Sunday, August 25, 2013

Today's links

1---Housing Market Recovery May Be Short-Lived, motley fool

There are reasons to be concerned that the housing market is getting ahead of itself, spurred on by ultra-low long-term rates. Below I'll show you why you should temper your belief in a housing recovery....

Bad news is coming
Data coming from the housing market aren't terrible yet, but a big reason is the lag time associated with buying a home. You may lock in an interest rate in May and not close on a home until July, so data based on today's rates won't be available for months. But early indicators aren't good.

The Mortgage Bankers Association says mortgage applications have fallen week over week for 9 out of the last 10 weeks, showing a consistent deterioration in the number of buyers hitting the market. The association's Refinancing Index is also down 62.1% from its peak during the week of May 3, a rapid drop in refinancing.
The next step is for housing prices to stabilize and possibly fall and pending home sales to slip as fewer buyers reach the market.
Foolish bottom line
Don't expect the housing market to collapse like it did from 2007 to 2009, but we shouldn't expect double-digit price increases to continue either. Inventory is abnormally low, interest rates are rising, and incomes aren't growing fast enough to push the market higher.

2---US existing home sales jump to 3-year high, cnbc

3---Russia Offers to Help Clean Up Fukushima as Tepco Calls for Help, Bloomberg

4---Analysis: Higher prices sap foreign interest in U.S. real estate, Reuters

 – Foreign investors, who rapaciously scooped up U.S. real estate during the 2007-2009 recession, are backing away from the same markets they so eagerly jumped into a few years ago.
Real estate brokers say demand from international investors has flagged in locations that have been most attractive to overseas buyers – markets such as San Francisco, Phoenix, Las Vegas and Miami.
Many of those markets are back on solid footing after stumbling during the housing crisis. Property prices have risen, while the dollar – against the Indian rupee in particular, and to a lesser extent the Canadian dollar – has appreciated over the past year, despite hitting a speed bump in recent weeks.
As a result, real estate is no longer the bargain it once was for foreigners. That is discouraging new sales, while many foreigners who already own property – especially those who bought strictly as investment – are turning into sellers
Kevin Kieffer, a broker who sells property in San Francisco for Keller Williams Realty, said in that area buying from foreigners has dropped by at least 30 percent in the last few months.
"That is partly due to the fact that prices escalated so quickly in the San Francisco area," he said. "But some of my foreign clients have also mentioned the value of the dollar as another reason they decided not to buy." At the same time, domestic demand for real estate held steady, he said.

Calamitous declines in many of the nation's housing markets during the economic crisis had attracted droves of international investors seeking to cash in on a weak U.S. dollar and rock-bottom property prices. Many were attracted to Sun Belt markets that had been battered by the crisis.
The opposite trend is now gathering steam, and that will likely spell the end of the double-digit price gains seen recently in markets such as San Francisco and Miami, say people in the real estate business community.

International sales of U.S. residential real estate dropped by $14 billion to $68.2 billion for the 12 months ending in March, the latest data available from the National Association of Realtors. Foreign purchases comprise 6.5 percent of the $1.050 trillion in total U.S. existing home sales.
Sluggish foreign economies and unfavorable exchange rates are reasons behind the decline, the NAR said. That hurts cities dominated by foreign buying but has little impact on large stretches of the country.

The NAR recorded buying from 68 countries, with Canada, China, Mexico, India and the United Kingdom accounting for about 53 percent of the transactions in the year ending in March.
At 23 percent, Canada took in the largest share. But real estate website said Canada's share of foreign-based searches of its site fell 9 percent year-over-year in the second quarter.
The dollar is up more than 2 percent versus the Canadian dollar in the last six months. That's a reversal from 2012, when the dollar fell 2.7 percent against the Canadian dollar, commonly called the loonie because of the image of a waterfowl engraved on the coin.
"Due to higher prices and a falling loonie, I decided to hold off on buying in Miami," said Norm Glick, a Canadian investor who owns property in Lake Worth, on Florida's east coast. "Miami is no longer the bargain it was a mere year ago.
About 45 percent of Miami's real estate is owned by foreigners, said Brigitte Lina Lombardi, an associate at Keller Williams Elite Properties, and home prices there gained over 14 percent year-over-year in May.
"About 25 percent of foreign investors who bought in Miami between 2009 and 2012 are not purchasing anymore because of the increase in price," she said. "Now they are thinking to sell."
After hitting a three-year high in July, the dollar index (.DXY), which tracks the greenback against a basket of six major currencies, has fallen nearly 3.7 percent. But the dollar has kept rising against the Indian rupee, which is down 13 percent against the greenback in the last six months and recently sunk to an all-time low against it.

A stronger dollar has "absolutely curbed my appetite to buy U.S. real estate," said Anant Bokar of Mumbai, India, who has invested in property in the San Francisco area. "I would much rather hold my money at home and look at buying here (in India) since house prices are low due to higher inventory."
San Francisco notched an annual price gain of 24.5 percent in May, according to Standard & Poor's/Case Schiller home price gauge, the largest rise in its 20-city index.
International investors have been backing away from San Diego as well. Karen Van Ness, owner of Ranch and Village Homes, a Coldwell Banker brokerage, said demand there has fallen over the last three months.

San Diego prices jumped over 17 percent annually in May.
"They are watching, but they are not circling as they were," she said, referring to prospective foreign buyers. "The international buyers are a financially astute group of individuals and not necessarily fixated on any one location."
More experts expect the dollar to strengthen in the months and years to come as the economy improves and as the Federal Reserve tapers off a bond buying program designed to fuel the economy recovery. Interest rates are also expected to rise, although that is less important to buyers paying in cash.

Michelle Meyer, senior U.S. economist at Bank of America/Merrill Lynch in New York, said declining demand from foreigners will help moderate home-price appreciation in coming years.
She sees prices up 6.5 percent in 2014, after annual price increases of more than 10 percent though May, according to S&P/Case-Shiller.

(Note to readers: The rest of today's entries are from the archive, mainly about how banks are raking in huge profits on the spread between mortgage rates and MBS rates)

5--The New Housing Market "Recovery" – Fact V. Fiction , Testosterone Pit (repeat)

6--Refi Program Expansion Eyed, WSJ
The Obama administration is considering expanding its mortgage-refinancing programs to include borrowers whose mortgages aren't backed by the government and who owe more than their homes are worth, according to people familiar with the discussions

one proposal being considered would also transfer potentially riskier loans held by private investors into the taxpayer-supported mortgage giants
Fannie MaeFNMA 0.00% and Freddie MacFMCC -1.69% .
About 22% of all homes with a mortgage

7---U.S. may expand mortgage refinance program: WSJ,  Reuters

The U.S. government is considering expanding its mortgage refinancing program to include borrowers whose mortgages are not backed by Fannie Mae and Freddie Mac , the Wall Street Journal reported, citing people familiar with the discussions. (
The refinancing program now being considered also seeks to include "underwater" borrowers who owe more than their homes are worth, the Journal said.

The proposal would also transfer potentially riskier loans held by private investors to the government-sponsored mortgage entities Fannie Mae and Freddie Mac, the paper said.
Such a move would require congressional authorization to temporarily change the charters of Fannie Mae and Freddie Mac, according to the Journal.
About 22 percent of all homes with a mortgage, or around 10.8 million homes, down from 12.1 million last year, were worth less than the outstanding balance at the end of June, the Journal said, citing data from CoreLogic.

8--Severely underwater borrowers could refinance to lower monthly mortgage rates, free rate

HARP, also known as Obama Refinance, is a non-traditional
mortgage refinance program which runs through the end of 2013. This program is for borrowers who have loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009. With the latest update, now called HARP 2.0, loan to value maximums were removed so that even severely underwater borrowers could refinance to lower monthly mortgage rates. HARP does not require an appraisal or other documentation, although borrowers may find that each lender is different with some having their own requirements.

Mortgage rates have dropped since the Fed announced it would buy MBS in Sept, but home sales are lower than were, refis are lower than they were." , Bloomberg video, The Real Deal's Michael McKee, Bloomberg

Investors do not believe that the fed will  accomplish anything" (with another round of QE)..."Yes the fed can push down interest rates, we've seen that with prior bond purchases. Mortgage rates have dropped since the Fed announced it would buy MBS  in Sept, but home sales are lower than were, refis are lower than they were...The only thing that's happened is the increase of profits at banks as the secondary spread widens as banks pay less for the cost of funds they are lending out to homeowners".

9---Refis soar, Businessweek

President Barack Obama’s administration has helped fuel gains in refinancing this year by making it easier for borrowers with Fannie Mae and Freddie Mac loans without home equity to qualify and by reducing costs for homeowners with older Federal Housing Administration loans

10---Banks Make Out like Bandits on QE3, economic populist

Quantitative easing was all about mortgage backed securities. We warned about QE3 being a gift to banks
here and in this in depth piece.
Financial Times:

Bank profits from new mortgages have soared since the Federal Reserve began its third round of bond purchases two weeks ago, fuelling the debate over the fallout of the latest dose of quantitative easing.
“For banks which are mortgage originators this [QE3] was some of the best news they could possibly have heard,” said Steven Abrahams, mortgage strategist at Deutsche. “They will continue originating loans and selling them into the market at a significant premium.”
The interest banks pay on mortgage bonds has dropped from 2.36 per cent on September 12, the day before the Fed announced its programme, to as low as 1.65 per cent last week. It edged up to 1.85 per cent on Monday.
That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4 per cent and selling the loans into the secondary market has risen to around 1.6 per cent. That is higher than the 1.44 per cent spread they pocketed before QE3 and significantly greater than the 0.5 per cent they earned on average in the decade between 2000 and 2010.

11---The Fed will buy over half of all new agency MBS, sober look
So much for shifting the US mortgage business into the private markets. Going forward the Fed will be a buyer of more than half of all new agency MBS issued. At this point one might as well make the GSEs part of the Fed or give the central bank a mortgage origination capability.
12---QE3 enriches subprime mortgage bonds, Housingwire

The scarcity of agency mortgage-backed securities intensified by the Federal Reserve third round of quantitative easing is adding momentum to the non-agency subprime MBS sector rally.

Bank of America Merrill Lynch
($9.10 0%) MBS strategist Chris Flanagan says the impact of QE3 on securitized products is that the “rich get richer.” Portions of the market saw valuations stretched even prior to the Fed announcement, and “QE3 will suck out an enormous supply of bonds from the market,” he says.

Agency MBS spreads were already at historically tight levels, and one week later QE3 has dramatically enriched the agency MBS market: the current coupon spread to the 10-year treasury has declined by 54 basis points to an all-time tight of 6 basis points.
Unlike the significant tightening in agency MBS, the spillover to other sectors such as non-agency MBS was a less expected outcome of QE3. In fact, Flanagan points out, the non-agency MBS sector has been in major rally mode since May..

“Given our own belief that home prices will continue to recover, we think the housing data will continue to attract investors to the non-agency market,” says Flanagan, who maintains his preference for last cash-subprime, which “we believe offer attractive fundamental value given the improving housing picture.”

BofAML anticipates further tightening and that agency valuations will get richer as the Fed continues its buying spree for what he thinks will be up to two years.

Analysts expect $1.4 trillion in gross agency MBS originations in 2012 and that the Fed will buy agency MBS at a gross annualized rate of about $850 billion per year, or roughly 60% of all new originations.
Last week “showed us that it is officially game on in terms of access to supply,” Flanagan says
Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), the largest U.S. home lenders, will post third-quarter profit buoyed by government policies intended to help borrowers.

Those firms, along with No. 3 U.S. Bancorp and fourth- ranked
Bank of America Corp., may report $6.9 billion of mortgage-banking revenue in the period, a 37 percent increase from a year earlier, Christopher Kotowski, an Oppenheimer & Co. analyst, said in a research note. That will help the companies generate a combined $10.9 billion in profit, according to the average estimate of analysts surveyed by Bloomberg.

The figures show the degree to which U.S. lenders have become dependent on revenue from mortgages to cushion weakness in other lending and investment-banking businesses. The banks are benefiting as President
Barack Obama’s administration targets housing in an effort to stimulate the economy. They’re earning more on each home loan they sell as Federal Reserve purchases of mortgage debt widen profit margins.

“Government policy is encouraging banks to make mortgages, and they want to keep it that way,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a bank-research firm in Charlottesville, Virginia. “For them it’s sort of a beneficent cycle right now.”
Lenders are generating revenue as middlemen between government-controlled mortgage firms such as Fannie Mae and Freddie Mac, which provide about 90 percent of the funds to the housing market, and borrowers looking to take advantage of record-low interest rates.
The four banks will post $7.25 billion in mortgage revenue, according to estimates by KBW Inc....

Obama has pushed for more refinancing for homeowners underwater on their mortgages, and the administration last year broadened the Home Affordable Refinance Program, known as HARP, so that more people qualify. Almost 900,000 homeowners have used the program to refinance since 2009, according to the

In all, consumers refinanced $305 billion of home loans in the three months ended Sept. 30, according to estimates from the Washington-based Mortgage Bankers Association. That’s the most since the fourth quarter of 2010, and a 52 percent increase from a year earlier, the group estimates. Refinancings accounted for 74 percent of the $412 billion in originations, the MBA said.

Central bank policy also is helping lenders. On Sept. 13, the Fed said it would buy $40 billion more in mortgage securities each month to stimulate the economy. The housing market is “one of the missing pistons in the engine” of the economic recovery, Chairman Ben S. Bernanke said at a press conference after the announcement...

Between the Fed’s announcement and Sept. 28, the last business day of the quarter, the rates offered for new 30-year mortgages fell by 0.10 percentage point, compared with a drop of about 0.28 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and The gap between the two, which typically signals increasing lender revenue when it widens, reached a record of more than 1.7 percentage points on Sept. 25.

“This is another form of a bailout,” said William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former U.S. bank regulator. “It transfers a whole lot more money to the banks than to people. It also gives homeowners more disposable income and potentially creates a wealth effect. The lower the interest rate, the higher home values should be. But in that transmission process, the banks will end up wealthier.”

Yield Gap

Lenders can also manage their capacity by not lowering the rates offered to consumers as fast as declines in bond yields, reducing demand while boosting margins. The gap between the cost of 30-year loans and yields on Fannie Mae mortgage securities into which they get packaged has widened to about 1.3 percentage points, from an average of about 0.7 percentage point last year, according to data compiled by Bloomberg.
The difference, known as the primary-secondary spread, helps determines lenders’ profit margins and can vary based on competition. Wells Fargo, which added the equivalent of about 2,000 mortgage workers last quarter, recorded gains of about 2.25 percent on loans it sold, up from 1.9 percent in 2011’s fourth quarter, according to comments by Chief Financial Officer Timothy J. Sloan in
conference calls in April and this month. Programs such as HARP may support demand for a longer period during this refinancing cycle, Sloan said on July 13.

Citigroup Margins

Citigroup Inc. (C) Chief Financial Officer John Gerspach called the margins “still well above the historical levels” on a conference call this week. In 2007, Countrywide Financial Corp., the then-market leader and later bought by Bank of America, reported a margin on prime loans of 0.80 percent.
Michael Bauer, a San Francisco Fed economist, signaled in a May paper the central bank was aware that its purchases of mortgage-backed securities might have a limited impact when it came to helping homeowners. Bauer
highlighted the “weaker link between MBS yields” and actual loan rates, and said the disconnect “may persist for some time.”

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