Freddie to Pay Treasury $10.4B, Warns High Profits 'Not Sustainable'

Freddie Mac, the U.S.-owned mortgage financier, will return $10.4 billion to the Treasury Department next month, bringing total payments to about $10 billion above what it got in aid after the credit crisis

The McLean, Virginia-based company had net income of $8.6 billion for the quarter ended Dec. 31 and a profit of $48.7 billion for all of 2013, according to a regulatory filing Thursday, a profit largely driven by rising home prices. Freddie Mac, which was taken into federal conservatorship in 2008 along with the larger Fannie Mae, earned $11 billion in 2012 and earned net income of $30.5 billion in 3Q13.
"The level of earnings we have experienced in recent periods is not sustainable over the long term," the company said in the Securities and Exchange Commission filing. "While our provision for credit losses benefited significantly from strong home price appreciation, we are beginning to see moderation in home price growth."
Freddie Mac is required to pay Treasury all profits in return for $71 billion in taxpayer aid it received under conservatorship. The money counts as a return on the U.S. investment and not as repayment, and there is no existing mechanism for the company to exit government control.
Freddie Mac and Washington-based Fannie Mae have now sent Treasury a combined $202.9 billion, $15.4 billion more than the $187.5 billion in government aid they received. Fannie earned net income of $6.5 billion in 4Q13.
The companies' reversals of fortune have complicated the debate over their future as lawmakers in both houses of Congress work on measures to wind them down.
Stakeholders including Perry Capital LLC and Fairholme Funds Inc. have sued the U.S., challenging the arrangement under which the government takes all quarterly profits from Fannie Mae and Freddie Mac. The lawsuits claim that Treasury is expropriating the value of its investors' preferred shares.
Meanwhile, Bill Ackman’s hedge fund, Pershing Square Capital Management, took stakes in Fannie Mae and Freddie Mac in November, and said it may seek talks with management, shareholders and the government.
Fannie Mae and Freddie Mac, which were created by the federal government before becoming publicly traded companies, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest.

Mortgage apps drop 8.5%, refi volume drops to 58%-Purchase applications fall below market trends

Mortgage applications fell 8.5% from a week prior continuing its downward trend for the week ended Feb. 21, the latest Mortgage Bankers Association report found.
As a whole, the refinance share of mortgage activity fell slightly to 58% of mortgage applications: the lowest level since September 2013.
Additionally, the refinance index fell 11% from the previous week, as the purchase index decreased 4% from one week earlier.
"Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s chief economist.
Meanwhile, the 30-year, fixed-rate mortgage with a conforming loan balance increased to 4.53% from 4.50%.
The 30-year, FRM with a jumbo loan balance increased to 4.47% from 4.45%.
The 30-year, FRM backed by the FHA reached 4.17%, a growth from 4.16% a week prior.
Furthermore, the 15-year, FRM escalated from 3.55% to 3.56%, and the 5/1 ARM dropped to 3.17% from 3.20%.

You won't believe what Fannie, Freddie are doing to sell REO-GSEs fire up generous incentive programs

Fannie Mae and Freddie Mac are offering limited-time incentives in a pair of programs for both real estate agents and homebuyers as the two government-sponsored enterprises are trying to sell some of their REO properties.
Freddie will offer a $1,000 bonus to selling agents and a separate $500 bonus to listing agents when they use the HomeSteps program to sell a Freddie owned property.
The HomeSteps program is being launched in 23 states for deals where the offer is made between Feb. 18 and April 15, with a closing date deadline of May 31.
Chris Boden, senior vice president of HomeSteps, said he expects the program to jumpstart a housing market slowdown being blamed on winter weather.
"HomeSteps' 2014 winter sales promotion is focused on firing up sales in 'cold weather' states and condominium deals everywhere. With mortgage rates still low and home inventories tightening, the 2014 HomeSteps Winter Sales Promotion is a great opportunity for families ready to buy and real estate agents ready to sell," Boden said.
Meanwhile, homebuyers may receive up to 3.5% in closing cost assistance when they purchase a HomePath property in 27 states for Fannie-owned properties.
During the FirstLook period, owner-occupant or public entity buyers are able to submit offers on HomePath properties, giving them the opportunity to purchase homes without competition from investors. Fannie Mae recently announced the extension of the FirstLook period from fifteen days to twenty days.
“This incentive will provide more opportunities for families to find a property to call home,” said Jay Ryan, Vice President of REO Sales.  “Our goal is to sell as many HomePath properties as possible to owner-occupants who will stabilize neighborhoods and help the housing recovery.”
To be eligible for the incentive, the initial offer must be submitted between February 14, 2014, and March 31, 2014, and close on or before May 31, 2014. The incentive will offer qualified buyers up to 3.5% of the final sales price to pay closing costs. In many cases, buyers could use these savings to buy down their interest rate through upfront points, resulting in additional savings over time.
Boden said that for the first time the HomeSteps Winter Sales Promotion offers homebuyers a choice of $500 incentives they can use towards condominium association dues, flood insurance premiums or the home warranty of their choice.
HomeSteps Winter Sales Promotion incentives are paid only when approved offers are received between February 18 and April 15, the home is sold as a primary or secondary residence and the closing settles on or before May 30, 2014. The promotion does not apply to investor purchases, auction sales, sealed-bid sales and bulk sales.
States where the 2014 HomeSteps Winter Sales Promotion is now active include Alabama, Connecticut, Colorado, Iowa, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Missouri, North Carolina, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, Washington, and Wisconsin.

What did the Fed say that matters to the housing market?-Out: Unemployment rate threshold - In: Vague guidance threshold

The big takeaway from the minutes of the Federal Open Markets Committee January meeting for the housing industry is that tapering is likely to continue apace, and that the Federal Reserve is throwing out its previous goal post of 6.5% unemployment in favor of an ill-defined mandate for continued quantitative guidance.
Although the employment situation is dire, given record numbers of people dropping out of the workforce, the official unemployment rate breeched 6.6% in January. (Read story on the real unemployment rate here.)
Members of the FOMC said it would soon be appropriate for the committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed.
A range of views was expressed – some participants favored quantitative guidance along the lines of the existing thresholds, while others preferred a qualitative approach that would provide additional information regarding the factors that would guide the committee’s policy decisions.
Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting.
That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.
Several members favored continuing a scheduled tapering of $10 billion per FOMC meeting. In contrast, two participants favored a pause in tapering due to slack in the economy and low inflation.
A number of participants noted that recent economic news had reinforced their confidence in their projection of moderate economic growth over the medium run.

Mortgage servicers foreclosing on very different timelines-

A new white paper is highlighting the vast differences in foreclosure timelines at varying mortgage servicers.
Without naming names, the research, from data analytics firm Oversite, found that mortgage servicers vary in foreclosure speed by up to 192%.
Oversite also found after examining more than 50,000 foreclosure files:
• Cases with a Lack of Prosecution (LOP) filing had an average foreclosure timeline of 308 days longer than cases without similar filings.
• Cases with an Amended Complaint (AC) filing had an average foreclosure timeline of 439 days longer than cases without similar filings.
• Cases with a Bankruptcy Discharge (BK) filing had an average foreclosure timeline of 448 days longer than cases without similar filings.
“Our analysis shows that it is possible to quantify a number of factors impacting foreclosure timelines that can then be used to benchmark foreclosure management and more accurately estimate foreclosure timelines,” said Oversite CEO, James Albertelli.

4 signs the real estate market is in trouble

I wish I’d said this (and in a few weeks I will have, I’m sure) but Ramsey Su at Acting Man Blog did it first and in a way I’ve been searching for the words to explain.
Every week or so we get another indicator that’s supposed to tell us how the housing market is doing.
And every part of the industry trumpets whichever metric best serves its own purpose. Thus you have the Mortgage Bankers Association touting this “good news” about interest rates, while the National Association of Realtors touts how rising home prices are a great sign, and on and on.
But none of these measures – home sales, home starts, home prices, interest rates – tell the real tale.
Then along comes this boy named Su, who gets right to the heart of the matter:

The strength of the real estate market should not be measured by price appreciation, or the number of new and existing home sales. It should be measured by the support of underlying fundamentals and whether they can help to withstand economic cycles without policy makers having to go hog wild just to avoid a total collapse.

How healthy is the real estate market today?

He looks at some troubling measures we’ve noted at HousingWire – the decline of income growth, the bulk of Americans having subprime credit, and the fact that there’s nothing left in the Fed for another bailout if (when) things go pear-shaped again.

1. The Subprime Majority  

Recently, I came across a report by the Corporation for Enterprise Development (CFED) titled Assets and Opportunity Scorecard. Some of their findings are quite interesting. According to the CFED Scorecard, 56% of all consumers have sub-prime credit. Sub-prime is "earned". A consumer has to miss a few payments, or default on a loan or two to earn that status. These 56% cannot, or should not, be taking on more debt, especially a large debt like a mortgage.  They may also be struggling with a mortgage that they should not have taken out in the first place.  

And with so few companies willing to loosen credit standards, even the worthy subprime don’t have many options.

2. Liquid Asset Poor

CFED found that 44% of households in America are Liquid Asset Poor, defined as having saved less than three months of expenses. As one would expect, 78% of the lowest income households are asset poor, but 25% of middle class ($56k to $91k) households also have less than three months of expenses saved. 

How much of a down payment can you expect them to have on hand?

3. The Federal Reserve is Spent

QE1, 2 and 3 all involved the purchase of agency MBS. In January 2014, the FOMC announced that it will decrease debt purchases by another $10 billion, from the original $85 billion to $65 billion per month, $30 billion of which is supposed to be for agency MBS. That appears to be all talk. For the first six weeks of 2014, the Fed has already purchased $74.7 billion, or $54 billion per month. They are not only continuing the QE3 purchases, they are still replenishing the prepaid holdings from QE1 and QE2. Mortgage rates are not responding anymore. Though somewhat stabilized, the current rate (30yr) is still a full percent above the low recorded before QE3. 

Furthermore, Fed members are only kidding themselves if they think they can ever tighten monetary policy. The national debt is at $17.3 trillion and growing at about $700 billion this year. The cost of financing this debt, per the Treasury, was $415.7 billion in 2013, crudely estimated at an average rate of about 2.5%.  At the moment, the 3 months bill is at less than 0.2% interest, while the 10 year note is only at 2.75%. If the cost of financing this debt were to increase by just 1%, it would cost the Treasury $173 billion more a year. There is no way that the dovish Fed chair Yellen would even dream of doing that.

Therefore, the risk of monetary policy is not whether the Fed will tighten, but rather what it can do to repeat a 2008 style bailout. In other words, the Fed as a safety net is full of holes that are big enough for an elephant to pass through.

Finally, the government itself is tapped out.

4. Exhausted Government Intervention

The FHFA just announced that HARP has reached the 3 million mark. We are no closer to reforming Freddie and Fannie than when they were put under conservatorship over five years ago. Numerous state and local governments have deployed their own foreclosure prevention laws and ordinances. The Consumer Finance Protection Bureau has created a mountain of bureaucratic red tape, adding compliance costs to the mortgage industry while providing questionable benefits to the consumer. The  FHA is now pushing for lending to borrowers with credit scores as low as 580  only one year after major financial catastrophes such as foreclosure.

In conclusion, the reason I remain bearish on real estate is that when the noise is filtered out, the market has only survived by means of an unprecedented amount of intervention. This dependency is not only unhealthy, its stimulating effect is now fading. If real estate prices cease to appreciate, the market will suffer, same as it did when the sub-prime bubble burst in 2006/2007. The Fed has already gone all in and there is little left it can do. Washington can always create a new set of laws to further erode private property rights as we knew them. Ironically, price appreciation is also not the answer, as it will just widen the income equality gap, turning would-be home owners into rent slaves of Wall Street's fat cats. It may be best for the market to freeze for an extended period and let consumers catch their breath.

The question becomes – do Yellen and the rest of Washington have the stones to allow the short-term pain needed to bring back a little balance to the Force here, or will they charge once more at the windmills?

Is snow a good or bad forecast for housing?-February work days slip even further down

The weather continues to inhibit every aspect of life — especially in the Northeast. Since the snow is cutting back on the days available to work and produce mortgages in February, it is presenting a risk to the prepayments and mortgage-backed security production, according to a recent report from Bank of America Merrill Lynch (BAC).
February naturally already falls in at the low end for monthly day counts, but that in compilation with this week’s snowstorm, President’s Day weekend and another winter storm in the forecast, puts this month even lower in count.   
BofAML explained that it now looks like the risk to its February forecast for prepayment rates is to the downside, and it now has to consider that activity will get pushed out to March.
And it may not end there.
“Given some of the momentum effects observed with economic activity such as refinancing, we also need to consider the possibility that the weather-driven hit to momentum means downside risks may last longer than just in February,” the report stated.
However, it is not bad news for everyone. BofAML noted that it may be good news for MBS IO investors, who benefit on a levered basis from each month of slower than expected prepayments.
While it is hard to capture the full impact of the weather on the economy since every state deals with problems differently, the numbers show that after this week’s weak retail sales number for January that 1Q14 GDP growth is tracking at 1.4%, down from the 2.2% tracking figure for 4Q13.
“Our economists indicate we may not get a clean reading on the economy until March data are released in April. Note the words “may not.” In other words, it could take longer to get a clean reading. Nonetheless, they forecast weak growth of 2.0% in 1Q14 and a strong rebound to 3.3% in 2Q14,” the report added.
But not every part of the economy was fully affected the bad weather.
According to the Reuters/University of Michigan's, the consumer sentiment index improved the last two weeks of January, to a final January reading of 81.2 versus 80.4 at mid-month, but ended up a little bit short of December's final reading of 82.5.
“Although the unusually bad weather appears to have hit US employment, retail sales and industrial production, it hasn’t taken a major toll on consumer sentiment,” Capital Economic said.
“But the truth is that confidence has not been a reliable predictor of consumption for some years now, so this really doesn’t offer much comfort. We would place more weight on the trends in job and income growth. Once you strip out the effects of the bad weather, they remain fairly good,” continued Capital Economic.