NAHB Construction Outlook Downgraded; Feedback on REITs; Loan Modification Stats; Foreclosure Scrutiny Delays Ally IPO

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Mortgage and Lending with Global Home Finance Inc. NMLS ID:316441 NMLS ID:184176

NAHB Construction Outlook Downgraded; Feedback on REITs; Loan Modification Stats; Foreclosure Scrutiny Delays Ally IPO


 

by Rob Chrisman

If someone "about scares you half to death" twice, what happens? What home builder economists lower their predictions twice, what happens? HomeBuilderForecast

In a similar vein, Federal Reserve Vice Chairman Janet Yellen said the housing market will undergo a "long, drawn-out recovery" and the Fed is working with other agencies to prevent foreclosures and clear the stock of vacant properties. "Looking forward, I unfortunately can envision no quick or easy solutions for the problems still afflicting the housing market. Even once it begins to take hold, recovery in the housing market likely will be a long, drawn-out process." This is nothing that should surprise anyone in our business, although it is sobering.

If I want my neighbor's help in moving some boxes, I don't tell him to get his dog out of my yard first. (I know, bad analogy, but at 4AM I couldn't come up with anything better.) Things tend to become more muddled when large companies and governments are involved. For example, on the one hand numerous representatives and regulators are calling for the phase out of Fannie & Freddie with their replacement being the private sector (assumed to be banks). On the other hand, these same companies in the private sector continue to keep reserves, not knowing what the next lawsuit or buyback or servicing penalty will be. The latest news involves the HAMP program: while servicers are required to address all instances of non-compliance, beginning this month, the Treasury Department is withholding financial incentives for three servicers, Bank of America, JPMorganChase and Wells Fargo. (Ocwen slid by and did not have its financial incentives taken away, in spite of also needing substantial improvement, due to its compliance results being substantially and negatively affected by a large servicing portfolio acquired during the compliance testing period.) FULL STORY

The results come from HUD and the U.S. Department of the Treasury's May edition of the Obama Administration's Housing Scorecard, which now include detailed assessments for the 10 largest mortgage servicers participating in the Administration's Making Home Affordable Program. Three categories make up the analysis: identifying and contacting homeowners, homeowner evaluation and assistance, and program reporting, management and governance. It is not a drop in the bucket: in April, 29,000 homeowners received a trial Home Affordable Modification Program (HAMP) modification, and 29,000 additional homeowners received a permanent modification. CHARTS

In other corporation-related news, Ally Financial is postponing its $5 billion IPO because of weak market conditions and impending fines due to its mortgage foreclosure practices. Our government owns nearly 74% of the lender due to past bail outs - the government invested $17bn in Ally in a series of rescues: AllyIPO.

I have an important correction to some information regarding a Freddie Mac program, more specifically Freddie Mac's Relief Refinance offering relating to why Fannie loans might be paying off faster than Freddie program loans. I stated that, "Freddie's plan must be refi'd in the name of the servicer..." Folks, including me, should note that, rep & warrant issues aside, with the Freddie Mac Relief Refinance - Open Access through LP, any lender can participate in the offering even if they do not currently service Freddie Mac Mortgages. This offering continues to offer up to 125% LTV and a transfer of the existing MI giving borrowers more refinance opportunities. One change that was made with the HARP extension is that Fannie Mae aligned their eligibility date to the May 31, 2009 date that Freddie Mac's program already had, so an additional 3 months of production are now available for Fannie HARP. I apologize for any confusion.

Yesterday the commentary discussed the continued publicity surrounding REIT's, and their impact on the residential mortgage market. But one seasoned vet wrote, "I still struggle with the mortgage REIT concept. Or, more specifically, I have a hard time seeing why anyone would pay much more than book value plus the present value of the leveraging benefits and the tax shield minus corporate operating expenses. I say this because if the economic value of the loans owned goes much higher than par, the risk that the borrower refinances and involuntarily takes the asset value increase away from the REIT is palpable. In return for the right to have a vehicle that can have assets involuntarily called away, you have to rely on the capital markets for funding and go through all kinds of gyrations in order to preserve the tax benefit. I know It's a golden age for mortgage REITs now since the yield curve is steep, mortgage capital is plentiful and prepayment nirvana continues but whether those three conditions persist indefinitely is another question altogether. And, of course, the cynic in me can't help noticing Wall Street's zeal to bring these things public now."

Companies using a REITs tax designation must meet certain criteria regarding their investment portfolios and must distribute 90% of taxable income as dividends - the trust pays no state or federal corporate taxes on dividends paid to investors. Investors are attracted to REITs for high ongoing dividend payments, but setting one up is not a slam-dunk.

Not only do they have the 90% requirement noted above, it must be an entity that is taxable as a corporation and be managed by a board of directors or trustees. It must have shares that are fully transferable and have a minimum of 100 shareholders. In addition, no more than 50% of its shares should be held by five or fewer individuals during the last half of the taxable year. A REIT must invest at least 75% of its total assets in real estate assets and derive at least 75% of its gross income from rents, from real property or interest on mortgages financing real property. It should have no more than 25% of its assets consist of stock in taxable REIT subsidiaries. Due to the high payout ratio, REITs routinely issue secondary offerings because they are unable to increase their capital base using retained earnings. And, aside from reminding folks that this is not a complete list of requirements - for that talk to a mortgage tax attorney - a mortgage REIT must invest at least 55% of its assets in "qualifying interests." To meet this test, an agency mortgage REIT invests 55% of its assets in whole pools, that is, pools with undivided interest in a mortgage. [More on REIT's on Monday.]

For anyone waiting to lock, once they actually process a file (and from what I am hearing, there are very few easy refi's), rates continue to be low. Yesterday the yield on the risk-free Treasury closed at 3.00%, worse in price by about .250. MBS prices fell 3/8s of a point on Fannie 3.5's, and about .250 on 4's (containing 4.25-4.625% loans). But this was after starting off the day with the 10-yr down at 2.92%, so as we sold off investors sent out intra-day price changes. And overall, volume was substantially above normal Thursday with better selling when all was said and done. The $13 billion 30-yr auction was "sloppy".

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