Refinance Free Credit

While the impact of a recent housing and foreclosure relief package passed by the Senate Committee on Banking, Housing and Urban Affairs isn’t likely to cost taxpayers money directly, the cost of the proposal is likely to be borne heavily by both Fannie Mae (FNM: 24.77, -0.48%) and Freddie Mac (FRE: 23.01, +2.31%).

According to an estimate released June 9 by the Congressional Budget Office, the proposed Federal Housing Finance Regulatory Reform Act of 2008 would cost both GSEs $9 billion over the next 10 years, with roughly $710 million of that total coming in 2009. Freddie Mac has said previously that it expected the cost of the program to be managable, at roughly $175 million for 2009. Clearly, the CBO estimate outstrips those earlier expectations.

A housing relief proposal crafted by Senate Banking Committee chair Chris Dodd (D-CT) could cost Fannie and Freddie $9 billion. (photo: Dodd’s office)

Representatives at Freddie Mac had not commented on the CBO report by the time this story was published on Friday.

Under the Senate foreclosure relief bill, both GSEs would be required to annually pay amounts equal to 4.2 basis points on each dollar of unpaid principal balance of each enterprise’s total new business purchases for that year. The net cost of the program will be below the $9 billion figure, however, once accounting for taxes not assessed; the affordable housing contributions by each GSE will reduce tax revenue that would have otherwise been assessed.

In net, the CBO estimated that GSE assessments into the proposed affordable housing fund would total $6.8 billion through 2018 and $531 million in 2009.

The massive cost of providing federally-sponsored funding of low-income and community revitalization projects — and the expectation that both GSEs provide funding for the effort — underscores lawmaker’s increasing reliance on both Fannie Mae and Freddie Mac to prop up the nation’s troubled housing market. The CBO report would seem likely to add to existing speculation that both GSEs aren’t yet done raising additional capital, should the proposed Senate bill become law.

The full Senate has yet to formally consider the Senate committee’s housing proposal. Sources suggest that House and Senate members are currently hammering out a compromise between the Senate’s version of the housing bill and that already pushed through the House by Financial Services Committee Chairman Barney Frank (D-MA), in an attempt to fast-track a bill before Congress adjourns in early July.

It’s a move that may seem odd to some, but to CEO Robert Klein and his employees at Cleveland-based Safeguard Properties, it’s part of what they see as being a positive influence in the local community. On Friday, the nation’s largest privately-held mortgage field services company said that it had donated $150,000 to Cuyahoga County’s Foreclosure Prevention Program.

Cuyahoga County, home to one of the nation’s highest foreclosure rates, includes Cleveland. The program, known as “Don’t Borrow Trouble,” is one of numerous local campaigns backed by Freddie Mac (FRE: 23.01, +2.31%), among other large mortgage finance companies.

Safeguard, which primarily manages distressed real estate for its banking and finance clients nationwide, may seem to be an odd supporter of foreclosure prevention efforts — after all, the foreclosure surge is a huge source of revenue for the firm. But that’s not how the company sees it, based on Housing Wire’s previous discussions with Diane Roman Fusco, a Safeguard Properties spokesperson.

Fusco has said that the company sees itself ultimately in the business of managing real estate for its clients; that includes foreclosed properties, but property management need not be a specialty limited to that particular line of work, she said.

Beyond that, companies like Klein’s can be a positive source of support for housing in local communities, despite foreclosures, by ensuring that properties are properly managed and maintained. Ask anyone who has worked in servicing or lived in a neighborhood with high foreclosure activity: it’s most often the properties that are in disrepair and poorly managed that end up becoming problematic.

Safeguard’s donation was recognized in a special reception Friday, attended by Cuyahoga County Treasurer Jim Rokakis, program staff, representatives of non-profit counseling agencies and area business leaders.

“This grant comes at an important time for all of us and will go a long way towards helping to protect at-risk homeowners from foreclosure,” said Rokakis.

Since its inception, the foreclosure prevention program, in partnership with United Way’s First Call for Help hotline, has assisted nearly 10,000 homeowners and directly prevented over 2,100 foreclosures.

“Cuyahoga County is our home, where we live and raise families,” said Safeguard CEO Robert Klein. “As a business, we see first-hand the devastation that results from foreclosures — to families, neighborhoods and communities here and across the country.

“It’s in all of our interests to work together to prevent home foreclosures, and Safeguard is honored to participate in this initiative.”

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

Foreclosure filings continued their surge in May, jumping 48 percent from levels recorded one year earlier as the number of distressed borrowers continues to mushroom in key housing markets across the nation. RealtyTrac Inc. reported Friday morning that 261,255 properties were subject some sort of foreclosure activity — default notices, auction sale notices and bank repossessions — during the month, up 7 percent from April.

That number translated into foreclosure filings for one in every 483 U.S. households, the highest such rate of foreclosures since RealtyTrac began normalizing against population in January 2005.

“May was the third straight month where we’ve seen a month-to-month increase in foreclosure activity and the 29th straight month we’ve seen a year-over-year increase,” said James J. Saccacio, chief executive officer of RealtyTrac.

“The nationwide rate of increase for default notices and foreclosure auction notices slowed in May, with default notices up just 1 percent from the previous month and auction notices down 3 percent from the previous month.”

While notices of default and trustee’s sale notices inched upward, the total number of REO properties in RealtyTrac’s property database surged above 700,000 as repossession activity doubled year-ago activity.

California, Florida lead the way
Foreclosure filings were reported on 71,930 California properties, 37,364 Florida properties and 12,959 Arizona properties during May, RealtyTrac said — the three highest state totals in May. Michigan was not far behind Arizona, however, with 12,792 properties receiving foreclosure filings during the month.

Illustrating just how bad the housing market is in the two former “bubble” states, for the second month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the RealtyTrac report.

Seven California cities were in the top ten, led by Stockton in the top spot. One in every 75 Stockton area households received a foreclosure filing in May — more than six times the national average. Other California cities in the top 10 were Merced, Modesto, Riverside-San Bernardino, Vallejo-Fairfield, Bakersfield, and Sacramento.

The Cape Coral-Fort Myers metro area in Florida registered the second-highest metro foreclosure rate in May, with one in every 79 households receiving a foreclosure filing during the month; the other Florida metro area in the top 10 was Port Lucie-Fort Pierce, ranking tenth.

Las Vegas was the only city outside of California and Florida with a foreclosure rate ranking among the top ten, RealtyTrac said. One in every 96 Las Vegas households received a foreclosure filing in May, more than five times the national average and sixth among the metro areas.

Other metro areas with foreclosure rates among the top 20 included Phoenix (20), Detroit (14), San Diego (17) and Miami (19).

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

Breaking news today from Countrywide. Effective today Countrywide wholesale will no longer offer the Non-Conforming Fast & Easy document waiver program. Fast & Easy is Countrywide’s version of stated income. Non-conforming loan amounts will no longer be eligible for stated income regardless of credit score.

This is a huge guideline change for the company that prided itself on offering jumbo loans with no income documentation in the past. The elimination of stated income loans from Countrywide should further depress home prices in expensive states where income and home prices just don’t line up.

From an internal email regarding the change:

Effective 8:00 pm (PT), Friday June 13, 2008, the Non-Conforming Fast & Easy document waiver program will no longer be available.

Guideline Impact
The following LPGs will be updated effective, June 13, 2008:
LPG 12.10 - Non Conforming Programs, Fixed Rate, Fixed Period ARMs, Short Term ARMs, Full, Alt, and Fast and Easy (sm) Documentation

Pipeline Protection

• Loans currently in the pipeline are eligible under the old guidelines only if submitted to CAWL via CWBC or boarded in EDGE and Approved by 8:00 pm (PT) Friday, June 13.
• Loans in the pipeline must be locked on or before June 27, 2008, and must fund/close on or before Monday, July 14, 2008.
• Any lock extension/re-lock will be subject to current lock extension/re-lock polices, and the loan must still fund on or before Thursday, July 14, 2008.
• If any material changes are made to a loan currently in the pipeline at any time after loan approval and prior to funding/closing, the original loan approval is no longer valid and the loan must be countered to full doc. Examples of material changes include, but are not limited to: FICO Score, Loan Amount, LTV, CLTV, Income, Employment, Assets, or Program and/or ratios.
• Loans that are not eligible under the old guidelines are subject to the new guidelines, and must generally either be Counteroffered or Declined (as applicable).

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Shares of commercial mREITs were clobbered on Wednesday, following a string of negative comments about the state of the commercial real estate market. The Federal Reserve’s most recent Beige Book managed the first volley, suggesting that “[c]ommercial real estate conditions varied in April and May, with some Districts reporting that activity had softened. Leasing activity eased in Boston, New York, Philadelphia, Richmond, and San Francisco. Vacancy rates edged higher in Boston, Kansas City, and San Francisco, as well as in pockets of the Richmond and St. Louis Districts.”

That was followed up by research firm Real Capital Analytics, which reported that U.S. commercial property sales transactions were off nearly 70 percent in the first quarter of 2008 versus a year earlier. Moody’s Investors Service also piled on, noting that “[t]he main issue is a standoff in the CMBS industry. Issuers don’t want to make new loans unless they can sell the resulting bonds to investors, but investors don’t want to buy bonds until the spreads have settled down. More people are sitting on the sidelines.”

The comments weighed heavily on the commercial originators on Wednesday, pushing down shares of Arbor Realty Trust (ABR: 12.44, +4.01%) by 14 percent, American Mortgage Acceptance (AMC: 0.70, 0.00%) by 23 percent, Gramercy Capital (GKK: 14.98, -0.47%) by 6.7 percent, and iStar Financial (SFI: 15.88, +0.44%) by 6.6 percent.

With the exception of iStar, all these stocks made new 52-week lows during the week, despite Gramercy’s continuation of its $0.63/share dividend.

Agency Agony
The other major sector of mortgage REITs, agency mREITs, was also hit hard this week. The latest comments from Fed officials, along with a downgrade of Annaly Capital (NLY: 16.045, +0.41%) had agency mREITs reeling. Boston Federal Reserve President Eric Rosengren confirmed on Tuesday that the Fed believes “total inflation,” not the so-called core rate, is really what monetary policy should focus on targeting over the long-run.

Rosengren also expressed concern over continued high commodity prices, noting that “…it seems to be taking quite a long time to date for long-run supply and demand influences to rein in oil price increases.”

Partly as a result of Rosengren’s comments, investors now believe the central bank will leave benchmark rates on hold at their current 2 percent level in the upcoming FOMC meeting. Tough talk on inflation from a string of Fed officials in recent days has even prompted the markets to begin pricing in an eventual rate hike, as early as August.

The economic news prompted JP Morgan Chase & Co. (JPM: 38.65, +1.68%) analyst Andrew Wessel to downgrade Annaly Capital from “overweight” to “neutral,” saying the stock is fairly priced given the likelihood of short-term interest rate hikes. Wessel commented in a note to clients that he believes “…a tightening environment could slow or even halt Annaly’s recent pace of accretive follow-on offerings.”

Agency mREITs reacted strongly to the economic data and analyst actions: particularly hard-hit were recent IPOs Hatteras Financial (HTS: 24.17, +0.71%) and American Capital Agency (AGNC: 17.01, -1.28%). Both stocks shed more than 10 percent on the week, though the sector as whole recovered somewhat following Capstead Mortgage’s (CMO: 12.29, +4.15%) late Thursday announcement that it would hike its dividend by 13 percent to $0.59/share.

Thornburg’s Testy Tell-All
Thornburg Mortgage Inc. (TMA: 0.6936, -7.52%) spent most of Thursday in the confessional, hosting both its first-quarter earnings call and its annual shareholder meeting on the same day. The company expects to post a massive $3.3 billion loss for the first quarter of 2008, of which $2.5 billion was due to valuation adjustments and the accounting for the issuance of stock warrants and its senior subordinated debt.

Thornburg admitted that its financial statements were not yet completely finalized, though it expected them to be ready early next week, when it plans to file its first quarter 10-Q with the SEC.

The company discussed its $1.35 billion financing transaction in a bit more detail, claiming that the deeply dilutive deal was the best option available to it at the time. CEO Larry Goldstone asserted that “[d]eclaring bankruptcy would likely have resulted in the liquidation of our mortgage securities, and existing shareholders would have received nothing.”

The assurances didn’t stem the tide of angry preferred shareholders on the earnings call, who hammered Goldstone on the terms of the transaction and the rationale behind the deal. Although Goldstone repeatedly made the point that the preferred shares were worthless if not for the tender offer, one angry investment manager closed his questions by muttering “[a]ll right, well at least the court battle will be interesting.”

The lone bright spot for Thornburg was its continued excellence in credit metrics. Delinquencies were reported just in 158 of its 36,316 loans, or 0.65 percent of the total loan portfolio. The company originated $548.7 million of loans in the first quarter, but aside from funding its existing pipeline of $239 million in loans, Goldstone admitted that “we’re not really originating any new loans right this minute.”

Credit Suisse Group (CS: 47.94, +2.81%) analyst Moshe Orenbuch set a 12-month target price of 50 cents on the stock, which he calculates to be a 25 percent premium to the expected book value.

“As a result of the additional shares, we now estimate that book value (using principal outstanding) is about 35 cents to 40 cents, compared to our estimate of 60 cents under the initial terms of the note,” he wrote in a note to clients. “Common book value would be negative using current market values of the assets.”

After the bell Wednesday, Thornburg announced that shareholders had approved an amendment to increase the number of authorized shares of capital stock from 500 million to 4 billion shares and to modify the terms of each of the company’s existing series of preferred stock to facilitate a planned tender offer for all outstanding shares of preferred stock.

Thornburg shares gained a few cents in Thursday’s trade, as a result, with little after-hours activity.

Editor’s note: Patrick Harden is a Certified Public Accountant with three years of experience in auditing publicly-traded real estate investment trusts. For the past two years, he has been involved in the mortgage finance industry as a member of the financial reporting group at a publicly-traded mortgage bank. His column covering mortgage REITs runs every Friday.

Disclosure: The author was long ABR and CMO, and held no other positions of relevance, when this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Blown Mortgage received a trusted tip this morning that banking giant HSBC closed 82 branches of Household Finance Corporation (HFC) and Beneficial . Both HSBC companies are players in the non-prime markets and specialize in mortgage refinancing and debt consolidation. Beneficial has also done it’s fair share of “personal loans” using a lien on title, which can show up as a 3rd mortgage on title reports.

HSBC has been pulling back by closing branches of HFC and Beneficial over the last several quarters and closed another one of its subprime lenders, Decision One (or D-1 as it was known, or D-Last as it was referred to in my company for their penchant for approving loan files that weren’t approved elsewhere) , back in September of 2007.

HSBC’s ownership in HFC and Beneficial have put it smack in the middle of the US housing meltdown. One top HSBC investor claimed that the company undervalued losses by $30 billion, after announcing first quarter losses of $3.2 billion in mortgage-related writedowns.

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Blown Mortgage received a trusted tip this morning that banking giant HSBC closed 82 branches of Household Finance Corporation (HFC) and Beneficial . Both HSBC companies are players in the non-prime markets and specialize in mortgage refinancing and debt consolidation. Beneficial has also done it’s fair share of “personal loans” using a lien on title, which can show up as a 3rd mortgage on title reports.

HSBC has been pulling back by closing branches of HFC and Beneficial over the last several quarters and closed another one of its subprime lenders, Decision One (or D-1 as it was known, or D-Last as it was referred to in my company for their penchant for approving loan files that weren’t approved elsewhere) , back in September of 2007.

HSBC’s ownership in HFC and Beneficial have put it smack in the middle of the US housing meltdown. One top HSBC investor claimed that the company undervalued losses by $30 billion, after announcing first quarter losses of $3.2 billion in mortgage-related writedowns.

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While the majority of the financial crisis tied to bad mortgages and esoteric debt structures may be waning, the effects of the crisis may be felt for years, according to remarks made earlier this week by BlackRock Inc. (BLK: 209.28, +3.12%) CEO Larry Fink. Speaking at a conference sponsored by the Wall Street Journal, Fink suggested that banks may be restricted in their ability to lend capital according to a report published by Reuters on Wednesday.

“The worst of the financial market crisis is behind us, but there’s more to come,” Fink was quoted as saying. “The economic problems associated with the turmoil have quarters to go, maybe years to go, because of the contraction of credit, the bloated balance sheets and the inability of banks to loan and restimulate the economy.”

Fink said that banks needed to raise capital in order to stimulate activity in the financial sector and among businesses dependent on capital for growing their operations.

Oddly enough, he also suggested that that both Fannie Mae (FNM: 23.99, -3.62%) and Freddie Mac (FRE: 22.00, -2.18%) needed to “do more” to help in the housing market; raising substantially more capital than they already have was suggested as one way to get there. Fannie and Freddie, together with government-sponsored Ginnie Mae, currently originate roughly 90 percent of all mortgages in the U.S., according to numerous market estimates provided for the first quarter of 2008.

At least one MBS analyst shrugged off the suggestion, in speaking with Housing Wire.

“What are the GSEs supposed to do? Raise capital so they can buy up bad debt, which will put them in the position of needing more capital?” said the analyst, who asked that his name not be identified in this story.

Fink, of course, isn’t the only Wall Streeter that yet sees tough times ahead. A separate report Wednesday from Reuters covered analyst estimates that suggest the total cost tied to falling home prices and the subprime mortgage crisis could tally $4 trillion in lost capital. FOUR TRILLION.

That’s the view of Peter Acciavatti, at least, a credit analyst and managing director at JP Morgan Securities Inc. In an interview with Reuters on Wednesday, he suggested that actual losses of roughly $325 billion thus far may translate downstream into $3.9 trillion in losses tied to tighter credit conditions.

Acciavatti also expected that home prices may fall as much as 30 percent from their peak in 2006, without bottoming out until sometime in 2010.

Disclosure: The author held no positions in BLK, FNM or FRE when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Here’s an interesting thought: walking away from your unaffordable mortgage might actually prop up consumer spending. At least, that’s the conclusion of Tom Lee, chief U.S. equity strategist at JPMorgan Securities.

Via Reuters:

“In a perverse way, people who are leaving homes are actually helping the consumer spending picture,” Lee told the Reuters Investment Outlook Summit on New York.

“If you were under water in a mortgage, and then you walked away, you literally stop paying the mortgage so your actual disposable income goes up,” he said.

This may be one reason why consumer spending hasn’t gotten hit harder given the headwinds of the worst U.S. housing market since the Great Depression and sweeping oil price gains, according to Lee.

Certainly an interesting theory, and a telling one: being “house poor” no longer is an advantage for many consumers. Not when they’re staring at having to make up hundreds of thousands of dollars of lost property value in places like Southern California.

If you haven’t figured it out just yet, the second quarter earnings about to be reported by more traditional banks and Wall Street’s i-banks isn’t exactly shaping up to be a pretty one. The latest case in point are woes at Cleveland-based regional bank KeyCorp, which shook up the financial headlines this week with news that it would raise $1.5 billion in capital and cut its dividend.

What’s amusing to almost no end is how ongoing financial woes continually lead analysts to the so-called “kitchen sink” analogy:

The Cleveland-based regional bank’s troubles are an ominous sign for second-quarter results due next month. “It’s going to be a disaster,” said Jefferson Harralson, a bank analyst at Keefe, Bruyette and Woods in Atlanta. “It’s going to be a big kitchen-sink quarter, but the issue is: Is it the first of many?”

For many financials, we’ve been hearing from analysts that each quarter is the proverbial kitchen sink. For Wall Street’s i-banks, that speculation was rampant in Q3 of last year. Then Q4. And again in Q1 of 2008. Each quarter the write-offs somehow seem to get bigger.

The fact that the same analogy is now being applied to regional banks can’t bode well for the near-term future, in our estimation.

And are we the only ones that seem to recall KeyCorp rumored to be among suitors for fellow Ohio-based bank National City Corp., which is wrapped up with its regulators? Just imagine how great that sort of marriage would have been.

Note: None of the staff contributing to this report held positions in National City or KeyCorp, and they’re pretty glad they don’t.