Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward…American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.
— Alan Greenspan, February 23, 2004 Read more
The vast majority of US mortgages made since the crisis have been guaranteed and securitised by government agencies, while many of the resulting bonds have been purchased by the Federal Reserve and will probably be held to maturity. For better or worse, the US residential lending market has effectively been socialised.
That’s the context for an important piece in today’ FT from former Alphavillain Tracy Alloway on the US government’s attempts to revivify private-label mortgage securitisation. Apparently the Treasury department is unhappy with the current situation:
Authorities are having to walk a fine line between encouraging private capital back into the mortgage market while ensuring availability of credit to less-than-pristine borrowers and simultaneously avoiding a repeat of the subprime bubble that brought the financial system to its knees in 2008…Sales of private-label MBS total just $4.5bn so far this year, compared with $17bn sold last year. Some $726bn worth of private-label MBS was sold in 2007, at the height of the subprime mortgage bubble.
This occasional Alphaville contributor just got back from a prolonged reporting stint in Las Vegas.
On the agenda was not one but two securitisation conferences. Some readers may recall that the American Securitization Forum (ASF) has for many years hosted an annual gathering, most often in the pleasant confines of the Aria hotel in Las Vegas. This year, a bitter schism within the securitisation industry meant there were dueling conferences – one organised by the ASF and the other by the break-away Structured Finance Industry Group (SFIG). Read more
It was only a matter of time before the mortgage refinancing wave receded.
As we noted last October, the limited pool of eligible borrowers meant that refinancing activity was already limited in how much it could increase. Read more
FT Alphaville does like a good Senate Banking Hearing. Especially when they feature a political body slam on proper statistical methods. And so we are proud to announce this month’s Ultimate Statistics Fighter… [dramatic pause]… is Senator Elizabeth Warren!
Warren demonstrated her moves on Thursday during a hearing on Outsourcing Accountability? Examining the Role of Independent Consultants. (Don’t let the incredibly dull title of the hearing deter you. That would be a mistake. Don’t be that person.) Read more
There’s loads of serious-minded UK Budget news & analysis on FT.com already, so…
It might just be us, but Fannie and Freddie’s makeover by the US Treasury last Friday seems not to have got much broader (political) play. It’s almost trite to observe that the GSEs have had almost no hearing in the 2012 election noise machine so far.
Odd when this could be a turning point in the mortgage agencies’ ties to the government. Read more
So farewell then, 10 per cent Fannie and Freddie senior pref dividends.
Spanish bank write-downs on residential mortgage loans, eh.
It’s something that had been vexing analysts before last week’s stress-test results from Oliver Wyman and Roland Berger, though these tests haven’t dived into individual bank loan books. That comes later. Read more
Covered bonds. The sacred cows of the fixed income universe. The instruments which have never knowingly failed (thanks to their cover pool of secured assets). Magic bonds.
It should be news then that the cover pool backing Spanish multi-cedulas — Spain being one of the biggest issuers of covered bonds in Europe — is for the first time experiencing a wobble. Read more
Three’s a trend — Citi’s joined JP Morgan and Wells Fargo in reclassifying home equity (junior lien mortgage) loans as bad assets this quarter.
From a footnote in its Q1 results: Read more
Released by the Justice Dept on Monday. First — the Complaint by US government agencies against Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo and Company, Citigroup INC. and Ally Financial Inc.
(Click image for full doc) Read more
For this, our final post covering FT Alphaville’s meeting with Yves Smith of Naked Capitalism, we asked her about the regulations that have arisen from the ashes of the financial crisis. Not wanting to leave the series on a depressing note, we (gently) prodded Ms Smith to also share with us something to be optimistic about.
AV: What do you think some of the biggest pitfalls/missteps have been since the crisis in terms of regulation? Read more
On Wednesday, FT Alphaville met Yves Smith, proprietor of the blog Naked Capitalism. Ms Smith is the author of the book ECONned: How unenlightened self interest undermined democracy and corrupted capitalism.
Nabbing the quietest table we could find at Candle 79, we asked her a few questions about Naked Capitalism, the blogosphere, bankers, and bonuses… as well as what she does for fun. Read more
UK homeowners could face higher mortgage costs and greater risk of foreclosure next year because of an obscure clause in the bank capital directive being worked on by the European parliament, says the FT. As part of a large reform package that seeks to make banks safer and regulation more uniform, the draft directive declares that all EU loans must be treated as if they are in default when they are 90 days in arrears. While this is common practice in much of the 27-nation bloc, it would overrule UK rules that give retail mortgage borrowers up to 180 days. The definition change pushes up the probability that mortgage loans will default, a key metric in determining capital charges. It will boost banks’ capital charges on UK mortgages by 15-20 per cent, forcing many institutions either to cut lending or charge more to customers. About half of 1 per cent of the UK’s 13.6m mortgages are already in “forbearance” compared with 1.2 per cent of mortgages that are in arrears, according to the Bank of England’s financial stability report. Italian public sector borrowers will also be hit but the Bank of Italy does not expect the impact to be as great.
Finance writers and television shows have used flipping houses as a symbol of the pre-crisis housing bubble.
But we weren’t aware of any statistical evidence until we saw this post on Monday from Liberty Street Economics, the New York Fed’s blog. The post is well worth a read and if you’re really interested here’s the underlying paper. Read more
Massachusetts sued the five biggest mortgage companies in the US on Thursday, accusing them of “corrupting” the state’s land records through pervasive use of fraudulent documentation in seizing borrowers’ homes, reports the FT. The lawsuit throws a wrench into discussions between various federal and state agencies and the five lenders – Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial – to settle allegations of faulty mortgage practices. The two sides have been nearing a $25bn deal over the past year to resolve claims sparked by the discovery that the banks employed so-called “robosigners”, or workers who signed foreclosure documents en masse without properly reviewing individual borrowers’ paperwork. Martha Coakley, Massachusetts attorney-general, on Thursday alleged that the banks illegally foreclosed on borrowers’ mortgages because they were not the actual holders of those mortgages, among other accusations. This was due to their failure to properly review, assign and transfer critical paperwork, she said, adding that the banks “had no legal right to conduct the foreclosure”.
Policymakers are considering ways to buy troubled government-guaranteed mortgages from a new refinancing programme in case investors balk, people familiar with the matter have told the FT. Mortgages refinanced under the Home Affordable Refinance Program, which has recently been extended to cover more loans, are currently not eligible for packaging into securities. Officials are considering allowing Fannie Mae and Freddie Mac to issue MBS made up of refinanced loans to investors, and for the agencies to buy the MBS to retain on their balance sheet if a private market fails to develop.
Metro Bank, which launched last year amid talk of a decades-overdue shake-up of British high street banking, has provided just 100 mortgage loans in the past 15 months, the FT reports. The number throws into stark relief the challenge new banks face in building a sustainable business model that can rival the biggest lenders. Metro has attempted to attract customers by promising better service, rather than the most competitive price. It has invested heavily in its branches, spending £1.7m-£2.1m ($2.7m-$3.3m) on each of the nine premises it has opened, and it offers longer opening hours than other banks. But high costs mean it cannot offer the most competitive rates. Metro said its focus so far had been on building up its retail deposit base, upon which it relies to make loans, and lending to small and medium-sized businesses. It emphasised that it only does prime residential mortgages, not buy-to-let or other types of home loans.
The improvement in US mortgage delinquencies has flattened or reversed, according to quarterly earnings from three of the four biggest US lenders, sparking fresh fears over the resilience of the American consumer, writes the FT. Record low mortgage rates and government loan modification programmes have failed to help struggling mortgage borrowers, the data from Wells Fargo, Citigroup and JPMorgan Chase show. Citigroup, which announced earnings on Monday, said the percentages of mortgages that were 90 days delinquent rose for the first time in almost two years – up from 3.87 per cent in the second quarter to 3.88 per cent in the third. Citigroup chief financial officer John Gerspach said it was seeing “redefaults” even on modified mortgages. “We could begin to see increased delinquencies,” he added.
Citigroup wasn’t the only US banking giant to report results on Monday.
Wells Fargo, America’s fourth biggest bank by assets and second biggest bank by operating income, also released its quarterly earnings statement. It contains less CVA flapdoodle than JPMorgan and Citi but there are some mildly interesting data points nonetheless. Wells is perhaps the bank most susceptible to Operation Twist and its earnings provide a picture of how some of the more vanilla banks are responding to long-term low interest rates, narrowing interest margins and mortgage refinancing. Read more
Freddie Mac, the US government-controlled mortgage financier, used flawed procedures for determining how lenders repurchased soured loans, probably saddling taxpayers with billions of dollars in losses, according to a federal audit to be released Tuesday. The FT says the report found the company was ignoring foreclosure trends for loans it purchased from lenders during the housing boom. The revelation could lead to increased requests to put loans back to originators such as Bank of America, which is struggling under the weight of such demands from Freddie, its sister agency Fannie Mae, private investors and mortgage insurers. BofA told investors earlier this year it was mostly through claims from Freddie Mac and Fannie Mae.
Jeff Horwitz has a cracking story in Tuesday ‘s American Banker on a previously undisclosed report by the Inspector General of the Department for Housing and Urban Development (HUD) into allegations that US banks took lucrative kickbacks from mortgage insurers.
This is the next link in the forced-place insurance chain, which Horwitz desrcribed in a 2010 article picked up by, among others, FT Alphaville and Felix Salmon. Read more
The lawsuits filed on Friday by the Federal Housing Finance Agency against 17 global banks involved nearly $200bn of mortgage-backed securities but the regulator refused to put a figure on the total losses it was seeking to recover.
To arrive at a very rough estimate, FT Alphaville used the 21 per cent loss ratio claimed by FHFA in its July lawsuit against UBS. We scrawled $40bn (a figure twice as high as Reuters suggested) on the back of our envelopes and headed out for the long weekend. Read more
Big US banks in talks with state prosecutors to settle claims of improper mortgage practices have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion dollar payment. The FT says talks aim to settle allegations that banks including Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial seized the homes of delinquent borrowers and broke state laws by employing so-called “robosigners”, workers who signed off on foreclosure documents en masse without reviewing the paperwork. The settlement might also release the companies from legal liability for wrongful securitisation practices, however officials from some states fear such provisions could be too lenient, and both parties stressed that talks remained fluid.
— By John McDermott and Cardiff Garcia
The details of the US government’s attempted bank raid are coming in on Friday afternoon. Read more
Friday promises to be an ugly day for US financials:
US mortgage rates have plunged to a 50-year low, sparking a surge in refinancing that is helping growing numbers of homeowners reduce their borrowing costs, the FT reports. Freddie Mac, the quasi-government entity that buys and insures mortgages, said on Thursday that an average US 30-year fixed-rate mortgage had dropped to 4.15 per cent, down from 4.32 per cent last week. The average in effect mortgage rate is 5.3 per cent, according to the Bureau of Economic Analysis, suggesting more borrowers could benefit. Homeowners are looking to take advantage of ultra-low US Treasury yields, which are used to price mortgages, to apply for refinancing. Data from the Mortgage Bankers Association show a 4.1 per cent increase in applications last week, with the sharp upward trend starting at the end of July. “It’s spurring a lot of people who were really fence-sitting, people who refinanced last year at 4.85 per cent,” said Daniel Kramer, a mortgage broker at United Mortgage Services, servicing affluent areas of New Jersey, New York and Connecticut.
New York’s attorney-general has moved to block an $8.5bn settlement between Bank of America and investors in mortgage securities that plunged in value during the financial crisis, the FT reports. Eric Schneiderman, New York AG, filed court papers on Thursday that accuse Bank of New York Mellon, one of the parties to the disputed settlement, of having “engaged in repeated fraud and illegality” in its role as trustee to investors in hundreds of billions of dollars of mortgage securities. The filing with the New York Supreme Court is the latest twist in a complex legal drama that seeks to address wrongdoing arising from the way mortgages were sold to homeowners and packaged into securities that then collapsed as the crisis deepened in 2008. BofA had proposed to pay $8.5bn to investors to settle claims related to its mortgage procedures and the activities of Countrywide, which it bought in 2008. The New York AG said BNY Mellon had a conflict of interest in agreeing to the settlement as it would be indemnified by BofA for related legal action.
Moody’s is taking another look at the way it rates Australian Residential Mortgage-Backed Securities.
We anticipate increases to Moody’s Aaa mortgage default probability and house price stress rate assumptions. Separately, Moody’s expects to modify its approach towards incorporating lenders’ mortgage insurance in Australian RMBS.