Category Archives: Investing

Investors favor equity ETFs, junk bonds as risk appetite grows: Lipper

(Reuters) – Investors poured money into equity exchange-traded funds and high-yield “junk” bond funds in the week ended on Wednesday, as U.S. President Donald Trump said he would extend a deadline to delay escalating tariffs on Chinese imports, citing “substantial progress” in talks between the two countries.

U.S.-based high-yield bond funds attracted $698 million, marking the sector’s fifth straight week of inflows, according to data from Refinitiv’s Lipper research service. U.S.-based equity ETFs attracted about $7.5 billion in the latest week, Lipper noted.

Investors’ risk appetite grew in the wake of “some positive” news about U.S.-China trade talks earlier in the week, said Pat Keon, senior research analyst at Lipper. He also cited the U.S. Federal Reserve’s statements that the central bank would be patient in hiking interest rate and that it would soon stop reducing its balance sheet.

“It was a good week overall, net inflows just shy of $16 billion with all four asset groups – money markets, taxable bond funds, muni bond funds, and equity funds – taking in net new money,” Keon said.

Taxable bond funds posted $4.3 billion in inflows, the largest outside of money market funds.

“It was the taxable bond funds group’s seventh straight weekly net inflow,” he said. “Ultra-short obligation funds (USO) drove the overall positive net flows for the group as they took in $1.47 billion. This is the continuation of a long-term trend as USO funds have had net inflows in 50 of the last 51 weeks for a total intake of over $69 billion.”

Equity ETFs, which attracted $7.5 billion, were responsible for all of the net inflows as equity mutual funds saw $5.1 billion leave, Keon noted.

“This was the second straight net outflow for equity mutual funds after six straight net inflows,” he said. “The net outflows for equity mutual funds were across the board as the majority of peer groups saw money leave, both for domestic and nondomestic funds.”

The two largest net inflows for individual ETFs belong to broad market U.S. equity products as SPDR SP 500 ETF and iShares Core SP Total U.S. Stock Market ETF took in $2 billion and $1.1 billion, respectively, Keon pointed out.

Reporting by Jennifer Ablan; Editing by Jonathan Oatis and Richard Chang

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Oil major Total CEO’s compensation drops 17 percent in 2018: company document

PARIS (Reuters) – The board of French oil and gas major Total has proposed total 2018 compensation for Chief Executive Patrick Pouyanne of 3.1 million euros ($3.55 million), compared with 3.8 million in 2017, company documents showed on Wednesday.

The total pay includes 1.4 million euros in fixed compensation, the same as in 2017, and 1.72 million in annual variable compensation, compared with 2.4 million in 2017, and 69,000 in other benefits, the documents showed.

The company said in a statement that the decrease in variable compensation resulted from criteria based on the average three-year change in Total’s adjusted net income in comparison with those of its peers. “The Board of Directors wants to emphasize that the decrease by 17 percent of Patrick Pouyanne’s cash remuneration due for the year 2018, resulting from the strict application of the rules,… doesn’t reflect in any way its appreciation of the exceptional work accomplished in 2018 by (him),” it said.

Pouyanne has often quipped that he is the least paid among the bosses of the global oil majors. The company reported a 28 percent jump in full-year profit in 2018 to $13.6 billion.

In comparison, Shell’s CEO Ben van Beurden’s 2018 pay package more than doubled to 20.1 million euros and Chevron Corp has said its Chief Executive Officer Michael Wirth is eligible for $19 million in total pay this year.

Total’s shareholders will vote on Pouyanne’s proposed package during an annual meeting on May 29.

Reporting by Bate Felix; editing by Leigh Thomas and Kirsten Donovan

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Big U.S. pension funds ask electric utilities for decarbonization plans

BOSTON (Reuters) – Top U.S. pension funds are asking electric utilities to accelerate efforts to cut carbon emissions but will not force the issue with proxy resolutions this spring, hoping market shifts and falling prices for renewable energy have already made executives and directors receptive to the goal.

Investors including New York City Comptroller Scott Stringer, who oversees retirement funds, and leaders of the California Public Employees’ Retirement System are asking the 20 largest publicly traded electric generators in the United States for detailed plans for achieving carbon-free electricity by 2050 at the latest, according to material seen by Reuters.

They also seek other steps like board commitments and tying progress to executive pay.

Stringer termed decarbonization a “financial necessity” in a statement sent by a spokeswoman. “This initiative makes clear that mobilizing for the planet goes hand-in-hand with protecting our pensions, and we need these commitments now.”

Making electricity carbon-free by 2050 will be key to meeting the goals of the 2015 Paris Agreement to constrain global warming, the investor group said in a separate statement. They praised a December announcement by Xcel Energy Inc that it will aim for carbon-free generation by 2050.

Large utilities receiving the letter include Duke Energy Corp and NRG Energy Inc. Each has already moved toward cutting emissions: Duke has set a goal of reducing carbon emissions by 40 percent by 2030 from its 2005 levels, and NRG aims to cut emissions in half by 2030 and by 90 percent by 2050 compared with 2014 levels.

Asked about the funds’ request, Duke spokeswoman Catherine Butler noted the goal and said via email, “We continue to evaluate options to further reduce emissions beyond that date.”

In a statement sent by a spokeswoman, NRG Vice President of Sustainability Bruno Sarda said the company agrees with the “urgency for decarbonization” and said it is reviewing its goals based on newly-available science.

Falling prices for wind and solar power will help the utilities’ efforts, while the pace of coal-fired power plant closures has accelerated in the face of price competition.

Funds involved in Stringer’s effort collectively manage $1.8 trillion and also include Hermes Investment Management and money overseen by New York State Comptroller Thomas DiNapoli.

Technically the group is asking for “net-zero” carbon emissions by 2050, meaning the amount of carbon utilities release must equal the amount they remove.

Reporting by Ross Kerber in Boston; Editing by Matthew Lewis

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Overdone? Short EU equities ‘most crowded’ trade for first time

LONDON (Reuters) – Fund managers have named bearish bets in European equities as the “most crowded” trade in Bank of America Merrill Lynch’s survey for the first time in its history, suggesting sentiment for one of the world’s most shunned markets may rise from here.

Investors have pulled cash from European stocks over the past year, betting the market would be weaker compared with the United States and other regions as euro zone economic growth slows and Britain’s chaotic exit from the European Union raises concerns about disruption to its economy.

Short European equities replaced long emerging markets, which held the title for just one month.

The shift in investor views reflects broader uncertainty about the direction of financial markets as the Federal Reserve and ECB keep interest rates on hold amid signs that growth is slowing.

The results also suggest that fund managers believe the gloom that has seen $30 billion leave European equities this year may have been overdone.

In a note on Sunday, Morgan Stanley chief European equity strategist Graham Secker said he believes Europe is set to surprise on the upside as issues that weighed on growth in the second half of last year start to fade.

The pan-European STOXX 600 rose 0.7 percent on Tuesday to its highest since Oct. 3 and was on track for its longest winning streak in six months.

Auto stocks led the gains after the bank’s auto analysts recommended contrarian investors buy select carmakers after the survey showed investors grew more bearish on the sector.

Tentative improvements in consumer and wage data – and the improving German car sector – are a good omen, Secker said, noting that China, whose slowdown has been behind much of Europe’s malaise, is finally showing a turnaround in new export orders PMIs.

(GRAPHIC: Evolution of FMS “most crowded trade” –


Still, BAML’s March survey – conducted between March 8 and 14, among 239 panelists managing $664 billion in total – also indicated that investor risk appetite had continued to fall, with global equity allocations remaining at September, 2016 lows.

“The pain trade for stocks is still up,” said Michael Hartnett, BAML’s chief investment strategist.

“Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities.”

A slowdown in China, the world’s No. 2 economy, topped the list of biggest tail risks, ousting the trade war, which had been investors’ main concern for the previous nine months, according to the survey.

Third on this month’s list was a corporate credit crunch.

The slight improvement in investor outlook toward the protracted trade war which has rattled markets for the past year comes as Washington and Beijing make progress in talks to agree a truce.

But reflecting the broad spectrum of views on interest rate policy, about 55 percent of those surveyed say they think the Fed will continue to hike, while 38 percent believe the hiking cycle is done.

Reporting by Josephine Mason and Helen Reid, Editing by Ed Osmond

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This housing market clue predicts pending economic slowdown

When it comes to the health of the economy, the housing market is the canary in the coal mine, providing clear and early clues of pending trouble. And that’s why analysts track its performance intently, looking at a multitude of indicators that might signal the looming recession some are forecasting.

Now, one critical clue from the housing market has emerged to suggest economic growth is likely to backslide, and that is a steady decline in single-family authorizations.

In essence: Construction activity appears to be slowing.

Single-family housing authorizations – what some call a key predictor of economic recessions – represent building permits requesting permission to commence construction. In contrast, housing starts signal that construction has already begun. 

According to the latest data released by BuildFax, single-family housing authorizations fell for the third consecutive month in February, declining 4.24% from the previous month. This also represents a 5.75% decline year over year.

The data left BuildFax to conclude that, “without relief from this steady decline in single-family housing authorizations, an economic slowdown is likely forthcoming.”

Existing housing maintenance and remodeling volumes are also down, continuing a four-month decline. Maintenance volume was down 5.53% year over year, while remodeling volume was down 10.07%.

But at the same time, spend for both maintenance and remodeling increased, which BuildFax attributed to recent spikes in construction labor costs.

Interestingly, some cities are defying national trends, posting increases in new construction and maintenance in February.

Dallas, New York City, Chicago and Washington, D.C., saw activity in new construction and maintenance rise.

BuildFax said Chicago saw the greatest increases, with new construction up 60.15% and maintenance up 19.51%, which the report said could be a result of the city’s strategic five-year housing plan to solve affordability problems.

“It’s yet to be seen whether housing activity in these cities will eventually slow as it has on a national level or if these will be key metros to watch as the U.S. potentially heads towards an economic slowdown,” BuildFax wrote.

BuildFax CEO Holly Tachovsky said the performance of these indicators over the next several months will be key to determining the overall impact on the economy.

“There have been persistent declines across key housing indicators for four consecutive months. However, we anticipate some economic relief as we head into 2019’s spring home buying season,” Tachovsky said.

“Mortgage rates have reached recent lows leading to increased potential for home sales, which is oftentimes followed by a surge in remodeling activity,” she continued. “The performance of single-family housing authorizations, maintenance and remodeling activity through this next season will shed light on whether declines in the housing market will spread to the broader economy.”

Here is a map of new construction and maintenance activity in the 10 largest metros:


(Source: BuildFax)

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PwC reaches $335 million settlement with FDIC over Taylor, Bean & Whitaker/Colonial Bank audits

PricewaterhouseCoopers will pay $335 million to the Federal Deposit Insurance Corp. in a settlement that ends claims that the auditor failed in its duties by not discovering the accounting malfeasance that led to the late-2000s collapse of Colonial Bank, which funded the mortgages originated by Taylor, Bean Whitaker.

Once upon a time, TBW was the largest privately held mortgage company in the country, employing more than 2,000 people. But TBW collapsed in 2009 after it was discovered that TBW Chairman Lee Farkas and others were cooking the books to cover for hundreds of millions of dollars in nonexistent mortgages.

PwC acted as the auditor for Colonial Bank, which also collapsed when the issues at TBW were uncovered.

When it failed, Colonial Bank was taken over by the FDIC, which then sued PwC and claimed that the bank’s failure cost the insurer $5 billion, making it one of the country’s largest ever bank failures.

Eventually, a federal judge ruled that PwC was “negligent” in its role as Colonial Bank’s auditor, stating that the company could have done more to prevent Colonial’s collapse.

And last year, the judge ordered PwC to pay more than $625 million for its actions in the Colonial/TBW matter.

But, late last week, the two sides announced that they’d reached a settlement in the matter that will see PwC pay $335 million to the FDIC for its role in the TBW affair.

That amount is much closer to the $306.75 million that PwC originally contended it should pay the FDIC, rather than the $625 million awarded to the agency by District Judge Barbara Jacobs Rothstein.

And the FDIC agreed to the settlement over the objections of former FDIC Chair Martin Gruenberg, who still serves on the FDIC board of directors.

Gruenberg issued a statement through the FDIC, in which he stated that he did not vote to approve the settlement because the settlement did not require PwC to admit liability in the matter.

“As a result of its failure to follow required auditing standards, PwC did not detect that hundreds of millions of dollars of assets claimed by Colonial did not in fact exist, had been sold to others, or were worthless. If PwC had complied with auditing standards, it would have discovered the fraud, the fraud would have been stopped, and the damages to Colonial Bank would have been limited,” Gruenberg said in his statement.

“As noted, the settlement announced today did not include a written admission of liability by PwC,” Gruenberg added. “Given PwC’s professional negligence, which contributed directly to the failure of Colonial Bank and large losses to the Deposit Insurance Fund, I voted against authorizing the settlement without a written admission of liability by PwC.”

Nevertheless, the FDIC agreed to the settlement.

“PricewaterhouseCoopers LLP and the Federal Deposit Insurance Corporation as Receiver for Colonial Bank have settled professional negligence claims brought by the FDIC-R against PwC to their mutual satisfaction,” a spokesperson for PwC said in a statement.

According to Rothstein, PwC was negligent in its audits of Colonial Bank’s business in 2003, 2004, 2005, and 2008. Rothstein ruled that PwC’s audits were not designed to detect fraud and did not fully inspect Colonial’s business in the relevant years.

According to Rothstein, PwC did not inspect any of TBW’s loan files at Colonial in 2003 or 2004, failed to follow up on the “illogical” dates on Colonial’s financial reports, failed inspect any of the supposed collateral backing the mortgages in question, and neglected to follow-up on sample loans that failed quality control checks.

TBW is one of housing crisis’ most notorious collapses.

Beginning in 2002 and stretching to 2009, Farkas and his fellow conspirators swept funds between accounts at Colonial and Ocala Funding, a TBW subsidiary that also provided funding for TBW’s mortgages to cover constant overdrafts.

By December 2003, the rolling overdraft had grown to more than $120 million and sweeping the funds back and forth became too complex, so Farkas and others began selling mortgages that didn’t exist to cover the shortages.

By 2009, Colonial Bank had more than $500 million in nonexistent loans on its books.

TBW also sold loans to Fannie Mae and Freddie Mac. In 2002, loans sold to Fannie represented 85% of TBW’s business, but Fannie Mae canceled its seller/servicer agreement with TBW after it learned that Farkas had personally taken out $2 million in loans that were not actually backed by homes or any other eligible collateral to pay for the buybacks on non-compliant loans that TBW sold to Fannie.

In fact, Farkas planned to sell eight fraudulent loans (totaling $2 million) to Fannie to cover the money he needed pay Fannie for other non-compliant loans.

Fannie Mae discovered this fraud when Farkas was unable to make payments on the eight fraudulent loans, but did not communicate its findings to Freddie Mac, its regulator or other interested parties.

Subsequently, Freddie considerably increased the volume of its business with TBW.

Farkas’ schemes were finally discovered when Colonial, which was on the verge of insolvency, applied for $553 million in funding from the Troubled Asset Relief Program.

According to a 2014 report from the Federal Housing Finance Agency’s Office of the Inspector General, Farkas planned to use TBW to invest $150 million in Colonial and help raise the additional $150 million because he knew that without the injection of funding, TBW’s massive fraud would be discovered.

The additional $150 million wound end up being diverted from Ocala’s books to Colonial’s, but the entire nature of Colonial’s fundraising raised a red flag with the Special Inspector General for TARP.

Investigators questioned whether the injection of funding from Farkas was a “round trip” transaction, where the $300 million from TBW would be paid back from the TARP funds.

In the process of the investigation, several of Farkas’ co-conspirators eventually revealed the details of the multi-year, multi-billion dollar fraud.

Farkas eventually received a 30-year prison sentence and was ordered to forfeit $38.5 million in ill-gotten gains for the $2.9 billion scheme after he was found guilty on 14 counts of bank, wire and securities fraud, becoming one of the only people actually jailed for financial crimes in the run-up to the housing crisis.

And this isn’t the first time that PwC has been forced to pay up over its role in the TBW collapse. Back in August 2016, the auditor settled a $5.5 billion lawsuit over the same issue.

For much more on the fall of TBW, click here.

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Your Money: State taxes are too hard for mere mortals to compute

NEW YORK(Reuters) – Can regular people calculate their state taxes in light of the new U.S. tax law?

No way, experts say.

“There isn’t a way to figure it out,” said Craig Smalley, an enrolled agent tax preparer in Orlando, Florida. “I’ve worked with clients all over the United States. There’s nothing you can do.”

But surely, users of do-it-yourself software can get a little window into what is going on?

TurboTax’s answer is that you need not know the intricacies of state law. The software “automatically imports your information into your state tax return from your federal tax return,” explained Lisa Greene-Lewis, a CPA and tax expert with TurboTax.

The Tax Cuts Jobs Act passed in December 2017 has already created a particularly challenging tax year. But situations in the 44 states that levy income tax are even more confusing.

Some states are following federal rules, but others like New York have broken ranks. Some, like New Jersey, have never been on board.

Virginia may be the winner for the most complicated taxes, according to Tynisa Gaines, an enrolled agent tax preparer based in Herndon, Virginia. It is among those states that say if you take the standard deduction on the federal return, you cannot itemize on your state return.

Since federal changes doubled the standard deduction to $12,000 for singles and $24,000 for married couples, fewer taxpayers are expected to itemize than before. But Virginia’s standard deduction is low, just $3,000 for singles and $6,000 for married.

Gaines said she would pay $1,000 more in state taxes if she did not itemize. She runs returns multiple ways to figure out the least painful options for her clients.

Keeping up with changes for her nationwide clientele requires constant attention. The only way Gaines manages is to download the regulation handbook from each state’s tax information website and pore over it.

“It’s not easy. I have to look it up for almost every client every year,” Gaines said. “A state might decide not to tax veteran retirement pay when they did before, or they might exempt military spouse pay suddenly. There is no shortcut to it at all.”

Even in a small state like Massachusetts, tax law can send professionals into a tizzy. The state conforms to federal law on issues like 529 college saving plan rules, but not on others like the tax treatment of debt cancellations, said John Warren, an enrolled agent tax preparer in Medford, Massachusetts.

“If I call up my tax software company, it’s most likely on the state side,” Warren said.


One reason you cannot just let the software figure it out is that the state takes out money from each of your paychecks. It is likely that the amount withheld in 2018 was incorrect and carried over to this year.

Even if you did projections, those may be obsolete. Enrolled agent Phyllis Jo Kubey did an analysis for each of New York clients, but the state later announced it would decouple from the federal rules.

New York still allows $1,000 per dependent personal exemption, for instance. “So if you just say, I’m going to use the standard deduction and not think about it, you might be leaving money on the table,” Kubey said.

Some state tax websites have withholding calculators, and you can navigate through the inputs – which, like the federal W-4 calculator, now require a lot of information.

You can also use your completed 2018 return as a baseline. Take your total state taxes due and then figure out the filing status and number of allowances that will equal the correct amount for 2019, divided by the number of paychecks you get for the rest of the year.

“The state is the stepchild. People forget about the state until the end,” Gaines said.

Editing by Lauren Young and Richard Chang

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Role of a Lifetime: Life Lessons with Peter Krause

NEW YORK (Reuters) – If you are looking for steady work, it is probably best not to go into show business. Unless you are Peter Krause, that is.

The 53-year-old Minnesota native has been a staple of U.S. TV screens for years, with roles in shows like “Sports Night,” “Six Feet Under,” “Parenthood,” and his current series “9-1-1,” which begins its spring season tonight on Fox.

For the latest in Reuters’ “Life Lessons” series, Krause talked with us about the heartland principles that have kept him working steadily in Hollywood for a couple of decades.

Q: Was an acting career always on your radar, even as a kid?

A: When I turned 16 in Roseville, Minnesota, it was expected that I would get a job, so I got one at the local movie theater.

It’s gone now, which is kind of sad. But I got to see every movie that came out, multiple times: Films like “The Mission,” “Chariots of Fire,” “On Golden Pond,” and “The Pope of Greenwich Village.”

So I got to really study those performances, even though I wasn’t thinking about being an actor at the time.

Q: Did your folks give you a hard time about your career choice?

A: My dad was a farm kid, always doing chores, who didn’t even have plumbing or electricity until he was 16. By the time he was 18, he was boots on the ground in Germany, as part of the army of occupation after World War Two. So the idea of acting was very foreign to him. We had a bit of a battle at first.

Q: What was the money situation like early on?

A: My parents didn’t have a lot of money. All of our family vacations were by car. So when I flew into New York City to go to New York University, I had never even been on a plane before.

I took the bus from LaGuardia Airport to Grand Central Station, and then walked from there down to NYU, which was about 40 blocks. Seeing the city like that was a shock to the system, since I had grown up in a small town in the middle of cornfields.

Q: Were those early acting years tough financially?

A: I had been bartending on Broadway in theaters, which is where I first met Aaron Sorkin, who was a bar manager at the Palace Theatre at the time, when they were playing “La Cage aux Folles.”

But one of my first shows out of college was with Carol Burnett, which was helpful with my parents, because they knew who she was. I finally got to take my dad out for lunch, and grabbed the check and signed the bill. He looked at me and said, “Well, this is different.”

Q: Which of your roles taught you the most?

A: All roles teach you something new. Different characters have different life rules, and some of those characters end up bleeding into me a little.

Nate Fisher from “Six Feet Under” was very difficult to play, because he was so at odds with himself all the time. That was a defining moment in my career. Working on that show was like a daily meditation on life and death.

Q: Have you thought about the future, and what retirement is going to look like for you?

A: I don’t plan on retiring. I’ll do this as long as I can. I still enjoy acting as much as I ever did. Right now on “9-1-1” I get to be a firefighter, which is basically my childhood dream come true.

Q: You have a kid, so what life lessons do you try to pass along to him?

A: He just turned 17, so I have taught him all sorts of things: How to ride a bike, drive a car. I was even his baseball coach for three years. What I have tried to impart to him the most is to figure out what makes him happy. For myself, I spent a fair amount of time trying to make my parents happy, and wanting to be a success in their eyes. That kind of messed me up. So I want to get my son to listen to his own compass.

(The writer is a Reuters contributor. The opinions expressed are his own.)

Editing by Beth Pinsker; Editing by David Gregorio

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Who would dare buy Ditech’s reverse mortgage servicing business?

The mortgage space is in the throes of a “massive and truly terrible period of restructuring that conjures up biblical images of the apocalypse,” wrote R. Christopher Whalen in his latest, weekly article for the Institutional Risk Analyst, and the fate of Ditech Holdings serves as a critical example.

Ditech, which filed for bankruptcy for the second time, is seeking bids for the sale of some or all of its business. But, as Whalen questioned, do its remaining assets have any value?

Specially, Whalen pondered, what will happen to Reverse Mortgage Solutions, Ditech’s HECM servicing business?

“RMS is consuming cash to such an extent that the company’s DIP lenders had to allocate a big portion of resources – $1 billion in working capital – to RMS as part of the bankruptcy filing,” Whalen wrote, noting that Ginnie Mae will be on the hook if the business is abandoned in bankruptcy.

The problem, according to Whalen, for those holding mortgages and mortgage servicing rights? The unstable climate created by the Federal Reserve’s policies that is wreaking havoc on the market.

Rumor has it that the Federal Open Markets Committee may end the runoff of the system open market account – or SOMA – portfolio later in 2019, and if that’s the case, expectations for rising rates will need to be adjusted, Whalen said.

The constant manipulation is giving the market whiplash.

“In effect, the Fed is discarding any hope of restoring private function and particularly unsecured lending in the U.S.,” Whalen wrote.

“By manipulating all manner of asset valuations, the FOMC has created two very specific risks for holders of mortgages and MSRs that are not well understood in the equity or debt markets,” he continued.

Whalen said that by accelerating prices for homes, mortgages and MSRs to “ridiculous levels,” the Fed has essentially crafted a short-put position for those holding mortgage credit and servicing exposures. 

Its policy of “quantitative easing,” or injecting new money into the nation’s money supply, will inevitably damage the financial markets, he said.

“Like shooting heroin, once a central bank gets onto the QE habit, it is impossible to stop without deflating the financial markets,” he said.

Further, “fair value” accounting rules imposed by the Financial Accounting Standards Board and the Securities and Exchange Commission add an extra bit of nonsense into the equation, according to Whalen.

“As benchmark interest rates fall, the modeled prepayment speeds for mortgage exposures will accelerate, this on the assumption that mortgage refinancing activity will increase –maybe,” he wrote. “Holders of MSRs, specifically, will be forced to take ‘fair value’ non-cash losses on their mortgage exposures, even if they are running aggressive hedge positions.”

And, the credit risk embedded in all one- to four-family mortgages that were originated during the three phases of QE may begin to emerge in the next 18-24 months, Whalen predicted, and this will drive up servicing costs for MSR holders. As owners of the servicing asset, MSR holders are responsible for the cost of resolving a distressed mortgage.

If the Fed does indeed resume another QE policy, should we face another downturn (as housing predicts) Whalen said those operating and investing in mortgage finance need to take note.

“With MSR valuations under the twin pressure of again falling long-term interest rates and rising capital costs of default servicing, investors could see the double-digit gains in the best performing asset class in the fixed-income market suddenly reversed, with catastrophic consequences for the mortgage market and certain publicly traded mortgage REITs,” he wrote.

“Given the impending resumption of QE, investors who are long servicing need to take pause,” he continued. “MSRs carry both interest risk and, as many have forgotten, default risk garnished with reputational hazard.”


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[Pulse] Did Amazon’s about-face on its NY HQ2 plans turn the Long Island City real estate market upside down?

Well before Amazon announced its plans to pursue a second headquarters in Long Island City, the Queens neighborhood was among the fast-growing real estate markets of NYC.

Major players in the real estate industry such as Durst, The Lightstone Group, Rockrose Development, Tishman Speyer, RXR Realty and TF Cornerstone have set their foot on the once-crumbling industrial neighborhood and secured millions of dollars to finance massive commercial and industrial projects that promise thousands of rental units to hit the market over the time span of up to five years.

To some extent, the gradual transformation of LIC exemplified Mayor Bill de Blasio’s vision of creating a “Tale of Two Cities” across the five boroughs.

Yet, Amazon’s snafu announced last week still stunned the LIC real estate market.

Chairman and CEO at The Lightstone Group, David Lichtenstein, dubbed Amazon’s about-face on its LIC HQ2 plans “the worst day for NYC since 9/11,” blaming elected politicians who voiced their strong resistance and stymied the deal.

With Lightstone owning two multifamily luxury rental properties in an LIC neighborhood – including a 413,000-square-foot, 428-unit building just a couple of miles from what was going to be Amazon’s LIC campus – Lichtenstein undoubtedly felt the staggering financial impact of Amazon’s abrupt pullout.

Unsurprisingly, Lichtenstein is not alone. Many real estate figures echoed his sentiments on the broken deal.

EVP Seth Pinsky at RXR Realty, another major player in the NYC’s real estate scene, said to The Wall Street Journal: “I think for some of the people opposing the project it was kind of a game. They enjoyed being the center of attention and having their statements tweeted and retweeted, but this isn’t a game.”

RXR Realty owns, among others, the 330,000-square-foot, seven-floor commercial property Standard Motor Products Building that would have become Amazon’s neighbor should the deal have gone through.

The idea of being close to Amazon’s HQ2 is too desirable to resist and definitely not a game in the NYC commercial real estate market. Indeed, a real-estate frenzy ignited over LIC upon Amazon’s November announcement.

More than 30 commercial and multifamily properties have changed hands since Amazon announced its LIC plans, according to WSJ. Now that the retail giant has ditched its plans to pursue a LIC HQ2, the frenzy has come up short.

And it doesn’t take a real estate professional to discern either the prospect of property value hikes thanks to Amazon’s upcoming presence or the financial implications of Amazon’s turnaround months later.

Having noticed skyrocketing interest and climbing asking prices in the area following Amazon’s November announcement, Nancy Wu, StreetEasy’s economic data analyst, said she expects “asking prices and buyer interest to fairly quickly revert back to their pre-announcement levels” as buyers have already started “backing out of their plans.”

Provided that LIC has been emerging as the burgeoning real estate market of NYC well before Amazon’s era, Amazon’s about-face on its LIC HQ2 plans certainly did not turn the LIC real estate market upside down.

However, Amazon’s presence could have accelerated the LIC transformation at an exponential rate. And it is safe to say that its abrupt snafu has caused the LIC real estate market a bit of a stroke. 

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