September 7, the day after Labor Day this year, and the mortgage market returns from a weekend of hotdogs and back-yard football games to a new “let’s hope this works” program of the FHA.
Back in August, HUD secretary Shaun Donovan talked about the launch of a new "FHA Short Refinance" program. Initially unveiled to the public on August 3 while speaking at the National Association of Real Estate Brokers Conference in Fort Worth, Texas, the plan outlined would provide a new form of refinancing option to underwater homeowners. Eligibility for the new loan would require that the homeowner (i) be underwater but still current on the mortgage and (ii) have a credit score of 500 or better. In addition, once refinanced and insured by the FHA, the new refinanced first lien loan must have a loan-to-value ratio of no more than 97.75% and the borrower’s combined loan-to-value ratio be no more than 115%. Since the new FHA mortgage can only be used to refinance the unpaid principal balance on the first lien, any second lien has to be written down to meet the CLTV requirement.
The biggest hurdle to the program, however, appears to be the requirement that the existing first-lien holder (the securitization trust in most cases) must agree to write down at least 10% of the unpaid principal balance, and it must bring the borrower's combined loan-to-value ratio on that first mortgage to no more than 115%. Servicers will have to look at the “imminent default” provision of the Pooling and Servicing Agreements to allow them to “write down” this principal without fear of investor litigation.
Questions abound as to the practicality of this program. How a borrower that is current, as required by the program, could be deemed to be in imminent default? Since the CLTV requirement is 115%, isn’t it possible that there may be situations that the first lien holder would have to take the 10% write down while the second would not be impacted? What is the value to be used for the LTV and CLTV calculations? Would the new appraisal/value also have to capture any advances that were previously made by the servicer on the loan in order to keep the calculation in balance? How is this write-down deemed allowable in the securitization structure, since it is not technically a “write-down” of the balance of the current loan, but rather a substitution of a new loan with an LTV of 97.75% and probably different terms? Don’t the Pooling and Servicing Agreements limit subsititutions?
The Treasury Department has committed $14 billion in TARP funds for this program. Together with the FHA insurance, these new refinanced loans will have a government guarantee for up to 97.75% of the new home value. It appears at this point, however, that this “quicky” program only applied to non-GSE loans, probably based upon some circular nature if it had. So, not only can the first lien loan to be refinanced not be an FHA loan, it appears that the Treasury has not cleared the GSEs to write-down underwater loans.
According to HUD, it appears that the TARP funds are a way for the servicers of these non-GSE securitization products to support write-downs and write-offs of mortgages and to provide coverage for a share of potential losses on these new loans. Therefore, this program is really a way that the government means to incentivize the servicers to make these refinancings.
So, it looks like we have another “Quick Snap Hail Mary” pass from the quarterbacks in Washington. And while this one looks like it will end up thrown out of bounds, with no receivers in site, it appears that the only “short(s)” in this refinance program are the ones the investors are going to take it in . . .
Showing posts with label MBS. Show all posts
Showing posts with label MBS. Show all posts
Tuesday, September 7, 2010
Thursday, September 2, 2010
THE PLAY ON ALT-A SECURITIZATIONS – LET THE GAMES BEGIN (AGAIN)
In an article today in the Wall Street Journal by Prabha Natarajan, it looks like there is a renewed interest and demand for previously issued Alt-A securitization paper. While unclear, it appears these non-agency bonds include the sub-prime variety (there is some distinction between Alt-A and true sub-prime, which appears to have been lost in the recent financial hurricane).
As reported, in was stated by Jesse Litbvak, head of non-agency trading and Jefferies & Co in Stanford, CT (an MBS trading powerhouse?) that these trades are occurring because investors believe that the credit risk of continuing defaults are already priced into the bonds. That, together with the prospect of early redemption, as noted in the article by Matt Toms, head of U.S. public fixed income investment at ING Investment Management, means that the bonds have up-side potential.
Well, as we have seen from our recent past, that is anything but a sure thing. Of significance to this analysis of the value of the bonds is the redemption of the bonds before their maturity date. Currently, due to the refinance boom (or really, bubble), the bonds can be redeemed at their face value due to the early payment of the underlying mortgages. Where in the past, early redemption was something to be avoided (when the investor was paying 105 for the bond), now at the discount of 60-80, a redemption at face would be a good thing. And since in most securitizations, early payments are covered in the cash flow waterfall as a payment to the most senior bonds first, the AAA stand in line to get theirs before the rest.
Right now, with interest rates at historic lows, there has been an increasing portfolio of mortgages being paid off in the refinance market. However, this is still just a limited and decreasing pool of applicants. Beyond the fact that there are only a decreasing percentage of homeowners that will qualify for a refinancing over time, there is also the issue of whether the underlying mortgages are still tied to those ugly prepayment penalties that were the rage in the latter part of the Alt-A and sub-prime boom. And the only way to know that fact is to have loan level detail of the pool. So, while redemptions may be occurring today, do not expect this trend to continue strongly into the future.
The article discusses the fact that the play now is on the AAA bonds off the securitizations – yes those same AAA bonds that now everyone is questioning how the rating agencies reached that rating. More problematic will be the coming tsunami of realized losses on the securitization pools due to short sales and foreclosures that are then liquidated. With the failure of HAMP, HAFA, HALA and all the other programs to stem the tide, foreclosure still seems to be the outcome for a significant number of borrowers. Even Fannie is starting to put pressure on servicers to quicken the pace of foreclosures, as discussed in an article today entitled “Excessively Delaying Fannie Mae Foreclosures Will Now Cost Servicers” by Jacob Gaffney in HousingWire. And once the property is thereafter sold (at a loss to the unpaid principal balance of the loan plus costs and reimbursed advances), these “Realized Losses”, as defined in the securitization trust agreements, could press the losses beyond the mezzanine tranches and into the AAA bonds.
So, while the yields on these bonds may be double that of corporate paper and triple that of Treasurys, it looks like Wall Street is selling investors on stepping up to the tables and laying down money to roll the dice again. Let’s hope we don’t crap out (again).
As reported, in was stated by Jesse Litbvak, head of non-agency trading and Jefferies & Co in Stanford, CT (an MBS trading powerhouse?) that these trades are occurring because investors believe that the credit risk of continuing defaults are already priced into the bonds. That, together with the prospect of early redemption, as noted in the article by Matt Toms, head of U.S. public fixed income investment at ING Investment Management, means that the bonds have up-side potential.
Well, as we have seen from our recent past, that is anything but a sure thing. Of significance to this analysis of the value of the bonds is the redemption of the bonds before their maturity date. Currently, due to the refinance boom (or really, bubble), the bonds can be redeemed at their face value due to the early payment of the underlying mortgages. Where in the past, early redemption was something to be avoided (when the investor was paying 105 for the bond), now at the discount of 60-80, a redemption at face would be a good thing. And since in most securitizations, early payments are covered in the cash flow waterfall as a payment to the most senior bonds first, the AAA stand in line to get theirs before the rest.
Right now, with interest rates at historic lows, there has been an increasing portfolio of mortgages being paid off in the refinance market. However, this is still just a limited and decreasing pool of applicants. Beyond the fact that there are only a decreasing percentage of homeowners that will qualify for a refinancing over time, there is also the issue of whether the underlying mortgages are still tied to those ugly prepayment penalties that were the rage in the latter part of the Alt-A and sub-prime boom. And the only way to know that fact is to have loan level detail of the pool. So, while redemptions may be occurring today, do not expect this trend to continue strongly into the future.
The article discusses the fact that the play now is on the AAA bonds off the securitizations – yes those same AAA bonds that now everyone is questioning how the rating agencies reached that rating. More problematic will be the coming tsunami of realized losses on the securitization pools due to short sales and foreclosures that are then liquidated. With the failure of HAMP, HAFA, HALA and all the other programs to stem the tide, foreclosure still seems to be the outcome for a significant number of borrowers. Even Fannie is starting to put pressure on servicers to quicken the pace of foreclosures, as discussed in an article today entitled “Excessively Delaying Fannie Mae Foreclosures Will Now Cost Servicers” by Jacob Gaffney in HousingWire. And once the property is thereafter sold (at a loss to the unpaid principal balance of the loan plus costs and reimbursed advances), these “Realized Losses”, as defined in the securitization trust agreements, could press the losses beyond the mezzanine tranches and into the AAA bonds.
So, while the yields on these bonds may be double that of corporate paper and triple that of Treasurys, it looks like Wall Street is selling investors on stepping up to the tables and laying down money to roll the dice again. Let’s hope we don’t crap out (again).
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