US mortgage sector braced for end of Fed help

By Michael Mackenzie in New York

Published: February 3 2010 22:46 | Last updated: February 3 2010 22:46

Cold turkey time is rapidly approaching for the US mortgage market as the Federal Reserve gets ready to end its mammoth $1,250bn buying programme at the end of March.

The prospect of such a large buyer moving to the sidelines means that the “artificial market” created by the Fed’s hefty purchases – part of a monetary policy strategy aimed at reducing mortgage borrowing costs – should result in more normal mortgage rates, likely to be at a higher level.

The question is, how much higher? There is a great deal of uncertainty among many investors on exactly how to position themselves for the withdrawal of the Fed from the mortgage market. Many want higher rates, as it makes the investments more attractive. Yet the Fed wants to keep mortgage rates low to help home-buyers.

In a survey of some of the 4,000 people attending a securitisation conference this week, 73 per cent of respondents expected spreads on mortgage-backed securities to go “much wider” when the Fed ceases buying mortgage bonds, backed by mortgage agencies Fannie Mae and Freddie Mac. But the impact is hard to pin down.

When the Fed began buying mortgages last January, the average 30-year coupon on Fannie Mae mortgage paper tumbled to a low of 3.68 per cent, having surged above 6 per cent during the worst of the financial crisis in late 2008.

Since November, the mortgage coupon has eased from a high of 4.60 per cent to a low of 3.90 per cent and is currently about 4.40 per cent.

That places the 30-year coupon about 70 basis points above the 10-year Treasury yield.

Before the financial crisis, 30-year mortgage paper tended to trade 100bps to 125bps above the 10-year note, suggesting that the market needs to sell off between 30bps and 50bps once the Fed halts its buying. Roger Lehman, a mortgage securities analyst at Bank of America Merrill Lynch expects mortgage spreads will widen modestly by some 20-30bps, and not excessively, say beyond 75bps.

“Once spreads widen by 20-30bps, there will be demand mainly from banks and money managers,” he says.

Certainly the Fed’s buying has been met with grateful selling by mortgage investors over the past year, resulting in many portfolios being extremely underweight the sector.

For example, Pimco’s flagship Total Return Fund of $202bn, managed by Bill Gross, currently has 17 per cent of its assets in mortgages after being about 83 per cent a year ago.

Kent Wosepka, money manager at Standish Mellon, says they remain “pretty underweight mortgages in our portfolios” and are watching to see how the market copes once the Fed steps away.

Gerald Lucas, senior investment adviser at Deutsche Bank, said he expected current coupon mortgage spreads would slowly widen by between 20-30bps, but that buyers should step up. “Investors are so underweight mortgages, that a widening in spreads will be contained by pent-up demand to own the paper,” he said.

Reinforcing the scenario of a modest widening in spreads is the targeted nature of the Fed’s buying.

Mr Lucas says that the Fed and Treasury between them hold about 80 per cent of the current 30-year mortgage paper with coupons of 4 per cent and 4.5 per cent.

The current Fannie Mae 30-year coupon trades about 4.40 per cent and when money managers start to buy mortgages, they will want the current paper, not older issues at higher yields.

Given the fact that the Fed and Treasury own so much of the current coupon sector, that should help limit a rise in mortgage spreads, says Mr Lucas.

Not all investors are so sure that less supply will help limit spread widening.

With the Fed and Treasury owning so much of the current mortgage coupons, there is far less available for investors and much less liquidity, which could exacerbate changes in rates.

That is particularly the case should rates rise. Under such a scenario, holders of mortgages usually sell some of their portfolio in order to maintain a balance between their overall holding and the level of rates.

This type of technical selling has in the past been violent and amid poorer liquidity conditions could easily compound an unruly sell-off.

“It seems unlikely we will have a gradual widening in mortgage spreads,” says Mr Wosepka. “That’s not normally the case in markets.”

Indeed, some analysts see the Fed’s purchases as having removed volatility from the market. Once it stops, more volatility will return, by definition. The spectre of instability and a sudden jump in rates is high on the Fed’s watch list.

Policymakers said after their meeting last week: “The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

That language is considered a code for further Fed buying should rates rise sharply, say analysts and investors.

Mr Lehman says that sharply wider mortgage spreads are likely to result in the government using Fannie and Freddie to step in and stabilise the market with buying. On Christmas eve the government announced that it would provide unlimited support for the mortgage giants over the next three years rather than cap their federal credit line at $400bn.

“If that doesn’t work we would not rule out the possibility that they may step in a bigger way,” says Mr Lehman.

Additional reporting by Aline van Duyn

Only 1,072 Permanent Loan Modifications in Colorado

Only 1,072 Permanent Loan Modifications in Colorado

Only 1,072 permanent loan modifications have been made to homeowners in Colorado facing foreclosure, according to the latest government data.

"That is the proverbial drop in the ocean," said Byron Koste, director of the Colorado Real Estate Center at the University of Colorado in Boulder. "That will have no impact at all. The only impact it has is that 1,000 families are better off."

The latest report from the federal government shows that as of the end of December, there were 11,170 homeowners in "active trials," for loan modifications. The trial modifications are required before the loan can be made permanent. Colorado ranked No. 19 in the nation for the number of active trials and permanent loan modifications. The 1,072 permanent loan modifications represents 8.8 percent of the trials, which is slightly better than the 8.4 percent ratio nationally. Nationwide, at the end of December there were 787,221 trial modifications and 66,465 permanent modifications. The goal of the program is to provide 3 to 4 million homeowners with lower mortgage payments through 2012.

Koste said he is surprised that there were even 1,072 permanent loan modifications in the state. Even though a focal point of the Obama Administration's year-old $75 billion war on foreclosure is modifying loans to keep people in their homes, banks have no incentive to play along, Koste said.

"There is no bank in a hurry to write down a loan," Koste said.

Friday, January 29, 2010

Homes held back? The shadow market knows

Denver Business Journal - by Paula Moore

Kathleen Lavine | Business Journal

James and Barbara Browning with one of their Denver listings, the Croke Patterson mansion at 11th Avenue and Pennsylvania Street, a bank-owned property.

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Denver-area residential real estate brokers fear a flood of foreclosed homes still held by lenders — the “shadow market” — will be put up for sale in 2010, depressing home prices and values even more than they already have been in the recession.

A big influx of homes coming on the market all at once would hurt the recovery in the local housing market, according to real estate experts. Brokers already anticipate a sharp drop in home sales in the second half of 2010, after federal homebuyer tax credits expire June 30.

Those who believe in the shadow-market effect vary widely about how big it is. Estimates nationwide put it beween hundreds of thousands to several million homes held by lenders, but not officially on the market.

Shadow-inventory estimates are based on extrapolations by real estate and financial companies using data such as loan-deliquency figures, and comparisons of bank-owned homes to listings of for-sale homes, as well as comparing for-sale homes, default notices and auction dates.

For example, RealtyTrac Inc., an online seller of foreclosure homes, found in a spring 2009 study that only 30 percent of foreclosed homes were listed for sale by Multiple Listing Services in four states, including California.

One national report put metro Denver’s shadow market at nearly 14,000 homes, relatively low compared to cities that have been harder hit by the recession.

“There’s no question you hear a lot of [brokers] talking about it,” Will Roberts, broker owner of MB BrokerForDenver.com LLC and former president of the Denver Board of Realtors, said of the shadow market.

But some Denver-area residential brokers aren’t even sure there is a shadow market.

“I’ve got to say I’m leery of it. … It’s like the boogeyman,” said Charles Roberts, broker owner at Your Castle Real Estate LLC in Lakewood and Denver Board of Realtors board member.

Some lenders with Denver-area operations, in their defense, contend they put foreclosure homes on the market for sale as fast as they can, largely because of federal regulatory pressure to sell those homes, as well as the cost of holding and maintaining the properties. Banks also hire real estate agents to sell foreclosure homes.

“It is our practice not to hold that inventory, because our goal is to get it ready for immediate sale,” said Kevin Waetke, spokesman for Wells Fargo Home Mortgage.

Wells Fargo & Company (NYSE: WFC) — along with Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Company (NYSE: JPM) and Citigroup Inc. (NYSE: C) — are among the country’s largest mortgage lenders.

“Most banks that are carrying this kind of inventory have regulatory pressure to move it off their books. … Most banks don’t want to own real estate because of the carrying expense,” said Bruce Alexander, president and CEO of VectraBank Colorado NA.

Alexander also pointed out that banks often sell mortgages to loan pools that are packaged into mortgage-backed securities. “Part of the problem is a lot of these loans are in pools, and it’s hard to … separate out properties and get them on the market,” he said.

Some Denver-area real estate brokers believe that an increase they’ve seen this year in broker price opinions (BPOs), which banks and mortgage companies use to value foreclosed properties before disposing of them, signals more bank-owned homes will be listed for sale in the next few quarters.

“There’s been an uptick in BPOs requested for banks,” said James Browning, broker owner of Westminster-based The Browning Group LLC and a specialist in selling bank-owned properties. “What that has meant in the past is that the banks are gearing up for inventory coming on the market.”

The shadow market generally is defined as homes that have been foreclosed on by their mortgage lender because a loan is in arrears, but haven’t yet been put on the market for sale.

Homes whose owners want to put them on the market, but are holding off until selling prices improve, also sometimes get lumped into this category.

Reasons for the delay in selling foreclosed homes, according to brokers and mortgage experts, include lenders waiting for home prices to go up, and being so overwhelmed with foreclosure homes that it takes a while to put them on the market. Longer waiting periods before a default notice is issued, and government-imposed requirements such as foreclosure moratoriums, also are clogging the sales pipeline for such homes.

National real estate- and mortgage-related companies such as RealtyTrac.com and Trulia.com recently have been warning about the shadow market. Trulia.com CEO Pete Flint has said a significant number of shadow homes could hit the market in the next four to six months.

Amherst Securities Group LP of Austin, Texas, a dealer and marketer of mortgage-backed securities, among other things, estimated the U.S. shadow market’s size at roughly 7 million properties in a report released in September 2009.

“That housing overhang is the single-largest impediment to a recovery of the housing market,” the report said.

The report calculated metro Denver’s shadow-market inventory at 13,888 homes.

Of 20 major cities included in the Amherst report, Los Angeles had the highest estimated shadow inventory, at 81,389 homes, followed by Las Vegas (52,849) and Phoenix (44,868). Boston had the lowest inventory, at 1,037.

Denver home prices show annual increase for 1st time in 3 years

Tuesday, January 26, 2010

Case-Shiller Index: Denver home prices show annual increase for 1st time in 3 years

Denver Business Journal - by Mark Harden

For the first time in three years, home prices in the Denver area showed a year-over-year increase in the latest S&P/Case-Shiller Home Prices Index.

The closely-watched report from Standard & Poor’s, released Tuesday, reported home sales prices for November 2009. Out of 20 U.S. cities in the latest Case-Shiller Index, Denver was one of just four that showed a year-over-year increase in prices.

Denver-area home prices rose 0.5 percent between November 2008 and November 2009. The last time Denver saw a year-over-year price increase was in November 2006, according to a Denver Business Journal analysis of Case-Shiller data; it had 36 straight months of year-over-year price declines after that.

As recently as early 2009, Denver was showing year-over-year home price declines of 5 percent or more, peaking at a 5.7 percent drop in February 2009.

But despite the good news in the latest index, Denver still has a long way to go before home prices reach their previous summer 2006 highs. Denver prices now are at about the same level as they were in early 2004, according to the DBJ analysis of Case-Shilling data.

During the current downturn, Denver prices reached a low point in February 2009, when they bottomed out at levels not seen since mid-2001.

Nationwide, only Dallas and San Francisco saw larger year-over-year price increases in the latest Case-Shiller report, at 1.4 percent and 1 percent respectively; San Diego saw a 0.4 percent rise.

On the other hand, price declines in the 12 months ending last November were greatest in Las Vegas (down 24.5 percent), Phoenix (down 14.2 percent) and Tampa, Fla. (down 13.2 percent). The average for the 20 cities in the latest report was a 5.3 percent decline for the 12-month period.

Month over month, the Denver area saw a 0.5 percent decline in prices in November from the previous month. That followed a 0.4 percent monthly drop in October and a 0.5 percent decline in September. Before that, prices rose month over month for six straight months.

Nationwide, home-price data, although showing improvement, presents a “mixed picture” in most markets, said David Blitzer, chairman of the index committee at Standard & Poor’s.

“While these data do show that home prices are far more stable than they were a year ago, there is no clear sign of a sustained, broad-based recovery,” Blitzer said in a statement.

The Case-Shiller index is compiled by comparing matched-price pairs for thousands of single-family homes in each market. Standard & Poor’s and Fiserv Inc. publishes it.

mharden@bizjournals.com

Savvy buyers use self-directed IRA to buy homes

Carolyn Said, Chronicle Staff Writer

Tuesday, September 1, 2009

(08-31) 18:44 PDT --

Nathan Foran used his self-directed IRA to buy a dilapidated foreclosed house in Richmond for $25,000 cash. Another $25,000 to $35,000 from the retirement account will go toward fixing up the property. He then hopes to rent it out for about $1,000 a month, money that will go straight into his retirement account.

Foran, 40, a San Anselmo real estate broker and investor, sees a lot of advantages in investing in real estate through his individual retirement account.

"The net rental income goes into the IRA, so it's generating money tax deferred," he said. "Once I sell, the money also goes directly into the IRA without capital gains tax. If I hold onto it for five to seven years, it probably will be worth in the low $200,000s, so I'll get a sizable gain. If I find another property I think will appreciate faster, I can sell this and use the funds to invest in that one. The IRA is a good long-term investment tool."

With many properties at bargain-basement prices, more people have been turning to their self-directed IRAs as a ready source of capital to make real estate investments. Companies that manage self-directed IRAs say real estate investments by their clients are up as much as 30 percent over the past year.

But experts caution there are a range of potential issues and gotchas - including ones that could even disqualify the entire IRA.

Self-directed IRAs account for just 2 percent of the $4.2 trillion IRA market, but are among its fastest- growing segments. They allow access to a variety of investment vehicles beyond just stocks and bonds. The IRS closely regulates them, and any real estate investments must be handled by IRA custodian firms that hold the property inside the IRA.

Can't live in property

IRA owners can invest in any kind of real estate - raw land, commercial properties or residential rental properties. They cannot invest in a property they already own or plan to live in, however.

The retirement funds "represent a large amount of untapped capital for investors that they can more actively manage," said Brad Hemstreet, vice president of sales and marketing for Equity Trust Co., a Cleveland company with $8 billion of IRA funds under management.

After the recent stock market downturn, "people are pulling out of Wall Street and want investments they understand and are comfortable with," he said. "Many people look at owning a property as a far better investment than owning a stock or bond."

Mary Kay Foss, a CPA and director of the Danville office for accounting firm Greenstein, Rogoff, Olsen and Co., said using IRAs to buy real estate can negate many tax advantages.

"Real estate is already one of the best investments you can have, tax-wise, because you can deduct all of your expenses, and when you sell it, you pay long-term capital gains (at 15 percent, much lower than income tax)," she said. "But if you have it in an IRA, none of the expenses are deductible. When it's sold, any profit is taxed when you take it out (of the IRA) as ordinary income."

Investing in real estate with a Roth IRA has fewer drawbacks, she said, because distributions are tax-free once the account has been in place for at least five years, although "you still have the downside that you can't deduct any expenses."

Must follow IRS rules

People who invest in real estate through an IRA have to make sure they adhere to IRS rules or they risk disqualifying the account, which carries heavy tax penalties. Neither they nor their relatives can live in the property. They cannot pay any expenses directly; everything from repairs to property taxes must be funded from the IRA. That means they must make sure their IRA has enough liquidity to handle expenses. If they have to add money, they pay a penalty.

"At this price point, I'm able to do the entire transaction with my IRA," Foran said about his $25,000 property. "I wanted to be very safe and make sure I have plenty of buffer in there so I won't have to do a capital contribution to keep that property afloat."

Companies that manage self-directed IRAs said they fully disclose all rules and recommend that investors educate themselves and consult their own accountants.

"Generally people in the real estate IRA business are very savvy about the market and investment properties," said Hugh Bromma, CEO of Oakland's Entrust Group, which has $4 billion in IRA funds under management. "They're picking up selected properties in areas that will be conducive to long-term appreciation."

About 30 percent of Entrust's clients invest in real estate, he said. Foran is among them. Entrust charges $250 a year to manage a single property, plus fees for purchasing the property.

Most IRA real estate investors buy properties with all cash, the simplest approach. If they don't have enough funds to do that, they can partner with other IRA account owners, or even partner with themselves, for instance paying half from their IRA and half from their personal savings.

30% down required

A handful of banks offer mortgages to IRA investors, but they must put down at least 30 percent, and they pay a higher interest rate because the loans must be nonrecourse, meaning the banks cannot go after other assets.

Once IRA account holders reach age 70 1/2, they must start taking minimum required distributions from their account. What if they have a house held in the account and can't sell it? "You can take a portion of it and transfer it to yourself," said Kathy Holcomb, business development officer at Pensco Trust Corp., a San Francisco IRA management company.

Suzanne Gregg, an agent with Paragon Real Estate Group in San Francisco, has bought and flipped a couple of properties through her IRA and said she tripled her money.

"It's not like you just buy a stock online and forget about it; it's a little more hands on," she said. "It's a tangible asset you can see and manage."

E-mail Carolyn Said at csaid@sfchronicle.com.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/01/BUQI19FAVM.DTL

This article appeared on page DC - 1 of the San Francisco Chronicle

Economy likely grew faster in 4Q, but fears remain

Economy likely grew faster in 4th quarter, but concerns linger about recovery's staying power

• Companies:

  • Ak Steel Holding Corp.

By Jeannine Aversa, AP Economics Writer , On Friday January 29, 2010, 7:18 am EST

WASHINGTON (AP) -- At the end of last year, the economy likely grew for the second straight quarter -- possibly at the fastest pace in nearly four years.

So the recession has ended, right? Yes, say most economists. But a panel of academics who officially decide such matters has offered a different response: silence.

That's despite signs that the economy, juiced by government aid, has begun to hum rather than sputter. On Friday, the government is likely to go further: it's expected to say growth accelerated from October through December.

The housing market, the collapse of which triggered the recession, is creeping back. Industrial production is up. Layoffs have slowed, though companies remain reluctant to hire.

Analysts surveyed by Thomson Reuters estimate the economy grew 4.5 percent in the final three months of 2009. If so, it would mark the best quarterly performance since 2006. Some predict even more dynamic growth -- possibly hitting 6 percent, a level not reached since 2003.

But many analysts worry that growth could slow or even stop in coming months. They point to temporary factors that propped up the economy in the fourth quarter but will eventually fade.

Much of the fourth-quarter expansion was due to government stimulus and to companies boosting output to restock supplies depleted by the recession. Such inventory restocking boosts production not only at manufacturers but also at their suppliers. That ripple effect can help boost an entire chain of related industries.

Economists estimate two-thirds to three-quarters of the fourth quarter's growth came from the inventory cycle, as companies shifted from sharply cutting stockpiles to rebuilding them or only slightly reducing them.

An increase in inventories, or even just a much slower rate of decline, means companies are producing more goods to fill orders and not shrinking their existing stockpiles.

But government stimulus will eventually be withdrawn. Inventory replacement, too, ends, unless demand picks up. And when it ends, so will the production gains that companies and their suppliers enjoy.

For now, the swing is benefiting companies large and small, up and down the supply chain. AK Steel Holding Corp. said this week that greater demand for steel from automakers and other customers drove a better-than-expected fourth quarter profit.

That's why few think the expansion seen in the fourth quarter can last. Some even fear the recovery might collapse into a "double-dip" recession.

In the meantime, the National Bureau of Economic Research, the group based in Cambridge, Mass., that determines the start and end of recessions, has said nothing about the latest one having ended.

Many economists predict growth will slow to a pace of around 2.5 percent in the current quarter. High unemployment is likely to make consumers cautious, leading to subdued spending in the months ahead.

"The all-important consumer is expected to take a pause," predicts Tom Porcelli, economist at RBC Capital Markets Corp.

Tuesday, January 26, 2010, 2:21pm MST

Denver again led metro area in home resales in 2009, but sales declined

Denver Business Journal

Denver County continued to have more sales than other metro-area counties of existing single-family homes in 2009, according to data from Metrolist Inc. The county had 7,482 closed sales of such homes last year, down from 9,399 the prior year.

Existing sales, also called resales, are those of homes that have sold at least once before.

The largest number of homes sold in Denver County — 2,581 — were in the affordable, $100,000-$200,000 price range often attractive to first-time buyers, followed by 1,580 home sold in the $200,000-$300,000 “move-up” range.

Independent Littleton broker and Metrolist analyst Gary Bauer broke down the data by county. Metrolist is metro Denver’s Multiple Listing Service (MLS), providing home-sale data to residential real estate brokers and agents.

“First-time homebuyer closings, via tax-credit assistance, took over the market for the majority of the year,” Bauer said in his report. “First-time homebuyer transactions are estimated to be 40-plus percent of all [home sale] closings.”

The federal government’s first-time homebuyer credit provides as much as $8,000 to such buyers. The credit was renewed in November of last year through April 30, 2010, for home sales that will close in June.

The least number of homes sold in the county last year — 114 — were in the $1 million-plus category.

But even with that relatively low number of high-end home sales compared to overall sales, Denver County had the highest number of $1 million plus home sales, according to Metrolist data. Boulder County was a close second with 111 sales in that price range.

Other home sales, by county, with 2009 and 2008 sales totals given:

• Arapahoe — 5,969 (2009)/7,327 (2008). Most homes last year — 2,255 — sold in the $100,000-$200,000 price range.

• Adams — 5,795/7,590. Most ’09 sales — 2,873 — were in the $100,000-$200,000 category.

• Jefferson — 5,277/6,144. Most houses — 2,107 — sold in the $200,000-$300,000 range last year.

• Douglas — 4,039/4,939. Most homes — 1,574 — sold in the $200,000-$300,000 category in ’09.

• Boulder — 2,975/4,272. Most houses — 1,096 — sold last year were in the $300,000-$500,000 price range.

• Broomfield — 854/1,058. Most homes — 312 — sold in ’09 were in the $200,000-$300,000 range, but 306 homes sold were in the $300,000-$500,000 range.

• Elbert — 314/376. Most homes sold last year — 111 — were in the $300,000-$500,000 range.

According to Metrolist, metro Denver’s seven counties plus Elbert County had a total of 32,705 closed existing single-family home sales last year, down 20 percent from 41,105 such sales in 2008. The largest number of those sales were in the $100,000-$200,000 price range.

Last year, 44,546 single-family homes were put under contract for sale, down 12 percent from 50,517 in ’08.

Total volume of single-family home sales marketwide was $8.7 billion last year, down $1.5 billion year over year.

Denver County also had the highest number of closed sales for condominiums in ’09, at 2,528, followed by Arapahoe County with 2,261 condo sales. Most of those sales in both areas — 899 for Denver County and 1,028 for Arapahoe County — were in the $100,000-$200,000 price range.

— Paula Moore