THE BASIS POINT

How Rates Work & Why They’re Low, Primer For New Local HFA Bond Program, Existing Home Sales Up 25% Since January

Is there ever a day that mattresses are not “on sale”? Securities are always for sale. I love this kind of talk: “Agency MBS reversed course this week as much of the coupon stack underperformed against duration hedges.” That is what I received from a buddy who works for a large investment bank. What the heck does that mean, and does it mean anything to some broker who has a client waiting for 4.875% to come back? Not really.

How Rates Work & Why They’re Low
On any given day, investors in fixed income securities have a huge number of options from which to choose. They can buy government securities, corporate bonds, municipal bonds, mortgage-backed securities, the list is too numerous to detail here. At the moment, agency MBS securities backed by Freddie & Fannie loans) are looking fairly priced versus Treasuries. And speaking of Treasury securities, the yields on two-year note yields rose above 1% for the first time this month, and the 10-yr Treasury hit 3.50% this morning.

The Fed’s MBS program, which many mortgage bankers believe is still the only thing keeping mortgage rates as low as they are, still has the capability to absorb close to $15 billion a week through the end of the first quarter. Whether or not this is enough to soak up the current production remains to be seen. Many banks, however, are selling their holdings of mortgage securities due to the large profits contained in them. Their profits are helped, but it doesn’t help current production, although they may go out and buy current production.

Will Local Housing Finance Agency Bonds Help?
What about this new bond program, proposed a week or so ago? Is it going to help the broker or small lender? Probably not: most housing agencies use banks as direct lenders to get to these first time home buyers. So perhaps there will be some peripheral benefits, perhaps not. The program (Homeowner Affordability and Stability Plan, from February) HFA Initiative: Support for State and Local Housing Finance Agencies. How the program will work is that the government will provide temporary financing for HFAs to issue new mortgage revenue bonds. Housing Finance Agencies will originate the loans, which pass through Freddie & Fannie, and then the Treasury will purchase securities backed by these new housing bonds.

And it will take some time: each HFA that desires to participate will be asked to develop a program participation request in consultation with Treasury, Fannie Mae, and Freddie Mac, indicating their desired level of participation. I am not an expert in bond issuance, and it doesn’t sound simple. HFA’s at the state and local levels receive allocations based on previous issuance history and the submission of requests, and us the money for single or multi-family bonds. HFAs will pay the GSEs and Treasury an amount intended to cover both the cost of financing the newly issued bonds as well as a fee designed to cover risk posed by the HFA, and the rates are set on newly issued HFA bonds to equal a short-term Treasury interest rate for the period in which the proceeds are held in reserve before being drawn down by the HFAs to originate mortgages. Within 30 days of the proceeds being drawn down, the interest rate on the bond will increase to cover Treasury’s cost of financing (set at the 10-year Treasury rate) plus the additional fee designed to offset risk to the taxpayer.

GMAC Commercial Files Chapter 11
Capmark Financial Group, formerly known as GMAC Commercial Holding Corp., filed for Chapter 11 bankruptcy protection. Owned by companies such as Goldman Sachs and KKR, they are one of the largest commercial real estate finance companies – but have $21 billion in debt versus $20 billion in assets. The plan is already in place to divvy up their assets: their $360 servicing portfolio may go to Berkshire Hathaway and/or Leucadia National, for example. The company owes billions to Citibank, Deutsche Bank, and Wilmington Trust.

Existing Home Sales Up 25% Since January
Existing Home Sales on Friday looked pretty impressive, better than forecast. (And those forecasts already include the tax credit for first-time home buyers. Many are hoping the credit is extended, while others feel that it is just delaying the inevitable…) Sales are up almost 25% from the low in January, and 9% higher than a year ago. We’re walking into a very full last week of the month for economic news. Today there is zip, but tomorrow we have Durable Goods for September, the Case-Shiller Index which never seems to go up, and Consumer Confidence, which seems to be holding this economy up. On Wednesday we have New Homes Sales, Thursday we have Jobless Claims and GDP, and then on Friday Personal Income and Consumption, the Michigan Consumer survey, and the Chicago PMI. As I mentioned above, the 10-yr hit 3.50% but is now back down to 3.48% and 30-yr mortgage prices are worse by about .125.

Daily Humor
Two blonde girls were working for the city public works department.
One would dig a hole and the other would follow behind her and fill the hole in. They worked up one side of the street, then down the other, then moved on to the next street, working furiously all day without rest, one girl digging a hole, the other girl filling it in again.
An onlooker was amazed at their hard work, but couldn’t understand what they were doing. So he asked the hole digger, “I’m impressed by the effort you two are putting in to your work, but I don’t get it – why do you dig a hole, only to have your partner follow behind and fill it up again?”
The hole digger wiped her brow and sighed, “Well, I suppose it probably looks odd because we’re normally a three-person team. But today the girl who plants the trees called in sick.”