California is Sellers' Market as Over-List Price Sales Soar

Nearly half of the homes sold so far this year in California went for more than their asking price.  Such sales usually result from so-called "bidding wars" when multiple sellers submit competing offers.   The California Association of Realtors® (C.A.R.) reports that the 49.5 percent of homes that sold over list in 2013 is almost double the number of such sales in 2012 (25.9 percent) and triple the 16.6 percent share in 2011.   The 20-year average for above-list price sales is an 18 percent share.  

C.A.R's released this and other data from its 2013 Annual Housing Market Survey.  The Survey also found that the tight inventories in the state led to multiple officers in more than 72 percent of sales compared to 57 percent in 2012.  This was the highest incidence of multiple officers in at least 15 years and for each home that sold at a higher amount there were an average of 5.7 offers compared to 4.2 offers last year and 3.5 in 2011. 

The survey also found that an increasing number of home sellers, nearly half of those responding, planned on purchasing another home in the future.  This was the third consecutive year that statistic has increased.

 "Sellers are more upbeat about the housing market and are more comfortable with their financial situation.  As the real estate industry and the economy continue to recover, many sellers regained confidence in owning a home since the Great Recession," said C.A.R. President Don Faught. "The number of home sellers planning on repurchasing, in fact, increased to the highest level since 2007, which suggests that repeat buyers could be the driving force in the housing market in 2014."

Distressed homes continued to make up the most competitive part of the market.  Ninety-one percent of owned real estate (REO) properties attracted multiple offers, up from 71 percent last year.  Three-quarters of short sales received more than one offer compared to two-thirds last year.  Close to seven of 10 equity sales attracted more than one bid in 2013, a surge from 51 percent in 2012.

The percentage of cash sales decreased for the first time in eight years. More than 25 percent of buyers paid with cash, down from about 30 percent last year but triple the 8.8 percent rate in 2001    The Mortgage Bankers Association projected a decline in cash sales yesterday as part of its 2014 projections.

Investors remain an active component of the California market, accounting for 19 percent of sales, up from 16 percent the previous year and more than double the investor market at the beginning of the last decade.  At the same time the share of first time buyers fell to 28 percent from 36 percent. It was the third decline in the last four years.  

The share of international buyers purchasing in the state increased for the third straight year to 8 percent from 5.8 percent in 2012 and 5.7 percent in 2011 with more than half buying a home as a primary residence. Buyers from China, Mexico, and Canada made up the vast majority of international buyers at 34 percent, 15 percent, and 10 percent, respectively.

Refinances Seen Dropping More Than 50 percent in 2014

The Mortgage Bankers Association (MBA) might not have been smiling as it prepared the economic forecast for 2014 it handed out today. The association's economists say they expect the volume of mortgage originations to drop by 32 percent next year as rising numbers of purchase applications fail to compensate for the fall-off in refinancing.

MBA expects to see $1.2 trillion in originations in 2014 compared to a projected $1.7 trillion in 2013.  Purchase originations are projected to rise by 9 percent but refinancing originations will plummet by 57 percent. 

The $1.7 trillion projected for this year is a revision from $1.6 trillion forecast earlier based on new Home Mortgage Disclosure Act (HMDA) data.  Jay Brinkmann, MBA's Chief Economist and Senior Vice President for Research and Education said the data showed a higher share of originations going to independent mortgage lenders, particularly purchase mortgages.  In 2012, 40 percent of the purchase volume was originated by independent mortgage companies, up from 36 percent in 2011.

The dollar volume of purchase originations in 2014 will increase to $723 billion from $661 billion while refinancing volume will drop from $1.08 trillion to $463 billion.  In 2015 MBA expects purchase originations of $796 billion and a further decline in refinancing to $433 billion.

Brinkmann said MBA expects home purchase originations will increase in 2014 due largely to gains in home sales and home prices but also expects to see a decline in the share of sales paid for with cash.  He anticipates seeing higher average LTVs on purchase mortgages, due to the rise in home prices.

"We expect mortgage rates will increase above 5 percent in 2014 and then increase further to 5.3 percent by the end of 2015," he continued.  "As a result, mortgage refinancing will continue to drop, and borrowers seeking to tap the equity in their homes will be more likely to rely on home equity seconds rather than cash-out refinances.  We will potentially see a small increase in refinances toward the end of 2015 as the Home Affordable Refinance Program 2.0 (HARP) expires but HARP activity during 2014 will still be low.  While on paper the number of HARP-eligible borrowers appears large, the reality is these borrowers have been unresponsive to numerous attempts to encourage them to participate in the program and are less likely to do so now that rates have gone up.

"Our forecast for the increase in the purchase market is based on our expectations for ongoing improvements in the broader economy and the jobs market. We are projecting overall economic growth to be 2.4 percent in 2014 and 2.7 in 2015, supported mainly by increases in consumer spending and residential fixed investment.  GDP growth will remain relatively weak through the end of 2013 and early 2014, at around 2 percent, due to a variety of uncertainties, particularly over US spending and tax policies linked to the debt limit debate.  Our expectation is that the economy will grow somewhat faster in the second half of 2014 as some of these issues are resolved.

"The 10-Year Treasury rate is expected to stay below 3 percent for the remainder of 2013 and into early 2014, but then increase more rapidly in the second half of 2014 as the Fed tapers its asset purchases and subsequently phases out the third round of quantitative easing (QE3).  We now expect the Fed to begin tapering its asset purchases in early 2014, and ending QE3 in September 2014. The Fed funds rate will be kept near zero until mid-2015, when we expect to see the first fed funds rate increase.

"Unemployment is expected to continue on a downward path due to falling labor force participation and job growth in the range of 150,000 to 170,000 jobs per month.  We expect the unemployment rate will decrease to 6.9 percent in 2014 and 6.4 in 2015."

MBA's origination projections are a bit more pessimistic than those provided earlier this month by Freddie Mac and Fannie Mae.  Housing market forecasts from the two GSEs were very similar in most respects, projecting total originations for 2013 at about $1.8 trillion, slightly more than MBA. For 2014, Fannie Mae and Freddie Mac estimated originations of $1.36 and $1.40 trillion respectively. 

CFPB Pursuing Individuals, Seeking Admissions of Guilt

It didn't attract a lot of notice at the time, but a speech last Wednesday by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray appears to be making some people nervous.  Cordray spoke to the Reuters Washington Summit and a story carried by the news agency quoted him as saying his agency "is committed to going after individuals, not just companies, when it punishes wrongdoers, reflecting a broader effort among enforcement officials to ensure penalties have real bite."

"I've always felt strongly that you can't only go after companies" Reuters quotes him as saying. "Companies run through individuals, and individuals need to know that they're at risk when they do bad things under the umbrella of a company." Cordray said his office is also seeking admissions of wrongdoing from persons who commit these offenses.

Cordray said the bureau would, in some cases, follow examples set by the Securities and Exchange Commission and the Commodities Futures Trading Commission in prosecuting offenders.  "There are times when that makes sense, times when it makes less sense. It's very much a case-by-case matter," he said.

It is apparently the statement about admission of guilt and the references to SEC and FTC that are setting a few teeth on edge.  Ballard and Spahr, a national law firm which pays particular attention to CFPB for its clients, reminded them today of two separate cases in which the agency did indeed pursue individuals.  The most recent one filed only Monday.   

The most recent was against a Kentucky law firm, Borders & Borders PLC and its principals.  This suit alleges that the defendants created a network of Affiliated Business Arrangements (ABAs) consisting of nine title agency joint ventures which were owned by the defendants and local real estate and mortgage brokerage companies.  CFPB alleges that there was a single common employee for all of the ventures, that all of their business was referred to them by Borders and Borders, and that the defendants used the joint ventures to disguise illegal referral fees and kickbacks as profit sharing.  The fees and kickbacks, CFPB says, were not bona bide return on ownership interests and violated Section 8 of the Real Estate Settlement Procedures Act (RESPA.)

The Bureau denies that the alleged actions were protected under the affiliated business arrangement exception in RESPA because the defendants failed to file disclosures properly and modified the filing form.  They also are alleged to have disclosed the relationship to clients not when required but only at closing.

The other case is one MND reported on in May.   CFPB settled with Texas homebuilder Paul Taylor over referral fee infractions.  Taylor owned two mortgage origination firms, one in partnership with a bank and the other with a mortgage company and received fees in return for referring his homebuilding company clients for mortgage financing.  Once again CFPB claimed that the referral fees, disguised in this case as profit distributions, were not entitled to the ABA "safe harbor" provisions of Section 8 because these ABAs were a sham. 

Taylor, who was named as an individual in the suit, was forced to disgorge the $118,194 he had received as fees over the previous two years and his homebuilding company and another affiliated company were prohibited from engaging in real estate settlements or owning an interest in any company that did for five years.

Incidentally, these weren't the only recent occasions that the Bureau has gone after kickbacks through Affiliated Business Arrangements.  Also this year CFPB settled an enforcement action against four of the largest national mortgage insurers alleging they had paid kickbacks to mortgage lenders through captive reinsurance arrangements.  After insuring loans made by the lender the companies purchased essentially worthless reinsurance from the lenders affiliate or subsidiary.  The premiums represented kickbacks to the lenders in return for which the mortgage insurers received private mortgage insurance referrals from the lenders. 

Alan S. Kaplinsky, writing on Tuesday in Ballard and Spahr's CFPB focused blog, noted the remark from Cordray about seeking admissions of wrongdoing.  He also referred back to a policy change at SEC that Ballard and Spahr had advised its clients of earlier in which SEC will more frequently require an admission of wrongdoing from defendants as a condition of settlement.  At that time, Kaplinsky said, his firm had said that Senator Elizabeth Warren's frequent criticism of SEC's "neither admit nor deny" policy might cause the CFPB to be more favorably disposed to making a similar change. 

Kaplinsky said, Because of the difficulty that defendants in enforcement actions may face by admitting any wrongdoing, the CFPB's apparent decision to adopt the SEC's new policy could be an obstacle for many companies in reaching settlements with the CFPB."  He noted that in the Borders and Taylor suits as well as in two mortgage modification enforcement suits which also named individuals there have been no admissions of wrongdoing by the individuals who have agreed to settlements.

DeMarco Determined to find Just the Right Amount of "Skin in the Game"

The acting director of the Federal Housing Finance Agency (FHFA) discussed the future of the government sponsored enterprises Freddie Mac and Fannie Mae (the GSEs) on Monday, focusing on the future of single family guarantee business and highlighting briefly the need for change in the putback risk loan originators face when selling mortgages. 

Edward J. DeMarco told an audience attending the 100th Mortgage Bankers Association convention and expo that representations and warranties or reps and warrants have long served a key risk control mechanisms for the GSE's, helping to ensure that loans sold to them meet the requirements set forth in their seller guides.  They attracted less attention when times were good but the tremendous breakdown in origination quality during the housing boom led to unprecedented delinquencies which led in turn to unprecedented loan reviews and putbacks.

DeMarco said that as conservator of the GSEs, FHFA believes that enforcement of long-standing contractual requirements was a necessary if painful process to protect taxpayers and assign losses appropriately.  But the experience has also demonstrated the need for improved quality control including better use of technology to enhance that control. 

Earlier this year he promised that the GSEs would first of all complete all rep and warrant claims on pre-conservatorship loans by the end of this year and the GSEs are on track in this regard.  Second, the quality control review process for all new production has been moved near the time of purchase rather than a later time such as when the loan becomes delinquent.  The period for which the rep and warrants remain active, except for limited issues such as fraud, is now limited to three years for performing loans.

While important changes have been made to the rep and warrant framework there is still a learning process going on and further improvements should emerge over time, especially improved data systems and technological developments to contribute to faster and more reliable loan reviews.

Another area of progress in wrapping up the past is resolving securities law claims on private-label MBS which are somewhat analogous to the rep and warrant issue and also need to be resolved.  FHFA has now settled four of the eighteen outstanding lawsuits in this area and hopes to build upon those cases to resolve the pending ones.

DeMarco again stressed the "overarching goal" of reducing the market presence of the GSEs and that, as their conservator FHFA has three main tools to accomplish that objective.  The first, risk sharing transactions, are important for reducing taxpayers' long-term risk exposure.  FHFA has set a 2013 Scorecard target for each GSE to achieve $30 billion in risk sharing using multiple types of structures.  Both Freddie and Fannie are on target with this goal and the transactions so far, including a new type of mortgage security and laying off risk on private mortgage insurers have been well received by the market.

Going forward he said he expects to see work done on other types of transactions such as senior/subordinated structures for certain portions of the GSEs' mortgage guarantees.  Alternative approaches will contribute to efforts to develop a securitization infrastructure that is less reliant on the GSEs' traditional government-sponsored enterprise securitization model.

Second, DeMarco said, guarantee fees are about double what they were prior to conservatorship.  A key reason for this is to price credit risk closer to what would be required by private sector providers. While that level is difficult to evaluate with precision, the fees are thought to be getting closer to a level that would encourage more private sector participation and future increases will be gradual in nature.

The third tool is a reduction in the maximum size of loans that the GSEs guarantee. This summer the President specifically endorsed a gradual reduction in maximum loan size and since then there has been much discussion about a near-term reduction in the loan limits.

During the past week DeMarco said he had made clear he understood the potential timing issues of such a change given the other regulatory changes in the mortgage market and that FHFA will follow its practice of announcing the 2014 conforming loan limits in late November, but will give market participants at least six months' notice of any change. 

(Read More: DeMarco Announces Six Month Notice for Loan Limit Changes)

Any reduction would be across the board, not just in some parts of the country and would measured and gradual so as not to disrupt markets.  In November FHFA will also provide further information on potential reductions in the size of loans the GSEs will guarantee going forward.

FHFA is also focusing efforts on building towards a future infrastructure to support the single-family mortgage market.  Among these efforts is the Common Securitization Platform with the focus on functions that are routinely repeated across the secondary mortgage market, such as issuing securities, providing disclosures, paying investors, and disseminating data; all functions where standardization could have clear benefits to market participants.  

FHFA recently announced the formation of Common Securitization Solutions as an equally-owned subsidiary of Fannie Mae and Freddie Mac.  It will have its own independent location and leadership and will manage the development of the platform and the associated data and legal infrastructure for future securitizations.

(Read More: The New Mortgage Securitization Platform Gets Real)

DeMarco said he is committed to ensuring broad industry input into the effort and next year will formalize a means for MBA members and other market participants to participate in the development of the platform.  He is also committed, he said to an outcome that strengthens, not weakens, the ability of small and mid-sized lenders to access the secondary mortgage market. "Competition, and thus consumer opportunities, is enhanced when large lenders and small effectively compete in offering mortgages to families and compete in servicing those mortgages. But to get there, we must be willing to envision the mortgage market working differently than it has in the past."

Long-term, continued operation in a government-run conservatorship is not sustainable the acting director said because each company lacks capital, cannot rebuild its capital base, and is operating on a remaining, finite line of capital from taxpayers.  Furthermore, a taxpayer-backed conservatorship provides a significant subsidy to the mortgage market that crowds out private capital and underprices risk in the market.  It also places long-term decision making in the hands of a government agency, decisions that should be made by private sector businesses based on reasonable returns on private capital.

At some point, lawmakers will need to decide on the appropriateness and level of a government credit subsidy for housing. Such a decision should include whether a government-owned corporation should undertake some or all of the business activities of Fannie Mae and Freddie Mac, or whether some or all of those functions should be repositioned in the private sector.

FHFA Breaks Down $5.1 billion JP Morgan Payout

The Federal Housing Finance Agency (FHFA has released details about its portion of the $13 billion settlement with JP Morgan Chase (JPM) announced last week by the U.S. Department of Justice.   The suit resolves several claims of alleged violations of federal and state securities laws in connection with private-label residential mortgage-backed securities purchased by Freddie Mac and Fannie Mae (the GSEs) in the years leading up to the financial crisis.  The GSEs will receive $4 billion from the suit, $2.74 billion of which will go to Freddie Mac and $1.26 billion to Fannie Mae.

FHFA also announced a separate agreement that will resolve representation and warranty claims arising out of the purchase by the GSEs of single family loans.  That settlement will result in an additional $1.1 billion payment from JPM to the GSEs, $670 million to Fannie Mae and $480 million to Freddie Mac.

Claims leading to the larger settlement involve nearly 130 securities issued by JPM, Bear Stearns & Company and Washington Mutual (WaMu).  JPM acquired the latter two companies in 2008 as Bear Stearns faced bankruptcy and WaMu was seized by the Federal Deposit Insurance Corporation.  About 80 percent of the claims are said to have involved securities issued by the two failed companies.

Under terms of the agreement JPM does not admit to any wrongdoing or liabilities.  The settlement does not indemnify the company from pending criminal actions in federal courts.

FHFA Acting Direction Edward J. DeMarco said, "The satisfactory resolution of the private-label securities litigation with J.P. Morgan Chase & Co. provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae's and Freddie Mac's assets on behalf of taxpayers. This is a significant step as the government and J. P. Morgan Chase move to address outstanding mortgage-related issues.  Further, I am pleased that a resolution of single family, whole loan representation and warranty claims could be achieved at the same time. This, too, will have a beneficial impact for taxpayers and the housing finance market."

FHFA has now settled 4 of the 18 PLS suits it filed in 2011.  The agency said it remains committed to satisfactory resolution of the pending actions.

Delinquency Rate Jumped in September

The national foreclosure rate jumped over 4 percent in September Lender Processing Services, Inc. (LPS) said today, but the foreclosure inventory continued to decline.  LPS, a data and analytics company, released a preview on Wednesday of selected delinquency statistics from its monthly Mortgage Monitor report.  The full report will be available in early November.

The rate of mortgage loans that were 30-days or more past due increased by 4.23 percent from August to a national rate of 6.46 percent.  That rate was 12.63 percent below the level of September 2012.  The September rate equates to a total of 3.27 million loans that are delinquent but not yet in foreclosure.  Of these, 1.33 million are seriously delinquent, that is 90 or more days past due but not in foreclosure.

The foreclosure pre-sale inventory currently consists of 1.33 million delinquent loans.  This is a national rate of 2.63 percent, a decrease of 1.29 percent from August.  The inventory, loans that are in some stage of foreclosure, has fallen 32.18 percent since September 2012.

The total number of non-current loans in the U.S. is now 4.59 million.  Florida, Mississippi, New Jersey, New York, and Maine have the highest percentage of non-current loans, a designation that includes both delinquent loans and loans in foreclosure.

Home Prices Rise for 19th Straight Month; Pace Decelerating

Home prices posted a 19^th consecutive monthly gain in August the Federal Housing Finance Agency (FHFA) said on Wednesday.  FHFA's purchase only Home Price Index (HPI) rose 0.3 percent on a seasonally adjusted basis from July but the 1.0 percent increase previously reported for July was revised down to 0.8 percent.

On a year-over-year basis the August index was up 8.5 percent.  Prices have now returned to the April 2005 index level but remain 9.4 percent below the home price peak attained in April 2007.

The index increased in seven of the nine U.S. Census Divisions in August with the South Atlantic and East North Central divisions experiencing declines.  The South Atlantic region, which encompasses all coastal states from Delaware to Florida plus West Virginia, was down 0.5 percent and the East North Central (Michigan, Wisconsin, Illinois, Indiana, and Ohio) division saw prices go down 0.3 percent.

The largest month-over-month increases were in the Mountain (Utah, Montana, Colorado, Nevada, Arizona, New Mexico, Idaho) and West North Central (Minnesota, both Dakotas, Nebraska, Iowa, Kansas, Missouri) divisions which rose 1.3 percent and 1.2 percent respectively. 

The August 2012 to August 2013 changes were largest in the Pacific Region (California, Oregon, Washington, Hawaii, and Alaska) where prices appreciated 18.2 percent and the Mountain division with a 13.8 gain.  The smallest annual increase was in the Middle Atlantic division which consists of New York, New Jersey, and Pennsylvania and where prices were up 4.0 percent.

The FHFA index is calculated using home sales price information from mortgages sold to or guaranteed by the government sponsored enterprises Fannie Mae and Freddie May.

QM and Non-QM Are Going to Get Along Just Fine

Savvy entrepreneurs or established organizations have little to fear from the new qualified mortgage (QM) and Ability-to-Repay (ATR) regulations about to come into effect a new white paper from CoreLogic says. They will find a way to deliver qualified and non-qualified mortgages in a way that meets all the regulations, incorporates sound lending and consumer protections, and makes a profit.

The paper, ATR/QM Standards:  Foundation for a Sound Housing Market, written by Faith A. Schwartz, CoreLogic's manager of government business and former director of HOPE NOW and Margarita S. Brose, a former director in Barclay Bank's Operational Risk Management Group, is upbeat about the mortgage market, its regulatory environment, and the opportunities it presents.

They point to the current environment as resulting from President Obama's goals for a new housing finance system; that private capital will be at its center, but it must maintain affordability and access to homeownership.  The Dodd-Frank Act (DFA) required lenders to assess the borrower's ability to repay a mortgage loan and the Consumer Financial Protection Bureau's (CFPB) regulations have formulated the rules to guide this. 

CFPB's QM and ATR provide the eight factors a lender must evaluate; current income or assets, current employment, monthly payment on the subject loan, payments on other loans secured by the property, payments for taxes and insurance, current debt obligations, debt-to-income ratio, and credit history.   The rules also provide thresholds for QM which, when met and depending on the APR create a "safe harbor" or presumption of compliance.  These protections, the authors say, fulfill the vision of Elizabeth Warren in her 2007 article Unsafe at Any Rate in which she proposed a regulated marketplace where the consumer would get the same protections as the purchaser of a toaster. 

Access to homeownership became increasingly common before the financial crisis, in part because the mortgage industry was willing to underwrite and sell loans with limited documentation coupled with additional risk layering.  This led to a "breathtaking" $3 trillion annual market for purchase and refinance mortgages in the pre-crisis period.

As the market continues to heal from the aftereffects of these loans there are, the authors say, a number of opportunities to ensure the creation of a sound lending process that works for all parties.  Achieving this will require transparency, accountability, and traceability.

In addition to presuming compliance with ATR a QM loan must meet limits on points and fees and specific underwriting requirements.   Loans are automatically considered QM (even if they do not require verification of income or meet points and fees or specific underwriting requirements) if they are eligible for guarantee or purchase by Freddie Mac or Fannie Mae a laundry list of government agencies. 

If some of the thresholds are not met there is still a presumption for a QM loan that ATR provisions have been met but a consumer can rebut this by providing evidence about his inability to repay the loan.  He can specify the features that disqualify a loan from this designation including negative amortization, interest only, balloon payment features, and amortization exceeding 30 years. 

Lenders who lend beyond the QM scope do have some litigation risk.  While this is a concern, it is hoped that the market an still serve homeowners who fall outside of the QM rules because of high DIT ratios, high points and fees and/or interest rates  and other QM criteria. 

Another concern is how much appetite investors will have for non-QM loans.  By not including a downpayment threshold CFPB preserved the opportunity for higher LTV loans to remain QMs when possible.  One area of focus is how to meet the demand of the changing demographics of first time homebuyers, some with low wealth but less risky credits scores, who may have limited options among first time programs offered by the government.  There is also a concern that lenders may limit or eliminate non-qualified products.

The authors see many opportunities under the ATR and QM rules for private capital to flow into the housing finance system.  It does not make sense to write a mortgage which the borrower cannot repay and the rules will require lenders to review their existing processes and procedures, data validation, and counterparty tracking and surveillance.  Traceable documentation of the eight ATR factors and the QM fee minimums will need to be retained.  CFPB has issued a list of the required documentation and will review it during their examinations.  Companies who are not used to reviews are apprehensive but a measured approach to implementing new processes and procedures should address any anxiety about audits.

Much of the concern defaults to common sense when thinking about systems and compliance.  How does a lender validate the way information was verified during underwriting?  How does an investor establish a clear audit trail?  When these issues are resolved markets will have confidence that the information and processes established to make a sound loan are likely to result in sound loan performance over the life of the loan.

The authors say that it is almost a certainty that pre-crisis lending will not return and that there will be few if any no-doc loans and loans with DTI above the QM thresholds will not be easy to get.  The Mortgage Bankers Association estimates approximately $1 trillion in mortgages will be originated in 2014, one third of the pre-crisis level.   Still, the new market has many opportunities.

"Many in the hedge fund world will tell you that there is an unlimited market for those who do not need the ordinary protections afforded the unsophisticated buyer," the Schwartz and Brose say.  In the new ATR and QM world lenders will still be able to offer mortgages to housing investors using ordinary contractual conditions.  Lenders will market mortgages for multi-family dwellings and commercial properties to purchasers who evidence an ability to pay but outside of the CFPB guidelines.

While the QM rule provides regulatory safeguard for ordinary home buyers, it does not prevent a lender from making a non-QM loan, assuming it adheres to the broader ability to pay requirements.  But it does require those lenders to make a sound risk assessment and have the documentation to support it.  

More People Will Buy Homes if Prices go Up, Wait... What?

More People Will Buy Homes if Prices go Up, Wait... What?

While it seems counterintuitive, could higher home prices lead an increase in home sales?  Two Federal Reserve Bank of San Francisco senior economists, William Hedberg and John Krainer think so as explained in an Economic Letter titled Why Are Housing Inventories Low?  It's not that higher prices will entice buyers, but rather, they may motivate sellers to help increase inventory.

For-sale inventories have been slow to rebound from the Great Recession even though home prices have increased steadily since 2012.  Hedberg and Krainer theorize that prices are still not high enough to entice many sellers.  For some this is because the value of their home is still below the outstanding balance on their mortgage, meaning that sellers would have to bring cash to the closing.  For others it may be that their equity is not back to a level that motivates them to sell.

Economic theory suggests that all homes are for sale if the price is right, but at any point in time, the price may not be right. Sellers have their own ideas about what is "right" and must also consider that selling a house can be costly because of brokerage fees, and necessary or cosmetic changes to the house.  For these reasons and others the active listing a home is viewed by economists as a strong signal of an intent to sell and they measure the short-run supply of homes for sale, the inventory, by the listing numbers.

Good times or bad, there is always some level of inventory in the housing market.  Some owners sell to move up, others to downsize, other move for employment reasons, or to free up cash.  These are life-cycles motives not necessarily tied to the business cycle and produce a general level of churning in the market.  Nevertheless the authors say there is a distinct cyclical pattern to inventories which rise in good times and fall in bad times.   

Credit conditions, which are also cyclical, can account for some of this.  Risk premiums charged by lenders and their willingness to lend tend to ease during good economic times, allowing more potential buyers to enter the market. But it is the level of house prices which is by far the variable that most influences the inventory of homes for sale.

Even though not all listed homes are vacant Census Bureau data on the numbers and price level of vacant homes have a long history of indicating the relationship between inflation-adjusted house prices and for-sale inventory.  As Figure 1 shows, inventories generally move with prices and changes in house prices have a causal effect on inventories.  The two series are tied together in a long-run relationship and the authors say this makes sense as rising house prices should encourage homeowners to sell and thus inventories to rise.

fig. 1

Inventories do not instantly react to house price changes and other economics can disrupt the price/inventory relationship as is evident in the most recent time period in the figure above.  House prices have been recovering broadly since 2012 but inventories have been declining.  Only recently have they begun to rise.

The relationship between inventory and prices may have broken down for an extended period as the market rebounded in 2012 because of fallout from the housing boom and bust.   The boom saw an unprecedented rise in homeownership rates with younger households more willing to buy and eased lending allowing in less qualified borrows.  When those trends reversed the inventory shifted from homes for sale to homes for rent with the later rising steadily during the recession and the for-sale inventory dropping and only recently stabilizing.

The authors say the data does not go back far enough to show if this is a typical reaction but some Census Bureau data suggest it is unprecedented since the 1960s.  The phenomenon is widespread and cannot be accounted for solely by the surge in foreclosures.  The inventory of homes in foreclosure has recently been falling in most markets but the ratio of owner occupied and renter occupied units has remained down. Thus, either preference for homeownership has shifted or, more likely, credit constraints have affected household home purchase decisions.

The changes in for-sale and for-rent inventories are seen most dramatically in markets like Las Vegas, Phoenix and Miami where foreclosures were high and investors have been buying large numbers of the foreclosed properties.  In these market the total inventory of homes for rent is approaching that of homes for sale, a remarkable shift that has continued throughout the recovery.  But, in addition to the investor-effect the decline in homes for sale is very closely linked with the large downward shift in the homeownership rate in these markets. It is impossible to say though whether declining sales are pushing down homeownership rates or falling homeownership is pushing down sales, or both are interacting with each other in a complicated feedback process.

Tight credit conditions may be affecting both the ownership decisions of young buyers and the supply side of the market.  In theory, falling house prices alone may keep some homeowners from selling. It may seem logical that decisions to sell should be based only on information about current and future market conditions and the authors point to research that shows homeowners take more time to sell if home prices have fallen since the original purchase. That is, two similar homeowners experiencing similar housing market conditions will behave differently if one of those homeowners has an unrealized loss on his or her house.

Falling prices may hold down home sales for several reasons. An underwater homeowner may be unwilling or unable to make up the difference between sale proceeds and mortgage balance and chose to delay selling.  Even if there is equity, it may be reduced enough that no cash is available for the downpayment on another home.

Since early 2008, homes for sale and homes underwater have been negatively correlated.  Counties with a high share of underwater mortgages have tended to have smaller for-sale inventories.  The authors say that while this relationship is significant, its strength diminished as the recovery got under way. Underwater borrowers may have been locked into their houses in a way that impaired the normal functioning of the housing market. But that effect seems to be waning.

Another explanation for this breakdown is that homeowners may be taking a longer view of the market.  In the housing cycle price changes are persistent, that is both price rises and price drops are likely to be followed by more of the same.  Homeowners who can be flexible on timing a sale can take advantage of this persistence, waiting and gambling that increases will continue and they can sell at a higher price.

Figure 4 confirms on a county level the negative relationship between prices and inventories shown at the aggregate level in Figure 1. Where counties experienced relatively large price increases they also saw for-sale inventories decline.

The authors say it turns out that that variables such as recent house price appreciation and changes in employment are the most robust predictors of recent changes in housing inventory. Once these are accounted for other variables, such as changes in the for-rent inventory, the underwater share, or local price-rent ratios, do little to explain the inventory of houses for sale. "Thus, current homeowners may be making a rational choice to postpone selling in the hope that prices will rise further. However, this behavior tends to be short run. In the longer run, the link between the level of house prices and for-sale inventories is strong. If prices continue to rise, inventories for sale should eventually rise too."

Conclusion

History shows a long-run relationship between house prices and the number of houses available for sale. Thus, current inventories of homes for sale are low given more than a year of house price appreciation. County-level data suggest that many homeowners are waiting for prices to rise further in their markets. Markets that have seen the strongest house price appreciation and job growth are the ones where for-sale inventories have declined the most.

Jury Rules against Countrywide, in Whistleblower Suit

A federal grand jury found the former Countrywide Financial and one of its executives guilty of mortgage fraud on Wednesday in a whistle-blower generated civil suit.  The company, acquired by Bank of America in 2008, was found liable for actions that resulted in the purchase of thousands of defective loans by government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.  Former Countrywide executive Rebecca Mairone was also found liable in the case.

Mairone had been chief operating officer of Countrywide's Full Spectrum Lending Division which was responsible for operating a program, implemented in 2007, called High-Speed Swim Lane, and nicknamed "the Hustle."  The program was designed to speed mortgage processing but federal prosecutors said it lacked quality checkpoints and processes such as income verification.  The loans were then sold to or guaranteed by the GSE's under representations that they met the companies underwriting guidelines. Mairone was the only Countrywide official named in the suit.

The government maintained that the 28,800 loans underwritten through the Hustle program were processed in as few as 10 days rather than up to 60 as in most programs.  The loans that ultimately defaulted cost the GSEs $131 million and they allege that Countrywide earned at least $165 million under the program.  

A whistleblower brought the original suit against Mairone and her former employer; it was then joined by the Department of Justice.  Edward O'Donnell, also a former executive at the company, said he had complained repeatedly about loan quality standards used in the program.  He could be awarded as much $1.6 million for his role in the legal action.

Countrywide's defense attorney Brendon Sullivan told jurors that only about 11,000 loans were processed through the program which only lasted a few months and that there was no fraud involved.  

Judge Jed Rakoff told attorneys he would determine the civil penalties in the case.  The Justice Department has requested payment of either that gross losses suffered by the GSEs, $848 million, or alternatively the estimated net loss of $131 million.  

Attorneys for both Mairone and Bank of America which is responsible for Countrywide's liabilities indicated they may appeal the decision.

Remodeler Confidence Highest in almost a Decade

Builders who remodel residential properties are seeing continued activity in their segment of the homebuilding market the National Association of Home Builders (NAHB) said today.  The organization's Remodeling Market Index (RMI) climbed 2 points in the third quarter of 2013 to 57.  It was the highest reading for the RMI since the first quarter of 2004 and the second quarter in a row the index has increased.

A score above 50 for the RMI or any of its components indicate that more builders engaged in remodeling report that activity in various market segments had improved relative to the previous quarter than report declining activity.  Remodelers are also asked to project future activity from current indicators.  Perceptions of current and future activity are averaged for an overall RMI average

The RMI's measure of current market conditions rose four points from the second quarter to 58, the highest in RMI's 12 year history and perceptions of the three major categories of remodeling also increased.  Major additions and alterations grew from 51 to 55, minor additions and repairs from 55 to 58 and maintenance and repair from 57 to 59.   The current market scores, NAHB said, were driven party by rising existing home sales. The future market indicators component of the RMI was unchanged from the previous quarter reading of 56.

"The growth in home equity and home sales prompted home owners to remodel as they prepare to move or undertake upgrades that they put off during tough times," said NAHB Remodelers Chairman Bill Shaw.  "NAHB Remodelers looks forward to continuing our tradition of professional service and craftsmanship as the housing recovery makes progress."

The RMI registered its second consecutive quarterly gains in the Northeast, Midwest and West but edged down slightly in the South after a five point gain the previous quarter. All four regions were above 50 and higher in the third quarter than in the first quarter of 2013.

"In addition to existing home sales, which support remodeling activity as owners fix up their homes before and after a move, remodeling has benefited from rising home values," said NAHB Chief Economist David Crowe. "This boosts home equity that owners can tap to finance remodeling projects. We expect existing home sales and house prices to increase, but at a slower rate over the next year, so the demand for remodeling services should also increase, but more gradually over that period."

Housing Market Skewed Toward Investors; All-Cash Purchases Surge

There was a substantial increase in September in the purchasing activity of what it called institutional investors RealtyTrac said today.  Persons or institutions who have purchased 10 or more residential properties in the last 12 months accounted for 14 percent of all residential sales in September, up 3 percentage points from August and from September 2012.  This was the highest level of such institutional investment since RealtyTrac started tracking those purchases in January 2011. 

Institutional buyers purchased 25 percent of properties sold in Georgia and Nevada.  These investors were also active in Missouri with a 17 percent share, Arizona (16 percent), Illinois and Texas (14 percent and 13 percent respectively).

"The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash," said Daren Blomquist, vice president at RealtyTrac. "While the institutional investors are pulling back their purchases in many of the higher-priced markets - places like San Francisco, Washington, D.C., New York, Seattle and Sacramento - they are continuing to ramp up purchases in markets where median prices are still below $200,000 - places like Jacksonville, Atlanta, Charlotte, St. Louis and Dallas. The availability of distressed inventory also makes a difference. For example, institutional investor purchases have rebounded in Las Vegas corresponding to a recent rebound in foreclosure activity there.

RealtyTrac's U.S. Residential & Foreclosure Sales Report estimates that home sales increased nationally by 2 percent in September.  Sales of single family homes, condominiums, and townhomes and including both market sales and sales of distressed properties reached an estimated annualized rate of 5,673,249 units in September, 14 percent higher than in September 2012. 

Annualized sales volume increased from the previous month in 34 out of the 38 states tracked in the report and was up from a year ago in 35 states. Notable exceptions where annualized sales volume decreased from a year ago were California (-15 percent), Arizona (-11 percent), and Nevada (-5 percent).

Distressed properties accounted for 25 percent of residential sales in September, an increase of 2 percentage points from August and 7 points from a year earlier.  Fourteen percent of all sales were short sales and 10 percent were sales of bank-owned real estate.  The two categories each had a 9 percent share in August.

Several states had much higher percentages of short sales than the national average including Nevada (32 percent), Florida (30 percent), Ohio (26 percent), Maryland (22 percent), and Tennessee (21 percent).  States with the highest percentage of ORE to total residential sales were Nevada (19 percent), Ohio (18 percent) followed by Arizona, Michigan, Illinois, and Georgia with ORE shares of 14 to 16 percent.

"Distressed sales remain persistently high, particularly short sales," Blomquist added. "Markets with the biggest increases in short sales tend to be those where either foreclosure starts or scheduled foreclosure auctions have rebounded in the last 18 months - translating into more motivated short sellers - or those with a still-high percentage of underwater homeowners with negative equity."

The median sales price of residential properties, both distressed and non-distressed was $174,000, up 1 percent from August and 6 percent from a $164,500 median price in September 2012.  Distressed properties had a median of $112,000, 41 percent lower than the median for non-distressed properties at $189,000.  States with the largest increases in median prices from September 2012 were California (30 percent), Michigan (25 percent), Nevada (23 percent), Georgia (20 percent), and Arizona (20 percent).

All-cash purchases represented 49 percent of all residential sales in September, up from a revised 40 percent in August and up from 30 percent in September 2012.

Regulators Give Lenders Green Light to Offer Fewer Options

In the post-meltdown era of hyper-regulation, lenders are understandably not eager to stick their necks out any further than necessary.  Many in the mortgage industry would prefer to avoid the risks associated with originating loans that don't qualify as "Qualified Mortgages" (QM), but have expressed concern as to whether Regulation B's disparate impact doctrine (part of the Equal Credit Opportunity Act or "ECOA") allows them to stick to offering the safest loans.

The ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction based on characteristics including race, religion, marital status, color, national origin, sex, and age.  QM regulations require lenders to make a good faith determination as to whether a consumer has the ability to repay a mortgage loan before extending credit to the consumer.  Lenders are presumed to have complied with the ability to repay requirement if they issue QMs.

In other words, lenders don't want to originate the non-QM loans that pose more risk to their balance sheets, but neither do they want to violate fair lending policies if such a choice is construed as discriminating against borrowers who don't fit the QM mold.  Federal regulators today clarified today responded to these concerns, essentially granting lenders permission to only offer QM loans.

The five regulatory agencies issuing today's statement say they do not anticipate that a creditor's decision to offer only qualified mortgages would, absent other factors, elevate a creditor's fair lending risk. The decisions creditors make about product offerings under the new rules should be similar to decisions made regarding other significant regulatory changes affecting particular types of loans.  Creditors, the regulators say, should continue to evaluate fair lending risk as they would for other types of products, monitoring policies and practices and implementing effective compliance management.

The statement was being issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Mortgage Activity Flat Despite Falling Rates

The volume of mortgage applications received by the nation's lenders was virtually unchanged during the week ended October 18 the Mortgage Bankers Association (MBA) said today.  MBA's Market Composite Index, a measure of that volume, decreased 0.6 percent on a seasonally adjusted basis from the week ended October 11 and 1 percent on an unadjusted basis.  MBA made no adjustment to the data to account for the Columbus Day holiday.

The Refinancing Index decreased 1 percent from the previous week and the refinancing share of applications decreased to 65 percent from 66 percent. 

Refinance Index vs 30 Yr Fixed

Both the seasonally adjusted and the unadjusted Purchase Indices were up 1 percent from a week earlier and the unadjusted index was 2 percent lower than during the same week in 2012.

Purchase Index vs 30 Yr Fixed

Contract interest rates fell during the week for all mortgage products tracked by the MBA and the effective rates also decreased.  Quotes are for mortgages with an 80 percent loan to value ratio and points include the origination fee.  

The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) decreased to 4.39 percent, the lowest rate since June 2013, from 4.46 percent, with points increasing to 0.41 from 0.31.  The average rate for the jumbo 30-year FRM (balances greater than $417,000) decreased to 4.43 percent, the lowest rate since June 2013, from 4.51 percent, with points increasing to 0.26 from 0.15

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.15 from 4.16 percent.  Points dropped from 0.44 to 0.27 point.

Fifteen-year FRM had an average rate of 3.51 percent, also the lowest rate since June, compared to 3.53 percent the previous week.  Points decreased to 0.30 from 0.31

The market share of adjustable rate mortgages (ARMs) increased from 6 to 7 percent of total applications.  The average contract interest rate for 5/1 ARMs was unchanged at 3.25 percent, with points decreasing to 0.26 from 0.32

MBA's data is compiled through a Weekly Mortgage Applications Survey that covers over 75 percent of all U.S. retail residential mortgage applications.  Respondents include mortgage bankers, commercial banks and thrifts.  Base period and value for all indexes is March 16, 1990=100.

Fannie and Freddie Announce Expanded HARP Eligibility Dates

In a move some borrowers and originators might consider "too little, too late" both Fannie Mae and Freddie Mac announced today they are expanding the eligibility dates for the Home Affordability Refinance Program (HARP).  While tremendously useful to the small amount of borrowers who benefit from the change, it's not quite as magnanimous as it might sound.

Previously, loans had to have been delivered to the agencies by 5/31/2009 to be eligible for HARP, which led to widespread confusion as lenders and borrowers had difficulty determining actual loan delivery dates without researching agency records.  In general, loans closed by April 2009 were delivered to Fannie/Freddie by end of May, so were previously eligible; those closing in May 2009, however, may have missed the initial delivery date requirement.

With the changes announced today, the eligibility date will now be based on the NOTE date,  thus opening the window of HARP eligibility to all those borrowers who may have closed their loans before the May 31st cutoff, but whose loans weren't acquired by the GSEs until after the cutoff.

Fannie Mae (per Selling Guide SEL-2013-08) will update their Desktop Underwriter (DU) system on Nov 16 to reflect the new eligibility dates;  Freddie Mac will update its Loan Prospector (LP) underwriting system to reflect the changes on Oct 27.  Lenders are required to have DU/LP approvals for HARP loans, so may be hesitant to start them until the underwriting guidelines are revised.

Best execution rates in May 2009 rose from 4.69 to 4.88%, versus the current 4.25% rate for ideal borrowers.  A borrower with a $200,000 loan could anticipate saving approximately $80/mn, an amount that could increase if rates continue their downward trend of the last month amid reduced expectations of Fed tapering.

The chief advantages of HARP loans include their reduced equity requirements, a feature that enables many equity challenged borrowers to reduce their rates without incurring additional mortgage insurance costs, and, in some cases, relaxed income documentation as well.

Home owners who closed their existing conforming loans in May 2009, and who were previously told they were not HARP eligible may want to contact a lender to discuss their HARP eligibility.  Both lenders and borrowers might be excused if they wonder why Fannie and Freddie waited until the HARP program was 3 years old to make this logical change.

Seasonal Remodeling Decline Arrives Early; More Severe

Residential remodeling eased off in August, dropping by 13 percent from the July seasonally adjusted annual rate of 3.434 million to 2.987 million.  The rate is also 5 percent below the 3.140 estimate for remodeling in August 2012 according to the BuildFax Remodeling Index (BFRI) released on Monday

BFRI is based on construction permits for residential remodeling projects filed with local building departments and estimates the number of properties rather than projects permitted.  The BuildFax database currently covers over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

"The end-of-summer drop this year was both earlier and more severe than last year," said Joe Emison, Chief Technology Officer at BuildFax, "but overall residential remodeling activity in 2013 still remains higher than it was in 2012."

If the BuildFax estimates are accurate they do indeed indicate an earlier slowdown in the booming remodeling market than had been predicted by LIRA (Leading Indicator of Remodeling Activity) earlier this month.  That index from the Harvard Joint Center for Housing Studies uses a quarterly moving average for remodeling expenses and had projected an increase from the second to third quarter of 10.4 percent and from the third to the fourth of 15.9 percent.  LIBA had seen a downturn finally occurring in the second quarter of 2014.

Seasonally-adjusted annual rates of remodeling across the country in August 2013 are estimated as follows: Northeast, 616,000 (down 10% from July and down 35% from August 2012); South, 1,241,000 (down 8% from July and down 8% from August 2012); Midwest, 668,000 (down 38% from July and up 8% from August 2012); West, 760,000 (down 3% from July and flat from August 2012).

Existing Home Sales Level Off; Prices Drop From Last Month

Even though sales of existing homes drifted off the record levels established in the previous two months, September sales were higher by double digits than a year earlier.  The month was the 27^th consecutive one in which prices were higher year-over-year.

The National Association of Realtors® said Monday that total existing home sales, including single-family homes, townhomes, condos, and cooperative apartments, declined 1.9 percent to a seasonally adjusted annualized rate of 5.29 million in September.  August sales were originally reported at 5.48 million but today's adjustment wiped out the 1.7 percent reported increase that month, putting the revised August number at 5.39 million, unchanged from July.  September sales were 10.7 percent higher than in September 2012 when the pace of sales was 4.78 million units.  

Existing single-family homes sold at a seasonally adjusted annual rate of 4.68 million, down from 4.75 million in August but sales remain 10.9 percent higher than in September 2012.  Condo and co-op sales were down 4.7 percent to 610,000 units from 640,000 units in August.  This was 8.9 percent higher than sales a year earlier.

Lawrence Yun, NAR chief economist, said a decline was expected. "Affordability has fallen to a five-year low as home price increases easily outpaced income growth," he said. "Expected rising mortgage interest rates will further lower affordability in upcoming months.  Next month we may see some delays associated with the government shutdown."

NAR President Gary Thomas said there are far-ranging consequences from the periodic stalemates in Washington. "Just one impact of the recent government shutdown - delays in tax transcripts needed for approval of mortgage loans - put a monkey wrench in the transaction process and could negatively impact sales closings in next month's report," he said.

Inventories remained low in some parts of the country NAR said, putting pressure on home prices which continue to rise.  The national median existing-home price for all housing types was $199,200 in September, up 11.7 percent from September 2012 and the 10th consecutive month of double-digit year-over-year increases.  The median existing single-family home price was $199,300, 11.4 percent higher than a year ago and the condo price was $198,600, up 14.2 percent from September 2012.

There were 2.21 million existing homes available for sale at the end of September.  At the current level of sales this represents a 5.0 month supply, a slight uptick from August and 1.8 percent below the 5.4 month supply in September 2012.

Foreclosures accounted for 9 percent of September sales and short sales for 5 percent.  The aggregate was up two percentage points from August when the 12 percent share for distressed property sales was the lowest since NAR began tracking them in October 2008.  This lower share of distressed sales is in part responsible for the growth in median prices as is the shrinking discount on those sales.  Foreclosures sold for an average discount of 16 percent below market and short sales were discounted 12 percent compared to 21 percent and 13 percent respectively a year ago.

NAR said some of the strongest increases in listing (as opposed to sale) prices from a year ago are in the Detroit area, up 44.6 percent; Las Vegas, up 30.7 percent; and Sacramento, up 28.9 percent.

Thomas expressed concern over the impact of flood insurance may have on home sales going forward. "Realtors® report that approximately 10 percent of transactions in September were located in flood zones, and that nearly one out of 10 of those transactions were delayed or canceled due to concerns over rising insurance rates."  Notably higher flood insurance rates went into effect on October 1, and could impact future sales in flood zones.

First time buyers accounted for 28 percent of sales in September, the same as in August but down from 32 percent a year earlier.  Thirty-three percent of sales were all cash, up 1 percentage point from August and 5 from the year before.  Investors purchased 19 percent of homes compared to 17 percent in August and 18 percent in September 2012.  Seventy-four percent of investor purchases in September were all cash.

The median time on market for all homes was 50 days in September, up from 43 days in August, but much faster than the 70 days on market in September 2012. Short sales were on the market for a median of 93 days, while foreclosures typically sold in 43 days, and non-distressed homes took 49 days. Thirty-nine percent of homes sold in September were on the market for less than a month.

Regionally, existing-home sales in the Northeast declined 2.8 percent to an annual rate of 690,000 in September, but are 15.0 percent above September 2012. The median price in the Northeast was $240,900, up 2.3 percent from a year ago.

Existing-home sales in the Midwest fell 5.3 percent to a pace of 1.25 million, but are 12.6 percent higher than a year ago. The median price in the Midwest was up 9.0 percent on an annual basis to $158,400.

In the South, existing-home sales declined 1.4 percent to an annual level of 2.10 million in September, but are 9.9 percent above September 2012. The median price in the South was $171,600, up 13.9 percent from a year ago.

Existing-home sales in the West rose 1.6 percent to a pace of 1.25 million in September, and are 7.8 percent higher than a year ago. With ongoing inventory restrictions, the median price in the West rose to $286,300, which is 16.8 percent above September 2012.

HOPE NOW Retention Actions Exceed Foreclosures by 25 percent

HOPE NOW member servicers completed 67,000 loan modifications in August. There were 63,000 modifications completed in July so the August figures represented an 8 percent increase.  There were also an estimated 23,000 short sales concluded during the month.

The voluntary alliance of private sector mortgage servicers, investors, and non-profit housing and loan counselors have modified 580,000 delinquent mortgages thus far in 2013 compared to 438,000 loans which have been foreclosed.  The modifications include both an estimated 48,000 that were done through proprietary programs and 19,069 completed through the Home Affordable Modification Program (HAMP) run by the Departments of Housing and Urban Development and Treasury.

Since HOPE NOW was founded in 2007 approximately 5.4 million homeowners have received proprietary loan modifications and another 1,255,751 have had loans modified through HAMP since that program originated in 2009.  Including the 1.36 million short sales, which were first tracked in 2009, there have been over 8 million permanent non-foreclosure solutions provided to borrowers by the alliance.

Foreclosure sales and starts were essentially unchanged from July to August at about 59,000 sales and 101,000 starts. Delinquencies declined by about 2.5 percent from the 2.24 million loans reported to be 60 or more days past due in July to 2.18 million.

HOPE NOW says that modifications done through proprietary programs in August continue have sustainable characteristics; 88 percent have fixed rates for five years or more and 82 percent of the modifications reduced monthly mortgage payments.  Seventy-one percent of the August modifications reduced principal and interest payments by more than 10 percent.

Homebuyers Lose Again As FHA Tightens Guidelines

Despite declining FHA loan originations (from 120,917 in April 2013 to 105,995 in July), HUD issued Mortgagee Letter 2013-24 on August 15,  tightening FHA borrower restrictions effective October 15 .  FHA raised  upfront and monthly mortgage insurance premiums (and made monthly MIP effective for the life of the loan) earlier this year, leaving FHA loans far less desirable for many buyers.  The new guidelines will most affect credit challenged buyers, those least likely to qualify for loans outside the FHA program.

For borrowers with collections and charged off accounts totaling over $2,000, FHA now requires lenders using the Total Scorecard underwriting system to include for the first time monthly payments on charged off accounts.  While some collections report a minimum payment on credit reports, most do not, and lenders will assume a payment of 5% of the outstanding balance.  Adding the assumed payments will raise buyers' debt ratios, reduce their purchasing power, and potentially prevent some from purchasing homes.

Guidelines for loans underwritten manually are even more stringent, requiring letters of explanation and supporting documentation from borrowers on all charged off/collection accounts.  Underwriters will have to determine if the account resulted from a "borrower's disregard for financial obligations, inability to manage debt, or extenuating circumstances".  Minimum payments must still be added to debt ratios, whether the charge offs/collections total $2000 or not.

Medical bills are exempt from the new guidelines, but old credit card accounts, utility bills, and other liabilities must be included.  Lenders (who have historically ignored many charge offs) will have to be vigilant to ensure they correctly calculate clients' debt ratios, especially while doing buyer pre-approvals.

HUD's continued guideline changes have left many FHA borrowers seeking alternatives such as Fannie Mae's 5% down payment program.  Those with challenged credit scores and debt ratios above Fannie requirements now face additional hurdles to obtaining financing.  Astute buyers  will examine their credit reports and obtain pre-approval letters well in advance of writing sales offers to avoid potential delays and stress during the loan process.

Home Improvement Spending to Level in mid-2014

LIRA, a forward looking indicator of remodeling activity, continues to project a double digit annual increase in home improvement spending through this quarter and the first quarter of 2014, but cautions it expects a slowdown thereafter.  LIRA (Leading Indicator of Remodeling Activity) has projected strong increases since the second quarter of this year, moving from an estimated $128.4 billion in the second quarter to $140.0 billion in the third and $146.1 billion this quarter.  As a moving average these increases translate to increases of 10.4 percent in the third quarter and, 15.9 percent in the fourth.

LIRA is a creation of the Joint Center for Housing Studies at Harvard University.  It is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters. The indicator, measured as an annual rate-of-change of its components, provides a short-term outlook of homeowner remodeling activity and is intended to help identify future turning points in the business cycle of the home improvement industry.  

Looking forward, the projection for spending in the first quarter of 2014 is $148.9 billion, movement of 17.3 percent.  Then spending will level off and drop slightly to a projected total of $147.9 billion in the second quarter, a moving average of 15.2 percent.

 "The soft patch that homebuilding has seen in recent months, coupled with rising financing costs, is expected to be reflected as slower growth in home improvement spending beginning around the middle of next year," says Eric S. Belsky, managing director of the Joint Center.  "However, even with this projected tapering, remodeling activity should remain at healthy levels."

 "In the near term, homeowner spending on improvements is expected to see its strongest growth since the height of the housing boom," says Kermit Baker, director of the Remodeling Futures Program at the Joint Center.  "Existing home sales are still growing at a double-digit pace, and rising house prices are helping homeowners rebuild equity lost during the housing crash."

Home Sales and Prices Fall in California; Shutdown Weakens October Outlook

Home sales in California were down over 5 percent in September as buyers, according to the California Association of Realtors® (C.A.R.) reacted to rising rates and economic uncertainty.  At the same time the supply of available properties continued to loosen up as the housing market entered the off season.

Sales of existing, single-family detached homes in the state were at a seasonally adjusted annual rate of 412,880 units in September, 5.1 percent below the revised rate of 434,910 in August and 2.6 percent below the rate of 424,000 one year earlier. 

Prices in the state also backed off the superheated pace they had been on, with the median home price down in September for the first time since February.  The median price of an existing, single-family detached home in the state was $428,810 in September, 2.8 percent below the median of $441,330 in August.  That September's price, though down, was 24.4 percent higher than the revised median of $344,760 in September 2012 shows how frothy the California market has been over the last year although a median price is influenced by the type of home being sold as well as price appreciation.

 "The debate leading up to the expected tapering of the Fed's stimulus program caused interest rates to rise over the past several months and might have put some of the housing demand on hold," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  "While interest rates have decreased since the Fed's decision last month to postpone the pullback, the government shutdown and debt ceiling discussions over the past two weeks are likely to have an adverse effect on October home sales."

The available supply of existing, single-family detached homes for sale rose in September to 3.6 months about the same as a year earlier but up from August's Unsold Inventory Index of 3.1 months. A six- to seven-month supply is considered typical in a normal market.

"It's encouraging that housing inventory has been steadily improving since May, when housing supply hit its recent bottom," said C.A.R. President Don Faught.  "While inventory remains constrained in the lower-priced home segment and primary home buyers continue to compete with investors, the number of properties for sale overall has been rising since March 2013 and is at its highest level since mid-2012."

The median marketing time for a home increased to 29.6 days on the market from 28.8 days in August.  In September 2012 it took a median of 39.2 days to sell a home.

Purchase Applications Suffer During Shutdown; Rate Reprieve Helps Refis

Refinancing extended its comeback during the week ended October 11, rising to a 66 percent share of all mortgage applications reported by the Mortgage Bankers Association (MBA) from its Weekly Mortgage Applications Survey.  MBA said the increased market share, up from 64 percent the previous week, was due in part to the impact of the government shutdown on home purchases.    

The Market Composite Index, a measure of all application activity, increased 0.3 percent on a seasonally adjusted basis and 0.4 on an unadjusted basis from the index for the week ended October 4.  The small increase was driven by refinancing which increased 3 percent from the previous week overcoming a 5 percent decrease in both the adjusted and unadjusted Purchase Index.  The unadjusted Purchase Index was 1 percent lower than during the same week in 2012.

Mike Fratantoni, MBA's Vice President of Research and Economics said, "The government shutdown had a notable impact on the mortgage market last week.  Purchase applications for government programs dropped by more than 7 percent over the week to their lowest level since December 2007, and the government share of purchase applications dropped to its lowest level in almost three years.  Conventional purchase applications dropped as well, but not to the same extent, falling almost 4 percent for the week."

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 or less increased to 4.46 percent from 4.42 percent.  Points decreased to 0.31 from 0.44 and the effective rate rose.

The jumbo 30-year FRM (balances greater than $417,000) had an average contract rate of 4.51 percent with 0.15 point compared to 4.45 percent with 0.21 point the week before.  The effective rate also increased.

Contract and effective rates for FHA-backed 30-year FRM both increased,  The contract rate rose 1 basis point to 4.16 percent and points increased from 0.37 to 0.44

Fifteen-year FRM had an average rate of 3.53 percent with 0.31 point compared to 3.52 with 0.34 point the previous week. 

Adjustable rate mortgages (ARM) had a 6 percent market share during the week.  The average contract interest rate for 5/1 ARMs remained unchanged at 3.25 percent, with points increasing to 0.32 from 0.29.

Rates quoted are for mortgages with 80 percent loan-to-value ratios.  Points include the origination fee.

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

Seasonal Sales Dip More Than Usual in Southern California

Like other housing indicators covering the summer's end, the one released today by DataQuick showed a gradually slowing market.  The San Diego based company reported that home sales in southern California, which traditionally decline from August to September, did so by a larger amount than usual.  Sales were still up over a year earlier.   

Sales of homes and condos in the state's six largest southern counties totaled 19,122 in September, a decrease of 17.1 percent from the 23,057 completed sales in August.  Sales in that region of the state have declined an average of 9.3 percent between August and September since 1988.  Still the September number exceeded sales in September 2012 by 7.0 percent. 

September sales were also almost 20 percent below historic September levels which have ranged between 12,455 in 2007 and 37,771 in 2003 with an average of 23,862.  It has been seven years since sales in any month have exceeded the average for that month.

The median price paid for all new and resale houses and condos sold in the region last month was $382,000, down 0.8 percent from $385,000 in August and up 21.3 percent from $315,000 in September 2012. This was the 18^th consecutive month that prices have risen on an annual basis and the 14^th for double digit increases - those have ranged between 10.8 and 28.3 percent.  September's median remained 24.4 percent below the peak $505,000 median in spring/summer 2007.

"We've seen a fairly normal downshifting in the housing market this fall. Couple that with the rise in inventory, higher mortgage rates and the ongoing, gradual drop in purchases by investors and cash buyers and it's no wonder prices have leveled off in recent months. What's not clear is how well the market can weather the job losses related to the federal government shutdown and the blow to consumer confidence caused by fears of a default in the national debt. Those impacts would start to show up in data released over the next couple of months," said John Walsh, DataQuick president.

It appears that most of last month's 21.3 percent year-over-year increase in the Southland median sale price reflects rising home prices, while a small portion reflects a change in market mix; a big increase in mid- to high-end sales over the last year and a big decline in sales of distressed properties.   Median square foot prices rose 23.2 percent in the lowest-cost tier of housing stock, 24.8 percent for the middle, and 18.5 percent for the most expensive homes.

In September, foreclosure resales accounted for 6.3 percent of the Southland resale market, down from 6.9 percent in August and 16.6 percent a year earlier.  It was the lowest rate since May 2007.  Short sales also fell to a 13.1 percent share, the lowest since May 2009.

Non-owner occupants bought 26.3 percent of homes sold last month.  That share has ratcheted down gradually each month in 2013 after peaking at 32.4 percent in January.  Flips, homes sold within six months of a previous sale, rose to 6.2 percent from 5.9 percent in August and 5.5 percent a year earlier.

Buyers paying with cash accounted for 27.6 percent of last month's home sales, down from 28.4 percent the month before and 32.2 percent a year earlier.   Among those using a mortgage 11.9 percent used an ARM, about double the national average, and 19.0 percent went with FHA.

The most active lenders in the southern California market in August were Wells Fargo with 8.7 percent of the purchase loan market, Bank of America with 2.6 percent and JP Morgan Chase with 2.5 percent.
All lenders combined provided $6.02 billion in mortgage money to home buyers in September, down from $6.58 billion in August and up from $4.47 billion in September last year.

CFPB Clarifies Rules for Borrower Contact

The Consumer Financial Protection Bureau (CFPB) released a bulletin today in response to requests for further clarification on three servicing issues.  Two of the clarifications are as follows:

• The January servicing rules require that policies and procedures be in place that ensure that servicers, upon the death of a borrower, contact the deceased's family members, heirs or other parties with a legal interest in the home. Today's bulletin provides examples of these policies and procedures to promote retention of the home such as procedures for continued payments, possible mortgage assumption, or loss mitigation measures.
• A second clarification concerns a requirement the servicer attempt to contact the borrower when he misses a payment. CFPB says such contact, intended to provide information to get the borrower back on track, can occur jointly with that made for another purpose such as a collection call. Also, the method of attempted contact may vary depending on how long a borrower is delinquent or whether the borrower has responded to earlier servicer attempts to communicate.

The third and most complex clarification involves the interplay between the servicing rules, the bankruptcy code, and the Fair Debt Collection Practices Act (FDCPA) where both of the latter provide significant protections to borrowers, allowing them to restrict certain types of communications about their debt. 

CFPB says that even if delinquent but non-bankrupt borrowers have invoked these protections and have instructed servicers to stop communicating with them certain notices and communications mandated by the CFPB servicing rules and the Dodd-Frank Wall Street Reform and Consumer Protection Act are still required.

These include responses to borrower requests for information, loss mitigation, error resolution, force-placed insurance, initial interest rate adjustment of adjustable-rate mortgages, and periodic statements.  Servicers will not be required to provide certain early intervention contacts or ongoing notices of interest rate adjustments to borrowers who have requested no communication.

Where borrowers have filed for bankruptcy, servicers are exempted at this time from CFPB requirements to provide periodic account statements and certain early intervention contacts.  CFPB says it will further assess how bankruptcy protections intersect with these servicing requirements and how to ensure that the servicing communications do not confuse consumers about the status of their loans.

"As servicing implementation enters its final phases, we heard from many sources that it was important to address these remaining issues to ensure a smooth transition and provide certainty to the market," said CFPB Director Richard Cordray. "When mortgage servicers better understand the rules they have to follow, that is better for consumers."

The Bureau is also releasing an interim final rule which, among other issues, clarifies a requirement that borrowers receive housing counseling before taking out a high-cost mortgage.  The interim rule will be available late Tuesday afternoon.

Reconsidering Death Sentence For Fannie and Freddie

There may be life in those old GSE bones yet.  At least that is one conclusion that can be drawn from an article in Bloomberg on Tuesday.  Writers Clea Benson and Cheyenne Hopkins write about some current Washington discussions about the future of Fannie Mae in a piece titled "Fannie Mae Survival is Back on the Table in Washington."  The Bloomberg piece is an interesting complement to an analysis from Bank of America/Merrill Lynch which MND covered in August. 

(Read More: Analysts Call for Salvaging GSEs, Advocate Small Tweaks not Massive Reform)

At that time Merrill Lynch Rates Strategists Ralph Axel and Priya Misra discussed saving both Fannie Mae and Freddie Mac, pointing to the GSEs' record financial performance in the previous few quarters, the substantial return the two had already made on the Treasury's investment in them, that they had needed no taxpayer support for over a year, and that during their conservatorships they have provided the bulk of the country's mortgage liquidity and completed several million foreclosure interventions.  These results provide two key takeaways, the Axel and Misra said; 1) the GSEs function well as government-run entities, and 2) the infrastructure of mortgage finance is not in need of major reform.

The Bloomberg reporters find that the Merrill Lynch is not alone in its opinion at least as regards the larger of the two corporations but at the same time few seem interested in absolute salvation.   The consensus in Washington, they say, is still strongly tilted toward dismantling the mortgage companies but it is "weakening amid opposition from hedge funds, regional banks and others who could benefit if the companies survive in some form."  Their article, however, is more concerned about the timing involved in elimination of the GSEs than in whether they actually survive.

The official Obama Administration position is that Freddie and Fannie should be wound down and replaced by a new housing system but some Democrats, the Bloomberg writers say, are leery of a home financing system that would rely too heavily on private money.  Both Senate Majority Leader Harry Reid (D-NV) and Banking Committee member Robert Menendez (D-NJ) have expressed some degree of support for keeping the GSEs.  

More strongly in favor are a few hedge funds which have accumulated large holdings of the GSEs' preferred stock and, the Bloomberg article says, have spent months lobbying for their recapitalization.  One of these hedge funds, Perry Capital, as well as Fairholme Funds have sued the U.S., charging that Treasury is "expropriating the value" of its investors' preferred shares through recent changes in Treasury's own agreement with the GSEs.  

While the hedge funds didn't get far in their early meetings with senators, the authors say that the atmosphere is warming to the idea that an entirely new system could risk instability in the market.   The primary piece of active legislation pushing a totally clean start is the so-called PATH bill sponsored by Jeb Hensarling (R-TX) Chair of the House Financial Services Committee which would eliminate virtually all government involvement in housing finance except for a scaled-down role for the FHA.  The PATH bill has been voted out of committee but Benson and Hopkins say it is unlikely to receive a full House vote this year.

(Read More: MBA's Stevens and Others Raise Concerns over PATH Proposal)

(Read More: Financial Services Committee Responds to PATH Criticism)

More likely to be the legislative vehicle is a bill sponsored by Tim Johnson (D-SD) and Mike Crapo (R-ID) which incorporates parts of the earlier Corker-Warner bill which would wind down Fannie and Freddie over five years.  If would keep the government involved in finance through a catastrophic guarantee that would come into play only after private funds had absorbed a certain level of losses. 

According to the Bloomberg article, regional and community banks are concerned that they will be shut out of a new system without entities like Freddie and Fannie available to purchase and securitize the loans they write.  At the same time large banks and others appear most worried about a too precipitous wind down.  Some say it is unclear whether private capital will be willing to take a first-loss position should the GSE guarantees go away.  Others say the five-year window is too aggressive. 

One very strong voice for a continued Freddie/Fannie presence represented in the article is James Millstein, CEO of Millstein and Company and author of a recapitalization plan for the enterprises, but even he seems most concerned with timing.   He told the National Press Club this month that, "As much as it's problematic in this town for people to stomach the idea that these entities are going to survive, we have to reform and recapitalize and privatize them to ensure stable credit formation during this transition to a new government guarantee

Bob Corker (R-TN), sponsor of the Corker-Warner bill said that the survival of the essential functions of the GSEs does not mean that the companies themselves must survive.  His bill, he said, "outlines a very clear picture for a future state of housing finance that does not rely on the duopolies of Fannie and Freddie, but it smartly leverages the existing technology and infrastructure already built in order to help us get there."

(Read More: MBA and FHFA Carefully Applaud Corker/Warner GSE Bill)

Benson and Hopkins say that Republicans, who have been most vocal about the need to eliminate the two companies, haven't budged.  Many of them were fighting to reduce the GSE housing footprint long before the financial crisis. 

The authors also say that Republicans and Democrats in general have shown little enthusiasm for a solution that would appear to reward investors more than taxpayers. Corker and his bill's cosponsor, Mark Warner (D-VA) say it would be possible to preserve some parts or functions of the mortgage companies without benefitting shareholders.