Refinance Free Credit

According to a cost estimate released Thursday by the Congressional Budget Office, enactment of a bill seeking to amend federal bankruptcy law to allow for principal cram-downs on primary residences would deliver $17 million in cost savings and additional revenues to the federal government.

The CBO estimated that HR 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007, would reduce direct spending by $10 million and increase government revenue by $7 million between 2009 and 2018. The report also estimates that while the bill would add to court costs, the CBO believes that such costs “would not be significant.”

While costs to the public sector aren’t expected to be signficant — and, indeed, the bill is expected to benefit the federal government — costs to the private sector may be. The CBO said that while the bill would impose additional costs on businesses, it was unclear if the aggregate costs of complying with the bill’s provisions would exceed a dollar threshold set by the Unfunded Mandates Reform Act, or UMRA.

UMRA was put into place in 1995 to ensure that Congressional leaders do not enact bills that place a costly burden on state-level agencies or private-sector parties without associated funding support.

The CBO said that it could not estimate the cost of private-sector mandates “because of uncertainty about the number of bankruptcy plans that would be modified and how these changes would affect holders of secured claims.”

The debate over whether bankruptcy cram-downs should be allowed has been an intense one; the fact that the proposed bill is likely to drive incremental revenue for the government, while costing the private sector an indeterminable amount of money, is likely to be an area of contention as the bill is debated at varying Congressional levels in the months ahead.

The complete report by the Congressional Budget Office is available here.

Get ready for jumbo conforming.

The U.S. Congress yesterday passed and sent to President George Bush a $168 billion economic stimulus plan that would boost the GSE conforming limit to as much as $729,750 through the end of this year. The plan would also raise FHA lending limits to the same level for high-cost areas.

More than a few commentators speculated that boosting the conforming limits was the real impetus behind the bill. From Andrew Jeffrey at Minyanville:

Only the most Pollyannaish would argue that mailing checks to the spending vacuum that is the American consumer is an effective way to bolster the economy, so the true motivation for the unusually quick congressional action is for Fannie and Freddie to step in and support housing values.

The NAR, not surprisingly, hailed the bill as a “major stimulus for the housing industry,” and said the higher GSE limits would reduce foreclosures by 210,000, while higher FHA loan limits would allow nearly 200,000 homeowners to refinance and avoid foreclosure.

Via the Associated Press, the consensus seems to be that raising the limits will provide some help in areas such as California:

Right now, borrowers in expensive areas are “really stuck between a rock and a hard place,” said Mark Vitner, senior economist with Wachovia Corp. Raising the caps, he said, will result in a refinancing boom for those properties.

“We’re more likely to see an immediate improvement at the upper end than we are at the lower end” of the housing market, he said …

… Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.

“The notion that we’re talking about vacation homes in Colorado is not correct,” Mudd said at an investor conference in New York. “We’re talking about working-class homes.”

The impact, however, may be more limited than some would otherwise hope; a lack of equity among many existing homeowners could be a significant hurdle, with the WSJ’s Development blog citing Peter Ogilvie, president of the California Association of Mortgage Brokers, as saying “many California homeowners may not qualify for the terms.”

Both GSEs have tightened lending guidelines recently amid the industry downturn, and in particular have pulled back on maximum loan-to-value ratios in many of the nation’s hardest-hit housing markets. Housing Wire reported in December of last year that Fannie Mae had instituted new restrictions on LTV ratios in declining market areas, pushing LTV and CTLV maximums down five percentage points.

With home values declining, even borrowers who aren’t quite underwater yet may have a tough time qualifying; and new borrowers in high-cost areas will be required to come up with a greater down-payment than during the go-go period of the recent housing boom.

But the largest unresolved issue — and one that many primary mortgage market participants have not considered — is the so-called TBA trade (see earlier coverage here). Secondary market activities here will impact borrower rates moreso than anything else.

Sources suggested to HW on Thursday that the SIFMA committee engaged in determining whether conforming jumbos will trade as TBA is expected to keep the newly-conforming loans out of TBA trades, although no decision had been announced when this story was published.

If the newly-minted conforming loans at higher limits are kept separate, “jumbo borrowers [will] only get the benefit of guarantee in market, while the prepayment hickey and higher GSE guarantee fees are tacked onto their rate,” said one source via email.

Last Friday, I jokingly wrote:

I’m giving odds of 10:1 that New York AG Andrew Cuomo muscles his way into the headlines, somehow, next week.

Turns out he did just that. Cuomo came out firing Friday against proposed reform efforts by leading rating agencies announced earlier this week, according to various media reports, saying the proposals are “too little, too late.”

“Both S&P and Moody’s are attempting to make piecemeal changes that seem more like public relations window dressing than systemic reform,” Cuomo said in a statement.

Moody’s said Tuesday that it was considering an overhaul of its MBS ratings, while Standard & Poor’s rolled out a series of new governance procedures (detailed on a new Web site, http://www.spnewactions.com).

Both agencies say they are working with Cuomo’s office and taking necessary steps to restore investor confidence. From the WaPo:

“The actions that we are taking today are meaningful and will be important measures to serve the capital markets,” S&P spokesman Steven Weiss said in a telephone interview. He said the initiatives pursued by S&P “are making a fundamentally good process better.”

S&P said the company was responding to the subpoena it received in September and is “interacting with the attorney general’s office.”

“We certainly welcome feedback from all market participants and look forward to further constructive dialogue,” Moody’s spokesman Anthony Mirenda said, responding to Cuomo’s statement.

The rating agencies have been taking plenty of heat this week, even from industry insiders at the recently-concluded American Securitization Forum, as HW reported on Monday.

Federal prosecutors are exploring whether or not a criminal case is warranted against Merrill Lynch and its treatment of mortgage bonds, the Wall Street Journal reported Friday.

From the WSJ:

The Justice Department’s U.S. attorney’s office in Manhattan, based near Wall Street, has notified the Securities and Exchange Commission that it wants to see information the agency is gathering in its investigation of Merrill Lynch & Co., according to people familiar with the matter. The SEC is examining, among other things, whether the securities firm booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, the people say.

While the interest of federal prosecutors is preliminary at this point, their inquiry comes as the SEC has upgraded the Merrill probe into a formal investigation, according the the Journal.

The Merrill investigation follows another criminal investigation by the U.S. attorney’s office into UBS AG, which also is alleged to have improperly inflated MBS holdings; the WSJ broke the UBS story last October, which detailed alleged impropriety at a hedge fund owned by financial services giant.

If that weren’t enough, Bear Stearns faces a federal indictment over two highly-publicized mortgage-led hedge funds that failed last year. (HW covered the hedge fund failures last year in great depth).

The Office of Federal Housing Enterprise Oversight said yesterday that it will begin publishing a monthly housing price index, according to a report by Reuters.

The news agency reported that Edward DeMarco, deputy director of OFHEO, told attendees at the New York Society of Security Analysts forum Thursday that the agency would move to move to a monthly reporting format beginning in March.

OFHEO’s HPI data has previously been published only on a quarterly basis.

Reuters’ coverage also had some input on market trends from DeMarco:

“For subprime loans, the seriously delinquent rate is now approaching levels of the 2001 recession,” DeMarco said. “The difference, of course, is that there are now over two times more subprime loans outstanding than there were in 2001.”

“We’re all hearing, and certainly the books of the two enterprises are showing, that delinquences are spreading to other parts of the real estate market,” he added.

In other words: it’s a housing leverage problem now.

After announcing earlier this week that it would raise $750 million in a common stock offering, as part of an attempt to build capital and protect its AAA rating, monoline insurer MBIA Inc. said late Thursday that it had bumped up its offer to $1 billion and priced the offering at $12.15 per share.

According to a press statement, private equity investor Warburg Pincus will purchase $300 million in common stock as part of the offering; MBIA also said the offering was oversubscribed, meaning that the private equity firm’s ‘backstop’ — it’s offer to purchase any outstanding shares not purchased by other investors — will likely not be needed.

Warburg Pincus has already invested $500 million into the ailing bond insurer.

MBIA has been scrambling to build a capital base as the rating agencies have begun downgrading some monoline bond insurers and warning on others, over concerns that exposure to mortgage-related bonds, including CDOs, will strain the capital resources of most insurers. Moody’s Investors Service was the latest to downgrade an insurer, hacking the ratings of former AAA-rated XL Capital Insurance down six notches.

With the current common stock offer, MBIA will have raised $2.5 billion since November of last year.

For more information, visit http://www.mbia.com.

Yesterday’s wide-ranging report on bond insurers here at HW is already out of date: late Thursday, Moody’s Investors Service downgraded the insurer financial strength rating of Security Capital’s bond insurance arm, XL Capital Insurance — making it the latest monoline to lose its AAA-rated status, and providing the latest headache for the mortgage market.

The monoline bond insurers provide the top-rated portions of MBS deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers (like XLCA) are wreaking havoc on the already unsteady mortgage-backed bond market, as investment-grade securities are seeing their top ratings vanish.

This wasn’t just any downgrade, either; XLCA was hit with a six-notch downgrade from AAA to A3, which should throw earlier assumptions regarding a bank-led bailout of certain insurers into question.

Moody’s, as well as other rating agencies, had previously suggested that any downgrades to AAA-rated bond insurers would be in the neighborhood of one to two notches — an assumption that has factored into discussion of any bailout attempts thus far, according to numerous media reports. But a six-notch downgrade? It’s time to rethink those assumptions, all over again.

As a result of the downgrade, tens of thousands of AAA-rated securities wrapped by XLCA — including numerous RMBS issues — were also downgraded six notches, to A3. To see the full list, including affected deals from Countrywide, C-BASS, IndyMac, Greenpoint and Option One, click here.

Moody’s said the capitalization required to cover losses in SCA’s insured portfolio at the Aaa target level would exceed $6 billion, compared to estimated claims paying resources of $3.6 billion; the rating agency said it considered XLCA’s capitalization level more consistent with the single A rating level. The agency also said that it estimated lifetime expected losses of approximately $1.2 billion in present value terms at the monoline.

For more information, visit http://www.moodys.com.

The Senate passed a $150 billion stimulus package in an attempt to avert a mortgage-crash fueled recession.  The bill now goes to the President for signing.  He is expected to pass the Republican-favored bill quickly.

From the Market Watch story on the stimulus package:

The plan would give tax rebates of up to $1,200 for households, with $300 more for each child. The full rebates would be sent to individuals with incomes under $75,000 and to families with incomes under $150,000, including seniors and disabled veterans. The rebate would be phased out for those earning more.

The bill also has provisions to prevent undocumented immigrants from receiving tax rebates.

The plan would also cut business investment taxes by $44 billion for one year. It would raise the caps on mortgages issued by the Federal Housing Administration or purchased by Fannie Mae and Freddie Mac.

No mention of the final increase in the conforming loan limits for Fannie Mae and Freddie Mac but as soon as I can dig it out of the news I’ll have it here.

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ECONOMY HITS HOME: REFINANCING

While you weren't watching ...

... mortgage rates were tumblingBut joining the refi rush won't be so easy this time

By Michael Oneal and Mary Umberger

TRIBUNE REPORTERS

January 26, 2008

Overall volume jumps 8.3%, spurred by surging refinancings as interest rates drop, according to Mortgage Bankers Association's survey.

January 23 2008: 4:04 PM EST

WASHINGTON (AP) -- Mortgage application volume rose 8.3 percent during the week ending Jan. 18, according to the trade group Mortgage Bankers Association's weekly application survey.The MBA's application index rose to 981.5 from 906.4 the previous week.