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RMBS: Who is the Servicer? (And Does it Matter)
Wednesday, January 25 2012 | 08:08 AM
NEWOAK CAPITAL LLC
|There are no national mortgage servicing standards. Score cards based on actual observed performance indicate servicing standards matters substantially. In the case of RMBS servicing data doesn’t lie.
Performance varies dramatically along various measures such as modification, short sale, balance reduction, foreclosure procedures & time lines, stop advancing, and REO liquidation strategy and recovery rates. They all affect magnitude and timing of cash flows that flow through RMBS waterfall.
The servicing industry is going through another wave of consolidation for non-agency sector. This creates variations in trends in even pools post transfer, not to mention servicing interruption impact.
Servicers’ incentives and economics are critical to the loss mitigation, default management process, hence recovery performance. Under current model (fixed-fee), servicers don’t have much incentives to dedicate optimal resources as their fees are limited. The performance is also affected by volume of troubled loans and corporate strength. The legacy servicing fee model is being questioned by regulators and investors for future securitizations and is expected to change.
There are several proposals to create an alignment of interest and better servicing incentives. Until then investors need to take that into account security by security and servicer by servicer.
0 Comment | Add Comment(s) | RMBS, Servicing_standards, Economy, Investing, |
Volatility in 2012: Will It Linger Longer?
Tuesday, January 17 2012 | 10:18 AM
NEWOAK CAPITAL LLC
|While European woes have led to investors’ fears and market volatility, a host of other hazards pose potential dangers. Despite the US markets recent positive trends in GDP and employment, key uncertainties remain: housing market, foreclosures, budgetary political impasse, tougher regulations and legacy mortgage litigations. We should not forget that several trillion in planned budget cuts are still ahead. The impact of the slowdown in BRICs, jointly due to the European crisis and their own natural economic evolution, may not be compensated by the US economy and emerging markets.
The potential in rapidly expanding BRICs’ credit markets, particularly in China, should be watched. As an example, the first domestic AAA default in China had the potential to send shockwaves through the Chinese economy but was cured by the bond guarantor. The Arab Spring, Egypt’s election, and potential Iranian blockade of Strait of Hormuse are still looming.
0 Comment | Add Comment(s) | Europe, BRICs, Economy, US_markets, China, Investors, |
How to Finance Infrastructure and Clean Energy Investments
Tuesday, September 06 2011 | 08:17 AM
|Investments in clean energy and infrastructure projects can help address the unemployment problem and make American business more competitive. The challenge is financing these investments in the current environment. There is a creative solution available that does not require new taxes, printing more money, or increasing the deficit.
The President is set to propose investments in infrastructure and clean energy in his jobs speech next week. There are several reasons that make spending on infrastructure and clean energy a good idea at this time: the jobs created are local and cannot be exported, the jobs created are in sectors like construction that are facing higher unemployment, it generates demand for products and services from a variety of industries creating more jobs, deteriorating US infrastructure is sorely in need of maintenance, and now is a good time to make these investments as raw materials and labor are cheap (maintenance is necessary and overdue - not doing it now just means that it will have to be done at a later time when it will likely cost more).
Even though infrastructure investment is a good idea, it faces two big problems.
First is the need to finance these investments. With the focus on reducing deficit, it will be difficult to get everyone to agree on spending money on these projects. The President has made similar proposals in the past. Republicans are almost certain to oppose more spending and any taxes to pay for it this time too. The bankruptcy filing this week by the solar power panel maker Solyndra, which had $527 million in loans from Federal government, and had been praised by the President, will be held up as an example by many of a poor government investment that put public money at risk, and a reason why government should not get involved.
The second problem is picking projects that are productive and not just a waste of money. Government may not be the best judge for picking the best projects.
The solution to both problems is increased involvement of private sector.
However, to get the private sector to invest in infrastructure projects, the government has to provide incentives, but in a way that does not increase deficit or taxes. One creative possibility for doing this may be by using the estimated $1 trillion of unrepatriated profits US companies hold in foreign subsidiaries.
American companies can generally defer paying taxes on foreign profits as long as they keep the money outside US. When they bring the money back to US, they have to pay the top corporate tax rate of 35%. To defer taxes, US companies generally have left large sums of profits in their foreign subsidiaries. These untaxed profits are part of the reason large multinationals have lower overall tax rates for which they have been criticized at times.
The administration has proposed taxing worldwide income of US companies, but faced strong opposition since that would put the US companies at a competitive disadvantage.
On the other end, US companies are arguing that they could bring back the earnings in their foreign operations if the US government offered a tax amnesty and permitted them to repatriate foreign earnings at a low rate of around 5% instead of the 35% federal tax they face at present. They argue that 5% tax could bring $1 trillion back to US for increased economic activity and could generate additional $50 billion in federal tax revenue.
The tax amnesty will not result in an increase in deficit or taxes, as government is giving up what it is not getting anyway - without it, these funds will not come back into the US economy, and the Treasury will not get the additional tax revenue.
However, the tax holiday idea has been opposed by many as the funds brought back will not necessarily be used to generate jobs. The companies could use the money for M&A activity, stock buybacks, and paying out dividends. A similar tax-amnesty program was implemented in 2004. However, of the $362 billion that was repatriated, very little was used for actual investments to create jobs.
A better idea, one that addresses this concern, will be to offer the tax amnesty only to the funds brought back that are actually invested in infrastructure and clean energy projects in the US. However, money is fungible, and it can be easily moved from one bucket to another. To ensure that the tax break really results in investments that create jobs, the repatriated money has to be separated from the other funds of the repatriating company. Hence, for this idea to be effective, the funds brought back must be invested with third-party private fund managers for a minimum number of years to qualify for the tax break.
A limited time tax amnesty will encourage US companies to repatriate earnings back to US quickly. A requirement to invest in infrastructure projects for a minimum fixed number of years (say something between 3 to 5 years) will ensure that the funds brought back create jobs. Companies will be allowed to invest in either debt or equity depending on their risk-reward preferences. Government will not be involved in making investment decisions. All investments will be chosen and managed by private fund managers, who will pick projects and investments based on sound economic calculations of cost-benefit and expected returns. The companies will be free to pick any fund manager based on their judgment of manager’s capabilities and investment strategy.
This basic framework could be enhanced in several ways. Companies could be encouraged to invest for a longer period by offering to reduce any taxes on the earnings from the infrastructure investments, if the investments are held for say 7 to 10 years or more. Also, companies could be allowed to use part of funds brought back to build new plants for their own use, or setup funds that finance purchases of company’s products.
This proposal is a middle of the road approach which addresses the problems the US economy is facing in a productive way and should be acceptable to both sides. Even if there are plans to change rules to tax worldwide earnings of US companies in future, it still makes sense to address the past earnings that are held outside US.
Longer term, the US needs to develop regulations that clarify and encourage private sector investment and involvement in the clean-energy and infrastructure sectors, both of which are essential for the growth and competitiveness of the US economy in the longer term. The areas that need attention from lawmakers and regulators include Public-Private Partnerships, securitization of infrastructure financing, and eligibility rules for MLPs and REITs.
Note: I originally wrote about this idea in November 2010 and shared it with several policy-makers, elected officials, industry chieftains, think-tanks, and members of the media. Given the state of the economy, the idea is more timely and urgent now. The original, more detailed, article is at http://marketsandeconomy.wordpress.com/2010/11/23/tackling-the-us-unemployment-problem/.
A version of this article was published in Thoughts on Markets & Economy.
0 Comment | Add Comment(s) | Economy, Jobs, President_Obama_Spee, Stimulus, Taxes, Unemployment, Infrastructure, Clean_Energy, |
Greece and the Sovereign Debt Crisis
Wednesday, June 01 2011 | 10:37 AM
NEWOAK CAPITAL LLC
|European Union finance officials are discovering the benefits of financial engineering in considering Collateralized Bailout ("CBO") as an alternative to sovereign debt restructuring. As the European Union finance chiefs explore various options to deal with the worsening Greece sovereign debt crisis, some EU countries suggest making any additional aid collateralized with national assets.
At this point officials deny any particular options. Given public opinion in Germany and Finland has been against further outright aid to Greece, any option to mitigate the impact of a Greece default would be attractive to the officials. Asset sales by governments to avoid default or raise needed cash have a long history, with an example being that a significant portion of the geographic area of the United States, such as Louisiana, was acquired through sale of land by other governments for cash. Yet a sovereign bond collateralized by a specific land or a national monument would be new. Structured finance traders may joke about a due diligence trip on a new "Apollo CBO" if it was a sovereign bond of Greece collateralized by Mykonos Island, though Greek nationals may not find that quite as funny. Given the financial conditions, we may also see collateralized or structured debt solutions considered in other public finance cases such as US municipal markets.
0 Comment | Add Comment(s) | Greece, Sovereign_Debt_Crisi, Economy, European_Union, Collateralized_Bailo, Structured_Debt, |