15 Comments for this entry

1. John M. says:

   August 14, 2008 at 9:11 AM

   twist -

   Meanwhile, the GSEs are stretching themselves to try to keep mortgage financing working. Unfortunately, if they dig too much into the less safe parts of the markets (where private lenders dare not tread these days; and CA+FL+AZ+NV really is “too big to fail”) they could poison their bonds and get into even bigger trouble.

   Look at your recent sidebar find:

   “Agency MBS may include 10 pct of high-balance loans – SIFMA”, Reuters, August 14, 2008.
   

   Fannie Mae and Freddie Mac, the largest providers of funding for U.S. housing, may now include larger loans in up to 10 percent of their bonds that trade in the $4.5 trillion mortgage-backed securities market, an industry group said on Thursday.

   The decision by the Securities Industry and Financial Markets Association follows U.S. legislation that permanently boosts limits on loans eligible for Fannie Mae and Freddie Mac programs to $625,550 from the base of $417,000.
   …

   Fannie Mae and Freddie Mac package the loans into securities for sale to investors in the so-called “to-be-announced” market that is the first stage in the life of a guaranteed MBS. SIFMA’s decision follows a controversial debate over whether to allow the loans in the TBA market, whose efficiency affects the cost of mortgages.

   Putting the big loans into the TBAs sounds like a big reputational risk. I’ve found a Freddie promotional slide show from July, and slide 57 (page 58) outlines what the TBA buyers are hearing.

   To-be-announced (TBA) market

   • Buyer and seller decide on general trade parameters
     • Term
     • Agency
     • Coupon
     • Settlement Date
     • Par Amount
     • Price
   • Buyer does not know which pools will actually be delivered until two days before
     settlement
   • Seller is obligated to provide pool information by 3 p.m. two days prior to settlement
     (“48-Hour Rule”)
   • Pools must satisfy Securities Industry and Financial Markets Association (SIFMA)
     good delivery guidelines

   So this part of the agency debt liquidity system is based on a lot of trust. The GSEs had better be careful what they put in the hopper.

   With spreads on agencies relative to treasuries starting to rise, this issue bears watching.
2. foreclosure_expert says:

   August 14, 2008 at 9:22 AM

   PMI Group, Inc provides lots of mortgage insurance. Think they are hurting a little? They just issued a press release:

   http://www.foreclosureexpert.info/2008/08/pmi-group-inc-s.html
3. twist says:

   August 14, 2008 at 9:42 AM

    

   John-

   Here’s more from Reuters:

   Investors are concerned that allowing larger loans would be tampering with a market that has become a more crucial source of home loan funding since the credit crunch set in last year. SIFMA members considered the "critically important role" that the TBA market plays, Davy said.

    

   The inclusion of large loans may have an outsized affect on TBA bonds since investors do not know what collateral is in their bonds, and assume they will receive securities with the worst-possible characteristics.

    

   The larger the loan, the more apt it is to be refinanced when rates are attractive, thus boosting the expected pace of principal repayment ahead of maturity. Faster-than-expected prepayments when rates are falling reduce the value of a mortgage-backed security (MBS).

    

   Agency MBSs, which trade in a market separate from the subprime mortgage bonds that sparked the credit crisis, have slumped since May on concern that capital-constrained investors like Fannie Mae and Freddie Mac would reduce their demand. Some investors have said uncertainty over the inclusion of large loans has influenced the weakness.

    

   But an analysis by Barclays Capital found that even full inclusion of large loans would have only a negligible impact on the TBA market since only 15 percent of existing jumbo loan borrowers will qualify under the new loan limits.

    
4. twist says:

   August 14, 2008 at 9:45 AM

   Foreclosure Expert-

   Thanks for sharing.

   Don’t you love how they word these things? I liked how selling the Australian operations “will enhance PMI’s overall liquidity and support opportunities for its U.S. mortgage insurance operations.”

   I suspect they mean “will help keep us afloat”.
5. John M. says:

   August 14, 2008 at 11:10 AM

   twist (#3) -

   Paul’s on the case now. It will be most interesting to see if this market sails successfully between the Scylla of the bailout bill and the Charybdis of investors’ comfort level.

   “Jumbo Conforming Mortgages Eligible for TBA Trades: SIFMA”, by Paul Jackson, HousingWire, August 14, 2008.
   

   Homeogeneity is key here, of course, so in an effort to “minimize liquidity disruption in this important market,” SIFMA said it will limit the inclusion of higher-balance loans to 10 percent of the total balance of a pool eligible for TBA delivery. (Note that SIFMA said “minimize,” not eliminate.)

   “We expect higher balance borrowers to receive both rate relief and increased liquidity as was desired in the legislation, while retaining the overall liquidity of the TBA market,” said Sean Davy, managing director at SIFMA. “This arrangement preserves the overall homogeneity of the market while at the same time minimizing the risk of a negative impact on mortgage rates for lower balance loan borrowers, or, potentially, all borrowers.”

   ———————–
   further:
   

   Remove that assumption, and risk locking up the only secondary market for mortgages that’s still functioning right now; which is why SIFMA limited the higher-balance inclusion to 10 percent of a given pool.

   So the amount of tainted tuna going into the can will be strictly limited to an amount where the customer won’t quite notice the smell when the can is opened. As a Maritimer, I can tell you there is a good chance this isn’t going to end well.
6. agnostic says:

   August 14, 2008 at 11:33 AM

   John,

   Those jumbos aren’t “Eating Tuna,” they are “Selling Tuna”.
7. John M. says:

   August 14, 2008 at 11:56 AM

   Agnostic -

   The markets and media seem to be pinning their hopes for a historic turnaround on this one roll of the dice. Today’s rally (such as it is) is based on the perception that the GSEs will now own the jumbo market and make enormous profits on the increase in market share. Seems odd given the limited number of these loans they’re supposed to be placing into the TBA market.

   Going on two years ago I was freaking out at the mere prospect of a “sticky down” $417k conforming limit in the post “OFHEO Change Could Shrink Jumbo Market” (Nov 16, 2006). That sounds almost quaint now.

   It’s amazing what folks are willing to put at risk now to reverse market sentiment for falling financial stocks.

   “U.S. Stocks Rise as Fannie Mae, Freddie Mac Spur Bank Rally “, by Lynn Thomasson, Bloomberg, August 14, 2008.
   

   U.S. stocks rose for the first time in three days after a trade group loosened restrictions on Fannie Mae and Freddie Mac to help revive the mortgage industry.

   Fannie Mae and Freddie Mac, the largest sources of financing for U.S. home loans, each jumped more than 6 percent after the Securities Industry and Financial Markets Association said larger loans financed by the two companies will be allowed in the main market for mortgage bonds. …
   …

   “Financials, while extraordinarily beaten down and with extraordinarily negative sentiment, I think two years from now will have been a brilliant move,” Fritz Meyer, the Denver-based senior market strategist at Invesco Aim, which manages about $162 billion, told Bloomberg Television.

   Wow! Is that calling a bottom or what?

   What? Igor says, “insane”
8. John M. says:

   August 14, 2008 at 12:10 PM

   twist -

   Do you want to see how high the stakes are on this issue? I just got the subscriber’s notification e-mail from The Economist, and check out the first two paragraphs:
   

   Business this week
   Aug 14th 2008
   From The Economist print edition

   After a four-week-long bounce, financial stocks tumbled back to reality. JPMorgan indicated that it faced further losses on mortgage-backed securities after a substantial deterioration in trading conditions. Speculation continued to mount that AIG may announce a capital increase. Meanwhile, Goldman Sachs faced a raft of downgrades as analysts worried about a slowdown at its capital markets divisions.

   Fannie Mae successfully sold $3.5 billion of debt to investors. America’s biggest mortgage company remains in crisis mode, however. Standard & Poor’s, a rating agency, downgraded Fannie’s preferred stock and subordinated debt, reflecting the risk that it might be taken into receivership. The company’s senior debt, with its near-explicit government guarantee, remains triple-A rated.

   That $3.5B bill sale is exactly the process that diluting the quality of the TBA market might put at risk.
9. jryskmpr says:

   August 14, 2008 at 12:40 PM

   Where will it end? Exactly where I always said it will end:

   1. 60% reduction in home values

   2. ban on housing evictions
10. agnostic says:

    August 14, 2008 at 1:05 PM

    John -

    I have seen Fritz Meyer speak in person – he is a semi-permaBull, mostly based on demographics in the U.S. – don’t ask me, ask him. I’ve always said, you can count the number of bearish mutual fund complex economists on a quadruple amputee’s digits.
11. John M. says:

    August 14, 2008 at 1:19 PM

    agnostic -

    I had a fine old time debunking renowned demographer Richard Florida (he’s moved to ON since, but I don’t think he goes by Richard Ontario ) in the post ” Dear Mr Jenkins, “means migration” is bogus” (Sept 18, 2006). I wonder if Meyer uses some of the same fluffy arguments and tortured heat graphs.
12. surak says:

    August 14, 2008 at 8:52 PM

    Twist,

    I heard a rumor that Bank of America may be on the verge of failure. I do not know if there is any validity to this or not. Just wanted to know if you heard anything pertaining to this.

    Thanks

    Igors word “disaster”
13. toysarefun says:

    August 14, 2008 at 11:45 PM

    Surak: Read this from Mish.
    http://globaleconomicanalysis.blogspot.com/2008/07/you-know-banking-system-is-unsound-when.html

    BAC is on the list of distressed banks.
    http://bankimplode.com/blog/2008/08/14/bank-of-america/

    I believe one thing they are known for is giving a credit card to just about anybody.
14. twist says:

    August 15, 2008 at 5:55 AM

    Surak, Toysarefun-

    BAC may be on the distressed list [Was the CFC aquisiton a big mistake for them, or what?] but there are a few others that I would expect to go down before they do.
15. leokingston says:

    August 17, 2008 at 7:15 PM

    Real estate professionals and investors have to keep sharply focused on their own local area and the activity of local lenders. Bad national press is not a good way to start our work day.

    Leo Kingston
    http://www.mr2sellhomes.com

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