Subprime bond investors blase on Bush mortgage plan
NEW YORK (Reuters) - A federal plan to aid struggling U.S. homeowners is seen as too little, too late for investors saddled with soaring mortgage-related losses.
The plan to jump-start legislation to overhaul the Federal Housing Administration (FHA) is aimed at giving borrowers at the brink of default an option at refinancing to a loan with better terms. Bush's decision to step in comes as forecasts predict delinquencies will worsen and lenders clamp down on who they lend to, creating more economic head winds.
But the weight of problems with subprime loans that could send as many as 1.4 million loans into default is overwhelming to a plan the administration says may help an additional 80,000 homeowners refinance, said Michael Youngblood, a managing director at FBR Investment Management in Arlington, Virginia.
The plan projects "marginal results relative to a problem that is growing and likely to continue to grow through the next year," Youngblood said. "One is grateful that 80,000 people will keep their homes, but you will forgive the markets for not over-reacting."
The ABX-HE 2007-1 "BBB-" subprime loan index rose 2 points to about 34.5 on Friday after the Bush plan hit media outlets. The index, one of the only visible ways to track prices in the opaque, over-the-counter market, has lost more than half its value since May and hit a record low close at 31.96 on Thursday, according to Markit Group Ltd.
Investors in the $7.2 trillion mortgage market have been battered in the past year as the rate of delinquency on loans of subprime quality has surpassed expectations. Rising monthly payments for millions of homeowners and reports of falling home prices have left them girded for more losses, and unbudged on bearish positions despite the government's intentions.
The bond market is still being flooded with loans made in 2006 when underwriting had grown particularly lax, Youngblood said.
Most subprime loans were packaged into bonds by Wall Street underwriters such as Bear Stearns Cos. BSC.N, which during the low-interest rate housing boom period found buyers had insatiable appetites for the high yielding debt. Lenders finding Wall Street alternatives were cheaper and less cumbersome than FHA programs steered loans that way, reducing the collateral available for Ginnie Mae securities.
FHA loans are securitized through Ginnie Mae, a government-owned corporation.
Ginnie Mae securities slipped relative to bonds issued by other "agency" issuers Fannie Mae and Freddie Mac on Friday as traders worried that more volume from government programs would erode scarcity value. The negative reaction contrasts with the mildly positive move in the subprime ABX index, and underscores vast differences between agency and subprime mortgage markets that appeal to different investors and are followed by an entirely different set of traders and analysts.
Beyond the niche of Ginnie Mae bonds, the effort to steady the U.S. housing market seemed of little help after a week of downbeat news from home builders, lenders and regulators. Home price indexes released this week found prices stagnant or falling in the second quarter, leading economists at Lehman Brothers Holdings Inc. LEH.N to call for steeper declines in the coming year.
The reactions are also muted since many money managers are already on holiday ahead of the U.S. Labor Day weekend.
"There's not a lot of trading activity, but nonetheless dealers are comfortable offering their markets higher" on the prospect of Bush's "modest intervention," said Christopher Sullivan, chief investment officer for the United Nation's pension funds in New York.
U.S. stocks surged after Bush announced his mortgage plan, which followed by minutes a pledge by Fed Chairman Ben Bernanke that the central bank would take steps needed to shelter the economy from financial market upheaval. The Bush speech was a psychological boost but did not leave investors believing the plan would have immediate results, said David Straus, a portfolio manager with Johnston Lemon Inc. in Washington.
Bush has also been trying since February 2006 to renew interest in FHA programs. Legislation introduced in April 2006 passed the U.S. House of Representatives last year but was stifled in the Senate.
More helpful to homeowners would be a cut in the key federal funds interest rate controlled by the Federal Reserve, a move advocated by FBR's Youngblood and scores of industry executives in recent days. Interest rate futures markets are signaling that investors believe the Fed will cut the rate by a quarter percentage point to 5 percent by its September 18 meeting.
If Fed rates are lowered, the markets would "re-liquify, risk premiums would abate and people would be able to refinance," Youngblood said.
(Additional reporting by Kristina Cooke and Julie Haviv in New York, and Patrick Rucker in Washington)