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from Breakingviews:

US housing recovery shows subsidies need trimming

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own. The U.S. housing recovery shows it’s time to trim subsidies. The market finally looks close to bottoming out. Prices are reasonable and rates for borrowing mortgages are ultra-low. Mortgage interest tax deductions, loan guarantees and even some foreclosure assistance are looking increasingly unnecessary.

Take, for example, the delinquency rate. It dropped to 7.4 percent in the first quarter, according to the Mortgage Bankers’ Association. That’s almost a full percentage point below last year. The number of new homes being built is a third higher than this time last year, while sales of both new and existing homes are also on the up. And the National Association of Homebuilders index is 20 points above its nadir and now at its highest level since the end of 2007.

All this suggests that much of the assistance the state gives to the housing market is no longer needed. The home mortgage tax break, for example, is a pre-crisis crutch that primarily benefits those who don’t need the help - wealthier borrowers, who get more back simply because they pay more tax. Scrapping the deduction completely risks causing hardship to those borrowing more modest amounts, but capping it at $10,000 would limit its market distortion without removing a prop from middle-market housing.

The most obvious distortions to eliminate are the outsize guarantees on home loans provided by government-backed mortgage agencies. Fannie Mae and Freddie Mac backstop qualifying loans up to $625,500, while the Federal Housing Authority’s limit of $729,750 is even more excessive. These are both hangovers from the crisis. Capping guarantees at the old rate of $420,000, or even lower, would limit the subsidy to middle-class borrowers. That could then mark the first step in reducing the overall influence of the agencies on the market.

There’s no quick and easy fix for the housing market. But it’s looking healthier each month. That makes keeping some of these more egregious distortions in place harder to justify. Cutting them would restore some balance to the market and allow the cash to be put to more productive uses.

from MacroScope:

Spanish banks 1, Spanish mortgages 0

The trillion euros lent out by the European Central Bank for three years at a rock bottom interest rates were supposed to do two things -  throw a comfort blanket around Europe's wobbly banks and pump money into  moribund economies. Some new data from struggling Spain confirms that while there may be a bit of a case for the former, the latter is still falling short.

Mortgage lending by Spanish banks  had their largest annual drop in more than six years in February - coming in at essentially half of what they were a year earlier. There are all kinds of reasons for this, not the least being that large numbers of Spaniards are out of work and house prices are still tumbling with at least one estimate being that they remain as much as 30 percent overvalued.

But given that Spanish lenders were among the biggest taker of the ECB's largesse  (officially known as  LTROs, a name only a central banker's mother could love) the lack of trickle down  is less than bracing.  The suspicion is that Spain's banks are holding back on lending because of their wonky balance sheets, which is of course a good thing in itself it it keeps the financial system on its feet.

This  would fit with data from the ECB itself showing banks in general are so flush with money they don't know what to do with it.  Tuesday's  ECB's overnight deposit facility showed banks parking 768 billion euros there. In normal times the amounts are minimal.

So while the money may be helping bank's rebuild their  balance sheets (Goal 1),  it is not yet getting into the general economy (Goal 0).

Just ask a  Spanish home buyer.

from Breakingviews:

Frannie generosity could cost taxpayers $128 bln

By Daniel Indiviglio 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.  

The holy grail of foreclosure prevention looks near struggling homeowners’ grasp - but its contents may taste bitter to taxpayers. The Federal Housing Finance Agency appears close to caving on letting Fannie Mae and Freddie Mac cut mortgage balances for underwater borrowers. A new Breakingviews calculator shows that this policy shift would not cost too much more at the margins. But it introduces another layer of moral hazard: if it encourages enough borrowers to sip from the cup, Frannie’s already gargantuan $150 billion bailout tab could almost double.

If properly targeted, forgiving lump sums from borrowers’ mortgages isn’t overly expensive. FHFA Acting Director Edward DeMarco revealed last week that 700,000-odd government-backed, underwater borrowers already in default might qualify. Their balances could be cut by an average of $51,000 a pop.

Plug those numbers into Breakingviews’ calculator, along with Barclays’ assumption that redefaults may hit 40 percent, and it shows that principal forgiveness costs $9 billion more than the projected cost of Treasury’s original Home Affordable Modification Program. That initiative shrinks a borrower’s monthly payment without reducing balances. Forgiveness is more expensive - while it usually pushes redefault rates down by five to 10 percentage points, according to Barclays, it cuts mortgage principal and interest revenue.

Frannie would, though, get a boost from the Obama administration, which has offered to use leftover bailout money to pay an incentive of up to 63 cents for each dollar of principal cut. The firms say that makes reducing loan balances $1.7 billion cheaper than traditional HAMP modification. That’s bogus math for taxpayers, of course - they provide the funds either way.

The real problems start if borrowers who are deeply underwater but still paying their mortgage demand principal relief. Some 2 million homeowners fall into this category, the FHFA says. Factoring those in and assuming none of them defaults, the calculator shows that slashing loan amounts would cost taxpayers a whopping $128 billion more than just rejigging payments.

from MacroScope:

U.S. housing slump: Six years and counting

Just as Americans begin to regain some hope that the housing sector might be on the mend, we get another batch of data showing the sector’s not quite there yet.

Groundbreaking on homes fell unexpectedly in March to an annual rate of just 654,000, down from 694,000 in February and well short of the 705,000 Reuters consensus forecast. Some context: permits peaked above 2.2 million in early 2006, at the apex of the housing bubble. On the bright side, permits for future construction rose to their highest level in 3-1/2 years.



In other housing data this week, homebuilder sentiment deteriorated again after posting a pretty decent rebound from the very depressed levels seen in 2011.

from Breakingviews:

Ally’s mortgage misery needs a clean ending

By Agnes T. Crane and Antony Currie The authors are Reuters Breakingviews columnists. The opinions epxressed are their own.

Ally Financial finally seems to have woken up to the need to get rid of ResCap, its ailing mortgage unit. Once the jewel in the former GM finance unit’s crown, the home lending and servicing operation has been a prime candidate for the bankruptcy court for years. ResCap has been on U.S. taxpayer-funded life support since 2008 - sucking up most of the $17.2 billion in aid the U.S. Treasury funneled to Ally. Now a Chapter 11 restructuring may finally be on the cards. But Ally needs to ensure its mortgage misery comes to a clean ending.

Bankruptcy ought to allow that. Back in 2005, Ally - or GMAC, as it was then called - revamped ResCap’s corporate structure so that it became a fully independent subsidiary with its own board and funding strategy. The purpose was to insulate the mortgage lender from any problems at GM and the auto finance arm. At the time, ResCap’s bondholders seemed perfectly satisfied they were protected.

Now, though, activist hedge fund Elliott Capital Management, which owns 2.3 percent of Ally, is questioning how watertight that arrangement is. It’s concerned a bankrupt ResCap could still drag its arms-length parent into another protracted mess. If that happened, Elliott argues, Ally would be embroiled in a flood of mortgage-related claims the hedge fund reckons could swamp the court. What’s more, Ally would have to duke it out with other creditors - its home-lending arm relies on its parent for $1 billion of secured loans and a $1.6 billion credit line.

Ally appears to think that’s less of a risk. According to Reuters it is considering whether to sell ResCap to another hedge fund, Fortress, through the bankruptcy process. If successful, that would remove most of the problem assets that caused it to fail the recent Federal Reserve stress test and may even put its mooted common stock offering back on track.

Taxpayers should cheer that: the unencumbered core auto business may be worth as much as $23 billion, more than enough to repay the $14 billion still owed Uncle Sam. But Ally Chief Executive Michael Carpenter needs to show that the risk of Ally being laid low by a ResCap bankruptcy is minimal. The last thing the firm, and taxpayers, need is for a bad decision to prolong its own pain.

from MacroScope:

Lenders still overvaluing properties, Fed study finds

The Fed calls it an “apparent misunderstanding.” Whatever term you prefer, a new Cleveland Fed study makes one thing clear: lenders are still overstating home values. The study focuses on real-estate-owned or REO inventory, which covers properties that are now owned by lenders.

We analyzed sales data from Cuyahoga County, Ohio, and found signs that appraisers, lenders, and investors could be routinely overestimating the property values of foreclosed homes there. We suggest some simple identifiers that can help lenders better estimate home values in weak housing markets. And though we have focused on one county, we believe the situation could be the same in other places. The factors we identify as possible causes of overestimation in Cuyahoga County are likely to be found in many other weak housing markets around the country.

The two Fed economists who wrote the report identify an array of reasons for such overvaluations, ranging from the perfectly innocent to the potentially dodgy:

Lenders may be overvaluing properties because their valuation methods—which they use because they work well in most markets—don’t happen to work well in weak ones. The evidence supports this explanation, since it is not only lenders that overestimate the value of properties acquired in the sheriff’s sale, but all parties, including federal agencies and investors. Proper valuation methods would substantially discount the appraised value of homes in weak markets, bringing the estimates of value more in line with what the property will sell for on the open market. It is important to remember that lenders usually cannot legally enter the home and inspect the interior prior to foreclosure, which would prevent them from detecting hidden defects. But even when they are allowed to inspect the interior, it may not be feasible to inspect each property prior to foreclosure, given the number of foreclosures initiated every year.

Finally, there may be incentives that encourage lenders to overvalue foreclosed properties. Doing so would allow them to shift accounting losses from their loan portfolio to their REO portfolio. Solvency tests and supervisors of financial institutions place less emphasis on REO portfolios than on loan portfolios. This is a function of banks having relatively small REO portfolios in normal times, but always having an active loan portfolio that can be analyzed.

from The Great Debate:

Three disturbing trends in commercial banking

The recession officially ended in July 2009, and yet the speed and scope of the subsequent recovery have been disappointing. Recent economic data have been encouraging, but there are three ominous trends in the consumer banking space that signal the waters ahead may be choppy.

1. No new banks were chartered in 2011

The Financial Times reported recently that not one new, or de novo, bank was created in 2011. (The FDIC actually lists three new bank charters for 2011 -- the lowest number in more than 75 years -- but they all involved bank takeovers of other failed banks.) What are some of the possible implications?

First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses’ access to loans could limit future employment growth as well.

The dominant narrative in 2011, like the 2010 version, was one of bank failures and distressed acquisitions. The FDIC reports that about a hundred banks failed and another hundred were absorbed this past year. But industry consolidation has been prevalent since the 1990s, as this excellent image-graphic from Mother Jones (where you can click on the image to enlarge it) reveals.

Overall, the number of banks declined by 15 percent in the past five years, to 7,357, while revenues decreased for the fourth consecutive year, to $737 billion. Although this is partly due to the Federal Reserve’s low-to-zero interest-rate policy, which reduces interest income, non-interest income also fell in 2011 for the second consecutive year.

from MacroScope:

Distress signals from U.S. housing

There was something for everyone in the January existing home sales report. Bulls could point to the level of sales, which reached a 1-1/2 year high, and the decline in housing supply, long an impediment to the sector’s recovery. Bears might focus on the sharp downward revisions to prior months that suggested conditions were improving but from considerably more depressed levels.

But one nugget in the report was unequivocally bad: the proportion of distressed sales surged to 35 percent from 32 percent, a considerable one-month rise. For Michael Meyer, economist at Bank of America-Merrill Lynch, this means existing home sales numbers have become less reliable:

We think that simply looking at existing home sales is an insufficient way to gauge underlying housing demand since the data are heavily affected by investors and distressed sales. The best measure for demand from primary homebuyers is to look at mortgage purchase applications, which have remained sluggish. In addition, we think it is prudent to wait for the spring selling season before making conclusions about underlying housing demand. The winter is typically the slow season for home sales, making the data less reliable. We expect the spring selling season to show some improvement, but we believe it risks disappointing relative to market expectations.

There is also reason for caution about the apparent progress in bringing down high inventories, the glut of supply resulting from the overbuilding of the boom years. Zach Pandl, economist at Goldman Sachs writes:

The 'months supply' of homes on the market has declined to the lowest level since April 2006. Although we consider the drop in this measure of inventories a modest positive, we also think it exaggerates the improvement in excess housing supply.

Active listings — which are what the existing home sales report measures — decline if a house is sold, but also if a current homeowner pulls their home off the market. They can also be held down by prospective home sellers who decide not to sell due to weak demand conditions. Available data suggest that the latter two factors may have been an important reason behind the improvement in existing home inventory and months supply.

We continue to think that the appropriate way to measure the overhang in the housing market is through excess vacancies: the number of homes currently sitting empty above and beyond the normal frictional or seasonal level of vacancies. Here we see some improvement, but progress looks much more gradual.

from Breakingviews:

Citi, BofA prove too big to punish harshly

By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Sticking it to Uncle Sam should attract harsh punishment. But the fines Citigroup and Bank of America will pay - $158 million and $1 billion respectively - to settle claims they defrauded the U.S. government look easily handled. Citi has even admitted fraud in its dealings over home loan insurance. A ban from participating in the government’s mortgage insurance programs would be a better deterrent. But unfortunately, Washington needs big banks too much.

BofA’s alleged misdeeds are still murky since its settlement was conveniently wrapped up in the broader $25 billion deal between federal and state enforcers and big mortgage servicing banks over so-called robo-signing transgressions. But the complaint against Citi offers a brutal account of the drive for profit squashing quality control. The Federal Housing Administration ended up insuring shoddy Citi mortgages that, in some cases, were in default within six months.

Federal insurance programs rely to a large extent on banks’ good faith in delivering mortgages that genuinely meet the required standards. Citi’s admission that it failed to do this came only after someone blew the whistle last year. It was a breach of the government’s trust and it has cost taxpayers money.

The penalties for ripping off the government usually go beyond dollars and cents. Yet Citi’s fine, in particular, is hardly crippling. And BofA has already set aside enough money to cover a good chunk of its settlement. A temporary ban on doing business with the FHA, on the other hand, would deliver more punch and show others in the industry that Washington won’t tolerate abuses of its largess.

Yet that’s unlikely to happen. The FHA, once a niche player focused on low-income housing, now backs about a third of new mortgages including super-sized ones for wealthy home buyers. The market for FHA-qualified mortgages runs $25 billion a month. While Citi has only a 2 percent share, BofA is the largest player with more than 26 percent, according to FTN Financial, using mortgage servicing as a proxy for origination activity. Booting offending banks out of the government’s program could make mortgages even harder to come by.

from Unstructured Finance:

Phil Angelides gives up his “secret formula”

By Matthew Goldstein and Jennifer Ablan

Phil Angelides, the former chairman of the commission set up by Congress to look into the causes of the financial crisis, is no longer part of a group seeking to turn a profit by investing in distressed mortgages.

A representative for Angelides emailed a statement to Reuters saying the former California state treasurer stepped down as executive chairman of the upstart firm, Mortgage Resolution Partners, on Jan. 27. Angelides, as we reported today, stepped down about two weeks after our exclusive story about his role with the firm was published by Reuters.

Angelides' role sparked controversy because the firm touted its political connections as part of its "secret formula" for negotiating deals to buy distressed mortgages.

We only found out that Angelides left Mortgage Resolution Partners when we asked him to comment on a recent letter from a U.S. Congressman criticizing the firm's marketing strategy.

On Feb. 10, Rep. Patrick McHenry, chairman of a House Oversight and Government Reform subcommittee on TARP program, sent a letter to Shaun Donovan, the Obama administration's secretary of Housing and Urban Development, asking him for details about steps that are being taken to guard against "cronyism or conflicts" in the recently announced $26 billion mortgage settlement with the nation's big banks.

McHenry, a Republican from North Carolina, took note of our Reuters story and the firm's claim that it would use  "legal and political leverage" to acquire the loans of distressed homeowners.