Mortgage

July 31, 2014 By howardpr Leave a Comment

Chase is Running From the FHA and Obama

Jamie Dimon is a big shark. He is the architect and mastermind behind the colossus known as JP Morgan Chase (JP Chase). A protégé of Sanford Weill (the gentleman who pieced together the megabank we now know as Citigroup), Mr. Dimon has put together his own megabank by assembling Bank One, Bear Stearns, and Washington Mutual into one large financial machine. He and his wife Judy are also big donors to the Democratic party.

In total, they have given over $500,000 to all of the Democratic heavyweights (Rahm, Hillary, Big Bill, Joe, Kerry, Schumer, Rangel and Chris Dodd). At the top of the Democratic food chain, Mr. Dimon was once chummy with President Obama. In 2008, he was considered Obama’s top pick for Treasury Secretary. CNN called him part of “Obama’s business brain trust.” Previously, Mr. Dimon called Mr. Obama’s Home Affordable Modification Program (HMAP) “good and strong, comprehensive and thoughtful.” However, things have changed. JP Morgan Chase has decided to pull back from FHA loans and Mr. Dimon attributed this change to the Obama Administration’s zeal for litigation.

JP Chase recently paid a $614 million settlement to the Federal government in a whistleblower probe and Mr. Dimon was flustered, as he commented “we are just thoroughly, thoroughly confused about how we got treated.” To Chase, the administration appears to want banks to ease up on lending guidelines, but its voracious appetite for litigation and settlements is ruffling feathers, bruising egos, and reducing consumer options along the way. Chase’s share of the low down payment, highly consumer friendly FHA product has fallen precipitously from 12.7% of FHA loan originations in 2013 to a dismal 2.3%. It’s FHA purchase business totaled only $606 million in the 2^nd quarter of 2013 compared to a quarterly average of $4 billion. Talk about falling off of a proverbial financial cliff! Such sentiments have created waves across the financial spectrum as a whole.

Chase joins Bank of America, as one of the bulge bracket banks that will only provide FHA loans to pre-existing customers who already have accounts at the bank. Smaller financial institutional banks are taking notice. Many are considering scaling back from or discontinuing FHA lending as well. This is a shocking state of affairs. For many, the FHA is loan of last resort. If large institutions like Chase, BofA, Wells, and Citi feel that providing a product has too many legal pitfalls consequences, other banks will follow suit and pull back from that piece of the market as well. How sad it is when high-level politics infiltrates big business. However, in this case that appears to be exactly what has happened.

I cant imagine what would happen if the Big Five stopped originating FHA loans. They probably won’t completely give up on the business due to low income lending requirements that need to be met, but voluntary drawbacks send strong signals to the marketplace as a whole. You might not be worried about this, but I am. When large lenders pull back, we lose distribution options. Consumer perception about the product gets modified in a negative way and everyone loses. How does one’s brain trust become a chief chop buster? I think there is a lack of communication and a focus on catering to particular constituencies. Either way, Jamie Dimon and Barack Obama are in a contentious divorce and the children known as the American consumers are caught in the middle. Divorce between individuals, business partners, corporations or in this case heads of state is ugly and messy, and rarely ends with any clear winners. I personally see losers….on all sides.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at howardpr@rosecityrealtyinc.flywheelsites.com.

July 16, 2014 By howardpr Leave a Comment

QE IV, Perhaps?

The Dow Jones has just crept past 17,000. The S&P is flirting with 2,000. All told, champagne bottles with corks should be popping, and the nation, no, the world’s economies should be celebrating. Although you may not be a “sophisticated investor” or a hedge fund manager, if you were smart enough to place your money in some form of equity based mutual fund, you earned no less than a 10% return on your money (if you had an index fund). However, we can’t jump the gun and celebration too quickly. The bond market is telling a different story.

As stock records are being made on a daily basis, government bonds from the US, Germany, and the UK are being purchased in droves, sending their prices up while their yields are inversely falling. Commensurately, this is occurring in the mortgage market as well. Recent auctions of Fannie Mae, Ginnie Mac, and Freddie Mac mortgage backed securities (MBS) have been oversubscribed. MBS on the secondary market are trading hands at lightning speeds, sending prices of securities up and rates down. Consumers and property owners are reaping the rewards by locking in the best rates of 2014, but at what cost?

The underlying thought process is that although the stock market is on a tear, the economy is still very weak worldwide. This is beyond the extended winter that walloped the first quarter earnings reports and froze people (literally) in their tracks. Money managers at the big banks, insurance companies, hedge funds, and even Black Rock (the $3 trillion money management behemoth) are worried that post-recessionary growth is not going to take off. This is a “yin and yang” conundrum at the highest extent. People love the idea that their portfolios are taking off in a positive direction and that they can a mortgage loan at a low interest rate on their home or commercial investment property. However, the extended lag in economic growth and output is a drag on the majority of the nation.

Rates are still historically low, but with an increase in home prices and the lack of full time employment, the majority of Americans still can’t afford to buy into the American dream of a white picket fence. Apartment buildings of all sorts and sizes can be financed at up to 85% CLTV, but wage suppression keeps many individuals from participating in a strategic purchase as their debt-to-income ratios are too high for current lender guidelines. Consumers continue to hear about higher payroll figures with a commiserate fall in unemployment, but the number of underemployed workers with challenged credit histories, and low liquidity is rising faster than wages. Essentially, reduced wages and credit-ability do not create an environment that is conducive to a healthy real estate marketplace or broad based economy.

In the end, some indicators will always tell you what is really going on. Like tealeaves in a cup, market indicators offer a glance into the mind of an investor. Treasury notes pay a paltry 2.5%, so why would anyone on earth buy them during a bull run, except out of fear? Will we get more growth powered by American ingenuity? Will we have a greater number of educated individuals working at more than entry-level grocery store wages? Will growth be sustainable without Fed assistance and will our economy be able to power itself out of economic darkness without monetary stimulus artificially propping it up? Could there be a fourth round of Quantitative Easing needed (QE IV perhaps)? I don’t know; however, like EF Hutton, when the $3 trillion BlackRock fund speaks, I listen.

July 1, 2014 By howardpr Leave a Comment

The Contemplation of Fannie Mac or Freddie Mae

What I just typed was not a misprint. The two government entities assigned the task of creating a liquid mortgage market are Fannie Mae and its kissing cousin Freddie Mac. However, over the decades it has been extremely common for two entities operating in the same business sphere to find operating efficiencies by combining, merging, or marrying one another and becoming a colossus with even more market muscle than ever before. Accordingly, I thought of Fannie Mac. Some would prefer the name Freddie Mae. Others would want nothing to do with either name and just settle for a new moniker and leave the names of the past in the past. But what sense could be derived from the idea of a merger of the two mortgage behemoths. Would it make sense? It’s possible. Let’s consider why.

When two banks merge together the deposits grow, the balance sheet balloons in size, and market share normally takes a huge pop. This is almost applicable in any combination for rivals in the same business. The biggest advantage comes in the strategic analysis of both portfolios. The thought is to keep and grow the business of the more profitable and popular product lines while jettisoning the market losing divisions between the two. The chief source of immediate value is the reduction of back office infrastructure. Most mergers involve the consolidation and or shutdown of the GSA (general, servicing, and administrative) expense departments that cost that most to operate. Hence, there will only be one accounting, HR, IT, and training department on a go-forward basis. As such, many jobs will be lost, but there will be a commiserate jump in stock price as the bottom line is fattened, thus substantiating the rule of thumb that for every dollar in sales there is 10 cents retained, while for every dollar in expense reduced is one dollar retained. For these two giants, GSA expenses totaled $4.2 billion combined!

So in the case of Fannie and Freddie, many merger and acquisitions I-bankers, lawyers, and CPAs could see many of these same business principles being applied to the merger of the century…….or maybe of the merger of the country……a two trillion dollar merger! Fannie Mae does a good job with residential pricing for deals that push the envelope for borrowers with short employment histories. Freddie Mac does an amazing job in packaging and distributing loans to the secondary marketplace, especially on apartment buildings. Freddie may work better with the self-employed being more lenient with their documentation requirements. Fannie may get more deals done for the recently employed, like people who are fresh out of college. Fannie has more extensive IT infrastructure. Freddie has more extensive Wall Street contacts. Freddie Mac is in McLean VA, while Fannie Mae is located in the heart of DC. Like any good merger, we can see the strategic thinkers keeping the good, cutting the bad, and taking a wait and see approach on the “so-so.” Banks would only have one set of regulators to deal with, one set of guidelines to maintain, and only one securitization model to follow when dealing with Wall Street. The benefits seem like no brainers, but the politics are not.

As it is, we, the people, the American taxpayers own the entities. In spite of the fact that Fannie Mae and Freddie Mac taxed (no pun intended) the American citizenry to the tune of $188 billion for their bailout, they are still an intricate part of the American existence. In addition, as an enterprise under the conservancy of the United States, they are technically Federal entities. So the occurrence of layoffs at a long-standing “Federal” employer could be a public relations nightmare that could prove difficult to put a positive spin on. Fannie Mae has roughly 7,000 employees and Freddie Mac has approximately 5,000 team members. The thought of 4,000 – 6,000 government employees losing their jobs sounds like a small number in the day and age of a national economy that produces 200,000 jobs per month and has total workforce of 155 million people, but we normally don’t talk about the shutdown of an entity that finances half of the American dream. Congressmen from Virginia would be loathe to allow Freddie Mac to get shutdown and financial institutions across the land would lobby hard for their preferred GSE to keep its doors open. So a marriage made in heaven (on paper) it might be, but where rubber meets the road, it may not.

Do I think that it makes sense that we have only one national mortgage company…yes. The savings to the American people are immense. The logic of the elimination in redundant of operations is a no-brainer, but the politics are not quite as clear. If the speculation that congress will create a new entity to provide liquidity to the market shows no teeth, a merger is almost is inevitable, as the Federal government only needs one market maker for mortgages. It will be interesting to see if serious discussion arises for a topic such as this. The common sense for a Fannie Mac or a Freddie Mae is there, but for now, the political will is not.

June 25, 2014 By howardpr Leave a Comment

Am I Really Worried About the Spanish Flu?

Recently, the Bank of Spain reported that it had foreclosed on almost 40,000 primary residence dwellings in 2013…….about 45,000 homes when you include vacation homes. If you are the average American, you think to yourself “oh that’s too bad” and go about your business, however, we can’t afford to think that way any more. I believe that it was Hillary Clinton in her book Hard Choices who made a comment, which really resonated with me. She said that we have to be just as aware of what is going on in Cairo, Egypt as we are of what is going on in Cairo, Illinois…….or if I take it a step further, we need to be just as concerned with Athens, Georgia as we are with Athens, Greece. As I consider it, this is so true. Our portfolios reflect it.

Because of diversification of all sorts, pension fund managers, mutual fund managers, insurance companies and investors have been chasing down higher returns wherever they can find them. They have invested in tech startups, LBOs, and precious metals. For so long, so many countries avoided the idea of real estate debt as an investable asset class. Accordingly, securitizing the debt and selling it to investors was equally absurd; particularly in countries in the East for which most purchases are made with 100% cash. Accordingly, with the advent of esoteric mortgage products that can be sliced and diced and sold in various pieces, at different interest rates that are commiserate with applicable risk, it is totally conceivable that anybody’s mortgage can end up just about anywhere….in the world.

I have international growth stocks and bonds as a part of my portfolio, and if you are a “moderate” to “aggressive” investor, your portfolio may have some of this asset class too. When you peek into the annual report or prospectus of your mutual funds, you may shocked to find out that you have a lot of debt from countries that haven’t been too stable as of late. Brazilian, Russian, Indian, and Chinese (BRIC) based bonds of all sorts have been stuffed into portfolios with the underlying owners not being preoccupied with it in the least bit, however, recent worldwide malaise has taken hold of the headlines and we all should consider “just where are my assets invested?” If it is Greece, Hungary, Ireland, Italy, or Spain, “caveat emptor” applies (let the buyer beware).

The Spanish Flu is real. Foreclosure in the land of the matador is very real. One can turn on the TV screen or flip through the paper and see hundreds of people being forced out of their homes by La Policia. In the same way that short sales, foreclosures, and “loan mods” turned the American…….no….I’m sorry, the world’s economic stability upside down, Spain, and so many other countries have the same potential effect, though for now at a smaller scale. Homeowners in Spain are committing suicide as they did here. The European Central Bank had to bailout the Spanish banking system just like they did here. It has also tightened lending standards, just like the Feds did here. However, Spanish lending rules aren’t necessarily the same as American rules. In Spain, the government can issue a moratorium on all mortgages across the nation (as they did in 2012). The thought of that in the US is unfathomable, as lenders make loans knowing that if a borrower defaults, due process will result in a returned asset that can later be sold to recoup dollars lent out. It’s easy to get up to speed on real estate laws that may vary from state to state; it’s a different ball game when the laws are written in another language. Hence, I think that we all should take a moment to see how heavily exposed we might be to real estate issues outside of the land of the free and the home of the brave. I know that a borderless investment world has changed the way that I think.

When I was growing up, the Spanish Flu was a part of history from 1900 to the modern era. It spoke of an unusually deadly pandemic that spread across the world with outbreaks that were so severe that they crippled parts of Germany, Britain, France, United States, and of course Spain, where King Alfonso XIII nearly died of the disease. It is said that the Spanish Flu infected over 500 million people across the world. The funny thing is, I would imagine that just might be the same number of people who have been in some way affected by the worldwide mortgage meltdown as well. Capital One’s now famous moniker is “what’s in your wallet.” I would venture to change it and ask, “what’s in your portfolio?” Atchew!!

June 3, 2014 By howardpr Leave a Comment

A Little Risk is What I Need (in My Portfolio)

The American investing public is a fickle bunch. Fund managers and stockbrokers must feel crazy when there is a sudden shift in the economic spectrum, or when data about the economy shifts from positive, to neutral, and then negative. The phrase “flight to safety” never meant so much as it has since the post-recession of 2008. It seemed as though every other day in periodicals or on the news wire that there was “a flight to safety as investors fled stocks and piled their profits into treasuries. “ It was unbelievably predictable, as for every two to three days of consecutive gains, that there would be the proverbial “flight to safety.” In recent days the flight has been halted, as there appears to be a more consistent appetite for risk, particularly with regards to the mortgage market.

The Wall Street Journal recently reported that of the 10 largest bond funds in the nation at the end of 2013, the four with the highest trajectory of growth were funds with portfolios weighted with 20% of their assets as bonds rated as “junk bonds.” Yes, that was 20%. The US Federal Reserve, the British Bank of England, and the European Central Bank’s obsession with low interest rates has pretty much forced the hands of the investing public around the world. With Certificates of Deposits (CDs) earning a paltry 1.2%, money market funds at 0.4%, and savings accounts offering dismal rates of .80%, investors fled “safety” and moved into the waiting arms of risk of all asset classes. Emerging markets like China, India, Malaysia, Venezuela, and even Chad received some foreign investment. Gold became a darling of the markets again, and tech startups became the rage. Recently, even riskier mortgage-backed securities (MBS) are starting to show up on the radar screens of investors as well.

Prior to Memorial Day 2014, Fannie Mae offered $1.6 Billion in residential MBS. It was so oversubscribed that the government securities entity was able to cut the interest rate yield on the bonds twice and still sold out. This set of securities was the third risk sharing class that Fannie Mae had issued since the down turn. Ironically, what makes this decision different than others is that the investors of these securities were willing to share in the risk of default. In the past, Fannie Mae and Freddie Mac’s central edict was to securitize debt and issue a guarantee on the underlying securities to backstop the originators from losses; now, this is not the case. This latest issuance involves sharing the risk. In fact, some of the MBS loans included borrowers with the high propensity to default (those with down payments as little as 3% of the purchase price). The amazing factoid to this scenario is that this portion of the $1.6 billion bond issue drew 19 times the bids needed to complete the sale!

Some of these MBS bonds were rated pure junk, and others were just a hair above junk. No matter what the rating was, there is no flight to security here. There was only flight from yields that were below inflation and a growing need to be at least 1.00% above treasuries! The trend appears to be poised to continue for the next three to five years as the artificially engineered low-rate environment is forcing investors of all sorts to do things that they normally would not do. But let’s consider the moneymakers as well.

If you are securitizing a loan and selling it to the secondary market, you are telling your originators (e.g. banks, mortgage bankers, and other providers of capital) what loan products are selling the most frequently. Therefore, mortgage lenders of all sorts are finding out that loans with higher LTVs and lower credit scores are being purchased in record volumes and that interest rate yields are being cut due to the overwhelming demand. This translates into banks and brokers starting to offer loans with even lower FICO scores, less documentation, and higher LTVs on different product types and occupancies to see if the market will buy it. Thus, the pendulum has swung back to aggressive product offerings and underwriting guidelines again. Some will say this is a good decision, as many deals were DOA. Conversely, others will say it’s a bad decision because of the damage that it caused. Some, like myself, see both sides, and can see the need for less documentation with a little discipline and regulation to prevent over levered insanity.

In summary, this recent Fannie Mae bond sale is a testament of flight from safety and time travel back to the future. The market has asked for riskier debt. Its voracious appetite is not enough. Given the sell out of such a riskier slice of the MBS pie, what is the market willing to digest next? Will it be stated income loans, bank statement loans, 90% commercial loans, or EZ qualifier construction loans? Given where rates are now, I think there is a market for just about anything that securitizers will sell and investors will eat it up. I think that if a $1 billion dollar offering of stated income apartment loans on the West Coast hit the market today, it would be sold in five minutes. I’ll take my slice of risky lending market optimism sunny side up.

May 20, 2014 By howardpr Leave a Comment

Banking with a Non-Bank

Bank of America, Chase, Citibank, U.S. Bank, and Wells Fargo are the “Money Center Banks.” These are the financial institutions where you go for checking accounts, savings accounts, CDs, trust services, insurance, investments, mortgages, credit cards, foreign exchange, international banking, and nowadays, even investment banking. Ambitious CEOs representing banks have cobbled together savings and loans, credit card companies, money management companies, and asset-based lenders in a concentrated effort to offer financial “one-stop shops,” in an effort to make banking easy and seamless. However, it hasn’t worked out that way.

Developers of all sorts have run into roadblocks as traditional banks (such as the ones previously mentioned) have balked at the idea of offering construction loans and other large mortgage products. In spite of the fact that most loans such as these are syndicated to a banking group of six to 12 lenders to diversify the risk, developers are still getting a hand-to-the face and a flat “no thanks,” unless they are top-notch pre-existing customers of the institution. Accordingly, to get their projects up and running, alternative lenders are approached to fill in the gap.

Real Estate Investment Trusts (REITs) with a focus on extending debt products are moving in the financing foray space in a big way. Previously, REITs focused almost exclusively on acquiring equity positions on properties. Now they are willing to jump to the other side of the balance sheet and extend debt to raise their yields for their investors. Some are even willing to structure construction transactions with acquisition and development pieces built in to sweeten the deal. As you can imagine, developers love it. Private equity funds and even hedge funds are getting into the game as well. With returns on riskier assets averaging 3.00% – 7.00% more than cookie cutter loans on properties such as fully leased malls or apartment buildings, non-traditional fund sources are leading the way to a “new normal” for nontraditional deals. Empty malls, single use properties like bowling alleys, and unanchored strip malls are getting a lot more attention than in the past.

The potential ability to earn 8% – 11% returns is attractive to many investors. In fact, loans made by non-bank lenders ballooned to $23 billion in 2013. According to the Mortgage Banking Association, banks originated an eye-popping $210 billion in 2013; however, this is nowhere near the $630 billion of credit lending extended in 2008 prior to the recession. A lot of retrenchment is due to a lack of appetite for riskier loans from credit administrators at different banks, but the regulatory environment has also changed dramatically as well. More banks are being forced to cast off loans, sell their servicing divisions, and/or increase their capital reserves. As such, lenders are selling off loans and leaving cash on the books as opposed to putting it out in the market for new lending–a total travesty.

Now, the non-traditionals are filling the void that banks are leaving behind in the mortgage market and in a major way. However, it’s not like it used to be. Prior to 2008, you could find an alternative lender that would lend up to 90% on a car wash or gas station with stated documentation. That doesn’t exist anymore. What is more common is 65%-70% in major metropolitan areas. If 75%-80% financing is given, it normally requires cross collateralization with a lowly levered property or some other type of credit enhancement to make the underlying investors behind the financing comfortable. No matter what lender is being approached, the most important thing to recognize is that traditional banks don’t have an exclusive lock on the market for the lending of money anymore.

Wells, Chase, City and BofA are the behemoths in the A-to-Z financial marketplace. You can find a branch in Krogers, get a safe deposit box at your corner branch, or initiate a controlled disbursement for your corporation in the blink of an eye. However, you may need to get an alternative lender is you are looking for specialized lending. The alphabet soup of the Fed, OTS, SEC, FHFA, and Basel III have provided a regulatory quagmire for the average borrower; accordingly, people are looking in different places to get the money they need and to get their deals done, without sacrificing an arm or a leg. So the place where you keep your deposits and mutual funds may not result in a mortgage loan, but it could be that you didn’t need to have all of your financial eggs in one basket anyway!