http://online.wsj.com/article/SB120632558989958655.html?mod=hpp_us_whats_news
Who Says You Can't Go Home Again?
By Diya Gullapalli
Monday, March 24, 2008
For 27 years, former Countrywide Financial Corp. President Stanford Kurland made a fortune helping to build a mortgage-lending empire. Now, as parts of the mortgage market collapse, Mr. Kurland and some former colleagues have a new plan -- make another fortune on the way down.
On Monday, the group will announce the launch of Private National Mortgage Acceptance Company LLC, or PennyMac, an investment firm formed as a joint venture between asset manager BlackRock Inc., under Chief Executive Laurence Fink, and Boston investment firm Highfields Capital Management.
PennyMac seeks to raise more than $2 billion to buy distressed mortgages.
Published: March 24, 2008
http://realtytimes.com/rtpages/20080324_washingtonreport.htm
Washington Report: Buying Bonds and the Mortgage Market
by Kenneth R. Harney
Amid the scary financial headlines last week, there were some less-publicized developments in Washington that bode well for the home real estate market in the months ahead.
Federal regulators last Wednesday gave the go-ahead for Fannie Mae and Freddie Mac to buy an extra $200 billion in mortgage securities -- a move that pushed down interest rates for home buyers and refinancers almost immediately.
At the same time, the 12 Federal Home Loan Banks prepared a plan that could allow them to buy an additional $160 billion in mortgage bonds.
Now you might ask: How does buying bonds help the mortgage market … or trickle down to help real estate sales?
Here's how: The biggest challenge in the capital markets right now is what economists call "illiquidity," which means that large U.S. investors aren't able to sell their mortgage bond holdings because global investors have lost confidence in their safety.
Now in reality, most of the mortgages in these illiquid loan pools are paying on time and often are not even subprime credit. But global investors still won't touch them because they got so badly burned in the subprime crash.
The new moves by Freddie and Fannie to buy up some of these securities are designed to break the logjam and get the secondary mortgage market flowing again. The same is true for the Federal Home Loan Banks.
So: We're looking at the prospect of up to $360 billion of fresh capital injected into the market. Who benefits?
Number one: Just about anybody looking for a mortgage. After the Fannie-Freddie deal was outlined in Washington last week, 30-year fixed rates dropped by anywhere from an eighth to a quarter point.
Rates fell back below 6 percent -- after hitting the mid sixes last month.
Another set of beneficiaries are likely to be thousands of financially-distressed homeowners with loans they can't afford. Fannie and Freddie promised to help some of these homeowners get into fixed-rate mortgages that they CAN afford.
Home buyers in high cost California and along the Eastern seaboard should also benefit: Part of the $200 billion is expected to finance some of the new "jumbo" mortgages authorized by the economic stimulus legislation through December 31 -- those are the big ones that go as high as $729,750.
At a time when the private capital markets are choked up with fear, moves by federal regulators to prime the pump and get fresh money into the housing market can only be a plus.
Which forces us to say: Now and then, amazingly enough, Washington works!
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http://www.bloomberg.com/apps/news?pid=20601087&sid=aIwBGxMWsNE4&refer=home
Fed May Buy Mortgages Next, Treasury Investors Bet
By Daniel Kruger
March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.
``An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,'' said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue ``debt that's backed by the U.S. government and there you go, you've unclogged the drain,'' he said.
Bill Rates Plunge
New York Life Investment Management is considering buying ``high-quality mortgages,'' said Thomas Girard, a money manager at the New York-based insurer. ``At some point here you've got to increase your allocation to non-Treasury securities.''
Mortgage bonds rallied last week. Yields on the securities fell to an average of 1.25 percentage points more than Treasuries from 1.57 percentage points on March 14, according to Merrill Lynch & Co.'s Mortgage Master Index. The so-called spread is still twice as wide as the average for all of 2007.
Investors, averse to holding most any debt except Treasuries, drove rates on three-month bills to 0.387 percent on March 20, the lowest since 1954. Rates on the securities, the safest assets next to cash, tumbled 0.59 percentage point last week to 0.57 percent. They were as high as 4.29 percent as recently as Oct. 15. The rate was 0.68 percent as of 1:59 p.m. in Tokyo.
`Very Helpful'
``Something like that would be very helpful, but the Fed was not designed to and shouldn't assume a huge amount of risk on behalf of taxpayers,'' said Alan Blinder, a Princeton University professor and former vice chairman of the central bank. ``That should come out of the elected parts of the government, which means the administration and Congress.''
President George W. Bush and Treasury Secretary Henry Paulson have resisted calls urging the use of government funds or guarantees to stem a record amount of mortgage foreclosures, the root of the financial crisis, preferring that the markets resolve the trouble. Bush said March 15 he wanted to avoid ``bad policy decisions'' that would do more harm than good.
President George H.W. Bush, the current president's father, signed the 1989 law which created the RTC to dispose of the assets of insolvent savings and loans banks. From 1986 through 1995, 1,043 savings banks with over $500 billion in assets failed, costing taxpayers $75.6 billion, according to a Federal Deposit Insurance Corp. analysis.
Joint Action
The Fed, the Bank of England and the European Central Bank are exploring the feasibility of using taxpayers' money to shore up the mortgage-backed securities market, the Financial Times reported on March 22, without saying where it obtained the information. A Fed official denied to Bloomberg News that day that it's in discussions to buy mortgage debt.
Smaller steps are already being taken. The Bush administration reduced the amount of capital Fannie Mae and Freddie Mac are required to hold as a cushion against losses. The March 19 agreement allows the government-chartered companies, the largest sources of money for U.S. home loans, to expand their purchases of mortgages by as much as $200 billion.
The Fed has also lowered borrowing costs, opened the so- called discount window to investment banks and arranged the sale of Bear Stearns Cos. since March 16 to ease financial-market turmoil. The world's biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to subprime mortgages and collateralized debt obligations as of March 20, according to data compiled by Bloomberg.
`Done That Already'
JPMorgan Chase & Co. agreed to pay about $240 million for the fifth-largest securities firm in a transaction that includes as much as $30 billion of financing provided by the Fed for Bear Stearns's ``less-liquid'' assets.
``In a sense they've done that already with Bear Stearns,'' Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments, said of the government taking on the risk of owning mortgage securities. ``This was not just a temporary situation. The process has begun, the question is how far can it go?''
Franklin Templeton manages $110 billion of bonds. Materasso is based in New York.
A March 13 proposal by Senator Christopher Dodd and Congressman Barney Frank that the Federal Housing Administration insure refinanced mortgages after lenders reduce the loan principal to make payments more affordable to homeowners ``is the next step,'' Senator Charles Schumer, a New York Democrat, said in a Bloomberg Television interview on March 19. It's a ``broader step, but not as broad as RTC,'' he said.
For Pimco's Gross that's not enough. ``If Washington gets off its high `moral hazard' horse and moves to support housing prices, investors will return in a rush,'' he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn't return calls seeking additional comment.
An RTC-like entity may not be ``the best idea, but maybe it's the idea that gets us through this,'' said New York Life's Girard. ``The likelihood of it happening has certainly increased.''
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
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