Let the buyouts begin
Freddie Mac has issued a press release this morning detailing their plans to purchase delinquent loans out of pools starting this month. As I read the press release from Freddie Mac and try to picture what is really going on behind the scenes I’m reminded of a tense scene from the movie Jurassic Park. There was a point in the movie where the computer system that helps contain all of the dinosaurs in the safe area had to be rebooted. There were serious concerns regarding the safety of this operation but it was viewed as necessary. Samuel L. Jackson is the computer guy that will have to hit the button, he’s worn down from the stress, he’s smoking a cigarette, and in a gesture half filled with surrender and half filled with frustration, hit’s the reboot button and mutters “hang on to your butts people.” This press release has the same feel.
The idea at this point is to pull out all loans that are 120 days delinquent. You might be asking something along the lines of “why wouldn’t they do that anyway?” The answer is that Freddie guarantees timely payment of P&I on the mortgage pools. One way to do that is to just use capital to keep the loans current…basically Freddie is paying the note to keep it current rather than paying to pull it out. The “keep it current” method burns less capital than the “buy the whole loan out” method. The GSE’s did this extensively during the height of the crisis. The owner of the security doesn’t care because they get their money on time, every time.
Now however there are new accounting rules in place. Under the new rules it is reportedly cheaper to buy the non-performing loans out of the pools than to simply keep them current. Keep in mind that Fannie and Freddie just received unlimited lines of capital from the US Government…they will be able to buy as many loans as they need to buy...they are not limited in any way by capital constraints.
So what does this mean to holders of Freddie MBS?
At a minimum it means you should be looking for a material spike in one-month speeds as Freddie buys a bunch of loans out of the pools. Every loan they buy will be the equivalent of a refi in the pool. Word on the street is that they will be more consistent with this process going forward so the big spike should be a one-time event. However…if they are going to be more consistent going forward I would expect prepays to increase by some amount across the board going forward.
Essentially it looks like they are going to clear a log-jam of stuff they’ve been putting off for a while. Once they get that taken care of it will be a “clean up as you go” process.
If the new operating plan is to “clean up as you go” then prepays should definitely increase by some amount going forward as the loans will be purchased out as soon as they hit 120 days delinquent. Will the speed increase be material on an ongoing basis? Time will tell.
Where the rubber meets the road
The most immediate and concrete impact for holders of Freddie pools will revolve around sales for FEB settle. There will be a high degree of reluctance for anyone to put a bid on a Freddie pool for Feb Settle since everyone knows that a big spike in prepays is coming. I’m not saying there will be NO bid for Feb settle…but if you can find one don’t expect it to be wonderful.
My mortgage trader is saying that everyone will wait to see what the speeds were, and then bids should come back for March settle.
What about Fannie?
Fannie Mae has not yet released such a press release but it is expected to something similar.
Other stuff in the news and rumor mill
From a “what’s in the news” perspective this has been a very interesting week. We’ve recently seen the market take a wild ride on concerns that Greece would default on its debt, only to have that reversed as traders around the world got comfortable with the fact that the EU would step-up and deal with the issues.
We also have Iran in the news promising a big surprise and to deliver a big punch to the west on February 11th. In a WWF type move Iran also told Britain they were about to get “smacked in the mouth”… for those of you who’ve never stepped foot inside a mobile home, own a Lynard Skynard T-shirt, or been to a monster truck show, “WWF” stands for World Wrestling Federation. If these guys weren’t working on a nuke I’d actually get a kick out of watching them. So far the Iran news doesn’t seem to have affected the markets much.
Moving on we have China’s military openly calling for dumping US debt as a punitive measure to demonstrate their displeasure with our foreign policy. There is some scuttlebutt that China is telling its larger institutions to begin selling Asset Backed Securities and Corporates and hold only Treasuries or Agency debt. I’ve not substantiated this bit of information yet but when my sources in China wake up I’ll see what they know and I’ll let you know if they have anything to add.
Someone in the office commented this morning that there is simply no telling how much money the country is saving due to the fact that a snow storm is keeping everyone in Washington from getting to work. I couldn’t agree more.
The markets
The bond market is fairly quiet at the moment. The curve is relatively unchanged through the 10-year spot. The 30-year is up 12 tics. Stocks are materially unchanged on the day.
If you have any questions or if there is anything I can do for you just let me know.
Steve Scaramastro, SVP
800-311-0707
Posts
No comments:
Post a Comment