NAHB Construction Outlook Downgraded; Feedback on REITs; Loan Modification Stats; Foreclosure Scrutiny Delays Ally IPO


If someone
“about scares you half to death” twice, what happens? What home
builder economists lower their predictions twice, what happens? HomeBuilderForecast

In a similar vein, Federal Reserve Vice
Chairman Janet Yellen said the housing market will undergo a “long,
drawn-out recovery”
and the Fed is working with other agencies to
prevent foreclosures and clear the stock of vacant properties.
“Looking forward, I unfortunately can envision no quick or easy solutions
for the problems still afflicting the housing market. Even once it begins to
take hold, recovery in the housing market likely will be a long, drawn-out
process.” This is nothing that should surprise anyone in our business,
although it is sobering.

If I want my neighbor’s help in moving some
boxes, I don’t tell him to get his dog out of my yard first. (I know, bad
analogy, but at 4AM I couldn’t come up with anything better.) Things tend to
become more muddled when large companies and governments are involved. For
example, on the one hand numerous representatives and regulators are calling
for the phase out of Fannie Freddie with their replacement being the
private sector (assumed to be banks). On the other hand, these same companies
in the private sector continue to keep reserves, not knowing what the next
lawsuit or buyback or servicing penalty will be. The latest news involves the
HAMP program: while servicers are required to address all instances of
non-compliance, beginning this month, the Treasury Department is withholding
financial incentives for three servicers, Bank of America, JPMorganChase and
Wells Fargo
. (Ocwen slid by and did not have its financial
incentives taken away, in spite of also needing substantial improvement, due to
its compliance results being substantially and negatively affected by a large
servicing portfolio acquired during the compliance testing period.) FULL STORY

The results come from HUD and the U.S.
Department of the Treasury’s May edition of the Obama Administration’s Housing
Scorecard, which now include detailed assessments for the 10 largest mortgage
servicers participating in the Administration’s Making Home Affordable
. Three categories make up the analysis: identifying and contacting
homeowners, homeowner evaluation and assistance, and program reporting,
management and governance. It is not a drop in the bucket: in April, 29,000
homeowners received a trial Home Affordable Modification Program (HAMP)
modification, and 29,000 additional homeowners received a permanent
modification. CHARTS

In other corporation-related news, Ally
Financial is postponing its $5 billion IPO
because of weak market
conditions and impending fines due to its mortgage foreclosure practices. Our
government owns nearly 74% of the lender due to past bail outs – the government
invested $17bn in Ally in a series of rescues: AllyIPO

I have an important correction to some
information regarding a Freddie Mac program, more specifically Freddie Mac’s
Relief Refinance
offering relating to why Fannie loans might be paying off
faster than Freddie program loans.  I stated that, “Freddie’s plan
must be refi’d in the name of the servicer…” Folks, including me, should
note that, rep warrant issues aside, with the Freddie Mac Relief
Refinance – Open Access through LP, any lender can participate in the
offering even if they do not currently service Freddie Mac Mortgages. 
This offering continues to offer up to 125% LTV and a transfer of the existing
MI giving borrowers more refinance opportunities. One change that was made with
the HARP extension is that Fannie Mae aligned their eligibility date to the May
31, 2009 date that Freddie Mac’s program already had, so an additional 3 months
of production are now available for Fannie HARP. I apologize for any confusion.

Yesterday the commentary discussed the
continued publicity surrounding REIT’s, and their impact on the
residential mortgage market. But one seasoned vet wrote, “I still struggle
with the mortgage REIT concept.  Or, more specifically, I have a hard time
seeing why anyone would pay much more than book value plus the present
value of the leveraging benefits and the tax shield minus corporate operating
expenses.  I say this because if the economic value of the loans owned
goes much higher than par, the risk that the borrower refinances
and involuntarily takes the asset value increase away from the REIT is
palpable.  In return for the right to have a vehicle that can have assets
involuntarily called away, you have to rely  on the capital markets for
funding and go through all kinds of gyrations in order to preserve the tax
benefit.  I know It’s a golden age for mortgage REITs now since the yield
curve is steep, mortgage capital is plentiful and prepayment nirvana continues
but whether those three conditions persist indefinitely is another question
altogether.   And, of course, the cynic in me can’t help noticing
Wall Street’s zeal to bring these things public now.”

Companies using a REITs tax designation must
meet certain criteria regarding their investment portfolios and must distribute
90% of taxable income as dividends – the trust pays no state or federal
corporate taxes on dividends paid to investors. Investors are attracted to
REITs for high ongoing dividend payments, but setting one up is not a

Not only do they have the 90% requirement
noted above, it must be an entity that is taxable as a corporation and be
managed by a board of directors or trustees. It must have shares that are fully
transferable and have a minimum of 100 shareholders. In addition, no more than
50% of its shares should be held by five or fewer individuals during the last
half of the taxable year. A REIT must invest at least 75% of its total assets
in real estate assets and derive at least 75% of its gross income from rents,
from real property or interest on mortgages financing real property. It should
have no more than 25% of its assets consist of stock in taxable REIT
subsidiaries. Due to the high payout ratio, REITs routinely issue secondary
offerings because they are unable to increase their capital base using retained
earnings. And, aside from reminding folks that this is not a complete list of
requirements – for that talk to a mortgage tax attorney – a mortgage REIT must
invest at least 55% of its assets in “qualifying interests.” To meet
this test, an agency mortgage REIT invests 55% of its assets in whole pools,
that is, pools with undivided interest in a mortgage. [More on REIT’s on

For anyone waiting to lock, once they
actually process a file (and from what I am hearing, there are very few easy
refi’s), rates continue to be low. Yesterday the yield on the risk-free
Treasury closed at 3.00%, worse in price by about .250. MBS prices fell 3/8s of
a point on Fannie 3.5’s, and about .250 on 4’s (containing 4.25-4.625% loans).
But this was after starting off the day with the 10-yr down at 2.92%, so as we
sold off investors sent out intra-day price changes. And overall, volume was
substantially above normal Thursday with better selling when all was said and
done. The $13 billion 30-yr auction was “sloppy”.

If you’re interested, visit my twice-a-month blog at the STRATMOR Group
web site located at . The current blog
is new and takes a look at the opinions on QRM’s impact on our industry. If you
have both the time and inclination make a comment on what I have written,
or on other comments so that folks can learn what’s going on out there from the
other readers.


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