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Aug. 8, 2011: Mortgage rates improve; Fannie, BofA, the US Post Office getting hit; Secondary marketing job; money out there for mortgage banks
Rob Chrisman
What
do Canada, Germany, France and the United Kingdom have in
common? Their debt (and a few other smaller countries) is rated
AAA by Standard & Poor's - just like the U.S's was prior to
Friday afternoon. But not no mo' for the U.S. The S&P's
downgrade of the USA on Friday to AA+ was not entirely
unexpected, although it was perhaps a little sooner than
"experts" thought. Over the weekend expectations included a
negative initial reaction in risk assets and in Treasuries,
wider spreads in agency MBS’s (meaning higher mortgage rates), a
weaker dollar, and higher bullion prices.
For
banks, the Fed already came out right after the announcement
with: "For risk-based capital purposes, the risk weights for
Treasury securities and other securities issued or guaranteed by
the U.S. government, government agencies and government-
sponsored enterprises will not change." So for banks this looks
like a non-event although with bilateral ISDA contracts
and collateral agreements at clearing houses (DTC, FICC, etc.)
there could be problems when it comes to GSE debt - watch for
potential downgrades early this week. But, looking out the
window, it appears that the sun is coming up - and this week's
FOMC meeting will definitely have something to discuss. (More on this down several
paragraphs.)
Fannie
Mae reported a $2.9 billion second-quarter loss and said it
would seek $5.1 billion in Treasury Department aid
to balance its books since it has a net worth deficit of $5.1
billion for the three-month period that ended June 30. The loss,
which compares with a $1.2 billion loss a year earlier, was
mostly a result of credit-related expenses on home loans made
before the 2008 financial collapse. Fannie Mae also made a $2.3
billion payment to the Treasury in the second quarter. As of the
second quarter, Fannie Mae has drawn $104.8 billion in Treasury
aid and paid $14.7 billion in dividends, the company reported.
Fannie Mae and Freddie Mac together have drawn about $170
billion in taxpayer aid.
(Fannie
&
Freddie are not the only Federal agencies/departments in the hot
seat. The U.S. Postal
Service posted a net loss of $3.1 billion in its third quarter,
and a loss of $5.7billion in the nine month period, and warned
again it would default on payments to the federal government if
Congress did not step in. Total mail volume for the quarter that
ended June 30 fell to 39.8 billion pieces, a 2.6 percent drop
from the same period a year earlier, as consumers turn to email
and pay bills online. The postal service does not receive
taxpayer funds, and next month is facing a $5.5 billion mandated
retiree health benefit prepayment - and with Congress in recess
until September...)
Bank of America’s stock
was hit late last week after telling investors that claims
from Fannie Mae and Freddie Mac may cost more than previously
forecast. The buyback claims have analysts saying that the
$30 billion of expenses booked may not be enough to clean up the
faulty mortgages. F&F can request a buyback from a seller if
a mortgage insurer denies coverage for a loan, even when the
lender disputes the insurer’s decision, and companies currently
have three months after being denied coverage to appeal the
repurchase demand and will have just 30 days starting in July
2012. For more details go to http://www.bloomberg.com/news/2011-08-04/bank-of-america-sees-claims-rising-from-fannie-mae-for-mortgage-buybacks.html.
But
there are still definitely jobs out there. For example, National Residential,
based in Phoenix, is searching for a Secondary Marketing
Manager to assist the Director of Capital Markets in hedging
and managing the rate risk of the mortgage pipeline as
well as assisting in the product development efforts of the
company. National Residential is a retail lender owned by
Heartland Financial, a bank holding company, with operations
primarily in the Midwest and the West, with recent mortgage
banking expansions into Southern California, Reno, and Austin,
Texas. Previous experience with the trading and forming of MBS
and/or GNMA pools is required. Previous experience with the use
of QRM is preferred but not critical. The ideal candidate can
review reports to validate exposure and coverage reasonableness,
communicate new MBS trades to Finance, review trade confirmation
received from counterparty, enter trade information, reconcile
and communicate hedge pair-off trades to counterparty and
finance department, maintain, run and distribute daily hedge
position reports and monthly mark-to-market reports, allocate
loans, form pools, and so on. For more information contact Sandy
Roe at sroe@natresdirect.com.
It
is an interesting time for mortgage banks. David Fleig from Financial Analysis
Partners writes, “Could the mortgage industry could be
headed for a wave of deconsolidation which would favor well
capitalized and managed privately held mortgage companies? The
marginal players in the residential mortgage banking industry
have been forced out of the business, and the surviving
companies have increased their market share and improved their
margins, posting excellent if not record profitability beginning
in 2009. During this period, minimum capital and liquidity
standards have been increased by the Agencies and the warehouse
lending community, which is causing many of the smaller
survivors to consider a merger or being acquired by the larger
players. The best run privately held companies are poised to
take advantage of future opportunities but will require capital
for such acquisitions and to fund other growth opportunities,
most notably retaining servicing rights (which some believe is
tremendously compelling now for the first time in decades).”
David
continues,
“Capital is generally not currently available through bank loans
or from Wall Street, providing private lenders with a unique
opportunity to fill this credit gap. Financial Analysis Partners
is in the process of launching a private equity fund to be
known as Residential Mortgage Capital Partners I, LP. The Fund
intends to make mezzanine investments, primarily subordinated
debt, in carefully selected mortgage companies with high
integrity management teams and solid operating histories.
Anticipated criteria for portfolio companies includes a
consistent earnings history and solid per loan profitability, a
strong management team and minimum net worth of about $5
million. The Fund’s investment should represent a classic
“win-win” transaction because target portfolio companies will
have the demonstrated ability to generate an ROE in excess of
the coupon on the Fund’s securities, creating an earnings
arbitrage opportunity. The Manager intends to assist portfolio
companies with their strategic planning with the objective of
maximizing future enterprise value.” If you’d like more
information contact David at dfleig@financialanalysispartners.com.
Over
in Washington, Bank of Whitman was shut down by the Washington
State Department of Financial Institutions, and the FDIC tapped
Columbia State Bank
in Tacoma to assume all of the deposits. The same happened up in
Illinois, where Bank of Shorewood was shuttered and Heartland Bank and Trust
Company took over the deposits.
At
some point it comes back to our economy, and continued worries
about jobs and housing. Feeble job growth and rising
unemployment don’t help the housing market, and in turn
construction or distributing distressed properties. For example,
California has significantly reduced its backlog of
foreclosures, while Florida has not. This will dictate the speed
with
which these housing markets return to normal. The home
price-to-rent ratio has slipped just below one, which means
rents are now slightly expensive to home prices on a national
basis.
Job-wise,
recent labor market trends have raised concerns that the
unemployment rate is high not because employers are reluctant to
hire but because they are unable to hire. These concerns, if
true, would cast doubt on using monetary policy to stimulate the
labor market, since it works by encouraging firms to hire more.
http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2011/3qtr2011_part1_barlevy.pdf
The
press, Wall Street firms, and overseas investors have been
jawboning over the S&P downgrade. (Even I wrote about it,
suggesting that it is more of a political move than financial: http://www.stratmorgroup.com/RobChrismansBlog/ViewBlogPost/tabid/90/Article/23/with-sps-downgrade-is-anyone-listening.aspx.)
So
here we are – stocks are down again (but they were down before)
and the bond market is behaving itself. Markets set rates, not
rating agencies, and it would seem that money if flowing into
bullion and into the bond market, as many expected would happen.
Perhaps the United States really is still viewed as a safe haven
for money – after all, few markets match the depth and liquidity
of the Treasury market, which has $9.3 trillion in debt
outstanding. That being said, keep in mind other debt tied to
Treasury rates, and risk quality, may be downgraded soon, which
may lead to higher rates – a ripple effect.
Going back to Friday, the Nonfarm Payrolls report surprised to
the upside with +117k jobs created in July versus a call for
+85k. In addition, May and June were revised upward by a total
56k jobs. The thought of the economy picking up pushed rates
higher, and the 10-yr closed at 2.56%, and mortgage banker
selling picked up to a daily average of $1.9 billion - almost
all in 4% coupons, compared to a daily average last week of $1.3
billion. MBS volume was higher as well to a 155% average this
week from 131% previously, based on Tradeweb's experience.
For
news this week, it is a very light week for scheduled news.
There is nothing today or tomorrow. Wednesday we have mortgage
apps (which doesn’t move rates, rates move that number), on
Thursday we have some trade numbers and Jobless Claims, and on
Friday we have Retail Sales, a Michigan Consumer Sentiment
number, and Business Inventories. But we also have Tuesday’s
FOMC meeting and a $32 billion 3-yr note auction (Tues), $24
billion 10-yr auction (Wed), and a $16 billion 30-yr bond
auction Thursday. This
morning we find the stock market taking it on the chin, but
the 10-yr back down to 2.48% and MBS prices are better by
roughly .250.
(A quick note about Friday's Ben Bernanke story link: the story
was a satire, and not true - my apologies to anyone who may have
thought otherwise.)
A married man was having an affair with his secretary.
One day they went to her place and made love all afternoon.
Exhausted, they fell asleep and woke up at 8 PM.
The man hurriedly dressed and told his lover to take his shoes
outside and rub them in the grass and dirt.
He put on his shoes and drove home.
"Where have you been?" his wife demanded.
"I can't lie to you," he replied, 'I'm having an affair with my
secretary. We had sex all afternoon."
She looked down at his shoes and said, "You liar! You've been
playing golf!"
If
you're
interested, visit my twice-a-month blog at the STRATMOR Group
web site located at
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