A change in rules for the most liquid part of the agency mortgage-bond market as Wall Street fights municipal seizures would make even government-backed loans costlier for certain borrowers, according to JPMorgan Chase & Co. analysts.
The Securities Industry and Financial Markets Association has discussed with its members who set guidelines for To-Be-Announced, or TBA, trading of the debt whether to exclude loans from areas that use eminent domain powers to buy “underwater” mortgages, said Kenneth Bentsen, an executive vice president at the New York-based group. San Bernardino County, California, last month created an authority to consider the action.
Excluding loans from the TBA market, where forward sales contracts can be filled with any bonds matching a broad set of characteristics, “would have a significant effect on credit availability for borrowers in these locations,” JPMorgan analysts led by Matt Jozoff wrote in a July 13 report.
The rule change would reflect powers available to investors and banks to withhold new mortgages now that the ubiquity of tax-supported programs has reduced the influence of other loans. Lenders restricted credit last decade in North Carolina, Georgia and Maryland in response to state predatory lending laws, the analysts said. Government-backed programs guarantee more than 90 percent of originations, even as both Democratic and Republican policy makers in Washington say they hope to reduce that amount.
For other loans, the use of eminent domain would lead investors to demand interest rates as much as 2 percentage points higher “or simply not lend there at all,” the JPMorgan analysts said.
TBA trading is used in the $5.4 trillion market for so-called agency mortgage securities guaranteed by taxpayer supported Fannie Mae and Freddie Mac or U.S.-owned Ginnie Mae. Officials who want to bolster housing by curbing defaults among underwater homeowners, or those who owe more than properties’ values, are considering seizing non-delinquent loans from the $1 trillion of bonds without those guarantees for an amount deemed fair value in order to lower borrowers’ debts.
Mortgage Resolution Partners LLC, which proposed the initiative to San Bernardino County, is also reaching out to officials in Florida, Nevada, and elsewhere in California, Compass Point Research & Trading LLC said yesterday in a report. Suffolk County, New York, is also considering the plan, the New York Times reported July 15, citing a county executive.
Robert Hockett, a professor of law at Cornell University, said in a telephone interview that he believed the talk from Sifma wasn’t serious because the move would potentially run afoul of so-called redlining or antitrust laws. Hockett describes himself as “an unpaid adviser” to San Francisco-based MRP after getting a “small payment” for research from the firm.
Being eligible for the TBA market, which Sifma says involves “hundreds of billions of dollars of daily trading,” boosts bond prices by making debt easier to buy and sell, reducing loan rates. TBA trading also represents the backbone of lending because it allows originators to sell bonds before they’re created, making it easier to lock rates for borrowers. The Wall Street Journal reported the potential exclusion of loans from areas using eminent domain last week.
“The Federal Housing Finance Agency has concerns with this use of eminent domain and is communicating with county officials to better understand their intentions,” said Corinne Russell, a spokeswoman for the overseer of Fannie Mae and Freddie Mac.
Terry Carr, a spokeswoman for Ginnie Mae, didn’t immediately return an e-mail yesterday seeking comment. Brian Sullivan, a spokesman for the Department of Housing and Urban Development, which manages agencies that insure loans put into Ginnie Mae bonds, declined to comment.
Pacific Investment Management Co., AllianceBernstein LP and Western Asset Management Co. have said the eminent domain proposal adds to state and federal actions that will reduce their desire to buy non-agency mortgage bonds once the government seeks to lessen its role in lending.
Laurie Goodman, the Amherst Securities Group analyst who opposes using eminent domain even after saying more principal cuts for homeowners are needed to rescue housing, suggested using TBA changes to push back on the strategy in a report last month. Fannie Mae and Freddie Mac, which own more than $100 billion of non-agency securities, could “stop the program immediately” by refusing to back certain new loans, she wrote.
Sifma explored the TBA exclusion on a conference call last week and “generally, participants were in favor,” Barclays Plc analysts including Nicholas Strand wrote in a July 13 report.
The JPMorgan analysts said “the rationale is that these loans could have significantly different risk characteristics than generic loans.” Loans excluded for similar reasons include debt with prepayment penalties or loan-to-value ratios of more than 125 percent, and securities filled more than 10 percent with mortgages exceeding typical size limits, they said.
“The fundamental concept that underlies TBA market is homogeneity,” Bentsen said in an e-mail. “The integrity of this market is of utmost importance, and market participants share a similar feeling of responsibility to ensure the market works as efficiently as possible so as to provide maximum benefits to consumers, lenders and other market participants.”
Any move to exclude a county’s loans before it makes a final decision would be “illegal,” David Wert, a San Bernardino County spokesman, said in an e-mail. “We plan to have a public discussion on this idea and any others that might provide relief to homeowners and get our economy moving again, despite any intimidation tactics.”