FHFA Says Significant Progress Made toward Strategic GSE Goals

The Federal Housing Finance Agency (FHFA) recently released its 2013 Conservatorship Scorecard detailing the progress made by the government sponsored agencies (GSEs) Freddie Mac and Fannie Mae in meeting the strategic goals set for them so far this year under FHFA's 2012 Strategic Plan.  The plan sets forth three principal goals for the current phase of the GSE conservatorship:

1.      Build a new infrastructure for the secondary mortgage market;

2.      Gradually contract the Enterprises' dominant presence in the marketplace while simplifying and shrinking their operations; and

3.      Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

Reduction of the governments risk in the single-family mortgage credit market requires giving investors greater certainty and confidence in the rules, policies, data, and disclosures used in mortgage securitization.  In order to build a new infrastructure for single-family mortgage securitization the GSEs need to develop a model Contractual and Disclosure Framework (CDF) that will help foster that certainty and confidence.

The GSEs made significant progress toward achieving interim goals in developing that framework.  A joint GSE team has analyzed and compared certain policies and practices relating to fully guaranteed mortgage-backed securities (MBS) while noting comparable practices in the private-label market.  By year-end 2013 the team will recommend ways to align the GSEs' policies and practices in each area. The team has focused on identifying best practices for non-guaranteed MBS, including those partially guaranteed by the GSEs and has begun a review and analysis of differences in the GSEs' Master Trust Agreements. 

The second major element of the new infrastructure for single-family mortgage securitization being developed is the Common Securitization Platform (CSP) which will consist of integrated hardware architecture and software applications that the GSEs and eventually other, fully private firms will be able to use to perform major aspects of the securitization process.

FHFA and the GSEs have made significant progress toward achieving each of these goals. Achievement of the longer-term objectives of the CSP remains a significant undertaking, as implementation of the platform encompasses both a complex technology project and significant changes in Enterprise business processes. Progress made by the GSEs and FHFA thus far include:

• Formation of a GSE joint venture business entity, Common Securitization Solutions, LLC (CSS). CSS will own the CSP and related business and operational functions. An executive search for an independent Chairperson of the Board of Managers and Chief Executive Officer who will govern the corporation is well underway
• Commercial office space has been leased for a period of three years for CSS in Bethesda, Maryland. Next year staff, provided up to now by the GSEs, will transition to being independent from them and will move into the new building.
• FHFA and the Enterprises are also developing the key legal documents and business infrastructure for the CSS covering items such as capital contributions by the GSEs, allocations of profits and losses, the structure of the Board of Managers, voting rights, identification of "significant matters" requiring super-majority voting, and the handling of intellectual property rights.
• The team building the platform has made significant progress on developing the design, scope, and functional requirements for the five CSP's modules which will perform the data validation, security issuance, disclosure, master servicing, and bond administration functions as well as transactional data stores, an integrated data store, and other components. To date, the team has achieved a number of milestones in the development and testing of the platform, all in a non-production environment.
• In addition to the continued work on the platform's core processing software, the CSP team and Enterprise staff have been working on other critical business operations including the development of detailed diagrams of business processes and data flows and the testing of completed software.

Under the Uniform Mortgage Data Program (UMDP) the GSEs are collaborating with industry to develop uniform data standards for single-family mortgages.  Data standardization will allow all types of lenders to participate in the secondary market and make it far easier and cheaper for them to acquire technology from third-party venders.  The GSEs have implemented three key phases of UMDP, the Uniform Appraisal Dataset, the Uniform Collateral Data Portal, and the Uniform Loan Delivery Dataset.  In September each GSE submitted white papers to FHFA that address strategies for data standardization, collection, and use under the three initiatives.

Each GSE has been working to develop and execute transactions that transfer single-family mortgage credit risk to private investors and each has executed multiple transactions totaling more than $40 billion after first issuing historical data on the credit performance of relevant mortgages.  Freddie Mac has sold two offerings of a new debt security backed by reference pools of 30-year fixed-rate mortgages and in October Fannie Mae a sold a similar type of debt security.  In addition both GSEs have executed transactions to transfer credit risk on pools of mortgages to private insurance companies. 

Under revisions made in 2012 to the Senior Preferred Stock Purchase Agreements (PSPAs) between the GSEs and Department of the Treasury the GSEs have had to accelerate the contraction of their retained mortgage portfolios.  For 2013 the PSPA requires that each retained portfolio decline to $553 billion. As of the date of this Progress Report, each Enterprise's retained portfolio was less than that amount.

As a result of the reductions in the retained portfolios made pursuant to the PSPAs and GSE purchases of delinquent mortgages from pools backing guaranteed MBS, the portfolios are increasingly concentrated in less liquid assets.  The 2013 Scorecard set a goal for each GSE to reduce these portions of the portfolio by 5 percent each year.  As of the date of this progress report, each has achieved the 2013 scorecard objective, Fannie Mae by selling at least $21 billion and Freddie Mac by selling at least $15.7 billion of less liquid assets.

The 2013 Scorecard established the expectation that each GSE would reduce the unpaid principal balance of its new multifamily business by at least 10 percent relative to 2012 through various means such as tightening underwriting, adjusting pricing, or limiting product offerings, but could not increase the proportion of credit risk retained by the Enterprises. Each Enterprise has taken steps to meet this goal, and the market appears to have absorbed the changes in business volumes without major disruption.

Significant changes to the Home Affordable Refinance Program (HARP) in late 2011 led to a surge in program activity throughout 2012 that resulted in more than a million HARP refinances for that year, an amount equal to activity over the prior three years. As of August 2013, HARP refinances since program inception totaled more than 2.8 million.  FHFA estimates that as many as 1 million more borrowers are HARP-eligible and is taking steps to reach those borrowers.

FHFA and the GSEs initiated the Servicing Alignment Initiative (SAI) in April 2011.  It established consistent mortgage loan servicing and delinquency management requirements across the two GSEs including policies related to borrower contact, delinquency management, loan modifications, servicer incentives, and compensatory fees. In 2013, FHFA and the Enterprises announced additional enhancements to the program:

• A Streamlined Modification initiative that initiative allows servicers to solicit certain eligible borrowers who are delinquent between 90 to 720 days with reduced documentation requirements.
• Changes to the servicer incentives framework, eliminating the borrower response package incentives and related performance benchmarks and increasing the modification incentive structure under the Home Affordable Modification Program (HAMP) by $500.00.
• Extension of HAMP programs to align with the Treasury so all eligible mortgages must have a Trial Period Plan with an effective date on or before March 2016. The Enterprises also extended the Streamlined Modification initiative to December 2015 to correspond to the HAMP sunset date.
• Issuance of servicing requirements in response to the Consumer Financial Protection Bureau's final rule relating to early intervention and communication with delinquent borrowers, alternatives to foreclosure and right of appeals, foreclosure referral and foreclosure suspension, and error resolution.

Achieving the objective of maintaining credit availability for new and refinanced mortgages requires a viable private mortgage insurance (MI) industry to provide credit enhancement for loans with loan-to-value ratios over 80 percent.  The 2013 Scorecard established the expectation that the GSEs would update and align counterparty risk management standards for mortgage insurers, including uniform master policies and aligned eligibility requirements.

FHFA and the GSEs have made considerable progress toward developing the new MI master policies and eligibility requirements.  The joint team has worked through a master policy for each MI and anticipates approving by the end of 2013 the submission of the master policies to state insurance regulators for approval. The new master policies are scheduled to take effect in mid-2014. FHFA expects to solicit public feedback on proposed new MI eligibility requirements by the end of 2013.

The 2013 Scorecard required each GSE complete its review of pre-conservatorship loan acquisitions and complete demands for repurchase or restitution for breaches of representations and warranties.  Using two methods, expanding existing capacities to conduct loan-by-loan file reviews and pursuing global settlements, the GSEs have resolved disputes with 10 lending institutions and has recovered more than $18 billion in lender payments so far this year.

"These accomplishments represent important steps that are helping to bring stability and liquidity to the housing market while also laying the foundation for a future, post- conservatorship housing finance system," said FHFA Acting Director Edward J. DeMarco. "Much more remains to be done and our work will continue while lawmakers decide a future course."

Mortgage Applications Unchanged After Seasonal Adjustments

Applications for mortgages moved in two directions during the week ending November 22, depending on whether the figures were presented "as is" or on a seasonally adjusted basis.  The Mortgage Bankers Association (MBA) said today that the Market Composite Index, a measure of loan application volume, decreased 0.3 percent on a seasonally adjusted basis but was up 9 percent on an unadjusted basis compared to the previous week.

There was a similar dichotomy with the Purchase Index which fell 0.2 percent seasonally adjusted and rose 6 percent compared with the week ended November 15.  When compared to the same week in 2012 the Purchase Index was up 35 percent. 

Purchase Index vs 30 Yr Fixed

The Refinance Index increased 0.1 percent from the week before and the share of applications that were for refinancing rose from 64 percent to 66 percent.

Refinance Index vs 30 Yr Fixed

Mortgage interest rates also lacked direction.  Contract rates inched up while points and fees generally declined. 

The average contract rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) increased from 4.46 percent with 0.38 point to 4.48 percent with 0.31 point.   The jumbo 30-year FRM (balances over $417,000) contract rate rose 1 basis point to 4.48 percent while points decreased to 0.15 from 0.22.  The effective rate of both types of 30-year FRM decreased from the previous week.

The average rate for 30-year FRM backed by the FHA increased to 4.16 percent from 4.14 percent.  Points decreased to 0.24 from 0.25 and the effective rate increased.

The average contract interest rate for 15-year fixed-rate mortgages remained unchanged at 3.52 percent, with points decreasing to 0.31 from 0.33.  The effective rate decreased from last week.

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) increased to 3.18 percent from 3.12 percent, with points unchanged at 0.37.  The effective rate increased from the prior week. The ARM share of activity increased from 7 to 8 percent of total applications.

Rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee. 

MBA has conducted its Mortgage Applications Survey weekly since 1990.  Respondents include mortgage bankers, commercial banks, and thrifts.  The survey covers 75 percent of all U.S. retail residential mortgage applications and the base period and value for its indexes is March 16, 1990.

Conforming Loan Limits Stay Put for 2014, Including High Cost Areas

Whether because of the uproar from some members of Congress, the Mortgage Bankers Association, National Association of Realtors, and other industry players or not, Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) has left loan limits for Fannie Mae and Freddie Mac unchanged for the coming year.  In a press release on Tuesday DeMarco said that the maximum conforming loan limits for mortgages acquired or guaranteed by the two government sponsored enterprises (GSEs) will remain at $417,000 for one-unit properties in most areas of the country.

Some high costs areas such as Washington, DC, New York, Boston, and large parts of California are exempt from the $417,000 ceiling with limits that range as high as $625,000.  This upper limit is also unchanged.  It is possible there are areas that have previous fallen into the jumbo mortgage category between the two loan limits that may now be capped at the national limit or have experienced some changes in maximums depending on local calculations. 

DeMarco had announced in late summer that he would roll back the limits to a lower level for the coming year as another step in reducing the influence of the GSEs in the mortgage market and encouraging greater participation by the private sector.  The industry groups above and others sent letters both to FHFA and to Congress protesting any downward revisions as potentially harmful to homebuyers, refinancers, and the housing market recovery. 

Loan limits are changed each year according to a formula which takes into account median prices in local areas.  The limits have been unchanged for several years because of emergency regulations put in place in response to the housing crisis and changes that lower limits are usually the province of Congress.

A link to a spreadsheet with a county by county breakdown of the new limits is available at www.FHFA.gov.

Inventories Pulling Home Sales and Prices in Opposite Directions

Pending home sales fell in October to the lowest level in nearly a year.  The Pending Home Sales Index (PHSI) released this morning by the National Association of Realtors® (NAR) slipped 0.6 percent to 102.1 in October from a revised estimate of 102.7 in September.  It was down 1.6 percent from the October 2012 of 103.8.   October was the fifth consecutive monthly decline for the index and its lowest level since December 2012.

NAR's PHSI is a forward looking measure of contracts signed for home purchases. The contracts are expected to become closed sales, usually within two months of contract signing.

Conditions were mixed across the country and Lawrence Yun, NAR's Chief Economist, said activity was not as weak as had been expected.  In a survey, 17 percent of Realtorsreported delays in October, mostly from waiting for IRS income verification for mortgage approvals during the government shutdown.  "We could rebound a bit from this level," he said, "but still face the headwinds of limited inventory and falling affordability conditions. Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors."

Modest gains in the Northeast where the PHSI was 85.8, up 2.8 percent in October and 8.1 percent from a year ago and in the Midwest where the index rose 1.2 month-over-month and 3.2 percent on an annual basis to 104.1 were offset by declines in the South and West. Pending home sales in the South slipped 0.8 percent to an index of 114.5 in October, and were 1.5 percent below a year ago. The index in the West fell 4.1 percent in October to 93.3, and were 12.1 percent lower than October 2012.  Yun notes there was a greater impact in the high-cost regions of the West, where tight inventory also is holding back contract offers.

NAR is forecasting an increase of 10 percent in home sales in 2013 compared to 2012, totaling just about 5.1 million units but then little change as sales flatten going into 2014.  There will be continued growth in home prices because of limited inventories.  The national median existing-home price for 2013 is projected to be 11 percent above last year, and then cool to a 5.0 to 5.5 percent increase in 2014.

Yun however expressed concerns as the country heads into 2014. "New mortgage rules in January could delay the approval process, and another government shutdown would harm both housing and the economy," he said.

Home Price Increases Narrow, Some States Show August Losses

Home prices ticked up a modest 0.4 percent in August Lender Processing Services (LPS) said today.  The company's Home Price Index (HPI) based on the months residential real estate transactions finished August at $231 compared to $230 in July.  The index was 9.0 percent higher than in August 2012 and 8.0 percent greater than at the end of 2012 when the index was at $212 and $214 respectively.  The LPS index takes into account price discounts for owned real estate and short sales.

Nevada saw the largest monthly increase among states, 1.4 percent followed by Florida and Michigan at 1.0 percent each.  Rhode Island and Colorado had the worst showings with each down 0.3 percent and Pennsylvania was also in negative territory with a decrease of 0.1 percent.

The small slip in Colorado was particularly notable as that state along with Texas recently passed through and surpassed pre-crisis peaks on the index.  Colorado established a new peak in July of $239 and has now fallen off of that level.  Texas, in contrast, set another new high in August, increasing 0.5 percent to $185.

Ten of the largest metropolitan areas had month-over-month increases of more than 1 percent.  This included six cities in Florida and two in Nevada.  Lakeland, Florida and Reno topped the list with increases of 1.5 percent each.  There were ten major metros where prices slipped 0.2 percent or more with the largest decreases in Colorado Springs (-0.6 percent), Kennewick, Washington (0.4 percent) and Spokane and Denver at -0.3 percent each.

Purchase Mortgages Top 60 percent in October

Mortgage loan originations for the purpose of purchasing topped 60 percent in October Ellie Mae said on Wednesday, for the first time since the company began publishing its Origination Insight Report.  Quite naturally the refinancing share was below 40 percent for the first time as well.

Purchase mortgages represented 61 percent of all mortgages originated during the month compared to 58 percent in September and 31 percent in October 2012.  Refinancing dropped to 39 percent from 41 percent the previous month and 68 percent a year earlier.  Ellie Mae first began tracking this data in August 2011.

Sixty-eight percent of originations were conventional mortgages, down from 70 percent in September and 74 percent in October 2011 while FHA-backed mortgages remained at the 19 percent level where it has been for five of the last six months and where is stood in October 2012 as well.

The time to close a loan rose slightly for all mortgages, from 42 days in September to 45 days in October.  The time to close was up 3 percentage points for both purchase and refinance mortgages which increased to 46 and 43 days respectively.

The pull-through rate, that is the percentage of applications which close as loans, fell slightly from 52.3 percent in September to 51.4 percent in October.  The closing rate for purchase loans was 56.9 percent, down from 59.6 percent and for refis it was 44.6 percent compared to 45.2 percent.

Underwriting standards seem to be easing.  Ellie Mae said that 28 percent of closed loans had an average FICO score of less than 700 compared to 16 percent one year earlier.  The average loan-to-value ratio (LTV) has increased to 81 percent from 78 percent in October 2012 while the average FICO score is down to 732 from 750.  The debt-to-income ratio is now at 25/38 instead of 23/34.

Ellie Mae draws its data from a sampling of loan applications that flow thought its proprietary software and loan network.  That volume represents more than 20 percent of all U.S. loan originations.

Mortgage Applications Drift Lower during Holiday Shortened Week

The volume of mortgage applications fell for the third straight week during the period ended November 15 the Mortgage Bankers Association (MBA) said today.  The Market Composite Index, a measure of application volume, decreased 2.3 percent on a seasonally adjusted basis and with an adjustment to account for the Veterans' Day holiday.  On an unadjusted basis the index was down 13 percent compared to the previous week.

The Refinancing Index was down 7 percent from volume during the week ended November 8 and the portion of all applications that were for refinancing declined to 64 percent from 66 percent the prior week.  The seasonally adjusted Purchase Index rose 6 percent from the previous week but on an unadjusted basis in was down 8 percent week-over-week and was 3 percent lower than during the same week in 2012. 

Refinance Index vs 30 Yr Fixed

Purchase Index vs 30 Yr Fixed

Results from MBA's Weekly Mortgage Application Survey showed a mixed pattern of mortgage interest rates changes.  The average contract rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances of $417,000 or less increased to 4.46 percent from 4.44 percent with points decreasing to 0.38 from 0.44 and the effective rate was down.

The average contract rate and the effective rate for jumbo 30-year FRMs decreased from the previous week.  The new contract rate was 4.47 percent with 0.22 point, down from 4.48 percent with 0.34 point.

FHA-backed 30-year FRM had a rate of 4.14 percent, down 2 basis points from the previous week and points decreased to 0.25 from 0.32.  The effective rate decreased.

The rate for 15-year FRM was unchanged at 3.52 percent while points increased to 0.33 from 0.27.  The effective rate increased.

Applications for adjustable rate mortgages (ARMs) maintained a 7 percent market share. The average rate for 5/1 ARMS increased 1 basis point to 3.12 percent with points increasing to 0.37 from 0.27.  The effective rate increased.

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

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

Potential Impacts of Lower Conforming Loan Limits

In the November edition of CoreLogic's e-magazine MarketPulse, Kathryn Dobbyn looks at the potential impact of lower conforming loan limits on the mortgage market.  These limits, which set maximum amounts for conforming loans purchased or guaranteed by Freddie Mac and Fannie Mae (the GSEs) and are generally followed for loans guaranteed by FHA and the VA, were raised temporarily to a maximum of $729,000 in certain "high cost" areas by the American Recovery and Reinvestment Act (ARRA) in 2009.  When that act expired in late 2011 and after much debate the limits rolled back to a maximum of $626,500 in high cost areas and $417,000 in the rest of the country, limits established by the Housing and Economic Recovery Act of 2008 (HERA).  The limits are updated annually based on median home prices at the county level.

The updates to loan limits are usually published in November and this year the debate has heightened as the Edward J. DeMarco, acting director of the Federal Housing Finance Agency, regulator and conservator of the GSEs, has announced he intends to lower the limits and had met considerable blowback from housing industry groups.  Dobbyn looks at the prevalence of the jumbo conforming mortgages - those falling between $417,000 and $625,500 - to see what might be the impact of eliminating this category in areas of the country where it currently exists.    

First, she found that only 110,000 of these mortgages have been originated nationwide this year - 1.72 percent of all mortgage originations.  Loans used for home purchases totaled 47,000 and there were 63,000 refinances.   Looking only at the 15 states where 50 or more such originations occurred she found only a few where they were widely used.  By percent of originations the District of Columbia had the highest incidence at 18 percent although that translates to just over 2,000 loans.  Sixty percent of all jumbo conforming mortgages in the U.S., 68,000 loans, were originated in California but they constituted less than 10 percent of California's total mortgage lending.

Taken together, the District, Maryland, and Virginia have also benefited from the HERA limits with a total of around 20,000 conforming jumbo originations, principally in the Washington and Baltimore metro areas.  The New York, New Jersey areas also together had 15,000 of the loans.

Dobbyn says it has been an interesting two years since ARRA expired and the mortgage market is confronting many unknowns, particularly in the regulatory area.  "As the debate regarding changes to the conforming loan limits is bound to continue to some time," she says, "it is helpful to note that at least for the high-cost areas the impact of the current limits has thus far been minimal, yet highly targeted."

Lenders Can Give FICO Scores as Customer Perk

FICO credit scores will soon be available to some consumers for free but only if their lenders authorize it.  The company announced recently it would start providing the scores used by lenders to determine whether and at what price to grant credit, to credit-card customers of Barclay Bank and First National Bank of Omaha. 

Under the new program, called Open Access, consumers can see their credit scores as often as a participating lender allows it, yearly, quarterly, even monthly.  FICO is marketing the program to lenders as a way "to build loyalty, trust, and growth, through greater customer transparency."  According to the FICO website the program allows lenders to share previously purchased scores with its customers with no additional score fees. The company will also provide subscribers with an implementation plan and access to consumer educational materials.  Other optional services available to lender subscribers are a 12-month historical trend score and the FICO Score Meter which indicates the strength of a customer's score.  The company expects the new free scores could be available to 25 million customers by the end of the year.

FICO, formerly Fair Isaac Credit Organization, sells both credit scores and scoring software to lending institutions and in recent years has made scores available to individuals for a fee.  The scores are currently available on the company website for $16.95 but there are subscriptions and other ways of obtaining the score at different price levels.  Mellody Hobson, Executive Vice President of Ariel Investments said on CBS's This Morning on Tuesday that these consumer fees represent only 5 percent of FICO's income.

Credit scores are offered by other companies as well, principally the three major credit reporting bureaus TransUnion, Experian, and Equifax although FICO claims on its website to have a 90 percent market share. Each uses a proprietary formula to calculate a numerical expression of an individuals' credit characteristics including payment history, outstanding debt, available credit, and types of credit.  The scores offered by the three bureaus are more consumer education- focused than tailored for lender use.

While FICO scores are designed to give lenders an indication of how likely an individual is to repay a debt the scores can also be helpful to consumers who can use them to determine whether an interest rate offered them reflects their credit worthiness.  Since FICO scores include references to factors which may have negatively impacted a score, consumers can also plan how to most efficiently upgrade their ability to qualify for affordable credit. 

For years the credit reporting bureaus made is extremely difficult for consumers to access their own credit history and most people had never heard of a credit score.  Various moves by the Federal Trade Commission, financial regulatory agencies, and finally the Dodd-Frank Wall Street Reform and Consumer Protection Act increased transparency and required each reporting bureau to provide yearly free credit reports but scores, because of their proprietary nature were more difficult to get and then only at a fee.  Under Open Access customers will still have to pay a fee if they go directly to FICO or the reporting bureaus but not if they are customers of a participating lender. 

There has been no word from the other bureaus whether they will follow FICO's lead or continue charging for their scores which they aggressively market along with credit monitoring and identity fraud protection.   Equifax has a temporary agreement with Wells Fargo Bank similar to that of Open Access but it is unclear if it will extend beyond this year.

Hobson said FICO is making this move to increase its brand identity in the face of competition from the bureaus.  While Kleenex and Xerox have employed dozens of lawyers to prevent their brand names from becoming generic substitutes for "tissues" and "photocopying," she said FICO would very much like to make its name synonymous with "credit score." 

Housing Recovery Intact but Moderating Fannie Mae says

Fannie Mae's Economic and Strategic Research Group calls the temporary government shutdown and debt ceiling negotiations in October a blow to consumers who "were cautious in their spending amid continued eroding confidence.  Housing indicators slowed further, and housing expectations turned bearish despite declining mortgage rates."  Businesses, however, seemed to have shrugged it off, showing the strongest payroll gains since February which was part of the reason behind the Federal Reserve advancing its schedule for tapering the purchasing program. 

The Group predicts the events in October will foreshadow likely continued market volatility during the next few months.  Economic growth will be hampered by several unresolved fiscal and monetary policy decisions which will weigh on consumer spending such as the appointment of a new Federal Reserve chair in January and another round of budget and debt ceiling debates.  Still the group expects modest growth of approximately 2.0 percent for the remainder of the year followed by a pick-up to 2.5 percent for 2014 once the fiscal drags wane and as labor market conditions improve further.

"The November economic and housing forecast reflects many of the themes we saw last month, specifically regarding the effect of the policy decision process on consumer attitudes," said Fannie Mae Chief Economist Doug Duncan. "Monthly data showed weakening momentum in real consumer spending and suggest a reluctance among consumers to take on more debt. Notably, third quarter data show that consumption grew at 1.5 percent, which is significantly lower than the average annual increase of 3.4 percent between the end of World War II and the year 2000. The modest consumer spending levels in recent months are consistent with the bearish trend in consumer confidence, which dropped significantly in the fall amid the fiscal standoff. Since many remaining policy decisions will spill over into the beginning of next year, it seems likely that both consumers and businesses will continue to pull back in the interim, lending to increased volatility in the markets."

The Group calls the housing recovery "intact" but says it is moderating.  During the third quarter real residential investment contributed 0.4 percentage point to GDP for the second consecutive quarter.  Much of the housing data which goes into the report has been delayed by the government shutdown but absent September data on housing starts, permits, and new home sales, so far this year single-family housing starts have been disappointing even though permits have risen.

Existing home sales decreased in September and the sharp decline in pending sales indicates that this trend will continue in coming months.  Builder confidence also edged down for the second month in a row and the October National Housing Survey showed a worsening housing market sentiment with home price growth expectations moderating and the biggest ever one-month drop in the numbers of respondents who say it is a good time to buy a house.  Multi-family starts have pulled back from the highs witnessed in the spring.

Home price gains also began to moderate, in part a seasonal phenomenon, but year-over-year gains remain strong.  The economists say they expect that the historically tight inventories will continue to support more price gains.  The decline in shadow inventories also bodes well for prices.  Because of the rapid price appreciation in the first half of the year the decline in properties with negative equity accelerated, falling to 14.5 percent or 7.1 million borrowers in the second quarter compared to 19.7 percent or 9.6 million borrowers in the first quarter according to CoreLogic.  Serious delinquencies also declined from a 90+ day rate of 9.70 percent at the peak in 2009 to 5.65 percent last quarter.  Both of these factors mean fewer homes are likely to fall into foreclosure.

There also appears to be an easing of credit conditions.  The Federal Reserve's Senior Loan Office Opinion Survey found for the fifth quarter that more banks reported an easing of credit standards for prime mortgage borrowers.  However demand has also weakened with 90 percent of survey respondents saying refinancing demand had substantially declined since spring while a smaller number said the same about purchase mortgage demand.

The drop reported to the Fed is consistent with results from the Mortgage Bankers Association Weekly Survey of Mortgage Applications. Refinance applications declined sharply between May and early September before rebounding modestly through mid-October. However, the latest survey during the first week of November showed that refinance applications fell for the second time in three weeks, while purchase applications dropped for the fourth time in six weeks to their lowest level this year.

Long term interest rates moved up in response to the strong October jobs report with 10-year Treasuries jumping 15 basis points to 2.75 percent.  Mortgage rates will likely rise somewhat in the near term then as the economy picks up should reach about 4.8 percent by the end of 2014

Because of what is calls the lackluster performance of single-family housing starts Fannie Mae has lowered its projections for the remainder of 2013 and for the next two years, but maintained existing estimates for existing home sales and home prices.  For 2013 they expect total mortgage originations to decline about 15 percent to $1.83 trillion and refinances to drop to around 63 percent compared to 73 percent in 2012.

Stronger Home Sales will Require More Construction and Looser Credit - NAR

Low inventories continue to drive home prices up from year-ago levels, but existing home sales appear to have at least temporarily cooled the National Association of Realtors® (NAR) said today.  Sales of existing single-family homes, condominiums, and co-ops were down in October for the second month in a row, decreasing 3.2 percent to a seasonally adjusted annual rate of 5.12 million units from 5.29 million in September.  Sales however were still 6.0 percent higher than in October 2012 when the annualized rate was 4.83 million.  NAR said that sales have exceeded their year-ago levels for the past 28 months.

Single-family home sales fell 4.1 percent to a seasonally adjusted annual rate of 4.49 million in October from 4.68 million in September, remaining 5.2 percent above the 4.27 million-unit pace in October 2012.  Existing condominium and co-op sales rose 3.3 percent to an annual rate of 630,000 units in October from 610,000 in September, and are 12.5 percent above the 560,000-unit level a year ago.

The available housing inventory was down again in October, declining 1.8 percent to 2.13 million existing homes for sale.  At the current rate of sales this represents a 5.0 month supply compared to a relative supply of 4.9 months in September and 5.2 months in October 2012.

Lawrence Yun, NAR chief economist, said a flattening trend in sales is expected. "The erosion in buying power is dampening home sales," he said. "Moreover, low inventory is holding back sales while at the same time pushing up home prices in most of the country. More new home construction is needed to help relieve the inventory pressure and moderate price gains."

Nationally home prices rose on an annual basis by double digits for the 11^th straight month, rising by 12.8 percent from October 2012 to a current median of $199,500.  The median price of an existing single-family home price was also $199,500 in October, up 12.7 percent from a year ago.  The median condo price was $199,200, a 13.1 percent annual jump.

Nine percent of sales in October were foreclosures and 5 percent were short sales with aggregate distressed home sales unchanged from the 14 percent market share in September.  These properties accounted for 25 percent of all existing home sales in October 2012.  Foreclosures sold at an average discount of 17 percent and short sales 14 percent.  NAR said part of the gain in the median price is from the smaller share of discounted distressed sales.

First-time buyers accounted for 28 percent of purchases in October, unchanged from September, but down from 31 percent in October 2012 while investors purchased 19 percent, essentially unchanged both month-over-month and year-over-year.  Two-thirds of investors paid cash for their purchases and accounted for many of the 29 percent of October home sales that were all cash.

Median marketing time rose slightly in October, from 50 days to 54, but remains well below the median of 71 days one year earlier.  Short sales took a median of 93 days to sell while foreclosures took 46 days and market rate sales 53.  Thirty-six percent of homes sold in October were on the market for less than a month.

Existing-home sales in the Northeast declined 2.9 percent to an annual rate of 670,000 in October, but are 11.7 percent higher than October 2012. The median price in the Northeast was $247,300, up 7.4 percent from a year ago.

Sales in the Midwest slipped 1.6 percent in October to a pace of 1.22 million, but are 8.0 percent above a year ago. The median price in the Midwest was $154,700, which is 9.3 percent higher than October 2012.

In the South, existing-home sales declined 1.9 percent to an annual level of 2.06 million in October, but are 7.3 percent above October 2012. The median price in the South was $171,500, up 12.9 percent from a year ago.

With constrained inventory, existing-home sales in the West fell 7.1 percent to a pace of 1.17 million in October, and are 0.8 percent below a year ago. The median price in the West was $284,800, up 17.2 percent from October 2012.

NAR President Steve Brown said credit remains unnecessarily restrictive. "Although mortgage interest rates are still historically affordable, some financially qualified buyers are being denied a loan," he said. "The risk-averse nature of lending also is impacting small builders who are unable to get construction loans, even when they see strong local demand. We simply have to reverse the pendulum swing back toward the middle to give more creditworthy borrowers access to safe and sound financing."

Freddie Mac Forecasts First Purchase-Dominated Market Since 2000

The coming year should bring an emergence of the first purchase-dominated market the U.S. has seen since 2000 Freddie Mac predicted today.  The single-family mortgage market will soon begin a transition from a rate-and-term refinance dominated market, the company's Chief and Deputy Chief Economists said, to one in which home purchase loans will take the lead. 

Freddie Mac's November U.S. Economic and Housing Market Outlook might be the sunniest forecast Frank Nothaft and Leonard Kiefer have published in some months.  They see economic growth in the 2.5 to 3.0 percent range, more than half a percentage point above 2013 expectations and a quickening recovery that will lead to more job creation and an unemployment rate below 7 percent, perhaps by mid-year.  And housing features prominently in the medium range outlook.

Freddie Mac expects single-family home sales and housing starts to be at the highest level since 2007 and multifamily transactions and construction to post gains as well.  Housing will remain affordable in most parts of the country despite rising interest rates and household formations should finally pick up.  The later, along with a slow growth in housing completions should keep inventories tight and vacancies low.

The details:

• Home sales should rise about 5 percent. Add in home price gains, a decline in all cash purchases, and purchase-money lending may be up about 15 percent in 2014 compared to 2013. At the same time, the upward creep in mortgage rates and a dwindling pool of refinance candidates will convert the market to one dominated by purchase money in 2014 and even more so in 2015.

• Interest rates are already off of record lows and will continue to move up in 2014, probably ending the year at close to 5 percent. There will be volatility wherever there are concerns about fiscal policy and when the Federal Reserve finally announces the "taper" markets will probably jump around as well.
• Housing affordability should hold up well even with rising rates. Large cities along both coasts are already expensive for the typical family so rising rates will have a greater effect there. "But in most parts of the country, incomes and home prices are such that rising rates by themselves will not be enough to end the recovery. What we need is some better income growth," Nothaft and Kiefer say.
• Housing construction, while improved, is still at a low level, not yet sufficient to keep up with household formations, second home demand, and the decommissioning of existing homes. Starts have risen to about a 900,000 annualized rate and should increase to about 1.15 million next year. This, using the National Association of Home Builders figure of three jobs created for every home built, should result in close to 700,000 jobs, and a lower unemployment rate.
• Many potential sellers are constrained by negative equity and Freddie Mac expects demand to match or exceed supply. Higher home prices and increased construction will improve inventories in some markets but the economists predict home sales will be able to rise only about 5 percent in 2014 compared to 2013. Tight inventories and relative affordability should help support continued price increases.
• Rental property values have risen well over the past year but more modestly than home prices - about 5.3 percent. Freddie Mac's Multifamily Investment Index remains well above its 2000-2013 average suggesting that sector remains a relatively attractive investment compared with the last decade.

Builders Blame Congress For Home-Buying Headwinds

Builder confidence in the market for newly constructed homes remains only moderately positive according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today.  The HPI registered at 54 in November, unchanged from a downwardly revised October reading.   It was the sixth consecutive month that more builders have viewed market conditions as good than poor but over that time the HPI has not moved significantly above the positive/negative dividing line.

The index is derived from a survey conducted by NAHB among its single-family residential builders.  They are asked to gauge current home sales and their expectations for sales over the next 12 months as "good," "fair," or "poor" and the rate the current traffic of prospective buyers from low to very high.  Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The index component measuring current sales conditions was also unchanged, remaining at 58, while the component measuring builders' six month expectations fell from 61 to 60.  The component gauging current buyer traffic dropped one point to 41.

"Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road," said NAHB Chairman Rick Judson. "Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals."

"Policy and economic uncertainty is undermining consumer confidence," said NAHB Chief Economist David Crowe. "The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline."

The HMI three-month moving average was mixed in the four regions. No movement was recorded in the South or West, which held unchanged at 56 and 60, respectively. The Northeast recorded a one-point gain to 39 and the Midwest fell three points to 60.

Mortgage Applications Continue to Slide; Previous Week Revised

In addition to releasing data on mortgage application activity for the week ended November 8, the Mortgage Bankers Association (MBA) revised its numbers from the week ended November 1, erasing most of what had been a significant decline in volume.  Rather than a drop of 7.0 percent in the Market Composite Index, MBA said the Index had declined only 2.8 percent.  They did not provide information on how the internal numbers (purchasing, refinancing) were affected by the adjustment.   It was the first time in recent memory that MBA had issued a revision to its data.

Turning to the week ended November 8, MBA said the seasonally adjusted Market Composite Index decreased 1.8 percent and the unadjusted index lost 3.0 percent.  The Refinance Index decreased 2 percent from the previous week and refinance applications represented 66 percent of all applications, unchanged from the week before.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index was 1 percent lower than the prior week and the unadjusted index was down 3 percent.  The unadjusted index was 6 percent below the level during the same week in 2012.

Purchase Index vs 30 Yr Fixed

Both contract and effective interest rates increased across the board.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming balances of $417,000 rose to 4.44 percent with .44 point from 4.32 percent with 0.42 percent.  The rate for 30-year FRM with jumbo balances (greater than $417,000) increased to 4.48 percent from 4.37 percent with points increasing to 0.34 from 0.26.  Rates for both conforming and jumbo versions of the 30-year FRM were the highest in a month.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.16 percent from 4.07 percent, with points increasing to 0.32 from 0.22.

The average contract interest rate for 15-year fixed-rate mortgages increased to 3.52 percent, the highest level in a month, from 3.44 percent, with points decreasing to 0.27 from 0.30.

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) increased to 3.11 percent from 3.08 percent, with points decreasing to 0.27 from 0.31.  The ARM share of activity increased to 7 percent of total applications.

All mortgage information is based on mortgages with 80 percent loan to value ratios and points include the origination fee.  MBA data is derived from a Weekly Mortgage Application Survey it has conducted since 1990 among mortgage bankers, commercial banks and thrifts.  Base period and value for all indexes is March 16, 1990=100.

Housing Affordability Eroded Dramatically by 'Perfect Storm' in Q3

Housing affordability suffered its biggest hit in nearly ten years during the third quarter of 2013 the National Association of Homebuilders (NAHB) and Wells Fargo said today.  Their Housing Opportunity Index (HOI) for the quarter was 64.5 percent, down from 69.3 percent in the second quarter.  This means that 64.5 percent of new and existing homes sold in the U.S. between the beginning of July and end of September were affordable to families earning the U.S. median income of $64,400.

 "Housing affordability is being negatively affected by a 'perfect storm' scenario," observed NAHB Chairman Rick Judson.  "With markets across the country recovering, home values are strengthening at the same time that the cost of building homes is rising due to tightened supplies of building materials, developable lots and labor."    
 
"The decline in affordability is the result of higher mortgage rates and the more than year-long steady increase in home prices," observed NAHB Chief Economist David Crowe. "While affordability has come down from the peak in early 2012, the index still means a family earning a median income can afford 65 percent of homes recently sold.  Some of the decline in the affordability index could be the result of a loss in some more modest priced home sales as tight underwriting standards have limited the purchases by moderate income families."

The most affordable major housing markets were Indianapolis-Carmel, Indiana, and Syracuse, New York which tied with 93.3 percent of all new and existing homes being affordable to families earning the areas' median incomes of $65,100 and $65,800 respectively. Meanwhile, Kokomo, Indiana was the most affordable smaller market, with 96.9 percent of homes sold in the third quarter affordable to those earning the median income of $60,100.

Other affordable major housing markets in descending order were Youngstown-Warren-Boardman, Ohio-Pennsylvania.; Harrisburg-Carlisle, Pennsylvania; and Buffalo-Niagara Falls, New York.

Following Kokomo in smaller market affordability were Vineland-Millville-Bridgeton, New Jersey; Davenport-Moline-Rock Island, Iowa-Illinois; and Bay City, Michigan.

For a fourth consecutive quarter, San Francisco-San Mateo-Redwood City was the least affordable major market.  Only 16 percent of homes sold in the third quarter were affordable to families earning the area's median income of $101,200.  Other least affordable major markets were Los Angeles-Long Beach-Glendale; Santa Ana-Anaheim-Irvine; New York-White Plains-Wayne, N.Y.-N.J.; and San Jose-Sunnyvale-Santa Clara, California.

All of the five least affordable small housing markets were in California. In Santa Cruz-Watsonville 20.3 percent of all new and existing homes sold were affordable to families with incomes of $73,800. Other small markets at the lowest end of the affordability scale included San Luis Obispo-Paso Robles, Santa Rosa-Petaluma, Napa and Salinas.

Biggest Home Price Gains Since Collapse; Potential Shift Ahead

Another firm has weighed in with an index that confirms both the continuation of the better than year-long housing price gains and that the price performance is beginning to moderate.  The latest, FNC's Residential Price Index^TM (RPI), shows both a substantial increase in home prices during the third quarter of 2013 but also a broadening of the housing recovery across the country.  The RPI increased 2.5 percent between the second and quarters, making the most recent quarter's growth the fastest in the current recovery.

FNC said rising home sales accompanied by a relatively low share of foreclosure re-sales are the key drivers of continued increases in home prices. As of September, foreclosure sales nationwide accounted for 13.4% of total home sales, up slightly from August's 12.7% but down from 16.6% a year ago.

The typical winter slowdown in housing demand is expected to curtail price increases in the coming months. FNC points to one sign of slower growth ahead, the leading October sales-to-list price ratio fell to 96.0 from 96.5 in July and August.

On a monthly basis the increase in FNC's composite covering the 100 largest metropolitan areas increased by 0.5 percent.  In another indication of moderating momentum the September price increase was lower than either of the previous months in the quarter.  The 100-MSA composite increased a modest 5.2 percent from a year ago and the 30-MSA and 10-MSA composites exhibit similar month-over-month price patterns but faster accelerations in year-over-year growth at 6.7 and 6.8 percent respectively.  FNC's composites are based on recorded sales of non-distressed properties, both new and existing homes.

Prices rose by August to September in 27 of the cities in the 30-MSA index with Miami, Baltimore, Charlotte, North Carolina; and Riverside, California each posting growth of about 20 percent.  Home prices in Denver declined for the second month in a row and the city's foreclosure sales picked up slightly in recent months.  St. Louis saw a significant uptick in foreclosure sales from 19.5 percent in September 2012 to 30 percent this September and a 1.3 percent drop in home prices. 

Fifty of the 100 MSAs have shown double digit price growth since early 2012 with some of the best numbers turned in by markets that were in high distress a few years earlier such as Phoenix, Las Vegas, Riverside, Los Angeles and Orlando.  The 100-MSA composite showed an 11.0 percent cumulative price recovery nationwide.

FNC's RPI is a hedonic price index built on a comprehensive database that blends public records of residential sales prices with real-time appraisals of property and neighborhood attributes. As a gauge of underlying home values, the RPI excludes sales of foreclosed homes, which are frequently sold with large price discounts, reflecting poor property conditions.

Home Prices in Smaller U.S. Counties made Softer Landings

Home Prices in Smaller U.S. Counties made Softer Landings

It has long been evident that some parts of the country such as California, Florida and other Sun Belt states were hit harder by price declines during the housing crash than other areas such as New England and some southern and Midwestern states.   Now a housing brief from the U.S. Census Bureau further defines the damage, showing that median home values in many small counties across the nation held steady after the most recent recession, while values in large counties declined.

The brief, Home Value and Homeownership Rates:  Recession and Post-Recession Comparisons from 2007-2009 to 2010-2012 uses the American Community Survey three-year estimates to focus on homeownership rates and home values for smaller areas.  Census figures show that between 2007-2009 and 2010-2012, the median home value decreased nationally by $17,300 to a post-recession value of $174,600.  Median prices decreased in 28 states and increased in 19 states.

In 66.9 percent of counties with populations between 20,000 and 65,000 (1,038 counties) the median home value in the post-recession period of 2010 to 2012 was not statistically different from the recession period of 2007 to 2009.  Similarly the Census Bureau found that the median home values in 37 of the 50 smallest counties showed no statistical differences between the two periods.  In contrast, median home values in 43 of the 50 largest counties declined over the same period.

"The American Community Survey is the only data source that has the capability to show us, how the economic situation in these smaller counties compares with the nation as a whole, as measured by these key housing indicators," said Arthur Cresce, an assistant division chief with the Census Bureau's Social, Economic and Housing Statistics Division. "The American Community Survey statistics are important because local businesses, local governments as well as homebuyers and renters can use it to make informed investment, policy and personal decisions."

Smaller counties also demonstrated much larger swings in homeownership rates than their larger counterparts.  In the 2010-2012 period the national homeownership rate declined by 1.7 percent from the earlier period to 64.7 percent.  The change in the 50 most populous counties ranged from a decrease of 0.4 percent in Westchester County, New York, to a decrease of 4.7 percent in Maricopa County, Arizona while in the 50 least populous counties the changes ranged from a decrease of 9.5 percent in Warren County, North Carolina to an increase of 8.5 percent in Gonzales County, Texas.

The District of Columbia had the lowest homeownership rate at 41.6 percent followed by New York at 53.9 percent. West Virginia had the highest homeownership rate (72.9 percent) and lowest median home value ($98,300), while Hawaii had the highest median home value ($503,100) in 2010-2012.  Only nine states did not show a significant change in homeownership rates between the recession and post-recession periods; all other states had lower homeownership rates.

Of the 50 largest metropolitan areas in terms of population, 49 had a significant decrease in their homeownership rates. The only metropolitan area whose homeownership rate did not decline from 2007-2009 to 2010-2012 was the Oklahoma City area, which was unchanged at 65.2 percent.

Of the smaller counties, McDowell County, W.Va., had the lowest median home value at $39,900, and Teton County, Wyo., had the highest median home value at $705,600.

Closer Look Gap Between Primary and Secondary Mortgage Rates

Primary-Secondary Spread is the difference between an average mortgage interest rate and a representative yield on newly issued agency mortgage-backed securities (MBS) based on that loan and others like it (aka "current-coupon rate").  This spread remained relatively stable from 1995 to 2000 at about 30 basis points then widened to about 50 basis points through early 2008.  In 2009 it soared to 100 basis points and in 2012 following the announcement in September of that year that the Federal Reserve would make additional MBS purchases it spiked temporarily to 150 basis points, a historic high.
 

 
While the primary-secondary mortgage rate spread is closely tracked, six analysts* from the Federal Reserve Bank of New York say it is an imperfect measure of the pass-through between secondary-market valuations and primary-market borrowing costs.  They tracked cash flows during and after the mortgage origination and securitization process to determine how many dollars (per $100 loan) are absorbed by originators either to cover costs or as originator profits.
 
According to the authors of The Rising Gap Between Primary and Secondary Mortgage Rates, there are several reasons why the rate spread measure is an imperfect proxy for the degree to which secondary market movements are reflected in mortgage borrower costs (the pass through).  First, the secondary yield is not directly observed but model-determined and thus subject to model misspecification. That means that it's subjectively determined based on various firms' perceptions of how the changing financial climate might impact borrower behavior.

Pass-through also depends on the evolution of the GSEs' guarantee or "g" fees and on mortgage originators' margins.  G-fee changes are easily observable but the originator's margin depends on the price at which they can sell their loans rather than the interest rate or the security into which the loans are sold. Therefore the authors opted to track the two components separately.
 
The authors conducted a "back-of-the-envelope" calculation to get a sense of what lenders earn from selling loans, tracking the secondary market value of the typical mortgage loan over time.  They assume that the lender securitizes and sells the loan as an agency MBS, so they first deducted the g-fee from the loans interest stream then computed the value of the remaining stream by interpolating MBS prices across coupons and deducting the model loan amount of $100.  The chart below shows that the approximate net market value of a mortgage grew from less than 100 basis points before 2009 to more than 350 basis points in the second half of 2012.  Taken literally, this implies that lender costs outside of g-fees, lender profits, or a combination of the two must have increased by 300 basis points, or quadrupled in five years.
 

 
The authors looked at the valuation of revenues from servicing and points and at costs from g-fees and derived a time series of average originator profits and unmeasured costs (OPUCs) for the period 1994 to 2012.  It then compared OPUCs and the primary-secondary spread as measures of mortgage market pass-through.  They then looked for possible explanations for the increase in OPUCs over that period including putback risks, changes in the valuation of servicing rights, pipeline hedging costs, capacity constraints, market concentration, and streamline refinancing programs.  While some of the costs faced by originators may have risen over the period 2008-2012, the authors concluded that a large part of the rise in OPUCs remains unexplained by those cost increases alone suggesting that originators' profits likely increased over this period.
 

 
In The purpose of the OPUC measure is to track how many dollars per $100 loan get absorbed by originators and by g-fees.  Increasing g-fees means less money goes to borrowers or they need to pay a higher rate.  So full pass-through of secondary-market movements to borrowers would require OPUCs and g-fees to remain constant or that a rise in one be offset by a decrease in the other.
 
The authors constructed a counterfactual exercise computing a hypothetical survey rate during 2012, assuming that either the OPUCs only (dark blue line) or both g-fees (light blue line) had stayed at average 2011:Q4 levels. The authors point out that "the comparison of the light blue line with the black line, the actual realized mortgage rate, shows that had the cost of mortgage intermediation stayed constant relative to 2011:Q4, mortgages rates during 2012 would at times have been substantially lower, with a maximum gap between the two rates of 55 basis points in early October 2012."
 

 
When the black line is compared with the dark blue line, holding OPUCs steady or letting g-fees increase, over most of 2012 much of the gap between the actual and the counterfactual rate derives from the rise in OPUCs.
 
When rates are stable or increasing, the counterfactual rate with constant OPUCs tends close to the actual rate and most of the gap between the two blue lines comes from higher g-fees.  It is during times when rates fall (secondary market prices increase) that actual rates do not fall as much as they would with constant OPUCs.  This is consistent with originators having limited capacity.
 
In the second panel of the chart the counterfactual analysis uses the primary-secondary spread as the measure of mortgage intermediation costs.  This model is more volatile with the gap between the actual and counterfactual rates spiking at 75 basis points in September 2012.
 
The widening gap between primary and secondary mortgage rates between 2008 and 2012 was due to a rise in OPUCs as well as increases in g-fees.  The magnitude of the OPUCs is influenced by MBS prices, the valuation of servicing rights, points paid by borrowers, and costs such as from loan putbacks and hedging.
 
The most significant driver of increases in OPUCs was higher MBS prices which were not offset by increases in measurable costs.  A decline in servicing rights have reduced OPUCs to some extent but among harder-to-measure costs the authors found little effect from putback costs and pipeline hedging.  Absent cost explanations, the authors conclude the rise in OPUCs reflected an increase in originator profits.  Market concentration alone does not explain these profits but capacity constraints do appear to have played a significant role.  There are also indications that originators had some pricing power over refinancing borrowers due to borrowers' switching costs.

*Andreas Fuster and David Lucca are senior economists in the Federal Reserve Bank of New York's Research and Statistics Group; Laurie Goodman is the center director of the Housing Finance Policy Center at the Urban Institute; Laurel Madar and Linsey Molloy are associates in the Bank's Markets Group; Paul Willen is a senior economist and policy advisor in the Federal Reserve Bank of Boston's Research Department.

Overwhelming Majority of Refinances are 30yr Fixed, no Cash-Out; 15yr Terms on the Rise

Overwhelming Majority of Refinances are 30yr Fixed, no Cash-Out; 15yr Terms on the Rise

Borrowers continued the conservative approach to refinancing they have exhibited since the housing crisis during the third quarter of 2013.  Freddie Mac said today that borrowers who refinanced with the company overwhelmingly chose the safety of long-term fixed rates, frequently refinanced into shorter loan terms and continued to eschew cash-out loans.

With mortgage interest rates still floating near record lows the average homeowner who refinanced during the quarter shaved 1.8 percentage points off of his loan, saving $3,500 on a $200,000 mortgage over the next 12 months.  Homeowners refinancing through HARP dropped their rate by an average of 1.9 percentage points, saving about $320 per month.  In total third quarter refinancing saved homeowners an estimated $6 billion in interest over the next 12 months.

Thirty-seven percent of refinancers chose a shorter loan term compared to 32 percent in the second quarter and the highest percentage since 1992.  Forty percent of non-HARP borrowers took a shorter term as did 32 percent of HARP borrowers.  Only 4 percent of all refinances were for longer loan terms.

Frank Nothaft, Freddie Mac vice president and chief economist said, "With mortgage rates still near their historic lows, 37 percent of refinancing borrowers chose to shorten their loan term. Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans during the third quarter, providing a financial incentive for homeowners to term shorten. HARP refinancers have an additional incentive to shorten as some origination fees are waived. By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $6.4 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending."

Cash-out refinances remained substantially below pre-recession levels both in number and in the amount of equity taken out of homes.  Only 15 percent of borrowers substantially increased their loan balance through refinancing. Those that did increase the balance of conventional prime-credit home mortgages cashed out an estimated $6.4 billion in net equity compared to $84 billion  cashed out at the peak in the second quarter of 2006. 

More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 86 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the second quarter. In contrast, only 3 percent of borrowers who had a fixed-rate loan chose an ARM.

With mortgage rates remaining below 5 percent for most of the past four years, relatively few homeowners with loans taken in this period had much incentive to refinance. Consequently, the median age the original loan increased to 6.7 years during the third quarter, the most since the analysis began in 1985.

Freddie Mac's figures come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. During the third quarter of 2013, the refinance share of applications averaged 64 percent in Freddie Mac's monthly refinance survey, and the ARM share of applications was 7 percent in Freddie Mac's monthly ARM survey, which includes purchase-money as well as refinance applications.

California Homes Now Affordable to only 1/3 of Californians

Housing affordability is on a prolonged downhill slide in California, falling for the sixth time in the third quarter of 2013.  As measured by The California Association of Realtors® (C.A.R.) Traditional Housing Affordability Index (HAI), the percentage of home buyers who could afford to purchase a median-priced, existing single-family home in the state fell by four percentage points to 32 percent compared to the first quarter of the year and was down from 49 percent in the third quarter of 2012. 

The affordability index had reached an all-time high of 56 percent in the first quarter of 2012 but has trended lower every quarter since.  The third quarter of 2013 marked the first time the HAI has fallen below 35 since the third quarter of 2008.

Home buyers needed to earn a minimum annual income of $89,170 to qualify for the purchase of a $433,940 statewide median-priced, existing single-family home in the third quarter of 2013.  The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $2,230, assuming a 20 percent down payment and an effective composite interest rate of 4.36 percent.  A year earlier it required an annual income of $65,828 to purchase a median priced home of $339,930 in California with an interest rate of 3.64 percent.

Nearly every county experienced a double-digit decline in affordability when compared to last year, reflecting the substantial increase in California home prices on a year-to-year basis.  Sacramento, Monterey, and Sonoma counties experienced the largest year-to-year declines, while San Mateo, Marin, and San Francisco counties experienced the smallest.  

San Bernardino was the most affordable county in the state with an index of 64 percent.  San Mateo was the least affordable at 15 percent.

NAR Voices Approval of Revamped QRM

The National Association of Realtors® (NAR) added its comments to those of other housing groups about a re-proposed definition of qualified residential mortgages (QRM).  Six federal regulatory agencies redrafted an earlier version in late summer to bring it into alignment with the qualified mortgage (QM) definition already finalized by the Consumer Financial Protection Bureau (CFPB).  The re-proposal is now in a period of public comment.

In its letter submitted on Wednesday NAR applauded the regulators for synchronizing the two definitions. Gary Thomas, NAR President said, "As the leading advocate for housing issues, NAR believes that aligning the QRM definition with the QM definition removes the risky product features and low- or no-documentation lending that led to increased defaults, without excluding those buyers who are unable to afford a high down payment."  

The regulators had also invited public comment on an alternative proposal which would require a 30 percent down payment from buyers.  NAR criticized it for being unduly narrow and unnecessary to assure safe and sound mortgage lending. "The demand for high down payments ignores strong evidence that responsible lending standards and ensuring a borrower's ability to repay have the greatest impact on reducing lender risk. The low foreclosure rate of Veterans Affairs loans, which have the lowest down payment requirements and relatively low default rates, is further evidence that the key to safe lending is sound underwriting and documentation, rather than high down payments," the letter said.

NAR said it was among the most vocal opponents of the first QRM rule proposed in April 2011 because it included a 20 percent down payment requirement.  The rule preferred by the organization would have had no down payment requirement and reasonable credit and debt-to-income standards. 

The Realtor group said it supports the proposed rule's treatment of the government-sponsored enterprises (GSEs) while in conservatorship in which the guaranty provided by the GSEs will satisfy the rule's risk retention requirements.

Purchase and Refi Applications Backtrack Amid Rising Rates

The Mortgage Bankers Association's (MBA) Refinancing Index lost most of the gains it had made the previous week as applications for refinancing fell 8 percent during the week ended November 1.  Applications had increased 9 percent during the week ended October 25.  Refinancing decreased to 66 percent of total application volume from 67 percent the week before.

Refinance Index vs 30 Yr Fixed

The MBA's Market Composite Index, a measure of overall application volume, fell 7 percent on a seasonally adjusted basis and 8 percent unadjusted after gaining over 6 percent the previous week.  Applications for purchase mortgages decreased 5 percent on a seasonally adjusted basis from one week earlier and the Purchase Index was down 7 percent on an unadjusted basis compared to the previous week and unchanged from the same week in 2012.

Purchase Index vs 30 Yr Fixed

Interest rates were mixed.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) was 4.32 percent with 0.42 points compared to 4.33 percent with 0.26 points.  The effective rate increased from the previous week. The contract rate for jumbo 30-year FRM averaged 4.37 percent, up from 4.36 percent, and points eased to 0.26 from 0.27.  The effective rate increased.

Thirty-year FRM backed by the FHA had a rate increase of 1 basis point to an average of 4.07 percent and points increased to 0.22 from 0.17.  The effective rate increased.

The average contract interest rate for 15-year fixed-rate mortgages increased to 3.44 percent from 3.42 percent, with points remaining unchanged at 0.30.  The effective rate increased.

The share of adjustable rate mortgages (ARM) was unchanged from the previous week at 7 percent.  The average contract rate for 5/1 ARMs decreased to 3.08 percent from 3.17 percent, with points decreasing to 0.31 from 0.38 and the effective rate decreased as well.  

MBA reports application volume and interest rate information from its Weekly Application Survey which has been conducted since 1991.  Interest rates are reported for loans with an 80 percent loan to value ratio and points include the origination fee.  Base period and value for all indexes is March 16, 1990=100.

CFPB Launches Tool to Locate Housing Counselors

The Consumer Financial Protection Agency reminded lenders today of the requirement, starting January 10, to provide consumers with a list of homeownership counseling organizations.  Consumers should be given such a list at the time they apply for a mortgage so they know where to get help or guidance to decide which loan is the best for them.

CFPB said it recognizes that developing a method to generate these lists appropriately may take lenders some time so they might not be able to provide the lists by the rules implementation date, so today it both launched a tool to help consumers find local housing counseling agencies and published guidance for lenders on how to prepare lists of these organizations for their customers.   The Bureau suggests that lenders can also use the on-line consumer tool to build their own lists of agencies if they desire

Housing counselors can provide advice on buying a home, renting, defaults, foreclosures, and credit issues, often at little or no cost to consumers. The tool:

• Shows consumers their closest options: The tool uses a search box and mapping function to show the consumer the ten closest counseling agencies to their zip code.

• Provides contact information for HUD-approved counselors: The tool only draws on information from the Department of Housing and Urban Development's (HUD) official list of housing counselors.

• Displays services offered by counseling agencies: When counselors are listed, the tool shows the consumer which services are available there, such as rental housing counseling, pre-purchase counseling, or default resolution counseling.

• Lists the languages offered: For those consumers who would prefer to receive housing counseling in a language other than English, the tool lists the languages that each housing counseling agency offers.

If a lender prefers to build its own list it can look to today's interpretive rule for instructions and can also consider directing borrowers to the CFPB's new tool in the interim.  If lenders take these steps in good faith while building their systems or are working with vendors to build systems, the CFPB would not raise supervisory or enforcement concerns.

"Consumers need and deserve the best guidance when making the decision to purchase a home," said CFPB Director Richard Cordray. "Buying a home may easily be the largest investment a consumer makes, and we want to make it easier for them to find a housing counselor that is a good fit for them."

Consumers and lenders can access the new tool at http://www.consumerfinance.gov/find-a-housing-counselor/.

Owners and Renters Shaken by Shutdown

The October National Housing Survey was conducted by Fannie Mae during a period that coincided with the federal government shutdown and the debt ceiling debate.  Fannie Mae spokesperson Pet Bakel said today that the dual crisis appears to have taken a toll on American's outlook toward the economy and housing market. 

Bakel said the most notable take-away from the survey was the huge increase in the gap between those who think the economy is on the right track and those who think it is headed in the wrong direction.  Wrong track answers soared by 12 percentage points from September levels to 67 percent.  This resulted in a 30 percentage point gap between the two responses and was the largest month-over-month change since the survey was initiated in 2010.

The share of people who said their personal financial situation would get worse in the next 12 months hit a survey high of 22 percent while those who reported significantly higher household income than 12 months ago fell to 22 points to 20.  One percent more reported significant higher household expenses than a year earlier.

The Housing Survey is conducted among about 1,000 homeowners and renters who are asked by phone for responses to around 100 question intended to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence

Homeowners also cooled on whether it is a good time to buy a house.  Affirmative responses to that question fell to 65 percent, another survey low, from 72 percent.  Respondents who thought it was a good time to sell also declined from 38 to 37 percent.  Fewer Americans expect mortgage rates to increase over the next year, decreasing to 57 percent from 63 percent.

The percentage of people who expect homes to appreciate over the next 12 months fell by 4 percentage points to 46 percent and those who expect price declines rose by those same 4 points to 10 percent.  The average price change expectation was 2.9 percent, 0.2 less than in September. Fifty two percent of respondents expect rents to rise, about the same as last month, but the average rent increase anticipated rose by 1 percent to 4.4 percent, a survey high.

"Housing market sentiment has clearly suffered in the wake of the recent government shutdown and debt ceiling debate," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "In October, we saw attitudes toward both the economy and the current buying environment experience their largest one-month drops in the survey's three-year history. While this decline in consumer optimism may portend a slowing of the housing recovery, supply constraint data suggest that we are likely to see continued positive growth in home prices. That being said, October's survey results suggest that consumer attitudes are highly responsive to ongoing debate and decision-making in Washington. Three key budget and debt ceiling dates loom in December, January, and February. The handling of each will likely play a key role in determining the pace and timing of any recovery in consumer sentiment."

Third Quarter Home-ownership Lowest in 18 Years, but Higher Than Q2

Homeowner and rental vacancy rates were essentially flat during the third quarter of 2013.  The Census Bureau reported on Tuesday that the vacancy rate for residential rental property was 8.3 percent, up 0.1 percentage points from the second quarter and 0.3 percentage points lower than in the third quarter of 2012.  Homeowner vacancies were virtually unchanged from both the previous quarter and a year earlier at 1.9 percent.

There were approximately 132.85 million housing units in the U.S. in the third quarter, an increase of about 363,000 from one year earlier.  The number of occupied units was 114.77 million, up from 114.39 million in Q3 2012. Of those occupied units about 74.9 million were occupied by their owners during both periods while renters occupied 39.87 million units in the third quarter of 2013 compared to 39.51 million during the same period in 2012.

Of the 18.1 million vacant properties reported in both periods, approximately 13.6 million were considered year round properties and of those 3.7 million were available for rent in the recent period compared to 3.8 million the year before.  The numbers of units for sale only were virtually unchanged at 1.5 million.

Rental vacancies peaked at 11.1 percent in the third quarter of 2009 and hit a recent low at 8.2 percent in the second quarter of this year.  Homeowner vacancies held at recent highs of 2.8 to 2.9 percent throughout 2008 but dropped below 2.0 percent for the first time since the financial crisis began in the second quarter of this year.

The rental vacancy rate inside of major cities (8.2 percent) did not differ significantly from the 7.9 percent rate in the suburbs.  The rate outside of Metropolitan Statistical Areas was the highest at 10.1 percent.  Vacancies were highest in the south at 10.1 percent followed by the Midwest at 9.1 percent.  The Northeast had a 7.2 percent rental vacancy rate and the West was at 5.9 percent.

Homeowner vacancies rates were highest outside MSAs (2.4 percent) and lowest in the suburbs (1.7 percent).  Inside principal cities the rate was 2.2 percent.  Regionally, the South again had the highest rate, 2.2 percent and the Midwest the second highest at 2.0 percent.  The West and Northeast followed at a distance with rates of 1.6 and 1.5 percent respectively.

The median asking price for vacant rental units in the third quarter was $736 per month.  The median asking price for vacant units for sale was $140,600.

The Census Bureau also released data on homeownership.  Homeownership has trended down fairly steadily since peaking in mid-2006.  The rate picked up slightly in the third quarter rising from 65.0 to 65.3 percent and was 0.2 percentage points lower than a year earlier but the Bureau said that seasonality factors made the small changes statistically insignificant.

For the third quarter 2013, the homeownership rates were highest in the Midwest (69.6 percent) and lowest in the West (59.5 percent). The homeownership rates in the Northeast, Midwest, South, and West were not statistically different from the rates a year ago.

As always the homeownership rate was highest among those 65 years of age or older (81.1 percent) non-Hispanic Whites (73.3 percent) with incomes higher than the median for their area (79.9 percent.)  Rates were lowest for those under age 36 (36.8 percent), African-American (43.1 and family income below the median (50.6 percent).

Adjustable Rate Resets no Longer a Looming Threat

One of the big worries in the early days of the housing crises were the large numbers of adjustable rate mortgages originated during the boom years that were scheduled to reset in stages over the upcoming years.  What would happen to home prices, delinquencies, and foreclosures once these loans, many of which also carried extra-low teaser rates or negative amortization, when those resets happened?

New data from Lender Processing Services (LPS) appear to show that those worries are largely in the past.  LPS's September Mortgage Monitor reports that 63 percent of outstanding hybrid adjustable-rate mortgages (ARMs) have already reset from their initial interest rates and of those that have not reset, three-quarters were originated post-crisis when most loans had credit scores of 760 and above.

As LPS Senior Vice President Herb Blecher explained, these numbers bode well for the performance of ARMs if mortgage interest rates rise as expected. "Only 36 percent of outstanding hybrid ARMs are in a pre-reset status, and the vast majority of those are coming from newer vintages where loan quality has been pristine."  

The remaining pre-reset loans originated during the bubble years where underwriting criteria was not nearly as strict as post-crisis criteria.  It is these borrowers who could be most negatively impacted by upward resets in their monthly mortgage payments but LPS sees little cause for concern.  The company found that interest rate indices would need to rise on the order of 300 basis points for most of these pre-crisis hybrid rates to increase. Most of these borrowers may be looking forward to their payments going down rather than up, although contractual rate floors may limit the decreases

Resets were one of four areas LPS focused on in the latest Monitor.  A second area was prepayment rates and their response to rising rates.  LPS found prepayments are at their lowest level since May 2001 as rates continue to rise. 

The decline was evident across all investor categories, with GNMA and GSE segments seeing the steepest drops - both down over 50 percent since rates began their climb back in May.

Prepayment of loans with loan-to-value ratios (LTVs) in excess of 100 percent - so call HARP-eligible loans -  have dropped sharply as well, declining over 40 percent.

Blecher said that since interest rates drive refinances and refinances have been driving prepayments and originations, overall origination activity has declined as well, down more than 9 percent from last month and nearly 18 percent year-to-date.

The third area on which LPS focused was trends in delinquency and foreclosure rates which were previously covered in its First Look report last month.  Delinquencies increased 4.3 percent from August to 6.4 percent, in-line with seasonal patterns, but are still down 9.9 percent for year-to-date 2013 and 12.6 percent compared to September 2012.

The foreclosure rate declined 1.3 percent to 2.63 percent and is down 23.6 percent year-to-date and nearly a third from a year earlier.  Foreclosure inventories continue to improve and new problem loans remain close to pre-crisis levels. 

Both delinquency rates (non-current rates) and foreclosures remain exceedingly local phenomena.

Finally, looking at home prices and sales, LPS found that prices are up about 9 percent from September 2012 but increases are starting to slow as they always do in the fall.  Home sales remain high but the share of distressed sales continues to decline, falling from about a third of all sales in 2011 to 19 percent in September.