Commentaries

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On MBS, Fed needs to point to the exit

When the medication is flowing, it’s hard to see straight.

Amid the giddiness in the markets and the cheers for the end of the recession, what often gets ignored is the fact that government stimulus is still fueling the reflation of financial markets.

Yes, the U.S. government has started to retire some programs — its backing of money market funds being the most recent. But there’s still a question mark about how it plans to wind down one of its largest supports — its $1.25 trillion mortgage-backed securities purchase plan — that is due to expire at the end of the year.

That’s dangerous, since a bungled hand-over of the market back to the private sector could derail a still fragile housing market.

This week, Ben Bernanke and his colleagues on the policy-making Federal Open Market Committee are sure to discuss how best to wind down its purchases of mortgage bonds guaranteed by state-run Fannie Mae and Freddie Mac. Some officials have already started to debate publicly whether they should pull the plug on the program before it reaches its $1.25 trillion limit.

Santander’s debt buy-back not necessarily a flop

Santander’s attempt to buy back 16.5 billion euros of asset-backed debt looks, at first glance like a bit of a flop: in the end investors only sold about 600 million euros of bonds by face value to the bank.

However, the result is not that surprising, for several reasons.

First, 16.5 billion euros was always a long shot. We don’t really know how much of the debt Santander had previously acquired in one-off trades in the secondary market, making it hard to say how much it could have bought back this time.

Russia says “Da” to asset-backed debt

It’s interesting to see Russia proposing a new law to encourage a domestic securitisation market for consumer debt. Russia is still a novice when it comes to asset-backed debt but seems to have cottoned on to something that not all western regulators have fully grasped — securitisation may have helped get us into the current crisis, but we are also going to need it to get us out of it.

US and European banks simply don’t have enough capital to finance both the loans they kept on their balance sheet and those coming due that were previously funded in by the shadow-banking system. They need to find ways to raise new capital and transfer risk to capital market investors. In short, they need securitisation.

Calling a bottom in Spain

Is the worst over for Spanish mortgage defaults? That’s one way to interpret Santander’s offer to buy back up to 16.5 billion euros of its outstanding asset-backed debt.

The securities are trading below par – more than 40 percent in some cases before today’s announcement – allowing the bank to reduce debt by buying them back. Cash-rich banks such as HSBC have launched similar buybacks this year to profit from the ABS market dislocation, but it’s the first time a Spanish bank has launched such a large public buyback.

The subprime to prime mortgage handoff

Data released by the Mortgage Bankers Association confirms the trend that prime borrowers are the ones to worry about.

While the percentage of mortgages entering the foreclosure process in the 2Q held relatively steady at 1.36%, the change in composition is noteworthy.

Yep, the banks really are gouging their customers

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Michael Saunders will get no thanks from his employers at Citicorp for pointing out how UK interest rates have swung dramatically against the borrower over the last two years.

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Bank Rate has plunged by 5.25 percent since July 2007, and two-year swap rates have fallen by 4.1 percent, but surprise surprise, the only rates that have come down anything like as far are those paid to the hapless retail depositor. For many of those wanting to borrow, the price has gone in the opposite direction – if they can get the money at all, that is.

The Fannie Mae sinkhole

Fannie Mae has reported the a $14.8 billion loss in the second quarter and is going hat in hand to the Treasury for another $10.7 billion to pull its net worth out of deficit. The release is here.

In a very quick read through, here are some of the things that jumped out:

We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers. Risk layering is the combination of risk characteristics that could increase the likelihood of default, such as higher loan-to-value ratios, lower FICO credit scores, higher debt-to-income ratios and adjustable-rate mortgages. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain states, higher risk loan categories and our 2006 and 2007 loan vintages continue to account for a disproportionate share of our foreclosures and chargeoffs.

It’s August. Do you know where Fannie and Freddie are?

Fannie and Freddie’s regulator-in-chief James Lockhart is stepping down to spend more time with his family, Reuters reports. Can’t say I blame him. He’s been at the helm of the Federal Housing Finance Agency, formerly known as OFHEO, for three years, saw through an unprecedented de facto nationalization of the companies, and still the future of the housing finance giants remains nearly as uncertain as it did a year ago.

Will the government wind them down, will they return them to the private sector, will they stop propping up the debt markets where they operate? There’s plenty of question marks – some might say too many considering the pivotal role these companies play in the U.S. housing market. Much of the game plan set forth when the government took over Frannie nearly a year ago expires at the end of the year, making all this uncertainty doubly worrying.

The Citi dump

City landfills aren’t pretty places. Much the same can be said for Citi Holdings, the newly formed dumping ground for Citigroup’s most ailing and malodorous assets.

Earlier this year, the de facto government-owned bank created Citi Holdings as a repository for assets that it either planned on selling or would simply have a hard time giving away. In truth, Citi Holdings really isn’t a distinct company. It’s merely part of a PR strategy to get investors to focus on the businesses that are going well at Citi and which are housed in a so-called good bank called Citicorp.

L-shaped housing market?

Economists seem willing to celebrate even the most tepid economic release these days. The National Association of Homebuilders’ Housing Market Index nudged up slightly to 17 in July, up from 15. Most economists had expected 16, so this is what passes for good news.

But the improvement is tepid indeed considering the record lows the index has hit. Even most dead cats bounce more vigorously than this.

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