Bond investors see Obama win fueling refinancing risk: Mortgages

, Bloomberg

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President Barack Obama’s re-election sent debt yields tumbling and stoked speculation his administration would seek more aggressive measures to boost housing that would lead to an increase in home-loan refinancing.

Real estate investment trusts that buy mortgage debt tumbled the most in a year on concern that more homeowners would be able to prepay mortgages, while lower yields on new investments would squeeze the firms’ earnings and dividends. The policies of Obama and the Federal Reserve, whose chairman Republican challenger Mitt Romney had said he would replace, have expanded opportunities for homeowners to qualify for new loans while last month sending borrowing costs to record lows.

‘The continuation of the policies that started last year or so are basically assured now,” said Vitaliy Liberman, a portfolio manager at Los Angeles-based DoubleLine Capital LP, which oversees more than $45 billion.

Government-backed mortgage bonds used by lenders to package and sell new loans rallied yesterday along with Treasuries, on speculation Obama’s win will make it tougher for politicians to avert a so-called fiscal cliff of spending cuts and tax increases, fueling a flight to the safety of government securities, and make it easier for the Fed to support the economy by buying the debt and restraining short-term rates.

Expanding Refinancing

Obama’s administration may do more to boost housing, which led the U.S. into recession and is now rebounding after a six- year slump. That recovery helped the president win in swing states such as Nevada and Colorado.

This includes expanding programs to help homeowners refinance, including the Home Affordable Refinance Program for borrowers with little or no home equity. Obama also may consider replacing the acting overseer of Fannie Mae and Freddie Mac, who has opposed principal forgiveness on loans they guarantee.

“We view housing as a clear winner following the election results,” said Edward Mills, an analyst at FBR Capital Markets.

Still, even as housing has shown signs of improvement, 10.8 million Americans owe more on their mortgages than their homes are worth, according to CoreLogic, Inc., 3.8 million home loans are at least 90 days delinquent, according to the Mortgage Bankers Association, and prices are still 29 percent below the July 2006 peak, according to the S&P/Case-Shiller Index.

‘Challenging Time’

“We’ve been through a very challenging time and there’s a lot of people still struggling out there,” said Bill Roth, chief investment officer at Minnetonka, Minnesota-based Two Harbors Investment Corp., a mortgage REIT with $8 billion of assets. “The administration is still very focused on helping homeowners, helping borrowers, putting more money in people’s pockets.”

Two Harbors, which has some investments that could benefit from housing gains, has also bought prepayment-protected Fannie Mae and Freddie Mac securities that will help it avoid having to reinvest in debt at lower rates. It increased its holdings of bonds backed by loans that have already been through HARP and are now excluded from tapping the program again, by $2.1 billion last quarter.

Bondholders paying more than face value for securities risk losses if enough homeowners take out new mortgages to repay their existing debt.

Rates on 30-year mortgages, which reached a record low of 3.36 percent last month, will probably be 0.1 percentage point lower under Obama before the election, Bank of America Corp. analysts led by Chris Flanagan wrote in a report last week.

Falling Rates

“Treasury rates are falling and primary mortgage rates may continue to fall as well,” said Walt Schmidt, a mortgage strategist in Chicago at FTN Financial, the brokerage unit of First Horizon National Corp. “The market is concerned because Obama won that he is going to be more inclined to provide refinancing relief to borrowers.”

Annaly Capital Management Inc., the largest mortgage real estate investment trust, is bracing for a higher level of prepayments as Obama continues to adjust policies.

Under Obama’s leadership, “we potentially see more policy meddling,” Wellington Denahan-Norris, chief executive officer of Annaly with $141.6 billion of assets as of Sept. 30, said this week on a conference call.

Annaly fell 2.7 percent yesterday to $14.91, adding to a 10 percent decline through Nov. 6 since the Fed in September started acquiring $40 billion of mortgage bonds a month to boost the economy. The Bloomberg index of REITs dropped 7.8 percent from the Fed’s announcement through yesterday.

Home Prices

Single-family home values are climbing after a six-year slump as buyers compete for a shrinking supply of properties listed for sale. U.S. house prices jumped 5 percent in September from a year earlier, the biggest 12-month increase since July 2006, CoreLogic Inc., an Irvine, California-based real estate data provider, said this week.

Legislation to expand HARP may not be required as the program is already exceeding expectations. Refinancing of higher-rate mortgages driven by the program reached new highs last month, beating the forecasts of analysts at JPMorgan Chase & Co., Credit Suisse Group AG, Barclays Plc, and Royal Bank of Scotland Group Plc.

The program is already being changed. Adjustments in September that lowered lenders’ risks of having to repurchase bad loans because of appraisal mistakes may have fueled some of October’s gains, Credit Suisse analysts led my Mahesh Swaminathan and Barclays analysts led by Nicholas Strand wrote yesterday in reports.

DeMarco Replacement

Obama probably will put forward a new head of the Federal Housing Finance Agency to replace Edward DeMarco, the current acting director, “as part of a broader package of financial regulators,” said Isaac Boltansky, an analyst for Compass Point Research & Trading LLC. The new leaders would not be confirmed until the second quarter of 2013, he said.

DeMarco has sought to reduce Fannie Mae and Freddie Mac’s role in the market as lawmakers failed to take action. One measure has been to increase the fees they charge to guarantee mortgage securities.

“Given that the FHFA has consistently been trying to make it easier for HARP borrowers to refinance over the last year, we think that some minor tweaks to HARP will be in the cards even if Ed DeMarco is not replaced,” Citigroup Inc. analysts led by Ankur Mehta said.

California Senator Barbara Boxer and Senator Robert Menendez of New Jersey, both Democrats, have pushed for an expansion of aid to homeowners.

HARP Expansion

A bill written by Menendez and Boxer would expand the HARP program with measures including more relief for lenders from repurchase requirements.

“The bill is a no-nonsense fix to the HARP program,” Boltansky said. “While HARP has helped about 1.5 million people, it still hasn’t come close to its potential. They estimate 3 million more people will be able to refinance under this bill.”

Obama’s election also means the mortgage interest tax deduction won’t be touched, said Chris Macke, senior real estate strategist at CBRE Group Inc.’s global research and consulting division in Boston. The credit reduces the cost of owning a home “significantly,” Macke said.
 

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