Coalition Letter Builds Non-Admitted Insurer Legislation
MBA (9/22/2008 ) Murray, Michael
The Natural Catastrophe Policyholders Coalition —which includes the Mortgage Bankers Association—sent a letter to Senate Banking Committee Chairman Christopher Dodd, D-Conn., detailing the importance of the Non-Admitted Lines and Reinsurance Act of 2007, under S. 929 and H.R. 1065.
“Ensuring adequate catastrophic insurance capacity for commercial and multifamily property owners remains a top priority for the NCPC. The passage of [the Act] by the Senate represents an important step for increasing catastrophic insurance capacity,” the letter said.
In November 2007, the Government Accounting Office’s report to the House Committee on Financial Services estimated that the federal government provided nearly $26 billion to homeowners who lacked adequate insurance in response to the 2005 Hurricanes Katrina, Rita and Wilma .
“Large losses associated with natural catastrophes are some of the biggest exposures that insurers face. Particularly in catastrophe-prone locations, government insurance programs have tended not to charge premiums that reflect the actual risks that homeowners face, resulting in financial deficits,” the GAO report said.
The NCPC’s letter pointed out that finding natural catastrophe insurance has become more difficult and expensive for commercial property owners because “admitted” insurance companies would reduce their exposure in states and/or regions impacted by a major natural catastrophe and no longer write policies for the impacted states or regions or significantly reduce the number of policies they write in these areas.
“In these instances, non-admitted insurance carriers serve a vital role by filling the insurance capacity gap caused by the reduced admitted carrier insurance,” the letter said.
Commercial and multifamily property loan documents require owners to have insurance coverage in place for the duration of the loan, including natural catastrophe insurance coverage.
The GAO report said federal reinsurance for state programs could lead to broader coverage but could also displace private reinsurance. The agency identified several policy options for tax-based incentives for insurance companies, homeowners, investors and state governments.
“But these options, which could help recipients better address catastrophe risk, could also result in ongoing costs to taxpayers,” the GAO report said. “While some options would address the public policy goals of charging risk-based rates, encourage broad participation, or promote greater private sector participation, these policy goals need to be balanced with the desire to make rates affordable.”
The National Association of Insurance Commissioners “generally agreed with GAO’s report findings,” the agency said.
This year was the heaviest hurricane season since Katrina hit the Gulf coast more than three years ago. Hurricane Gustav hit the Louisiana area without the intensity of Katrina, but Hurricane Ike caused severe damage to Galveston, Texas and many Houston residents had property damage from falling trees with power yet to be restored in a number of homes and businesses. The hurricane was blamed for more than 60 deaths.
The Washington Post reported last week that the American Red Cross was falling into debt from its aid in Hurricanes Gustav and Ike, based on a recent GAO report. The report said the Red Cross and other disaster relief charities still face shortages in trained volunteers and have not dedicated enough resources for disaster preparedness, based on the inability to raise funds through private donations in a weakened economy.
Passage of S. 929 or H.R. 1065, however, would provide the means to reduce uncertainty regarding availability of natural catastrophe insurance in the wake of a major hurricane or other natural disaster, NCPC’s letter noted.
“Given the fragile state of the commercial and multifamily lending and capital markets, this consideration assumes heightened importance,” the letter said.
The Natural Catastrophe Policyholders Coalition includes MBA; the American Resort Development Association; Building Owners and Managers Association; Chamber Southwest Louisiana; Commercial Mortgage Securities Association; Greater New Orleans Inc.; International Council of Shopping Centers; National Apartment Association; National Association of Industrial and Office Properties; National Association of Real Estate Investment Trusts; National Association of Realtors and the National Multi Housing Council.
HELOCs Gain Borrower Interest Despite Fewer Originations
MBA (9/22/2008 ) Palaparty, Vijay
Home equity line of credit product applications and originations decreased 33.8 percent and 26.4 percent, respectively, among small/medium-sized lenders, bewteen the first and second quarters, according to a study from BenchMark Consulting International, Atlanta.
However, the study revealed that from a book-to-look perspective, borrowers’ interest found renewal in the second quarter, with the rate rising by 5 percent to 49 percent from 44 percent in the first quarter,
“From the second quarter of 2007 through this year’s first quarter, originations were fairly constant, increasing 6.25 percent; applications increased 32.75 percent over the same period,” said Brian King, senior vice president at BenchMark Consulting. “However in the second quarter, applications and originations dropped significantly. Overall, the ability to book new originations for HELOC products for the small/medium group, however, has been fairly consistent over the past five years.”
Furthermore, the study revealed that among large lenders, HELOC applications dropped 55 percent between the second quarter of 2007 to the second quarter this year. “With tightening of credit standards, tougher underwriting guidelines and less direct marketing focus, it is understandable why applications are down so significantly,” King said.
The book-to-look rate also degraded among large lenders, decreasing from 43 percent in the second quarter of 2007 to 37 percent a year later. “Typically large lenders will receive more applications with lower credit scores and that increases the number of applications, but the approval rates are lower so there is a lower book-to-look rate,” King said. “It is interesting that the large group’s book-to-look rate is lower than that of the small/medium group, which impacts efficiency in the loan originations areas.”
In terms of distribution by channel, the branch was most popular among borrowers. Seventy-six percent of borrowers applied for a loan and 74 percent of loans were originated among the small/medium group. Among originations, the internet accounted for only 1 percent of transactions and the phone accounted for 14 percent. The broker channel disappeared by the second quarter in both small/medium and large lender groups.
Among the large group, the internet channel was more popular. “However, for the internet channel, we also see the impact of pull-through rate with 13 percent of all applications but only 6 percent of all originations,” King said. “So while this channel has potential, the pull-through rate continues to be a challenge, possibly due to the proliferation of aggregators in this space.”
In terms of defining prime borrowers, small/medium respondents were more conservative. Sixty-seven percent of the small/medium group established cutoff points of FICO scores greater than 700 or greater than 720, while those responses were not provided in the large group.
“This may explain in part why the credit cycle appears to have a more severe impact on the large lenders,” King said. “However, what is interesting is that this is recent information—second data as of the end of June. To see such a drastic different in the definition of “prime” is interesting.”
Analysis of credit score distribution among both small/medium and large lenders yielded similar results. “Lenders typically have a higher pull-through percentage for higher credit scores versus lower credit scores,” King said.
The study revealed that 56 percent of the applications had FICO scores of 720 or higher, while 79 percent of originations had FICO scores of 720. Comparatively, 12 percent of applications had less than a 600 FICO score, while only 1 percent of originations were in the same band. “The higher the credit score, the more likely the borrower is to make it from application to origination, which increases the book-to-look rate and profitability,” King said.
“Underwriting restrictions have tightened and they will remain that way,” King said. “It will make it difficult for some borrowers to get HELOCs, but there is still plenty of business out there. With the reduction in the brokerage space, especially, banks have more business opportunity now.”
Policymakers Attempt to Stabilize Markets
MBA (9/22/2008 ) Velz, Orawin
Financial turmoil dominated financial markets last week. The week began with several dramatic events, including Lehman Brother’s bankruptcy, the sale of Merrill Lynch and the threat that AIG could go bankrupt.
Once again, investors re-priced their risk and moved their funds, including those from money-market mutual funds, to safe-haven U.S Treasuries, bringing down the yields across the curve, with the yield on three-month Treasury bills dipping below a tenth of a percent.
The extent of risk aversion and the resulting liquidity crisis was reflected in the explosion in the TED spread—the difference between the three-month Libor and three-month Treasury bill rate. (Libor is the dollar-denominated overnight London interbank offered rate or the rate at which banks lend to one another). The significantly wider TED spread reflected market jitters and extreme levels of counterparty risks as it indicated that banks were unwilling to lend each other money and would do so only by charging a considerable risk premium.
Amid the crisis, the Federal Reserve held the federal funds rate steady on Tuesday but took extraordinary measures to inject liquidity into the global financial markets. On Wednesday, to relieve the pressure on the Libor market, the Fed boosted its U.S. dollar swap line with foreign central banks so that they could provide their respective financial institutions with short-term dollar funding.
These efforts did little to relieve liquidity pressure, however. The TED spread continued to rise to more than 300 basis points by mid-day Thursday. This was considerably higher than the spread seen in mid-August, 2007 of about 240 basis points and more than 200 basis points above its recent lows on September 5. The spread narrowed modestly on Thursday afternoon, as the stock markets rebounded in response to reports that policymakers were considering to create a new entity to absorb distressed and illiquid assets from the balance sheets of troubled banks.
The details of how such an entity will operate are being worked out as this is written. Congressional action will also be required. There will be many questions to be answered and a great deal of uncertainty involved. More immediately, as part of its broad plan to stabilize markets, the Treasury will double its planned purchases of mortgage-backed securities to $10 billion this month and may make more MBS purchases in coming months. Fannie Mae and Freddie Mac will also increase their purchases of MBS.
Economic reports, which took a backseat to the financial crisis, generally pointed to deteriorating activity. Industrial production fell sharply in August. The Conference Board’s Index of Leading Indicators dropped in August for the second consecutive month, indicating a slowing economy ahead. Total housing starts dropped sharply in August, driven by declines in multifamily starts. Single-family starts fell modestly, but sharp back-to-back drops in single-family permits suggested further cutbacks in coming months. Continued pullbacks are necessary, however, to reduce the excess supply in the market given the huge overhang of unsold inventory in many parts of the country and soft housing demand.
While continued decreases in home sales are likely, near-term leading indicators suggested that the declines should be moderate in the coming months. Home builders reported that current market conditions and outlook for new home sales modestly improved in September, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index was up slightly from a record low, the first increase in seven months. Rising consumer confidence, declining mortgage rates and the first-time homebuyer tax credit helped lift builders’ confidence.
The Mortgage Bankers Association Weekly Application Survey also showed that the purchase application index has steadily increased since mid-August as mortgage rates trended down. The increases in the purchase index paled in comparison, however, to the surge in the refinance index of 88 percent in the latest week following a 15-percent rise in the prior week.
Treasury yields dropped sharply across the curve through mid-Thursday, benefitting from a flight to quality. Stocks surged on Thursday afternoon and continued through Friday. Treasuries declined and yields rose as investors’ risk appetite increased. The yield on the 10-year Treasury note stayed around 3.82 percent by mid-Friday afternoon, about five basis points higher than the rate on the previous Friday but 35 basis points higher than the rate at the start of the week.
With the turmoil in financial markets, the spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages widened to about 230 basis points, still about 40 basis points narrower than the gap seen before the announcement on Fannie Mae and Freddie Mac.
Housing and Mortgage Indicators:
The National Association of Home Builders/Wells Fargo Housing Market Index rose two points to 18 in September from 16 in August. The August reading matched the record low reached in July. (Readings below 50 indicates that more respondents view market conditions as poor.)
The survey asks builders for their sentiments on current sales, traffic of potential buyers, and projected sales over the next six months. All the three components improved over the month. The index gauging current sales conditions increased to 17 from 16 in August, while the index gauging traffic of prospective buyers edged up to 14 from 13. The index gauging sales expectations for the next six months jumped to 30 from 24—the largest one-month gain since April 2003 and the highest reading since April.
All four regions posted increases in September. The Northeast led the gain with a six-point increase, while the Midwest, South and West each posted a two-point increase.
Rising consumer confidence, declining mortgage rates and the first-time home buyer tax credit have combined to improve builders’ confidence, according to NAHB. Nearly half of the builders in the survey expected to see a positive impact from the tax credit in their markets, while 20 percent already saw some of the impact.
Total housing starts fell 6.2 percent in August to a seasonally adjusted annualized rate of 895,000. Single-family starts dropped a modest 1.9 percent, reaching the lowest level since January 1991, while multifamily starts were down 15.1 percent, following a 26.8 percent plunge in July. Multifamily starts surged about 230 percent in June in the Northeast, reflecting a rush to start building activity before local building code changes took effect at the beginning of July. A huge decline in multifamily starts in the Northeast in July partially reversed that surge. In August, every region but the West showed sizable drops in multifamily starts.
Through the first eight months of this year, single-family starts were 39.7 percent lower than those in the first eight months of 2007. By contrast, year-to-date multifamily starts with five units and over were 11.2 percent higher than those last year. Year-to-date construction of structures with 2-4 units declined 45.6 percent.
Total permits fell 8.9 percent in August. Single-family permits—a leading indicator for single-family housing starts—dropped 5.1 percent following a similar drop in July. This marked the 16th decline over the past 17 months. The report also showed that the share of single-family starts intended for sale was about one third in the second quarter of 2008 (the rest were owner- or contractor-built units). This suggested that seasonally adjusted single-family starts intended for sale in August were around 420,000 units, well below the sales pace in recent months. Unless new home sales slip considerably going forward, the months’ supply (inventory-sales ratio) should decline slowly from the current level of about 10 months.
Economic Indicators:
Industrial production—the nation’s output from factories, mines and utilities—fell by 1.1 percent in August after edging up 0.1 percent increase in July. Manufacturing output dropped 1.0 percent in August, led by a plunge in motor vehicle and parts output. Business equipment production fell 0.6 percent—the biggest decline since April—driven by a large drop in transportation equipment production.
Utility output declined 3.2 percent, while mining output fell 0.4 percent. Capacity utilization fell a full percentage point to 78.7 percent, the lowest reading in four years.
The Consumer Price Index fell 0.1 percent in August after a 0.8 percent increase in July and 1.1 percent gain in June. From a year ago, the CPI was up 5.4 percent, edging down from 5.5 percent, which was the biggest year-over-year increase since January 1991. During the three months ended in August, the CPI has risen at an annual rate of 7.2 percent, compared with a 10.6 percent increase during the three months ended in July.
Excluding the volatile food and energy items, the core CPI rose 0.2 percent following a 0.3 percent gain in July. Over the past year, the core CPI was up 2.5 percent for the second consecutive month.
The Conference Board index of leading indicators—a gauge of future business activity three to six months ahead—fell 0.5 percent in August after dropping 0.7 percent in July. The index was at its lowest level since October 2004.
The Conference Board’s index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. A decline in building permits led the decline.
The biggest positive contributors included positive Treasury yield spreads and an increase in consumer expectations. The six-month annualized growth rate slipped to negative 2.1 percent from negative 1.6 percent.
The index is down 3.7 percent from its recent peak in January 2006. During the 2001 recession, the index posted a 3.6 percent peak-to-trough decline. Over the past three months, the index fell 4.2 percent (annualized rate) suggesting that the economy has decelerated quickly.
Weekend Developments
MBA (9/22/2008 ) Sorohan, Mike
The Mortgage Bankers Association said it welcomed efforts by the Treasury Department on steps taken in the past week to support liquidity in the financial markets and will work with leaders in the House and Senate in moving forward this week with legislation.
Treasury Secretary Henry Paulson Jr. this weekend announced a number of “powerful tactical steps” to increase confidence in the nation’s financial systems, including establishment of a temporary guaranty program for the U.S. money market mutual fund industry.
“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” Paulson said. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
Treasury said it would authorize Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities; and expand the MBS purchase program announced earlier this month to increase the availability of capital for new home loans;
“Right now, our focus is restoring the strength of our financial system so it can again finance economic growth,” Paulson said. “The financial security of all Americans—their retirement savings, their home values, their ability to borrow for college and the opportunities for more and higher-paying jobs—depends on our ability to restore our financial institutions to a sound footing.”
MBA Chief Operating Officer John Courson issued the following statement in response:
“The moves Secretary Paulson announced [Friday] to increase GSE and Treasury purchases of mortgage-backed securities should provide support for mortgage rates. The fear was that the illiquidity in the financial markets we have seen this week would have reversed the recent drops in mortgage rates.
“The broader steps outlined by Treasury are aimed at ending the further meltdown in the financial markets and are designed to minimize the resulting impact of the market turmoil on the broader economy. It is another step in the long-term process of restoring a balance between the supply and demand for housing in a number of markets and thus addressing the continuing problem of mortgage delinquencies and foreclosures.
“The mortgage finance industry looks forward to continuing to work with Congress and the Administration on this historic proposal.”
In other developments:
Fed Approves Switch of Goldman Sachs, Morgan Stanley to Holding Companies. The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.
In a statement, the Fed said the quick approval is designed to ”provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure.” The Fed authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility; the Fed has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.
In addition, the Fedalso authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF. The Fed statement can be viewed at http://www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm.
Treasury Clarifies Details of Guaranty Program. Treasury continued to clarify details involving the temporary guaranty program for money market funds that was announced on September 19:
1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.
2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19.
The Treasury statement can be found at http://www.treas.gov/press/releases/hp1151.htm.
Congress to Take Up Administration Plan
The House and Senate are expected to consider the Administration’s proposal to shore up the U.S. financial system with a series of hearings and possibly votes. Paulson has been working with House and Senate leaders over the weekend to reach an agreement on a bill; both the House Financial Services Committee and Senate Banking Committee, which hold jurisdiction over such legislation, will hold hearings this week; for more details, see the “Week Ahead” section of today’s MBA NewsLink.
GE the Lender Tries to Dodge Bank Wrecks Piling on Shore
Seattle Times (09/22/08); Lohr, Steve
The finance arm of General Electric–which includes property lending, home mortgages and credit cards and accounts for half of its profits–is putting pressure on the industrial giant. GE Capital entered the subprime mortgage lending market by acquiring WMC Mortgage in 2004 but, reacting to red flags, sold the business in 2007 and took a loss of about $1 billion. Robert Spremulli, an analyst at the investment company TIAA-CREF, says “that was a big mistake… but it wasn’t a disaster for GE.” The finance unit is still exposed, however, to residential mortgages and commercial real estate loans–although most are outside of the United States.