Freddie Mac Obtains Insurance Policies Aimed At Reducing Taxpayer Risk

Freddie Mac announced Tuesday that it has obtained a number ofinsurance policies under its Agency Credit Insurance Structure (ACIS) in an effort to reduce risk to taxpayers in mortgage loans and further expand risk-sharing initiatives beyond capital markets.

The announcement comes one week after Fannie Mae announced it was expanding the role of private capital in the mortgage market by transferring the credit risk on a pool of loans from taxpayers to a panel of domestic reinsurers.

Freddie Mac’s newly-obtained insurance policies, which are underwritten by a panel of insurers and reinsurers, will cover up to approximately $155 million in losses for a portion of the credit risk associated with a pool of single-family loans acquired in the third quarter of 2013.

The acquisition of the insurance policies is part of Freddie Mac’s ongoing market-leading effort to introduce new risk-sharing initiatives. Since mid-2013, Freddie Mac has introduced four ACIS transactions and nine Structured Agency Credit Risk (STACR) debt note offerings. Freddie Mac has laid off a substantial portion of credit risk for more than $205 billion in unpaid balances on single-family mortgages through these transactions.

“This transaction is backed by a mix of new and returning participants,” said Kevin Palmer, vice president of Freddie Mac’s Single-Family strategic credit costing and structuring. “These policies further demonstrate Freddie Mac’s business strategy to expand risk sharing with private firms to reduce taxpayers’ exposure to mortgage losses.  ACIS demonstrates an alternative to risk transfer outside of the capital markets that we believe will be a meaningful part of our future risk transfer strategy. ACIS transfers a portion of the remaining credit risk associated with STACR reference pools to a diversified set of insurance and reinsurance companies around the globe, some of which are among the largest and best-capitalized in the industry.”

Freddie Mac and Fannie Mae were taken under conservatorship of the federal government in September 2008, and both received a combined total of $188 billion in bailout money from taxpayers. Both have since returned to profitability. The Federal Housing Finance Administration (FHFA), conservator for both GSEs, has drawn some criticism for its recent announcement that it was lowering the required down payment for a mortgage loan to 3 percent for qualified first-time homebuyers, with critics citing the amount of risk involved for taxpayers.

Tax Provisions Covered By New Senate Bill Include Mortgage Deductions

The U.S. Senate passed a bill on Tuesday night that retroactively extends 55 tax provisions, among which are allowing deductions for mortgage insurance premium interest and tax relief on forgiven mortgage debt.

The tax provisions covered by the bill, known as the Tax Increase Prevention Act of 2014, expired on December 31, 2013. The bill provides for a retroactive one-year extension which expires on December 30 of this year and would be effective for those filing 2014 returns next year.

H.B. 5771, originally introduced by U.S. Representative Dave Camp (R-Michigan), Chairman of the House Committee on Ways and Means, on December 1, 2014, passed in the Senate by a 76 to 16 vote on Tuesday night. It passed on the House on December 3 by a vote of 387 to 46.

The Joint Committee on Taxation (JCT) estimates that extending the tax provisions for one year would reduce revenues by $44.8 billion over the 10 fiscal years from 2015 to 2024, according to a release by the Committee on Ways and Means.

About $3,143 of that revenue reduction would come from Section 102 of the new bill, according to JCT. This provision calls for the extension through December 30, 2014, for homeowners to exclude forgiveness of qualified mortgage debt (the remaining mortgage loan balance when a home is sold in a “short sale” to avoid foreclosure) from their gross income when filling out tax returns.

Section 104 of the bill allows taxpayers who own homes to count qualified mortgage insurance premiums as interest for the purpose of mortgage interest deduction on their tax returns. Taxpayers with an adjusted gross income of between $100,000 and $110,000, or half of that amount for married taxpayers filing separately, would be phased out ratably. The JCT estimates this provision will reduce revenues by $919 million for the 10-year period from 2015 through 2024.

Home Price Appreciation Gives Institutional Investors Incentive to ‘Cash Out’

While statistics show that few institutional investors involved in the single-family rental market have sold off their inventory in large quantities, that might be about to change due to strong home price appreciation in the last few years, according to data released byRealtyTrac on Wednesday.

The possibility of a high return on investment has given institutional investors the opportunity and motivation to cash out, leaving many to wonder about the future of the single-family rental industry and how it would be affected in areas with a high concentration of single-family homes purchased as rentals, should investors sell off in large quantities.

To examine the return on investment institutional investors could receive by selling off now, RealtyTrac analyzed more than 200,000 purchases made by institutional investors (defined as homebuyers who made 10 or more purchases in a calendar year) made during a two-and-a-half year period from January 2012 to August 2014.

The average purchase price of those 200,000 properties was $167,556, and those properties have a current estimated value of $211,897, which would result in a gained equity of 26 percent (a combined total of $8.9 billion) if all of these properties were sold today, according to RealtyTrac. Homes purchased during 2012 would result in the greatest return on investment, ranging from 38 to 43 percent, depending on the month purchased, RealtyTrac reported.

The top five states with the highest potential percentage of gained equity return on investment for the past three years are Delaware (63 percent), California (47 percent), New Hampshire (44 percent), Oregon (42 percent), and New York (39 percent), according to RealtyTrac. The top five states for the highest potential total dollar value in gained equity on institutional investor purchases were California ($1.9 billion), Florida ($1.4 billion), Georgia ($662 million), Arizona ($546 million), and Illinois ($486 million).

Four of the top five metro areas with the highest potential percentage of gained equity return on investment for the past three years, out of those metro areas with at least 1,000 institutional investor purchases during that period, located in California: San Francisco (63 percent), Portland (50 percent), San Diego (47 percent), Los Angeles (46 percent), and Riverside-San Bernardino (46 percent), according to RealtyTrac. The five metro areas with the highest potential dollar value in gained equity for institutional investor purchases during that period were Miami ($611 million), Atlanta ($609 million), Los Angeles ($568 million), Phoenix ($512 million), and Chicago ($464 million).

Fed Announces Slow Approach to Interest Rate Increases in 2015

The Federal Reserve announced Wednesday that it intends to take a slow approach to raising interest rates in the coming year, even as the economy continues to strengthen.
In a policy statement released following the last 2014 meeting of the Federal Open Market Committee (FOMC), the central bank reaffirmed its view that the economy is expanding at a “moderate pace,” pointing to continued improvements in the labor market tempered by still-high numbers of unemployed and underemployed Americans and slower growth in the housing sector.
Given the current climate, the committee hinted that it will take steps to raise short-term interest rates in 2015, though it still would not commit to a time frame, saying only that “it will likely be appropriate to maintain … the [current] federal funds rate for a considerable period of time.”
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said in its statement.
While the phrase “considerable period of time”—commonly interpreted by analysts to be around six months—is not a new addition to the Fed’s language, policymakers did clarify that they’re counting the time from when the central bank ended its asset purchase program in October. If the interpretations hold out, that could signal an increase as soon as April, though many economists expect June is more likely.
In a survey, 15 of 17 officials at the Fed predicted an increase in interest rates starting next year, with the other two saying the first hikes will come in 2016.
At the same time, their forecast for rates slipped to 1.125 percent by year-end 2015, down from the last outlook in September.
Perhaps encouraged by recent monthly payroll numbers, officials predicted the unemployment rate next year will drop to 5.2–5.3 percent, a more optimistic outlook than in September. As of November, the national unemployment rate was 5.8 percent.
Economic growth, meanwhile, was pegged at 2.6–3.0 percent for 2015, unchanged despite a rosier outlook for 2014.

Monitor Expresses Doubts About Servicer’s Internal Review Group for Settlement

Ocwen Financial Corporation has come under fire again, attracting scrutiny this time from the overseer of 2012’s National Mortgage Settlement.
In an update on his continued oversight of the landmark agreement, Joseph Smith Jr. revealed doubts about the internal review group Ocwen is using to monitor the company’s compliance with settlement terms. Ocwen falls under Smith’s supervision due to its acquisition of mortgage servicing rights from a unit of Ally Financial, one of the original banks included in the settlement.
Smith said his team launched an investigation in May after hearing from an employee about “serious deficiencies in Ocwen’s internal review group process.” The investigation included interviews with nine company executives and employees and a review of thousands of documents, he said.
“As a result, I retained an independent auditing firm to review and retest the Ocwen internal review group’s work,” Smith said in his announcement. “This work is ongoing, and I will report on Ocwen’s performance for the period covered in these reports when it is complete.”
The monitor also said that he has taken steps to strengthen the review process of all servicers’ review groups, including adding employee interviews, additional reviews at various steps in the testing process, and the establishment of an ethics hotline so that whistleblowers can easily and anonymously report concerns.
Smith said he has also engaged with the Atlanta-based firm about concerns over its backdating of customer notices. The same independent firm has been tasked with determining the scope of that issue and evaluating the reliability of Ocwen’s systems.
“Many [National Mortgage Settlement] standards and metrics have timeline requirements, so it was important to me to investigate Ocwen’s work in this area,” he said.
According to the report, Ocwen has cooperated throughout both investigations and has agreed to five remedial actions to date.
In a statement, Ocwen CEO Ronald Faris said the company will continue to work to ensure it is fully compliant with all aspects of the settlement.
“We are committed to delivering best-in-class servicing as we work to help struggling borrowers keep their homes,” he added.
Smith’s report also included an update on Ocwen’s consumer relief progress under the settlement terms. Through September 30, the company self-reported that it has completed $1.5 billion in first-lien principal reductions to borrowers. The monitor has yet to credit those numbers toward the company’s obligations.

President to Nominate Investment Banker for Treasury’s Senior Domestic Finance Position

President Barack Obama will nominate Antonio Weiss, global head of investment banking at merger-advisory firm Lazard Ltd., for U.S. Treasury Under Secretary, the top domestic finance position with the government organization, according to a statement released by the White House.
Weiss, 48, is replacing Mary Miller, who left the Treasury Under Secretary position in September. Matthew Rutherford has been serving as acting Under Secretary since Miller’s departure.
The appointment of Weiss as Treasury Under Secretary must be confirmed by the U.S. Senate. As Treasury’s Under Secretary for domestic finance, Weiss will be responsible for implementing the Dodd-Frank Wall Street Reform Act and other financial regulation as well as coordinating capital markets, banking, and debt financing.
Weiss has been with Lazard since 1993 and has served in various leadership positions with the company, including managing director, vice chairman of European investment banking, and global head of mergers and acquisitions. He graduated with a bachelor’s degree from Yale College and an MBA from Harvard Business School. At Harvard, Weiss was a Baker Scholar and Loeb Fellow in Finance.
President Obama issued the following statement regarding the nomination of Weiss and three others to key administration posts on Wednesday:
“I am confident that these experienced and hardworking individuals will help us tackle the important challenges facing America, and I am grateful for their service. I look forward to working with them in the months and years ahead.”
Lazard and Weiss have been the subject of some controversy due to the company’s alleged involvement in tax-inversion deals, which involve American companies changing their addresses to foreign countries which have more tax-friendly laws in order to avoid paying taxes imposed by the U.S. government.

Lender Does Not Plan to Relax Mortgage Credit Standards

As policymakers signal a desire to open up the mortgage credit box to include more borrowers, Bank of America’s CEO says the bank isn’t likely to loosen its standards any time soon.
Speaking at an investor conference in New York, Bank of America CEO Brian Moynihan said his firm—frequently listed among the top five mortgage lenders in the nation—has little incentive “to try to create more mortgage availability where the customers are susceptible to default.”
Moynihan’s comments run against one of the most common complaints about the mortgage market today, which is that over-tight lending standards have cut too many potential homebuyers out of the picture.
The issue is a commonly cited problem for younger first-time homebuyers, who, in addition to facing tight mortgage criteria, also have to clear the hurdle of saving for a down payment.
Despite this, Moynihan said his bank has no intention of opening up low down payment options, instead suggesting those consumers should consider renting a home instead of buying.
As part of the government’s effort to boost homeownership, both Fannie Mae and Freddie Mac have taken steps to make lenders more comfortable expanding their offerings. In October, Mel Watt, the director of the Federal Housing Finance Agency (FHFA), announced that the GSEs were working on developing guidelines for mortgages with loan-to-value ratios between 95 and 97 percent, allowing for down payments as low as 3 percent.
FHFA is also working with the enterprises to clarify their representation and warranty framework as a way to reduce lenders’ concerns about buyback risk.
While those efforts may appease some who insist tight credit is holding back the housing market, Moynihan—whose bank has paid tens of billions of dollars in recent years to settle mortgage-related claims, many of which stemmed from its acquisition of Countrywide Financial—said his thinking takes a longer view.
“I know that that doesn’t sound good for an instant housing recovery and faster housing markets, but it’s actually good, because in the long term it keeps housing more fundamentally based,” he said.