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Nov. 29, 2010: Comments on the 5% mortgage reserve requirement and mortgage interest tax deductibility; rates improve slightly on Ireland news
Rob Chrisman
I don't remember the exact moment that I decided to
start my own investigation of the foreclosure issue. I figured
that with Congress, 50 states attorneys, the OCC, the OTS, the
FDIC, FHFA, and probably several dozen high-powered law firms
around the nation doing their own investigations and
investigations for various MBS investors, I may-as-well do one.
Heck, even the FTC issued a "Mortgage Assistance Relief Services
Rule two weeks ago, stating that by year-end, so-called
“mortgage foreclosure rescue” and loan modification firms
will be prohibited from collecting fees until homeowners have
a written offer from their mortgage lender or loan servicer
that they deem acceptable.
The
owners of MBS’s are pushing for a resolution of the 50-state
probe of foreclosure practices. The attorney general from
Arizona said, “The mortgage backed securities are worth pennies
on the dollar, so any kind of recovery would be better.” State
officials have begun informal talks with some investors, but for
the last month and a half all 50 U.S. states have been
investigating whether banks and loan servicers used false
documents and signatures to justify hundreds of thousands of
foreclosures. http://www.bloomberg.com/news/2010-11-24/state-foreclosure-probe-talks-include-mortgage-investors-urging-quick-deal.html
What’s the next huge problem to face our industry?
“The potential liability facing bankers arises from the $2
trillion in subprime, alt-A and option-adjustable rate mortgages
that they underwrote and sold to investors, mostly as
mortgage-backed securities during the home-lending boom of 2005
to 2007. The losses on the mortgages will be horrendous before
the dust settles—over $700 billion on these and other
so-called non-agency mortgage securities…”
http://online.barrons.com/article/SB50001424052970203676504575618621671054514.html#articleTabs_panel_article%3D1
Last
week I wrote about the Federal Reserve's comment period
regarding the exclusion of certain "safe" loans from the 5%
holding requirements. "I have watching the Federal
Reserve's 'safe mortgage' news with interest. For a while people
in the business talked about having all Fannie & Freddie,
FHA, and VA loans be 'safe'. The problem with this is two-fold.
One, some of the underwriting guidelines they approve for
certain programs I don't view as safe - and the programs they
had a few years ago were even worse. But more importantly, what if Freddie and Fannie don't even exist in a
year? Then what will regulators say is 'safe' and exempt
from reserving 5% in capital?"
Another wrote, "Do regulators know that forcing mortgage bankers
to retain 5% in capital of what they originate will force our
business to grind to a halt? Even requiring the top 5 investors
to do this would be a nightmare. Is it going to be based on LTV?
DTI? FICO? Originator? Agency? Obviously it can't
be the last two - originators are susceptible to going out of
business, and the government may do away with Fannie and
Freddie entirely - then what?"
Two
bored Congressman were absentmindedly chatting a few weeks ago.
"What do you want to do?" "I don't know. What do you want to
do?" "I dunno. How about we question whether or not to keep
the mortgage interest tax deduction?" Of course, this was
picked up by a reporter, and now we have folks talking about it
for about the 18th time that I can remember. The news comes from
the president’s deficit reduction study, and as I wrote about a
few weeks back, it seems that the viability of the treasured
mortgage interest deduction is being questioned again. (That's
just what the housing market needs, right? Let's see what
happens to values in whatever segment of the market in which the
deduction is ended.)
One
senior VP at WestStar Mortgage wrote to me saying, "“In
our business, of course, the tax break helps promote home
ownership, since people have to come with less of a down
payment. An interesting question to ask a borrower is whether or
not they'd buy a home if the tax deduction went away. In
countries that don't offer the tax break, like England, home
ownership is about the same as the US, but house prices are much
lower. And the argument can always be made that economies are
better off when people are making decisions based on economic
principals rather than tax considerations, and in fact the
current crisis is due in part to increased borrower debt
magnifying risk. Many economists feel that any system meant to
encourage people to take on more debt is not a great thing.”
He continued, "What many people fail to realize is that the current tax deduction for mortgage interest is
simply an acceleration of the type of deductions that we take
for other investments. For instance, if you trade stocks
on margin, you incur margin interest costs which are deductible
from your gains at the end of the year. You can also deduct
broker commissions, costs to improve commercial real estate,
etc. – the same should apply to home mortgage interest.
"As Economists will tell you, eliminating the annual deduction
simply reduces the present discounted value of the home to the
homeowner and, consequently, will result in a reduction in home
values in the marketplace. As such, the elimination of the
annual deduction is, at best, a revenue-neutral action and
would actually reduce the long-term value of the largest piece
of personal “capital” that any of us own – our home. At
the margin (as economists like to say), this would have a
significant negative “income effect” for homeowners and those
industries related to home ownership the reduction in associated
income taxes would probably more than offset any enhanced tax
revenues from elimination of the deduction."
Friday
was an early close for the fixed-income markets, and MBS's ended
the day better by about .250 in price. Treasury debt prices rose
as worries over the potential fallout from a euro zone debt
crisis had investors turning away from stocks for the lower-risk
haven of government debt. 10-yr notes were 12/32 higher in price
to yield 2.87%. 5-yr notes, probably a better proxy for MBS
prices given the life of new-production mortgages, were better
by about .125.
At this
point, in spite of the huge US deficits and other credit
problems, our rates are being moved by overseas activity. Today
we have firm news of a $113 billion bailout plan for Ireland.
There is more geopolitical stress in Dubai, N/S Korea, Spain,
and Portugal. In addition to the Ireland plan, European
governments are crafting blueprints for future rescue efforts.
The aid for Ireland, after a rescue for Greece earlier this
year, is intended to show that the euro zone will help its
members. But will it be enough?
In the
short run, fortunately for mortgage rates MBS traders report
that they are continuing to see steady demand from banks, money
managers and oversea investors. The Fed is scheduled to buy
about $39 billion in Treasuries this week after purchasing only
$10 billion in a holiday abbreviated week. We have no economic
news today, aside from the media chewing on shopping news.
Tomorrow is the S&P/Case-Shiller set of housing price
indices, Consumer Confidence, and the Chicago Purchasing
Manager’s numbers. Wednesday we have the ADP private employment
numbers, productivity and cost statistics, Construction
Spending, ISM Manufacturing data, and the release of the Beige
Book. Thursday we’ll see the usual Jobless Claims, and also
Pending Home Sales, and on Friday the unemployment data. With
that ahead, the 10-yr yield has further improved to 2.83%
and 30-yr MBS prices are better by about .125.
A Catholic Priest, a Baptist Preacher, and a Rabbi all served as
chaplains to the students of Northern Michigan University in
Marquette. They would get together two or three times a week for
coffee and to talk shop.
One day, someone made the comment that preaching to people isn't
really all that hard - a real challenge would be to preach to a
bear. One thing led to another, and they decided to do an
experiment.
They would all go out into the woods, find a bear, preach to it,
and attempt to convert it.
Seven days later, they all came together to discuss their
experience.
Father Flannery, who had his arm in a sling, was on crutches,
and had various bandages on his body and limbs, went first.
“Well,” he said, “I went into the woods to find me a bear. And
when I found him, I began to read to him from the Catechism.
Well, that bear wanted nothing to do with me and began to slap
me around. So I quickly grabbed my holy water, sprinkled him
and, Holy Mary Mother of God, he became as gentle as a lamb. The
Bishop is coming out next week to give him first communion and
confirmation.”
Reverend Billy Bob spoke next. He was in a wheelchair, had one
arm and both legs in casts, and had an IV drip. In his best
fire-and-brimstone oratory, he claimed, “Well, brothers, you
KNOW that we don't sprinkle! I went out and I FOUND me a bear.
And then I began to read to my bear from God's HOLY WORD! But
that bear wanted nothing to do with me. So I took HOLD of him
and we began to wrestle. We wrestled down one hill, UP another
and DOWN another until we came to a creek. So I quickly DUNKED
him and BAPTIZED his hairy soul. And just like you said, he
became as gentle as a lamb. We spent the rest of the day
praising Jesus... Hallelujah!”
The priest and the reverend both looked down at the Rabbi, who
was lying in a hospital bed. He was in a body cast and traction
with IVs and monitors running in and out of him. He was in
really bad shape.
The Rabbi looked up and said: "Looking back on it
...circumcision may not have been the best way to start."
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