Freddie Mac May Move STACR Program Entirely to Actual Loss

I have been wondering when Fannie Mae and Freddie Mac were going to expand their risk-sharing mortgage-backed securities offerings. They have been slowly expanding investor exposure (and reduce taxpayer exposure) to test the waters, so to speak.

Freddie Mac has now taken another small step in the right direction with their STACR program.

(Bloomberg) — All Freddie Mac STACR sales may be moved to the “actual loss” structure from the “fixed-severity” model used since the program’s inception, Kevin Palmer, Freddie Mac VP of Single Family, said during an interview at Freddie’s McLean, Va. headquarters Wednesday.

Palmer said the actual loss deal marketing this week, the 1st of its kind, is a “pilot”

Freddie is discussing the new bond with market participants and has conducted a large scale “listening tour”

“If it goes well, starting in September or October all transactions will be actual loss,” Palmer said

Palmer cites accounting treatment as reason for the shift: traditional STACR transaction requires derivative accounting, mark-to-market

Current accounting structure “not a healthy framework”

Actual loss also allows transfer of more volatility risk

Relatively new STACR and CAS transactions may have gone through “growing pains” last year

Saw period of sharp spread tightening and then widening

In 2013, ~$1b issued, while in 2014 ~$10b was sold; quick ramp-up was a lot for the market to absorb

There’s now “equilibrium” in the market

Freddie changed the way it has syndicated STACR product in reaction to 2014 spread volatility

Now, it markets at a lower size, with flexibility to upsize

Also, Freddie has calibrated offerings:

*Amid good conditions, it can transfer risk though STACR

*If conditions not favorable, Freddie can use Agency Credit Insurance Structure (ACIS) program; it might only transfer half of risk through STACR, and then use reinsurance markets via ACIS

*Strives to be “deliberate and methodical” with STACR; trying to avoid too much customization, wants “one standardized security for all”

Joint Bookrunners: Credit Suisse (str) and Citigroup.
Anticipated Capital Structure
CLS, $AMT(mm), WAL, F/M
M-1, 200.000, 1.89, AA-/A3
M-2, 200.000, 4.33, A/Baa3
M-3, 250.000, 8.17, BB+/B1
B, 70.000, 9.99, NR/NR
Bloomberg Ticker: STACR 2015-DNA1
Increased Seasoning: 28 Months (4Q 2012 Originations)
Class B is now DTC Eligible


Here is the deal structure for STACR 2015-DNA1.


By the way, STARC stands for STRUCTURED AGENCY CREDIT RISK DEBT NOTES. Not to be confused with Burger King’s Stackers!!


Affordable? Home Rents Increase To 2.7 Percent YoY While Wage Growth Is 2.1 Percent YoY

I attended Fannie Mae’s Affordable Housing Advisory Council meeting on April 15th as a member. We were asked not to disclose what was discussed, but suffice it to say that the name “Affordable Housing Council” kind of gives it away.

In general terms, the “credit is too tight” theme was discussed by affordable housing advocates (not Fannie Mae management). Needless to say, I chimed in with the following chart showing that potential borrowers are worse off today than in 2001 or 2007 making it difficult to qualify for a mortgage according to DEBT TO INCOME (DTI) requirements in the face of rising home prices.


But that only addresses the home ownership part of Fannie Mae’s business. What about their multifamily operations?

Well, the Consumer Price Indices for March were released today and the US CPI Urban Consumers Owners Equivalent Rent of Residences YoY rose to 2.7 percent. While this seems modest, bear in mind that average wage growth is only 2.1 percent YoY.


Then we have New York Ciy where The median rent in Manhattan jumped 8.9 percent last month to $3,375, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Costs for studio apartments climbed 10 percent to a median $2,351, while rents for one-bedrooms rose 9.4 percent to $3,400, both the highest in more than seven years of record-keeping.

Nationally, apartment rents are growing at a 3.5 percent clip, according to REIS.

Let’s see. Super low interest rates combined with investors (foreign and domestic) coupled with households that are priced out of home ownership have created … high rents. If Jimmy McMillan of “The rent is too damn high Party” would run for mayor or governor today ….

So, Houston (or Washington DC), we have a problem. The CPI measure of “rent” is too low compared to observed rents. Home prices and apartment rents are rising faster than wages. Either wages have to start rising more than they have or home prices (and apartment rents) have to drop.

Here is what COULD cause home prices to fall. Baby-boomers are retiring and the GenXers and recent immigrants from Latin America don’t have the accumulated wealth or wages to purchase some of mondo-expensive big homes that America has grown accustomed to.

So, only mentioned my concerns about the housing market, wages, and the baby-boomers.

Or what I may call “Baby KABOOMERS.”

Here is a picture of Janet Yellen and Ben Bernanke injecting a typical renter with Fed stimulus that helps rents to rise and wage growth to stagnate.


Housing Nirvana On Hold: Housing Starts Miss Badly, Rise Only 2% In March (Yesterday’s Gone)

March housing starts (new construction) began with a whimper instead of the expected housing Nirvana rally. Economists forecast a 16 percent MoM increase in housing starts, but only 2 percent materialized. This came after a dismal February where housing starts declined by 15.3 percent.


Housing starts increased 2 percent, but 1 unit starts increased by 4.39 percent. 5+ unit (multifamily) starts actually fell by 7.12 percent.


1 unit housing starts are slowly recovering but remain below levels from 2001 … when real median household income and average wage growth were higher.


My former colleague at Deutsche Bank Joe Lavorga tweeted that it is hard to break ground when the ground is frozen.


That was an odd comment since The West saw a 19.28 percent DECREASE in housing starts in March (they may be hot and thirsty, but frozen ground isn’t a problem). But in the “frozen” Northeast, housing starts were up 114.89 percent.

Say it ain’t so, Joe!

Let’s see if April is kinder to the housing market (and Joe Lavorgna). But that was yesterday and yesterday’s gone.


Caution! Ex-Freddie Mac Officials Settle SEC Suit Over Subprime Loans

Bloomberf: Three former Freddie Mac executives settled a lawsuit by regulators over whether they misled the market about the mortgage-finance company’s exposure to risky loans, in a deal that included about $300,000 in donations to a fund set up to reimburse investors.

The settlement marks a quiet end to a high-profile U.S. effort to hold individuals accountable for some of the shocks to the financial system after banks, ratings companies and others underplayed the risks of subprime mortgages.

Richard Syron, the former chief executive officer of Freddie Mac, and two other executives settled the Securities and Exchange Commission’s 2011 lawsuit without admitting liability. In 2007 and 2008, according to the SEC suit, the three executives had said exposure to subprime mortgage loans was from $2 billion to $6 billion, when it was actually as high as $244 billion.

“This was one of the big cases to come out of the financial crisis. They accused CEOs of lying,” said Peter Henning, a corporate law professor at Wayne State University in Detroit. “And now, it ends, with I guess you can say, a whimper.”

Weak Case
The unusual settlement likely reflects a weak case by the SEC, Henning said. The agency also sued executives of Fannie Mae, including former CEO Daniel Mudd, over similar claims of misrepresentations. Tuesday’s resolution with Freddie Mac executives will likely help Mudd and his former colleagues.

“If I were Mudd, I would see if I could get this deal,” Henning said.

James Wareham, Mudd’s attorney, declined to comment on the case.

Also settling the case in Manhattan federal court were Patricia Cook, a former Freddie Mac executive vice president, and Donald Bisenius, an ex-senior vice president.

Under the agreement, the three executives must donate money to the Freddie Mac Fair Fund, set up to reimburse investors, in amounts tied to their stock and option awards during fiscal years 2006 and 2007. Syron will pay $250,000; Cook, $50,000; and Bisenius, $10,000. The three agreed to cooperate with the SEC in any related proceeding.

“We’re delighted with the terms of the dismissal,” Bisenius’s lawyer, Daniel Beller, said. “Mr. Bisenius is not making any payment. Freddie Mac’s insurer will make a donation on his behalf.”
Steven Salky, Cook’s lawyer, said in a statement, “We are extremely pleased with this resolution.”

Syron said in an e-mailed statement Tuesday that “The agreement states that it is not in the interests of justice to continue to litigate this matter, and I wholeheartedly agree with that sentiment.”
‘Appropriate Resolution’

The three also agreed for limited periods not to violate anti-fraud and reporting provisions of U.S. securities laws or sign company reports filed with the agency. The SEC initially sought to ban them from serving as officers or directors of other companies.

“The settlement’s limitations on future activities and financial payments reflect an appropriate resolution of the matter,” Andrew Ceresney, the SEC’s director of the Division of Enforcement, said in an e-mail.

U.S. District Judge Richard Sullivan on Tuesday approved the agreement.

McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are government-sponsored enterprises that issued more than half of all mortgage-backed securities at the time of the financial crisis.
The case is SEC v. Syron, No. 11-cv-09201, U.S. District Court, Southern District of New York (Manhattan).

The case revolved around whether “Caution loans” were subprime loans or not. Caution loans are loans where Freddie Mac is supposed to exercise greater caution in their underwriting.

Were these loans “subprime” or “prime?” Freddie Mac is not permitted to purchase subprime loans. But the very mention of “caution” seems to indicate that these loans are more risky than their average loan, but perhaps less risky then “subprime” loans since Freddie Mac bought many of them.

In fact, caution loans had serious delinquency rates that were somewhere in between “subprime” and the conforming loans usually purchased by Freddie. Let’s call them A- loans. hpd_1302_gates

Here is Freddie’s Richard Syron singing “Alleluia” on the case being settled with the SEC.

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Industrial Production “Growth” MoM WORST Since End Of Great Recession

US Industrial Production numbers are out for March 2015 and they are ugly.

Industrial Production “growth” MoM fell more than expected to -0.6 percent.


Utility output fell 5.9 percent, leaving it 3.6 percent lower year over year. This is no surprise, given that the weather in March moderated from record cold temperatures in February (as it does EVERY YEAR).

Mining and mineral extraction fell 0.7 percent, as the recent declines in oil prices have caused the energy sector to trim back activity, although this represents a moderation from declines of 1.6 and 1.7 percent in February and January, respectively. Utilities are now 3.6 percent lower from a year ago.

Alarm! Dive, dive, dive!


Burnout! Mortgage Purchase Applications Fall 2 Percent WoW As Home Prices Keep Rising

And the hits just keep coming! Home prices continue to rise as mortgage purchase applications decline 2 percent week-over-week.

Mortgage applications decreased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 10, 2015.


The seasonally unadjusted Purchase Index decreased 2.14 percent compared with the previous week and was 7.2 percent higher than the same week one year ago. Bear in mind that purchase applications peaked on May 2, 2015, so the peak may be close at hand.


The seasonally adjusted Purchase Index decreased 3.07 percent from one week earlier. Although home prices are rising again, wage growth remains slow to recover along with mortgage purchase applications.


The Refinance Index decreased 1.76 percent from the previous week. I wonder if we are near the “burnout” equilibrium for refis since mortgage rates are approaching their all-time low again and refi activity is lackluster.


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.87 percent from 3.86 percent, with points increasing to 0.38 from 0.27 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

The good news? American consumers have less debt than in previous “recoveries.” The bad news? American consumers also have less income.


Despite the rhetoric from the affordable housing lobbying groups, the US is worse off than in 2001. Adjust your forecasts accordingly.


About The “Credit Is Too Tight” Meme (Freddie Mac Average LTV and DTI The Same In 2001 and 2013)

Logan Mohtashami did an interesting interview with David Lykken (not to be confused with the Lycans from the Underworld movie series). The title of the interview is “Slaying The Tight Lending Myth.”

Here is another piece to the puzzle.

Freddie Mac distributes their loans on line since 2000. So following my interview with Diana Olick on CNBC, I thought I would look at loan-to-value ratios and debt-to-income ratios from Q3 2001 and Q3 2013 (the latest quarter released to the public).

The results? The average loan-to-value (LTV) ratio is Q3 2001 was 75.91 percent. The average LTV in Q3 2013 was … 75.84 percent. Looks pretty similar to me!


How about average debt-to-income (DTI) ratio? 33.57 percent in 2001 and 33.63 percent in 2013. Once again, they look pretty similar to me!

Freddie Mac deals with conforming loans, not subprime loans. The Urban Institute report is decrying the lack of subprime lending!

The credit is too tight meme is way overblown. It’s really an “Income to too low” meme.