New Home Sales Regain Modest Momentum

New home sales turned upward in August after an especially poor showing in July, though remain well off levels from the first half of the year.  The Census Bureau and the Department of Housing and Urban Development report that sales increased by 7.9 percent over the previous month to a seasonally adjusted annual rate of 421,000 .  July sales were revised down to a rate of 390,000 units from the original estimate of 394,000 which had already represented a 13.4 percent drop from sales in June and a nine-month low.  The August estimate is 12.6 percent higher than the 374,000 unit estimate in August 2012.   

The non-seasonally adjusted rate of sales in August was 35,000 compared to a revised estimate of 34,000 in July and 31,000 in August of last year.

The median price of a new home sold in August was $254,600 compared to $253,200 in August 2012 and the lowest median price reported since October of last year.  The average sales price was $318,900, up from $305,500 a year earlier and the highest average price since April's $337,000.

There are an estimated 175,000 new homes currently for sale compared to 143,000 in August of last year.  At the current pace of sales this is estimated to be a 5.0 month supply.

New home sales in the Northeast were 8.8 percent above sales in July and 27.6 percent higher than one year earlier.  In the Midwest sales were up for the two periods by 19.6 percent and 15.1 percent respectively.  Sales in the South increased by 15.3 percent month-over-month and 28.2 percent since last year.  However sales in the West were down 14.6 percent from July and 21.2 percent from the same month in 2012.

GSEs Waiting on CFPB Before Publishing Standardized Data Requirements

Fannie Mae and Freddie Mac told their lenders today that they will soon provide a common industry data set for the Consumer Financial Protection Bureau's (CFPB) proposed new Closing Disclosure Forms.  The new forms will consolidate a number of previous forms into two and give consumers enhanced information on loan terms, payment amounts, escrow items, and loans costs. 

The GSE's support of the CFPB forms will be a continuation of the Uniform Mortgage Data Program® (UMDP), an ongoing effort to standardize the way loan data is defined, collected, and delivered in the mortgage industry in order to enhance the accuracy and quality of loan data.  The Uniform Closing Dataset (UCD) which is used by both of the government sponsored enterprises (GSEs) is a component of the UMDP and will be used to support the proposed closing forms.  The UCD will rely on the Mortgage Industry Standards Maintenance Organization^® (MISMO^®) data standards that are already well-established in the industry.

In press releases Tuesday afternoon both GSEs said they would publish the UCD after CFPB publishes its Final Rule for the Integrated Mortgage Disclosures Regulation, which includes the Closing Disclosure form. The UCD will contain the standardized data requirements for electronically implementing the form. The GSEs said they are currently gathering input on draft data specifications from industry participants including lenders, vendors, and settlement service providers.

The press releases said if the final rule is published this fall as expected, the GSEs will have more information later in 2013 on the implementation plans, specifications, and resources available to transition to the new dataset.

Longer Term Investors Outnumber Flippers 2 to 1 in California

Investors have played a major role in California real estate since the financial crisis began and are continuing to fuel the housing recovery in that state. The California Association of Realtors® (C.A.R.) did not estimate the numbers or percentages of properties being purchased by investors today but did look at their current modus operandi through a survey conducted in April.

The survey was conducted among investors who had worked with a Realtor. It found that 64 percent of investors have a long-term strategy in investing, indicating they planned to keep their property for more than a year although three-quarters intend to resell within six years. About 36 percent of investors intend to flip the property.

Most California investors are of the small "mom and pop" type, owning one to 10 other investment properties. Fifteen percent own only one property, 46 percent own two to five, and 14 percent own six to ten. Seventy-eight percent of investor transactions involved single-family homes and 14 percent were multi-family purchases. Bulk sales made up only 1 percent of investor purchases. More than two-thirds of investors manage their properties themselves.

Investors spent a median of $272,500 to purchase their properties and eight out of 10 made repairs, spending a median of $10,000. The lower the purchase price the more the investor spent, as a percentage of that price, on repairs. Sixty-seven percent of investors paid cash at purchase.

Thirty-four percent of investors said their motive for purchasing was the profit potential, 26 percent said it was the favorable price, and 10 percent said low interest rates motivated them.

Foreign investors made up 27 percent of the total with China, India, and Mexico providing the largest numbers of buyers.

Freddie Mac Extends Disaster Assistance to Colorado Flood Victims

As it did following the devastation of Hurricane Sandy, Freddie Mac has made the full menu of its mortgage relief policies available to borrowers in the Colorado area.  The state has been hit by days of flooding that, according to the latest news reports, are likely to have destroyed 11,000 homes.

Freddie Mac's disaster relief policies enable servicers to help borrowers with homes in presidentially declared Major Disaster Areas where federal Individual Assistance programs are being made available.  Under the directive issued by Freddie Mac today servicers can place borrowers with properties affected by the flooding on forbearance and suspend foreclosures for up to 12 months.  This forbearance need not be reported to the nation's credit bureaus.  Servicers can waive late fees assessed against borrowers whose homes were damaged by the disaster.  Evictions and lock-outs can also be suspended for up to 90 days.

When forbearance ends, a new Freddie Mac option allows servicers to add missed mortgage payments to the outstanding loan balance and extend the term of the loan in order to keep the monthly mortgage payment essentially unchanged. 

Freddie Mac is also reminding servicers to consider Freddie Mac's standard relief policies, including forbearance or mortgage modifications, for borrowers who work in eligible disaster areas but live in unaffected areas.

Tracy Mooney, Senior Vice President of Single-Family Servicing and REO at Freddie Mac said, "Freddie Mac is urgently reminding the nation's mortgage servicers about the full range of mortgage relief options they can provide to affected borrowers with mortgages we own or guarantee, including forbearance on mortgage payments for up to one year. We strongly encourage borrowers to contact their servicers, who are fully authorized to work with them on a case-by-case basis."

Fannie Mae is expected to issue a similar emergency declaration.

FHA Required to Take Treasury Draw

The Federal Housing Administration (FHA) notified Congress this morning that, as had been rumored earlier in the week, it will need to draw on its borrowing authority from the U.S. Treasury.  In a letter signed by FHA Commissioner Carol Galante, FHA said it would require $1.7 billion to shore up its Mutual Mortgage Insurance (MMI) Fund, marking the first time in the agency's 79 year history it has needed taxpayer help.

The request is twice what Housing and Urban Development Secretary Shaun Donovan said last April would be FHA's shortfall at the end of the fiscal year next week, $943 million, and well above the $1 billion number that was rumored earlier this week. 

Those rumors previously sparked a reaction from Republican members of both the House and Senate committees studying the reform of the nation's housing finance system.  Jeb Hensarling, Chairman of the House Financial Services Committee issued a statement in which he called FHA "the nation's largest subprime lender."

In her letter Galante said that the need for a Treasury draw does not mean the agency's finances are in trouble and that forthcoming data will indeed show its finances to be on solid footing.  Other FHA officials said there is more than $30 billion in cash and investments on hand to pay expenses and potential mortgage claims.  However Congress requires the MMI to maintain 2 percent in capital reserves, a level it has not met for some time. 

In addition to the unprecedented claims FHA has had to pay out since 2007 for defaults on mortgages it guaranteed, largely during the 2005-2007 real estate boom, the company has had losses totalling $5 billion in its Home Equity Conversion (HECM) or reverse mortgage. 

An independent actuarial audit of FHA last year found the MMI to have a negative value of about $16 billion.  Through raising guarantee fees, tightening credit requirements, changing HECM lending procedures, and other risk reducing factors FHA had substantially reduced that shortfall by spring when Donovan quoted the $943 million number. 

Reuters quoted Maxine Waters (R-CA), ranking member of the Financial Services Committee as saying "Although this one-time transfer of funds from the Treasury is legally necessary, it's important to note that FHA is far from bankrupt."  She noted the agency continues to generate revenue.

The Center for Responsible Lending released a statement that said in part, "The proposed draw from the U.S. Treasury Department would not have been needed if Congress had not prevented FHA from clamping down on fraudulent seller-funded down payment loans, as it tried to do.  Noting that FHA's losses are related to only a small portion of its portfolio, CRL said "In response, FHA has increased its pricing and tightened its underwriting, including the ban on seller-funded down payments and fixing some reverse mortgage problems. These administrative adjustments have led recent loans to perform extremely well."

According to Reuters, "Since the cash draw from Treasury will not be disbursed by the FHA, it will not impact how quickly the government runs out of money to pay its bills under the nation's $16.7 trillion debt ceiling. In addition, the Treasury has the authority to take the $1.7 billion back once the FHA rebuilds its reserves."

REITs, Pension Plans Increase Multifamily Debt Holdings

Commercial and multi-family mortgage debt increased by $24.5 billion in the second quarter of 2013, with $10.9 billion of that being debt in the multi-family sector.  The Mortgage Bankers Association (MBA) said the increase in debt from quarter to quarter was 1.0 percent for all mortgage debt and 1.3 percent for multi-family.  The aggregate outstanding commercial and multifamily debt at the end of the second quarter was $2.45 trillion; the multifamily portion was $875 billion.

MBA's Vice President of Commercial Real Estate Research, Jamie Woodwell, said of the numbers, "A strong appetite among investors to put their money to work in commercial and multifamily mortgages led to an increase in the level of mortgage debt outstanding. In the second quarter alone, banks increased their holdings of commercial and multifamily mortgages by $16 billion; Fannie Mae, Freddie Mac and FHA increased their multifamily holdings and guarantees by $5.6 billion and life insurance companies increased their commercial and multifamily holdings by $4.0 billion."

The largest holders of aggregate debt were banks and thrifts at $855.3 billion or 34.5 percent followed by the category of Commercial Mortgage Backed Securities (CMBS), Collateralized Debt Obligations (CDOs) and other asset-based securities (ABS) with $557.1 billion or 23.0 percent.  Agency and GSE portfolios and mortgage backed securities (MBS) were third with holdings of $388.1 billion in aggregate debt or 15.9 percent, most of which, $366.1 billion, was multifamily debt which made that category of investors the largest in the mortgage sector with 44.4 percent. 

Banks and thrifts were the second largest holders of multifamily debt at $244.2 billion or 27.4 percent.  CMBS/CDO/ABS were third at $75.1 billion or 8.6 percent followed closely by state and local governments with $74.8 billion or 8.5 percent.  Other holders of more than 1 percent of the outstanding multifamily debt in the second quarter were life insurance companies (5.8 percent), nonfarm non corporate business (1.7 percent) and the Federal government (1.6 percent.)

Agency/GSE portfolio and MBS holdings increased from the first quarter of 2013 to the second by 5.57 billion or 1.5 percent and banks and thrifts increased by 7.4 billion or 3.1 percent.  The largest relative increase in holdings was a 31.1 percent increase ($668 million) by Real Estate Investment Trusts (REITS) and 13.4 percent growth in the portfolios of private pension funds to a total of $4.8 billion.  State and local governments dropped their multifamily investment by $2.5 billion or -3.3 percent.  The largest relative divestiture was by finance companies which lowered their holdings by 20 percent, from $2.7 billion to $2.2 billion.

Following banks and thrifts and the CMBS/CDO/ABS and Agency/GSE/MBS sectors, other large holders of overall commercial and mortgage debt were life insurance companies ($325.0 billion or 13.3 percent), State and local governments ($89.7 billion, 3.7 percent), and the Federal Government ($83.6 billion or 3.4 percent.)  Finance companies, REITS, and nonfarm, non-corporate businesses each held between 1 and 2 percent of the total debt. 

The largest increases in overall commercial and multifamily debt were insurance companies other than life insurance companies with a 12.2 percent increase to $6.6 billion.  The household sector had a 43.2 percent drop in holdings from $4.5 billion to $2.5 billion.

MBA's analysis summarizes the holdings of loans or, if the loans are securitized, the form of the security. For example, many life insurance companies invest both in whole loans for which they hold the mortgage note (and which appear in this data under Life Insurance Companies) and in commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs) and other asset backed securities (ABS) for which the security issuers and trustees hold the note (and which appear here under CMBS, CDO and other ABS issues).

MBA's analysis is based on data from the Federal Reserve Board's Flow of Funds Account of the United States and the Federal Deposit Insurance Corporation's Quarterly Banking Profile. More information on the construction of this data series is contained in Appendix A in the report.

Freddie Mac Issuance Still Refi-Heavy in August

Freddie Mac's total mortgage portfolio ended August with a principal balance of $1.93 trillion.  This represented a 5.0 percent reduction from the outstanding balance of $1.94 trillion at the end of July.  Purchases for that portfolio totaled $35.96 billion while Sales were ($3.87) billion, and Liquidations ($40.27) billion.  The annualized growth in the Total Mortgage Portfolio for the year-to-date is (1.7) percent and the Annualized Liquidations rate is (28.0) percent.

The Total mortgage portfolio is the sum of Freddie Mac's mortgage-related securities and other guarantee commitments plus the sum of mortgage loans and non-Freddie Mac mortgage-related securities, both agency and non-agency.

The Mortgage-Related Investments Portfolio had an ending balance of $511.94 billion compared to $521.25 billion in July, a decrease of $9.3 billion and an annualized growth rate of (21.4) percent.  This was the first drop in the portfolio balance since May.  Purchases totaled $17.84 billion, Sales were ($16.52 billion and Liquidations were ($10.55) billion. 

As of August 31, 2013, Freddie Mac had net unsettled purchase (sale) agreements of approximately $2,461 million.  The ending balance of the mortgage-related investments portfolio as of August 31, 2013 after giving effect to these unsettled agreements and assuming there were no other agreements entered into after that date would have been $514 billion.

Freddie Mac's mortgage-related securities and other guarantee commitments increased at an annualized rate of 2.3 percent to an ending balance of $1.61 trillion.

At the end of August the components making up the $511.94 billion Mortgage-Related Investment Portfolio broke down as:  $190.82 in PCs, REMICs and other structured securities; $20.70 billion in non-Freddie Mac Agency Securities and $106.87 billion in non-Freddie Mac non-Agency Securities; $193.55 billion in Mortgage Loans.

Single-family refinance loan purchases and guarantee volume was $20.8 billion during the month, representing 63 percent of total single-family purchases or issuances.  Relief refinances were approximately 33 percent of the companies refinance business.

Freddie Mac's total delinquency rate fell to 2.64 percent in August from 2.70 in July and 3.36 percent one year earlier.  Delinquencies of non-credit enhanced loans were at a rate of 2.25 percent, up one basis point from July but down from the 2.70 percent rate a year earlier.  The credit enhanced portfolio had a rate of 5.34 percent, compared to 5.90 percent and 7.64 percent in the earlier period.  The multifamily delinquency rate was .05 percent.

Foreclosure Starts Halved over 12 Months

Foreclosure starts in the second quarter of 2013 were down to half the level of a year earlier the Office of Comptroller of the Currency (OCC) said on Thursday.  There were 150,592 new foreclosures initiated during the quarter, down 50.8 percent from the second quarter of 2012 and the fewest in any quarter since early 2008. 

OCC noted significant improvements in most but not all measures of delinquency in its second quarter Mortgage Metrics Report.  The report provides performance data on first-lien residential mortgages that represent 52 percent of all those outstanding in the U.S; approximately 26.5 million loans with $4.5 trillion in unpaid principal balances. 

Strengthening economic conditions, aggressive foreclosure prevention assistance, regulatory actions, and home forfeitures contributed to the improved performance, OCC said.  The metrics also improved due to servicing transfers from the selected national banks and one federal savings association included in the report.  The number of loans covered in the report has decreased 13.0 percent from a year ago and 23.3 percent from the end of the second quarter in 2008.  Principal balances are down 13.7 percent and 26.8 percent for the two periods.  In addition to transfers the decline in the portfolio also resulted from the reduction of mortgage debt overall.

At the end of the quarter 90.6 percent of all mortgages covered in the report were current and performing compared to 90.2 percent at the end of the first quarter and 88.7 percent a year earlier.  The 30+ day delinquency rate was 2.9 percent, 11.6 percent higher than the previous quarter and 1.8 percent above the rate a year earlier.  Delinquencies of 60 days or more decreased to 3.8 percent from 4.0 percent the previous quarter and 4.4 percent the prior year.

Foreclosure activity overall reached the lowest level since OCC initiated its report in the first quarter of 2008.  In addition to the drop in starts, the number of loans in the process of foreclosure at the end of the quarter declined 39.8 percent from the previous year to 744,369 loans.  The number of completed foreclosures fell 22.2 percent year-over-year to 79,960.

Performance of government guaranteed mortgages, which comprised 24.6 percent of the serviced portfolio, did not improve in the second quarter but did better than a year earlier.  Current and performing loans represented 85.7 percent of the guaranteed portfolio compared to 86.2 in Q1 and 84.9 percent in the second quarter of 2012.  Seriously delinquent mortgages in this part of the portfolio increased 0.5 percent from the previous quarter to 6.2 percent.

Just over 57 percent of the portfolio were loans serviced for Fannie Mae and Freddie Mac.  Current and performing loans were 95.1 percent of that portfolio, compared to 94.6 percent in the first quarter and 93.7 percent a year earlier. 

Servicers implemented more than twice as many home retention actions during the quarter as home forfeiture actions.  There were 314,672 loan modifications, trial-period plans, and shorter term payment plans put in place during the quarter compared to 121,746 completed foreclosures, short sales, and deeds-in-lieu.  Still the foreclosure prevention activities were down 9.8 percent from the first quarter and 25.2 percent from a year earlier. 

Loan modifications completed in each of the last five quarters have performed similarly over time even though factors that can influence their performance such as the average change in monthly payment, the characteristics and geographic location of the loans and the addition or deletion of modifications programs among reporting institutions have varied. 

Among modifications completed in each of the last five quarters, 60 day delinquencies occurred at the following rate: Three months after modification, between 5.8 and 7.7 percent; after six months, 11.5 to 14.2 percent; at 12 months, 16.9 to 20.9 percent.  Among modifications completed during the last five quarters, less than 16 percent were 90 or more days delinquent 12 months after modification. Loans modified in the most recent four quarters appear to be re-defaulting at materially lower rates than modifications completed in earlier quarters.

HAMP modifications have performed better than other modifications implemented during the same periods perhaps because of HAMP's emphasis on the affordability of monthly payments relative to the borrower's income, verification of income, and completion of a successful trial-payment period. While these criteria result in better performance of HAMP modifications over time, the greater flexibility allowed through other types of modifications results in more of those modifications for borrowers who do not qualify for HAMP.

Falling Mortgage Rates Boost Purchase, Refinance Activity

Applications for both refinancing and home purchase increased last week as mortgage interest rates retreated.  The Mortgage Bankers Association (MBA) said that its Market Composite Index, a measure of overall mortgage application volume, increased 5.5 percent on a seasonally adjusted basis during the week ended September 20 and increased 5.0 percent unadjusted.  MBA also reported that contract interest rates fell between 13 and 18 basis points for the various products tracked in its Weekly Mortgage Applications Survey.  Effective rates were down for all products as well.

The seasonally adjusted Purchase Index was 7 percent higher than during the week ended September 13 and the unadjusted version increased 5 percent from the previous week and was up 7 percent from the level a year earlier.  It was the most active week for purchase applications since July but the government share of that business decreased to 28.4 percent from 29.9 percent, the lowest level since early August and close to the series low of 28.2 percent in June 2013.  

The Refinance Index increased 5 percent from the previous week and refinancing maintained the same 61 percent share of the market it had the week before.  Applications for refinancing through the Home Affordable Refinancing Program represented a 41 percent share of all refinancing applications, up from 40 percent the previous week and the highest portion since MBA began tracking the program in early 2012.  

Purchase Index vs 30 Yr Fixed

Refinance Index vs 30 Yr Fixed

The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances of $417,000 was down to 4.62 percent with 0.41 point from 4.75 percent with 0.39 point.  The jumbo 30-year FRM (balances over $417,000) fell from 4.83 percent to 4.66 percent and points decreased from 0.33 to 0.29.

Thirty-year FRM with a FHA guarantee had an average contract rate of 4.32 percent with 0.37 point.  During the previous week the average rate was 4.50 percent with 0.41 point.

The rate for a 15-year FRM was down 18 basis point from the previous week to an average of 3.68 percent.  Points decreased to 0.28 from 0.34.

Adjustable rate mortgages (ARM) had a 7 percent share of applications, unchanged from the previous week.  The average rate for the 5/1 ARM dropped from 3.54 percent with 0.43 point to 3.39 percent with 0.35 point. 

All interest rates are for loans with an 80 percent loan-to-value ratio.  Points include the origination fee.

MBA's weekly survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990.  Respondents include mortgage bankers, commercial banks and thrifts.  Base period and value for all indexes is March 16, 1990=100. 

Cash Sales Jump to 45 percent in August

Distressed homes accounted for 25 percent of residential home sales in August, up 2 percentage points from July.  RealtyTrac, in its August U.S. Residential and Foreclosure Sales Report, said that short sales and sales of bank-owned properties (REO) each rose one point from their July numbers to 15 percent and 10 percent respectively. 

The big news, however, was the growing level of all-cash sales which are rapidly approaching half of all residential real estate transactions.  Those sales rose to a 45 percent share in August, up from 39 percent in July and 30 percent in August 2012.   The percentage of cash sales was even higher in some metropolitan areas such as Miami (69 percent), Detroit (68 percent), Las Vegas (66 percent), Jacksonville, Florida (65 percent), and Tampa (64 percent).

The numbers of institutional investors, those who have purchased at least 10 properties in the last 12 months, are also increasing and accounted for 10 percent of all sales in August compared to 9 percent both in July and one year earlier.  Memphis, Jacksonville, and Atlanta appear particularly attractive to these large investors with those purchases representing respectively 31, 29, and 22 percent of local sales.

RealtyTrac said homes (including single-family residences, condos, and townhomes) sold at a seasonally adjusted annual rate of 5.6 million in August, up 2 percent from 5.5 million in July and 12 percent higher than the 5.0 million pace in August 2012. 

The national median sales price in August was $175,000, up 3 percent from the previous month and up 6 percent from a year ago.  The company said this marked the 17^th consecutive month of annual price increases.  Distressed property sold at a median price of $116,000, 1 percent higher than in July but down 3 percent from August 2012.  Distressed home sales including REO and short sales have now seen year-over-year median prices decline for six straight months.

"Seven years after the housing bubble burst, U.S. home prices are clearly on the rise again, up 23 percent from the bottom in March 2012 although still 26 below the peak of the housing price bubble in August 2006," said Daren Blomquist, vice president at RealtyTrac. "This recovery in home prices and sale volume continues to be driven in large part by cash buyers and institutional investors, as evidenced by the increasing share of sales represented by those two categories in August."

Sales volume increased from the previous month in 39 out of the 42 states tracked in the report and was up from a year ago in 37 states, including Texas, (31 percent), Illinois (29 percent), and Pennsylvania (28 percent), Virginia (up 26 percent), and Florida (up 22 percent). Notable exceptions where sales volume decreased from a year ago included California (-17 percent), Arizona (-12 percent), and Nevada (-6 percent)

States with biggest annual increases in median prices include California (32 percent), Nevada (26 percent), Georgia (21 percent), Arizona (20 percent) and New York (19 percent).

Home Prices Increased Substantially in July, but Growth May be Slowing

Indices released by two of the leading sources of home price information this morning confirm the continued growth of home values in the U.S., at least through July.  While their methodologies differ and direct comparison is not possible, both showed substantial growth for the month.  The Federal Housing Finance Agency (FHFA) said its House Price Index (HPI) rose 1.0 percent on a seasonally adjusted basis in July while S&P/Case-Shiller reported its 10-City Composite rose 1.9 percent and its 20-City Composite was up 1.8 percent.

However, while the Case-Shiller Indices indicate that growth may be slowing, both its indices rose 2.2 percent from May to June, the FHFA HPI showed month-over-month appreciation at the highest level since March.  Case-Shiller reports that all 20 cities tracked by its two indices showed monthly gains for the fourth consecutive month, but like the two composites, 15 of the cities had smaller gains in July than in June. 

On an annual basis the 10-City has gained 12.3 percent since July 2012 and the 20-City 12.4 percent and the deceleration in price gains was not as pronounced as in the monthly returns.  Thirteen of the 20 cities had larger annual increases in July than in June. 

"Home prices gains are holding their 12% annual rate of gain established by the two Composite indices in April," says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. "The Southwest continues to lead the housing recovery. Las Vegas home prices are up 27.5 percent year-over-year; in California, San Francisco, Los Angeles and San Diego are up 24.8, 20.8, and 20.4 percent respectively. However, all remain far below their peak levels.

"Since April 2013, all 20 cities are up month to month; however, the monthly rates of price gains have declined. More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked.

Prices nationally have returned to the levels last seen in the spring of 2004.  Measured from the peak prices reached in the summer of 2006 the two composites are down approximately 21 to 22 percent and they have recovered from the troughs of March 2012 by 20.5 percent for the 10-City and 21.2 percent for the 20 City.

Chicago showed the greatest positive change from June to July at 3.2 percent, followed by Las Vegas at 2.8 percent.  In both cases their increase was identical to the gain from May to June. Detroit had a monthly increase of 2.7 percent, slipping from the 3.1 percent improvement the previous month.   Seattle, Tampa and Washington were the only three MSAs where returns increased from June to July. Cleveland showed the most weakness with a +0.5 percent return in July versus +2.0 percent in June.

Looking at the annual rates of change, thirteen cities showed acceleration with San Francisco posting its highest year-over-year return of 24.8 percent since March 2001. Atlanta, Boston, Charlotte, Detroit, Miami, Minneapolis and Phoenix were the seven MSAs with lower annual growth rates; the Twin Cities decreased the most with +9.5 percent in July compared to +11.5 percent in June. Although Detroit posted its 25th consecutive positive year-over-year return, it remains the only city below its January 2000 level.

The FHFA index had an annual increase of 8.8 percent with all nine census divisions posting positive year over year numbers ranging from 20.8 percent in the Pacific region (Hawaii, Alaska, Washington, Oregon, California) to 3.8 percent in the East South Central (Kentucky, Tennessee, Mississippi, Alabama).

The monthly improvement in the national FHFA number was not reflected in all divisions.  Price deprecation was reported in the East South Central division which was down 0.7 percent in July after increasing 1.3 percent from May to June.  The West South Central Division (Oklahoma, Arkansas, Texas, Louisiana) also reversed directions, falling from a gain of 0.4 percent in June to an identical loss in July.   

The S&P/Case-Shiller Home Price Indices combines matched price pairs for thousands of individual houses from the available universe of arms-length sales data and each index has a base value of 100 in January 2000; thus, for example, a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the subject market.

The FHFA HPI is based on home sales price information from repeat mortgages sold to or guaranteed by Freddie Mac or Fannie May.

These Four "D's" Plague Consumers Seeking Credit -Cordray

There are "Four Ds" that plague consumers, the Director of the Consumer Financial Protection Bureau told an audience of Bankers on Tuesday; deceptive marketing, debt traps, dead ends, and discrimination.    Richard Cordray, speaking to the American Banker Regulatory Symposium, said that from the perspective of the Bureau, sensible rules of the road, appropriate market oversight, and evenhanded enforcement empower the American consumer.  In order to ensure that the financial marketplace functions properly consumers need to be educated and informed, CFPB needs to complete the work it has started with mortgage regulations, and it needs to address those Four Ds.   

Consumers cannot make sound financial choices if they are deceived by false or misleading information which Cordray says happens with surprisingly frequency in the financial marketplace.  It happened, for example in the years leading to the financial crisis when some lenders marketed mortgages with misleading teaser rates and many homebuyers ended up with complicated mortgage products they did not understand and could not afford; products they might have avoided had they known better.

Sometimes consumers are confused rather than deceived because relevant information is buried in pages of fine print or written in language that requires an advanced degree to decipher.  "Various providers may describe the same fee very differently, making comparisons numbingly difficult," he said.

In response the CFPB's "Know Before You Owe" effort is attempting to make information more accessible and more understandable.  However disclosure is only half the solution so the Bureau has taken action against deceptive sales pitches, notably against credit card companies and has put more than $700 million back in the pockets of over 8 million consumers so far. 

The Director said debt traps can put consumers into a downward spiral that deeply undermines their personal finances.   People in a tough situation with nowhere else to turn may think their only option is to use products marketed as short-term solutions where the fees can seem small compared to the pressing need for quick cash.  But when the payment comes due or is automatically taken from their accounts, they may not have enough money to repay the debt, the fees and their living expenses so they borrow again, initiating a vicious cycle.

CFPB has been analyzing these products and their markets, Cordray said, and payday lenders are now supervised for the first time at the federal level.  There is an obvious demand for small-dollar credit products and the challenge is how best to protect consumers while preserving access to them.   

Another "D" are markets that create frustrating and damaging "dead ends" where consumers cannot chose the businesses they must deal with and thus lack the control of being able to sever their ties, even though those markets and can have a profound influence on their lives.  Debt collection is one example. There are many legitimate debt collectors, Cordray said, but we have all heard the horror stories about constant phone calls or falls threats of arrest.  These tactics are indefensible, he said; people deserve to be treated with dignity, even if they do owe a debt.

There are other markets in which consumers face problems because they cannot "vote with their feet."  Mortgage servicing has presented millions of people with unwelcome surprises and constant runarounds, improper fees, and needless loss of their homes.  Credit reporting agencies also hurt consumers who have little or no say in decisions made about their credit reports.  "At the Consumer Bureau, we recognize that effective oversight through supervision and enforcement is needed to help protect consumers against these potential dead-ends," Cordray said.  "We plan to achieve just that.  And where we determine that regulations are the appropriate tool for addressing these issues, we will act accordingly."

Combating the fourth "D," discrimination is a clear focus for the Bureau. There are too many instances of consumers being treated unequally because of characteristics like race or gender and from the perspective of a consumer, it makes no practical difference whether the discrimination that harmed him was intended or not.   The Bureau has made it clear we will pursue discrimination in financial markets based on disparate impact as well as disparate treatment and that lenders are responsible for the operation of their lending programs even if there is a middleman between them and the borrower.  The bottom line is that every consumer should have equal access to credit, as required by law.  Cordray said the Bureau will also be examining the way financial institutions provide information under the Home Mortgage Disclosure Act (HMDA), both to improve the categories of information that are gathered and to ease the operational and technological burdens on industry to comply with this law.

The Bureau plans to use all of its tools, supervision, enforcement, and rulemaking, along with consumer education initiatives to address the Four Ds in the financial marketplace as well as continuing to study other issues consumers are facing.   But at the same time, Cordray said, we recognize that consumers bear their own share of responsibility for how they participate in the financial marketplace.  They need to position themselves to make sensible decisions that they can live with over the course of their lives.  "They need to recognize that the best form of consumer protection is self-protection:  avoiding problems before they occur and the damage is done." 

Cordray concluded by emphasizing the need for a consistent and sustained emphasis on financial education.  "Every year, we send thousands of young people out into the world to survive on their own, with little or no training in the kinds of decisions they must make to succeed financially.  That is a self-defeating approach in any free society ordered around a free market economy, and we simply have to face up to our current failures and insist on doing better - in our schools, in our workplaces, and in our houses of worship".  He said the Bureau will be working very hard to bring more visibility and sense of urgency to this topic and to insist on making tangible progress for the American people in the years ahead.

Home Price Appreciation Strong in 2nd Quarter

Home prices continued their strong two year-long national trajectory by increasing 2.1 percent in the second quarter and 0.7 percent from May to June, the last month of that quarter.  The Federal Housing Finance Agency (FHFA) said the second quarter was the eighth consecutive one in which its purchase only Home Price Index (HPI) had increased on a seasonally adjusted basis and FHFA's Principal Economist Andrew Leventis called it one of the strongest quarters since the boom prior to the housing crash.  The index for the second quarter of 2013 was up 7.2 percent from Q2 2012 figures.

Seven of the nine U.S. Census Bureau divisions posted monthly increases in June with the East South Central division having the largest increase at 1.6 percent followed by the Pacific region at 1.3 percent.  The two regions in which prices dipped were New England (-0.3 percent) and the Middle Atlantic (-0.6 percent). 

The index rose 7.7 percent compared to June 2012 and each of the nine U.S. Census Bureaus also posted annual increases ranging from a maximum of 17.0 percent in the Pacific Region followed by 11.0 percent in the Mountain division.  The smallest increases were logged in the Middle Atlantic (2.5 percent) and New England (3.7 percent).

The seasonally adjusted purchase-only HPI rose in 47 states and the District of Columbia.  Prices fell in Hawaii (-1.93 percent), West Virginia (-0.64 percent), and Montana (-0.40 percent).

The HPI is calculated using home sales prices from mortgages sold to or guaranteed by Fannie Mae and Freddie Mac.  FHFA also maintains an expanded data HPI which adds transaction information from county recorder offices and the Federal Housing Administration to the basic HPI data.  That index rose 2.4 percent over the latest quarter and is up 7.5 percent over the last four quarters.

CFPB Updates Financial Institution Exam Procedures

The Consumer Financial Protection Bureau (CFPB) has released a set of exam procedures to assist financial institutions and mortgage companies plan for regulatory examinations once the new mortgage rules become effective. The updated procedures, the second set issued by CFPB in the last few weeks, cover the Bureau's origination rules issued through the end of May and mortgage servicing rules issued through July 10. Most of the new rules with which the institutions will have to comply will go into effect in January 2014.

"We are committed to transparency around our examination process," said CFPB Director Richard Cordray. "So we have worked hard to provide industry with advance notice of what we will be expecting. That, in turn, will improve compliance and benefit consumers."

The updates issued on Thursday cover the Ability-to-Repay/Qualified Mortgages, high-cost mortgages, and appraisals for higher-priced mortgage loans, as well as new amendments related to the escrows rule. The updates also cover recent changes to credit card rules.

The CFPB is sharing with industry what it will be looking for in its examinations under the new rules by updating the applicable sections of the exam procedure manuals for the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). These documents are intended for use by CFPB examiners in examining the mortgage companies and other financial institutions subject to the new regulations.

A copy of the RESPA exam procedures released today can be found at:
http://files.consumerfinance.gov/f/201308_cfpb_respa_narrative-exam-procedures.pdf

A copy of the TILA exam procedures released today can be found at:
http://files.consumerfinance.gov/f/201308_cfpb_tila-narrative-exam-procedures.pdf

Pending Sales: Another Indication of Cooling California Boom

Like closed sales which were reported last week, pending real estate sales in California dropped in August while distressed home sales were down to levels last seen six years ago the California Association of Realtors® (C.A.R.) said today.  C.A.R. said rising mortgage rates were responsible for the drop in the Pending Home Sales Index (PHSI) which fell 5 percent in August.

The Index was at 114 in July.  In August it fell to 108.3 which was also 8.9 percent below the index recorded in August 2012.  Pending sales are a forward looking indicator of future home sales activity based on signed home purchase contracts.   Last week C.A.R. said closed sales in August had fallen to a seasonally adjusted annual rate of 434,700 units, a 2 percent decrease from July.  

"Rising interest rates over the past several months at the specter of a tapering of the Fed's stimulus program sent buyers to the sidelines in August," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  "However, the Fed's decision last week to postpone the  pullback should lead to lower interest rates, which bodes well for prospective buyers." 

Non-distressed or equity property sales have risen on a month-to-month basis for 18 of the last 19 months C.A.R. said and now account for more than four in five sales, the highest share since November 2007.  Equity sales rose from 82.9 percent of all residential sales in July to 84.7 percent in August.  One year earlier equity sales made up 62 percent of the total.

Twenty-five of the 38 counties reporting to C.A.R. reported distressed sales down in August and some of the largest counties - San Diego, San Mateo, Alameda, Orange, and others - reported distressed sales in the single digits. 

Short sales fell to 10.2 percent of all sales, the lowest point since February 2009 and were less than half what they were in August 2012.  C.A.R. said the continuing decline in short sales indicates more previously underwater homes are now selling at a high enough price to cover the mortgage.

The share of REO sales also continued to fall and was in single-digits for the fifth straight month.  Bank owned property accounted for 4.7 percent of sales in August compared to 5 percent in July and 14.7 percent in August 2012. 

Housing inventory levels improved further in August but remained in short supply.  The Unsold Inventory Index for equity sales inched up from 3 months in July to 3.1 months in August.  The supply of REOs edged up from 2.1 months in July to 2.3 months in August, and the supply of short sales rose from 2.5 months in July to 2.9 months in August.

Possible Ulterior Motive Behind New CFPB HMDA Tool

A national law firm which frequently analyzes actions either coming from or having an impact on the Consumer Financial Protection Agency raised questions today about one of the Bureau's most recent moves.  Karen Morgan, writing in the Ballard Spahr's CFPB Monitor, questioned the motives of the Bureau in creating and releasing a new on-line tool for analyzing Home Mortgage Disclosure Act Data (HMDA).

(Read More: CPFB Provides Key to Using HMDA Data)

Data collected for 2012 from 7,400 financial institutions under the HMDA were released last week by the Federal Financial Institutions Examination Council (FFIEC).  The data, which covers about 19 million mortgage loan actions, covers loan level data on loan applications,  originations and denials, loan amount, type, purpose, property type, location, applicant characteristics (race, gender, income), and pricing related data.

Almost simultaneously CFPB announced release of its tool which allows researchers, agencies, and consumers to slice and dice the data to look at individual variables at national and local levels.  In announcing the tools CFPB said they will "help maximize the impact of this tremendous public dataset by providing a user-friendly tool to enable consumers to explore mortgage application and loan data at a local level."

But then CFPB went on to say, "The public information is important because it helps show whether lenders are serving the housing needs of their communities; it gives public officials information that helps them make decisions and policies; and it sheds light on lending patterns that could be discriminatory."

And this has Morgan, a member of the Consumer Finance Services Group at Ballard Spahr concerned.  She said the release of the data and the tool to access the data along with remarks from CFPB Director Richard Cordray "appeared to indicate that HMDA data may be used to identify institutions that may be discriminating against protected classes of borrowers. Although the CFPB's emphasis was on the use of the mortgage tool by the public, at this time the more important message for the industry is that the CFPB appears to be gearing up to use HMDA data to identify institutions that may be discriminating."

Institutions are required to collect certain data on mortgage related lending and the data has always been publicly available, Morgan said, and the tool released by the CFPB merely repackages the information into a more consumer-friendly format.  But "a number of the data fields, particularly those regarding the ethnicity, race, and sex of the borrower, could be used by regulators and plaintiff's attorneys to target lenders for examinations, enforcement actions, and litigation relating to discrimination."

Morgan says CFPB appears to be foreshadowing the use of HMDA data to identify institutions that may be discriminating.  She quotes comments from the press release that the HMDA data "can shed light on lending patterns that could be discriminatory" and on Cordray's statement that  this data "helps shine a spotlight on lending disparities" and "reveals lending patterns, including some that might be discriminatory.'   Morgan concludes, "This use of HMDA data may lead to targeted examinations for these institutions and an increase in enforcement actions under ECOA based on HMDA data."

Further she says it is significant that Cordray did not state that HMDA lending disparities necessarily establish discrimination. "A much deeper analysis is required to determine whether and the extent to which other factors (e.g., credit scores and histories, loan-to-value ratios, etc.) explain any statistical disparities. And, of course, we have taken issue in the past with the view that disparate impact on a protected basis is sufficient to ground an ECOA or Fair Housing claim. Still, Director Cordray's remarks make it clear that, at a minimum, the CFPB, like the federal banking agencies before it, will statistically sample HMDA data to determine whether a lender merits a targeted fair lending examination.'

She fears that plaintiff's attorneys may also be tempted to cull the data "to identify lenders ripe for class actions and private litigation based on similar theories. However, private parties will have a much tougher time using HMDA data in lawsuits since, in light of the manifold potential legitimate explanations of HMDA statistical disparities, any violation remains speculative.'

At present there is actually very little that can be done with the data on the CFPB website.  There are three available actions, a heat map that can be generated to show the difference in the volume of either mortgage applications or originations from 2010 to 2011 or from 2011 to 2012 and sets of graphical crosstabs on applications and originations nationally or by metropolitan statistical area and by loan type (FHA, Conventional, VA) or by loan purpose.   CFPB says it has other tools on the way and has provided web designer tools for persons who wish to develop their own applications.  

Fannie Mae to get $948 Million for Misrepresented Citi Loans

Fannie Mae has agreed to take $968 million as compensation from Citigroup (Citi) for a large group of mortgages the bank was accused of misrepresenting. Some 3.7 million mortgages sold to Fannie Mae by Citi between 2000 and 2012 were involved in the resolution agreement. Fannie Mae had maintained the bank had not properly confirmed underwriting details for the loans such as borrower income.

Citi said the resolution agreement covers potential future origination-related representation and warranty claims on this group of loans but does not release the bank's liability with respect to its servicing or other ongoing contractual obligations on the loans. There is also ongoing liability for a population of less than 12,000 loans originated during the same period with certain characteristics such as performance guarantees or special credit enhancement.

In a press release announcing the settlement the bank said "substantially all" of the payment was covered by Citi's existing mortgage repurchase reserves as of the end of the first quarter of 2013. However the bank also announced it had set aside an additional $245 million in its reserves for the second quarter,

Jane Fraser, CEO of CitiMortgage, said: "We have a strong and productive relationship with Fannie Mae. This agreement resolves substantially all potential future repurchase claims from them for loan originations from 2000 to 2012. As we work to deepen and enhance financial relationships with our clients, we will continue to focus on the production of high-quality mortgage loans."

Bradley Lerman, Fannie Mae Executive Vice President and General Counsel said the resolution agreement is a sample of the company's desire to find common ground with its business partners. The agreement, he said, "resolves legacy repurchase issues, compensates taxpayers for losses, and allows Fannie Mae and Citi to move forward and strengthen our business relationship.

"We continue to focus on making strong progress in resolving repurchase requests with other lenders, and remain committed to helping people to buy, refinance or rent a home."

Obscure Fannie Program Benefits Parents, Students, and Disabled Children

Buying a home for your college student or disabled adult child can be challenging.  The same holds for acquiring a home for your elderly parent(s) to live in.  Potential buyers find lenders often treat these transactions as investment purchases, requiring down payments of 20% or more.  The interest rates on investment homes can be .5% (or more) above owner occupied homes as well.  As a loan officer, I've seen many parents who didn't have adequate down payment funds available, and ended up renting residences for their children.

Fannie Mae, however, also allows certain homes to be classified as owner occupied (with better interest rates and reduced down payments), even if the buyer doesn't live there.  Fannie's guidelines state: "Parents wanting to provide housing for their college student child, physically handicapped or developmentally disabled adult child, or children wanting to provide housing for elderly parents" can, if they meet program requirements, be considered owner occupied.  Sadly, although Fannie Mae allows this definition of owner occupancy, many lenders don't.

I recently had clients who wanted to buy a home for their adult son to live in.  The son was unable to work, and his parents were willing and able to buy him a home.  They did not, however, have 20% in liquid funds for the down payment on the home they wanted to buy.  They considered cashing in retirement funds and incurring large tax penalties, and their financial advisor asked me if I had any options allowing them to buy a home without drawing down their investment portfolio.

After researching our underwriting guidelines, I determined that they met Fannie's requirements.  They were pleased when I gave them their pre-approval letter for a 95% conforming loan, and delighted when we closed 30 days later.  Their financial advisor couldn't have been more relieved, and they avoided the tax penalties on early retirement account withdrawals.  I was happy to have been in a position to help and hope that by sharing this story, more families in need become aware of this obscure, but beneficial program.

National Home Prices Nearing Pre-Crash Levels

Home prices keep edging closer to pre-crash price levels and today's Home Price Index report from Lender Processing Services (LPS) indicates that national prices are now back within 15.2 percent of that peak.  The index for June rose to $229,000 from 226,000 in May, an increase of 1.2 percent and is up 6.9 percent from the end of last year.  The peak, in June 2006, was $270,000.

LPS used its loan-level databases and June 2013 residential real estate transactions to conduct a repeat sales analysis of home prices.  The LPS HPI represents the price of non-distressed sales by taking into account price discounts for bank-owned real estate (REO) and short sales.

States with the biggest month-over-month appreciation were Nevada, up 2.4 percent, Florida, 1.7 percent, and California and Illinois at 1.6 percent each.  Other states with increases exceeding one percent in a month were Delaware, Georgia, Utah, North Dakota, Colorado, and Arizona. 

All states showed some appreciation from May to June but the smallest gains were in Nebraska at 0.4 percent, Alaska at 0.5 percent, and Iowa at 0.6 percent. 

The large metropolitan areas with the best performance during the month were among those hardest hit by the housing crisis - Stockton, California, up 2.6 percent; Las Vegas up 2.6 percent and Sacramento and Vallejo, California up 2.4 percent and 2.3 percent respectively.  Harrisburg, Pennsylvania and Ocean City, New Jersey were at the other end of the scale, each posting 0.2 percent increases followed by Bremerton, Washington at 0.3 percent.

Among the 20 largest states, the only ones for which LPS provides detailed information, several have HPI's substantially above the national average.  California's HPI in June was $381,000, Massachusetts, $362,000; New York, $321,000; Virginia, 311,000; and New Jersey, $301,000.  Two of these states are still significantly below their peaks, California down 26.3 percent, and New Jersey, 21.2 percent.  Massachusetts is only 10 percent off of its peak and Pennsylvania and Tennessee, each of which have posted over 3 percent appreciation since the first of the year, are now down only 5 percent from pre-crash highs.  Both Texas and Colorado, had surpassed their pre-crash peaks by May.

Immigration Reform Suggests $500 bln Housing Boom

The immigration reform bill will finally get it's debut on the floor of the Senate tomorrow with potentially big implications for the Housing and Mortgage markets.  Though not specifically related to immigration reform, the CAP recently argued that the future mortgage market will benefit from providing more credit access to socioeconomic groups that have had less access in the past (read more).  

Before that, the National Association of Hispanic Real Estate Professionals (NAHREP) was out with a slightly different take on the same core concept: more participants in the housing/mortgage means more business.  The Association estimates that some 6 million undocumented immigrants would pursue legalization--about half of those with the desire and the economic resources to buy a home. 

The estimates suggest a new pool of roughly 3 million new prospective homeowners, capable of purchasing a home at the median price of $173,000.  NAHREP based its projections on updated data and the approach it used for its 2004 study "The Potential for Homeownership Among Undocumented Workers." Using information from that study it estimates that those 3 million prospective homeowners would pump about $500 billion into the housing market.

But that would be just the beginning, NAHREP said. The chain reaction triggered by those home purchases would bring an additional $233 billion in spending for origination fees, real estate commissions, and consumer spending associated with homeownership. These expenditures are factored in over a five year period.

"Foreign-born householders have a high value and strong desire for homeownership," said Juan Martinez, NAHREP president. "They have been here in our midst for years, working and participating in our economy. Legitimizing them through immigration reforms would finally give them the access and the confidence to buy homes."

The press released said that other housing and corporate leaders that work closely with the underserved market agree that legalization will spark swift interest in homeownership among these Latinos because they are already established in communities here in the U.S.

FHFA Credits "Market Drivers" for GSE Earnings

On Thursday the Federal Housing Finance Agency (FHFA) released the first Quarterly Performance Report of the Housing GSEs.  The report summarizes data on the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac which are in conservatorship under FHFA and the Federal Home Loan Banks (FHLBanks) for which FHFA is the regulator.

Included in the report is information on the three entities finances, activities over the previous quarter, as well as data on what FHFA calls the "market drivers," home prices, mortgage interest rates, and swap rates. 

FHFA says that both the GSEs and the FHLBanks reported positive earnings in the second quarter and this was significantly influenced by house prices which rose 4 percent for the year-to-date that ended in May, the seventh consecutive quarterly price increase.  Earnings also benefited from increased hedging income driven by increases in interest rates in the second quarter.   

The GSEs reported combined net income of $15.1 billion in the quarter and $78.4 billion in the first half of 2013.  The latter number was in large measure due to Fannie Mae's release of a substantial portion of its valuation allowance against deferred tax assets in Q1, resulting in the recognition of a $50.6 billion tax benefit. 

The GSE's portfolio quality continued to improve and the delinquencies of its legacy pre-2009 loans to decline.  Rising prices lowered expected defaults on mortgages in most localities and reduced the severity of credit losses on sales of owned real estate (REO).  These factors resulted in a $9.3 billion decrease in the GSEs combined loan loss reserves in the second quarter, resulting in a benefit of $6.0 billion; the third quarterly benefit in a row.   There was an aggregate gain of $2.6 billion in the second quarter and $3.5 billion for the year-to-date accruing to the GSEs from fair value gains on derivatives used to hedge interest rate risk. 

Seriously delinquent loans have also declined by 8 percent to approximately 783,000.  This is down 22 percent from a year earlier.

Refinancing continued to drive new business volume, accounting for 79 percent of Fannie Mae's business and 81 percent of Freddie Mac's in the first half of the year.  Refinancing through the Home Affordable Refinance Program (HARP) remained high following enhancements made to the program in late 2011.

The GSEs and Ginnie Mae continue to account for essentially all issuances of mortgage-backed securities (MBS).  In the first half of the year the GSEs accounted for $728 billion or 77 percent of MBA issuances.

The FLHBank System generated $699 million, an increase of 22 percent from the first quarter.  Year-over-year the System earned $134 million or 25 percent more than in the second quarter of 2012.   "Focusing on the year-over-year figure, the higher net income was attributable to items in non-interest income - unrealized gains in derivatives and hedging activities, changes in fair value, and low credit impairment charges."

Holdings of private-label MBS continue to fall and are now 3 percent of assets.  While the Banks have recorded cumulative credit impairment charges of $4.0 billion on these MBS, charges in the second quarter were less than $1 million.

Net interest income fell to 19 percent year-over-year because of reductions in yields on earning assets in the prolonged low rate environment and declines in asset balances.  Return on assets of 37 basis points was 6 basis points higher than in the first quarter and 7 higher than a year earlier. 

As of the end of the quarter the Banks had combined assets of $775.2 billion, $36.3 billion more than the first quarter and $15.5 billion above the assets in the second quarter of 2012.  The quarterly increase was primarily caused by a $40.2 billion increase in advances which represented 59.1 percent of assets at quarter-end compared to 56.6 percent on March 31, 2013.  Investments decreased to 34.5 percent of assets from 36.5 percent in the previous quarter and mortgages declined to 6.0 percent from 6.5 percent.

Advances plus acquired member assets (AMA) average 65.4 percent of total assets across the system, ranging from 35.9 percent to 75.6 percent at each of the individual FHLBanks.  These are two asset classes directly related to the mission of the System.

At the end of the quarter the System held $51.0 billion of regulatory capital and $43.1 billion of GAAP capital.  The current System regulatory capital ratio is 6.6 percent and the current GAAP capital ratio is 5.6 percent. Both ratios marginally decreased over the quarter.  Retained earnings now equal 1.5 percent of assets, the highest level in more than 20 years.

NAR Objects to DeMarco's Rumored Loan Limit Changes

The National Association of Realtors® (NAR) sent a strongly worded letter to Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency yesterday, directed at several issues impacting the cost and potential availability of credit.  A particular target of the letter is DeMarco's rumored intentions to lower loan limits for Fannie Mae and Freddie Mac (GSE) loans.  Gary Thomas, NAR president said the letter was intended "to raise concerns about continued attempts to increase the cost and reduce access to conventional mortgages for an ever increasing amount of borrowers."  He specifically alluded to a September 8 article in the Wall Street Journal which stated that DeMarco would reduce the conforming loan limit, currently set at $417,000, notwithstanding the statutory prohibitions against such a change.

Thomas noted that DeMarco had not yet made public any legal theory for overriding the statutory prohibition but doubted that he had the authority.  Congress sets the loan limits and adjusts them annually and after an effort by the FHFA predecessor agency OFHEO to unilaterally reduce limits in 2007 Congress made its policy against such reductions permanent in the Housing and Economic Recovery Act of 2008 (HERA).  

Thomas's letter acknowledges the broad authority granted FHFA as conservator of the GSEs but said NAR believes it is required to exercise it within the statutory framework established by the GSE's Charter Acts.  If allowed to exceed the authority in the area of loan limits, Thomas asks, what would prevent FHFA from making other fundamental changes, a litany of which he outlined.  "Aside from our apparent disagreement over whether you have legal authority to reduce loan limits or make other fundamental changes to the mission of the Enterprises, we believe that a decision to override congressional intent made clear by the specific prohibitions in the Charter Acts, cited above, is bad policy," the letter says.

While private lending has been returning, it remains limited with tough credit standards attached, Thomas said.  An arbitrary reduction in existing limits in the hope it will encourage more private sector lending is a social policy experiment that risks harming the recovery and denying homeownership to many credit-worthy borrowers who cannot meet the extremely risk averse standards prevailing in the jumbo market. 

Lowering limits, Thomas said, will hit first-time homebuyers the hardest. He also expressed concern about the impact lower limits would have on high-cost markets such as many California cities, Washington, and Boston.  "Without higher limits in these areas, many hard-working, middle income families will be denied homeownership simply because they happen to reside in an area of high home prices."

Lowering limits also would also create confusion and uncertainty for potential borrowers and lenders at a time when there is already turbulence in the market because of the new regulations regarding "ability to repay" requirements and the continued revisions to the definition of Qualified Residential Mortgage.

Thomas also questioned plans in FHFA's Strategic Plan for 2013-2017 to raise guarantee fees "closer to the level that other market participants would charge to assume the credit risk."  This assumes, Thomas said, that if the GSEs continue to raise fees then pricing will be attractive enough to draw private money back into the mortgage market.  However a July report from FHFA's Inspector General raised questions and concerns about this policy and recommended that FHFA "develop definitions and performance measures that would permit Congress, financial market participants, and the public to assess the progress and effectiveness of FHFA's initiative."

Thomas said the supposition that higher costs for GSE loans will help return the private sector to the mortgage market runs contrary to history:  In the 1990s the GSEs had more than a 60% share of the market, FHA and other federal programs had approximately a 20% share, and the private sector had less than a 20% share.

There may be many other factors keeping purely private sector lending at current low levels Thomas said, pointing to some of the Dodd-Frank regulations and investors' fears over litigation.  There are also concerns that higher fees could drive more borrowers to FHA rather than enticing private money back into the market.

Thomas also asked DeMarco to consider removing the adverse market fees put in place in 2008 because of deteriorating market conditions.  Noting the many improvements in market indicators in recent months he said that NAR believes that there is no longer a factual basis for imposing an adverse market fee on all mortgages in all markets and it should be rescinded.

Finally Thomas raised the issue of the revisions to the agreement between Treasury and the GSEs which now requires the latter to pay all but a small amount of their incomes to Treasury.  The policy, he said, may make the transition to a replacement structure for the GSEs much more difficult by removing capital that could be used for reserves to meet GSE obligations as they are wound down and to capitalize a backstop ahead of taxpayer support.

Thomas concluded saying NAR urges FHFA to "resist using general conservatorship powers to override the congressional policy that loan limits not be reduced. If you remain determined to amend FHFA policy and lower the loan limits, we believe you should proceed through notice and comment rulemaking to give all interested parties, including Members of Congress, an opportunity to fully explain their legal and policy objections.

We also urge FHFA to take the OIG recommendation to heart and establish definitions and measurement standards for its policy of increasing fees to entice the private sector back into the mortgage market."

As Rates Rise, Origination Trends Toward Looser Credit

Ellie Mae reported today that the refinancing share of loans has dropped 15 percentage points since rates first began to escalate in May.  The company's August Origination Insight Report shows that 43 percent of August's closed loans were for refinancing compared to 47 percent in July and 58 percent in both April and May.  Refinancing accounted for a 62 percent share of all closed loans in 2012.

Seventy percent of closed loans were financed conventionally, down from 72 percent in both July and July.  FHA lending accounted for 18 percent of closings compared to 19 percent in each of the three previous months.  The average conventional share in 2012 was 69 percent and the average FHA share was 23 percent. 

The average FICO score for closed loans dropped to 734 in August, the lowest level since Ellie Mae began tracking them and both loan-to-value (LTV) and debt-to-income (DTI) ratios rose slightly.  Jonathan Corr, president and chief operating officer of Ellie Mae said this indicates a continuation of the credit easing trend.

Corr continued, "Purchase loans continued to gain share in August, climbing 4 percent to 57 percent of all loans.  This was the highest percentage of purchase loans since we began tracking this data in August 2011.

"HARP-related high LTV refinances (95 percent or more) continued their resurgence, moving up from 11.1 percent in July to 13.4 percent in August," he added.

The time required to close a loan, regardless of purpose, fell significantly from July to August.  It took an average of 41 days to close a loan for refinancing and 42 for a purchase money mortgage compared to 48 days and 46 days respectively in July.  During the last three months of 2012 loans for refinancing were taking well over 50 days to close. 

Ellie Mae compiles a lender "pull-through" rate by reviewing a simple of loan applications initiated 90 days prior to calculate an overall closing rate.  The rate in August was 53.1 percent, down from 55.4 percent in July.  The closing rate for purchase mortgages was essentially unchanged from July at 61.5 percent, however the closing rate for refinances dropped from 51.3 percent in July to 46.8 percent.

Ellie Mae draws its data from a sample of the approximately 20 percent of all U.S. loan applications that flow through its mortgage management software and network. 

Debate over Mortgage Interest Deduction, Government Role in Housing

There was sharp disagreement among participants in at least one panel at a forum on the future of housing sponsored by the National Association of Home Builders (NAHB) and produced by CQ Roll Call.  Fellow panelists agreed while that the private sector needs to play a greater role in mortgage financing maintaining some level of federal support is essential. 

Peter Wallison of the American Enterprise Institute said lowering the conforming loan limits of government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac over time will allow the private sector to come in and pick up that business.  "If you simply made those changes and authorized the withdrawal of the GSEs, you would find we would gradually move to a completely private system, which is where I think we should be going," he said.

 Michael Calhoun, president of the Center for Responsible Lending retorted that "Private capital by itself will not secure a safe market and most importantly, private capital during a down market is least likely to be there."  Georgetown University Law Professor Adam Levitan concurred, saying private money dries up when the going gets tough.

Michael Stegman, counselor to the Secretary of the Treasury for Housing Finance Policy told the audience "We know how much more serious the [housing and economic] crisis would have been without the FHA stepping up."

Another panel on tax reform drew broad general agreement that the mortgage interest deduction (MID) plays a key role in shaping housing demand, while differing in their evaluation of current policy.  NAHB economist Robert Dietz quoted the Tax Foundation that repealing the MID and lowering marginal tax rates would cause the GDP to decline by $100 billion annually.  It would also cause home values to fall. 

Anthony Randazzo, director of economic research at the Reason Foundation, said he opposes the mortgage interest deduction and believes that tax policy should not be set to achieve social purposes.   "Do we want to support middle class or low-income home owners? Then let's just provide an explicit subsidy to people we want to, and then find a middle ground," he said.

Dr. John Weicher, a director of the Hudson Institute's Center for Housing and Financial Markets, rejected the idea that the mortgage interest deduction is a tax distortion.  "Keep in mind if you are a home owner you have an asset and consumption," he said. "You are a landlord renting to yourself. It is silly to think of this as simply a consumption when it is the biggest investment that nearly anyone is going to make."

The forum was keynoted by two of the ten co-sponsors signed on to S 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013; the Corker-Warner bill.  Co-sponsors Jon Tester (D-MT), Bob Corker (R-TN) were joined by Johnny Isakson (R-GA), a member of the committee studying tax reform

Tester said the senators had worked hard to make sure the 30-year, fixed-rate mortgage remains a viable option.  "This is something consumers want and expect. I don't think we could have a viable 30-year note in a purely private market."

Corker who, along with Mark Warner (D-VA) filed S 1217, said he thought the 10 senators who had weighed in on the bill had made a difference.  "I think we have struck a very good balance. The 10 percent capital piece is a very, very important element. Another component that was very important was having a federal backstop."  As the process moves forward he expects to see improvements to his bill as well as changes to a housing finance proposal pending in the House.

In terms of tax reform, Sen. Isakson said the Senate Finance Committee is prepared to move forward if it gets "the opportunity."   Every provision in the tax code, he said, including the mortgage interest deduction and Low Income Housing Tax Credit, must be justified in terms of "what they produce for the country. If you can't make a case for your tax provision, it should not be in there."

"I can make a great case for the preservation of the mortgage interest deduction and I can make a phenomenal case for low and moderate income housing tax credits in terms of the payback to the country, but those arguments have to be won and lost when you are truly doing a major reform," the former real estate broker said. 

Another speaker at the forum, Eric Belsky, managing director of the Joint Center of Housing Studies at Harvard University said the housing downturn had led to a remarkable slowdown in household growth.  "There is not a strong recovery in household formations, but we are seeing signs of that happening. People don't want to live with their parents into their 30s; they are doing it out of economic necessity."

The future of homeownership looks bright, he said.  "Nineteen out of 20 people say they plan on buying a home somewhere in the future if they are under the age of 45.  You can lock in housing payments with a fixed rate mortgage today or look at higher rents in the future. A lot of people will look at that calculation and say 'I think it is time to buy a home.'"

Residential Construction Spending Stayed Strong in July

Construction contributed nearly a trillion dollars to the U.S. economy on a seasonally adjusted annualized basis in July, an increase of 0.6 percent from June and 5.2 percent from July 2012 the Census Bureau announced today.   All of the improvement came from private sector construction which was up 0.9 percent for the month and 9.5 percent from one year earlier to a seasonally adjusted rate of $631.40 billion.

The private sector gains were offset in part by a slide in public expenditures which dropped to $269.42 billion from $270.11 billion in June, a loss of 0.3 percent, and were down 3.7 percent from a year earlier.

Along with office construction which increased 29.3 percent year-over-year, housing was a bright spot in the private construction sector.  Overall residential construction grew by 0.6 percent in July from a seasonally adjusted annual rate of $332.65 billion in June to $334.58 billion in July.  This rate was 17.2 percent above the $285.55 billion posted in July of 2012. 

The value of new single-family residences put in place in July grew by 0.5 percent to a seasonally adjusted annual rate of $168.19 billion from $167.35 billion the month before.  The dollar volume of construction in this sector was 29.3 percent higher than in July 2012 when expenditures for single family construction totaled $130.09 billion.

Private construction of multifamily residences rose only 0.1 percent from June's annualized figure of $31.83 billion to $31.87 billion but was 39.3 above the rate of construction in July 2012 of $22.88 billion. 

On a non-seasonally adjusted basis private residential construction contributed $31.73 billion to the economy in July compared 27.20 billion a year earlier.  Expenditures year-to-date in 2013 are $183.22 billion, 20.7 percent above the YTD figure of $151.85 billion in July 2012.

Of the July residential construction dollar $15.75 billion was for single family construction and 2.81 billion for multifamily construction.  The respective figures in 2012 were $12.19 billion and $1.98 billion.  The 2013 YTD figure for single family construction is $92.14 billion, 32.9 percent above the 2012 YTD expenditures of $69.33 billion.  Multifamily construction put in place thus far in 2013 has a value of $17.73 billion compared to $11.69 YTD in 2012, an increase of 51.7 percent.

Total public expenditures on residential construction in July were at a seasonally adjusted annual rate of 6.03 billion, down 3.1 percent from June and 2.4 percent from a year earlier.  On a non-seasonally adjusted basis public residential construction during the month was $517 million and year-to-date is $3.44 billion, down 4.7 percent from the 2012 YTD figure of $3.60 billion.

Lenders Reported 38 percent More Loans in 2012; 54 percent More Refinances

Information collected in 2012 through the Home Mortgage Disclosure Act (HMDA) was released today by the Federal Financial Institutions Examination Council (FFIEC).  Included is detailed information on originations and denials resulting from 15.3 million applications for home loans made through 7,400 covered banks, savings associations, credit unions, and mortgage companies.  The data also covers purchases and sales of loans, originations and other actions related to applications.

Loan level data includes the disposition of loan applications, loan amount, type, purpose, property type, location, applicant characteristics (race, gender, income), and pricing related data.  Other information includes census tract data and whether the loan is a first or second lien or unsecured.

The number of institutions reporting in 2012 decreased 3 percent from the number in 2011.  This represented a continuing downward trend resulting from mergers, acquisitions, and failures of financial institutions.  In 2006 HMDA covered just over 8,900 lenders.

Of the 15.3 million home loan applications covered in the report, 9.8 million resulted in loan originations.  There were also 3.2 million loan purchases for a total of nearly 18.5 million actions.  Also covered in the report are 477,000 mortgage preapproval requests related to home purchases.  The total number of originated loans reported increased by about 2.7 million or 38 percent from 2011.  This resulted in part from a 54 percent increase in refinancing while home purchase lending increased by 13 percent. 

As the financial crises resulted in a tightened private lending market borrowers relied more heavily on government backed mortgages.  The FHA share of first mortgage lending increased from about 5 percent in 2006 to a peak of 37 percent in 2009.  In 2012 the FHA's role had diminished to a 27 percent share, 4 percentage points below that of 2011.  VA guaranteed loans also increased during this period from about 2 percent in 2006 to nearly 8 percent in 2011.  The number of VA loans increased by about 11 percent from 2011 to 2012, but its market share remained unchanged at about 8 percent. 

Conventional lending accounted for 85 percent of all refinancing in 2012 while FHA and VA loans accounted for 9 percent and 6 percent respectively.  The number of conventional loans used for refinancing increased by 51 percent from 2011 to 2012 while those backed by FHA or the VA increased 78 percent and 90 percent.

Lenders report through HMDA on loan pricing and this includes their pricing information for loans classified as "higher priced," that is loans with annual percentages rates (APRs) more than 1.5 percentage points above the average prime offer rates for first liens and 3.5 percentage points above for junior liens.  A small minority of first lien loans made in 2012 had APRs that exceeded the loan price reporting thresholds. For conventional first lien loans used to purchase site-built dwellings; about 3.2 percent exceeded the reporting threshold compared to 3.9 percent in 2011. About 4.2 percent of comparable FHA loans were also priced in excess.  However, for loans used to purchase manufactured housing about 82 percent exceeded the reporting threshold.

The lending institutions covered by the HMDA regulations are those regulated by the Federal Deposit Insurance Corporation, the Federal Reserve, National Credit Union Administration, Office of Comptroller of the Currency, the Consumer Financial Protection Bureau, and the Department of Housing and Urban Development.  Financial institution disclosure statements, individual institutions' LAR data, and MSA and nationwide aggregate reports are available at http://www.ffiec.gov/hmda.

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Mortgage Activity Rebounds from Tough Holiday Week

Mortgage applications rallied last week from the week ended September 6 in which applications were down 13.5 percent and refinancing applications fell 20 percent.  The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage application volume, rose 11.2 percent on a seasonally adjusted basis during the week ended September 13, driven by an 18 percent rebound in refinancing.  On an unadjusted basis the composite was up 23 percent from the previous week.

The previous week's numbers had included an adjustment for the Labor Day holiday, but even when this week is factored in, refinances are still down 3% from 2 weeks ago while purchases are unchanged.  This week, however, the seasonally adjusted Purchase Index increased 3 percent from the previous week and the unadjusted Purchasing Index rose 12 percent and was 1 percent higher than during the same time period in 2012.

Purchase Index vs 30 Yr Fixed

Refinancing applications represented 61 percent of applications during the week, up from 57 percent the previous week.  The Home Affordable Refinance Program (HARP) had a 40 percent share of mortgage applications, up from 38 percent and the highest share the program has enjoyed since MBA began tracking it early last year.

Refinance Index vs 30 Yr Fixed

Data from MBA's Weekly Mortgage Application Survey indicated that mortgage rates, both contract and effective, fell slightly during the week for loans with an 80 percent loan-to-value ratio. 

The average contract interest rate for the 30-year fixed-rate mortgage (FRM) with a conforming balance of $417,000 or less decreased from 4.80 with 0.46 point to 4.75 percent with 0.39 point.  Points included the origination fee.

The rate for a jumbo 30-year FRM with balances over $417,000 eased down 1 basis point to 4.83 percent.  Points decreased from 0.41 to 0.33.

Thirty-year FRM backed by the FHA had an average contract rate of 4.50 percent with 0.41 point.  The previous week the rate had been 4.56 percent with 0.28 point.

The average rate for a 15-year FRM was 3.81 percent with 0.34 point compared to a rate of 3.83 percent with 0.42 percent during the week ended September 6.

The share of applications for adjustable rate mortgages (ARM) inched up slightly to 7 percent.  The contract rate for the hybrid 5/1 ARM decreased 5 basis points to 3.54 percent with points remaining unchanged at 0.43 point.

MBA's survey covers of 75 percent of all U.S. retail residential mortgage applications and collects data from mortgage bankers, commercial banks, and thrifts.  The base period and value for all indexes is March 16, 1990=100.