Article of the Day

Forecasting Home Price Recovery: Turnover Rate as a Powerful Indicator

03/29/2012 By: Carrie Bay 

Home prices in many areas are already rebounding from the bottom of the market, according to the March HomeValueForecast.com update from Pro Teck Valuation Services.

This month, the company explores the turnover rate, which is the number of non-distressed sales divided by the total housing stock in a particular market. Pro Teck says this calculation is one of the most powerful and, yet, simplest leading indicators of the future direction of home prices.
The company’s data shows that the turnover rate hits bottom six to 18 months before the bottom in home prices. The relationship between turnover rate and sales price is highlighted with the numbers for Los Angeles and Miami-Dade counties.
The peak in sales in these markets occurred in 2005 and approximately a year before the peak in prices, according to the HomeValueForecast.com update. Sales then proceeded to drop sharply for the next few years until their low points in early 2009. After the 2009 trough, regular sales activity jumped sharply on a percentage basis and has been on an increasing trend ever since.
Pro Teck says its fundamental interpretation is that the significant decline in prices made home values so compelling that both new owner-occupant homebuyers and astute U.S. and foreign investors came into these markets. The new demand prevented further declines, creating the longer-term bouncing around the bottom in prices we are experiencing today, the company explained.
“Our data illustrates that many markets actually hit bottom in early 2009 despite others predicting that home prices had much further to fall,” said Tom O’Grady, president and CEO of Pro Teck Valuation Services.
“The Miami and Los Angeles markets are highly representative of what we foresee for most of the important

coastal U.S. real estate markets,” O’Grady noted. “In particular, we see stabilizing and then gradually increasing prices over the next few years.”
Each month, HomeValueForecast.com also includes a listing of the 10 best and 10 worst performing metros according to its market condition ranking model. The rankings are run for the single-family home markets in the 200 largest core-based statistical areas (CBSAs) and derived from a number of real estate market indicators, including: number of active listings, average listing price, number of sales, average active market time, average sold price, number of foreclosure sales, and number of new listings.
“In March, the top ranked metros show a strong connection to states such as Texas and Oklahoma, which directly benefit from the resurgence in the U.S. oil exploration industries,” said Dr. Michael Sklarz, a contributing author to HomeValueForecast.com and a principal with Collateral Analytics, which worked alongside Pro Teck to develop HomeValueForecast.com.
“In addition,” Sklarz said, “most of these markets did not experience price bubbles during the mid-2000s boom period and, thus, never became overpriced in the first place.”
The top CBSAs for March were:

• Midland, Texas
• Tulsa, Oklahoma
• Clarksville, Tennessee-Kentucky
• Billings, Montana
• Provo-Orem, Utah
• Salt Lake City, Utah
• Crestview-Ft. Walton Beach- Destin, Florida
• Dallas-Plano-Irving, Texas
• Corpus Christi, TX Texas
• Oklahoma City, Oklahoma

The bottom ranked metros include a number of areas which are still in the midst of price corrections from the 2000 to 2006 run-ups. At the same time, a number of these markets have experienced sizable declines in employment over the past several years.
The bottom CBSAs for March were:

• Hartford-West Hartford-East Hartford, Connecticut
• Eugene-Springfield, Oregon
• New Haven-Milford, Connecticut
• Daphne-Fairhope-Foley, Alabama
• McAllen, Edinburg, Mission, Texas
• Tyler, Texas
• Hickory-Lenoir-Morganton, North Carolina
• Harrisonburg-Carlisle, Pennsylvania
• Jacksonville, North Carolina
• Cleveland, Elyria, Mentor, Ohio

Article of the Day

Default Risk of New Mortgages Continues to Edge Lower: Study

03/28/2012 By: Carrie Bay 

With today’s economic conditions, investors and lenders should expect defaults on mortgages currently being originated – both prime and nonprime – to be 28 percent higher than the average of loans originated in the 1990s, according to the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Michigan.

The UFA Default Risk Index for the first quarter of 2012 registered a reading of 128. The index slipped slightly compared to the previous quarter, which was revised downward from 131 initially reported to 129.
Currently, mortgage default risk is significantly lower than the worst vintages of this cycle – from 2006 to 2008 – when the index hovered around 225, which means loans made during that three-year period are 125 percent more likely to default than loans extended in the 1990s. A reading of 100 represents UFA’s baseline scenario of the 1990 decade.
UFA says the risk of default today is due solely to the local and national economic environment.
“Our baseline macro scenario is based on consensus expectations and has real GDP growing at 2.5 percent for the next two years and core inflation at 1.6 percent,” said Dennis Capozza, who is the Dale Dykema professor of business administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA.

According to the UFA Default Risk Index, the risk of default for residential mortgages has been on the decline ever since early 2008, and it’s continuing to fall. However, Capozza notes that positive, unexpected economic events would reduce defaults even more.
“We believe that surprises are more likely to be on the upside than the downside of this consensus,” he explained, referring to the company’s GDP growth and inflation forecasts over the next two years.
“Upside surprises for the macro scenario would reduce defaults relative to this baseline. Currently, record low mortgage rates and accommodative monetary policy are helping to support the housing market and reduce defaults relative to what would otherwise prevail,” Capozza said.
The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan, and collateral characteristics.
The Index reflects only the changes in current and expected future economic conditions, which UFA says “are much less favorable currently than in prior years.”
Each quarter UFA evaluates economic conditions in the United States and assesses how these conditions will impact expected future defaults, prepayments, loss recoveries, and loan values for prime and nonprime loans.
A number of factors affect the expected defaults on a constant-quality loan, UFA says. Most important are worsening economic conditions. A recession causes an erosion of both borrower and collateral performance. Borrowers are more likely to be subjected to a financial shock such as unemployment, and if shocked, will be less able to withstand the shock, according to the analytics and modeling company.
UFA was founded in 1990 by two renowned professors of finance to bring state-of-the-art analytical techniques to lenders. The principals bring over 50 years of experience in mathematical modeling and data analysis to financial problem solving.

Article of the Day

Home Prices Have Been Rising for Three Months: Report

03/27/2012 By: Carrie Bay 

Standard & Poor’s reported Tuesday that it’s closely watched Case-Shiller index declined in January for the fifth straight month, with both the 10-city and 20-city composite readings slipping 0.8 percent from December.
But according to John Burns Real Estate Consulting (JBREC), that’s stale news and doesn’t reflect what’s actually happening in the market right now. In fact, the independent research company says home prices are rising.

JBREC conducted its own analysis of home prices in 97 markets and found that over the January-to-March period prices are up in 90 of them. The average price increase over the last three months is 1.1 percent, or a 4.5 percent annual rate, according to data issued by JBREC just before S&P’s Case-Shiller release.
The company also found that home prices have been trending up nationally since January, and even more markets have turned positive recently, with 93 of the 97 markets it analyzed showing appreciation over the last month.

So why are other industry indices still painting a picture of the doom and gloom of freefalling home prices? Wayne Yamano, VP and director of research for JBREC, says it’s because most price indices are on a three-month lag.
Yamano explains that after hundreds of hours of research vetting 23 data sources and running calculation after calculation, JBREC developed the Burns Home Value Index (BHVI), which calculates home values based on prices that are set at the time purchase contracts are negotiated and signed.
Nearly all other indices are based on when the purchase transaction closes, he says, which is typically two months after the purchase contracts were negotiated. Then, it takes one to two months for the closing price data to be compiled and reported, according to Yamano.
He contends that the BHVI is a better assessment of current changes in home prices and precedes median price data from the National Association of Realtors by three months and the S&P/Case-Shiller index by four to six months.
“It is current because it uses what is happening in MLS databases all over the country, as well as some leading indicators we have determined are reliable,” Yamano explained. “We call it a Home Value index because it is partially based on an ‘electronic appraisal’ of every home in the market, rather than just the small sample of homes that are actually transacting.”
JBREC has calculated BHVI index values for the United States and 97 major metro areas, with history going back to January 2000.
“The slow housing market recovery is underway, and it can accelerate or turn down quickly,” said Yamano. “The future is uncertain, and it is even more uncertain when you are using data that is three months old.”

Article of the Day

Pending Home Sales Index Slips in February

03/26/2012 By: Mark Lieberman, Five Star Institute Economist 

The Pending Home Sales Index (PHSI) edged down February to 96.5 from January’s 97, which had been the highest level since April 2010, the National Association of Realtors reported Monday.

The index slipped for just the second time in the last five months, but was 9.2 percent ahead of the level in February 2011. It remains down 26 percent from the April 2005 level. The index began in March 2005.
Pending home sales are counted when sales contracts are signed, and are viewed as a leading indicator of existing home sales; recent reports suggest that home re-sales should be a bit stronger over the next couple of months but at a level that is still fairly subdued.

The PHSI has been drifting upward, albeit modestly for most of the past two years but remains lackluster. A substantial number of sales contracts are failing to meet underwriting standards and/or other loan criterion as sales contract cancellations remain elevated. Although a hopeful movement, home sales still appear to be searching for a sustainable level and continue to be subject to conflicting trends in labor markets, house,hold formation, mortgage interest rates and underwriting standards.
The PHSI in the Northeast slipped 0.6 percent to 77.7 in February but is 18.4 percent above a year ago. In the Midwest, the index jumped 6.5 percent to 93.8 and is 19 percent higher than February 2011. Pending home sales in the South fell 3 percent to an index of 105.8 in February but are 7.8 percent above a year ago. In the West, the index declined 2.6 percent in February to 99.3 and is 1.8 percent below February 2011.
The index is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.
The dip in the index was consistent with declines in mortgage purchase applications edged down in January and with the month-over-month drop in new home sales, which are also tracked by contract signings.

Article of the Day

NPR and ProPublica Report GSEs Considering Principal Reduction

03/23/2012 By: Esther Cho 

NPR and ProPublica reported Friday that Fannie Mae and Freddie Mac might consider principal reduction as a means to help underwater homeowners.

“NPR and ProPublica have learned that both firms have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases,” NPR stated in an article.
Edward DeMarco, acting director of the FHFA, has stood firm in his decision to not allow for principal reduction, despite mounting criticism from Democrats and petitioning from organizations to have DeMarco fired.
But, in a statement to ProPublica and NPR, ProPublica reported that DeMarco said, “As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

Despite the Treasury’s offer to provide incentives to the GSEs for administering principal reduction, DeMarco told lawmakers during a hearing on February 28 that “both companies have been reviewing principal forgiveness alternatives. Both advised me they do not believe that it is in the best interest of the companies to do so.”
While many contend that allowing the GSEs to apply principal reduction would help the housing market to recover and keep people from going into foreclosure, others argue that while 60 percent of all mortgages are owned or guaranteed by the GSEs, they account for roughly 29 percent of seriously delinquent loans.
Mark Calabria, director of financial regulation at the Cato Institute, showed support for the FHFA’s stance on principal reduction during a separate hearing March 15, where he pointed that GSE loans display a smaller percentage, just 9.9 percent of underwater loans, compared to private label securities, with 35.5 percent of loans underwater.
But, since principal reduction is considered as part of the HAMP modification, it has also been noted that the GSEs account for about half of all HAMP modifications.
During the fourth quarter of 2011, the FHFA reported about 19,500 HAMP trials became permanent modifications, which brought the total number of active HAMP permanent modifications to about 400,000.
Another argument used against principal reduction is its potential cost to taxpayers. FHFAs estimate is principal reduction will cost taxpayers $100 billion, in addition to the $180 billion rescuing the GSEs has cost already.

Article of the Day

Mortgage Rates Up, With 30-Year Fixed Above 4 Percent

03/22/2012 By: Esther Cho 

Moving along side higher yields on bonds, mortgage rates continued to climb upwards, with the 30-year fixed-rate mortgage above the 4 percent benchmark for the first time since October 27, 2011, according Freddie Mac’s Primary Mortgage Market Survey.

“Bond yields rose over the past two weeks in part due to an improving assessment of the state of the economy by the Federal Reserve, better than expected results of commercial bank stress tests and the likelihood of a second bailout for Greece,” said Frank Nothaft, VP and chief economist for Freddie Mac.

The 30-year fixed-rate averaged 4.08 percent (0.8 point) for the week ending March 22. Last week, the 30-year averaged 3.92 percent, and during this time last year, it averaged 4.81 percent.
The 15-year fixed-rate managed to stay below 4 percent and averaged 3.30 percent (0.8 point), up from last week when it averaged 3.16 percent. Last year at this time, the 15-year fixed-rate averaged 4.04 percent.
The 5-year ARM inched up to 2.96 percent (0.7 point); last week, it averaged 2.83 percent. Like other averages, the 5-year ARM is still down compared to last year when it stood at 3.62 percent.
The 1-year ARM increased to 2.84 percent (0.6 point) this week. Last week, it averaged 2.79 percent and 3.21 percent during this time last year.
Bankrate, which uses data provided by the top 10 banks and thrifts in the top 10 markets, reported the 30-year fixed-rate mortgage climbed 14 basis points to 4.29 percent, a 5-month high.
The 15-year fixed-rate rose to 3.48 percent, up 10 basis points, and the five-year ARM also went up 10 basis points to 3.24 percent, according to Bankrate. The 7-year ARM moved upwards to 3.43 percent.

Article of the Day

Survey Suggests More Homeowners Are Open to Strategic Default

03/21/2012 By: Carrie Bay 

An alarming number of homeowners see strategic default as a viable option should their home continue to depreciate. Almost half of the homeowners participating in an online poll from Housing Predictor say they will walk away from their mortgage obligation if falling home values persist.

Five years into the housing downturn, and Housing Predictor found that 47 percent of those surveyed would intentionally stop making their mortgage payments even if they could afford to in order to get out from under the sinking investment of home-sweet-home.
The number of mortgage borrowers open to strategic default has risen sharply since Housing Predictor last surveyed public opinion on the issue roughly a year-and-a-half ago. In October 2010, 36 percent of homeowners participating in the poll said they would throw in the towel should housing prices continue to drop.
Housing Predictor says the foreclosure crisis, falling home prices, and lingering doubts that the value of homes will increase over most homeowners’ lifetimes are contributing to the increase in mortgage holders who say they will walk away.

Housing Predictor’s results are based on responses provided by 1,000 visitors to the company’s website.
A recent study commissioned by the Mortgage Bankers Association called attention to the fact that the vast amount of media coverage dedicated to the financial crisis and the persistent woes of the housing market has made homeowners take note of their equity position.
For those who owe a great deal more on the mortgage than the home is now worth, the idea of simply walking away before the situation worsens has its allure. A market report issued by Moody’s Analytics last July warned of the growing risk of strategic default among loans that have always performed, meaning the borrower has remained current since taking out the loan.
Moody’s analysts explained that as home prices fell over the previous year, the loan-to-value ratios (LTVs) of these always-performing loans began to approach, and in many cases surpass, average LTVs for loans that have defaulted since 2009. They point out that this is a departure from what they’d seen up until the middle of 2010, during which LTVs for always-performing loans had stayed flat or even decreased slightly.
Back in July, Moody’s analysts identified between 12 percent and 24 percent (depending on the asset type) of always-performing loans with LTVs that were higher and had risen more steeply than those of defaulted loans.
“Rapid rates of LTV increases may themselves be a factor in a borrower’s decision to strategically default, since they may quickly erode any remaining confidence in borrowers that they could ever restore positive equity in their property,” Moody’s said in its report.
FICO estimates strategic defaults to be more than a $20 billion problem annually.

Article of the Day

FHFA Criticized for Arguments Used Against Principal Reduction

03/15/2012 By: Esther Cho

The FHFA’s decision to not allow for principal reductions on Fannie Mae and Freddie Mac loans due to taxpayer costs and other issues came under sharp criticism during a Senate subcommittee hearing Thursday.

John DiIorio, CEO of 1st Alliance Lending, a mortgage origination firm, argued in support of principal reduction, even when analyzing the benefits from a bottom-line perspective, not simply as a form of aid.
“Again, let me emphasize – these investors and mortgage holders that we work with agree to principal reduction in these situations voluntarily,” said Dilorio in his written testimony. “Moreover, they make the decision to do principal reduction not out of a sense of charity, but because they believe it is in their best financial interest to do so. They are sophisticated, and are doing these transactions to maximize asset value.”
Dilorio also called principal reduction the best economic option for the holder of the mortgage when done correctly and in a targeted manner.
Laurie Goodman, senior managing director of Amherst Securities, said there were a number of flaws in an FHFA study used to defend the decision to not apply principal forgiveness, and discussed three major criticisms and “technical flaws.”
For one, Goodman said the study was based on a hypothetical model rather than actual HAMP results.
As one of the technical flaws, Goodman said in her testimony that “the results were done on a portfolio level, not an individual loan level. Thus, the FHFA did not consider the possibility of following a forgiveness strategy for some borrowers and a forbearance strategy for others.”
Goodman also pointed that the FHFA did not differentiate between loans with mortgage insurance versus loans without it, and further explained that, “when there is mortgage insurance, it is generally not NPV-positive to the GSEs to do principal forgiveness – forbearance creates the preferred outcome, as the MI does not cover the forgiven amount.”
The study Goodman referred to was used by Edward DeMarco, FHFA acting director, to respond to a request from the House Committee on Oversight and Government Affairs on whether principal forgiveness on GSE loans would be in the interest of taxpayers.
“I would suggest that they if they have doubts about the value of principal reduction, they need not commit wholesale to principal reductions, but could start by dipping their feet into the water on a pilot or limited basis, to test out how and whether principal reduction is effective,” said Dilorio.
Mark Calabria, director of financial regulation studies at the Cato Institute, shared a different opinion on principal reduction, and cited industry facts from Fitch Ratings to support his opinions.

“The vast majority of underwater borrowers are current on their mortgages,” said Calabria. “Even the majority of deeply underwater borrowers are current. For prime borrowers with loan-to-values over 125 percent, over 75 percent are current. Over half of deeply underwater subprime borrowers are current.”
Calabria also pointed that GSE loans display a smaller percentage, just 9.9 percent of underwater loans, compared to private label securities, with 35.5 percent of loans underwater.
Citing a CoreLogic report which stated 22.8 percent of all residential properties with a mortgage are in negative equity, Calabria explained that the situation is concentrated in five states: Nevada, Arizona, Florida, Michigan, and Georgia, with those states having an average negative share of 44.3 percent, compared to 15.3 percent for the remaining states.
“Any taxpayer efforts to reduce negative equity would largely be a transfer from the majority of states to a very small number,” said Calabria.
In response to criticism FHFA has been receiving, Calabria said Acting FHFA Director DeMarco should be commended.
“Given FHFA’s estimate that a broad based program of principal reduction would cost almost $100 billion, the argument that an unelected, unappointed, acting agency head should, in the absence of statutory authority, spend $100 billion on taxpayer money is simply inconsistent with our system of government,” said Calabria, who also stressed that $180 billion in taxpayer dollars has been used to rescue the GSEs.
The moral hazard issue was also addressed during the hearing, which is the fear that offering incentives such as principal reduction will lead to borrowers purposely defaulting to reap benefits.
“We understand that the primary issue in the mind of the FHFA is that more than 90 percent of GSE loans are current,” said Goodman, who offered two solutions.
“The first solution is to require that the borrower be delinquent as of a certain date, so performing borrowers do not intentionally go delinquent in order to get the principal reduction,” said Goodman. “The other choice is to establish a series of frictions so that only those borrowers who need the principal reduction take advantage of the program. This could involve the inclusion of a shared appreciation feature or other frictions to default.”
Goodman’s example and explanation for a generally negative NPV when applying principal forgiveness for loans with mortgage insurance
- Assume a borrower has a $100,000 loan, on a house worth $75,000, and the GSEs have mortgage insurance from a mortgage insurer, which covers any loss down to $70,000.
- The borrower defaults, and the GSE offers the borrower $20,000 of principal reduction, which reduces the loan balance to $80,000, and gives the loan a 75% chance of eventual success. If the loan does not re-default (there’s a 75percent chance of that happening), the GSE ends up losing the $20,000 principal amount they gave up.
- But if the loan re-defaults and the house then sells for $70,000 (25 percent chance), the mortgage insurance pays $10,000 to the GSE for the lost principal, in which case the GSE still loses $20,000.
- But if principal is forborne, and the borrower defaults, the mortgage insurer would cover the loss.

Article of the Day

Capital Economics Expects Recovery to Continue Even with Higher Rates

03/19/2012 By: Esther Cho 

Even with recent reports of rising mortgage rates and falling home prices, Capital Economics stated it still expects the housing recovery to be under way.

The research firm cites two reasons in a report on why mortgage rates won’t threaten recovery: rates can only rise so far when tighter monetary policy is still years away, and homes will still be affordable even if mortgage rates were to rise back to normal levels.
Last week ending March 15, Freddie Mac reported the 30-year fixed rate at 3.92 percent, an increase from the 3.88 percent reported the prior week, but still below 4 percent for 15 consecutive weeks.
“We doubt that higher mortgage rates will derail a housing recovery that in the last six months has seen total

home sales rise by 13 percent and the NAHB homebuilder activity index more than double to 28,” the research firm stated.
In addition to those recent reports, home prices are still dropping, with data from Zillow showing prices declined 4.6 percent from January 2011 to January 2012.
“Also, the fall in house prices over the last five years has been so large that even more normal mortgage rates would leave housing looking very affordable. And with housing appearing undervalued relative to disposable incomes per capita, valuations are also very favorable,” Capital Economics stated.
An economic outlook report from Fannie Mae echoed a similar sentiment about the direction of the housing market in a report Monday and stated, “GDP revisions for the fourth quarter of 2011 indicated a stronger underlying pace of demand with higher consumer spending and business investment.”
After four months of private sector payroll growth, the GSE named employment growth as an important factor in housing recovery.
Even with declining home prices, Capital Economics explained it can take up to six months for changes in demand and supply to have their full impact on house prices because even with attractive asking prices, it can still take a few months to find a buyer and another month or so before the contract is closed.

Article of the Day

Fed Study: Overpriced Foreclosures Hiking REO Carrying Costs

03/16/2012 By: Carrie Bay 

Appraisers, lenders, and investors appear to be routinely overestimating the values of homes prior to foreclosure, especially in the weakest housing markets, according to two economists with the Federal Reserve Bank of Cleveland.

The Cleveland Fed’s Thomas Fitzpatrick and Stephan Whitaker suggest that more accurate pricing could speed the clearing of REO inventories, save lenders money by reducing the carrying costs associated with bank-owned homes, and bring greater stability to housing markets across the country.
Analyzing data from Cuyahoga County, Ohio (where Cleveland is located) the researchers found that lenders and other buyers at county foreclosure auctions tend to resell acquired properties for a fraction of what they paid at the auction.
Lenders tend to sell property out of REO for 42 percent less than the auction price, according to the Cleveland Fed economists. The pair assessed 16,012 foreclosed properties in Cuyahoga County that were taken back by the lender at foreclosure auction between 2006 and 2011. Lenders’ total losses on the pool of properties – calculated as the difference between a property’s auction reserve and the sale price at the exit from REO – amounted to $326.2 million.
In a report detailing their findings, Fitzpatrick and Whitaker contend that placing more weight on two simple property characteristics – a home’s age and its location –

would improve the accuracy of appraisals in weak housing markets.
With more precisely targeted values for homes prior to foreclosure auction, the researchers say lenders could lower their REO carrying costs in a number of measurable ways:

• Lenders could avoid taking on REO altogether by setting their auction reserves lower and allowing others to purchase more properties at auction.

• Lenders would be more likely to offer loan modifications, and not initiate foreclosures, on low-value properties.

• Identifying properties that have the least value early in the foreclosure process would facilitate their disposition to land banks or other organizations seeking to remediate blight.

The Fed economists stress that problems arising from swollen REO inventories – including costs to lenders and neighborhood blight – are compounded in weak housing markets where the supply of housing exceeds the demand for it. They say several factors combine to increase the odds that REO homes will actually cost more to maintain than lenders can expect to bring in from their sale.
For example, carrying costs are likely to be higher when you factor in securing the properties, bringing them up to local housing codes, properly maintaining them, shelling out money to cover property taxes, and marketing them for resale.
Homes entering foreclosure and lingering in REO in weak markets tend to be older and of lower quality than homes entering REO in strong markets, the researchers note. In addition, homes in weak markets are more likely to be vandalized while sitting vacant and older housing stock will typically deteriorate more rapidly. To top it off, anemic demand for housing in such markets further depresses overall housing prices.
In weak markets, Fitzpatrick and Whitaker contend that lenders may be better served by not taking properties into REO in the first place, or at least minimizing the time repossessed homes spend in REO by donating them to land banks or nonprofits.

Article of the Day

Mortgage Rates Head Higher on Positive Economic Data

03/15/2012 By: Carrie Bay 

Rates for all mortgage loan products headed higher this week as positive employment indicators rolled in, with job growth over the last six months the strongest it’s been since 2006. That, coupled with the Greek debt restructuring on the international front and the results of the Federal Reserve’s stress tests pointing to a stronger financial banking system, boosted investor confidence and drove bond yields higher.

“An upbeat employment report for February caused U.S. Treasury bond yields to increase over the week and mortgage rates followed,” according to Frank Nothaft, Freddie Mac’s chief economist.
Studies from both Freddie Mac and Bankrate showed the same measurable increases across-the-board.
The GSE reports the average rate for a 30-year conforming mortgage at 3.92 percent (0.8 point) for the week ending March 15, up from 3.88 percent last week. Despite the increase, the average 30-year fixed rate mortgage has been below 4.00 percent for 15 consecutive

weeks in Freddie Mac’s study, helping to keep homebuyer affordability high. The GSE averages rate data from 125 lenders across the country.
Bankrate’s study zeros in on rate quotes from the 10 largest lenders in the 10 largest markets. That analysis put the 30-year rate at an average of 4.15 percent (0.40 point) this week, up from 4.11 percent last week.
The average 15-year fixed mortgage stepped up from 3.34 percent last week to 3.38 percent (0.33 point), according to Bankrate, while the jumbo 30-year fixed mortgage jumped to a three-month high of 4.73 percent, soaring 10 basis points from 4.63 percent last week.
Adjustable-rate mortgages (ARMs) were mostly higher as well in Bankrate’s study, with the average 5-year ARM rising to 3.14 percent (0.33 point) and the 7-year ARM climbing to 3.33 percent.
Freddie Mac’s study found the 15-year fixed mortgage averaging 3.16 percent (0.8 point) this week, up from 3.13 percent last week.
The GSE reports the average rate for a 5-year ARM to have ascended 2 basis points to 2.83 percent (0.8 point) this week, and the 1-year ARM posting a 6 basis point increase to 2.79 percent (0.6 point).
Dan Green is a loan officer with Waterstone Mortgage in Cincinnati and a regular blogger on issues affecting the housing market, and mortgage rates in particular. He says rates have been low because of the weak U.S. economy and with the economy now showing signs of strengthening, we should expect mortgage rates to continue to rise.

Article of the Day

Payrolls Up 227,000 in February; Unemployment Rate Steady

03/09/2012 By: Mark Lieberman, Five Star Institute Economist 

The nation added 227,000 jobs in February – the seventh straight month of 100,000-plus payroll gains, the longest such string since 2005 – as the unemployment rate held steady at 8.3 percent, the Bureau of Labor Statistics reported Friday morning.

Economists had anticipated about 210,000 new jobs in February and a slight uptick in the unemployment rate.
Indeed, the unemployment rate – if calculated to additional decimal places – did increase slightly but still rounded to 8.3 percent. The increase would reflect workers returning to the labor force.
The strong report continued a positive trend with just a smattering of weak spots: retail employment dropped slightly and construction jobs declined, hinting that gains in construction in recent months were related to mild weather.
Payroll gains for December and January were revised upward. January’s payroll growth was changed to 284,000 from 243,000 and December’s was revised to 223,000 from 203,000.
In other key statistics in the report, average weekly hours increased along with average hourly earnings which should help personal consumption spending, about 70 percent of the nation’s Gross Domestic Product (GDP).
Government was less of a drag on the payroll report in February than it has been in recent months, subtracting about 6,000 jobs. Federal payrolls shrank by 7,000 while state and local payrolls improved by a net, 1,000. State and local governments appear – for the moment – to have weathered the evaporation of federal stimulus funds.

Even with the improved labor picture, 42.6 percent of those officially counted as unemployed have been out of work for more than 27 weeks and the average duration of unemployment, though improved from February, was 40.0 weeks.
There were both bright spots and yellow flags for the housing sector: credit intermediation jobs – essentially underwriting positions – increased, but construction payrolls slipped, dropping 13,000 jobs, primarily in non-residential activity.
For the overall economy, retail employment slipped slightly reflecting the wind-down of holiday shopping and its aftermath. Temporary jobs rose a strong 45,200 in February, a statistic which could be interpreted as good or bad. On the one hand, temporary employment is considered a precursor to permanent positions but on the other hand temporary workers represent less of a commitment than permanent hiring, a reluctance by employers to increase staff – and benefit costs.
Professional and business services payrolls – which include those temporary jobs – expanded by 82,000, the strongest sector, followed by education and health care (up 71,000) and leisure and hospitality (up 44,000). The leisure and hospitality sector is the lowest paying of the major industry sectors.
The labor force – the sum of employed and unemployed – grew 476,000 with increases in both components. The labor force participation rate which signals confidence improved to 63.9 percent after falling in January to 63.7 percent. It remains far below the 66.0 percent level at the onset of the recession in December 2007.
The employment-population ratio which measures the percentage of the percentage of the over-16 population which is employed ticked up to 58.6 percent, its highest level since May 2010.
The movement in unemployment rates in most demographic sectors was erratic. While the unemployment rates for adult (over 20) men and women remained flat at 7.7 percent each, the unemployment rate for teenagers (16 to 19) rose 0.6 percentage points to 23.8 percent. The unemployment rate for high school dropouts improved to 12.9 percent from 13.1 percent in January while the unemployment rate for college graduates was unchanged at 4.3 percent.

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FOMC Votes 9-1 to Keep Rates Low, Housing Sector Still "Depressed"

03/13/2012 By: Mark Lieberman, Five Star Institute Economist 

Echoing the statement it issued following its January meeting, the Federal Open Market Committee said Tuesday “the economy has been expanding moderately” in the last two months, but the housing sector “remains depressed” in deciding, by a 9-1 vote, to keep the Fed Funds rate at historic low levels.

The Committee said “labor market conditions have improved further…the unemployment rate has declined notably in recent months but remains elevated.”
The FOMC said it “anticipates that economic conditions – including low rates of resource utilization and a subdued

outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Richmond Fed President Jeffrey Lacker cast the sole dissenting vote because he “does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014,” according to an FOMC statement.
“Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook,” the FOMC said. “The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate” of price stability and maximum employment.
The FOMC said it would continue a “highly accommodative stance” for monetary policy: low interest rates. Despite the low rates, housing – arguably the sector most affected by low rates – remains mired in a slump.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

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BofA to Offer Principal Reductions of More than $100K

03/12/2012 By: Krista Franks Brock 

Some Bank of America borrowers may be in for principal reductions in amounts exceeding $100,000, according to the latest developments in the settlement the bank and four other large servicers made with state and federal regulators.

Of the five servicers participating in the settlement, BofA is set to pay the largest portion of the total $25 billion settlement. The bank will pay $3.24 billion to the government and $8.58 billion to borrowers.
Of BofA’s total, $1 billion is part of a separate settlement regarding loan origination issues for Countrywide, which BofA acquired in 2008.

While the other four servicers in the national settlement are being required to diminish principal so underwater borrowers have loan-to-value ratios of 120 percent or less, BofA will be reducing principal for about 200,000 homeowners to fall in line with current market values.
For some deeply underwater borrowers, this may result in reductions of more than $100,000.
The expanded principal reductions may prevent BofA from paying $850 million in penalties, according to the Wall Street Journal.
Fitch Ratings responded to the news stating that the 200,000 principal reductions will be “neutral to negative for some RMBS bondholders and potentially beneficial for the bank.”
Fitch suggests the loans most likely to qualify for the extended principal reductions will be those originated between 2005 and 2007.
“Because the bank has already reserved for penalties, any reversals could help BAC’s income going forward,” Fitch stated. “While the agreement will help the bank reduce the amount of penalties it owes over time, the aggregate best case benefit is moderate from a financial perspective.”

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Freddie Mac Reports Net Income Gain for Q4

03/09/2012 By: Esther Cho 

Freddie Mac reported a gain in net income for the fourth quarter and less losses overall for the year 2011 compared to the previous year, according to the GSE’s fourth quarter and year 2011 report released today.

Freddie Mac reported a net income of $619 million for the 2011 fourth quarter. A net loss of $4.4 billion was reported for the third quarter, which ended September 30, 2011.
Freddie Mac will still need to request $146 million from the U.S. Treasury for the company’s fourth quarter net worth deficit due to “senior preferred dividends paid of $1.7 billion,” the report stated.
For the 2011 third quarter, $6 billion was requested after the GSE reported its largest quarterly loss in over a year.
The report stated that the shift from a net loss for the third quarter to net income for the fourth quarter of 2011 is due to lower derivative losses as a result of less borrowers refinancing into lower, long-term interest rates.

According to the report, Freddie Mac has requested $7.6 billion from the Treasury for the year 2011 and 13 billion in 2010.
“We continue to take actions to protect the investment American taxpayers have made in Freddie Mac and build a stronger foundation for the future housing finance system,” said Freddie Mac CEO Charles E. Haldeman, Jr. in the report. “This included cutting about $180 million in expenses over the last two years, and continuing to build a strong new book of business – which now accounts for about half of our single-family portfolio.”
Since the beginning of 2008, Freddie Mac has recorded a provision for credit losses of $73.2 billion, with the majority of the losses associated with loans originated between 2005 to 2008, according to the report. As of December 31, 2011, loans originated in 2005 to 2008 represented 32 percent of the single-family portfolio, while loans originated after 2008 accounted for 51 percent.
Freddie Mac workouts
Loan modifications
109,174 (2011); 170,277 (2010)
Repayment plans
33,421 (2011); 31,210 (2010)
Forbearance agreements
19,516 (2011); 34,594 (2010)
Total home retention actions
162,111 (2011); 236,081 (2010)
Short sales & deed-in-lieu of foreclosure transactions
46,163 (2011); 39,175 (2010)
Total single-family loan workouts
208,274 (2011); 275,256 (2010)

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Rates Are Trending Downward Still; 15-Year Hits Record Low

03/08/2012 By: Esther Cho 

Record high-levels of homebuyer affordability continue as rates drop and stay near their 60-year lows, according to Freddie Mac’s Primary Mortgage Market Survey.

The 15-year fixed hit an all-time record low of 3.13 percent. Aside from the 1-year ARM, all rates saw a decrease.
The 30-year fixed-rate mortgage averaged 3.88 percent (0.8 point) for the week ending March 8, a decrease compared to last week’s average of 3.90 percent. Last year at this time, the 30-year rate averaged 4.88 percent.
The 15-year fixed-rate stood at 3.13 percent (0.8 point), down from last week when it was 3.17 percent. A year ago at this time, the 15-year rate averaged 4.15 percent.

The 5-year ARM decreased at 2.81 percent (0.7 point). Last week it averaged 2.83 percent, and 3.73 percent a year ago at this time.
The 1-year ARM saw a slight increase at 2.73 percent (0.6 point) this week, compared to last week’s average of 2.72 percent. The 1-year ARM averaged 3.21 percent last year at this time.
“With these historically low rates and declining house prices, the typical family had more than double the income needed to purchase a median-priced home in January,” said Frank Nothaft, VP and chief economist, Freddie Mac, noting the National Association of Realtor’s Housing Affordability Index, which registered the highest reading since records began in 1970.
In addition to this report, Nothaft added that Corelogic’s Home Price Index fell for the sixth consecutive month in January to the lowest level since January 2003.
“This high level of affordability likely contributed to the recent two-week rise ending March 2nd in mortgage applications for home purchases,” Nothaft said.
Finance website Bankrate.com released its report, which showed the 30-year fixed-rate mortgage rose slightly to 4.11 percent compared to 4.10 percent last week. Bankrate.com’s results are from a national survey of large lenders. The 15-year fixed was at 3.34 percent, .01 percent down from last week. The five-year ARM averaged 3.03 percent, also down .01 percent.

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Home Affordability Index Reaches Record-High Level

03/07/2012 By: Esther Cho 

Home affordability has reached the highest peak since 1970, which is when the data was first recorded, according to National Association of Realtor’s (NAR) housing affordability index.

The index rose to 206.1 in January, and an index of 100 is defined as the point where a median-income household has exactly enough income to qualify for the purchase of a median-

priced single-family home, assuming a 20 percent down payment and 25 percent of gross income for mortgage principal and interest payments.
“This is the first time the housing affordability index has broken the two hundred mark, meaning the typical family has roughly double the income needed to purchase a median-priced home,” said Moe Veissi, NAR president.
While projections about future mortgage rates and home prices have been mixed, NAR expects little change and anticipates affordability levels will stay high through 2012.
“Housing inventory levels have declined to a point where conditions are becoming much more balanced in much of the country,” Veissi said. “If access to credit improves, we could see a much more meaningful increase in home sales and broader stabilization in home prices with modest gains in areas with stronger job growth.”
The index is based on the relationship between median home price, median family income, and the average mortgage interest rate.

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FHA to Reduce Premiums for Certain Loans

03/06/2012 By: Esther Cho 

Through a streamline refinance program, borrowers with FHA-endorsed loans may find it easier to lock in lower interest rates while paying less in fees.
Beginning June 11, 2012, FHA will lower upfront mortgage insurance premiums to .01 percent and reduce annual premiums to .55 percent for certain FHA borrowers, Carol Galante, acting FHA commissioner, announced today.

To be eligible, borrowers must to be current on their FHA-insured loans, which need to have been endorsed on or before May 31, 2009.

“This is one way that FHA can make a real difference to help homeowners who are doing the right thing, paying their bills on time and want to take advantage of today’s low interest rates,” said Galante. “By significantly reducing costs for these borrowers, we can make certain they cut their monthly mortgage burden which will benefit the housing market and the broader economy in the process.”
Currently, 3.4 million mortgages endorsed on or before May 31, 2009 pay more than a five percent in interest. The average FHA-insured borrower is estimated to save approximately $3,000 a year or $250 per month.
The streamlined process may also allow many borrowers to refinance without requiring additional underwriting. FHA-insured homeowners should contact their existing lender to determine eligibility.
Late last month, the FHA also announced plans to increase upfront and annual premiums on most other loans insured by FHA beginning in April to raise capital. Upfront premiums will increase to 1.75 percent from 1 percent, and annual premiums will increase 10 basis points and 35 basis points on mortgages higher than $625,500.
FHA estimates that the increase to the upfront premium will cost new borrowers an average of approximately $5 more per month.

Article of the Day

Credit Trends Among U.S. Consumers Point to End of Housing Downturn

03/05/2012 By: Carrie Bay 

Consumer credit data suggests spending will increase and the housing market will begin to emerge from its slump this year, according to Equifax and Moody’s Analytics.

Statistical analysis applied by CreditForecast.com, a joint product of Equifax and Moody’s, to new performance data for consumer credit supports the forecast issued by the credit bureau and ratings agency.
Both companies note that as key market data align with pre-recession totals, consumers should anticipate steady economic growth for major credit sectors.
Looking across the full spectrum of consumer credit, Equifax and Moody’s found that delinquency rates for auto, bankcard, and consumer finance are back to pre-

recession levels. These sectors are expected to contribute to the U.S. economy’s nascent recovery.
The home mortgage lending sector continues to see the highest percentage of delinquencies, the companies’ report notes, even with outstanding mortgage balances (including first liens and home equity lines and loans) having declined by $1 trillion since 2008 and continuing to drop.
Even so, mortgage rates are at all-time lows, with refinance activity at high levels and offsetting diminished demand for new loan originations, according to Equifax and Moody’s.
The companies also note that tighter lending guidelines are reflected in loans made to the prime risk segment (those borrowers with an Equifax score of 700 or above). Consumers that fit the bill of a prime risk now account for more than 80 percent of all new mortgage originations.
“After spending recent years in the financial doldrums, U.S. consumers are poised to make a comeback in 2012,” according to Amy Crews Cutts, chief economist for Equifax.
She says the most promising indicators are showing up in consumer spending and the auto financing sector, but even the housing market is exhibiting incremental progress that points to increased traction in the coming months.

Article of the Day

Treasury Reinstates HAMP Incentives as Servicers Show Improvement

03/02/2012 By: Carrie Bay 

The Treasury Department says servicers participating in the Home Affordable Modification Program (HAMP) are getting better at evaluating homeowners for the program, including noticeable improvement in assessing borrower income to determine program eligibility and calculate the amount of their modified payments.

Treasury reported Friday that during the fourth quarter of 2011, seven of the largest participating servicers were found to be in need of “moderate improvement” and two servicers were found to need only “minor improvement” with respect to the specific performance metrics tested. No servicer was found in need of substantial improvement last quarter.
OneWest Bank and Select Portfolio Servicing performed at the highest level, needing only minor improvement. The seven servicers deemed to need moderate improvement include: America Home Mortgage Servicing, Bank of America, CitiMortgage, GMAC Mortgage, JPMorgan Chase, Ocwen, and Wells Fargo.

HAMP performance reviews evaluate servicers based on three categories: identifying and contacting homeowners; homeowner evaluation and assistance; and program reporting, management, and governance.
Treasury singled out JPMorgan and BofA in its latest report, noting that both servicers had improved their practices over the last quarter. Treasury had been withholding HAMP incentive payments from the two companies because prior servicer assessments found them to be in need of “substantial improvement.”
Bank of America was found to have remedied essentially all areas previously identified as needing improvement and continued to demonstrate improved processes generally, Treasury said.
JPMorgan Chase showed marked progress in remedying a number of outstanding issues from previous quarters, according to the report, including improving the speed at which it processes eligible homeowners for permanent HAMP modifications and strengthening its internal quality assurance processes around the program.
Treasury said it agreed to release withheld incentives for past deficiencies as part of the $25 billion federal-state mortgage servicing settlement announced last month, but officials stress that they retain the right to withhold incentives in the future should the results of HAMP compliance reviews warrant such remedial action.
As of the end of January, participating servicers had granted 951,319 permanent HAMP modifications to distressed borrowers. There are an additional 76,343 HAMP trials currently in active status.

Article of the Day

Do Principal Reductions Subsidize Consumer Debt at Investors' Expense?

03/01/2012 By: Krista Franks Brock 

Principal reductions have been approached with some reluctance and much debate throughout the industry, but as part of the recent $25 billion settlement with the state attorneys general, the nation’s largest servicers have agreed to administer the loss mitigation tactic.

California Attorney General Kamala Harris insists “principal reduction programs are the most helpful form of loss mitigation for homeowners and the most cost effective for investors when compared to foreclosures,” and she is pushing for the GSEs to write down principal for struggling homeowners as well.
In fact, she recently requested a “good-faith pause” on Fannie and Freddie foreclosures while their conservator, the Federal Housing Finance Agency conducts further analysis on the pros and cons of the loss mitigation strategy.
Meanwhile, Fitch Ratings has released its own analysis of the strategy and its effects on investors. Fitch suggests

principal reductions can have a positive impact on the market by preventing some foreclosures.
However, Fitch maintains the issue of principal reductions is not a simple “yes” or “no” question, and “if not implemented carefully, a wide-ranging principal reduction program could potentially increase defaults among borrowers who would otherwise remain current.”
Furthermore, without reviewing each borrower’s entire financial situation, principal reductions have the potential to be ineffective or disproportionately impact investors.
For example, allowing a substantial reduction in principal on a mortgage loan may allow a borrower to fulfill his or her debt obligations but may in effect be “using mortgage debt (and, therefore, mortgage investors) to subsidize other consumer debt and expenditures,” according to Fitch.
Fitch advises approaching principal reductions with caution, writing mortgage debt down to “a reasonable housing payment-to-income ratio” or setting a “predetermined LTV” to apply to all principal reduction scenarios.
While Fitch observes that borrowers with positive equity are more likely to stay current on their loans than borrowers with negative equity, Fitch says even negative equity homeowners “show a willingness to repay.”
The ratings agency cites a Fannie May survey indicating that just 10 percent of respondents condone strategic default for underwater homeowners.
However, a widespread principal reduction strategy may sway some homeowners’ opinions, Fitch suggests.

Article of the Day

Nearly 1 in 4 Households Use Over 1/2 of Income for Housing Costs

02/24/2012 By: Esther Cho 

Even with falling home prices, a study from the Center for Housing Policy found that affordability is still becoming increasingly out of reach for homeowners and renters. According to the 2012 Housing Landscape report released by the Center, the share of working households paying more than half their income for housing between 2008 and 2010 went up from 21.8 percent to 23.6 percent.

Source: Center for Housing Policy
As home prices dropped between 2008 and 2010, working homeowners also dealt with shrinking paychecks. For working homeowners over the two-year period, incomes dropped twice as much as housing costs, according to the study.
Jeffrey Lubell, executive director of the Whington-based Center, said this was primarily due to a drop in average hours worked among moderate-income homeowners.
“The data show that homeowners have been hit hard by the housing crisis in more ways than just lost equity,” Lubell explained. “Many working homeowners have been laid off or had their hours cut.”

According to the study, the monthly median income for working homeowners’ fell from $43,570 in 2008 to $41,413 in 2010, which is about a 5 percent decrease. The median number of hours worked per week dropped from 50 to 48 between the two years, which partly explains the decrease in income.
For renters, the monthly median income fell 4 percent from $31,570 to $30,229 between the two years. Housing costs for renters also increased, up by 4 percent over the same period.
Laura Williams, author of the report, said rent rose because of increased demand for rental housing, which was partly encouraged by the housing market crises.
“More and more people are interested in renting,” Williams said. “Some prefer it because it allows them to be more mobile in a tough job market. Others are postponing purchasing a home or facing difficulties obtaining a mortgage. Given the long lead times involved in responding to increased demand with increased supply, the rental market has tightened somewhat and rents increased.”
The five states with highest share of working households with a severe housing cost burden in 2010 were California (34%), Florida (33%), New Jersey (32%), Hawaii (30%), and Nevada (29%).
The five metropolitan areas with the highest share of working households with a severe housing cost burden in 2010 were Miami-Fort Lauderdale-Pompano Beach, Florida (43%); Los Angeles-Long Beach-Santa Ana, California (38%); San Diego-Carlsbad-San Marcos, California (37%); Riverside-San Bernardino-Ontario, California (35%); and New York-Northern New Jersey-Long Island, New York-New Jersey-Pennsylvania (35%).