With a price tag of $100 billion required to forgive the principal of underwater Fannie Mae and Freddie Mac mortgages, the best bet for the government-sponsored enterprises and for taxpayers is for the GSEs to pursue a policy of principal forbearance, the Federal Housing Finance Agency said. This week, the FHFA released its analysis conducted in 2010 following numerous requests and an eventual threat of subpoena by House Democrats. The agency’s number crunchers found that “principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure.” As of June 30, 2011, Fannie and Freddie...

The non-agency MBS market sank to a record low in 2011, with just $27.59 billion in total issuance, although performance has steadied in the dwindling supply of outstanding deals. New issuance of non-agency MBS was down 56.6 percent from the level reached in 2010, ending a three-year string of modest gains. As has been the case since 2008, the vast preponderance of new issuance involved seasoned collateral – either whole loans or repackaged MBS. Over half (52.3 percent) of non-agency MBS issued in 2011 were re-securitizations, yet the volume of such deals was down 75.2 percent from...(Includes two data charts)

There has been little progress in the development of new ways to pay for credit ratings even though researchers have seven proposed systems designed to address the conflicts of interest that have plagued the non-agency MBS market, according to a new Government Accountability Office report. The GAO noted that there were five significant ratings compensation models when it last reported on the subject in 2010, and two more have since been proposed. But the authors of these models have done little additional work to flesh them out, and none has been adopted in the marketplace, the GAO said. “Given that the [rating...

New research is helping foment pervasive rumors about a massive government refinancing of agency-backed mortgages intended to bolster – or replace – the underperforming Home Affordable Refinance Program for underwater Fannie Mae and Freddie Mac borrowers. Earlier this month, industry watchers began to speculate about possible HARP changes following a note by the Washington Research Group’s Jaret Sieberg – picked up by an American Enterprise Institute blog posting – that predicts President Obama will appoint a “housing advocate” to the Federal Housing Finance Agency via a recess appointment. Such an...

Insurance companies will likely increase their investment in non-agency residential MBS, with market and regulatory influences encouraging movement toward hybrid and floating-rate securities as opposed to fixed-rate bonds, according to some top securities industry analysts. The primary driver on the regulatory level is the anticipated slight rise in capital requirements expected to result from a recent action by the National Association of Insurance Commissioners, the association of state insurance regulators. On Dec. 27, 2011, the NAIC released updated pricing designations that...

Principal reduction to ease negative equity situations may have a lot of positive effects for homeowners, but recent research suggests it may have little impact on worker mobility. A forthcoming working paper by Sam Schulhofer-Wohl, of the Federal Reserve Bank of Minneapolis, contends that research showing underwater borrowers are 33 percent less likely to move to better employment markets is flawed because it ignores key data. In an analysis of Census Bureau housing data, Schulhofer-Wohl reached the opposite conclusion, that underwater borrowers are more likely to move, suggesting that principal...

Redwood Trust is set to issue a $415.73 million non-agency jumbo mortgage-backed security by the end of this month, continuing its run as the only issuer of new non-agency MBS. Unlike its three previous securities issued in 2010 and 2011, the real estate investment trust has faced little criticism from rating services regarding the characteristics of the new MBS. Fitch Ratings and, in a first, Kroll Bond Rating Agency are set to place AAA ratings on Sequoia Mortgage Trust 2012-1, which includes a pool of 30-year fixed-rate mortgages, ARMs and 15-year fixed-rate mortgages, 446 loans in all. Standard & Poor’s and Moody’s Investors Service were critical of Redwood’s previous deals and will not place ratings on the new issuance ...

Well-known jumbo originators contributed most of the collateral for Redwood Trust’s pending $415.73 million non-agency mortgage-backed security, but a handful of smaller lenders also benefitted from Redwood’s jumbo correspondent program. These lenders have little securitization experience but received strong endorsements from rating services and due-diligence firms. Redwood purchased most of the loans to be included in Sequoia Mortgage Trust 2012-1 on a flow basis, according to Kroll Bond Rating Agency. Flagstar Bank led the smaller originators, with $31.84 million of its loans included in the security ...

Only five non-agency mortgage-backed securities were issued in 2011 that were not re-securitizations, servicer advances or agency-related deals, according to the Inside Mortgage Finance MBS Database. Some $27.59 billion in non-agency MBS were issued in 2011, nearly all of which was re-MBS. The five transactions, totaling $1.31 billion, accounted for 4.7 percent of all non-agency MBS issued in 2011. The $1.31 billion in issuance was nearly evenly divided among newly originated jumbo mortgages included in two securities issued by Redwood Trust and three securities backed by seasoned loans from other issuers ... [Includes one data chart]

Congress should repeal legislation raising the FHA’s maximum loan limit before the agency’s losses skyrocket, triggering a massive taxpayer bailout, warned the American Enterprise Institute. In a new research paper, Peter Wallison and Edward Pinto, resident fellows at the AEI, urged Congress to correct its mistake of restoring the pre-Oct. 1 temporary maximum loan limits of $729,750 for FHA while leaving Fannie Mae and Freddie Mac at the lower “permanent” high-cost loan limit of $625,500 set by Congress in 2008. “Congress should bite the bullet – recognize the losses that are already embedded in the FHA’s insurance fund and adopt reforms to the agency’s accounting and underwriting that will stop the bleeding,” the two public policy analysts said. Last fall, the FHA came under fire from Republicans and conservatives after an independent actuarial review of the agency’s Mutual Mortgage Insurance Fund found ...