Freddie Mac (OTCQB: FMCC) today announced it sold via auction 3,577 deeply delinquent non-performing loans (NPLs) from its mortgage investment portfolio on July 28th, 2015 with an aggregate unpaid principal balance (UPB) of $591 million. The transaction is expected to settle in September, 2015 and the sale is part of Freddie Mac’s Standard Pool Offerings (SPO(SM)).
These loans have been delinquent for approximately three years, on average. Given the deep delinquency status of the loans, the borrowers have likely been evaluated previously for or are already in various stages of loss mitigation, including modification or other alternatives to foreclosure, or are in foreclosure. Mortgages that were previously modified and subsequently became delinquent comprise approximately 28% of the aggregate pool balance.
The loans were offered as three separate pools of mortgage loans, and investors had the flexibility to bid on one or more pools, or bid on the aggregate of all three pools. All of Pool #3 is comprised of loans with loan-to-values less than 50% of the property value, based on BPO (Broker Price Opinion). The three pools, winning bidders and cover bid prices (second highest bids) are summarized below:
Freddie Mac, through its advisors, began marketing the transaction on July 8, 2015 to potential bidders, including minority and women owned businesses (MWOBs), non-profits, neighborhood advocacy funds and private investors active in the NPL market.
On March 2, Freddie Mac’s regulator and conservator, the Federal Housing Finance Agency (FHFA), announced enhanced requirements for NPL sales. Requirements on winning bidders’ servicers include:
Advisors to Freddie Mac on the transaction were Citigroup Global Markets Inc., Credit Suisse Securities and The Williams Capital Group, L.P., an MWOB.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. Additional information is available at FreddieMac.com, Twitter @FreddieMac and Freddie Mac’s blog FreddieMac.com/blog.
The loans, which are three years delinquent on average, have an aggregate unpaid principal balance (UPB) of $591 million, according to Freddie Mac. Given the length of time the loans have been delinquent, the borrowers have likely either been previously evaluated for or are in various stages of loss mitigation or other foreclosure alternatives, or actually in foreclosure.
About 28 percent of the aggregate pool balance consisted of previously modified mortgages that subsequently became delinquent, according to Freddie Mac. The transaction is part of Freddie Mac’s Standard Pool Offerings (SPOs) and is expected to settle sometime in mid-September.
Investors had the flexibility to bid on one or more of the three separate pools of mortgage loans offered, or they could bid on the aggregate total of all three pools. Pool number 3 was comprised of loans with LTV ratios of less than 50 percent of the property value, based on broker price opinions. Below is a summary of the pools of loans for sale and the winning bidders, as well as the cover bid prices (second highest bids).
All bidders must comply with the Federal Housing Finance Agency (FHFA)’s enhanced requirements for NPL sales announced on March 2, which include approval by and good standing with government housing agencies (Freddie Mac, Fannie Mae, Ginnie Mae, and the Federal Housing Administration); evaluating borrowers for eligibility in the government’s Home Affordable Modification Program (HAMP); and applying a “waterfall” of resolution tactics before resorting to foreclosure.
Freddie Mac began marketing this transaction on July 8 through its advisors, Citigroup Global Markets Inc., Credit Suisse Securities and The Williams Capital Group, L.P., an MWOB to non-profits, neighborhood advocacy funds, and private investors active in the NPL market.
FHFA, Freddie Mac’s conservator, stated in its 2014 Report to Congress released in June that “FHFA’s expectation is that the sale of seriously delinquent loans through non-performing loan sales will result in more favorable outcomes for borrowers, while also reducing losses to the Enterprises, and, therefore, to taxpayers.”
This transaction was Freddie Mac’s fourth SPO NPL transaction of 2015 and fifth overall since July 2014. The previous four NPL transactions totaled approximately $2.17 billion in UPB.
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WASHINGTON – Millennials prefer walking over driving by a substantially wider margin than any other generation, according to a new poll conducted by the National Association of Realtors and the Transportation Research and Education Center at Portland State University.
The 2015National Community and Transportation PreferenceSurvey found that millennials, those aged 18-34, prefer walking as a mode of transportation by 12 percentage points over driving. Millennials are also shown to prefer living in attached housing, living within walking distance of shops and restaurants, and having a short commute, and they are the most likely age group to make use of public transportation.
The poll also found that millennials show a stronger preference than other generations for expanding public transportation and providing transportation alternatives to driving, such as biking and walking, while also increasing the availability of trains and buses. Millennials likewise favor developing communities where people do not need to drive long distances to work or shop.
“Realtors don’t only sell homes, they sell neighborhoods and communities,” said NAR President Chris Polychron, executive broker with 1st Choice Realty in Hot Springs, Ark. “Realtors aid in improving and revitalizing neighborhoods with smart growth initiatives, helping create walkable, urban centers, which is what more Americans want in their neighborhoods. While there is no such thing as a one-size-fits-all community, more and more homebuyers are expressing interest in living in mixed-used, transit-accessible communities.”
As a whole, the survey found that Americans prefer walkable communities more so than they have in the past. Forty-eight percent of respondents reported that they would prefer to live in communities containing houses with small yards but within easy walking distance of the community’s amenities, as opposed to living in communities with houses that have large yards, but they have to drive to all amenities. And while 60 percent of adults surveyed live in detached, single-family homes, 25 percent of those respondents said they would rather live in an attached home and have greater walkability.
When choosing a new home, respondents indicated that they would like choices when it comes to their community’s transportation options. Eighty-five percent of survey participants said that sidewalks are a positive factor when purchasing a home, and 79 percent place importance on being within easy walking distance of places. Women in particular value walkability in their communities, with 61 percent indicating that having sidewalks with stores and restaurants to walk to is very important.
When it comes to respondents’ thoughts on transportation priorities for the government, 83 percent indicated that maintaining and repairing roads and bridges should be a high priority, with expanding roads to help alleviate or reduce congestion as the next highest priority, at 60 percent. While consumers’ top two concerns are related to driving, over half of survey participants stated that expanding public transit and providing convenient alternatives to driving should also be high priorities.
TREC’s research on active transportation and urban housing choices provided a foundation to build upon in working with NAR for this poll. “It’s great to work with an organization that reaches so many professionals and has such an effect on people as they decide where to live,” said Jennifer Dill, director of TREC. “This poll shows again how strong a role transportation plays in housing decisions.”
The survey of 3,000 adult Americans living in the 50 largest metropolitan areas was conducted by American Strategies and Meyers Research in May 2015 and analyzed by researchers at Portland State University.
TREC, the Transportation Research and Education Center at Portland State University, produces timely, practical research useful to transportation decision makers and supports the education of future transportation professionals. TREC houses the National Institute for Transportation and Communities, the Initiative for Bicycle and Pedestrian Innovation and the Portal transportation data archive.
The National Association of Realtors, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
Posted: Sunday, July 26, 2015 2:00 am
WASHINGTON — Fannie Mae and Freddie Mac, the quasi-public mortgage giants, have come a long way since they had to be bailed out by the taxpayers in the real estate crash — so far in fact that their chief operating officers can now have $3.4 million raises.
WASHINGTON — Fannie Mae and Freddie Mac, the quasi-public mortgage giants, have come a long way since they had to be bailed out by the taxpayers in the real estate crash — so far in fact that their chief operating officers can now have $3.4 million raises.
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Sunday, July 26, 2015 2:00 am.
From the New York website: Could a little-noticed policy change by giant mortgage investor Fannie Mae help homeowners who’d like to move but can’t because they’re underwater — they owe more to the bank than the likely selling price of their houses? Could it help you?
Maybe. But you’re going to have to be able to qualify for a new mortgage to buy a new primary residence and rent out your current house, converting it into an investment property.
Here’s the background: Roughly 7.4 million American homeowners remain underwater as the result of plummeting prices during the housing bust and recession years, according to new data from research firm RealtyTrac. The vast majority have continued to make their mortgage payments on time and have maintained relatively good credit, say mortgage industry experts.
Many could qualify to purchase a new home but have been prevented from doing so. They either don’t have — or don’t wish to spend — the thousands of dollars needed to settle up with their lender as part of any sale. So they stay put. Daren Blomquist, vice president at RealtyTrac, estimates that 56 percent of underwater borrowers have owned their homes for nine years or longer. Nearly three-quarters have owned for six years or more.
“These (are) the folks who most likely would have had some life circumstance that makes it necessary for them to move,” such as a new job, a bigger family or simply a desire to live in a different neighborhood, he told me last week. Yet they haven’t because of their negative equity position.
Enter Fannie Mae’s recent policy change. With no fanfare or public announcement, Fannie has informed lenders that when owners seek to convert their primary homes to rental investment properties and buy a replacement home with a new mortgage, there will no longer be a minimum equity stake they’re required to have in the current home. Under previous rules, put in place during the last decade to counter fraud schemes, you needed at least 30 percent equity in your primary residence if you wanted to convert it into a rental, counting the rent toward your qualifying income for a mortgage on a new primary home. Plus you needed six months of liquid financial assets.
That’s all changed. Now you don’t need a minimum equity amount. Nor do you need a mandatory six months of liquid reserves — maybe just two months. In its notice to lenders, Fannie said it feels that it now has adequate controls on credit requirements, rental income and financial reserves in place to ensure that qualified borrowers who want to convert their primary homes into rental investments and buy a new house can do so responsibly.
How can this help owners who’ve been underwater and need a way out of their current houses? Take this real-life example. It involves a 37-year-old Maryland resident who bought her two-bedroom house at the peak of the price bubble — 2006. She owes $270,000 on it, but its current market value is just below $200,000. She’s never missed a payment — $1,615 a month — and has FICO credit scores in the low 700s. She earns $65,000 a year and needs a larger home, ideally with three bedrooms.
According to Paul Skeens, president of Colonial Mortgage Group, who is handling her application, she’s a good candidate for Fannie’s revised approach. With her current $5,416 monthly income plus $1,125 in net new rental income ($1,500 rent minus a mandatory vacancy factor of 25 percent), she qualifies for a $1,608 monthly new mortgage payment on a $230,000 three-bedroom home in the area.
But does this sort of solution work for everybody with negative equity and a hankering to buy another house? Not by a long shot. It takes a special set of circumstances: Underwater owners have to be able to pass all the standard tests to qualify for the new mortgage — credit, debt-to-income ratios that include car payments plus payments on both the old and new mortgages, as well as at least a couple of months of reserves. They also need to be prepared to handle the duties of being a landlord, collecting rents and managing the property.
Then there’s the debt on the rental property. Over time the owners will still have to figure out how to pay it off. They just won’t have to be stuck in the same old house while they do it.
Though the value of Fannie Mae‘s Book of Business remained relatively flat from May to June, the GSE’s gross mortgage portfolio took another tumble, falling another $5 billion down to a total value of about $390 billion, according to Fannie Mae’s June 2015 Monthly Volume Summary released Friday.
June was the third consecutive month in which the gross mortgage portfolio contracted at a double-digit annualized rate following March’s expansion at a rate of 7.8 percent. In April, the portfolio contracted at an annualized rate of 17.4 percent; in May, it contracted at a rate of 25.9 percent as the total value fell below $400 billion for the first time since the conservatorship began in September 2008; and in June, the portfolio shrank at a compound annualized rate of 13.8 percent.
The March expansion was a rare one for Fannie Mae’s gross mortgage portfolio in the last five years; the portfolio has expanded only three times in the last 60 months dating back to June 2010 (March 2015, January 2015, and December 2012). The value of the portfolio has declined by more than half since June 2010, from $818 billion that month down to $390 billion in June 2015. It has declined by more than $21 billion just since March 2015, when the value was $411.7 billion.
The value of Fannie Mae’s Book of Business stayed relatively flat at $3.110 trillion from May to June following a contraction at an annualized rate of about 2.6 percent from April to May. The Book of Business, which includes the gross mortgage portfolio plus the total Fannie Mae mortgage-backed securities and other guarantees less the Fannie Mae mortgage-backed securities in the portfolio, contracted at an average compound annualized rate of 0.09 percent this year.
The total value of Fannie Mae’s mortgage-backed securities and other guarantees for June was $2.81 trillion, a slight increase from May’s level of $2.809 trillion. The value of mortgage-backed securities in the portfolio as of June 30, 2015, was $92.8 billion, down from $94.9 billion in May.
The single-family serious delinquency rate for Fannie Mae in June fell another four basis points down to 1.66 percent, its lowest point since before the recession. The single-family serious delinquency rate on Fannie Mae-backed single-family residential mortgage loans has declined every quarter since Q1 2010.
Fannie Mae completed 8,356 loan modifications in June, a slight decline from the 8,597 loan mods completed in May. Fannie Mae has completed 52,914 loan mods for the first six months of 2015, an average of 8,819 per month. For the full year of 2014, Fannie Mae completed 122,823 loan mods, a monthly average of 10,235.
Memphis-based Magna Bank will join a select list of multifamily lenders for a Freddie Mac initiative.
Freddie Mac’s Small Balance Loan program chose nine lenders across the United States to help finance multifamily properties for loans valued at $1-$5 million on properties with five to 50 units.
The purpose of the Small Balance Loan is to provide funds for the acquisition or refinancing of multifamily properties, thus promoting “liquidity, stability and certainty of execution to the affordable rental housing market nationwide.”
Holding everything else constant, Freddie Mac’s (OTCQB:FMCC) total comprehensive income could be as much as $3.0 billion higher than last quarter based on one item alone–derivative gains. Of course, everything else will not be constant, making Freddie Mac’s income for Q2 2015 hard to predict. Also, Freddie Mac’s total comprehensive income is swept to the U.S. Treasury (Treasury) rather than going to shareholders as it should. Nevertheless, improved earnings could benefit investors in FMCC common stock as well as FMCKJ and other Freddie Mac preferred stocks.
During Q2 2015, the Treasury yield curve has gone up, especially at the long end of the yield curve, with 30-year Treasury bonds trading 57 basis points higher (as of June 30) compared to the end of the first quarter. A higher and steeper Treasury yield curve may result in derivative gains rather than derivative losses in Freddie Mac’s next earnings report.
In a previous Seeking Alpha article, I had anticipated that the derivative losses for Q1 2015 would be $1.4 billion less than the previous quarter. In Q1 2015, the derivative losses were, in fact, $1.0 billion less than the previous quarter, resulting in derivative losses of $2.4 billion. For Q2 2015, I anticipate that there will be derivative gains rather than losses, totaling perhaps $0.6 billion.
Freddie Mac long ago established derivative positions to emulate “as if” they were instead issuing long-term bonds. With current GAAP accounting, this means quarterly mark to market. Given this, Freddie Mac is working toward replacing more of the derivative positions with long-term bonds. In the meantime, Freddie Mac has a quarterly mark to market “problem” that increases the volatility of its total comprehensive income. This quarter, however, derivative gains could add to Freddie Mac’s total comprehensive income.
The Prospect for Derivative Gains Rather than Losses
I do not have access to the exact methodology and inputs used to calculate Freddie Mac’s derivative gains (losses). To calculate estimated derivative gains (losses) for Q2 2015, I have instead developed a methodology using quarterly changes in the Treasury yield curve as a proxy for the actual methodology used by Freddie Mac.
In Table 1, I present the Treasury yield curve as of March 31, 2015 and June 30, 2015 as well as the delta (change) between the two. Note: a basis point is 1/100th of one percent so three basis points is equal to 0.03 percent. Treasury yield curve data can be found here. I include all of the various maturities (one month, three month, all the way to the thirty years) in my calculations.
Table 1: Delta (Change) in U.S. Treasury Yield Curve (3/31/2015 vs. 6/30/2015)
For each quarter in the 2009-2015 period, I then calculate correlation coefficients between the changes in the yield curve in Q2 2015 and the selected quarter in order to find the quarters that are most comparable to the changes in the yield curve during Q2 2015. This is easy to calculate using standard spreadsheet software.
Next, I identify the derivative gains (losses) that occurred in the quarters that I use as a proxy for Q2 2015. I found this information in the Freddie Mac earnings reports. For example, the press release earnings report for Q1 2015 can be found here.
Table 2 presents the correlation coefficients that I calculated and the derivative gains from the earnings reports for the six quarters that are in the proxy group. The six quarters shown in Table 2 are the ones that may best provide a proxy for the Q2 2015 results. Derivative gains (losses) vary widely for these six quarters, reflecting the volatility of this line item on Freddie Mac’s income statement. It may also reflect the imperfect nature of the methodology used in this report.
Table 2: Correlation Coefficients and Derivative Costs for Quarters that are in the Proxy Group
While numerous uncertainties exist, I selected $0.6 billion as my base-case estimate for Freddie Mac’s Q2 2015 derivative gains. I calculated this based on the simple average of the three most recent quarters (zero, $0.4 billion, and $1.4 billion).
I subjectively selected the seemingly anomalous derivative loss of $1.1 billion in Q1 2012 as my worst case estimate.
A best-case estimate might factor in the derivative gains in Q4 2009 and Q4 2010 in some fashion.
Given the derivative losses of $2.4 billion in Q1 2015, my base-case estimate would be an improvement of $3.0 billion in Q2 2015 earnings. My worst-case estimate would be a $1.3 billion improvement relative to Q1 2015. This is a substantive improvement given that Freddie Mac’s total comprehensive income for Q1 2015 was only $0.746 billion.
There are obvious limits to the methodology used in this article. Life is uncertain and Freddie Mac’s derivative gains (losses) are hard to predict. Nevertheless, Freddie Mac’s derivative gains for Q2 2015 may be somewhere in the neighborhood of $0.6 billion, which would be $3.0 billion better than the Q1 2015 results.
Time will tell. Freddie Mac is expected to announce its Q2 2015 earnings sometime before August 10, 2015.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Disclosure: I am/we are long FMCKJ AND OTHER FREDDIE MAC AND FANNIE MAE PREFERRED STOCKS. (More…)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
K. Hovnanian Homes is committed to working with the broker community. The company recognizes the importance of the broker market to the success of its new-home communities — and goes the extra mile to make it easy for agents to sell new K. Hovnanian homes, according to Barry McCarron, president of K. Hovnanian Homes Northeast Division.
“Among our New Jersey and eastern Pennsylvania communities, the percentage of buyers who use an agent to buy a new home ranges between 30 to 50 percent of our total sales,” McCarron said. “Over the years, we’ve recognized that some brokers may not be as inclined to recommend a new home as a used one to their clients, for a variety of reasons. They may feel like they don’t know enough about a builder or the builder’s communities. Or maybe they feel like they’re giving up some control of the sales process. At our new-home communities, we assure them that they’ll receive their commissions with no delay, which is always appreciated. On top of that, we provide a number of helpful sales tools to educate brokers about our processes and our communities, so they’ll feel comfortable bringing their clients here. And then there’s the benefit of our strong national reputation. K. Hovnanian has been in business for over 50 years and we’ve earned a reputation for quality. That provides a stamp of approval or verification for brokers, assuring them and their clients that we are a builder they can trust.”
According to the National Association of Realtors, as many as 88 percent of homebuyers purchased their new or used home through a real estate agent or broker (Source: 2013 National Association of Realtors Profile of Home Buyers and Sellers). That number is not quite as high when it comes to new home sales alone, but still significant: historically, approximately 30 to 35 percent of all new home sales have been brokered by Realtors. However, that number has been increasing in recent years, particularly since the last recession.
Last year, one of K. Hovnanian’s top three brokers in New Jersey and Pennsylvania was Linda Muller of Coldwell Banker. In the past two-and-a-half years, Muller has sold 92 K. Hovnanian homes, with a dollar volume of $59,430,000 in home sales generated. Muller, who works out of the Coldwell Banker Pascack Valley regional office in Hillsdale is a distinguished agent with numerous honors and awards. Muller has been working with K. Hovnanian for over ten years now.
“It’s very easy for me to represent their com-munities because they are so welcoming and professional, and because they make everything easy,” Muller commented. “I feel a close bond with everyone I work with at K. Hovnanian, from sales to construction. The sales teams are very well trained and they assess the needs of my buyers beautifully. They really do help agents when we bring customers in. They take over in a very gentle fashion and overcome any objections. They are very informative about the community and its demographics. The homes are beautifully designed and my customers have been very pleased with what they saw in terms of workmanship. This makes it easy for me to confidently make my presentations to other real estate agencies, who welcome the opportunity to work with the professional staff at K. Hovnanian. Working with the professional K. Hovnanian teams is a highlight of my 37 years of real estate experience.”
K. Hovnanian Homes also strives to makes it easy for buyers to purchase a new home, which is another source of comfort for agents. The company builds a variety of communities (townhome, single-family, active-adult), in a wide range of desirable locations, with varying home styles and floor plans to accommodate most every type of buyer. And with a new K. Hovnanian home there is no price haggling, so buyers don’t have to worry about making an offer and negotiating a price. The company offers set prices, often with special incentives, so buyers know they’re getting the best deal possible when they walk in the door. The company also has its own mortgage company, K. Hovnanian American Mortgage, L.L.C. (KHAM), which offers loan programs to meet the needs of all types of buyers. KHAM provides full disclosure of all fees and rates upfront, explains to buyers how their mortgage will work, and guarantees that their loan will close on the date specified.
For information about any K. Hovnanian Homes community, visit www.khov.com.