11.25.2015 Why I Support New Legislation That Would Block Proposed FHLB Membership Rule Changes

Since the Federal Home Loan Banks (FHLB) were first established in 1932, insurance companies have always been allowed to be FHLB members. Insurance companies have historically been active participants in providing capital to the home mortgage markets both through whole loans and through investments in the mortgage backed-securities (MBS) markets.

But the Federal Housing Finance Agency (FHFA) would like to change this. Late last year, the FHFA issued a proposed rule that would prohibit captive insurance companies from becoming FHLB members. The primary type of captives impacted by this rule are those that are owned by real estate investment trusts (REITs).

Public Opposition to the Change

Since the FHFA’s proposed rule was issued last year, the agency has received more than 1,300 comment letters. Not surprisingly, the vast majority of these letters have opposed the change in FHLB membership requirements.

Now, Congress has stepped in to try to stop the FHFA from what several representatives have said is an overreach of its authority. A bipartisan bill was introduced in the House of Representatives last month that would stop the FHFA’s proposed rule dead in its tracks.

“Congress, not the Federal Housing Finance Agency, has historically decided the membership requirements of Federal Home Loan Banks,” stated one of the representatives who introduced the bill. “While conversations around membership in the system are valuable, decisions should not be made in a vacuum. They should be made by Congress and based on public input and extensive analysis.”

Importantly, the bill would also require the Government Accountability Office to study the impact the proposed FHFA membership revisions would have on the Home Loan Bank system and its members. And it would require the GAO to review the FHFA’s legal authority to exclude any class or category of insurance company from FHLB membership.

In addition to excluding captive insurance companies and REITs from FHLB membership, the FHFA proposed rule would also require all financial institution members to maintain a minimum level of assets in mortgage-related activity in order to retain their membership.

The FHFA’s and MBA’s Positions

For its part, the FHFA has said that it hopes to finalize the final rule by the end of this year or early next year at the latest. Meanwhile, industry groups like the Mortgage Bankers Association are happy that Congress is actively trying to stop what they consider to be a potentially damaging new rule from the FHFA.

“This legislation would preserve today's membership and prevent costly disruption by ensuring community banks and captive insurers remain members of their regional Home Loan Bank,” stated the president of the MBA, David Stevens. “Captive insurers facilitate substantial investment in the housing finance market, and mortgage REITs represent a growing and necessary segment of the housing finance market. Their access to the Federal Home Loan Bank System facilitates greater credit availability while simultaneously reducing financial risk to the taxpayer.”

Count me in agreement with David Stevens. I believe the FHLB should be allowed to continue offering membership to captive insurance companies. This will allow REITs to tap into the FHLB cost of funds, which is important to the success of mortgage REITs.

So I hope Congress is successful in its efforts to stop the proposed FHFA membership rule changes. I’ll keep you posted on the progress of the legislation in future blogs.

We’re interested in hearing from you. What do you think about the legislation to block the FHFA’s proposed membership rule changes? Send me an email at steven@lendtrade.com.

11.17.2015 What Might Google’s and Apple’s Car Initiatives Mean for the Automobile Industry?

Apple and Google are two of the most recognized and iconic technology brand names in history. Apple, of course, brought us the iPod, iMac, iPad and just about anything else with an ‘i’ in front of it, while Google revolutionized the search engine and became synonymous with looking up anything on the Internet (as in “just Google it.”).

Now, it appears that both of these tech titans could be on the verge of branching out beyond their technology roots into a brand new industry: automobiles. If Apple and Google eventually have the same impact on the automobile industry that they’ve had on the technology industry, the car industry could look very different in the not-too-distant future.

Bringing High-Tech to Automobiles

Not surprisingly, Google isn’t content to just build a normal car — they are on the leading edge of developing self-driving vehicles. Google has built a test fleet of self-driving cars that can be spotted on the roads in Mountain View, Calif., and Austin, Texas — the company claims its self-driving cars have already driven more than one million miles.

At this point, Apple’s foray into the car industry is more speculation than established fact. During a recent interview, Apple CEO Tim Cook wouldn’t confirm or deny that the company is working on developing a prototype car, repeatedly dodging the question. This isn’t surprising, given Apple’s super-secretive nature when it comes to new product development. But there’s plenty of buzz in technology and automobile circles about this, with The Onion even creating its own satirical version of a so-called iCar.

Other hints at Apple’s possible intentions when it comes to developing a new car are open speculation about it by billionaire investor Carl Icahn (who owns 52 million shares of Apple stock), the recent hiring by Apple of several prominent auto industry executives, and speculation that Apple is looking for sites where it can test self-driving vehicles.

Those who are convinced that Apple is secretly working on developing a self-driving iCar believe it could be introduced as soon as 2019. It would be, in the words of Icahn, “the ultimate mobile device.”

Already Making Inroads

Both Google and Apple have already made some inroads into the car industry. Each has rolled out a program that integrates their mobile operating systems with car dashboards: Android Auto and CarPlay. Most auto manufacturers have announced that their new vehicles will be compatible with one or both programs.

Once an Android or iPhone is plugged into a vehicle with Android Auto or CarPlay installed, the car’s in-dash display reflects the apps on the phone. Navigation, contact lists, phone calls, text messages, music and more are then accessed by drivers via the phone, not an in-dash computer.

Analysts say that these programs are just one more way for Google and Apple to enable Android and iPhone users to use their devices more safely while driving. “They don’t want to lose you just because you happen to be sitting behind a steering wheel,” notes Sam Grobart of Bloomberg BusinessWeek in a video on Bloomberg.com.

Meanwhile, automakers are happy about these programs because they take the onus off of them when it comes to installing technology into new vehicles — the results of which have been “decidedly mixed,” said Grobart in the video. And drivers don’t have to learn their car’s new interface — they can use the same interface in their car that they use (and are comfortable with) on their phone.

Will Google’s and Apple’s ventures into the auto industry be successful? Only time will tell. But if their history in technology is any indication, it might not be wise to bet against them.

We’re interested in hearing from you. What do you think about Google’s and Apple’s entry into the car industry? Send me an email at steven@lendtrade.com.

11.10.2015 Jumbo RMBS Issuance Grows in 2015

What This Means for the Housing and Mortgage Industries

In the aftermath of the financial crisis, issuance of jumbo residential mortgage-backed securities in the U.S. fell off a cliff. There was only one jumbo RMBS transaction in 2010, worth just $200 million.

Since then, we’ve seen slow but steady growth in the issuance of jumbo RMBS, with issuance peaking in 2013 at 31 transactions worth $13.1 billion. Issuance fell off last year to 26 transactions worth $8.3 billion, due primarily to the fact that whole loan bids were generally more attractive than securitization last year.

However, jumbo RMBS issuance is back on the upswing this year, according to a report from Fitch Ratings. There were 29 transactions in 2015 worth $10.1 billion through the end of the third quarter alone, already surpassing last year’s totals. This puts jumbo RMBS issuance on track to meet and possibly surpass 2013’s numbers.

A Strong First Half

This year started off with a bang, with 12 jumbo RMBS transactions in the first quarter alone and 10 in the second quarter. Things slowed down a little in the third quarter with just 7 transactions from six issuers.

According to the Fitch Ratings report, the increased transaction volume is indicative of more issuers becoming active in the market. The report notes that eight different issuers had issued prime jumbo RMBS through the end of the third quarter, compared to just seven issuers all of last year.

During the third quarter of this year, prepayment speeds declined and mortgage rates rose above 4 percent during the summer before dipping again in the fall. The Fitch Ratings report notes that prepayment speeds could continue to decline along with the percentage of loans with refinance incentives. This is especially true given the impending Fed rate increase either later this year or early next year.

“The slowly increasing pace of new RMBS issuance reflects more issuers willing to tap the market,” commented Fitch Director Sean Nelson.

What’s It Mean?

So what do these numbers mean? For starters, it’s clear that more jumbo mortgages are now getting securitized than at any time since the financial crisis. This is a positive sign when it comes to the mortgage markets beginning to heal.

In addition, this also suggests that investor demand is returning for securities backed by non-agency mortgages — these have been lukewarm at best since 2008. In order for the housing market to really get legs, we need a robust securitization market for loans that stand on their own.

Fannie Mae and Freddie Mac are essentially credit enhanced by the government, but jumbo mortgages aren’t. Therefore, growth in jumbo mortgages is a clear indication that the appetite for taking mortgage risk is improving. And that’s good news for the housing and mortgage industries.

We’re interested in hearing from you. What do you think the rise in issuance of jumbo RMBS means for the housing and mortgage industries? Send me an email at steven@lendtrade.com.

11.4.2015 Are Millennials Ready to Start Buying Homes?

A lot has been written recently about how Millennials don’t want to buy homes and the impact this is having on the housing market. There are about 75 million Millennials in the U.S., who are defined as those between 18 and 29 years of age.

Myriad reasons are listed for Millennials’ apparent aversion to home ownership. For example, they are waiting longer to get married and have kids, they are still spooked by the burst housing bubble, they have lots of college debt, their job prospects are dim, or they prefer the freedom that renting affords them.

As Forbes.com put it in the headline of a recent article: “Young people can afford homes — they just don’t want to be homeowners.” The article cites a recent report from Zillow noting that first-time homebuyers are now waiting an average of six years to make the transition from renting to owning a home.

Plummeting Home Ownership Rate

One result of all this is a home ownership rate that recently dropped to a 48-year low, the Forbes.com article notes, while home ownership among Millennials stands at just 36 percent. In addition, a relatively low demand for new homes has put housing starts 25 percent below the 30-year average, even though home prices are rebounding nicely in many areas of the country.

But there are some signs that this trend might be starting to change. In a recent survey conducted by real estate website Trulia, nine out of 10 Millennials (93 percent) said that they do want to own a home in the near future. But when asked about their priorities in life, only 20 percent listed home ownership. In comparison, 52 percent listed having a successful marriage and 32 percent listed being a good parent as their top priorities.

“We are at the beginning of a multiyear period where more young people become homeowners,” stated the chief economist Trulia in an article on BloombergBusiness.com earlier this year.

One factor that might start pushing more Millennials into the home buying market is the soaring cost of renting in many areas of the country. Rental vacancy rates recently hit a 21-year low, which is giving landlords more leverage to charge higher rents. Millennials who can save enough for a down payment can sometimes pay less per month on a mortgage than they would pay in rent while also starting to build home equity.

The uncertainty surrounding interest rates is another factor affecting Millennials’ home buying decisions. While the Fed is still holding off on a rate increase, everyone knows it’s not a matter of if, but when, rates eventually start to rise. Some Millennials say they would like to buy a home while mortgage rates remain historically low.

Where Millennials Are Buying

According to CNNMoney.com, the top 10 homebuying markets for Millennials are:

  1. Des Moines, Iowa
  2. Provo, Utah
  3. Baton Rouge, La.
  4. Pittsburgh, Pa.
  5. Lafayette, La.
  6. Grand Rapids, Mich.
  7. Madison, Wis.
  8. Clarksville, Tenn.
  9. New Orleans, La.
  10. Shreveport, La.

Interestingly, four of these top 10 cities for Millennial homebuyers are in Louisiana. It’s also worth noting that none of these is a particularly large or expensive city. In six of them, the median home price is under $200,000, and only in Provo is the median home price over $300,000.

On the Other Hand…

On the flip side, a recent Fed study recommends that Millennials postpone buying a home for up to a decade or longer if it will stretch their finances too far. Millennials should “delay purchase of a home with its attendant debt burden until it was possible to buy a house that did not make the family’s balance sheet dangerously undiversified and highly leveraged,” according to the study.

Of course, every Millennial’s situation is different. But this will be an interesting development to watch in the coming months for those who follow the real estate and mortgage lending industries closely.