Watch What's About 2 Happen 2 Mortgage Investors When The Fed Pulls Out The Supports

[bobbyw24]

Fitch: Watch What's About To Happen To Mortgage Investors When The Fed Pulls Out The Supports

Joe Weisenthal | Mar. 12, 2010, 11:17 AM | 529 | 3

If you don't think the housing market is still floating on a Washington-inflated lifeboat, think again.

Here's Fitch analyzing what's about to happen to Residential Mortgage-Backed Securities values once the fed pulls out the scaffolding:

Fitch Ratings-NY-12 March 2010: Loss severities on distressed U.S.
residential mortgage loans are likely to rise this year as several key
government support programs expire, according to Fitch Ratings.

Low mortgage rates, homebuyer tax credits and government directed
loan-modification programs have led to an improvement in home prices and
loss severities since second quarter-2009. But the expiration in the
coming months of both the homebuyer tax credit and the Federal Reserve’s
$1.25 trillion MBS purchase program will increase negative pressure on
home prices and loss severities, according to Senior Director Grant
Bailey.

Additionally, an increase in the liquidation of loans with unsuccessful
loan modifications is expected to add to the supply of distressed
inventory in the housing market. ‘Servicers are further along in
identifying borrowers ineligible for modifications and will likely be
more aggressive in liquidating those loans this year compared to last,’
said Bailey. ‘Less costly alternatives to foreclosure, such as
short-sales, should help stem rising loss severities due to the lower
costs and speed of the resolution.’

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http://www.businessinsider.com/fitch-watch-whats-about-to-happen-to-mortgage-investors-when-the-fed-pulls-out-the-supports-2010-3

[newbitech]

I would just like to add also that with unemployment running out, along with the end of tax season and refunds, folks are starting to abandon my neighborhood again.

For comparison, our family's household benefited from the loan mod programs. Our mortgage on a double lot 1500 square foot home is $615 a month. The smaller property smaller living home on just my block that were built or renovated in the last 5 years have rents from 1200-1500. Our city (Tampa) has the highest unemployment of the state, close to 20% maybe 18% and rising still.

From talking to property owners in this old neighborhood where I grew up, as well as the several renters who are expiring their one year leases, these properties have been renting at a loss. We have 3 house on this block that have remained vacant for coming up on 3 years now (bank owned). We have 2 maybe 3 renters that will not be renewing their leases.

These houses are not going to sell, and the owner will have to continue taking rental losses, and probably even more extreme then the last round of leases. For example, next door to us, a home on a single lot rents for 930 a month. The owner has a 950 mortgage payment. This doesn't include tax or insurance, just the note. She will NOT find another renter to pay 950 a month because the house is a 2 bedroom 1 bath house with less than 1000 square feet living area.

So yeah, on top of the fed pulling out, we still have natural market forces at play, and I just feel like the renting scene has also been propping up the market probably more so than the fed. Any deterioration in the rental scene is going to squeeze property owner from the other side as well.

[Kelly.]

i dont think the govt will stop / the the programs end.
they have already showed they are going to keep the housing market propped up, they even extended the tax credit to people just selling to 'move up'

whats makes anyone think they are going to stop supporting housing?

[wgadget]

i dont think the govt will stop / the the programs end.
they have already showed they are going to keep the housing market propped up, they even extended the tax credit to people just selling to 'move up'

whats makes anyone think they are going to stop supporting housing?

Because the propping is set to end at the end of March. The Federal Reserve says they will stop buying their own Treasuries at that time.

[Kelly.]

Because the propping is set to end at the end of March. The Federal Reserve says they will stop buying their own Treasuries at that time.

housing credit should have ended in dec 09, but it got extended.
we will see if the fed really does end its buying.

i know it cant go on forever, but i dont see it ending soon.

[gonegolfin]

Because the propping is set to end at the end of March. The Federal Reserve says they will stop buying their own Treasuries at that time.
The Federal Reserve does not issue interest bearing debt (they do not issue treasuries). I have speculated that in the future, they may issue Fed bonds to drain reserves from the banking system. But if they do so, it would be unprecedented.

The Fed ceased its purchases of treasuries in October of last year (~$300 billion).

The Fed has announced that it will cease its purchase program of Agency debt ($200 billion max) and Agency MBSs ($1.25 trillion max) by the end of March.

Brian

[gonegolfin]

Fitch: Watch What's About To Happen To Mortgage Investors When The Fed Pulls Out The Supports

Joe Weisenthal | Mar. 12, 2010, 11:17 AM | 529 | 3

If you don't think the housing market is still floating on a Washington-inflated lifeboat, think again.

I think that it is quite possible that in the early months, we may see Agency MBSs tread water or even move a bit higher (lowering yields). The Fed has supported the market for so long that a number of major players sat on the sidelines. Thus, there is likely some amount of pent-up demand for these securities ... especially when there is a reasonable premium over treasuries of similar maturity ... and Agency debt and Agency MBSs are really no different than US treasuries at this point (the US government is backstopping them).

But after a while, the honeymoon will be over and I expect yields to move gradually higher.

Brian

[hugolp]

The Federal Reserve does not issue interest bearing debt (they do not issue treasuries). I have speculated that in the future, they may issue Fed bonds to drain reserves from the banking system. But if they do so, it would be unprecedented.

Last news I heard about it was that the Fed wanted to do it but congress said no way. So the Fed said it would use the rate it was paying for the bank reserves to do the same. If you think about it, its kind of equivalent. A Fed bond would pull liquidity from the system at the expense of some interest. The deposit does the same. They have not the same dinamics since the bond would have a fixed maturity and the deposits can be used anytime, but they are similar.

[gonegolfin]

Last news I heard about it was that the Fed wanted to do it but congress said no way. So the Fed said it would use the rate it was paying for the bank reserves to do the same. If you think about it, its kind of equivalent. A Fed bond would pull liquidity from the system at the expense of some interest. The deposit does the same. They have not the same dinamics since the bond would have a fixed maturity and the deposits can be used anytime, but they are similar.
There are some similarities, but they are not nearly the same. Paying interest on reserves simply has the potential to lock reserves, but not nearly in the same way as issuing Fed debt ... which would drain reserves. Banks can currently lend/invest their reserves at any time ... not the case if they own Fed debt in lieu of those reserves. The term deposits program would be much closer to the issuance of Fed debt. But that program has not launched.

Make no mistake, if the crisis becomes more critical and the Fed strongly suggests issuing Fed debt as a solution, I think Congress will support it. But I think they are going to try a slew of other games before going here. Having money market funds purchase Fed assets (essentially extending the primary dealer network) may be the next step.

Brian

[wgadget]

What about the idea of coercing taxpayers into buying Treasuries with their retirement plans? I've heard that they're already kicking the idea around. Prolly a lot easier than pointing guns at the Chinese...

[Nanerbeet]

These houses are not going to sell, and the owner will have to continue taking rental losses, and probably even more extreme then the last round of leases. For example, next door to us, a home on a single lot rents for 930 a month. The owner has a 950 mortgage payment. This doesn't include tax or insurance, just the note. She will NOT find another renter to pay 950 a month because the house is a 2 bedroom 1 bath house with less than 1000 square feet living area.


As long as the property owner is deducting mortgage interest and depreciation, he's still making money. Sure, its hurting his liquidity as the cash flow to service the mortgage and do repairs is out pacing his rental income but in the long run, he's still making money.

[newbitech]

As long as the property owner is deducting mortgage interest and depreciation, he's still making money. Sure, its hurting his liquidity as the cash flow to service the mortgage and do repairs is out pacing his rental income but in the long run, he's still making money.


She won't make anything if the property is foreclosed tho. She still has to pay the note which is worth far less than the 950 she is getting right now from the renters. Once those renters are gone, she is going to have a negative cash flow. Sure if she has enough cash socked up or has a positive balance sheet on the whole, she might be able to hang on to break even in 10 years.

I am sure the house is an anchor to her financial freedom. I just hope she can make it through the next vacancy cycle. It took her 6 months to rent last time and she dropped the rent almost 400 bucks just to get people in.

So, not sure how she is making money now. Property values are still dropping and her cash flow is locking up. Its like a margin call if you mess with stock futures. If she can't cover the spread, she loses and doesn't get a chance to hold out for the recovery in 10 - 15 years.