by Calculated Risk on 12/28/2009 06:36:00 PM

Last Thursday, Treasury issued an Update on Status of Support for Housing Programs. One of the key points was to increase the cap on Treasury's funding commitment "to accommodate any cumulative reduction in net worth over the next three years".

Here were the reasons given:

Treasury will also amend the terms of its agreements with Fannie Mae and Freddie Mac to support their ongoing stability. The steps outlined today are necessary for preserving the continued strength and stability of the mortgage market.
emphasis added

and

The amendments to these agreements announced today should leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.

Why not just be explicit and explain the reasons for the change?

I speculated on Saturday that this might have something to do with more modifications. Others thought this was possible, from MarketWatch:

The government may put a mortgage-modification effort, called the Home Affordable Modification Program, or HAMP, into overdrive in coming years, pushing for reductions in the principal outstanding on home loans overseen by Fannie and Freddie, Bose George, an analyst at Keefe, Bruyette & Woods, wrote in a note to investors Monday.

Others thought this was wrong, from housing economist Tom Lawler today:

[A] few folks postulated that the Treasury’s move to explicitly up the government’s potential support for Fannie and Freddie might be related to plans by the Treasury to expand the HAMP to include a principal reduction plan, which would accelerate losses on HAMP modifications. I have no clue what’s going on in the minds of Treasury officials, I very much doubt that any such change in the cards soon.

Note: of course HAMP already allows principal reductions, but servicers receive no additional subsidy for principal reduction.

Credit Suisse argued that this increases the prospect of "large-scale voluntary buyouts" of delinquent mortgages guaranteed by Fannie and Freddie. Other analysts have argued this could be related to the adoption of FAS 166/167 in January.

And still another analyst suggested Fannie and Freddie would become the world’s biggest SIVs, and he viewed this as an attempt to hold down mortgage rates after the conclusion of the Fed's program to purchase MBS.

Dean Baker wrote at the HuffPost: Fannie Mae and Freddie Mac: Just a Four-Letter Word?

Since Fannie and Freddie went into conservatorship in September of 2008, it has been explicit policy that the government would back up their debt. Originally, $200 billion was committed for this purpose. That amount was subsequently doubled to $400 billion ... [T]he Obama administration should make its case to the public and explain how losses could conceivably run above $400 billion (credit markets don't need reassurance against inconceivable events).

And that is really the bottom line: Why did Treasury release this on Christmas Eve with essentially no explanation. This has just lead to speculation and confusion. Why not be explicit? Why should we have to guess?

"What we've got here is ... failure to communicate." (from Cool Hand Luke)

by Calculated Risk on 12/28/2009 03:55:00 PM

Since it has been a while ...

Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990.

The dashed line is the closing price today. The S&P 500 was first at this level in April 1998; over 11 1/2 years ago.

The S&P 500 is up 67% from the bottom (451 points), and still off 28% from the peak (438 points below the max).


The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 12/28/2009 12:52:00 PM

From Bloomberg: Fannie, Freddie Changes Clear Way for ‘Large-Scale’ Buyouts

The U.S. government’s expanded capital backstops and portfolio limits for Fannie Mae and Freddie Mac increase “the prospect of large-scale” purchases by the companies of delinquent mortgages out of the securities they guarantee, according to Credit Suisse Group analysts.
...
“This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence,” Mahesh Swaminathan and Qumber Hassan, the Credit Suisse debt analysts in New York, wrote in a report yesterday.

Tanta discussed this possibility a couple of years ago:

Fannie Mae has always had the option to repurchase seriously delinquent loans out of its MBS at par (100% of the unpaid principal balance) plus accrued interest to the payoff date. This returns principal to the investors, so they are made whole. If Fannie Mae can work with the servicer to cure these loans, they become performing loans in Fannie Mae’s portfolio. If they cannot be cured, they are foreclosed, and Fannie Mae shows the charge-off and foreclosure expense on its portfolio’s books (these are no longer on the MBS’s books, since the loan was bought out of the MBS pool).

Now, Fannie also sometimes has the obligation to buy loans out of an MBS pool. But we are—Fannie Mae made this clear both in the footnote to Table 26 of the Q and in the conference call—talking about optional repurchases. Why would Fannie Mae buy nonperforming loans it doesn’t have to buy? Because it has agreed to workout efforts on these loans, including but not necessarily limited to pursuing a modification. Under Fannie Mae MBS rules, worked out loans have to be removed from the pools (and the MBS has to receive par for them, even if their market value is much less than that).
emphasis added

I suspect the uncapping the losses of Fannie and Freddie is related to modifications (update: others don't think this has anything to do with mods)

by Calculated Risk on 12/28/2009 10:46:00 AM

Here are a couple of stories with very different views ...

From Bloomberg: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (ht Bob_in_MA)

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

And the LA Times has comments from PIMCO's El Erian (Update: the article is not clear when El Erian made these comments, but the article is dated Dec 27, 2009):

El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff.

His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.

Earlier Greenlaw argued that the Fed would start raising rates in the 2nd half of 2010 because of rising inflation, even with a fairly weak economy. I think it is unlikely that the Fed will raise rates in 2010 (although possible) - and I'll definitely take the under on Greenlaw's 2010 prediction of 7.5%+ rates on 30-year fixed mortgages - that seems extremely unlikely.

by Calculated Risk on 12/28/2009 08:48:00 AM

The Square Feet Commercial Real Estate Blog has a post on a new lease signed in San Jose for 188 thousand square feet: (ht Eric)

10-Year Term

September 1, 2010 commencement

2-Years Free Rent

$1.90 NNN start (year 3), with $.10 annual bumps (CR update: Monthly rent)

$100 PSF Tenant Improvement dollars (over shell)

Right to cancel after 7 years

Talk about a low effective rent. Not only is the tenant getting two years free rent, but the tenant improvements are about 4 years of rent (the lease is triple net, so the tenant is also paying taxes, insurance and maintenance).

And the tenant can cancel after 7 years ... the landlord is mostly just covering expenses.

To review - at the end of Q3, Reis reported the national office vacancy rate rose to 16.5% in Q3 from 15.9% in Q2. We should have the Q4 numbers in early January.

Click on graph for larger image in new window.

This graph shows the office vacancy rate starting 1991.

The peak following the previous recession was 17%.

I've also heard there has been a sharp increase in occupied available space (tenants planning to downsize), suggesting the vacancy rate could increase significatly in 2010.