Tag Archives: mortgage

Here Comes The Next Crisis: Up To 30% Of All Mortgages Will Default In “Biggest Wave Of Delinquencies In History”

Unlike in the 2008 financial crisis when a glut of subprime debt, layered with trillions in CDOs and CDO squareds, sent home prices to stratospheric levels before everything crashed scarring an entire generation of home buyers, this time the housing sector is facing a far more conventional problem: the sudden and unpredictable inability of mortgage borrowers to make their scheduled monthly payments as the entire economy grinds to a halt due to the coronavirus pandemic.

And unfortunately this time the crisis will be far worse, because as Bloomberg reports mortgage lenders are preparing for the biggest wave of delinquencies in history. And unless the plan to buy time works – and as we reported earlier there is a distinct possibility the Treasury’s plan to provide much needed liquidity to America’s small businesses may be on the verge of collapse – an even worse crisis may be coming: mass foreclosures and mortgage market mayhem.

Borrowers who lost income from the coronavirus, which is already a skyrocketing number as the 10 million new jobless claims in the past two weeks attests, can ask to skip payments for as many as 180 days at a time on federally backed mortgages, and avoid penalties and a hit to their credit scores. But as Bloomberg notes, it’s not a payment holiday and eventually homeowners they’ll have to make it all up.

According to estimates by Moody’s Analytics chief economist Mark Zandi, as many as 30% of Americans with home loans – about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.

“This is an unprecedented event,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. She also points out another way the current crisis is different from the 2008 GFC: “The great financial crisis happened over a number of years. This is happening in a matter of months – a matter of weeks.”

Meanwhile lenders – like everyone else – are operating in the dark, with no way of predicting the scope or duration of the pandemic or the damage it will wreak on the economy. If the virus recedes soon and the economy roars back to life, then the plan will help borrowers get back on track quickly. But the greater the fallout, the harder and more expensive it will be to stave off repossessions.

“Nobody has any sense of how long this might last,” said Andrew Jakabovics, a former Department of Housing and Urban Development senior policy adviser who is now at Enterprise Community Partners, a nonprofit affordable housing group. “The forbearance program allows everybody to press pause on their current circumstances and take a deep breath. Then we can look at what the world might look like in six or 12 months from now and plan for that.”

But if the economic turmoil is long-lasting, the government will have to find a way to prevent foreclosures – which could mean forgiving some debt, said Tendayi Kapfidze, Chief Economist at LendingTree. And with the government now stuck in “bailout everyone mode”, the risk of allowing foreclosures to spiral is just too great because it would damage financial markets and that could reinfect the economy, he explained.

“I expect policy makers to do whatever they can to hold the line on a financial crisis,” Kapfidze said hinting at just a trace of a conflict of interest as his firm may well be next to fold if its borrowers declare a payment moratorium. “And that means preventing foreclosures by any means necessary.”

“I don’t know how I’m going to pay my mortgage and my condo dues and still be able to feed myself,” Habberstad said. “I just hope that, once things open up again, we who are impacted by Covid-19 are given consideration and sufficient time to bring all payments current without penalty and in a manner that does not bring us even more financial hardship.”

Borrowers must contact their lenders to get help and avoid black marks on their credit reports, according to provisions in the stimulus package passed by Congress last week. Bank of America said it has so far allowed 50,000 mortgage customers to defer payments. That includes loans that are not federally backed, so they aren’t covered by the government’s program.

Meanwhile, Treasury Secretary Steven Mnuchin has convened a task force to deal with the potential liquidity shortfall faced by mortgage servicers, which collect payments and are required to compensate bondholders even if homeowners miss them. The group was supposed to make recommendations by March 30.

“If a large percentage of the servicing book – let’s say 20-30% of clients you take care of – don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments,” QuickenChief Executive Officer Jay Farner said in an interview. But not Quicken, of course.

Quicken, which serves 1.8 million borrowers, and in 2018 surpassed Wells Fargo as the #1 mortgage lender in the US, has a strong enough balance sheet to serve its borrowers while paying holders of bonds backed by its mortgages, Farner said,  although something tells us that in 6-8 weeks his view will change dramatically. Until then, the company plans to almost triple its call center workers by May to field the expected onslaught of borrowers seeking support, he said.

Ironically, as Bloomberg concludes, “if the pandemic has taught us anything, it’s how quickly everything can change. Just weeks ago, mortgage lenders were predicting the biggest spring in years for home sales and mortgage refinances.”

Habberstad, the bar manager, was staffing up for big crowds at the beer garden, which is across from National Park, home of the World Series champions. Then came coronavirus. Now, she’s dependent on her unemployment check of $440 a week.

“Everybody wants to work but we’re being asked not to for the sake of the greater good,” she said.

Source: ZeroHedge

Ginnie Mae Weighs Bailout For Servicers After Major Mortgage-Lender Slashes 70% Of Workforce

Update (1500ET): A top U.S. regulator is exploring whether to throw a lifeline to mortgage servicers stressed by the coronavirus pandemic by tapping a program meant to address natural disasters.

Bloomberg reports that, in order to prepare for an expected wave of missed payments as borrowers deal with the economic fallout from the virus, officials at Ginnie Mae are considering using relief programs most often activated in the wake of hurricanes, floods and other calamities, according to people familiar with the matter.

Mortgage-industry lobbyists unsuccessfully tried to get Congress to include some sort of liquidity facility for servicers in the stimulus bill. Still, many servicers expect the Treasury Department and the Federal Reserve to create a lifeline for servicers out of other money in the $2 trillion package.

Earlier this week, ZeroHedge highlighted the fact that numerous mortgage-related companies were facing considerable – and in some cases existential – crises in their day-to-day operations amid margin calls, illiquidity, and a drying up of demand for non-agency products thanks to The Fed’s intervention.

First, its was AG Mortgage Investment Trust which last Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. Then, on Monday it was first Invesco, then ED&F Man Capital, and then the mortgage mayhem took down MFA Financial, which stated “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”

And now that mortgage-mayhem has impacted one of the largest U.S. mortgage firms catering to riskier borrowers.

Earlier in the week, we mentioned Angel Oak Mortgage Solutions – which specializes in so-called non-qualified mortgages that can’t be sold to Fannie Mae or Freddie Mac – pointing out that the company would pause all originations of loans for two weeks “due to the constant shifts and the inability to appropriately evaluate credit risk.”

And now Sreeni Prabhu, co-chief executive officer of the firm’s parent, Angel Oak Cos., is slashing 70% of the comany’s workforce (almost 200 of its 275 employees).

“The world has dramatically changed,” Prabhu said.

“We have to slow down and re-underwrite in the new world that we’re in. That’s going to take some time.”

Bloomberg reports that Angel Oak is primarily known for its riskier lending arm, which is one of the leaders in funding non-qualified mortgages. Such loans include those made to borrowers who verify their incomes with bank statements instead of tax returns and others who may have recently filed for bankruptcy or had a previous foreclosure that hurt their credit scores.

Angel Oak Mortgage Solutions funded some $3.3 billion of non-QM loans in 2019, making it one of the biggest lenders in the space. In January, Angel Oak’s mortgage units said they planned to fund more than $8 billion of home loans in 2020, but the total is now likely to be perhaps a quarter of that, Prabhu said.

The coronavirus pandemic has brought non-QM lending to a virtual standstill industrywide. Many non-QM borrowers are self-employed, making them among the hardest hit by a broad slowdown in business activity.

Citadel Servicing Corp., another top non-QM lender, said it was halting originations for 30 days, and Mega Capital Funding Inc. told brokers last week that it was suspending its programs for those mortgages “for the foreseeable future,” according to a notice seen by Bloomberg.

Add this halting of originations to the margin calls of the fund side, and it all sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…

Source: ZeroHedge

$14 Billion Commodity Broker Facing Crushing Margin Calls After Mortgage Hedges Go Wrong


(ZeroHedge) We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields…

At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.

“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning.

Well, they are not alone.

As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government).

And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls.

Flagstar Bancorp, one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans.

One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”

Things escalated over the weekend, according to Bloomberg,  when some firms rushed to raise cash by requesting offers for their bonds backed by home loans.

“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”

And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter.

The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public.

ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said.

As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.

It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website.

Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.

“The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department.

“But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.”

All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…

Source: ZeroHedge

Core Mortgage Repayment Risk Factors Exceed Former Financial Crisis Highs

The GSEs (Government Sponsored Enterprises) of Fannie Mae and Freddie Mac have seeming forgotten the financial crisis.

Fannie Mae, for example, now has the highest average combined loan-to-value (CLTV) ratio in history. Even higher than during the financial crisis.

How about borrower debt-to-income (DTI) ratios? Fannie Mae’s average DTI is the highest its been since Q4 2008.

At least the average FICO scores remains above kickoff of the last financial crisis.

David Lereah, Chief Economist, National Association of Realtors (2006)

Source: Confounded Interest

Negative Interest Rates Spread To Mortgage Bonds

(John Rubino) There are trillions of dollars of bonds in the world with negative yields – a fact with which future historians will find baffling.

Copenhagen Mint Images/Getty Images

Until now those negative yields have been limited to the safest types of bonds issued by governments and major corporations. But this week a new category of negative-yielding paper joined the party: mortgage-backed bonds.

Bankers Stunned as Negative Rates Sweep Across Danish Mortgages

(Investing.com) – At the biggest mortgage bank in the world’s largest covered-bond market, a banker took a few steps away from his desk this week to make sure his eyes weren’t deceiving him.

As mortgage-bond refinancing auctions came to a close in Denmark, it was clear that homeowners in the country were about to get negative interest rates on their loans for all maturities through to five years, representing multiple all-time lows for borrowing costs.

“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry.

For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.

The record-low mortgage rates, which don’t take into account the fees that homeowners pay their banks, are the latest reflection of the global shift in the monetary environment as central banks delay plans to remove stimulus amid concerns about economic growth.

Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years. That’s considerably less than the U.S. government.

The spread of negative yields to mortgage-backed bonds is both inevitable and ominous. Inevitable because the current amount of negative-yielding debt has not ignited the kind of rip-roaring boom that overindebted countries think they need, which, since interest rates are just about their only remaining stimulus tool, requires them to find other kinds of debt to push into negative territory. Ominous because, as the world discovered in the 2000s, mortgages are a cyclical instrument, doing well in good times and defaulting spectacularly in bad. Giving bonds based on this kind of paper a negative yield appears to guarantee massive losses in the next housing bust.

Meanwhile, this is year ten of an expansion – which means the next recession is coming fairly soon. During recessions, the US Fed, for instance, tends to cut short-term rates by about 5 percentage points to counter the slowdown in growth.

With Europe and much of the rest of the world already awash in negative-yielding debt

https://www.zerohedge.com/s3/files/inline-images/bfm5377_1.jpg?itok=wZzY0aC5

… this imminent slide in interest rates will turn the rest of the global financial system Danish, giving us bank accounts and bond funds that charge rather than pay, and very possibly mortgages that pay rather than charge.

Anyone who claims to know how this turns out is delusional.

Source: ZeroHedge

The Evolution Of Mortgage Policy, 1970-1999

“A Crack in The Foundation?” Part 2: Three Decades of Red Flags — Mortgage Policy & Praxis, 1970-1999

Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.

Part 2 begins at the start of the 1970s and follows the uneasy path of government policy and economic turmoil as we creep towards the end of the century. (Missed Part 1? Read it here).  This section will follow the astronomical growth in the secondary market, the mounting government pressure put on Fannie and Freddie to increase their offerings to lower- and moderate-income borrowers, as well as a widespread shift towards deregulation in the market that (spoiler alert) will prove to have disastrous consequences as the new millennium begins.

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The Evolution Of Mortgage Policy, 1930-1960

“A Crack in The Foundation?” Part 1: Fannie & Friends — The Evolution of Mortgage Policy from 1930-1960

Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.

Part I starts at the turn of the 20th century and traces the establishment of the Federal Housing Administration (FHA), as well as the birth of Fannie and Ginnie, to look at the inception of the modern mortgage and its impact on home ownership.

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