Source: The Providence Journal (Rhode Island)
PROVIDENCE –– In a decision issued Friday, U.S. Bankruptcy Court Judge Arthur N. Votolato upheld the court’s right to establish a mediation program for homeowners facing foreclosure.
Votolato implemented the program, called the loss mitigation program, in November 2009. It does not require lenders to issue loan modifications, but it requires them to engage in good-faith negotiations with borrowers who want to modify their mortgages.
With the decision, Votolato overruled objections to the program filed by creditors in two bankruptcy cases. The creditors are PHH Mortgage Corp., doing business as PHH Mortgage Service Center, and Ocwen Loan Serving LLC as servicer of Deutsche Bank National Trust Co.
The cases involve homeowners Alberto G. Sosa and Jason E. and Bridget L. Lawton.
“Today’s decision by Judge Votolato is a win for Rhode Island homeowners,” said U.S. Sen. Sheldon Whitehouse, D-R.I. “The Rhode Island bankruptcy court’s foreclosure-mediation program helps distressed families to cut through the red tape of our broken mortgage modification process and has already saved at least 100 homes in our state.
“I hope today’s decision will encourage other bankruptcy districts to follow Rhode Island’s lead and adopt similar programs.”
In Friday’s decision, Votolato stated the program “was implemented in response to the home mortgage and foreclosure crisis generally,” and also because the court “repeatedly had to postpone hearings” due to delays that debtors were experiencing in seeking out-of-court mortgage-loan modifications.
“This practice of parties repeatedly seeking more time simply because they had not yet connected was counterproductive, it was a huge waste of time for the parties and the Court, and was forcing needless litigation ...” the order stated. “...We decided to break the log jam” by introducing a process that would open “communications between debtors and the lenders’ decision-makers.”
At a hearing in October, Whitehouse praised Votolato’s program, saying it is especially needed because of the documented failures of the federal government’s flagship foreclosure-prevention program, the Home Affordable Modification Program.
Just $4 billion of the $30 billion budgeted for HAMP is likely to be spent, and only a fraction of eligible homeowners will be assisted by the program, according to a December report from the Congressional Oversight Panel.
Whitehouse will chair a Senate Judiciary Committee hearing Tuesday to examine the success of bankruptcy court mediation programs.
The Center for Responsible Lending projects that 31,192 homes in Rhode Island will proceed to foreclosure during the years 2009 to 2012.
URL to original article: http://www.housingwire.com/2011/01/30/judge-upholds-bankruptcy-courts-right-to-launch-foreclosure-mediation-program
Monday, January 31, 2011
Wednesday, January 26, 2011
Moody's says keeping Fannie, Freddie intact is lose-lose
by JACOB GAFFNEY
The Treasury Department is delaying a report on the future of the government-sponsored enterprises from the end of January until mid-February.
Meanwhile, Moody's Investors Service is throwing its hat into the ring, arguing that the current model is not only unsustainable, but against government vision.
Residential mortgage analysts at the rating agency say that keeping Fannie Mae and Freddie Mac in the current manifestation would create two scenarios. And both are not good.
"If the GSE model is to be preserved, the companies would require far more capital and the risk premia on their debt would likely be much higher," write the analysts in a report Tuesday.
"This would, in turn, necessitate either significantly higher mortgage rates, in contradiction of the government’s first policy objective of providing affordable housing financing," they continue, "or require much more financial backing from the government, defeating the second, fiscal objective of maximizing private-sector participation in the $5 trillion GSE mortgage market in order to reduce the risk of taxpayer bailouts."
The report quotes Federal Housing Finance Agency figures that show Fannie may end up owing the U.S. government between $14.7 billion and $23.2 billion in annual preferred dividends — even though the company has never earned more than $8.1 billion.
Freddie may be on the hook for up to $10.4 billion to the Treasury. Freddie's highest yearly earning was in 2002, when the GSE posted $7.1 billion in profits.
"Clearly, the failure of the GSEs’ financial model, including their inability to service their preferred dividends over the longer term, mean that reform must occur at some point," they add.
Moody's is maintaining its stable rating on the GSEs and predicts a window of 12 to 18 months for reform.
"Although there are many directions GSE reform could take, we believe the likely path will result in the U.S. government supporting the senior obligations issued by the GSEs prior to the implementation of reform through their final maturities," they conclude, "as well as the continuance of the effective credit substitution of the U.S. sovereign rating for these instruments."
URL to original article: http://www.housingwire.com/2011/01/25/moodys-says-keeping-fannie-freddie-intact-is-lose-lose
The Treasury Department is delaying a report on the future of the government-sponsored enterprises from the end of January until mid-February.
Meanwhile, Moody's Investors Service is throwing its hat into the ring, arguing that the current model is not only unsustainable, but against government vision.
Residential mortgage analysts at the rating agency say that keeping Fannie Mae and Freddie Mac in the current manifestation would create two scenarios. And both are not good.
"If the GSE model is to be preserved, the companies would require far more capital and the risk premia on their debt would likely be much higher," write the analysts in a report Tuesday.
"This would, in turn, necessitate either significantly higher mortgage rates, in contradiction of the government’s first policy objective of providing affordable housing financing," they continue, "or require much more financial backing from the government, defeating the second, fiscal objective of maximizing private-sector participation in the $5 trillion GSE mortgage market in order to reduce the risk of taxpayer bailouts."
The report quotes Federal Housing Finance Agency figures that show Fannie may end up owing the U.S. government between $14.7 billion and $23.2 billion in annual preferred dividends — even though the company has never earned more than $8.1 billion.
Freddie may be on the hook for up to $10.4 billion to the Treasury. Freddie's highest yearly earning was in 2002, when the GSE posted $7.1 billion in profits.
"Clearly, the failure of the GSEs’ financial model, including their inability to service their preferred dividends over the longer term, mean that reform must occur at some point," they add.
Moody's is maintaining its stable rating on the GSEs and predicts a window of 12 to 18 months for reform.
"Although there are many directions GSE reform could take, we believe the likely path will result in the U.S. government supporting the senior obligations issued by the GSEs prior to the implementation of reform through their final maturities," they conclude, "as well as the continuance of the effective credit substitution of the U.S. sovereign rating for these instruments."
URL to original article: http://www.housingwire.com/2011/01/25/moodys-says-keeping-fannie-freddie-intact-is-lose-lose
Tuesday, January 25, 2011
Mortgage loan origination to drop below $1 trillion in 2011
by JASON PHILYAW
Residential mortgage origination will fall short of $1 trillion in 2011, dropping to levels last seen about 15 years ago, according to one market research firm.
iEmergent expects mortgage loan purchase volume plus refinancings of between $903.8 billion and $990.7 billion this year.
"Expect total volume to move toward the lower end of the range if mortgage rates rise and the refinance spigot shuts off during the first half of the year," said Dennis Hedlund, president of the Iowa-based firm.
iEmergent expects the total number of refinancings to decline by nearly one-third this year with a corresponding drop in dollar volume of 29%. The company also projects slow growth in the housing market for 2012 through 2015.
"No one wants to hear about crippled communities and dire housing situations. We'd rather not forecast a floundering home financing depression, either. But we believe that those who trumpet a burgeoning housing recovery for 2011 are grasping at very elusive straws," Hedlund said. (Click chart to expand.)
iEmergent also projects slow growth in the housing market for 2012 through 2015.
While the number of purchases is projected to be flat with 2010 at about 2,620, the total dollar amount is expected to dip 0.4% from last year's estimated $493.2 billion to $490.9 billion, according to iEmergent.
The firm also expects average loan size to decline in 2011, due to continued declines in housing prices "caused by high for-sale inventory levels, recalcitrant overhang, weak homebuyer demand, the shadow inventory of impending foreclosures, and tighter product, down payment and credit standards."
iEmergent said Fannie Mae, Freddie Mac and the Mortgage Bankers Association "offer slightly rosier futures" with their projections for 2011 home loan originations. But the estimates these "industry oracles" have put forth for each year between 2004 and 2009 were consistently high by an average of more than 30% compared to volumes eventually reported by lenders, the research firm said.
Hedlund said the robo-signing debacle of the past few months has severely damaged the reputation of the entire banking and mortgage lending industries. And demand is too weak despite rates at generational lows and falling home prices.
"The result: An angry American public that likes banks and bankers less than they like the TSA," he said. "The U.S. will remain in the throes of a real estate collapse that will take years to repair."
iEmergent has been projecting mortgage volume declines consistently for the past few years.
URL to original article: http://www.housingwire.com/2011/01/25/mortgage-loan-origination-to-drop-below-1-trillion-in-2011
Americans' savings take a hit, along with their loans
Source: Wall Street Journal
Wall Street Journal's Mark Whitehouse reports on a watershed change in the nation's savings and investment behavioral trends. "Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve. That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year." Hopefully, a temporary phenomenon.
URL to original article: http://www.builderonline.com/builder-pulse/americans-savings-take-a-hit.aspx?cid=NWBD110125002
Wall Street Journal's Mark Whitehouse reports on a watershed change in the nation's savings and investment behavioral trends. "Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve. That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year." Hopefully, a temporary phenomenon.
URL to original article: http://www.builderonline.com/builder-pulse/americans-savings-take-a-hit.aspx?cid=NWBD110125002
Monday, January 24, 2011
Outraged about Fannie and Freddie's legal bills?
Source: The Atlantic
The consequences of Fannie Mae and Freddie Mac's bailout continue to get uglier and uglier. We already know taxpayers will be on the hook for at least $150 billion of losses that the mortgage companies have incurred. Now we learn of another messy outcome: Americans are also on the hook for Fannie and Freddie's still growing legal bills. And their cost is already in the hundreds of millions of dollars. The natural reaction to this is outrage, but how angry should we be?
Gretchen Morgenson of the New York Times provides the numbers. She says taxpayers are on the hook for around $160 million in legal bills so far. A large portion of this total went to pay for litigation surrounding accounting manipulation by Fannie Mae prior to the mortgage crisis taking hold. Millions of dollars have also been spent since, as suits continue to be brought against the companies.
Why Bailouts Are Bad
The first sort of glaringly obvious lesson here is that bailouts are bad. When the government took over Fannie and Freddie it agreed to also cover all of its legal expenses. That created a very strange circumstance in some cases. For example, some of the lawsuits regarding the accounting manipulation were brought by government oversight offices. So that means the government is paying for both sides of the litigation now, since it's covering the defendants' bills and obviously its own.
Bailouts Are Messy
Something else we probably could have predicted: bailouts are very messy. If a firm needs a massive bailout, chances are pretty good that some shenanigans took place somewhere along the way that led to its collapse. If the government takes it over and becomes responsible for its legal fees, then it shouldn't be too surprised when the bills start stacking up. That will leave taxpayers will be on the hook for those legal expenses.
Do We Need Rulemaking On Bailouts?
In theory, bailouts shouldn't happen anymore. The non-bank resolution authority was created to prevent the government from ever having to take over a company again. Of course, this assumes that the new regulatory tool will work. Financial reform didn't explicitly tackle situations where the government finds itself in a situation where it feels forced to take over a firm going forward -- it just assumed that would never happen again. This assumption isn't enough. If Congress passes rules surrounding things like legal bills and executive compensation, then this could make such bailouts a little easier to stomach. For example, one rule could be that executives must be responsible for their own legal expenses whenever a firm is rescued. Even though we hope to never see another bailout, there is some value in being practical about the matter.
A Drop in the Bucket?
Finally, this news should definitely outrage taxpayers. At $160 million, every man, woman, and child in the United States would have to pay 50 cents to cover Fannie and Freddie's legal bills. And yet, compared to the full bailout cost for Fannie and Freddie, this is actually a drop in the bucket. If you consider the bailout's still growing $150 billion cost to taxpayers thus far, then these legal bills amount to one-tenth of one-percent, or 0.1%, of the total. So while we shouldn't shrug this problem off, we also shouldn't lose site of the bigger issue: that the government backing of the mortgage market resulted in a cost of at least $480 for every one of the 311 million people living in the U.S.
URL to original article: http://www.housingwire.com/2011/01/24/outraged-about-fannie-and-freddies-legal-bills
The consequences of Fannie Mae and Freddie Mac's bailout continue to get uglier and uglier. We already know taxpayers will be on the hook for at least $150 billion of losses that the mortgage companies have incurred. Now we learn of another messy outcome: Americans are also on the hook for Fannie and Freddie's still growing legal bills. And their cost is already in the hundreds of millions of dollars. The natural reaction to this is outrage, but how angry should we be?
Gretchen Morgenson of the New York Times provides the numbers. She says taxpayers are on the hook for around $160 million in legal bills so far. A large portion of this total went to pay for litigation surrounding accounting manipulation by Fannie Mae prior to the mortgage crisis taking hold. Millions of dollars have also been spent since, as suits continue to be brought against the companies.
Why Bailouts Are Bad
The first sort of glaringly obvious lesson here is that bailouts are bad. When the government took over Fannie and Freddie it agreed to also cover all of its legal expenses. That created a very strange circumstance in some cases. For example, some of the lawsuits regarding the accounting manipulation were brought by government oversight offices. So that means the government is paying for both sides of the litigation now, since it's covering the defendants' bills and obviously its own.
Bailouts Are Messy
Something else we probably could have predicted: bailouts are very messy. If a firm needs a massive bailout, chances are pretty good that some shenanigans took place somewhere along the way that led to its collapse. If the government takes it over and becomes responsible for its legal fees, then it shouldn't be too surprised when the bills start stacking up. That will leave taxpayers will be on the hook for those legal expenses.
Do We Need Rulemaking On Bailouts?
In theory, bailouts shouldn't happen anymore. The non-bank resolution authority was created to prevent the government from ever having to take over a company again. Of course, this assumes that the new regulatory tool will work. Financial reform didn't explicitly tackle situations where the government finds itself in a situation where it feels forced to take over a firm going forward -- it just assumed that would never happen again. This assumption isn't enough. If Congress passes rules surrounding things like legal bills and executive compensation, then this could make such bailouts a little easier to stomach. For example, one rule could be that executives must be responsible for their own legal expenses whenever a firm is rescued. Even though we hope to never see another bailout, there is some value in being practical about the matter.
A Drop in the Bucket?
Finally, this news should definitely outrage taxpayers. At $160 million, every man, woman, and child in the United States would have to pay 50 cents to cover Fannie and Freddie's legal bills. And yet, compared to the full bailout cost for Fannie and Freddie, this is actually a drop in the bucket. If you consider the bailout's still growing $150 billion cost to taxpayers thus far, then these legal bills amount to one-tenth of one-percent, or 0.1%, of the total. So while we shouldn't shrug this problem off, we also shouldn't lose site of the bigger issue: that the government backing of the mortgage market resulted in a cost of at least $480 for every one of the 311 million people living in the U.S.
URL to original article: http://www.housingwire.com/2011/01/24/outraged-about-fannie-and-freddies-legal-bills
Texas passes Florida for second most reverse mortgages in U.S.
by JON PRIOR
The amount of reverse mortgages originated in Texas is growing, passing Florida for the second most nationwide but still behind California, where 13% of these loans are located.
A reverse or Home Equity Conversion Mortgage allows the borrower, who must be at least 62 years old, to convert a portion of the equity in the home for cash. No repayment is required until the borrower no longer uses the home as a principal residence or does not meet the obligations of the loan.
According to the Texas Mortgage Bankers Association, there are currently more than 72,000 reverse mortgages outstanding in the U.S. Texas holds more than 6,300 for an 8.2% market share.
"This is incredibly positive news for Texas families," TMBA President Scott Norman said. "As more seniors are forced to cope with rising cost of health care and home improvements, reverse mortgages will take on a greater significance."
But these loans are not without their risks. Former Florida Attorney General Bill McCollum warned senior citizens in 2008 about several scams that target them directly. Predatory lenders, he said, can often engage in deceptive practices and use high-pressure sales tactics to steer borrowers into "inappropriate loans."
He did say that reverse mortgages can serve a purpose when financed through the Department of Housing and Urban Development's HECM programs.
Still, reverse mortgages are becoming more popular in Texas. In 1999, the Legislature amended the Texas constitution to authorize reverse mortgage lending. Since 2008, senior citizens in the state have borrowed more than $2 billion.
More could be coming. The real estate center at Texas A&M University estimates that by 2030, 5.18 million Texans will be over the age of 62, compared to 2.5 million in 2010.
"The overwhelming growth we’re seeing reinforces our belief that reverse mortgages remain a safe and viable option for Texas seniors as they evaluate their retirement plans," Norman said.
URL to original article: http://www.housingwire.com/2011/01/21/texas-passes-florida-for-second-most-reverse-mortgages-in-u-s
The amount of reverse mortgages originated in Texas is growing, passing Florida for the second most nationwide but still behind California, where 13% of these loans are located.
A reverse or Home Equity Conversion Mortgage allows the borrower, who must be at least 62 years old, to convert a portion of the equity in the home for cash. No repayment is required until the borrower no longer uses the home as a principal residence or does not meet the obligations of the loan.
According to the Texas Mortgage Bankers Association, there are currently more than 72,000 reverse mortgages outstanding in the U.S. Texas holds more than 6,300 for an 8.2% market share.
"This is incredibly positive news for Texas families," TMBA President Scott Norman said. "As more seniors are forced to cope with rising cost of health care and home improvements, reverse mortgages will take on a greater significance."
But these loans are not without their risks. Former Florida Attorney General Bill McCollum warned senior citizens in 2008 about several scams that target them directly. Predatory lenders, he said, can often engage in deceptive practices and use high-pressure sales tactics to steer borrowers into "inappropriate loans."
He did say that reverse mortgages can serve a purpose when financed through the Department of Housing and Urban Development's HECM programs.
Still, reverse mortgages are becoming more popular in Texas. In 1999, the Legislature amended the Texas constitution to authorize reverse mortgage lending. Since 2008, senior citizens in the state have borrowed more than $2 billion.
More could be coming. The real estate center at Texas A&M University estimates that by 2030, 5.18 million Texans will be over the age of 62, compared to 2.5 million in 2010.
"The overwhelming growth we’re seeing reinforces our belief that reverse mortgages remain a safe and viable option for Texas seniors as they evaluate their retirement plans," Norman said.
URL to original article: http://www.housingwire.com/2011/01/21/texas-passes-florida-for-second-most-reverse-mortgages-in-u-s
Friday, January 21, 2011
Most MSAs see significant home price decline in November: Radar Logic
by CHRISTINE RICCIARDI
URL to original article: http://www.housingwire.com/2011/01/20/most-msas-see-significant-home-price-decline-in-november-radar-logic
Most major metropolitan statistical areas experienced significant declines in home prices in November from a year earlier, according to the Radar Logic RPX composite price index released Thursday.
The report said November home prices fell in 22 of the 25 MSAs tracked by Radar Logic, with the largest declines in Atlanta (down 12.7%), Chicago (down 10.5%), Miami (down 9.3%) and Minneapolis (down 8.9%).
Homes prices for November remained essentially flat with October, increasing just 0.3%. Radar Logic said that upward swing will be short-lived.
"Based on the historical pattern of housing price changes in autumn and winter, we expect to see declines in the RPX composite resume when the December 2010 RPX values are published next month," the firm said.
On a month-over-month basis, home prices in Milwaukee, Jacksonville, New York and Seattle increased the most — up 5.6%, 3.6%, 2.2% and 1.9%, respectively.
The number of sales transactions between Oct. 18 and Nov. 18 fell 2.5%, marking the sixth consecutive month of declines. Transactions fell in 15 MSAs. Compared to 2009, transactions for the period plummeted 25.6% no longer aided by the government's homebuyer tax-incentive plan that expired in April, Radar Logic said.
"In fall 2009, the federal government bolstered housing demand and therefore sales by offering tax credits to homebuyers and reducing mortgage rates through the Fed's purchases of over $1.4 trillion in mortgage-backed securities and agency debt," the report said. "These initiatives were phased out by mid-2010, and transaction counts decline year-over-year in all 25 MSAs tracked by Radar Logic as a result."
Of the transactions that occurred during the month, 28% are attributable to "motivated sales," or foreclosure sales/auctions by financial institutions. This number is up 23% from one year prior, and is expected to increase in the coming months as Radar Logic predicts more homebuyers will strategically default and their homes will be repossessed by the banks.
Lender Processing Services reported in November nearly 2.2. million mortgage loans were 90 days or more delinquent.
URL to original article: http://www.housingwire.com/2011/01/20/most-msas-see-significant-home-price-decline-in-november-radar-logic
Freddie Mac 30-year mortgage rates back on the rise
by CHRISTINE RICCIARDI
Mortgage rates for 30-year fixed-rate mortgages are back on the rise after two consecutive weeks of decline, according to Freddie Mac's Primary Mortgage Market Survey. The rate for that type of mortgage came in at 4.74% for the week ending Jan. 20.
The rate was 4.71% one week ago and 4.99% one year ago.
Despite the increase, rates on 15-year FRMs decreased from one week prior, down to 4.05% from 4.08%. The average origination point for this type of loan is currently 0.8. The rate for a 15-year FRM was 4.40% one year ago.
Short-term mortgage rates also showed mixed results last week. Five-year, Treasury-indexed hybrid adjustable rate mortgages dropped to 3.69% from 3.72% the week prior, while 1-year, Treasury-indexed ARMs increased two basis points to 3.25%. A year ago, the rates for these ARMs were 4.27% and 4.32%, respectively.
Freddie Mac Chief Economist Frank Nothaft commented that rates generally remained stable alongside reports that other economic factors were stable also.
Mortgage rates were little changed during the holiday week amid reports that inflation remains tame," Nothaft said. "Compared to December 2009, core consumer prices rose at a 0.8% rate, the smallest yearly increase since records began in 1958."
The Bankrate survey of large thrifts found similar results. The rate for a 30-year FRM increased one bps to 4.95%, the rate for a 15-year FRMs stayed flat at 4.29% and the rate for a 5-year ARM increased 2 bps to 3.86%.
URL to original article: http://www.housingwire.com/2011/01/20/freddie-mortgage-rates-back-on-the-rise
Mortgage rates for 30-year fixed-rate mortgages are back on the rise after two consecutive weeks of decline, according to Freddie Mac's Primary Mortgage Market Survey. The rate for that type of mortgage came in at 4.74% for the week ending Jan. 20.
The rate was 4.71% one week ago and 4.99% one year ago.
Despite the increase, rates on 15-year FRMs decreased from one week prior, down to 4.05% from 4.08%. The average origination point for this type of loan is currently 0.8. The rate for a 15-year FRM was 4.40% one year ago.
Short-term mortgage rates also showed mixed results last week. Five-year, Treasury-indexed hybrid adjustable rate mortgages dropped to 3.69% from 3.72% the week prior, while 1-year, Treasury-indexed ARMs increased two basis points to 3.25%. A year ago, the rates for these ARMs were 4.27% and 4.32%, respectively.
Freddie Mac Chief Economist Frank Nothaft commented that rates generally remained stable alongside reports that other economic factors were stable also.
Mortgage rates were little changed during the holiday week amid reports that inflation remains tame," Nothaft said. "Compared to December 2009, core consumer prices rose at a 0.8% rate, the smallest yearly increase since records began in 1958."
The Bankrate survey of large thrifts found similar results. The rate for a 30-year FRM increased one bps to 4.95%, the rate for a 15-year FRMs stayed flat at 4.29% and the rate for a 5-year ARM increased 2 bps to 3.86%.
URL to original article: http://www.housingwire.com/2011/01/20/freddie-mortgage-rates-back-on-the-rise
Thursday, January 20, 2011
Existing homes sales rose 12.3% in December to 5.28 million
by JASON PHILYAW
Existing homes sales shot up 12.3% in December, coming in well above most analysts' estimates and marking growth in five of the final six months of 2010.
The National Association of Realtors said seasonally adjusted sales rose to 5.28 million last month from 4.7 million for November, which was upwardly revised a few thousand. The monthly rate is down 2.9% from the 5.44 million units sold in December 2009.
Economists polled by Econoday were expecting December sales to climb to 4.9 million with a range of estimates from 4.55 million and 5.04 million. A Briefing.com survey projected sales of 4.85 million for last month.
"December was a good finish to 2010, when sales fluctuate more than normal," NAR Chief Economist Lawrence Yun said. "The pattern over the past six months is clearly showing a recovery. The December pace is near the volume we’re expecting for 2011, so the market is getting much closer to an adequate, sustainable level. The recovery will likely continue as job growth gains momentum and rising rents encourage more renters into ownership while exceptional affordability conditions remain."
NAR said the median existing-home price in December was $168,000, down 1% from a year earlier, and hurt the number of distressed sales that are normally discounted 10% to 15%, according to Yun.
The level of distressed-home sales last month rose to 36% of the existing-home market, up from 33% in November and 32% a year earlier.
NAR said all-cash sales have remained consistently high for the past six months at nearly 30% of the market. In December, all-cash transactions accounted for 29% of all sales down from 31% in November yet higher than 22% a year earlier.
The giant real estate industry group, which measures the completed transactions of single-family, townhomes, condos and co-ops, now puts the inventory of existing homes at 3.56 million, which is an 8.1-month supply and down 4.2% from November when inventory represented a 9.5-month supply.
Mortgage interest rates rose steadily the last few weeks of 2010 and the average rate for a 30-year, fixed-rate mortgage was 4.71% in December up from 4.3% a month earlier. Rates reached the lowest level in generations in early November at 4.07%, according to Zillow.
In late December, Freddie Mac said the average rate for a traditional 30-year mortgage in 2010 was the lowest since 1955 at 4.7%.
"Historically low mortgage interest rates, stable home prices, and pent-up demand are drawing home buyers into the market," said NAR President Ron Phipps. "Recent home buyers have been successful with very low default rates, given the outstanding performance for loans originated in 2009 and 2010."
Sales of single-family homes rose 12% in December from the prior month but were 2.5% lower than a year earlier. Existing condo and co-op sales increase 16.4% from November yet remain 5.2% below the 2009 pace, according to NAR.
"The decent increase in existing home sales in December takes them marginally above the levels seen before sales were boosted and subsequently depressed by the homebuyer tax credit," according to analysts at Capital Economics. "But high unemployment, tight credit conditions and fears of more price declines mean that further upward progress will be gradual."
URL to original article: http://www.housingwire.com/2011/01/20/existing-homes-sales-shot-up-12-3-in-december-to-5-28-million
Existing homes sales shot up 12.3% in December, coming in well above most analysts' estimates and marking growth in five of the final six months of 2010.
The National Association of Realtors said seasonally adjusted sales rose to 5.28 million last month from 4.7 million for November, which was upwardly revised a few thousand. The monthly rate is down 2.9% from the 5.44 million units sold in December 2009.
Economists polled by Econoday were expecting December sales to climb to 4.9 million with a range of estimates from 4.55 million and 5.04 million. A Briefing.com survey projected sales of 4.85 million for last month.
"December was a good finish to 2010, when sales fluctuate more than normal," NAR Chief Economist Lawrence Yun said. "The pattern over the past six months is clearly showing a recovery. The December pace is near the volume we’re expecting for 2011, so the market is getting much closer to an adequate, sustainable level. The recovery will likely continue as job growth gains momentum and rising rents encourage more renters into ownership while exceptional affordability conditions remain."
NAR said the median existing-home price in December was $168,000, down 1% from a year earlier, and hurt the number of distressed sales that are normally discounted 10% to 15%, according to Yun.
The level of distressed-home sales last month rose to 36% of the existing-home market, up from 33% in November and 32% a year earlier.
NAR said all-cash sales have remained consistently high for the past six months at nearly 30% of the market. In December, all-cash transactions accounted for 29% of all sales down from 31% in November yet higher than 22% a year earlier.
The giant real estate industry group, which measures the completed transactions of single-family, townhomes, condos and co-ops, now puts the inventory of existing homes at 3.56 million, which is an 8.1-month supply and down 4.2% from November when inventory represented a 9.5-month supply.
Mortgage interest rates rose steadily the last few weeks of 2010 and the average rate for a 30-year, fixed-rate mortgage was 4.71% in December up from 4.3% a month earlier. Rates reached the lowest level in generations in early November at 4.07%, according to Zillow.
In late December, Freddie Mac said the average rate for a traditional 30-year mortgage in 2010 was the lowest since 1955 at 4.7%.
"Historically low mortgage interest rates, stable home prices, and pent-up demand are drawing home buyers into the market," said NAR President Ron Phipps. "Recent home buyers have been successful with very low default rates, given the outstanding performance for loans originated in 2009 and 2010."
Sales of single-family homes rose 12% in December from the prior month but were 2.5% lower than a year earlier. Existing condo and co-op sales increase 16.4% from November yet remain 5.2% below the 2009 pace, according to NAR.
"The decent increase in existing home sales in December takes them marginally above the levels seen before sales were boosted and subsequently depressed by the homebuyer tax credit," according to analysts at Capital Economics. "But high unemployment, tight credit conditions and fears of more price declines mean that further upward progress will be gradual."
URL to original article: http://www.housingwire.com/2011/01/20/existing-homes-sales-shot-up-12-3-in-december-to-5-28-million
Adjustable-rate mortgages fall to 3% market share as homeowners watch risk
by JON PRIOR
A recent New York Federal Reserve report shows that adjustable-rate mortgages fell from a nearly 70% share of the market in 1994 to just 3% in early 2009 as homebuyers grew more wary of the risks associated in these products. One of the government-sponsored enterprises, Freddie Mac, is also stating it is doubtful the mortgage product will return to those glory days any time soon.
Freddie Mac studied prime loan offerings from Jan. 3 to Jan. 5 of this year, and found that ARMs are financing just 7% of new home purchases. The report from the New York Fed developed two theories for the fall. One, was that when the securitized mortgage market collapsed in 2008, a place where ARMs were predominate, homebuyers had less access to these products.
But the NY Fed's second theory coincided with what Freddie Mac Chief Economist Frank Nothaft found: Homebuyers were simply more aware of the risk.
"Households have become more risk averse following the publicity given to high default rates on subprime ARMs, and the reports of 'payment shock' associated with interest rate resets on ARMs," the NY Fed said in its report.
Nothaft, too, concluded, "Homebuyers have shied away from ARMs because they are wary of the risks. The potential for much larger payments if future interest rates are significantly higher and the high delinquency rates borrowers have experienced on ARMs over the past couple of years have led consumers to prefer fixed-rate loans instead of ARMs."
Of adjustable-rate loans that were offered to homeowners, 5/1 hybrid ARMs are the most popular. Nearly every lender surveyed by Freddie offered one. Seven in 10 lenders offered a 3/1 hybrid ARM, and only 9% of lenders surveyed offered a 3/3 ARM, which adjusts once every three years.
Nothaft added that fixed-rate loans currently continue to stay at such low levels, that homebuyers do not see the incentive for ARMs, which are only slightly lower. The NY Fed drew a similar conclusion as well, citing historical patterns that showed borrowers preferred fixed-rate loans over ARMs when both were advertising low rates.
However, Nothaft expects ARMs to gradually gain back favor with some borrowers, possibly rising to an average 9% market share by the end of 2011.
URL to original article: http://www.housingwire.com/2011/01/18/adjustable-rate-mortgages-fall-to-3-market-share-as-homeowners-watch-risk
A recent New York Federal Reserve report shows that adjustable-rate mortgages fell from a nearly 70% share of the market in 1994 to just 3% in early 2009 as homebuyers grew more wary of the risks associated in these products. One of the government-sponsored enterprises, Freddie Mac, is also stating it is doubtful the mortgage product will return to those glory days any time soon.
Freddie Mac studied prime loan offerings from Jan. 3 to Jan. 5 of this year, and found that ARMs are financing just 7% of new home purchases. The report from the New York Fed developed two theories for the fall. One, was that when the securitized mortgage market collapsed in 2008, a place where ARMs were predominate, homebuyers had less access to these products.
But the NY Fed's second theory coincided with what Freddie Mac Chief Economist Frank Nothaft found: Homebuyers were simply more aware of the risk.
"Households have become more risk averse following the publicity given to high default rates on subprime ARMs, and the reports of 'payment shock' associated with interest rate resets on ARMs," the NY Fed said in its report.
Nothaft, too, concluded, "Homebuyers have shied away from ARMs because they are wary of the risks. The potential for much larger payments if future interest rates are significantly higher and the high delinquency rates borrowers have experienced on ARMs over the past couple of years have led consumers to prefer fixed-rate loans instead of ARMs."
Of adjustable-rate loans that were offered to homeowners, 5/1 hybrid ARMs are the most popular. Nearly every lender surveyed by Freddie offered one. Seven in 10 lenders offered a 3/1 hybrid ARM, and only 9% of lenders surveyed offered a 3/3 ARM, which adjusts once every three years.
Nothaft added that fixed-rate loans currently continue to stay at such low levels, that homebuyers do not see the incentive for ARMs, which are only slightly lower. The NY Fed drew a similar conclusion as well, citing historical patterns that showed borrowers preferred fixed-rate loans over ARMs when both were advertising low rates.
However, Nothaft expects ARMs to gradually gain back favor with some borrowers, possibly rising to an average 9% market share by the end of 2011.
URL to original article: http://www.housingwire.com/2011/01/18/adjustable-rate-mortgages-fall-to-3-market-share-as-homeowners-watch-risk
Wednesday, January 19, 2011
We're all Goonies now
by RICK GRANT
I caught an old movie over the long weekend. One of the cable channels (I don't know which one. It comes on after you hit the next channel button a couple hundred times in search of something to watch) was running the 1985 film "The Goonies." It took me back to my college days and surprised me with a critical connection to the mortgage lending business I'd never noticed before.
Without going into a lot of detail, the movie revolves around a group of kids (led by a sword wielding Sean Astin long before his "Lord of the Ring" days) who are desperate to help their parents stave off the impending foreclosure of their home.
The antagonists are a family of petty criminals, led by Anne Ramsey, that tries to beat the kids to a fabled treasure that folklore says is hidden in a cave by the bay. But the real bad guys are the rich mortgage holders who plan to foreclose on all of the neighborhood homes and build a golf course.
Even back in the 1980s, you could count on moviegoers to know that rich folks who hold your mortgage cannot be trusted.
But things were different back then. Today, with an estimated half a million homes owned by banks and enough shadow inventory to keep our real estate agents in homes to sell for over four years without building any more, bankers don't even want to think about another foreclosure. This is too bad because other estimates suggest that we've only worked our way through about half of the properties that will eventually be foreclosed upon.
Of course, banks will have to work against the courts, shoddy paper trails in their own shops and their partners', legislators and the plaintiff's bar to get these foreclosures done. If they don't, it could hold off a housing recovery for … well, no one knows for how long.
It should come as no surprise that today, everyone wants to be on the Goonies' team.
Bankers don't want to deal with REO any more than homeowners want to be kicked out of their houses. It would be easier to make everyone happy if people paid their mortgages.
I realize that's not a politically correct thing to say. We are in the middle of an economic downturn and people do get sick and divorced, to say nothing of strategic default. I just think that if more people thought like the Goonies, this problem wouldn't be as serious as it is.
This group of kids know that they're about to lose their home and have to start over at a new school. They don't even discuss why their parents are behind on the mortgage, except to show the mother's arm in a cast and throw out one line about how the dad was passed over for a promotion. Instead, they focus on what they can do to get the mortgage paid. It's the hook that spins us into the movie.
The Goonies win in the movie because the kids make the conscious decision to take control of their lives and risk everything on an adventure that just might give them a chance to stay in their home.
It's totally unrealistic, '80s fun that bears no resemblance to anything in the real world. And yet, the film worked for a lot of people of my generation because it spoke to that part of us that believed we could take control — the part that didn't sit around waiting for an unemployment check or a government bailout.
Maybe our industry isn't the best one to tell folks not to take the bailout money if Uncle Sam stops by with his checkbook, but I have to believe we'd all be a lot better off if none of us took it and we acted more like Goonies.
URL to original article: http://www.housingwire.com/2011/01/18/were-all-goonies-now-2
I caught an old movie over the long weekend. One of the cable channels (I don't know which one. It comes on after you hit the next channel button a couple hundred times in search of something to watch) was running the 1985 film "The Goonies." It took me back to my college days and surprised me with a critical connection to the mortgage lending business I'd never noticed before.
Without going into a lot of detail, the movie revolves around a group of kids (led by a sword wielding Sean Astin long before his "Lord of the Ring" days) who are desperate to help their parents stave off the impending foreclosure of their home.
The antagonists are a family of petty criminals, led by Anne Ramsey, that tries to beat the kids to a fabled treasure that folklore says is hidden in a cave by the bay. But the real bad guys are the rich mortgage holders who plan to foreclose on all of the neighborhood homes and build a golf course.
Even back in the 1980s, you could count on moviegoers to know that rich folks who hold your mortgage cannot be trusted.
But things were different back then. Today, with an estimated half a million homes owned by banks and enough shadow inventory to keep our real estate agents in homes to sell for over four years without building any more, bankers don't even want to think about another foreclosure. This is too bad because other estimates suggest that we've only worked our way through about half of the properties that will eventually be foreclosed upon.
Of course, banks will have to work against the courts, shoddy paper trails in their own shops and their partners', legislators and the plaintiff's bar to get these foreclosures done. If they don't, it could hold off a housing recovery for … well, no one knows for how long.
It should come as no surprise that today, everyone wants to be on the Goonies' team.
Bankers don't want to deal with REO any more than homeowners want to be kicked out of their houses. It would be easier to make everyone happy if people paid their mortgages.
I realize that's not a politically correct thing to say. We are in the middle of an economic downturn and people do get sick and divorced, to say nothing of strategic default. I just think that if more people thought like the Goonies, this problem wouldn't be as serious as it is.
This group of kids know that they're about to lose their home and have to start over at a new school. They don't even discuss why their parents are behind on the mortgage, except to show the mother's arm in a cast and throw out one line about how the dad was passed over for a promotion. Instead, they focus on what they can do to get the mortgage paid. It's the hook that spins us into the movie.
The Goonies win in the movie because the kids make the conscious decision to take control of their lives and risk everything on an adventure that just might give them a chance to stay in their home.
It's totally unrealistic, '80s fun that bears no resemblance to anything in the real world. And yet, the film worked for a lot of people of my generation because it spoke to that part of us that believed we could take control — the part that didn't sit around waiting for an unemployment check or a government bailout.
Maybe our industry isn't the best one to tell folks not to take the bailout money if Uncle Sam stops by with his checkbook, but I have to believe we'd all be a lot better off if none of us took it and we acted more like Goonies.
URL to original article: http://www.housingwire.com/2011/01/18/were-all-goonies-now-2
Tuesday, January 18, 2011
Mortgage defaults decline in December
by JACOB GAFFNEY
More Americans are coming current and staying current on their debts, according to the latest Consumer Credit Default Indices released today by Standard & Poor’s and Experian.
For mortgages, the data shows a turnaround in month-on-month behavior. December's monthly default rates for first and second mortgages stand at 2.93% and 1.74% respectively. In November mortgage defaults were on the rise, with default rates for first and second mortgages at 3.05% and 1.80% respectively.
However, the November rise in defaults proved to be a blip, the only such month of mortgage default increase since December 2009.
The year over year decline in mortgage defaults currently stands at around 34%.
“Nationally, consumers continue to gradually improve their financial condition,” said David Blitzer, managing director and chairman of the Index Committee at Standard & Poor’s. “Debt-service ratios, the proportion of disposable income that goes to paying debt, continues to decline."
Consumer credit defaults varied across major cities and regions of the U.S. Among the five major metropolitan statistical areas reported each month, Los Angeles and Chicago experienced a decrease in defaults this month to 3.07% and 3.13%, respectively. Dallas was the only one that had increased in default rates at 2.21%. Miami and New York defaults declined slightly to 10.15% and 3.01% respectively.
Auto loans experienced the biggest decline this month to 1.68% from 1.76% in November.
The Indices are calculated based on data extracted from Experian's consumer credit database. The credit rating agency, S&P, powers the data. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month, covering approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
URL to original article: http://www.housingwire.com/2011/01/18/mortgage-defaults-decline-in-december
More Americans are coming current and staying current on their debts, according to the latest Consumer Credit Default Indices released today by Standard & Poor’s and Experian.
For mortgages, the data shows a turnaround in month-on-month behavior. December's monthly default rates for first and second mortgages stand at 2.93% and 1.74% respectively. In November mortgage defaults were on the rise, with default rates for first and second mortgages at 3.05% and 1.80% respectively.
However, the November rise in defaults proved to be a blip, the only such month of mortgage default increase since December 2009.
The year over year decline in mortgage defaults currently stands at around 34%.
“Nationally, consumers continue to gradually improve their financial condition,” said David Blitzer, managing director and chairman of the Index Committee at Standard & Poor’s. “Debt-service ratios, the proportion of disposable income that goes to paying debt, continues to decline."
Consumer credit defaults varied across major cities and regions of the U.S. Among the five major metropolitan statistical areas reported each month, Los Angeles and Chicago experienced a decrease in defaults this month to 3.07% and 3.13%, respectively. Dallas was the only one that had increased in default rates at 2.21%. Miami and New York defaults declined slightly to 10.15% and 3.01% respectively.
Auto loans experienced the biggest decline this month to 1.68% from 1.76% in November.
The Indices are calculated based on data extracted from Experian's consumer credit database. The credit rating agency, S&P, powers the data. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month, covering approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
URL to original article: http://www.housingwire.com/2011/01/18/mortgage-defaults-decline-in-december
Mortgage mess not a concern
Source: New York Post
JPMorgan's Jamie Dimon's not sweating the bad mortgage problem hanging over the bank.
The chief executive said yesterday that JPMorgan has set aside enough in reserves to deal with potential settlements and litigation related to charges that the bank improperly documented home mortgages.
So far, JPMorgan has set aside $1.5 billion in so-called litigation reserves related to potential legal battles tied to improper foreclosures, Dimon said during a fourth-quarter call with analysts to discuss its results.
The reserves were earmarked for legal expenses linked to private label disputes.
Dimon said that the battle between banks, regulators and private companies over mortgages could be an ugly one lingering for years.
JPM's move to set aside money comes more than a week after Bank of America and Ally Bank agreed to pay hefty sums to settle claims with mortgage giants Fannie Mae and Freddie Mac that they improperly originated mortgages during the housing boom.
URL to original article: http://www.housingwire.com/2011/01/17/mortgage-mess-not-a-concern
JPMorgan's Jamie Dimon's not sweating the bad mortgage problem hanging over the bank.
The chief executive said yesterday that JPMorgan has set aside enough in reserves to deal with potential settlements and litigation related to charges that the bank improperly documented home mortgages.
So far, JPMorgan has set aside $1.5 billion in so-called litigation reserves related to potential legal battles tied to improper foreclosures, Dimon said during a fourth-quarter call with analysts to discuss its results.
The reserves were earmarked for legal expenses linked to private label disputes.
Dimon said that the battle between banks, regulators and private companies over mortgages could be an ugly one lingering for years.
JPM's move to set aside money comes more than a week after Bank of America and Ally Bank agreed to pay hefty sums to settle claims with mortgage giants Fannie Mae and Freddie Mac that they improperly originated mortgages during the housing boom.
URL to original article: http://www.housingwire.com/2011/01/17/mortgage-mess-not-a-concern
Monday, January 17, 2011
Fed report details consumer behavior during recession
by KERRY CURRY
The rise and fall of home prices was a key driver in household savings and debt behavior during the Great Recession from late 2007 to June 2009, according to a new Federal Reserve Bank of New York report.
Consumers responded to the economic stresses of the recession by curbing spending, reducing contributions to retirement accounts and paying off debt.
The savings rate during the recession largely reflects a decline in debt as households paid down mortgages and is not reflective of increased contributions to retirement or savings accounts, the report said.
Consumers were pessimistic about the availability and tightening of credit during the study period, according to the January report written by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar of the New York Fed.
The authors used a variety of data for the report, including a special Federal Reserve survey on saving, administered between the end of October 2009 and January 2010 as part of the Fed’s Household Inflation Expectations Project.
One of the most dramatic consequences in the rise and fall of home prices was the dramatic fall in home equity, the report said.
“When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in (the first quarter) 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60%,” according to the report. "At the end of 2009, owner’s equity was estimated at $6.3 trillion, still more than 50% below its 2006 peak.”
Among homeowners with mortgages, at the end of 2009, 21% reported they were “underwater” — meaning they owed more than what their house was worth — at the time of the survey. That share of underwater owners is much higher among investors, defined as those with three or more first mortgages.
Ultimately, the impact of the decline in the housing market on a specific household’s financial situation and the consequential behavior depends on many factors, the authors wrote, including where the house is located, when the house was bought and how it was financed, among other influences.
On the positive side, consumers saw historically low interest rates on loans. But few had a demand for them and supply tightened due to tougher underwriting standards.
The authors reported that the proportion of all mortgage originations with loan-to-price ratios of more than 90% dropped steadily from 31% in the middle of 2007 to about 7% of new mortgages at the end of 2009.
In addition to significant losses in housing wealth during the recession, the report also detailed how households were affected by the stock market crash in October 2008 and the declining labor market. Like the housing market, which saw big house price declines in bubble states like California, Nevada, Arizona and Florida, the unemployment rate also varied geographically and by age groups.
The national savings rate, computed by the Bureau of Economic Analysis, increased from historically low levels of around 1% in the first quarter of 2008 to recent levels of more than 6%, the report said.
URL to original article: http://www.housingwire.com/2011/01/11/fed-report-details-consumer-behavior-during-recession
The rise and fall of home prices was a key driver in household savings and debt behavior during the Great Recession from late 2007 to June 2009, according to a new Federal Reserve Bank of New York report.
Consumers responded to the economic stresses of the recession by curbing spending, reducing contributions to retirement accounts and paying off debt.
The savings rate during the recession largely reflects a decline in debt as households paid down mortgages and is not reflective of increased contributions to retirement or savings accounts, the report said.
Consumers were pessimistic about the availability and tightening of credit during the study period, according to the January report written by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar of the New York Fed.
The authors used a variety of data for the report, including a special Federal Reserve survey on saving, administered between the end of October 2009 and January 2010 as part of the Fed’s Household Inflation Expectations Project.
One of the most dramatic consequences in the rise and fall of home prices was the dramatic fall in home equity, the report said.
“When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in (the first quarter) 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60%,” according to the report. "At the end of 2009, owner’s equity was estimated at $6.3 trillion, still more than 50% below its 2006 peak.”
Among homeowners with mortgages, at the end of 2009, 21% reported they were “underwater” — meaning they owed more than what their house was worth — at the time of the survey. That share of underwater owners is much higher among investors, defined as those with three or more first mortgages.
Ultimately, the impact of the decline in the housing market on a specific household’s financial situation and the consequential behavior depends on many factors, the authors wrote, including where the house is located, when the house was bought and how it was financed, among other influences.
On the positive side, consumers saw historically low interest rates on loans. But few had a demand for them and supply tightened due to tougher underwriting standards.
The authors reported that the proportion of all mortgage originations with loan-to-price ratios of more than 90% dropped steadily from 31% in the middle of 2007 to about 7% of new mortgages at the end of 2009.
In addition to significant losses in housing wealth during the recession, the report also detailed how households were affected by the stock market crash in October 2008 and the declining labor market. Like the housing market, which saw big house price declines in bubble states like California, Nevada, Arizona and Florida, the unemployment rate also varied geographically and by age groups.
The national savings rate, computed by the Bureau of Economic Analysis, increased from historically low levels of around 1% in the first quarter of 2008 to recent levels of more than 6%, the report said.
URL to original article: http://www.housingwire.com/2011/01/11/fed-report-details-consumer-behavior-during-recession
Friday, January 14, 2011
John Burns: Despite the housing struggle, people still want to buy
by JON PRIOR
While the overall economy is starting to head forward through recovery, housing continues to stumble behind, according to a recent report card from John Burns Real Estate.
But consumers still believe the time is right to get in.
According to the report, 88% of the 10,000 potential homeowners surveyed by John Burns believe now is a good time to buy. For entry-level homeowners, especially, the market appears very attractive. Prices have fallen as much as 30% from the peak in 2007, and while mortgage rates are longer hovering at a 50-year low, the average 30-year fixed-rate mortgage is still below 5%.
But for move-up or move-down buyers, the timing has "rarely been worse," John Burns said. As prices fell, so did the available equity in the home.
The overall economy is improving. Real GDP was revised upward by 2.6%, and the employment growth increased again in January with the rate reaching 9.4%. Homeowners are even improving their home more than ever since the housing crash. According to John Burns, homeowner improvement activity increased for the first time since the second quarter of 2007.
But the housing market strength appears only in a few "regional pockets," Société Générale said Thursday.
Nationally, housing starts increased to 465,000 units by the middle of January, but activity still remains below historical lows. Vacancy rates in the U.S. have also improved in recent quarters, falling to 2.5% by the end of 2010, the majority of the U.S. remains oversupplied. Only five states and Washington, D.C. are undersupplied.
"The economy is starting to reach its long-term average outlook. Housing, however, is clearly going to lag the recovery rather than lead it," according to John Burns.
URL to original article: http://www.housingwire.com/2011/01/13/john-burns-despite-the-housing-struggle-people-still-want-to-buy
While the overall economy is starting to head forward through recovery, housing continues to stumble behind, according to a recent report card from John Burns Real Estate.
But consumers still believe the time is right to get in.
According to the report, 88% of the 10,000 potential homeowners surveyed by John Burns believe now is a good time to buy. For entry-level homeowners, especially, the market appears very attractive. Prices have fallen as much as 30% from the peak in 2007, and while mortgage rates are longer hovering at a 50-year low, the average 30-year fixed-rate mortgage is still below 5%.
But for move-up or move-down buyers, the timing has "rarely been worse," John Burns said. As prices fell, so did the available equity in the home.
The overall economy is improving. Real GDP was revised upward by 2.6%, and the employment growth increased again in January with the rate reaching 9.4%. Homeowners are even improving their home more than ever since the housing crash. According to John Burns, homeowner improvement activity increased for the first time since the second quarter of 2007.
But the housing market strength appears only in a few "regional pockets," Société Générale said Thursday.
Nationally, housing starts increased to 465,000 units by the middle of January, but activity still remains below historical lows. Vacancy rates in the U.S. have also improved in recent quarters, falling to 2.5% by the end of 2010, the majority of the U.S. remains oversupplied. Only five states and Washington, D.C. are undersupplied.
"The economy is starting to reach its long-term average outlook. Housing, however, is clearly going to lag the recovery rather than lead it," according to John Burns.
URL to original article: http://www.housingwire.com/2011/01/13/john-burns-despite-the-housing-struggle-people-still-want-to-buy
Jobless claims rose 8.5% last week to highest level in months
by JASON PHILYAW
Initial jobless claims increased 8.5% last week to 445,000, well above most analysts' estimates and to the highest level since October.
The Labor Department said the seasonally adjusted figure of actual initial claims for the week ended Jan. 8 rose by 35,000 from the previous week's revised figure of 410,000.
Analysts surveyed by Econoday expected jobless claims to come in at 405,000 with a range of estimates from 400,000 to 415,000. A Briefing.com survey projected new claims of 415,000 for last week.
The four-week moving average, which is considered a less volatile indicator than weekly claims, increased by 5,500 to 416,500 claims from a revised average of 411,000. The seasonally adjusted insured unemployment rate fell to 3.1% for the week ended Jan. 1 from 3.3% for the prior week, according to the Labor Department.
The number of jobless claims in the first week of the year often skews higher because people wait until after the holidays to file, according to Bloomberg. Also paperwork backlogs ensure, as state unemployment offices are open for fewer hours, as reported by MarketWatch.
The total number of people receiving some sort of federal unemployment benefits shot up to nearly 9.2 million for the week ended Dec. 25, an increase of 4.8% from the previous week.
URL to original article: http://www.housingwire.com/2011/01/13/jobless-claims-rose-8-5-last-week-to-highest-level-in-months
Initial jobless claims increased 8.5% last week to 445,000, well above most analysts' estimates and to the highest level since October.
The Labor Department said the seasonally adjusted figure of actual initial claims for the week ended Jan. 8 rose by 35,000 from the previous week's revised figure of 410,000.
Analysts surveyed by Econoday expected jobless claims to come in at 405,000 with a range of estimates from 400,000 to 415,000. A Briefing.com survey projected new claims of 415,000 for last week.
The four-week moving average, which is considered a less volatile indicator than weekly claims, increased by 5,500 to 416,500 claims from a revised average of 411,000. The seasonally adjusted insured unemployment rate fell to 3.1% for the week ended Jan. 1 from 3.3% for the prior week, according to the Labor Department.
The number of jobless claims in the first week of the year often skews higher because people wait until after the holidays to file, according to Bloomberg. Also paperwork backlogs ensure, as state unemployment offices are open for fewer hours, as reported by MarketWatch.
The total number of people receiving some sort of federal unemployment benefits shot up to nearly 9.2 million for the week ended Dec. 25, an increase of 4.8% from the previous week.
URL to original article: http://www.housingwire.com/2011/01/13/jobless-claims-rose-8-5-last-week-to-highest-level-in-months
Thursday, January 13, 2011
Foreclosures getting more erratic out West: ForeclosureRadar
by JON PRIOR
As mortgage servicers grapple with unique foreclosure issues from state to state, the amount of filings varied just as widely in December.
New data from ForeclosureRadar showed mixed foreclosure levels in the states out West for the month of December. For example, foreclosure starts were down in Arizona, California and Washington, flat in Nevada, and higher in Oregon. Specifically, notice of default filings dropped 16.7% in California from the previous month but rose by 18% in Oregon.
Variations appear on the back-end of the process, too. Sales increased 17.2% in Arizona, dipped only slightly by 0.7% in California but fell 20% in Oregon.
In October, servicers froze foreclosures in 23 states where affidavits were signed without proper reviews. Then, regulators and state attorneys general branched out their investigations into the entire servicing process. Finally, 2011 kicked off with a controversial ruling by the Massachusetts Supreme Court, throwing into question any foreclosure done without the proper paperwork, the report states.
The result has been a servicing industry in serious flux, which "could certainly slow one type of activity while accelerating another," ForeclosureRadar said.
"Servicers appear to have their hands full and it may be a while before foreclosure activity stabilizes," ForeclosureRadar CEO Sean O'Toole said. "While it seems unlikely at the moment, it is our hope that 2011 will bring clarity to the foreclosures process for all involved."
URL to original article: http://www.housingwire.com/2011/01/13/foreclosures-getting-more-erratic-out-west-foreclosureradar
As mortgage servicers grapple with unique foreclosure issues from state to state, the amount of filings varied just as widely in December.
New data from ForeclosureRadar showed mixed foreclosure levels in the states out West for the month of December. For example, foreclosure starts were down in Arizona, California and Washington, flat in Nevada, and higher in Oregon. Specifically, notice of default filings dropped 16.7% in California from the previous month but rose by 18% in Oregon.
Variations appear on the back-end of the process, too. Sales increased 17.2% in Arizona, dipped only slightly by 0.7% in California but fell 20% in Oregon.
In October, servicers froze foreclosures in 23 states where affidavits were signed without proper reviews. Then, regulators and state attorneys general branched out their investigations into the entire servicing process. Finally, 2011 kicked off with a controversial ruling by the Massachusetts Supreme Court, throwing into question any foreclosure done without the proper paperwork, the report states.
The result has been a servicing industry in serious flux, which "could certainly slow one type of activity while accelerating another," ForeclosureRadar said.
"Servicers appear to have their hands full and it may be a while before foreclosure activity stabilizes," ForeclosureRadar CEO Sean O'Toole said. "While it seems unlikely at the moment, it is our hope that 2011 will bring clarity to the foreclosures process for all involved."
URL to original article: http://www.housingwire.com/2011/01/13/foreclosures-getting-more-erratic-out-west-foreclosureradar
Foreclosures in 2011 to break last year's record: RealtyTrac
by JON PRIOR
Lenders filed a record 3.8 million foreclosures in 2010, up 2% from 2009 and an increase of 23% from 2008, according to RealtyTrac. But 2011 could be even worse.
RealtyTrac follows filings across the country that include notices of default, scheduled auctions and REO. The number in 2010 would have been higher were it not for the foreclosure moratoria banks announced in October when employees were found to be signing and filing affidavits improperly in what has become known as the robo-signing scandal. RealtyTrac CEO James Saccacio said as many 250,000 foreclosures will likely be resubmitted and added to the numbers for 2011.
Daren Blomquist, who edits the RealtyTrac monthly reports, said the record set in 2010 will not last for long.
"We don’t think we’ve peaked yet nationwide," Blomquist told HousingWire. "We’re expecting the 2011 numbers to be slightly higher than 2010, and then start the downward trend toward 'normalcy' in 2012."
Saccacio said foreclosure filings would have been higher in 2010 "had it not been for the fourth quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings."
The final quarter of 2010 had the lowest total since the fourth quarter of 2008. Lenders filed slightly fewer than 800,000 foreclosure cases in the fourth quarter, down 8% from a year ago and down 14% from the previous period.
In December, filings dropped 26% from a year ago and 2% from the previous month. Lenders ramped up repossessions, REO, for the month by 4%, led by a 71% monthly increase in Nevada to 3,022 repossessions. However, Nevada REO was still down 24% from a year ago.
Overall, Nevada had the highest foreclosure rate for the fourth consecutive year. There, one in 11 homes received a filing in 2010 despite a 5% decrease in activity from 2009. Filings did ramp up 18% in December from the previous month and were up 14% from December 2009.
Arizona followed with the second highest rate. One in 17 homes there received a filing. Florida, one in 18, was third.
But Blomquist warned more foreclosures could be in store even for those markets that many believe are peaking now.
"There are some states and metro areas where it appears the numbers may have technically peaked, areas of California like Stockton are good examples," Blomquist said, "but foreclosures are still pretty high in most of those areas and there is still risk that we could see some foreclosure aftershocks hitting those markets in 2011."
URL to original article: http://www.housingwire.com/2011/01/12/foreclosures-reach-record-high-in-2010-realtytrac
Lenders filed a record 3.8 million foreclosures in 2010, up 2% from 2009 and an increase of 23% from 2008, according to RealtyTrac. But 2011 could be even worse.
RealtyTrac follows filings across the country that include notices of default, scheduled auctions and REO. The number in 2010 would have been higher were it not for the foreclosure moratoria banks announced in October when employees were found to be signing and filing affidavits improperly in what has become known as the robo-signing scandal. RealtyTrac CEO James Saccacio said as many 250,000 foreclosures will likely be resubmitted and added to the numbers for 2011.
Daren Blomquist, who edits the RealtyTrac monthly reports, said the record set in 2010 will not last for long.
"We don’t think we’ve peaked yet nationwide," Blomquist told HousingWire. "We’re expecting the 2011 numbers to be slightly higher than 2010, and then start the downward trend toward 'normalcy' in 2012."
Saccacio said foreclosure filings would have been higher in 2010 "had it not been for the fourth quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings."
The final quarter of 2010 had the lowest total since the fourth quarter of 2008. Lenders filed slightly fewer than 800,000 foreclosure cases in the fourth quarter, down 8% from a year ago and down 14% from the previous period.
In December, filings dropped 26% from a year ago and 2% from the previous month. Lenders ramped up repossessions, REO, for the month by 4%, led by a 71% monthly increase in Nevada to 3,022 repossessions. However, Nevada REO was still down 24% from a year ago.
Overall, Nevada had the highest foreclosure rate for the fourth consecutive year. There, one in 11 homes received a filing in 2010 despite a 5% decrease in activity from 2009. Filings did ramp up 18% in December from the previous month and were up 14% from December 2009.
Arizona followed with the second highest rate. One in 17 homes there received a filing. Florida, one in 18, was third.
But Blomquist warned more foreclosures could be in store even for those markets that many believe are peaking now.
"There are some states and metro areas where it appears the numbers may have technically peaked, areas of California like Stockton are good examples," Blomquist said, "but foreclosures are still pretty high in most of those areas and there is still risk that we could see some foreclosure aftershocks hitting those markets in 2011."
URL to original article: http://www.housingwire.com/2011/01/12/foreclosures-reach-record-high-in-2010-realtytrac
Wednesday, January 12, 2011
Freddie Mac says rising mortgage rates won't stop the housing recovery in 2011
by JON PRIOR
Although home sales may not improve as much as expected in 2011 because of rising mortgage rates, Freddie Mac Chief Economist Frank Nothaft still estimates a 10% increase from last year as housing and the overall economy pushes through to recovery.
In his economic outlook for 2011, Nothaft predicts home sales will reach an annual rate of 5.7 million by the fourth quarter. At the end of the third quarter in 2010, the market was on an annual rate of 3.9 million home sales. After the homebuyer tax credit expired in April, home sales plummeted by 27% in July, according to National Association of Realtors data.
Since then, the only spur to the market has been historically low rates, hovering near 4% on average, and spurring a very gradual recovery from July. But even rates have begun to increase in recent months, reaching as high as 4.83% in the middle of December for the 30-year fixed-rate loan. Nothaft predicts rates will reach as high as 5.5% by the end of the year.
But he said with prices falling as much as 30% from their peak in 2007, affordability is still very high. Unemployment should reach below 9% by the end of 2011, consumer spending is improving, and other factors could overwhelm the disappearance of 4% mortgage rates, Nothaft said.
"More robust growth of jobs and incomes should offset much of the impact of the rise in rates, and help make 2011 a year of recovery for the housing market, as well as the economy overall," he said.
URL to original article: http://www.housingwire.com/2011/01/12/freddie-mac-says-rising-mortgage-rates-wont-stop-the-housing-recovery-in-2011
Although home sales may not improve as much as expected in 2011 because of rising mortgage rates, Freddie Mac Chief Economist Frank Nothaft still estimates a 10% increase from last year as housing and the overall economy pushes through to recovery.
In his economic outlook for 2011, Nothaft predicts home sales will reach an annual rate of 5.7 million by the fourth quarter. At the end of the third quarter in 2010, the market was on an annual rate of 3.9 million home sales. After the homebuyer tax credit expired in April, home sales plummeted by 27% in July, according to National Association of Realtors data.
Since then, the only spur to the market has been historically low rates, hovering near 4% on average, and spurring a very gradual recovery from July. But even rates have begun to increase in recent months, reaching as high as 4.83% in the middle of December for the 30-year fixed-rate loan. Nothaft predicts rates will reach as high as 5.5% by the end of the year.
But he said with prices falling as much as 30% from their peak in 2007, affordability is still very high. Unemployment should reach below 9% by the end of 2011, consumer spending is improving, and other factors could overwhelm the disappearance of 4% mortgage rates, Nothaft said.
"More robust growth of jobs and incomes should offset much of the impact of the rise in rates, and help make 2011 a year of recovery for the housing market, as well as the economy overall," he said.
URL to original article: http://www.housingwire.com/2011/01/12/freddie-mac-says-rising-mortgage-rates-wont-stop-the-housing-recovery-in-2011
Foreclosure pet rescues reach the 1,000 mark, group says
by JON PRIOR
No Paws Left Behind, a nonprofit dedicated to finding homes for pets abandoned during foreclosure, said Monday it has rescued its 1,000th animal.
The organization was started by Cheryl Lang, president and CEO of Integrated Mortgage Solutions, an REO property management company based in Houston. It rescues pets from dogs and cats to llamas and pot-bellied pigs and places them in "no kill" shelters, where care is given until a family can adopt them.
"Sadly, the current housing crisis has severely affected countless homeowners creating a trickle down negative effect on helpless animals," Lang said. "During routine housing inspections, we frequently discover animals left behind in deplorable conditions with no food and at times inadequate shelter."
Many homeowners lack the finances to care for a pet once they are evicted, and many are left behind locked in basements, garages or in the backyard. NPLB provides food, shelter and vaccinations to the pets, and also provides families money to make pet deposits for their next move.
"We receive over 20 calls a week regarding an abandoned pet being left behind," said Lang. "It's just heartbreaking. Our goal is to be the voice of these silent victims and bring greater awareness and solutions to the growing phenomena of foreclosure pets."
URL to original article: http://www.housingwire.com/2011/01/10/foreclosure-pet-rescues-reach-the-1000-mark-group-says
No Paws Left Behind, a nonprofit dedicated to finding homes for pets abandoned during foreclosure, said Monday it has rescued its 1,000th animal.
The organization was started by Cheryl Lang, president and CEO of Integrated Mortgage Solutions, an REO property management company based in Houston. It rescues pets from dogs and cats to llamas and pot-bellied pigs and places them in "no kill" shelters, where care is given until a family can adopt them.
"Sadly, the current housing crisis has severely affected countless homeowners creating a trickle down negative effect on helpless animals," Lang said. "During routine housing inspections, we frequently discover animals left behind in deplorable conditions with no food and at times inadequate shelter."
Many homeowners lack the finances to care for a pet once they are evicted, and many are left behind locked in basements, garages or in the backyard. NPLB provides food, shelter and vaccinations to the pets, and also provides families money to make pet deposits for their next move.
"We receive over 20 calls a week regarding an abandoned pet being left behind," said Lang. "It's just heartbreaking. Our goal is to be the voice of these silent victims and bring greater awareness and solutions to the growing phenomena of foreclosure pets."
URL to original article: http://www.housingwire.com/2011/01/10/foreclosure-pet-rescues-reach-the-1000-mark-group-says
Monday, January 10, 2011
Refinancing wave ending, say mortgage bond analysts
by JACOB GAFFNEY
Mortgage refinancings through the Home Affordable Refinance Program known as HARP increased 26% in the third quarter of 2010. Strategists for Fannie Mae and Freddie Mac investors, however, say the spike is likely to be short lived.
Fannie Mae and Freddie Mac loan modifications through HAMP increased 16% in the third quarter of 2010, according to Federal Housing Finance Agency, which oversees the government-sponsored enterprises.
Overall, the spike remains muted as the Mortgage Bankers Association refinance index remains near a multiyear low and Braver Stern Securities reports that it would look for the December prepayment report to hit the high-water mark for prepayment speeds for this cycle. The MBA reported on Wednesday that refinancings accounted for 70.3% of all mortgage applications for the week ended Dec. 24 and 71% for the last week of the year.
Expected rises in mortgage interest rates, however, do not bode well for future refinancings.
The 5.0% coupon remains on the 40 bps refinancing cusp given the 5.04% effective mortgage rate, which moves almost 45% of the 30-year mortgage universe out of the refinancing window.
"Many investors are total return in nature and the 5.0 coupon is going to prove very sensitive to small changes in interest rates with 4.5% now completely out of the money," said Scott Buchta head of investment strategy at the firm. "Prepayment speeds will slow higher up in the coupon stack, but to a lesser degree."
Aggregate Fannie 30-year prepayments slowed 5% month on month, according to analysts at Barclays Capital. "The slowdown in overall speeds suggests that there is not much backlog left in the origination pipeline, and, therefore, there should be a sharp slowdown in speeds next month," they wrote in a note to clients.
Buchta adds that unless originators expand the credit window, the refinancing window will shut for many more borrowers than simple economics would indicate.
Currently 45% of the 30-year mortgage borrowers are currently out of the money from a rate point of view, with added fees prohibiting many marginal borrowers from refinancing their existing loans.
"It doesn't seem likely that banks will be looking to refinance marginal credit borrowers whose loans they did not underwrite in the first place because of uncertainties associated with reps and warrants,” he add.
The Barclays analysts also pointed to harsh realities that will lower the rate of mortgage refinancings. "While a significant easing of underwriting standards would lead to a rebound in speeds, the likelihood of that happening in 2011 is slim, in our view, because recent developments have been pointing to continued tightening," they said.
The latest examples include Fannie and Freddie's new increase to the loan-level delivery fees, the Federal Housing Administration's plan to aggressively pursue put-backs in 2011, and originators' raising the DTI and FICO requirements.
"Given this, it should take a while for underwriting standards to stabilize," they add. "Credit easing does not seem to be on the horizon yet."
URL to original article: http://www.housingwire.com/2011/01/07/spike-in-refinancing-over-say-mortgage-bond-analysts
Mortgage refinancings through the Home Affordable Refinance Program known as HARP increased 26% in the third quarter of 2010. Strategists for Fannie Mae and Freddie Mac investors, however, say the spike is likely to be short lived.
Fannie Mae and Freddie Mac loan modifications through HAMP increased 16% in the third quarter of 2010, according to Federal Housing Finance Agency, which oversees the government-sponsored enterprises.
Overall, the spike remains muted as the Mortgage Bankers Association refinance index remains near a multiyear low and Braver Stern Securities reports that it would look for the December prepayment report to hit the high-water mark for prepayment speeds for this cycle. The MBA reported on Wednesday that refinancings accounted for 70.3% of all mortgage applications for the week ended Dec. 24 and 71% for the last week of the year.
Expected rises in mortgage interest rates, however, do not bode well for future refinancings.
The 5.0% coupon remains on the 40 bps refinancing cusp given the 5.04% effective mortgage rate, which moves almost 45% of the 30-year mortgage universe out of the refinancing window.
"Many investors are total return in nature and the 5.0 coupon is going to prove very sensitive to small changes in interest rates with 4.5% now completely out of the money," said Scott Buchta head of investment strategy at the firm. "Prepayment speeds will slow higher up in the coupon stack, but to a lesser degree."
Aggregate Fannie 30-year prepayments slowed 5% month on month, according to analysts at Barclays Capital. "The slowdown in overall speeds suggests that there is not much backlog left in the origination pipeline, and, therefore, there should be a sharp slowdown in speeds next month," they wrote in a note to clients.
Buchta adds that unless originators expand the credit window, the refinancing window will shut for many more borrowers than simple economics would indicate.
Currently 45% of the 30-year mortgage borrowers are currently out of the money from a rate point of view, with added fees prohibiting many marginal borrowers from refinancing their existing loans.
"It doesn't seem likely that banks will be looking to refinance marginal credit borrowers whose loans they did not underwrite in the first place because of uncertainties associated with reps and warrants,” he add.
The Barclays analysts also pointed to harsh realities that will lower the rate of mortgage refinancings. "While a significant easing of underwriting standards would lead to a rebound in speeds, the likelihood of that happening in 2011 is slim, in our view, because recent developments have been pointing to continued tightening," they said.
The latest examples include Fannie and Freddie's new increase to the loan-level delivery fees, the Federal Housing Administration's plan to aggressively pursue put-backs in 2011, and originators' raising the DTI and FICO requirements.
"Given this, it should take a while for underwriting standards to stabilize," they add. "Credit easing does not seem to be on the horizon yet."
URL to original article: http://www.housingwire.com/2011/01/07/spike-in-refinancing-over-say-mortgage-bond-analysts
Friday, January 7, 2011
How the Great Recession created ghost towns
by JON PRIOR
In Detroit, bulldozers crumple vacant homes left behind during foreclosure by the thousands. Las Vegas developments sit abandoned, and the rapid growth of Stockton, Calif., has screeched to a halt in the wake of the Great Recession.
As some markets such as San Diego and Washington, D.C., lead the recovery out of the housing crisis, others are becoming ghost towns. A study from James Follain of the Research Institute for Housing America showed in some markets such as Cleveland and Stockton, a recovery could be many years out as populations are moving out faster than the homes they vacate can either be resold or even destroyed.
"Such decreases in population and employment trigger declines in the demand for housing, and because people are more mobile than houses, it takes many years for supply and demand to become balanced again and for house prices to return to prior levels," Follain wrote.
A red flag for declining cities is the amount of traditional home sales moving on the market compared to ones lost to foreclosure, or REO. In Cleveland, the decade began with regular home sales accounting for about 94% of the market, but over the next several years, that number dropped to about 60% as the few buyers that remained bought more REO.
In Stockton, the drop was starker. Regular sales dominated through 2006 but declined by half in 2007 and made up only of 11% of the market in 2008.
Since then, the recovery has sputtered along. Regular sales have only taken back one-third of the market since.
Submarkets, too, are transforming with some experiencing such deep declines that their future survival is in question or at the least will be in recovery mode for some time, Follain said.
The Department of Housing and Urban Development has acted, releasing roughly $7 billion in Neighborhood Stabilization Program grants that go to municipalities, state governments and nonprofits looking to buy up and clear out vacant homes. But Follain concludes that the future remains uncertain for everyone.
"The fundamental problem facing today’s new breed of declining cities and their neighborhoods seems very similar to a problem in many parts of government seeking to manage our economic recovery," Follain concluded. "That is, investment and lending are seriously hampered by great uncertainty, which in itself hinders the speed of recovery to the 'new normal.'"
URL to original article: http://www.housingwire.com/2011/01/06/how-the-great-recession-created-ghost-towns
In Detroit, bulldozers crumple vacant homes left behind during foreclosure by the thousands. Las Vegas developments sit abandoned, and the rapid growth of Stockton, Calif., has screeched to a halt in the wake of the Great Recession.
As some markets such as San Diego and Washington, D.C., lead the recovery out of the housing crisis, others are becoming ghost towns. A study from James Follain of the Research Institute for Housing America showed in some markets such as Cleveland and Stockton, a recovery could be many years out as populations are moving out faster than the homes they vacate can either be resold or even destroyed.
"Such decreases in population and employment trigger declines in the demand for housing, and because people are more mobile than houses, it takes many years for supply and demand to become balanced again and for house prices to return to prior levels," Follain wrote.
A red flag for declining cities is the amount of traditional home sales moving on the market compared to ones lost to foreclosure, or REO. In Cleveland, the decade began with regular home sales accounting for about 94% of the market, but over the next several years, that number dropped to about 60% as the few buyers that remained bought more REO.
In Stockton, the drop was starker. Regular sales dominated through 2006 but declined by half in 2007 and made up only of 11% of the market in 2008.
Since then, the recovery has sputtered along. Regular sales have only taken back one-third of the market since.
Submarkets, too, are transforming with some experiencing such deep declines that their future survival is in question or at the least will be in recovery mode for some time, Follain said.
The Department of Housing and Urban Development has acted, releasing roughly $7 billion in Neighborhood Stabilization Program grants that go to municipalities, state governments and nonprofits looking to buy up and clear out vacant homes. But Follain concludes that the future remains uncertain for everyone.
"The fundamental problem facing today’s new breed of declining cities and their neighborhoods seems very similar to a problem in many parts of government seeking to manage our economic recovery," Follain concluded. "That is, investment and lending are seriously hampered by great uncertainty, which in itself hinders the speed of recovery to the 'new normal.'"
URL to original article: http://www.housingwire.com/2011/01/06/how-the-great-recession-created-ghost-towns
Thursday, January 6, 2011
Clear Capital home prices end up 4.1% lower in 2010, more declines ahead
by JON PRIOR
URL to original article: http://www.housingwire.com/2011/01/05/home-prices-end-up-4-1-lower-in-2010-more-declines-ahead
U.S. home prices were turbulent through 2010 ending up 4.1% lower than the year before, according to analytics firm Clear Capital.
And prices are expected to fall another 3.6% over 2011.
The homebuyer tax credit proved an artificial boost to home prices, which tapered off nearly as soon as it expired in April. The period immediately after created probably the most volatile year of home prices in history, the report claims. Values declined 5.3% over the first 12 weeks of the year, only to spike 9.7% through mid August. But when the market left the summer months, prices dipped right back down another 9.4%.
"In terms of home prices, this past year has certainly been characterized by uncertainty,” Alex Villacorta, senior statistician at Clear Capital, said. "Tax incentives and high levels of distressed sale activity had counter effects on home prices which contributed to the fragility of the markets."
At least the decline in 2011 will be a smooth one.
"The wild spikes experienced in 2010 will likely be replaced with more gradual price trends this year. Price forecasts show varying levels of decline across all four regions in 2011, with local markets in the West expected to accumulate the largest overall losses," according to the Clear Capital report.
Prices fell in 70% of the major markets in the U.S, and half experienced double-digit drops. Those were Dayton and Columbus, Ohio; Milwaukee, Wisc.; Tucson, Ariz.; and New Haven, Connecticut; Jacksonville, Fla.; Virginia Beach and Richmond, Va.
In Dayton, prices fell more than 22% from the year before.
2011 doesn't look much better for these markets. Clear Capital expects all but Columbus and Milwaukee to experience double-digit declines again. But some markets such as Washington, D.C. and Houston, Texas are expected to see brighter improvements.
URL to original article: http://www.housingwire.com/2011/01/05/home-prices-end-up-4-1-lower-in-2010-more-declines-ahead
Builders face a desert reckoning
Source: The Wall Street Journal
Some of the nation's largest home builders might be forced to buy hundreds of acres of desert 10 miles from the Las Vegas Strip at boom-era prices as part of a legal battle with a group of banks led by J.P. Morgan Chase & Co.
If a judge rules in favor of the banks over builders such as KB Home and Toll Brothers Inc., it could cast a shadow over a popular but controversial form of off-balance-sheet accounting used when buying land. The strategy is used by builders to insulate themselves from debt and other obligations.
The development, called Inspirada, is another housing-crisis casualty in Nevada, one of the hardest-hit U.S. states. Just 635 homes out of the planned 14,500 were sold before financial problems and fighting erupted.
When a venture formed by the home builders bought the land in 2004, the companies thought their liability was limited to $370 million, in return for 2,000 acres where they envisioned a sprawling $1.5 billion planned community.
The J.P. Morgan-led group, which lent the builders $585 million, now says the home builders are on the hook to buy hundreds of millions of dollars in raw land and develop it as they agreed to when the deal was struck. That would repay the lenders, and buyers of homes in Inspirada would get more of the infrastructure promised by developers.
Builders contend they shouldn't be forced to buy the land because the agreements were made with a separate entity named South Edge LLC, not the banks.
Last month, the banks moved to force the Inspirada venture into involuntary bankruptcy proceedings. If the effort succeeds, the banks expect a bankruptcy judge to appoint a trustee that would force the builders to buy the land.
The banks believe they are in a strong position because of a confidential arbitration panel ruling in July in a related lawsuit brought by one of the group's smaller members, Las Vegas developer Focus South, against the others. In that decision, recently made public, the panel found that the builders breached their agreement to buy the land. The builders are appealing.
"The lenders have made every possible attempt to resolve this consensually with the builders," said a J.P. Morgan spokeswoman. "The involuntary filing was a last resort needed to protect the property."
A KB spokesman said the company is "disappointed" that J.P. Morgan decided to "pursue a bad-faith legal maneuver, rather than continue to work with the builders who are endeavoring to find a resolution."
Toll Brothers Chairman Robert Toll said the legal action is without merit. "It's like the rest of Vegas. It didn't go as it should, but the question is: Who should take the loss?" said Mr. Toll.
Builders did hundreds of off-balance-sheet deals during the boom for land valued at billions of dollars, because the deals enabled companies to secure large parcels without putting much debt on their balance sheets.
Such ventures have been criticized because they lack transparency and sometimes haven't let investors know the extent of the risk the company is assuming.
"People felt like [joint ventures] were a black box…and that included who, in the end, would be responsible for the debt," said Robert Curran, an analyst with Fitch Ratings.
In 2008, Florida home builder Tousa Inc. filed for bankruptcy protection after defaulting on a $500 million loan related to a joint venture formed to buy land assets of another home builder. Tousa believed it was insulated from that debt, but was forced to take much of it onto its books.
Since the recession hit, most builders have purchased land directly because it has fallen in value. Many of their former joint-venture partners also have gone out of business. Still, housing analysts expect joint ventures eventually to regain momentum.
Lennar Corp., the nation's third-largest home builder by number of homes sold behind D.R. Horton Inc. and PulteGroup Inc., was the industry's most aggressive user of the tool. Ventures including Lennar had $5.6 billion of debt outstanding in 2007. KB Home, which owns 48% of the Inspirada deal, was involved in ventures with as much as $1.72 billion in debt.
In most ventures, the builder would own less than 50% so that the risk in the venture could be kept off the builder's balance sheet under accounting rules. Builders typically reported only in footnotes of their regulatory filings the amount of recourse debt they were on the hook for in case of default.
Most builders escaped losses by selling off land assets or walking away from the deals made with nonrecourse debt. In other cases, they negotiated with banks to get out of agreements to buy land. Lennar and KB have reduced the debt exposure of their ventures to $1.7 billion and $374 million, respectively.
At Inspirada, $370 million of the $585 million borrowed from the J.P. Morgan-led group is recourse debt, meaning the builders are required to repay that portion of the loan no matter what happens.
The banks claim their deal requires the builders to buy land from South Edge for more than $500,000 an acre, or nearly twice its current value. In a mediation session in San Francisco in April, the builders offered to buy the land at 50% to 60% of their 2004 offer, according to a person briefed about the meeting.
J.P. Morgan rejected the offer, the person said. A bankruptcy court in Nevada has scheduled hearings on the involuntary petition for this month.
URL to original article: http://www.housingwire.com/2011/01/05/builders-face-a-desert-reckoning
Some of the nation's largest home builders might be forced to buy hundreds of acres of desert 10 miles from the Las Vegas Strip at boom-era prices as part of a legal battle with a group of banks led by J.P. Morgan Chase & Co.
If a judge rules in favor of the banks over builders such as KB Home and Toll Brothers Inc., it could cast a shadow over a popular but controversial form of off-balance-sheet accounting used when buying land. The strategy is used by builders to insulate themselves from debt and other obligations.
The development, called Inspirada, is another housing-crisis casualty in Nevada, one of the hardest-hit U.S. states. Just 635 homes out of the planned 14,500 were sold before financial problems and fighting erupted.
When a venture formed by the home builders bought the land in 2004, the companies thought their liability was limited to $370 million, in return for 2,000 acres where they envisioned a sprawling $1.5 billion planned community.
The J.P. Morgan-led group, which lent the builders $585 million, now says the home builders are on the hook to buy hundreds of millions of dollars in raw land and develop it as they agreed to when the deal was struck. That would repay the lenders, and buyers of homes in Inspirada would get more of the infrastructure promised by developers.
Builders contend they shouldn't be forced to buy the land because the agreements were made with a separate entity named South Edge LLC, not the banks.
Last month, the banks moved to force the Inspirada venture into involuntary bankruptcy proceedings. If the effort succeeds, the banks expect a bankruptcy judge to appoint a trustee that would force the builders to buy the land.
The banks believe they are in a strong position because of a confidential arbitration panel ruling in July in a related lawsuit brought by one of the group's smaller members, Las Vegas developer Focus South, against the others. In that decision, recently made public, the panel found that the builders breached their agreement to buy the land. The builders are appealing.
"The lenders have made every possible attempt to resolve this consensually with the builders," said a J.P. Morgan spokeswoman. "The involuntary filing was a last resort needed to protect the property."
A KB spokesman said the company is "disappointed" that J.P. Morgan decided to "pursue a bad-faith legal maneuver, rather than continue to work with the builders who are endeavoring to find a resolution."
Toll Brothers Chairman Robert Toll said the legal action is without merit. "It's like the rest of Vegas. It didn't go as it should, but the question is: Who should take the loss?" said Mr. Toll.
Builders did hundreds of off-balance-sheet deals during the boom for land valued at billions of dollars, because the deals enabled companies to secure large parcels without putting much debt on their balance sheets.
Such ventures have been criticized because they lack transparency and sometimes haven't let investors know the extent of the risk the company is assuming.
"People felt like [joint ventures] were a black box…and that included who, in the end, would be responsible for the debt," said Robert Curran, an analyst with Fitch Ratings.
In 2008, Florida home builder Tousa Inc. filed for bankruptcy protection after defaulting on a $500 million loan related to a joint venture formed to buy land assets of another home builder. Tousa believed it was insulated from that debt, but was forced to take much of it onto its books.
Since the recession hit, most builders have purchased land directly because it has fallen in value. Many of their former joint-venture partners also have gone out of business. Still, housing analysts expect joint ventures eventually to regain momentum.
Lennar Corp., the nation's third-largest home builder by number of homes sold behind D.R. Horton Inc. and PulteGroup Inc., was the industry's most aggressive user of the tool. Ventures including Lennar had $5.6 billion of debt outstanding in 2007. KB Home, which owns 48% of the Inspirada deal, was involved in ventures with as much as $1.72 billion in debt.
In most ventures, the builder would own less than 50% so that the risk in the venture could be kept off the builder's balance sheet under accounting rules. Builders typically reported only in footnotes of their regulatory filings the amount of recourse debt they were on the hook for in case of default.
Most builders escaped losses by selling off land assets or walking away from the deals made with nonrecourse debt. In other cases, they negotiated with banks to get out of agreements to buy land. Lennar and KB have reduced the debt exposure of their ventures to $1.7 billion and $374 million, respectively.
At Inspirada, $370 million of the $585 million borrowed from the J.P. Morgan-led group is recourse debt, meaning the builders are required to repay that portion of the loan no matter what happens.
The banks claim their deal requires the builders to buy land from South Edge for more than $500,000 an acre, or nearly twice its current value. In a mediation session in San Francisco in April, the builders offered to buy the land at 50% to 60% of their 2004 offer, according to a person briefed about the meeting.
J.P. Morgan rejected the offer, the person said. A bankruptcy court in Nevada has scheduled hearings on the involuntary petition for this month.
URL to original article: http://www.housingwire.com/2011/01/05/builders-face-a-desert-reckoning
Wednesday, January 5, 2011
Assessing the housing sector
Source: The New York Times
URL to original article: http://www.housingwire.com/2011/01/05/assessing-the-housing-sector
A few economists are contending that our housing market is now in a “double dip,” based in part on last week’s report of housing price indexes for September and October that were lower than they were during the summer. In my opinion, the data on housing prices and construction do not show any significant housing market change during the second half of 2010.
When connecting the housing sector with the wider economy, three different measures of housing prices are helpful: inflation-adjusted housing prices, inflation-unadjusted housing prices and cost-adjusted housing prices.
Inflation-adjusted housing prices tell us how much the prices of homes have changed relative to the prices of other consumer goods. If, for example, we want to know whether demand for housing these days is any different than it was before the housing bubble, it helps to check whether, from the 1990s through 2010, housing prices failed to increase as much as other prices have.
In this case I look at a housing price index that has been normalized by a consumer price index.
Inflation adjustments are not appropriate for the purposes of analyzing foreclosures – a big drag on our economy – because the mortgage principal that pulls homeowners “under water” is not adjusted for inflation either. If unadjusted housing prices increase, even if more slowly than other consumer prices, that helps homeowners swim out of the water.
For this purpose, I look at an index of the dollar value of housing properties, without any adjustment for inflation.
For the purposes of understanding construction activity, it helps to know whether housing prices have increased more than the costs of building materials. The more that housing prices increase beyond the cost of materials, the more value that can be created by home construction activity.
For this purpose, I look at an index of housing prices that has been normalized by an index of building costs.
It turns out that practice is messier than theory, because there are so many different houses in America and many different price trends. In practice, it matters which housing price index is used, regardless of which inflation or cost adjustment is used.
The Case-Shiller repeat sales index is one such index of existing homes. The Federal Housing Finance Agency has another index of existing homes (and there are others, as well). The Census Bureau has a quality-adjusted index of new home prices.
Chart 1 displays the three aforementioned home price indexes, measured quarterly without any inflation adjustment. The Case-Shiller index for the third quarter of 2010 (the first quarter without the government’s home buyer tax credit) was essentially the same as in the previous quarter. The other two indexes show slight decreases over the same time period, although well within the range of ups and downs over the previous six quarters.
By themselves, these data suggest that homeowners did not go significantly deeper under water in the third quarter and that the housing market trends were not dramatically different in the third quarter than in previous quarters.
Chart 2 displays the same three indexes, adjusted by the implicit price deflator for consumer spending. Because inflation has been low recently, it shows a similar pattern to Chart 1. By themselves, these series show no dramatic change in housing demand over the most recent quarter.
Chart 3 displays the same three indexes, adjusted by the producer price index for home building materials. Deflated this way, the Case-Shiller index actually shows a housing price increase from the second to the third quarter. That’s because building costs peaked in May and have been lower since then.
Without home prices falling by this measure, we do not expect construction activity to be lower than it was during 2009 (but, unsurprisingly, lower than it was during the short rush to sell homes before the tax credit expired).
You may notice that various housing price indexes disagree, and our most recent data is still three months old. Yet another approach is to look at home construction activity. Chart 4 displays monthly home construction activity through November 2010, measured as the number of housing permits, housing starts, homes under construction and homes completing construction.
Permits and starts are particularly interesting, because homes take time to build and we presume that many builders are looking ahead to the prices homes will command in the future, when the construction project is complete. Those series were actually higher in November 2010 than they were for several months before.
Predicting the future is difficult, but the price and construction data so far do not seem to suggest that home values will be significantly different this year than they were in 2010.
URL to original article: http://www.housingwire.com/2011/01/05/assessing-the-housing-sector
Tuesday, January 4, 2011
J.I. Kislak expects higher purchase loan activity in 2011
by JASON PHILYAW
The mortgage market will get much more competitive this year, as the level of refinancings wanes and purchase loans drive the market, according to one analyst.
Tom Wind, managing director of J.I. Kislak Mortgage, expects the refinancing activity to fall to $350 billion in 2011 from $1 trillion last year.
The former chief executive of JPMorgan Chase’s (JPM: 44.16 +1.45%) residential mortgage lending businesses and former president and chief operating officer of Citi's (C: 4.90 0.00%) mortgage unit also expects jumbo-loan lenders to slowly start coming back to the market this year.
But "the industry is still married to Fannie and Freddie" and still "a long way from functioning in a non-agency market," Wind said.
He expects the monumental change in the regulatory framework for the mortgage market this year to result in the lenders likely making 30% to 40% less on each loan origination.
"Couple this with significantly less loan volume and there will be some major shifts ahead," Wind said. "However, there is light at the end of the tunnel. Moderate interest rates and lower prices are driving affordability, which will ultimately stabilize homeownership as a good, long-term investment."
He also expects increased availability of credit to start create more home-purchase opportunities for borrowers.
Kislak is a Florida-based mortgage banker.
URL to original article: http://www.housingwire.com/2011/01/03/j-i-kislak-expects-higher-purchase-loan-activity-in-2011
The mortgage market will get much more competitive this year, as the level of refinancings wanes and purchase loans drive the market, according to one analyst.
Tom Wind, managing director of J.I. Kislak Mortgage, expects the refinancing activity to fall to $350 billion in 2011 from $1 trillion last year.
The former chief executive of JPMorgan Chase’s (JPM: 44.16 +1.45%) residential mortgage lending businesses and former president and chief operating officer of Citi's (C: 4.90 0.00%) mortgage unit also expects jumbo-loan lenders to slowly start coming back to the market this year.
But "the industry is still married to Fannie and Freddie" and still "a long way from functioning in a non-agency market," Wind said.
He expects the monumental change in the regulatory framework for the mortgage market this year to result in the lenders likely making 30% to 40% less on each loan origination.
"Couple this with significantly less loan volume and there will be some major shifts ahead," Wind said. "However, there is light at the end of the tunnel. Moderate interest rates and lower prices are driving affordability, which will ultimately stabilize homeownership as a good, long-term investment."
He also expects increased availability of credit to start create more home-purchase opportunities for borrowers.
Kislak is a Florida-based mortgage banker.
URL to original article: http://www.housingwire.com/2011/01/03/j-i-kislak-expects-higher-purchase-loan-activity-in-2011
Would-be buyers could find it harder to get into a home in 2011
Source: Chicago Tribune
The drumbeat from the housing community was loud and clear in 2010: There was never a better time to buy a home.
For most of the past 12 months, home prices tumbled, mortgage rates ticked downward, and the inventory of available traditional and distressed homes was plentiful.
But would-be buyers, even if they were able to overcome job worries, found that the hurdles to obtain a loan were formidable. They remained on the sidelines, and housing analysts opined that if the broader economy improved and unemployment fell, pent-up demand would be unleashed, credit guidelines would ease and home sales would improve.
As the new year begins, that guarded optimism has turned into uncertainty, thanks to a combination of rising mortgage rates, tighter underwriting guidelines and sweeping government regulation. As a result, it's unlikely to get any easier and may, in fact, get much more difficult to buy a home in 2011.
"From a credit standpoint, I tend to think we're toward the bottom of that cycle," said Bob Walters, chief economist for Quicken Loans Inc. "The bad news is, I don't think it's going to get a lot better in 2011. You'll hear a lot more noise pressuring the industry to ease guidelines, and you'll hear from the industry that we don't want a redo of what's happened."
Looming large over the mortgage market are provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that have yet to be finalized. Among them is a requirement that mortgage lenders maintain some "skin" in the game on the mortgages they originate by holding at least 5 percent of the credit risk rather than bundling the loans and selling them off entirely.
The goal is to discourage a repeat of risky past practices, but the legislation makes an exception to the risk-retention standard for what is labeled a "qualified residential mortgage." It is the still-unspecified definition of what's become the industry's latest acronym to digest, QRM, that has lenders in an uproar.
If a very strict definition is applied by regulators, and a final rule isn't expected until the spring, it could become more difficult, and more costly, for homebuyers to secure mortgage financing.
"People have some very different ideas of how to define this," said Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association. "Some would say if it doesn't have a 30 percent down payment, it's not a QRM. For a first-time homebuyer, that would really be eye-opening. It definitely has the potential to turn the market upside down.
"This could dramatically tighten underwriting much more than what the lenders have already done. It's going to make it even tougher to work through the (housing) overhang."
Wells Fargo has told regulators it supports exempting mortgages with a 30 percent down payment. Community banks worry such a strict definition would curtail home mortgage lending.
"If you have to have 30 percent down, the American dream would become the American fantasy," said Nick Parisi, a senior vice president at Standard Bank and Trust Co. in Hickory Hills.
Additional regulation on mortgage bankers will mean a thinning of their ranks, weeding out the unscrupulous players. However, it also will lessen consumers' ability to widely comparison shop for the best home mortgage product.
"That means less competition, and, generally, less competition is not good for consumer," said Quicken's Walters. "It might mean that your interest rate over time is a little higher. A less competitive industry has to work less hard."
Tighter lending requirements already have steered 40 percent of buyers to secure Federal Housing Administration-backed loans, which carry their own set of fees. FHA-backed loans are exempt from the Dodd-Frank provision.
Another new wrinkle to the mortgage market is that beginning in March, Freddie Mac will raise fees for mortgages sold to Freddie that carry higher loan-to-value ratios. The additional fees will vary depending on the borrower's credit score and the loan-to-value ratio, but in some cases the upfront fees will increase by as much as 0.75 percent of a loan's balance. If a lender passes along a 0.25 percent fee to the borrower, it could add about $10 to the monthly payment on a $200,000 mortgage, according to Freddie Mac.
Fannie Mae in late December announced its own series of considerable loan-level price adjustments, effective April 1, for mortgages with greater than a 60 percent loan-to-value that will apply even to consumers with credit scores above 700.
Loan fees aren't the only item going up: So is the cost of money itself. The average rate on 30-year, fixed-rate mortgages has been below 5 percent since early May, but economists predict those days are nearing an end.
General guidance on mortgage rates for a 30-year, fixed-rate mortgage call for them to stay under 6 percent for the year and likely falling somewhere between 4.75 percent and 5.5 percent. Still, that could be a jolt to buyers on the sidelines who watched rates drop to as low as 4.2 percent in the fall.
URL to original article: http://www.housingwire.com/2011/01/02/would-be-buyers-could-find-it-harder-to-get-into-a-home-in-2011
The drumbeat from the housing community was loud and clear in 2010: There was never a better time to buy a home.
For most of the past 12 months, home prices tumbled, mortgage rates ticked downward, and the inventory of available traditional and distressed homes was plentiful.
But would-be buyers, even if they were able to overcome job worries, found that the hurdles to obtain a loan were formidable. They remained on the sidelines, and housing analysts opined that if the broader economy improved and unemployment fell, pent-up demand would be unleashed, credit guidelines would ease and home sales would improve.
As the new year begins, that guarded optimism has turned into uncertainty, thanks to a combination of rising mortgage rates, tighter underwriting guidelines and sweeping government regulation. As a result, it's unlikely to get any easier and may, in fact, get much more difficult to buy a home in 2011.
"From a credit standpoint, I tend to think we're toward the bottom of that cycle," said Bob Walters, chief economist for Quicken Loans Inc. "The bad news is, I don't think it's going to get a lot better in 2011. You'll hear a lot more noise pressuring the industry to ease guidelines, and you'll hear from the industry that we don't want a redo of what's happened."
Looming large over the mortgage market are provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that have yet to be finalized. Among them is a requirement that mortgage lenders maintain some "skin" in the game on the mortgages they originate by holding at least 5 percent of the credit risk rather than bundling the loans and selling them off entirely.
The goal is to discourage a repeat of risky past practices, but the legislation makes an exception to the risk-retention standard for what is labeled a "qualified residential mortgage." It is the still-unspecified definition of what's become the industry's latest acronym to digest, QRM, that has lenders in an uproar.
If a very strict definition is applied by regulators, and a final rule isn't expected until the spring, it could become more difficult, and more costly, for homebuyers to secure mortgage financing.
"People have some very different ideas of how to define this," said Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association. "Some would say if it doesn't have a 30 percent down payment, it's not a QRM. For a first-time homebuyer, that would really be eye-opening. It definitely has the potential to turn the market upside down.
"This could dramatically tighten underwriting much more than what the lenders have already done. It's going to make it even tougher to work through the (housing) overhang."
Wells Fargo has told regulators it supports exempting mortgages with a 30 percent down payment. Community banks worry such a strict definition would curtail home mortgage lending.
"If you have to have 30 percent down, the American dream would become the American fantasy," said Nick Parisi, a senior vice president at Standard Bank and Trust Co. in Hickory Hills.
Additional regulation on mortgage bankers will mean a thinning of their ranks, weeding out the unscrupulous players. However, it also will lessen consumers' ability to widely comparison shop for the best home mortgage product.
"That means less competition, and, generally, less competition is not good for consumer," said Quicken's Walters. "It might mean that your interest rate over time is a little higher. A less competitive industry has to work less hard."
Tighter lending requirements already have steered 40 percent of buyers to secure Federal Housing Administration-backed loans, which carry their own set of fees. FHA-backed loans are exempt from the Dodd-Frank provision.
Another new wrinkle to the mortgage market is that beginning in March, Freddie Mac will raise fees for mortgages sold to Freddie that carry higher loan-to-value ratios. The additional fees will vary depending on the borrower's credit score and the loan-to-value ratio, but in some cases the upfront fees will increase by as much as 0.75 percent of a loan's balance. If a lender passes along a 0.25 percent fee to the borrower, it could add about $10 to the monthly payment on a $200,000 mortgage, according to Freddie Mac.
Fannie Mae in late December announced its own series of considerable loan-level price adjustments, effective April 1, for mortgages with greater than a 60 percent loan-to-value that will apply even to consumers with credit scores above 700.
Loan fees aren't the only item going up: So is the cost of money itself. The average rate on 30-year, fixed-rate mortgages has been below 5 percent since early May, but economists predict those days are nearing an end.
General guidance on mortgage rates for a 30-year, fixed-rate mortgage call for them to stay under 6 percent for the year and likely falling somewhere between 4.75 percent and 5.5 percent. Still, that could be a jolt to buyers on the sidelines who watched rates drop to as low as 4.2 percent in the fall.
URL to original article: http://www.housingwire.com/2011/01/02/would-be-buyers-could-find-it-harder-to-get-into-a-home-in-2011
Monday, January 3, 2011
A simple approach to preventing the next housing crisis
Source: The Huffington Post
The Dodd-Frank Wall Street Reform and Consumer Protection Act was, ostensibly, a response to the crisis in the U.S. housing market and the inter-related crisis in the market for mortgage-backed securities ("MBS"). One of the goals of the legislation, presumably, was to prevent another crisis in housing and mortgage finance. And, certainly after what we have seen in recent years, no one could question the importance of that goal. The housing crisis has deprived thousands upon thousands of Americans of not just wealth but of their homes; it has helped drive municipalities to the brink of fiscal collapse; and it has impeded the recovery of the U.S jobs market. The MBS crisis took down major financial institutions in the U.S., and almost caused a complete collapse of the financial sector. We cannot afford a repeat experience.
But Dodd-Frank, even if it is implemented in the far-reaching way that some hope and think it can be, will not address a problem at the heart of the housing and MBS crisis: excessive complexity. The years running up to the implosion of the housing and MBS markets were marked by ever-increasing complexity. This complexity caused confusion and poor judgment on the part of unsophisticated home buyers and owners and supposedly sophisticated securities investors. This complexity also allowed some people and institutions to make an astonishing amount of money originating mortgages that never should have been originated and selling MBS that never should have been sold, at least at the prices they were sold. Dodd-Frank does not do the structural work of simplification we need to prevent this all from happening again once the memories of the current crises fade.
Instead of Dodd-Frank, we need clear statutory reform that limits residential mortgages to a few sensible products, all girded by strict underwriting standards, and that correspondingly produces a well-ordered, transparent market in bonds or securities based on these mortgages. Other countries, most notably Denmark, have maintained a simplified, and hence much more stable, regime of residential lending and finance with reasonable costs of capital for borrowers. Moreover, it would probably be a good thing if reforms brought about lower rates of household investments in home ownership in the United States would be desirable: from a basic economics perspective, American households have long been overinvested in where they live. The approach I advocate -- the simplicity approach, if you will -- is admittedly politically infeasible at present, but if what is politically feasible is only Dodd-Frank, then perhaps our attention needs to most immediately focus on changing our politics and hence expanding the domain of the politically feasible.
The Move to Complexity and Its Consequences
At one point in time, residential lending in the United States was fairly simple, involving few parties per transaction and few instruments. Thirty year fixed rate, fully amortized mortgages were overwhelmingly the mortgage of choice; a significant down payment deposit was required; second and third mortgages were relatively uncommon, at least as part of the initial purchase transaction. In the last twenty years or so, we saw the utilization of a dizzying array of nontraditional alternatives in which rates were not fixed or only fixed for a time, principal was only partially amortized or not amortized at all, and by means of second mortgages or simply through lax underwriting standards, purchases often means little or no upfront, unborrowed cash deposit. At the same time, the number of parties involved in a single loan proliferated. Whereas once mortgages were solicited, originated and held by lenders, now those functions are typically performed by different parties. Mortgage brokers often originate mortgages, and usually sell them as fast as possible to lenders, who in turn quite often sell them again and again. Lenders very often retain servicing on loans they long ago sold. As the big servicers such as Bank of America have recently been forced to admit, the fabric of transactions surrounding a given ordinary residential mortgage can now be so complex that it is no mean feat to determine at a given point in time who exactly "owns" the mortgage.
There has been a corresponding move to complexity in the MBS arena. Mortgages have been securitized for quite a long time in the United States, but until recently, almost all of the securitized mortgages were fixed rate mortgages that were originated using relatively strict FHA or Freddie Mac underwriting requirements and that enjoyed an implicit repayment guarantee of the United States. In the years immediately leading up to the implosion of the housing and mortgage finance market, we witnessed an array of new private label MBS that were much more complex than traditional MBS. The new kinds of MBS had so many tranches and permutations that you needed flow charts and advanced engineering degrees just to map them out. FHA and Freddie Mac sought to compete with private label MBS by loosening their underwriting standards and by producing more and more varied MBS products. The greater complexity in the market for mortgage instruments and in the MBS market were intertwined and reinforcing: The greater and more complex array of MBS fed demand for more borrowers, which was achieved in part by means of new, more complex loan arrangements that targeted households that could not have afforded traditional mortgages.
That the housing and MBS crises were preceded by a move from simplicity to great complexity does not, by itself, mean that the complexity per se was a cause of the two crises. But complexity can operate to lead to sub-optimal decisions, as the behavioral psychology literature illustrates. Faced with a confusing array of choices, people tend to fall back on heuristic biases that do not necessarily result in the decisions that maximize their welfare. In particular, the complexity of mortgage arrangements and instruments likely made it easier for potential home owners and refinancing home owners to fall prey to "the optimism bias." With this bias, it was too easy for many borrowers to believe that housing prices always rise (and certainly never fall) and hence that a no-money down, variable-interest rate mortgage is not just immediately tempting but also prudent. So, too, the dizzying array of MBS choices made it easier for investors to heavily invest funds that were supposed to be reserved for prudent investments, without tackling straight on the possibility that the always-rising-prices scenario might be nothing more than an historical anomaly.
Swindlers flourished in the complexity and the confusion of the housing and MBS markets. The complexity of consumer choice made it easier for unscrupulous mortgage originators to target and sell vulnerable homeowners and home buyers products that they did not understand, could not afford, did not need, or were more expensive than available alternatives. The complexity of the MBS markets and its instruments allowed the originators, poolers, and sellers of MBS to take advantage of their superior information by overcharging and overselling their customers. Complexity made it easier for the MBS poolers and marketers to shop offerings among credit agencies for the best ratings. Complexity helped the credit agencies to meet the implicit demands of the MBS poolers and marketers -- and hence boost their profits -- because it allowed them to tell themselves the story that the offerings, which after all were too complex for them to really understand, somehow might deserve the AAA or AA ratings.
Complexity also has made it harder for the government and private actors to respond sensibly to the housing and MBS crises. One plausible solution to the housing crisis would be the re-working of mortgages to reduce principal and make the mortgages more in keeping of actual market values. There are many reasons we have observed almost no loan modifications with principal reductions, but one contributing factor is the division of individual mortgages into many distinct and often adverse investment interests and the consequent difficulty of gaining approval from mortgage "owners" to significant modifications. The division of the ownership of mortgages from their servicing also has impeded loan modifications.
Finally, complexity helped vested economic interests -- including those making money off the poor choices home buyers and owners and securities investors make in an environment of complexity -- avoid effective regulatory oversight. In the lead up to the implosion of the housing and MBS markets, federal regulators were largely passive, but when they did try to act, they received an enormous push-back from the financial industry and they quickly retreated. The financial industry's enormous clout with both political parties and in Congress and the White House would make it difficult for even the most courageous, well-intentioned regulators try to get anything done that that industry does not favor. But complexity makes it harder for such regulators to try to get anything done, because regulators quite plausibly can be (and are) assaulted with the claim that they do not fully understand the complexities of the relevant markets and hence are not equipped to impose new rules and regulations. Indeed, in the wake of the MBS crisis, regulators had to turn for advice and counsel to the same entities that had helped create and benefited from the bubble in MBS instruments for explanations of those instruments and guidance as to what they really might be worth.
The Simplicity Approach (or Why Not Follow Demark?)
In a simplified mortgage and MBS market, there would be only one or two kinds of residential mortgages available, with the 30-year fixed-rate as the predominant instrument; putting twenty percent down or paying mortgage insurance requirements would be a strict requirement and not easily evaded using second mortgages; and rates among mortgages offered to borrowers thus would not be very varied. The similarity in instruments and the uniformity of the underwriting standards would not support a wide range of rates. Because only traditional, reasonable risk mortgages would be made, there would be no possibility of MBS based on nontraditional mortgages. MBS pools would be based on quite transparent instruments, and investors in MBS thus could make reasoned and reasonable investment choices. In such an environment, the bubbles we experienced and subsequent implosions would be less likely.
Moreover, there are models -- and not just historical ones -- for such a simplified regime of mortgage finance. In Denmark, the form of residential mortgages is tightly regulated -- so much so that there is really only a single mortgage rate good for virtually all new mortgages on any given day. Mortgages are financed with bonds, such that banks are able to off-load interest rate risk while retaining creditworthiness risk. The Danish system, which no less prominent an investor than George Soros has suggested as a model for the United States, was adopted in the wake of late nineteenth century housing bubbles and has proved highly effective in preventing bubbles. At the same time, the cost of capital for mortgages in Denmark compares favorably with the rest of Europe and the United States. If a simplified regime can satisfy the needs of home buyers and owners in Denmark while achieving admirable stability, why, at least in theory, can the United States not do the same?
Dodd-Frank does not even come close to offering greater simplicity. It is a massive piece of legislation. The bill does not bar nontraditional mortgage instruments; it does not even require that potential home buyers be given a lucid explanation of how a plain vanilla mortgage would compare to less traditional, higher risk alternatives. Perhaps implementing regulations could require mortgage brokers to at least offer traditional mortgages to customers who can afford them, but even that modest reform seems unlikely given the clout of the financial industry. Moreover, it is hard to imagine that courts will uphold regulations that in effect re-insert into Dodd-Frank provisions Congress quite plainly removed from it as part of the process that allowed for its ultimate passage and enactment into law. Congressional intent that Dodd-Frank be limp and lax and not terribly protective of consumers is in no way admirable, but is quite plain for all to see.
Dodd-Frank also does not restrict what kinds of mortgages can be securitized or how they can be securitized. It is true that Dodd-Frank may make certain mortgages riskier than before for investors by giving borrowers who feel they were sold an unsuitable mortgage some recourse against foreclosure. But if recent history teaches us anything, it is that investors in MBS sometimes can be sold on securities based on mortgages that are in fact quite risky -- indeed, that in a search for a higher rate of return, they may gravitate to such investments whether they understand what they are doing or not. We can be assured the financial industry will seek to tap the ever-present yearning for higher return.
The Choice-Is-Always-Good/Innovation-Is-Always-Good Objection
One central objection to a simple regime of mortgage finance is that complexity is beneficial when it gives consumers (home buyers and owners and investors) greater choice and thus allows them to maximize their preferences. After all, if choice is good, isn't more choice better? And if innovation is good, why isn't financial innovation in mortgages and MBS good, too? Even after the recent crises, it is still commonplace for politicians, business leaders and elite commentators to opine that financial innovation is a key American comparative advantage that we must not undermine in the interest of reform.
As noted above, however, more choice does not always translate into better informed, better-reasoned choice. Moreover, even if one (unrealistically) assumed that people always do maximize their own narrowly-understood welfare through more choice, the fact is that the many people are affected by other people's choices that impact the stability of the housing market. Children who lose their family home because a parent entered into an imprudent mortgage, neighbors whose housing values plummet and basic services disappear because of foreclosures, and retirees whose pensions go underfunded because the pension fund invested in overvalued MBS all lose out as a result of other people's choices.
Perhaps in some part because housing is a domain where such externalities abound, there is in fact a long tradition of constraining individual choice and requiring the use of certain standardized forms in the area of real property law generally and in the context of mortgages in particular. What makes a mortgage a mortgage rather than an installment land contract, legally, is that mandatory rights and obligations are read into the agreement between borrower and lender whatever the parties, as a matter of their contractual intent, actually intended. Viewed in the broader swath of Anglo-American legal history, the essence of mortgage law is legal constraint on ad hoc innovation in the interest of preserving social stability and protecting the vulnerable.
Indeed, as Henry Smith of Yale Law School and Thomas Merrill of Columbia Law School have argued, what arguably distinguishes the domain of property law from that of contract law is that property law insists upon a high degree of standardization and, in that sense, simplification. Smith and Merrill root property's traditional demand of standardization in the benefits of reducing transaction costs for third parties to property transactions, but the recent housing and MBS crises suggest that this tradition can also be defended as a means of protecting parties to property transactions from the cognitive pitfalls of complexity and from the underhandedness of those who would take advantage of those pitfalls. The recent crises also underscore the wisdom of the tradition in property of constraining and overriding private party choice in the interest of preventing or overcoming excessive fragmentation of interests in real property.
The Ownership Society Objection
If mortgages and MBS were standardized and simplified, the average costs of borrowed money for purchase money mortgages might not climb but it is certainly possible both that (1) some buyers would be not be able to buy as expensive a home as they otherwise would have, and (2) some buyers with poor credit histories or limited income and assets would be unable to buy a home at all. With respect to the first possibility, I think the best response is, why would that bad thing? Until very recently, the average size of new U.S. homes has steadily increased as the size of the households occupying them has declined or at most remained steady. The result is more sprawl, more fossil fuels consumption, more greenhouse gas emissions, and not necessarily more happiness, as far as anyone can objectively measure happiness. Moreover, households that have invested heavily in homes are not acted in accord with standard portfolio theory, which teaches that the best way to temper financial risks is to diversify one's investments. From this perspective, many households that sank all their available capital and committed all their anticipated earnings in a single asset -- a house -- would have been much better off diversifying by buying less house while investing more in their human capital (e.g. education) or other, more liquid forms of capital (bonds, stocks, life insurance).
But what about people who would be left out of the housing-ownership market altogether under a regime of only traditional mortgage instruments and straightforward, reasonably strict underwriting? The ownership-society school of social policy and popular commentary teaches that by owning homes, people achieve greater personal and familial success, communities become more stable, and social ills are reduced. If ownership equals greater individual and social welfare, is not anything that reduces that rate of ownership a bad thing?
Recent scholarship calls into question the necessary connection between ownership and stability and human flourishing, but even if we accept that connection, the fact is that owning a fee simple is not the only way to gain the emotional attachment and longer-term perspective that we believe is the mechanism by which "ownership" confers individual and social benefits. In the United States, there are relatively few protections for residential renters from displacement by landlords, government action, or market forces. Most available leases are one-year or month-to-month, and there are very few protections in more than a handful of locations against landlord's decisions not to renew leases or to drastically increase rent at the time of lease renewal. If the menu of rental arrangements available to low-income households included ones that offered more of the stability that (sometimes) is offered by a fee simple while costing less than a fee simple and thus being genuinely affordable to these households, then many of the benefits of the ownership society could be achieved. Providing people with greater ownership in their places of employment and in their local schools also could go a long way to achieving the benefits of an ownership society.
The Hard Reality of Politics and the Need for Campaign Finance Reform
So what is to be done? If Dodd-Frank gets us (almost) nowhere and something more radical and much more simple is needed, how can that be achieved? The answer is only through new Executive leadership or new legislation, and there is no reason, under the current politics, to anticipate either. Thus, the only "solution" is a terribly hard one: to change the politics. But as many commentators have noted, both political parties appear aligned with, if not captive to, the interests of the financial industry and the apparent goal of that industry to essentially go on now as if the housing and MBS crises never happened. At least in part, this alignment reflects the reality of the huge financial contributions that industry makes and (after Citizens United) will be freer to make than ever before. What that means is that new legislation is needed to reform campaign finance and to pressure the Supreme Court to temper its First Amendment absolutism when the interests of large corporations are at issue. Hence the catch and the challenge: we need (at a minimum) new rules for campaign finance to get a better politics, but until we get a better politics, we cannot get the new rules. So, somehow, we need to achieve meaningful, constructive political change even under rules that have led to dominance by two parties that cannot or will not undertake the reforms that are needed for our public welfare. It is a hard challenge but our politics has overcome even harder challenges -- the Great Depression, World War II, Jim Crow -- and prevailed. We can do that again.
URL to original article: http://www.housingwire.com/2011/01/02/a-simple-approach-to-preventing-the-next-housing-crisis
The Dodd-Frank Wall Street Reform and Consumer Protection Act was, ostensibly, a response to the crisis in the U.S. housing market and the inter-related crisis in the market for mortgage-backed securities ("MBS"). One of the goals of the legislation, presumably, was to prevent another crisis in housing and mortgage finance. And, certainly after what we have seen in recent years, no one could question the importance of that goal. The housing crisis has deprived thousands upon thousands of Americans of not just wealth but of their homes; it has helped drive municipalities to the brink of fiscal collapse; and it has impeded the recovery of the U.S jobs market. The MBS crisis took down major financial institutions in the U.S., and almost caused a complete collapse of the financial sector. We cannot afford a repeat experience.
But Dodd-Frank, even if it is implemented in the far-reaching way that some hope and think it can be, will not address a problem at the heart of the housing and MBS crisis: excessive complexity. The years running up to the implosion of the housing and MBS markets were marked by ever-increasing complexity. This complexity caused confusion and poor judgment on the part of unsophisticated home buyers and owners and supposedly sophisticated securities investors. This complexity also allowed some people and institutions to make an astonishing amount of money originating mortgages that never should have been originated and selling MBS that never should have been sold, at least at the prices they were sold. Dodd-Frank does not do the structural work of simplification we need to prevent this all from happening again once the memories of the current crises fade.
Instead of Dodd-Frank, we need clear statutory reform that limits residential mortgages to a few sensible products, all girded by strict underwriting standards, and that correspondingly produces a well-ordered, transparent market in bonds or securities based on these mortgages. Other countries, most notably Denmark, have maintained a simplified, and hence much more stable, regime of residential lending and finance with reasonable costs of capital for borrowers. Moreover, it would probably be a good thing if reforms brought about lower rates of household investments in home ownership in the United States would be desirable: from a basic economics perspective, American households have long been overinvested in where they live. The approach I advocate -- the simplicity approach, if you will -- is admittedly politically infeasible at present, but if what is politically feasible is only Dodd-Frank, then perhaps our attention needs to most immediately focus on changing our politics and hence expanding the domain of the politically feasible.
The Move to Complexity and Its Consequences
At one point in time, residential lending in the United States was fairly simple, involving few parties per transaction and few instruments. Thirty year fixed rate, fully amortized mortgages were overwhelmingly the mortgage of choice; a significant down payment deposit was required; second and third mortgages were relatively uncommon, at least as part of the initial purchase transaction. In the last twenty years or so, we saw the utilization of a dizzying array of nontraditional alternatives in which rates were not fixed or only fixed for a time, principal was only partially amortized or not amortized at all, and by means of second mortgages or simply through lax underwriting standards, purchases often means little or no upfront, unborrowed cash deposit. At the same time, the number of parties involved in a single loan proliferated. Whereas once mortgages were solicited, originated and held by lenders, now those functions are typically performed by different parties. Mortgage brokers often originate mortgages, and usually sell them as fast as possible to lenders, who in turn quite often sell them again and again. Lenders very often retain servicing on loans they long ago sold. As the big servicers such as Bank of America have recently been forced to admit, the fabric of transactions surrounding a given ordinary residential mortgage can now be so complex that it is no mean feat to determine at a given point in time who exactly "owns" the mortgage.
There has been a corresponding move to complexity in the MBS arena. Mortgages have been securitized for quite a long time in the United States, but until recently, almost all of the securitized mortgages were fixed rate mortgages that were originated using relatively strict FHA or Freddie Mac underwriting requirements and that enjoyed an implicit repayment guarantee of the United States. In the years immediately leading up to the implosion of the housing and mortgage finance market, we witnessed an array of new private label MBS that were much more complex than traditional MBS. The new kinds of MBS had so many tranches and permutations that you needed flow charts and advanced engineering degrees just to map them out. FHA and Freddie Mac sought to compete with private label MBS by loosening their underwriting standards and by producing more and more varied MBS products. The greater complexity in the market for mortgage instruments and in the MBS market were intertwined and reinforcing: The greater and more complex array of MBS fed demand for more borrowers, which was achieved in part by means of new, more complex loan arrangements that targeted households that could not have afforded traditional mortgages.
That the housing and MBS crises were preceded by a move from simplicity to great complexity does not, by itself, mean that the complexity per se was a cause of the two crises. But complexity can operate to lead to sub-optimal decisions, as the behavioral psychology literature illustrates. Faced with a confusing array of choices, people tend to fall back on heuristic biases that do not necessarily result in the decisions that maximize their welfare. In particular, the complexity of mortgage arrangements and instruments likely made it easier for potential home owners and refinancing home owners to fall prey to "the optimism bias." With this bias, it was too easy for many borrowers to believe that housing prices always rise (and certainly never fall) and hence that a no-money down, variable-interest rate mortgage is not just immediately tempting but also prudent. So, too, the dizzying array of MBS choices made it easier for investors to heavily invest funds that were supposed to be reserved for prudent investments, without tackling straight on the possibility that the always-rising-prices scenario might be nothing more than an historical anomaly.
Swindlers flourished in the complexity and the confusion of the housing and MBS markets. The complexity of consumer choice made it easier for unscrupulous mortgage originators to target and sell vulnerable homeowners and home buyers products that they did not understand, could not afford, did not need, or were more expensive than available alternatives. The complexity of the MBS markets and its instruments allowed the originators, poolers, and sellers of MBS to take advantage of their superior information by overcharging and overselling their customers. Complexity made it easier for the MBS poolers and marketers to shop offerings among credit agencies for the best ratings. Complexity helped the credit agencies to meet the implicit demands of the MBS poolers and marketers -- and hence boost their profits -- because it allowed them to tell themselves the story that the offerings, which after all were too complex for them to really understand, somehow might deserve the AAA or AA ratings.
Complexity also has made it harder for the government and private actors to respond sensibly to the housing and MBS crises. One plausible solution to the housing crisis would be the re-working of mortgages to reduce principal and make the mortgages more in keeping of actual market values. There are many reasons we have observed almost no loan modifications with principal reductions, but one contributing factor is the division of individual mortgages into many distinct and often adverse investment interests and the consequent difficulty of gaining approval from mortgage "owners" to significant modifications. The division of the ownership of mortgages from their servicing also has impeded loan modifications.
Finally, complexity helped vested economic interests -- including those making money off the poor choices home buyers and owners and securities investors make in an environment of complexity -- avoid effective regulatory oversight. In the lead up to the implosion of the housing and MBS markets, federal regulators were largely passive, but when they did try to act, they received an enormous push-back from the financial industry and they quickly retreated. The financial industry's enormous clout with both political parties and in Congress and the White House would make it difficult for even the most courageous, well-intentioned regulators try to get anything done that that industry does not favor. But complexity makes it harder for such regulators to try to get anything done, because regulators quite plausibly can be (and are) assaulted with the claim that they do not fully understand the complexities of the relevant markets and hence are not equipped to impose new rules and regulations. Indeed, in the wake of the MBS crisis, regulators had to turn for advice and counsel to the same entities that had helped create and benefited from the bubble in MBS instruments for explanations of those instruments and guidance as to what they really might be worth.
The Simplicity Approach (or Why Not Follow Demark?)
In a simplified mortgage and MBS market, there would be only one or two kinds of residential mortgages available, with the 30-year fixed-rate as the predominant instrument; putting twenty percent down or paying mortgage insurance requirements would be a strict requirement and not easily evaded using second mortgages; and rates among mortgages offered to borrowers thus would not be very varied. The similarity in instruments and the uniformity of the underwriting standards would not support a wide range of rates. Because only traditional, reasonable risk mortgages would be made, there would be no possibility of MBS based on nontraditional mortgages. MBS pools would be based on quite transparent instruments, and investors in MBS thus could make reasoned and reasonable investment choices. In such an environment, the bubbles we experienced and subsequent implosions would be less likely.
Moreover, there are models -- and not just historical ones -- for such a simplified regime of mortgage finance. In Denmark, the form of residential mortgages is tightly regulated -- so much so that there is really only a single mortgage rate good for virtually all new mortgages on any given day. Mortgages are financed with bonds, such that banks are able to off-load interest rate risk while retaining creditworthiness risk. The Danish system, which no less prominent an investor than George Soros has suggested as a model for the United States, was adopted in the wake of late nineteenth century housing bubbles and has proved highly effective in preventing bubbles. At the same time, the cost of capital for mortgages in Denmark compares favorably with the rest of Europe and the United States. If a simplified regime can satisfy the needs of home buyers and owners in Denmark while achieving admirable stability, why, at least in theory, can the United States not do the same?
Dodd-Frank does not even come close to offering greater simplicity. It is a massive piece of legislation. The bill does not bar nontraditional mortgage instruments; it does not even require that potential home buyers be given a lucid explanation of how a plain vanilla mortgage would compare to less traditional, higher risk alternatives. Perhaps implementing regulations could require mortgage brokers to at least offer traditional mortgages to customers who can afford them, but even that modest reform seems unlikely given the clout of the financial industry. Moreover, it is hard to imagine that courts will uphold regulations that in effect re-insert into Dodd-Frank provisions Congress quite plainly removed from it as part of the process that allowed for its ultimate passage and enactment into law. Congressional intent that Dodd-Frank be limp and lax and not terribly protective of consumers is in no way admirable, but is quite plain for all to see.
Dodd-Frank also does not restrict what kinds of mortgages can be securitized or how they can be securitized. It is true that Dodd-Frank may make certain mortgages riskier than before for investors by giving borrowers who feel they were sold an unsuitable mortgage some recourse against foreclosure. But if recent history teaches us anything, it is that investors in MBS sometimes can be sold on securities based on mortgages that are in fact quite risky -- indeed, that in a search for a higher rate of return, they may gravitate to such investments whether they understand what they are doing or not. We can be assured the financial industry will seek to tap the ever-present yearning for higher return.
The Choice-Is-Always-Good/Innovation-Is-Always-Good Objection
One central objection to a simple regime of mortgage finance is that complexity is beneficial when it gives consumers (home buyers and owners and investors) greater choice and thus allows them to maximize their preferences. After all, if choice is good, isn't more choice better? And if innovation is good, why isn't financial innovation in mortgages and MBS good, too? Even after the recent crises, it is still commonplace for politicians, business leaders and elite commentators to opine that financial innovation is a key American comparative advantage that we must not undermine in the interest of reform.
As noted above, however, more choice does not always translate into better informed, better-reasoned choice. Moreover, even if one (unrealistically) assumed that people always do maximize their own narrowly-understood welfare through more choice, the fact is that the many people are affected by other people's choices that impact the stability of the housing market. Children who lose their family home because a parent entered into an imprudent mortgage, neighbors whose housing values plummet and basic services disappear because of foreclosures, and retirees whose pensions go underfunded because the pension fund invested in overvalued MBS all lose out as a result of other people's choices.
Perhaps in some part because housing is a domain where such externalities abound, there is in fact a long tradition of constraining individual choice and requiring the use of certain standardized forms in the area of real property law generally and in the context of mortgages in particular. What makes a mortgage a mortgage rather than an installment land contract, legally, is that mandatory rights and obligations are read into the agreement between borrower and lender whatever the parties, as a matter of their contractual intent, actually intended. Viewed in the broader swath of Anglo-American legal history, the essence of mortgage law is legal constraint on ad hoc innovation in the interest of preserving social stability and protecting the vulnerable.
Indeed, as Henry Smith of Yale Law School and Thomas Merrill of Columbia Law School have argued, what arguably distinguishes the domain of property law from that of contract law is that property law insists upon a high degree of standardization and, in that sense, simplification. Smith and Merrill root property's traditional demand of standardization in the benefits of reducing transaction costs for third parties to property transactions, but the recent housing and MBS crises suggest that this tradition can also be defended as a means of protecting parties to property transactions from the cognitive pitfalls of complexity and from the underhandedness of those who would take advantage of those pitfalls. The recent crises also underscore the wisdom of the tradition in property of constraining and overriding private party choice in the interest of preventing or overcoming excessive fragmentation of interests in real property.
The Ownership Society Objection
If mortgages and MBS were standardized and simplified, the average costs of borrowed money for purchase money mortgages might not climb but it is certainly possible both that (1) some buyers would be not be able to buy as expensive a home as they otherwise would have, and (2) some buyers with poor credit histories or limited income and assets would be unable to buy a home at all. With respect to the first possibility, I think the best response is, why would that bad thing? Until very recently, the average size of new U.S. homes has steadily increased as the size of the households occupying them has declined or at most remained steady. The result is more sprawl, more fossil fuels consumption, more greenhouse gas emissions, and not necessarily more happiness, as far as anyone can objectively measure happiness. Moreover, households that have invested heavily in homes are not acted in accord with standard portfolio theory, which teaches that the best way to temper financial risks is to diversify one's investments. From this perspective, many households that sank all their available capital and committed all their anticipated earnings in a single asset -- a house -- would have been much better off diversifying by buying less house while investing more in their human capital (e.g. education) or other, more liquid forms of capital (bonds, stocks, life insurance).
But what about people who would be left out of the housing-ownership market altogether under a regime of only traditional mortgage instruments and straightforward, reasonably strict underwriting? The ownership-society school of social policy and popular commentary teaches that by owning homes, people achieve greater personal and familial success, communities become more stable, and social ills are reduced. If ownership equals greater individual and social welfare, is not anything that reduces that rate of ownership a bad thing?
Recent scholarship calls into question the necessary connection between ownership and stability and human flourishing, but even if we accept that connection, the fact is that owning a fee simple is not the only way to gain the emotional attachment and longer-term perspective that we believe is the mechanism by which "ownership" confers individual and social benefits. In the United States, there are relatively few protections for residential renters from displacement by landlords, government action, or market forces. Most available leases are one-year or month-to-month, and there are very few protections in more than a handful of locations against landlord's decisions not to renew leases or to drastically increase rent at the time of lease renewal. If the menu of rental arrangements available to low-income households included ones that offered more of the stability that (sometimes) is offered by a fee simple while costing less than a fee simple and thus being genuinely affordable to these households, then many of the benefits of the ownership society could be achieved. Providing people with greater ownership in their places of employment and in their local schools also could go a long way to achieving the benefits of an ownership society.
The Hard Reality of Politics and the Need for Campaign Finance Reform
So what is to be done? If Dodd-Frank gets us (almost) nowhere and something more radical and much more simple is needed, how can that be achieved? The answer is only through new Executive leadership or new legislation, and there is no reason, under the current politics, to anticipate either. Thus, the only "solution" is a terribly hard one: to change the politics. But as many commentators have noted, both political parties appear aligned with, if not captive to, the interests of the financial industry and the apparent goal of that industry to essentially go on now as if the housing and MBS crises never happened. At least in part, this alignment reflects the reality of the huge financial contributions that industry makes and (after Citizens United) will be freer to make than ever before. What that means is that new legislation is needed to reform campaign finance and to pressure the Supreme Court to temper its First Amendment absolutism when the interests of large corporations are at issue. Hence the catch and the challenge: we need (at a minimum) new rules for campaign finance to get a better politics, but until we get a better politics, we cannot get the new rules. So, somehow, we need to achieve meaningful, constructive political change even under rules that have led to dominance by two parties that cannot or will not undertake the reforms that are needed for our public welfare. It is a hard challenge but our politics has overcome even harder challenges -- the Great Depression, World War II, Jim Crow -- and prevailed. We can do that again.
URL to original article: http://www.housingwire.com/2011/01/02/a-simple-approach-to-preventing-the-next-housing-crisis
Subscribe to:
Posts (Atom)
