by Tanta on 1/25/2008 06:06:00 PM

This probably wasn't what Congress had in mind, ya think?

NEW YORK (Reuters) - A key element of the stimulus package aimed at jump-starting the ailing U.S. housing market may have the unintended consequence of raising mortgage rates, said analysts studying the plan.

A federal proposal to increase the size limit on loans eligible for purchase by mortgage finance giants Fannie Mae and Freddie Mac has unsettled traders in the $4.5 trillion market for bonds backed by the "conforming" mortgages.

Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.

Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS.

Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.

Potential damage to the "to-be-delivered" (TBA) market -- the most actively traded agency mortgage market where investors can buy bonds before they are actually created -- prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.

"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone.

Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.

When falling rates prompt refinancing of loans in mortgage bonds, investors can be hurt since principal may be returned to them at a price below market value. The investor is also faced with reinvesting principal in bonds paying lower rates.

MBS paying low interest rates have been hurt in recent days amid expectations the addition of many jumbo loans will boost supply in those coupons, analysts said. As much as $500 billion in jumbo loans could qualify, according to Barclays research.

Wall Street MBS traders last beat down SIFMA's door in October when the advent of the Federal Housing Administration's FHA Secure program threatened to taint TBA pools of Ginnie Mae securities. The dealers got their way -- Ginnie Mae created new "specified" pools outside of their TBA issues for FHA Secure.

"The street is on high alert," one mortgage trader at a New York-based primary dealer said in an e-mail.

Rajadhyaksha and other analysts, including RBS Greenwich Capital's Noah Estrin, expect the TBA market will be protected if Congress and President George W. Bush approve the stimulus plan as written.

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC. "That has made the market as liquid as it is. Home owners have benefited from lower mortgage rates."

TBA works the way it does precisely because "agency" loans are basically interchangeable: the normal variation just isn't wide enough to prevent traders from pricing deals before seeing the exact loan composition.

Certainly this problem can be solved by putting the LFKAJ* in their own pools--as with FHASecure. That might keep this plan from driving up rates for everybody, but it's not clear to me how it improves the spread on those LFKAJ-only pools. Hmmm.

*Loans Formerly Known as Jumbo

by Calculated Risk on 1/25/2008 04:31:00 PM

From Housing Wire: Option ARM Specialist FirstFed: Delinquencies Up 231 Percent in One Quarter

... FirstFed said that option ARMs hitting a forced recapitalization were “a contributing factor in the higher level of delinquent loans.”

During the fourth quarter of 2007, just over 1,800 borrowers, with loan balances of approximately $830 million, reached their maximum level of negative amortization and had a resulting increase in their required payment. The bank said that it estimated that another 2,400 loans totaling approximately $1.1 billion could hit their maximum allowable negative amortization during 2008.

Hitting the maximum level of negative amortization doesn't necessarily mean the homeowners will be in trouble. But the fear is that many of these homeowners used Option ARMs as affordability products (they could only buy the home making the neg-am payment), and that they will be in unable to make the payment when they no longer have the neg-am option.

by Calculated Risk on 1/25/2008 02:54:00 PM

From MarketWatch: Banks may need $143 bln in fresh capital

If bond insurers are downgraded a lot, banks will need as much as $143 billion in fresh capital to absorb the impact, Barclays Capital estimated on Friday.

The Barclays analyst believes that the "regulators and banks will be strongly incentivised to reach a workable solution" and avoid the downgrades.

by Calculated Risk on 1/25/2008 01:01:00 PM

Yesterday Peter Viles at the LA Times brought us a story of a homeowner planning to use "jingle mail": A tipping point? "Foreclose me ... I'll save money"

A commenter on L.A. Land this morning writes, "I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.
...
"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

Today Viles has a poll: Is walking away irresponsible? Or smart?

There are other issues to consider than just a wrecked credit rating. There are possible tax consequences. And it is possible, depending on whether the loan is recourse or non-recourse - and the frame of mind of the lender - for the lender to seek a deficiency judgment against the homeowner. Also it appears the homeowner has not properly disclosed the planned foreclosure on his current home with his new lender.

I'm not a lawyer or a tax advisor, and there may be other issues too. Hopefully the homeowner mentioned above has obtained tax and legal advice.

by Calculated Risk on 1/25/2008 10:34:00 AM

Statement of OFHEO Director James B. Lockhart on Conforming Loan Limit Increase

We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

... We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.

OFHEO is the regulator charged with ensuring the safety and soundness of Fannie Mae and Freddie Mac.

by Tanta on 1/25/2008 09:02:00 AM

The builders and Realtorz© are happy. The dollar amount is still apparently a matter of debate. The kabuki about the conventional conforming (Fannie and Freddie) limit being "temporary" is still in there, but it seems we've agreed to make the FHA change permanent. (Does this mean that the previously reported change to FHA making its maximum loan amount 100% of the conventional limit would be permanent, or that the FHA limit would be permanently set to whatever arbitrary dollar amount we eventually agree to? One assumes the former, as this one in particular has a hard time imagining a future in which FHA loan limits could be larger than Fannie and Freddie's. Then again, this one never thought she'd live to see $700,000 one-unit conforming loans in the contiguous 48, so whatever, dudes.) Paulson's leadership has been, er, flattened.

From the Wall Street Journal:

Democrats and Republicans provided conflicting versions of how much more leeway the companies will get. The package agreed upon by Congress would temporarily allow Fannie and Freddie to buy or guarantee mortgages as high as $729,750 in cities with high housing prices, according to House Speaker Nancy Pelosi. House Republican Leader John Boehner put the ceiling at $625,000, according to a news release.

The higher allowance would expire Dec. 31, though it would be permanent for loans guaranteed by the Federal Housing Administration, the New Deal-era agency that typically helps low- and middle-income home buyers qualify for low-interest mortgages. Currently, FHA can't guarantee mortgages higher than $367,000.

The plan, as outlined by Speaker Pelosi, also expands the role of FHA in assisting homeowners in trouble. In addition to raising the loan limits for FHA, Congress will permit more borrowers facing defaults to refinance through the FHA, and increase funding for housing counseling to $500 million to help home buyers who fall behind on their mortgage.

Raising the loan limits should allow a larger pool of borrowers to qualify for lower-cost mortgages or to refinance existing mortgages, something that has been difficult to do since mortgage lenders pulled back from nonconforming loans. "This, along with the fact that interest rates have dropped, will give a big kick to the demand side of the housing market," said Nariman Behravesh, chief economist at Global Insight, an economic consulting firm in Lexington, Mass.

Yesterday, Bankrate.com was quoting mortgage rates for 30-year fixed conforming mortgages of 5.25%, compared with 6.41% for some nonconforming mortgages.

But the plan means a major expansion of Fannie's and Freddie's already large role in providing funds and setting standards for American home loans. With the compromise, moreover, the administration is continuing a retreat from its efforts in the first half of this decade to scale down Fannie and Freddie and let free-market forces have more sway in the mortgage market.

Major accounting scandals severely tarnished both companies earlier this decade. But they continue to exert political power, largely because builders and Realtors see them as a vital prop for the housing market and fiercely resist efforts to constrain them.

Though the rise in the conforming-loan limit is supposed to be temporary, Congress may find it tough to reverse it in the face of warnings by builders and Realtors that such a move would cause another drop in home prices.

Yesterday, Treasury Secretary Henry Paulson said he had wanted to increase the conforming-loan limit only if Congress would pass long-stalled legislation designed to tighten regulation of Fannie and Freddie. But, he said, "I got run down by a bipartisan steamroller...Republicans and Democrats were united on this."

And who is in dire need of cheaper jumbo financing?

by Calculated Risk on 1/24/2008 07:22:00 PM

From The Times: Mortgage bond insurers 'need $200bn boost'

America's biggest mortgage bond insurers collectively need a $200 billion (£101 billion) capital injection if they are to maintain their key AAA credit ratings, a figure that dwarfs a plan by New York regulators to put together a capital infusion of up to $15 billion ... Sean Egan of Egan Jones Ratings Company, said.

The next few weeks should be very interesting for the monoline insurers.

by Calculated Risk on 1/24/2008 05:16:00 PM

No, not another Buffett rumor!

From the Evening Standard: Billionaire to rescue of crisis-hit US insurer

Billionaire vulture fund operator Wilbur Ross is in takeover talks with Ambac, the troubled bond insurer whose recent financial crisis was a major factor in this week's dramatic US interest rate cut.

The Evening Standard has learned that a deal for the stricken .... company ... could come within the next two weeks.

Insiders said the negotiations are serious and progressing well.
...
"The monoline insurance industry's success depends on the reversal of some very unfortunate errors," Ross said. "It took what was a very safe industry and, through quite terrible misapplication of risk management, caused the troubles we see today."

He added that any deal would depend on whether "you really have your arms around the degree of insolvency" in the sector.

If a deal depends on having "your arms around the degree of insolvency", then my guess is there will be no deal.

by Calculated Risk on 1/24/2008 01:35:00 PM

For more existing home sales graphs, please see the earlier post: December Existing Home Sales

Last month I noted:

If inventory follows the normal pattern, we will probably see a decline to 3.7 million units or so in December (from 4.273 million units in November). This will bring out even more bottom callers, but it is just the normal seasonal pattern.

In fact, inventory levels only declined to 3.905 million units and the bottom callers were muted. The following graphs put this record inventory into perspective:

Click on graph for larger image.

The first graph shows annual existing home sales and year end inventory. As the NAR noted 2007 was the fifth highest sales year on record.

With falling sales, and an expected surge in inventory in the spring, it is very likely that inventory will be higher than sales at some point next year. That will put the "months of supply" number above 12. The last time that happened was in 1982.


The second graph shows the annual sales and year end inventory since 1982 (sales since 1969), normalized by the number of owner occupied units. This graph shows that year end inventory is at an all time record level by this key measure.

This also shows the annual variability in the turnover of existing homes, with a median of 6% of owner occupied units selling per year. Currently 6% of owner occupied units would be about 4.6 million existing home sales per year. This indicates that the turnover of existing homes - December sales were at a 4.89 million Seasonally Adjusted Annual Rate (SAAR) - is still above the historical median.

This suggests sales in 2008 will fall significantly from the 2007 level.

by Calculated Risk on 1/24/2008 12:42:00 PM

Here are the winners for the contests to guess:

1) the NAR reported sales for 2007. Actual: 5.652 million.

Winner: poszi!

Person	Prediction
1st: poszi	5.65 million
2nd: ams16	5.64 million
3rd: Curlydan	5.666666 million

2) the peak inventory reported by NAR in 2007. Actual: 4.561 million.

Winners: Rich, AllenM, Jed!

Person	Prediction
1st (tie): Rich	4.592 million
1st (tie): AllenM	4.592 million
1st (tie): Jed	4.592 million

Note: 4.592 million was the peak at the time of the contest (revised down later).

3) the peak Months of Supply reported by NAR. Actual: 10.7 months.

Winner: AllenM!

Person	Prediction
1st: AllenM	10.56 months
2nd (tie): ipodius	10.9 months
2nd: (tie) Rich	10.9 months

Congratulations to all!