Morning Report - Is the REO to Rental trade played out?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1838.3	2.1	0.11%
Eurostoxx Index	3122.8	1.3	0.04%
Oil (WTI)	102.4	-0.3	-0.34%
LIBOR	0.235	-0.001	-0.32%
US Dollar Index (DXY)	80.36	0.076	0.09%
10 Year Govt Bond Yield	2.77%	0.02%
Current Coupon Ginnie Mae TBA	105.4	0.0
Current Coupon Fannie Mae TBA	103.9	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are up small this morning on no real news. Bond and MBS are down. HP's earnings beat consensus. Nat Gas continues to move higher based on forecasts of another polar vortex to hit next week. Nat Gas is up 36% over the past two weeks.

Fannie Mae posted a profit for the fourth quarter and will distribute $7.2 billion to Treasury. At this point, Fannie Mae has sent Treasury $121 billion, more than the $116 billion in aid it has received. The stock continues to climb, but emails have shown that the Obama Administration has no intention of letting the common shareholders have anything. So why do the common shareholders still exist? Because as long as the government holds under 80% of the company (they hold 79.9%), Fannie Mae's debt doesn't get consolidated on the government's balance sheet (which incidentally was the reason why LBJ spun out a piece of Fannie Mae in the first place - so that Fannie Debt is not counted as sovereign debt. Of course the Obama Administration will have to deal with court cases from Perry and Fairholme so the Administration's edict is not necessarily the last word.

The MBA just released fourth quarter delinquency and foreclosure data. The delinquency rate for 1-4 family homes was 6.39% in the fourth quarter, a drop of 2 bps from the 3rd quarter and 70 bps from a year ago. The foreclosure inventory was 2.86%, the lowest since 2008. The remaining inventory is concentrated in the judicial states on NY, NJ, CT, FL, IL.

Investors are beginning to focus more on buying distressed mortgages as a cheap way to secure property as the supply of foreclosed inventory has shriveled up, at least out West. Blackstone is beginning to wind down the amount of additional capital they are putting in the business. As I said yesterday, given that the big price increases are probably in the past and forecasts are predicting a more normal mid-single digit price appreciation pace going forward, the returns in this business today look a lot different than they did two years ago. When the smart early entrants are starting to eye the exit, you know the trade is getting played out.

The government regulators have trained their sights on the non-bank servicers which is evident from the stock prices of Ocwen and Nationstar. Ocwen's sale of bonds tied to MSRs raised less than expected. New York has placed an indefinite hold on Ocwen's purchase of a Wells MSR portfolio. The CFPB also gave a tongue-lashing to the industry at a MBA conference. So, while the servicers should have an interest rate wind at their backs, the regulators are dominating the news flow, which has put a damper on valuations.