Homebuilding stocks too hot?

Fannie and Freddie CFOs make more than CEOs

The Federal Housing Finance Agency's (FHFA) announcement of
salary cuts for Fannie Mae and Freddie Mac executives doesn't go
as far as some would like.  The FHFA detailed a $500,000 cap on
salaries Friday, in particular for the incoming CEOs of the
government-sponsored enterprises. That remains above the federal
pay scale and falls short of compensation caps in standing
legislation, and includes deferred payments that boost potential
pay to $30.73 million for the top 10 executives.  Fannie and
Freddie's chief financial officers are exempt from the base
salary cap, meaning they'd make more than the new chief
executives. CFOs Ross Kari and Susan McFarland will make $675,000
and $600,000, respectively, in 2012.  Patrick Lawler, FHFA chief
economist, said candidates the agency contacted for CEO positions
requested subordinates make a competitive salary.  "We're going
to try and fill these two positions at a very low wage rate, but
we just don't think there's any chance on the others," Lawler
said.

Three Freddie executives are also set to receive a raise, albeit
at or below the $500,000 barrier.  These levels do represent a
sharp reduction since the government took Fannie and Freddie into
conservatorship. Compensation for the top 15 executives at each
GSE is down 63%, according to the FHFA.  Members of Congress,
however, weren't keen on the changes.  "That may (be) an
appropriate level for the private sector, but as long as the GSEs
live off the taxpayers, these companies are owned by taxpayers
and their staff should be paid accordingly," Rep. Spencer Bachus,
R-Ala., said in a statement Friday.  A House bill sponsored by
Bachus would limit GSE executive pay at $218,978 for 2011. It
passed the committee level in November.  Jeff Emerson, a
spokesman for Bachus, said that bill could come up before a full
House vote soon. Bachus called the FHFA's change "long overdue,"
but said it doesn't go far enough.

Another measure, attached to a House and Senate-approved
congressional insider trading bill, would put Fannie and Freddie
employees on a federal pay scale with a maximum $275,000 salary
and no bonuses.  Both chambers approved separate versions, each
with the GSE provision, in February, but have yet to reconcile
the two measures.  Sen. Jay Rockefeller, D-W.Va., cosponsored the
GSE amendment in the Senate and called the FHFA's move a "good
first step."  "Even a $500,000 salary is too much," Rockefeller
said in a statement. "Excessive executive pay at taxpayer-funded
entities has already been going on for too long and must end —
period."  The FHFA said any further salary reduction from its
$500,000 benchmark or uncertainty around it would "heighten
safety and soundness concerns."  "A sudden and sharp change in
pay from these levels would certainly risk a substantial exodus
of talent, the best leaving first in many instances," FHFA acting
director Ed DeMarco said in a release. "A significant increase in
safety and soundness risks and in costly operational failures
would, in my opinion, be highly likely."

Legislators in Washington railed against executive pay at Fannie
and Freddie during committee hearings in the fall, including
before the House Oversight Committee. That committee, chaired by
Rep. Darrell Issa, R-Calif., issued a critical report on GSE pay,
calling executives "government-sponsored moguls."  "I'm
encouraged to see that (the) FHFA took the Oversight Committee's
recommendation to reevaluate the bonus structure for these
executives," Issa said Friday in a release.  The $500,000 salary
cap, however, only refers to bimonthly or weekly payments,
according to FHFA documents. The pay structure includes "deferred
payments," which the FHFA does not consider bonuses, delayed by a
year for each quarter.  The top 10 executives can still earn that
$30.73 million with deferred payments included, a 13% reduction
from roughly $35.3 million in 2011. Executives ultimately brought
in $30.1 million last year with these payments.

Deferred payments are subject to reductions based on
conservatorship and personal performance, as well as continued
employment up to Jan. 31 2014. Early-exit provisions make up 70%
of deferred salary.  The FHFA included that provision to
encourage executives to stay, Lawler said.  "This is an unusual
pay structure that's designed for a very unusual situation,"
Lawler said. "It doesn't look 100% like the private sector, but
it certainly isn't the government either."  Charles "Ed" Haldeman
and Michael Williams, Freddie and Fannie's outgoing CEOs, could
earn up to $5.4 million in 2012, including $900,000 in base
salary. Haldeman, however, recently asked not to receive $2
million in incentives tied to 2009 and 2010, according to a
regulatory filing and first reported by The Wall Street Journal.
But both have said they'd leave before year-end, with $2.88
million in deferred salary tied to retention reductions.

Stress tests expected to show progress

The Federal Reserve will release the results of its latest stress
tests this week, and they are expected to show broadly improved
balance sheets at most institutions.  While unpleasant surprises
are possible, analysts are counting on the Fed to find banks
largely healthy. That would stand in marked contrast with the
holes, in the tens of billions of dollars, found on balance
sheets in the first round of stress tests in 2009.  The
examination is not merely an intellectual exercise. If
institutions fall short, they could be required to raise billions
in new capital, depressing their shares. If they pass, dividend
increases and stock buybacks by the strongest institutions will
follow as they did after the second round of tests a year ago,
pleasing investors whose banks’ stocks still trade at levels
far below where they where before the collapse of Lehman Brothers
in September 2008.

Under the tests, Federal Reserve specialists are trying to
predict how capital levels at the 19 largest banks would
withstand an economic downturn even more severe than the one that
followed the Lehman collapse.  In addition to a 50% stock market
decline and an 8% contraction in real gross domestic product, the
tests envision an unemployment rate of 13%, well above the 10.2%
peak recorded in October 2009. A surge in unemployment would
increase losses for banks on mortgage and credit card debt.  If
all that were not enough, the Federal Reserve is considering what
would happen to bank assets if a market shock hit Europe and
reverberated in the United States, gauging the extent of losses
that have not loomed large for American institutions, despite the
continuing problems in Greece and weaker European borrowers.

Regulators are walking a fine line: if they permit the banks to
return too much capital now, that might leave the industry
vulnerable in the event of a downturn and lead others to think
the industry was returning to its risky ways. On the other hand,
a raft of negative results would alarm investors just as calm
seems to be returning to the markets.  For banks to pass the
tests, they must show that their Tier 1 capital ratio - the
strictest measure of a bank’s ability to absorb financial blows
- will be at 5% or better, even in the Fed’s nightmare case. To
raise dividends or buy back stock, the ratio would have to remain
above 5%, after capital was returned to shareholders.  Tier 1
capital ratios for the 19 largest banks have improved since the
depths of the financial crisis, rising to 10.1% in the third
quarter of 2011 from 5.4% in the first quarter of 2009. Actual
capital in dollar terms has jumped to $741 billion from $420
billion.

Olick - homebuilding stocks too hot?

"Improvement in the jobs market, improvement in potential buyer
traffic, improvement in existing home sales, no change in record
low mortgage rates…no surprise the analysts are starting to
upgrade the nation’s public home builders. Not to mention that
we’re getting an unusually warm start to the spring market.
'We are raising our targets for the builders, and are upgrading
DHI, LEN, and TOL to Outperform (from Neutral), and also
upgrading MTH and RYL to Neutral (from Underperform),' wrote
Credit Suisse’s Dan Oppenheim in a note this morning, that then
sent the stocks of all the builders on a tear.  Not that they
haven’t been on a tear since last fall, with the S&P home
builder’s index nearly doubling. If that happened even before
all this new spring energy in the market, then the obvious
question is, how much farther do these stocks have to go?

That will depend entirely on the spring results, which we won’t
get until summer. We want to focus on new orders and new home
sales, but we also need to pay close attention to the distress in
the market, since many foreclosed homes are relatively new
construction, left over from the building boom barely six years
ago.  'There will likely be added supply/competition as more
foreclosures come to market following the robo-signing agreement,
and a significant backlog of 6.6 million delinquent
loans/foreclosures still needs to be worked off (though
foreclosure pricing seems to have bottomed and there are plenty
of investor buyers of foreclosures),' writes Oppenheim.

He also cites increases in FHA mortgage insurance premiums. FHA
is a favorite loan product for first time home buyers, and first
time buyers are major clients of the new home builders. And while
bargain-basement foreclosures may be hurting the home builders in
the short term, the rental boom due to all these foreclosures may
actually provide builders with another opportunity.  'Bowing to
the realities of today's for-sale housing market, a growing cadre
of market-rate builders are warming to the concept of houses as
an alternative rental product,' writes Lew Sichelman in National
Mortgage News.  That’s right, building houses to rent, not
sell. Not so crazy, given rising rents and rising demand. If the
multi-family developers can do it, why can’t single family
builders?  As for the stocks of the big guys, are they too hot?
Most builders are pricing in order increases of 20% at least,
according to CNBC’s Bob Pisani.  'That seems to be happening,
which would leave little room for price run-ups, but remember,
this market is very under-owned by a lot of investors, so these
stocks could go beyond reasonable valuations very easily,' says
Pisani."

Obama defends energy policy

President Obama is stepping up defense of his record amid concern
higher oil prices may lift gasoline to $5 a gallon in some parts
of the country this summer, posing a potential threat to the
president's bid for reelection on November 6.  Republicans point
out that Obama policies have hobbled the energy industry with red
tape and point to the administration's blockage of TransCanada
Corp's Keystone XL oil pipeline project to back their charge that
he is hostage to environmentalists in his political base.  Obama
visited election battleground states North Carolina and Virginia
last week to promote his message and will speak at the White
House on Monday with local television stations serving key swing
states, including Colorado, Nevada and Pennsylvania.

BOA and MBIA battle over evidence

Bank of America (BOA) is defending itself after insurer MBIA
filed a letter with a court asking for sanctions against BOA over
alleged delays or failure to produce records compelled in
discovery.  MBIA, which is suing Countrywide over alleged
misrepresentations made about the quality of Countrywide loans
that MBIA insured as securities, is requesting documents that
could shed light on allegations of fraud within the former
subprime lending giant. BOA purchased Countrywide in 2008.  In a
letter to Judge Eileen Bransten with the New York State Supreme
Court, MBIA claims BOA failed to produce documents requested on
fraud allegations, delayed the production of requested materials
and dumped thousands of documents on MBIA at the last minute,
making it difficult for the insurer to conduct an appropriate
investigation before depositions in the case.

Bank of America responded with its own letter to the court. The
bank said the allegations are baseless and blamed the mass
release of documents on a coding error that was disclosed to
MBIA.  Furthermore, in its letter, BOA claims MBIA refused to
wait for the coding error situation to be remedied, which led to
the production of documents on a rolling basis. The bank claims
MBIA knew the process would take weeks and says BOA devoted
significant resources to the document production.  MBIA views the
recent discovery spat in a different light.  "Over the course of
the last three weeks, Bank of America has produced nearly 170,000
pages of new, relevant, successor liability documents," MBIA
attorneys wrote. "These productions, which are continuing, have
forced postponement of a number of successor liability
depositions and compelled MBIA to agree to a brief extension of
the successor liability discovery schedule. This is just the
latest conduct by BAC to sabotage the discovery schedule and
cause MBIA significant prejudices, and is part of an indefensible
pattern of delay and discovery abuses by both the BAC and
Countrywide defendants."

MBIA's request for discovery sanctions also claim Countrywide
failed to produce documents related to allegations of fraud on
Countrywide home loans.  "This includes withholding important
categories of documents on specious grounds and then selectively
producing certain of such documents that it believes are
favorable on the eve of (or during) depositions," MBIA said in
its filing.  Bank of America denies the discovery process has
prejudiced MBIA and says MBIA's sanction requests are baseless in
a letter to the court.