Brooklyn Law School. ‘A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.’ Reiss added that homeownership rates are low and expanding them ’seems reasonable.’ But making credit looser ‘will probably drive up housing prices.’”

From Realty Biz News. “When real estate is bought with all cash, buyers have a lot more flexibility and are able to take many more shortcuts. When Wall Street funnels billions into securitized bonds this becomes real power. Today, Fannie Mae is guaranteeing the income of all but the bottom tranches of Blackstone’s latest rental securitization. The mission of these government-backed agencies is enabling home ownership (Main Street). Not to, again, give ‘too big to fail’ financial institutions another ‘loss avoidance’ or undeserved ‘deliver on promised returns’ exit strategy.”

“Enter the SEC, which has opened an investigation into whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments. The investigation focuses on the use of Broker Price Opinions (BPOs) instead of appraisals. In March, the SEC sent letters to several Wall Street registered companies that provide BPOs. Disclosure of these letters began emerging through regulatory filings in May.”

“Consider the drive-by BPO. A glaring difference between an appraisal and a BPO is the drive by valuation. These are BPO value estimates done from the curb without entering the home. No consideration is given to if the house has a 1970s modeled kitchen and bathroom to say nothing about if the interior walls and fixtures are even intact. In an April securities offering of about $944.5 million, one major provider (Green River) submitted BPOs that relied on ‘drive-by’ evaluations. As stated in a deal prospectus issued by Fannie Mae, these homes were ‘assumed to be repaired and in good condition.’”

“But why should Main Street care? After all, once Fannie Mae (taxpayers) pays out their guarantee, Main Street buyers will help Wall Street recover their earned losses by paying top dollar as these houses coming up for sale during a period of tight inventory. This helps explain where the foreclosure ‘shadow inventory’ went to.”

From The Sentinel in Pennsylvania. “Although they’re been selling at a brisk pace since the end of the national economic recession, foreclosed and otherwise in-limbo properties seem to be the gift that keeps on giving. In fact, Cumberland County is selling more of them than ever, according to real estate data. But at the same time, local governments are seeing more and more unkempt properties crop up—properties whose ownership is often unclear.”

“‘You have a lot of lending institutions now that, for whatever reason, do not take ownership and protection of [the property],’ said Dearan Quigley, Zoning Officer for East Pennsboro Township. ‘They may do some things to protect their investment, they may even have property maintenance come in, but they don’t want to indicate their financial interest.’”

“Also important are the number of homes that are delinquent on mortgage payments, but not necessarily foreclosed upon just yet. For the first quarter of 2017, that delinquency rate was 3.93 percent of residential mortgages, according to the St. Louis Federal Reserve. This is a huge drop from the delinquency peak of 11.53 percent in the first quarter of 2010, but still significantly higher than the historic low of 1.41 percent seen in the last quarter of 2004.”

“In many cases, these homes – those that are seriously delinquent but which banks have not actually claimed – are the ones most difficult for local officials. ‘Basically you had people who could no longer afford the payments on their houses, and the banks essentially said they were going to foreclose, but have not actually done it,’ Quigley said. ‘Either the occupant walked away from the mortgage preemptively, or was warned by the bank that they were delinquent and assumed foreclosure was going to go through.’”

From KATU in Oregon. “A couple who recently moved to the Portland area woke Sunday to find their home and car spray-painted with graffiti telling them to ‘move back’ to California. On Sunday Preston Page and his fiancée, Jessica Faraday, found their house and car covered in graffiti, and the car was also keyed. The gold paint messages included ‘CALI - surfs up’ and ‘get California out of Portland.’”

“Page said he feels that the act was likely out of frustration with Portland’s housing market. ‘So much industry has come in here and, I’m sure, pushed some locals out. That can be rough … you see housing prices double, or triple in the past five to ten years,’ Page said.”