Finding a Bottom

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Yesterday’s S&P/Case Shiller index provided additional signs of a housing market that is beginning to recover .The Federal Reserve Bank of New York recently published a series of maps http://www.newyorkfed.org/home-price-index/ and an excellent explanation at Liberty Street Economics blog.

These maps provide a full cycle visual walk of the housing market from boom in 2003 through the bust years and now in 2012 and the beginning of a recovery. The question remains is there enough economic velocity in the broader economy to solidify the formation of a home price bottom and will there be sufficient mortgage credit availability to transform the bottom into a foundation for future growth in housing and home values?

QM & Market uncertainty

Last week the CFBP reopened the proposed rule addressing the ability-to repay requirement, which will impact all mortgages originated and the definition of a ‘‘qualified mortgage”. The request for more input virtually guarantees market uncertainty will continue at least until late this year or early next year. The qualified mortgage rule will determine how narrow or expansive the access to lowest cost mortgages will be; and second, whether to provide a legal safe harbor or only a rebuttable presumption when the qualified mortgage standards are met. So maybe more time and more data is warranted. Ironically, if a legal safe harbor is not provided for qualified mortgages, the practical result will be less access and tighter underwriting regardless how the qualified mortgage is ultimately defined. In fact, today FHA provides a real-time demonstration of how uncertainty has led to mortgage overlays in the basic FHA single-family program. An overlay is a technical term for a tighter underwriting box than required by published standards and translates into harder qualifications for potential homeowners.
Federal Reserve Governor Elizabeth Duke identified the problem of uncertainty as impacting lender’s willingness to lend and the future strength of the housing economy. Gov. Duke went on to identify factors that added to uncertainty, including the regulatory environment and the future structure of the mortgage market. One can only hope that the additional comment period provided by the CFPB for data and comments will lead to an ultimate outcome that recognizes that the level of access is directly correlated with the degree of confidence, which is why a safe harbor must be provided.

Eminent Domain

Bondholders See Eminent Domain as Latest State Attack: Mortgages
2012-07-13 17:50:45.271 GMT

By Jody Shenn and John Gittelsohn
July 13 (Bloomberg) — Bond investors who will be needed to
reduce taxpayers’ role in U.S. mortgage lending have a new
reason to stay away: the threat of outright confiscation by
local governments.
A plan under consideration in San Bernardino County,
California, would use a local government’s eminent domain
authority to confiscate and write down mortgages for borrowers
who are underwater on their loans, meaning they owe more than
their houses are worth. The plan would raise borrowing costs and
deter private lenders from returning to the $10 trillion
mortgage market, according to bond buyers such as Pacific
Investment Management Co. and AllianceBernstein LP.
“If you know that the county in which you make a loan
could force you to sell it for less than it’s worth if it goes
underwater, then the rate you will charge, in a free market
system, would be a lot higher,” said Mike Canter, head of
securitized assets at New York-based AllianceBernstein, which
oversees about $400 billion.
About 11.4 million American borrowers — 24 percent of
homeowners with a mortgage — were underwater as of March 31,
according to Corelogic Inc., with prices down 34 percent from
their July 2006 peak. In San Bernardino County, about 150,000
homeowners or half of all houses with a mortgage are underwater
and the area’s economic struggles helped push the city of San
Bernardino, the county seat, to decide to file for bankruptcy
protection.

Government Dominates

Private mortgage securities now fund less than 1 percent of
new loans, down from more than a third before the housing market
collapsed in 2007. The U.S. government currently backs about 90
percent of home loans, and politicians from both parties say
they want to reduce that number.
Advocates of the San Bernardino eminent domain proposal,
led by San Francisco entrepreneur Steven Gluckstern, argue it
will fight neighborhood blight and help speed the pace of the
housing market’s recovery from a six-year slump.
Confiscating the mortgages to reduce the principal for
borrowers, while paying investors “fair value” for the loans,
will stabilize home prices and thereby fuel issuance of private
securities, said Gluckstern, whose company-provided biography
describes him as an initial member of the national finance
committee for President Barack Obama’s 2008 election and a
former general manager of reinsurance operations at Warren
Buffett’s Berkshire Hathaway Inc.

‘Helpful Solution’

“In our view, this is helpful, not harmful,” Gluckstern,
former co-owner of the National Hockey League’s New York
Islanders and current chairman of Ivivi Health Sciences LLC., a
medical technology company in San Francisco, said in a telephone
interview. “There haven’t been very many good solutions to this
in six years.”
San Bernardino officials last month approved an agreement
that allows the county and the cities of Fontana and Ontario to
create the program being pushed by Gluckerstern’s firm, San
Francisco-based Mortgage Resolution Partners LLC, which targets
only borrowers who have been making on-time payments and have
loans held in mortgage bonds without government backing. The
first organizational meeting of a so-called joint-powers
authority was today.
Mortgage Resolution Partners would charge flat per-loan
fees to the municipality for managing the program, and is
seeking to line up financial backers that would fund the
purchases and share profits when reworked loans get sold after
refinancings with the municipalities. San Bernandino officials
will award contracts only after public review, according to
county Chief Executive Officer Gregory Devereaux.
Devereaux was elected chairman today of the joint powers
authority set up to explore creating a so-called Homeownership
Protection Program. Officials will next meet on August 16.
During a comment period at today’s hearing, Brenda Meyer,
owner of Cozy Cabins Realty, said that the plan “may appear to
be a solution on the surface but for every action there’s a
reaction,” warning private lenders will abandon the county.
Tim Cameron of the Securities Industry and Financial
Markets Association, whose members include asset managers
overseeing more than $20 trillion, said that officials should
remember pension plans and individual investors may be harmed.
In addition, county residents will find it “harder or
impossible to obtain credit” and need to bear the costs of
“lengthy and expensive litigation with the holders of mortgage
loans.”
Officials from the California Bankers Association, Inland
Valley Association of Realtors, Association of Mortgage
Investors and an individual county resident also spoke against
the plan at the meeting.
The American Securitization Forum trade group separately
told the San Bernardino County Board of Supervisors in a letter
today that the idea will be “short-sighted and ultimately be
counterproductive for the residents of San Bernardino County.
Moreover, it would violate both the United States and California
Constitutions.”

‘Legitimate Use’

Governments across the U.S. and countries such as Great
Britain and Canada have used the powers of eminent domain for
centuries to condemn and seize property and compensate owners
for their losses. The practice has been upheld by the U.S.
Supreme Court in cases of a “legitimate public use,” according
to Robert Hockett, a professor of law at Cornell University, who
argued for extending the practice to condemn mortgages.
Gluckstern’s plan has gained support from Yale University
professor Robert Shiller, co-creator of the S&P/Case-Shiller
index of home prices. Shiller, who warned of the housing bubble
before its collapse, argued in a New York Times op-ed that “we
have to stop the wishful thinking that the problem will solve
itself through a spontaneous rally in home prices.”

Origination Evaporates

Origination of private-label loans, which accounted for
about one-third of the mortgage market in the middle of the last
decade, dried up in 2008 as defaults began to soar. The
delinquency rate of private label loans peaked at 32.7 percent
in August and fell to 30.6 percent as of May according to data
compiled by Bloomberg.
Many of the investors who are concerned their bonds will
lose value if the plan is carried out bought the securities they
hold at steep discounts after the market crashed, Gluckstern
said. Typical prices for the most-senior bonds tied to so-called
option adjustable-rate mortgages rose last week to 55 cents on
the dollar from a record low 33 cents in 2009, according to
Barclays Plc data. Option ARMs allowed borrowers to pay less
than the interest they owed by increasing their balances.
“The only thing that keeps the prices as high as they are
is actually the performing loans, the exact loans that it
appears are being targeted for condemnation,” said Paul
Jablansky, who heads structured products at Pasadena,
California-based Western Asset Management Co., the bond unit of
Legg Mason Inc. that oversees about $450 billion.
“Securitization investors could pull back dramatically.”

Global Crisis

Issuance of securities backed by new home loans without
government backing peaked at about $1.2 trillion in each of 2005
and 2006, or more than a third of total lending, before halting
in 2008 as defaults on the debt fueled a global crisis,
according to industry newsletter Inside Mortgage Finance. Deals
have totaled about $3.5 billion since 2010, when the market
restarted, according to data compiled by Bloomberg.
Democratic and Republican lawmakers in Washington say they
want to eventually reduce government involvement in the mortgage
market, which would require more private securities.
“If the government wants to back down from its more than
85 percent share of the mortgage market to 50 percent or lower,
it’s going to require the private-label market to be embraced by
a larger number of institutional investors,” said Michael
McMahon, a managing director at Redwood Trust Inc., a Mill
Valley, California-based issuer of private mortgage securities.
“And if they can’t model cash flows because they expect
unexpected wrinkles like this, they’re just not going to
invest.”

‘Higher Rates’

Some bond investors spent the past three years complaining
that government actions subvert their contractual rights, favor
banks or damage their holdings.
“What people really need to understand is you’re sowing
the seeds of significantly higher interest rates,” said Mark
Goldhaber, who spent 20 years at mortgage insurer Genworth
Financial Inc., including as its government affairs chief,
before leaving this year to become an independent consultant in
Raleigh, North Carolina. “Investors are going to say, look at
all the things you’ve done. We’ve got to price for them.”
Pimco is among investors that say they support greater
targeted use of principal forgiveness on loans backing their
bonds. Still, it sees the use of eminent domain as putting
“another nail in the coffin of the private mortgage market,”
said Scott Simon, its mortgage head. “It just means you’re
going to need to have monster credit scores and monster down
payments if you’re ever going to have a private market.”

Investors’ Ire

Investors’ ire has been building since a 2008 settlement
between Bank of America Corp.’s Countrywide Financial unit and
state attorneys general in which claims of predatory lending
yielded a deal that called for mostly investor-owned loans to be
reworked, Goldhaber said.
Since then, state and federal governments have taken a
series of steps to freeze or slow foreclosures. Congress passed
a law protecting servicers from investor suits and the federal
Home Affordable Modification Program was structured in a way
that aids lenders, according to bondholders.
Pimco and BlackRock Inc., the world’s biggest money
manager, publicly objected to the terms of a $25 billion state
and federal settlement with mortgage servicers over foreclosure
abuses that allowed five of the largest U.S. banks to rework
loans owned by investors. Servicers can rework debt owned by
bondholders without forcing the banks to wipe out second-lien
home-equity debt that the lenders hold.

Jerry Brown

California Governor Jerry Brown signed the “Homeowner Bill
of Rights” on July 11, extending the February settlement terms
to all servicers in the state, which has the highest number of
delinquent and underwater mortgages.
“By doing what they’ve done, you really discourage private
capital from coming in down the road,” BlackRock Vice Chairman
Barbara Novick said. “From a long-term perspective it’s not
serving the interests of our economy and taxpayers.”
BlackRock declined to comment on the eminent domain issue,
said Lauren Trengrove, a spokeswoman.
Under mortgage bond contracts, servicers and trustees
probably have no obligation to object in court to the prices
offered in loan seizures, forcing investors to accept amounts
that are too low, according to Amherst Securities Group LP
analyst Laurie Goodman. The New York-based analyst testified
June 7 to Congress that underwater borrowers need their loan
principals reduced to aid a housing market recovery.

‘Not Generous’

Mortgage Resolution Partners has told potential investors
that it will target paying 75 percent to 80 percent of a home’s
market value for the mortgages seized through eminent domain,
Goodman wrote in a report.
“If a nonprofit did it you could, in theory, do it on
terms that were fair but not generous to investors, but I don’t
like the use of eminent domain and there’s nothing you can do
that will work for MRP and work for the other parties,” she
said.
In a frequently asked questions document used for Mortgage
Resolution Partners’ marketing, the firm said it might use a
“quick take” process in which courts would approve a loan
seizure and let the price be determined afterward.
Mortgage Resolution Partners is factoring in “extensive”
legal costs and is prepared for a fight, according to the
document.
“We hope they will come to recognize the program is the
best way to resolve the troubled loans in the securitizations
for the benefit of all parties involved,” the document said.
Paul Herrera, government affairs director for the Inland
Valley Association of Realtors, said at the hearing today that
the firm played too big a role in the push and that officials
had been too secretive in moving forward with its ideas.
“Entire communities could be caught in the blast radius of
this eminent domain denotation,” he added

Penalty Box

I am launching the Housing Insights blog to create a place where people who care about the substantive issues facing housing and mortgage finance can share thoughts and ideas in a non-acrimonious nature.

I have been involved in housing and mortgage finance issues — both private and public sector – since 1981. There is an extraordinary imbalance in our housing and mortgage finance system today. I recognize there’s an appropriate place for the public sector, but there is a critical need for private capital in the housing sector and in neighborhoods across the country.

It seems like financial regulation is headed toward a permanent penalty box mentality, which will result in less lender participation and less choice for the consumer. There is no question that in the mid-2000s there were significant failures throughout housing and mortgage finance. But if the penalty box continues to be the sole regulatory framework, housing, the consumer, and the US economy will be the long-term losers.

All participants in the housing and mortgage finance sectors need to work together, along with regulators and policy makers, to forge a forward-looking approach to housing that creates an environment that incents the private sector participation that will allow housing to flourish, while limiting the excesses of the past.

The conversation can begin here, and I encourage others to make this Housing Insights blog a forum to share constructive views on this vital issue.