Tuesday, December 30, 2008

FED: MBS Purchase Program To Begin In January

Release Date: December 30, 2008

For immediate release

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Further information regarding the structure and operation of the MBS purchase program is provided in the attached set of Frequently Asked Questions (FAQs).

Frequently asked questions

Effective December 30, 2008


What is the policy objective of the Federal Reserve’s program to purchase agency mortgage-backed securities?
The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Why is it necessary for the Federal Reserve to transact in the agency MBS market via external investment managers?
The operational and financial characteristics of MBS purchases are significantly more complicated than those associated with the assets that have traditionally been purchased by the Federal Reserve. The Federal Reserve has chosen external investment managers as a means of implementing the MBS program quickly and efficiently while at the same time minimizing operational and financial risks.

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian. The investment managers are BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP. The selection criteria were based on the institution’s operational capacity, size, overall experience in the MBS market and a competitive fee structure. The contract for a custodian is not yet final.

What securities are eligible for purchase under the program?
Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.

What is the investment strategy that will be employed?
Investment managers will employ a passive buy and hold investment strategy in accordance with investment guidelines prescribed by the Federal Reserve. Purchases will be guided by commonly referenced market indices. The agency MBS program will involve the outright purchase of up to $500 billion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the second quarter of 2009. The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.

The investment strategy may involve the use of dollar rolls as a supplemental tool to smooth market supply and demand. A dollar roll is a transaction involving the sale of agency MBS for delivery in the current month and the simultaneous agreement to repurchase substantially similar (although not the same) securities on a specified future date.

Does the agency MBS program expose the Federal Reserve to increased risk of losses?
Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When will the purchases begin?
Purchases are expected to begin in early January, 2009.

Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?
Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers.

Will the agency MBS held by the Federal Reserve through this program be eligible for lending through the Treasury Securities Lending Facility (TSLF) or the daily System Open Market Account (SOMA) securities lending operations conducted by the New York Fed?
There are no plans for the agency MBS held by the SOMA to be available for borrowing through the TSLF or the daily securities lending program.

How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.

What is the legal basis for the agency MBS purchase program?
Purchases of agency MBS in the open market, under the direction of the FOMC, are permitted under section 14(b) of the Federal Reserve Act.

How is the Federal Reserve’s agency MBS purchase program related to the U.S. Treasury’s efforts to purchase agency MBS?
The Federal Reserve’s agency MBS program is separate and distinct from the U.S. Treasury’s program but both programs are aimed at fostering improved conditions in mortgage markets.

How will holdings under the agency MBS program be reported?
Balance sheet items related to the agency MBS purchase program will be reported after settlement occurs on the H.4.1. statistical release titled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when the new items appear for the first time. However, these data may be published well after trade execution due to agency MBS settlement conventions. In addition, the New York Fed will publish the SOMA agency MBS activity in more detail on its external website on a weekly basis.

What measures will the Federal Reserve take to ensure that an investment manager implementing the MBS program will not have an unfair advantage relative to other market participants due to the information it receives about the MBS program?
Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve’s agency MBS program from other advisory and proprietary trading activities of the firm. The New York Fed will monitor each investment manager’s compliance with this requirement.

Where should questions regarding the MBS purchase program be directed?
Questions regarding the MBS program should be directed to the New York Fed’s Public Affairs department: 212-720-6130.

Find the press release here.

Friday, December 26, 2008

"I Remember When Mortgage Rates Were So Low, That..."

That's how the conversation will begin when you're sitting in your rocking chair, grandkids at your feet, being asked what life was like in 2008/2009. You'll go on to say how you saved X amount of money because you had the foresight to lock in an historically low rate. And they'll be impressed.

Okay, so maybe that won't impress any of the kids. And the story may include recollections of how the stock market dropped 40% that year and World Market filled your inbox with "Up To 75% OFF!" emails.

But here's my point:

30 year fixed mortgage rates are currently in the 5% range, a level that hasn't been seen since 1971, the year Freddie Mac began it's weekly rate survey. It's a once-in-a-generation type of thing.

Of course this doesn't mean you should go out and get a mortgage loan at all costs. No mortgage rate is worth making yourself worse-off. But those who are in the market for a home or anyone who could significantly reduce their current monthly mortgage payment should seriously consider pulling the trigger on a new home loan or refinance. Sure, not everyone can take advantage of these rates - credit issues, no downpayment, NO INCOME. Yet there are many who can, and it's not hard to find out by calling your loan officer.

Yeah, there's a conflict of interest in me saying all this (I'm "talking my book"). After all, I make a living originating mortgage loans. But it doesn't take a rocket scientist to figure out that jumping on these low rates could save you money. And I believe I would be remiss not to inform those around me (clients, readers, etc). In fact, it was a conversation I had on Christmas Eve in St. Louis, MO while visiting family that encouraged me to do this post. While chatting about work life, a friend admitted he didn't follow economic/business news and had no idea what was going on with mortgage rates. There are many I've run into who are in the same boat.

Contact your financial advisor. Talk with one (or several) of the many reputable mortgage professionals here in town. Get quotes and crunch some numbers. Call a local Realtor if you're thinking of buying. And seriously consider making a move if it fits your situation/goals/wants/needs.

Wednesday, December 24, 2008

Merry Christmas

We wish everyone a happy holiday season and hope all can enjoy the time with your family and friends!

Santa Claus Blog

Friday, December 19, 2008

Fannie/Freddie Friday Links

Freddie Mac: 30-year fixed mortgage rate at 37-year low (MarketWatch.com, 12/18)
"The average rate fell to 5.19% with an average .7 point for the week ending Dec. 18, down from 5.475% last week and 6.124% a year ago."

"... lowest since the survey began in April 1971."

Fast Track Workouts for Delinquent Borrowers with Freddie Mac-Owned Mortgages Underway (MarketWatch.com 12/18)

Fannie Mae, Freddie Mac foreclosures slow-regulator (Reuters.com 12/16)
"Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home mortgages, slowed the pace of foreclosure starts on delinquent loans for the second straight quarter, their regulator said on Tuesday."
"...but loans reinstated by the former's HomeSaver Advance loan program to borrowers jumped to 27,277 last quarter from 16,658 in the second quarter, the FHFA said."

Loan terms can now be modified before you're late (Chicago Tribune 12/19)
"Starting immediately, Fannie Mae—the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees—will allow borrowers who face imminent financial difficulties to request "early workout" loan alterations, even if they've never been late."

Homeowners Are Rushing To Refinance As Rates Fall (CNBC, 12/18)
I concur.

Thursday, December 18, 2008

Yesterday's MBS Action

A chart of yesterday's pricing action in the FNMA 5.0 coupon, from the Mortgage News Daily's MBS blog

Wednesday's movement is from the middle of the chart on (1st half is Tuesday). Traders were on a shopping spree in the morning and rates improved to the best levels we've seen since 2003 (just under 5%). But within 15 minutes the buyers remorse kicked in and prices fell precipitously for the next 2 hours and continued to trade down for the remainder of the day. Our sub-5% rates had come and gone in a blink of an eye.

Some material to chew on:

Paulson Denies Rumored 4.5% Mortgage Rate Plan (Housing Wire, 12/17)

Jim Cramer seems to think we'll see 3.5% rates - Cramer's Stop Trading (Seeking Alpha, 12/16). Then he said on Mad Money (12/17) that "Benjamin Booyah Bernanke" will "take mortgage rates down to 4%, I'm telling you, that's where they're going to go." For those who follow or know of Cramer, a statement like this is no surprise. Jim likes to entertain, he often changes his tune, and he has quite a few critics.

And even with the FED buying MBS, not all lenders are able to meet the increased demand for loans - Mortgage Rates Left In Dust By Treasury Yields, Failed Lenders (Bloomberg 12/18)

Wednesday, December 17, 2008

MBS Reversal

MBS took a nosedive this afternoon. We're now back to yesterday's prices, and sinking. Rate worsening.

More to follow.

MBS Market Rallies on FOMC Announcement - Mortgage Rates Going Lower

MBS saw an afternoon rally yesterday, due to the FOMC's announcement to cut the Fed funds rate to a range of 0-.25% and their statement: "... the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant." MBS investors were overjoyed and are hopping on the (gravy) train.

MBS is also spiking higher (up 90bps so far) in early trading this morning and we should see rates improve by 1/4% or more this AM. When prices go up, rates go down.

FNMA 4.5 coupon

If you're on the fence with refinancing or purchasing, you may want to jump off.

Tuesday, December 16, 2008

A Perspective Behind The FED's Plan To Lower Mortgage Rates, aka The MBS Bailout

In his most recent post, Brad Setser doesn't specifically address the FED's recent action in the Agency MBS market (remember the FED's $500b MBS purchase program?), but he does provide some great analysis of the numbers that are behind the FED's move.

From one of my new favorites, Brad's Follow The Money blog:

This is what a crisis looks like in the balance of payments data, 12/15/08

[Agency - Fannie, Freddie, Ginnie Mae]

"So much for talk that central banks are always a stabilizing presence the market. They clearly have destabilized the Agency market. The fall in demand for Agencies over the past three months — and most Agency demand has come from central banks until recently — has been sharper than than the fall in demand for US corporate bonds (think securitized subprime mortgages, the category “corporate bonds” in the BoP data includes asset-backed securities) after the crisis of last August."

"The Agency market is a rather important market. Increased lending by the Agencies offset the fall in demand for “private” mortgage-backed securities after the crisis last August. More recently, the absence of a “central bank bid” has kept
Agency spreads wide even after the US Treasury bailout of Freddie and Fannie. And that in turn has pushed the US to adopt other measures to bring down long-term mortgage rates. The Fed and the Treasury are literally now buying the Agencies that foreign central banks are selling. Action, reaction …

Earlier in the same post, Brad points out "[foreign investors added] $400 billion in demand for safe dollar denominated assets [T-bills, T-bonds]. If that kind of monthly inflow is annualized it is a shockingly large number. It allowed foreigners to reduce their holdings of Agencies by close to $75 billion (including a $25 billion fall in short-term Agencies), their holdings of long-term corporate bonds by $13 billion and their holdings of US equities by $6 billion without causing any strain on the dollar."

According to Brad, that's $75b just in October. I'm sure numbers like these make the FED and Treasury nervous.

Friday, December 12, 2008

Questioning Lockhart's Grasp Of The Situation

I want to give FHFA Director James Lockhart the benefit of the doubt. I really do. He's been willing to take on the giant mess that the GSEs, Fannie Mae and Freddie Mac, find themselves in. It takes guts and brains and ability.

But his latest comments make me wonder about, well, his understdanding of the problems in the housing market. From Bloomberg, Dec. 10, Fannie, Freddie May Waive Appraisals for Refinancings:

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

“If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”

They're looking at it? You mean "they" (and you, Mr. Lockhart) are actually considering the idea of ignoring the actual/current value of the collateral on which tens or hundreds of billions of loans would be based? I certainly don't expect that you'd go as far as allowing loan applicants to place their own value on their properties. Of course not, that would be crazy.

Maybe you're thinking about just requiring an AVM (Automated Valuation Models) instead of a full appraisal. But wait, that's still a type of appraisal, and you did say "... do they need a new appraisal if they already have credit?"

Or would the plan be to have Fannie/Freddie accept the original purchase price or appraisal done for a previous refinance? If that's what you're going after, you'd certainly take care of a lot of underwater mortgages. But what about the investors, who Fannie/Freddie depend on for capital? The folks who buy your loans, do you really think they will accept this? I have a hard time believing they will if they know that what they're buying is upside down from the get go. Okay, you at least have the FED - they'll buy anything.

There's also a post (and tons of comments) on Calculated Risk - Report: GSEs May Waive Appraisals For Refis

After(post) Thought: FHFA could bring back the PIW (property inspection waiver) or the FNMA 2075 (Property Inspection Report) . The PIW required no appraisal/inspection, was used for purchases and refis with low LTV (80% or less) and applied to borrowers with high credit scores. A PIW cost the issuing bank $50, a fee which they passed on to the borrower at closing. The 2075 was also used for purchases and refis with low LTV, but did come from an appraiser and required them to inspect the property (but no value given). But using these on a nationwide, across the board basis in today's market could be very problematic.

Wednesday, December 10, 2008

Grill On The Hill

Former Fannie/Freddie chiefs testified at a House Financial Services Committee hearing on Tuesday (CSPAN Video).

Raines Faults Regulators For Fannie, Freddie Missteps (Bloomberg 12/09)

Fannie, Freddie Ignored Risky Loan Warnings (ABC News 12/09)
Fannie and Freddie Execs Defend Their Decisions as House Members Question Motives

Evading Fiscal Responsibility (op ed from Charlottesville's Daily Progress 12/10)

Monday, December 8, 2008

New Protections

Part of the reason we’re in the present mess is that many of people who originated loans during the housing bubble had no business doing so.  In the heyday, mortgage brokering promised a lot of money without requiring a lot of skill.  This attracted more than its share of scoundrels.

Personally, I know of one loan officer, still in the business I understand, who wrote subprime loans in between jail stints for drug possession.   Let’s call him, Jimmy.  Something of a local legend in the biz, there are lots of Jimmy stories.  He reportedly made forty-grand or more a month suckering decent people into bad deals. 

He even continued writing new loans in the prison yard using a smuggled cell phone.  Since he couldn’t go to closing during these stretches, Jimmy would even send his mother to the table to make sure that no honest title rep informed his clients as to how obscenely overcharged they were.

Fortunately, there should be a lot less of these reprobates coming into the mortgage business.  Starting last July, the state of Virginia put a new law into effect to raise the notoriously low barrier of entry into this industry.

Part of this law requires employers to perform background checks on any new employee who may have access to or process personal indentifying or financial information of a Virginia customer. 

Mercifully, new employees do not need to be fingerprinted.  But it is a thorough check.  It includes a criminal history generated by the Virginia State Police.

In no instance can a mortgage company employ someone with any felony or any misdemeanor involving fraud, misrepresentation, or deceit.

That means there will be less Jimmy’s entering this industry.  And that’s no small comfort.

Thursday, December 4, 2008

Bair's On Board With Obama

This morning's story on Bank.com's blog:

Sheila Bair Encouraged By Barack Obamas Foreclosure Ideas

"The chairperson of the FDIC, Sheila Bair, has been pushing an aggressive plan, modeled off of what was tried when IndyMac went under, to help stop foreclosures. Her efforts, though, have been running into opposition from the Treasury Secretary, Henry Paulson, as well as other prominent members of the Bush Administration. The current administration seems reluctant to fund such a comprehensive plan aimed at helping individual homeowners. Now, though, it seems as though she can bide her time and wait for a Barack Obama administration. Maybe Timothy Geithner will be a more compatible and understanding Treasury Secretary."

Bair has been standing out on a limb for some time now with her forward thinking ideas about mortgage modifications. As we discussed in an August post, Indy Mac's failure and quick takeover by FDIC in August provided Bair and team an opportunity to do things her way. The success or failure of the modification program is yet to be seen, but I'd be very surprised if President-elect Obama didn't keep her on board to see it through (and possibly help implement it with other banks/lenders).

The Morning After-Still Just Rumors

The morning after has revealed few details of Paulson’s latest plan to save us.   In fact, more questions and concerns have reared.

Here’s what we do know.  Treasury would give us 4.5% 30-year fixed loans through Fannie and Freddie.  The two GSE’s would buy the bonds at around 4%.  Banks would sell the loans around 4.5%.   

This is a point below current market rate.  (As a historical note, rates have not fallen below 5.375% in the last 45 years).  That means Federal bucks will be needed.

Whatever will be spent will most probably be in addition to the $600 billion committed last week to buying mortgage-backed securities (MBS).  But there’s still no clearer idea of where the money might come from.

Concerns about private investors have reared.  Will they still want to buy MBS while the government floods this market with dollars and forces down the return on bonds?  Will government become the all but exclusive buyer of agency MBS?

Who will this help?  Less than the numbers might suggest.  Bloomberg quotes Rajiv Setia, a fixed-income strategist for Barclays Capital.  “Over 90 percent of the mortgage universe out there would be refinancable, but you can't force banks to lend to people. . .”

These would be agency loans.  That’s not going to help people in trouble, those facing foreclosure.  Homeowners nearing this precipice are going to have damaged credit.  They won’t qualify for an agency product. 

Same with most of the consumers in subprime loans.  They were in subprime because they couldn’t get an agency loan.

This will also mean nothing for those with jumbo loan amounts.

And one of the biggest questions is whether this was just a trial balloon floated up to see if anyone thought this might work or a genuine leak. 

If it was a leak, some have suggested that it came from one of the realtor or builder lobbyists who have been pushing for something similar.  They might be publicizing it in hopes of pushing Treasury more towards this.

Our brothers in these industries may not realize what havoc this will cause to us in the mortgage industry.  This news is disrupting loan pipelines throughout the country, as borrowers now want to wait for what may be the much better deal.

But if it was a trial balloon, I wonder if Paulson and his crew realize how all this is starting smell of desperation.  They keep trying one thing after another and nothing seems to work.  Nevertheless, it keeps costing the taxpayer untold billions.

Wednesday, December 3, 2008

Everybody Limbo!

How low can we go?  4.5% mortgage rates?

That’s the breaking story on CNBC, Wall Street Journal and others in what could be one of the biggest headlines for our business this year. 

A leak has emerged suggesting that the Treasury Department wants to stimulate the housing market by lowering the mortgage rates to 4.5% on a 30 year fixed. The devil will be in the details, which remain sketchy at this point.

How will they do it?  Where all the money come from?

And will it be for all mortgage types?  If it includes refi’s, this leak could destroy whatever pipelines loan officers have at the moment.  All current customers could pull their loans in the hopes of waiting for that magic number.

Even those still in the midst of their recession days could be pulling out of their closed but not funded loans. 

If this was the Drudge Report, we’d have a spinning siren at the top of our page.  Stay tuned.

Monday, December 1, 2008

For The Modern Pilgrim: Plymouth or Jamestown?

As I'm still not ready to let go of the Thanksgiving holiday, I thought I'd share this interesting post I found on the Cyberhomes blog.

Plymouth vs. Jamestown: Which is best?

"As you enjoy leftover turkey today, Cyberhomes offers something to think about: If the first U.S. settlers were to choose a settlement in 2008, which would be the better place to live: Plymouth, Mass., or Jamestown, Va.?"