Low-End Home Prices More Useful in Predicting Big-Picture

In the most recent issue of CoreLogic's MarketPulse on-line magazine Sam Khater suggests that low-end home prices can be useful in predicting the future direction of all home prices.  Analysts, he says, frequently base their forecasts on aggregate national price trends or on geography.  The former can sometimes mask large changes in different price segments that could provide useful information.

Khater uses the example of low-end prices hitting bottom in March 2011, nearly a full year earlier than the trough for high-end properties and for prices overall.  "Not only can turning points be different," he says, "so can the momentum in low-end versus high-end price changes."

Pre-crisis year-over-year house price increases peaked at 19.3 percent for low-cost houses in March 2005 then decelerated to 9.3 percent 12 months later.  On the high-end of the price range however, prices in March 2005 were up 15.2 percent from the previous year and 12 months later the annual increase was still 10.8 percent.

Khater says that looking at high versus low-end price trends reveals that low-end changes and levels lead high-end counterparts by six months to a year and that prices at the low-end are much more volatile than those at the high end.  The latter occurs because there are three major buyers at that price level; first-time buyers, lower income repeat buyers, and investors.  Although there are different reasons, each segment is more sensitive to economic trends than high-end buyers. 

The high-end/low-end variances are more marked still when viewed on the metropolitan statistical area level.   The author looked at prices in 21 geographically diverse markets and found that over the last six months low end price growth decelerated in six while high-end slowed in four.  But while that is not a significant number, the intensity at the low end was very large compared to the high end.  In Boston for example the annual price increase in March 2013 was 17.0 percent, in September it had dropped to 4.2 percent.  High-end prices in contrast have risen in recent months.

Likewise in Las Vegas the price grow on the low end has decelerated from 34.1 percent in March to 25.9 percent in September and in Phoenix from 23.3 percent to 15.5 percent.  Among the 21 markets studied for high-end patterns the largest decrease was in Phoenix, a decline in growth from 16.2 percent to 14.6 percent.

There are some markets where low-end price increases have picked up over the referenced six month period.  Khater singles out Chicago where prices went from flat to a 9.8 percent annual increase by September.  Chicago has also shown the most rapid growth in owner-occupied home purchases over the last two years of any market in the country.  Raleigh, North Carolina has gone from a 1.4 percent annual loss in March to a 9.1 percent gain in low end prices.  On the high-end the strongest acceleration has been in California, particularly San Diego and Riverside. 

Khater says that while there are caveats, lower end home prices are clearly decelerating, especially in the Southwest and that "the magnitude of the declines presages lower growth for prices overall."  When prices bottomed out in early 2012 prices on the low end were still 14 percentage points (growth rate) above those on the high end; currently the difference is 22 percentage points, the biggest gap in two decades.  "This indicates that the low-end price correction is over and overall price growth will be markedly slower heading into 2014."

GSE Foreclosure Prevention Actions top 3 Million

The Federal Housing Finance Agency (FHFA) is celebrating the completion of more than 3 million foreclosure prevention actions by Freddie Mac and Fannie Mae since the two government sponsored enterprises (GSEs) were placed in conservatorship.  Helping families avoid foreclosure through loan modification and other programs has been a priority of the agency and is one of the key goals of FHFA's Strategic Plan for the two companies.

Foreclosure prevention is generally categorized as either home retention actions which include loan modifications, forbearance plans and repayment plans and or as foreclosure alternatives where homeowners are assisted to exit homeownership without foreclosure, usually through a short sale or a deed in lieu.

"Three million completed foreclosure prevention actions is a significant achievement," said FHFA Acting Director Edward J. DeMarco. "It represents real assistance to homeowners, improved stability for their communities, and has produced meaningful savings for taxpayers. I am grateful for the persistent effort of everyone at FHFA, Fannie Mae, and Freddie Mac, who have contributed to reaching this milestone."

The three million foreclosure prevention actions since September 2008 included 1.024 million trial modifications started through the Home Affordable Modification Program (HAMP) which resulted in 601,542 permanent modifications of which 431,852 are still active.  Permanent modifications that were done outside of HAMP total 748,542.  In addition the GSEs have put into place 736,033 repayment plans, 157,961 forbearance plans, and 9,717 charge-offs in lieu.  Home forfeiture actions have resulted in 482,363 short sales and 49,383 deeds-in-lieu.

Even though the housing crisis appears to be winding down, the two GSEs completed 74,879 home retention actions in the third quarter of 2013, 57,878 of which were loan modifications.  This is down from the 87,675 home retention actions and 59,635 modifications in the second quarter.  The companies completed 21,803 short sales (compared to 24,656 in the previous quarter) and 4,194 deeds in lieu (down from 4,757).

Delinquencies in the GSE portfolios continue to drop, with loans 30 to 59 days past due falling from 513,000 in the second quarter to 460,000 in the third.  60 day plus loans fell from 915,000 to 852,000 and seriously delinquent loans from 783,000 to 724,000.  The thirty-day delinquency rate was down from 1.83 percent to 1.64 percent and the serious delinquency rate from 2.78 percent to 2.56 percent.

There were 117,000 foreclosure starts in the third quarter compared to 125,000 in the second and the number of housing units in the REO inventory increased slightly to 148,000 from 142,000.  The number of third party and foreclosure sales increased by 1,000 to 56,000.

The more than 3 million foreclosure prevention actions completed since the start of the conservatorships have helped roughly 2.5 million borrowers stay in their homes through loan modifications and other actions. In addition, over 500,000 borrowers avoided foreclosure through short sales or deeds-in-lieu.

In addition to the foreclosure prevention actions, Fannie Mae and Freddie Mac have completed more than 18 million refinances since April 2009 including more than 2.9 million through the Home Affordable Refinance Program.

Mortgage Application Dives Further into 12-Year Low

After falling to it's lowest level in more than 12 years last week, the Mortgage Bankers Association's (MBA) Market Composite Index fell another 6.3 percent this week.  The index, a measure of application volume for both purchases and refinances, moved from from 374.6 during the week ended December 13 to 351.1 on the week ended Dec 20.  It's important to remember that there is typically a substantial dip into late December despite the data being seasonally adjusted.

"Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008,” said Mike Fratantoni, MBA’s Vice President of Research and Economics.  “Purchase application volume was weak too, continuing to run more than ten percent below last year’s pace.  Notably, government purchase application volume is almost 25 percent below where it was at this time last year, with the larger drop compared to conventional purchase likely due to the increase in FHA premiums over the course of the year.”

The MBA's Refinance Index was down 8 percent from the previous week and refinance share of all activity returned to 65 percent after rising to 66 percent last week.  The seasonally adjusted Purchase Index decreased 4 percent from last week's 1-year low 174.7 to 168.6 in the current week.  The unadjusted Purchase Index decreased 5 percent and was 11 percent lower than the same week one year ago.

Refinance Index vs 30 Yr Fixed

Purchase Index vs 30 Yr Fixed

Mortgage rates continued higher.  The 30-year fixed-rate mortgage (FRM) with conforming balances of $417,000 or less had an average contract rate of 4.64 percent with 0.41 points, the highest since September.  The previous week the rate was 4.62 percent with 0.38 point.  The effective rate also increased.

The jumbo 30-year FRM (balances over $417,000) had an average contract rate of 4.63 percent, an increase of 2 basis points from the previous week, and points remained unchanged at 0.24.  This was also the highest contract rate since September and the effective rate increased as well.

30-year fixed rate mortgages backed by the FHA rose from the previous week with the contract rate at 4.29 percent compared to 4.35 percent.  Points decreased to 0.24 from 0.32.

Average rates for 15-year FRM increased to 3.74 percent, the highest since September, though points decreased from 0.35 to 0.29.

Both the average contract rate and effective rate of the 5/1 ARM increased with the contract rate rising 6 basis points to 3.26 percent though points decreased to 0..39 from 0.42.

Application volume and rate information are compiled by MBA from its Weekly Mortgage Application Survey which has been conducted since 1990.  Rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee.  Base period and value for indexes is March 16, 1990=100.

As Mortgage Rates Rise, Affordability is Diverging

Freddie Mac's December U.S. Economic & Housing Market Outlook looks at what the company's chief economist Frank Nothaft and deputy chief  Leonard Kiefer call "diverging homebuyer affordability", that is affordability that depends to a large extent on the part of the country in which one lives.

In June of this year the Outlook reported on how rising interest rates would affect homebuyer affordability and found that most markets were affordable and that rates would have to rise to about 7 percent before they became unaffordable to a typical family.  Six months later interest rates are up by about a half point and prices have been rising nationwide so Outlook took a second look to see how housing affordability looks now and what it might look like in the future.

The economists say that mortgage rates are key to affordability and by the end of September that affordability had eroded in many parts of the country from where it was in March.  Several of the largest markets on the coasts, representing about 28 percent of the households in Freddie Mac's data, had become unaffordable.  Affordability is measured by the percentage of households who could afford to buy a median priced home while earning the median income for the area.  If rates increase to 5 percent, then two-fifths of the metro areas would become unaffordable while in much of the Midwest and South affordability would remain high.

Freddie Mac has created the interactive map above to show how affordability could be affected at different rates.   At a 4.4 percent rate for a 30-year fixed rate mortgage, the prevailing rate in the third quarter, all of the North Central Region remained affordable while just 36 percent of the West did.  When the maps parameters are changed to reflect a 5 percent rate (with no change in prices or income) approximately 63 percent of the country would be affordable; at 6 percent mortgage rates 55 percent would be affordable; and at 7 percent only 35 percent of the country (but 64 percent of the North Central region!) would be affordable.

Income growth may be partially able to offset any rise in mortgage payments and there has been recent good news.  Job growth in October and November beat the consensus forecast with job growth increasing at a monthly pace of 193,000 over the past 3 months.  These are better paying jobs as well and the unemployment rate is down to 7 percent and there has been an encouraging increase in job openings.  

Having housing payments fall relative to income is not only good for potential home buyers but for sustaining homeownership for existing owners.  Housing payment-to- income   ratios   have moved sharply  lower  over  the  past few years, and currently are at the lowest level since 1980, when  the  Federal  Reserve began  to  keep  track  of  the ratio. Relatively low, manageable ratios are critical, Nothaft and Kiefer say, for homeowners to have a successful, sustained homeownership experience.

The Federal Reserve's Flow of Funds data for the third quarter of 2013 shows that household wealth is also increasing because of gains in both the stock market and house prices, rising $1.9 trillion in the third quarter of 2013 from the second quarter of 2012. Residential real estate holdings increased by $428 billion in the third quarter, while equities and mutual funds added $917 billion. Home mortgage debt expanded for the first time since early 2008, up by 1 percent in the third quarter, and is a positive sign that new mortgage loans are exceeding charge-offs on defaulted debt.

Freddie Mac's economists say that all eyes will be on the 'Taper' in the coming months of 2014 and without a doubt it will be the quintessential factor in mortgage rate swings.  "But mortgage rates are just one factor in the affordability equation, and other fundamentals, such as income growth, will be those that help create a stable and sustainable environment for attaining homeownership."

CFPB Launches Education Campaign Ahead of New Mortgage Rules

With new mortgage regulations due to be implemented in less than a month, the Consumer Financial Protection Bureau (CFPB) has released a set of materials designed to educate both homebuyers and homeowners about the new regulations and how they can be used to protect homeowners and ease the home buying process.  CFPB also released a manual summarizing the new regulations and designed to be used by housing counselors.

The materials, all available on the Bureau's website, explain what a Qualified Mortgage is, why the category was designed, what it does for consumers, and how to find one in the mortgage market.  Consumer rights under new rules effecting mortgage servicers are also explained, as are ways to gather information about an existing loan and to get help if the rules are violated.

The materials are in several formats:

Factsheets: There is a two-page factsheet with an overview of all of the new consumer protections in the Bureau's mortgage rules.  It explains what a WM mortgage is and why it protects the borrower including an explanation of its protections against steering and high fees.  It also lays out the consumer protections afforded borrowers under new servicing rules and explains how to file a complaint with CFPB for any violations of the rules.  A second factsheet is a summary of the new procedures to facilitate borrower's access to foreclosure avoidance options.

Tips:  There are separate tip sheets homebuyers looking for a mortgage, for homeowners on how to get the most out of their mortgage, and one for troubled homeowners facing foreclosure. 

Tools:  CFPB also has added questions and answers about the regulations to its interactive AskCFPB website tool and reminds consumers that its website also offers tools to find local housing counseling agencies to answer their questions or address their concerns. Consumers that have an issue with consumer financial products or services, such as a mortgage, can also submit a complaint on the site.

"Taking on a mortgage may be the largest financial obligation of a consumer's lifetime," said CFPB Director Richard Cordray. "We want to make sure that potential homebuyers have the information they need to make responsible decisions and that current borrowers know about their new protections."

 The Bureau says it is working with industry, housing counselors, and consumer groups to promote a smooth implementation of the new rules.  Most of the rules, including the new Qualified Mortgage regulation, go into effect on January 14.

Pull-Through, Processing Time, and Refinance Share Much-Improved in November

The percentage of loans originated for refinancing increased in November for the first time in 10 months Jonathan Corr, president and chief operating officer of Ellie Mae said today.  Refinancing's share of loans increased six percentage points from October to 45 percent, the highest share since July.  Corr said, "HARP-related refinancing activity also increased, as conventional refinances at 95%-plus LTV rose to 8.30% in November from 7.30% in October.  He noted that the increased activity "was probably attributable to the quarter of a point decline in the interest rates on the 30-year note in November, which declined to 4.526 percent."

Ellie Mae's Origination Insight Report for November shows the share of originations that were adjustable rate mortgages increased from 5.6 percent in October to 5.8 percent in November.  While is still a tiny share of new mortgages, use of ARMs has nearly tripled in the last year, increasing from 2.0 percent in November 2012.

Ellie Mae draws its data from a sampling of the loan applications that are handled by its mortgage management software and network.  About 20 percent of all mortgage originations in the U.S. flow through that system.

Loans closed at a faster pace in November than in October, requiring an average of 42 days as compared to 45.  Processing time for refinances dropped by six days to 37 and purchase mortgages took 45 days compared to 46.

To get a meaningful view of lender "pull-through," Ellie Mae reviewed a sampling of loan applications initiated 90 days prior (i.e., the August 2013 applications) to calculate an overall closing rate of 53.1% in November, up from 51.4% in October 2013.

"Credit requirements also continued to loosen," Corr added. "The average FICO score for all closed loans in November 2013 was 729, compared to 750 in November 2012. Also, 30% of closed loans had an average FICO score below 700 in November 2013, compared to 22% in 2012.

Mortgage Rates to Take Big Hit from Fee Hikes

As loan officers and borrowers prepare for the Federal Open Market Committee's ("the Fed") potential tapering announcement Wednesday, Fannie Mae and Freddie Mac ("the GSEs") Tuesday released new pricing adjustments that dramatically raise costs for borrowers in 2014.  The new fees are mandated by the Federal Housing Finance Agency (FHFA) as a part of their strategic plan to encourage private capital to reenter the mortgage market, which is currently dominated by the GSEs.

There are two parts to the fee increase.  The first of which has already been seen on three occasions (2 from the FHFA and 1 to pay for the payroll tax extension) and involves a permanent increase of 0.1% to all loans on average.  This is a known quantity for the mortgage market and similar increases are mandated every year until 2021.  No surprises there.

The added layer of complexity comes from the upfront portion of the fee increase.  While the ongoing fees don't vary based on strength of a loan file (borrower credit and loan details), the upfront fees, known as "Loan Level Price Adjustments" (LLPAs) can vary greatly. 

In the original announcement about the fee increases, the FHFA said that LLPAs would be changing to more appropriately align costs with credit risk, but that did little to prepare mortgage market participants for the magnitude of the changes.  What sounded like a bit of shuffling was revealed yesterday to be an across the board hike for anyone borrowing more than 60% of their home's value. In some cases, these hikes are severe.  The blanket base increase of 0.25% will end up netting out to 0.00% in many cases due to the removal of 0.25% "Adverse Market Delivery Charge" (AMDC) in all states except CT, FL, NY, and NJ.

Current LLPAs range from a credit (meaning some borrowers receive a cost discount) of .25% of the loan amount (or $250 on a $100,000 loan) to a penalty of 3.25% (a hefty $3250 cost for a $100,000 loan) for borrowers with lower credit scores and less equity.  Substantial additional charges are incurred for cash out refinances, investment properties, and loans with subordinate financing. 

Borrowers with credit scores over 740 currently receive Fannie Mae's lowest LLPA's, but the new standards raise the score required for best pricing to 800, significantly above any prior industry requirements. By comparison, in 2007 a 680 score qualified buyers for best loan pricing.

As shown on the table below, depending on the combination of credit score and LTV (the ratio of a borrower's loan to the value of the home or the purchase price in the case of a purchase), some borrowers will face well over a point in additional fees above and beyond the existing LLPAs.  Interestingly, costs for lower credit scored borrowers were not increased, while those in the 680-759 score range (the majority of borrowers) face the stiffest hikes.  A home buyer with a 720-739 score who borrows $200,000 and puts down 10% faces a whopping 1.25% increase ($2500), and that's just in the up-front fees.  The 0.10% increase in the ongoing fee makes for an additional fee over the life of that loan of more than $4000.

Net Change in LLPAs (no AMDC)  in 2014  (FL, CT, NY, NJ add 0.25%)

FICO	LTV <60.00%	60.01 â€" 70.00%	70.01 â€" 75.00%	75.01 â€" 80.00%	80.01 â€" 85.00%	85.01 â€" 90.00%	90.01 â€" 95.00%	95.01 â€" 97.00%Â
>=800	0.00%	0.00%	0.00%	0.00%	0.25%	0.25%	0.25%	0.00%
780-799	0.00%	0.00%	0.00%	0.00%	0.25%	0.25%	0.25%	0.00%
760-779	0.00%	0.00%	0.00%	0.25%	0.50%	0.50%	0.50%	0.00%
740-759	0.00%	0.00%	0.25%	0.25%	1.00%	1.00%	1.00%	0.00%
720-739	0.00%	0.00%	0.50%	0.50%	0.75%	1.25%	1.25%	0.00%
700-719	0.00%	0.00%	0.50%	0.50%	0.75%	1.00%	1.00%	0.00%
680-699	0.00%	0.00%	0.75%	0.50%	0.75%	1.00%	1.00%	0.00%
660-679	0.00%	0.00%	0.00%	0.00%	0.25%	0.25%	0.25%	0.00%
640-659	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
620-639	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
<620	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%

The fee increases to borrowers come even as the Consumer Protection Finance Bureau enacts new limits on the costs borrowers can be charged to obtain loans.  The limits, however, do not include fees charged by FHFA.

In addition to the hikes on Conforming Loans, FHA recently increased their upfront and monthly insurance premiums and made them effective for the life of the loan (drastically impacting borrowers' lifetime costs), stating an intent to effectively drive loans to the private sector.  While some credit unions, banks, and other private lending institutions will certainly expand their private lending portfolios, they're not waiting in the wings with rates and fees even remotely close to current market levels.

The widespread fee hikes come as the Federal Reserve continues to purchase $40 Billion per month in Mortgage Backed Securities to boost the economy by supporting the recovering housing market.  But the Fed is widely expected to begin reducing these purchases soon.  Ironically, the time frame in which most economists see this happening is the same as the time frame in which the mortgage fee hikes will be rolled out. 

This is a potentially debilitating one-two punch for many borrowers and it raises serious questions as to the unintended consequences of these ambitious fee hikes.  The changes are set to go into effect for loans sold to the agencies beginning in April 2014.  That means lender rate sheets may start adjusting for the new fees shortly into the new year.

The last time the ongoing fee was increased, some lenders adjusted rate sheets literally overnight and with little rhyme or reason as to the timing.  The only known is that virtually all borrowers will soon face higher costs and rates, and a fragile housing recovery will deal with yet another major challenge.

The Rental Housing Affordability Crisis

A new study from the Harvard Joint Center on Housing Studies in conjunction with the McArthur Foundation looks at the growing importance of rental housing in the U.S. as households reverse their long upward trend in homeownership and increasingly turn to renting.  The renter share of households climbed from 31 percent in 2003 to 35 percent in 2013 or 43 million households.

The study, America's Rental Housing: Evolving Markets and Needs, looks at the factors contributing to the growing reliance on rentals, how likely the trend is to continue and the human and policy impacts of the trend.  Of particular importance, the study concludes, is the crisis presented to the country by the growing burden housing is placing on low and very low income households.

The trend toward renting has been driven by several factors.   The Great Recession brought high levels of sustained unemployment and a flood of foreclosures while highlighting some of the risks of homeownership and the benefits of renting; greater ease of moving, the ability to better budget for housing, and freedom from maintenance responsibilities.

The shift toward renting has affected all but the oldest age groups with most cohorts exceeding the overall 4 percent increase.  Only high homeownership rates among the oldest age groups moderated the increase which made the 2000s the strongest decade of growth in renter households in half a century.

The Center expects this growth to continue, but not at the current pace. Depending on the trajectory of immigration, they project renter household to increase by 4.0 to 4.7 million over the next ten years.  While this would represent a considerable slowdown from the current rate, it would still outstrip growth in both the 1960s and 1990s.

Mirroring overall population growth, minorities will contribute virtually all of the net increase in renters over the coming decade, with Hispanics alone accounting for more than half of the total. Significant shares of the younger renter households will be married couples with children and single-parent families, which together will account for another 30 percent of new renters. This group of households will seek more spacious homes to accommodate their larger families and in locations with access to good schools and employment opportunities.  The rapid increase in the senior population will lead to their higher numbers of renters.  This population will require some level of adaptive housing to accommodate them as well as assisted living.

While renting is more common among young adults, more than a third of renters are aged 35 to 54, about the same as their population share.  Even at stages when homeownership is greatest people still move in and out of the rental market. Against stereotype, families with children account for as many renters as single persons.  Renters' incomes are disproportionately low.  Nearly a quarter have annual incomes under $15,000 while only 13 percent of all households fall into that category.  2

Unlike owner-occupied housing, rentals come in a variety of configurations.  About four out of ten properties are single-family homes, another fifth are in two to four unit buildings and 30 percent are in buildings with 10 or more units. Rental housing is more likely to be located in urban areas and tends to concentrate in low-income communities.

Much of the demand from the recent increase in renter households was met by the 3.0 million units, mostly single family, that changed from owner occupied to rental property between 2007 and 2011, pushing the share of single-family rentals up 4 percentage points, to 35 percent, in 2011.  Institutional investors also began buying up single-family properties for rentals, testing new business models that may further expand rental housing options.

Rental housing has bounced back from the Great Recession faster than the rest of housing.  Demand forced down vacancy rates and led to rent increases and increases in landlord operating income and property values.  Multi-family housing starts jumped 54 percent in 2011 and the improvement has been wide spread across markets.

The study says one aspect of the rental market that does bear watching is multifamily finance.  Credit sources dried up there as elsewhere during the downturn with activity sustained through government channels. 

The situation for renters who were cost burdened before the recession worsened during and after it.   After 2007 the share of renters paying more than 30 percent of their income for housing rose from 38 to 50 percent.  Most of the increase was felt by those severely burdened, i.e. paying more than 50 percent of their income for housing by 2010.

Housing cost burdens are nearly ubiquitous among the lowest-income renters. "An astounding 83 percent of renters with incomes of less than $15,000 were housing cost burdened in 2011, including a dismal 71 percent with severe burdens. But the largest increases in shares in 2001-11 were for moderate- income renters, up 11 percentage points among those with incomes of $30,000-44,999 and 9 percentage points among those with incomes of $45,000-74,999," the study says.

Unemployment accounted for some of the increase in housing burden but it has been even worse among households with full-time workers where the cost-burdened share of renters rose by nearly 10 percentage points or by 2.5 million between 2001 and 2011.

The consequences for those unable to find affordable housing the Center says is dire.  They spend about $130 less on food, 40 percent less than those living in housing they can afford.  Thus housing is clearly linked to hunger in the U.S.  They also spend significantly less on health care and retirement savings.

A family with a $15,000 in annual income would have to find housing that costs no more than $375 a month to stay under the 30 percent level.  By comparison, the 2011 median monthly cost for housing built within the previous four years was more than $1,000. Less than 34 percent of these new units rented under $800, and only 5 percent for less than $400."

Thus the gap between the demand for and the supply of affordable units continues to grow.  In 2011, 11.8 million renters with extremely low income competed for just 6.9 million rentals affordable at that income level. Making matters worse, 2.6 million of these affordable rentals were occupied by higher-income households.  The study also evaluates energy costs and concludes that these costs also fall disproportionately on low income renters, either directly or as pass-throughs from land lords. 

Housing that is affordable to low income renters tends to be older and more likely to be in poor condition and so at greatest risk of being demolished or otherwise lost from the housing stock. Over the 10 years ending in 2011, 5.6 percent of all units available for rent were removed from the inventory as were 12.8 percent of those renting for those renting for less than $400.

Rental subsidies are also reaching fewer very low income households.  Between 2007 and 2011 the number of such renters increased by 3.3 million while the number able to receive subsidies expanded by only 225,000 and the share of eligible households receiving assistance shrunk from 27.4 percent to 23.8 percent.  The number of renters with worse case needs receiving no assistance jumped by 2.6 million to 8.5 million.

Even where funding for assistance increased, rising rents and falling incomes raised cost and limited the reach to more households.   About $26 million in capital investments for public housing remains unfunded and privately owned housing is rapidly aging and assistance contracts are expiring.  Mandatory budget cuts under sequestration could reduce vouchers by 125,000 this year.

So far, the Low Income Housing Tax Credit (LIHTC) program has been spared from sequestration but its subsidies are inadequate to make units affordable for extremely low-income tenants, so it is often combined with other forms of assistance. The program may be endangered when debate about tax reform begins in earnest.

The study looks at the two factors which it says will influence rental growth over the next decades; the growth of households and prevailing attitudes toward homeownership.  While economists can give some estimates of the first, the second is subject to so many influences it is nearly impossible to predict. 

The study points to other issues that can impact rental housing going forward; the aging housing stock, barriers to construction, and the looming reform of the government related sources which currently provide most of the financing for rental units. 

The study concludes that, despite the magnitude of the affordability crisis and the clear need for new thinking about assistance, active debate on rental housing policy has just begun.  There are promising approaches from both government and advocates, but as the country faces difficult choices and an aging population and rising health care costs strain the federal budget, it would be all too easy for rental housing concerns to get lost in the debate. 

Appraisal Exemptions for Streamline Refis and Low Balance Loans

Both very small mortgages and some "streamlined" refinancings will exempted from certain of the appraisal requirements for higher-priced mortgages (the agencies use the term "higher-priced" as opposed to the original term "higher risk") set to go into effect in January.  In a joint release six federal regulators said that the exemptions are intended to save borrowers time and money while still ensuring that the loans are financially sound.

Under the Dodd-Frank Act higher-priced loans, those with interest rates above a certain threshold, are required have a written appraisal based on a physical inspection of the homes' interior.  The new regulations will exempt loans, either for refinancing or home purchase, with a principal balance under $25,000 from this requirement.  The dollar amount of this exemption will be indexed each year for inflation.

Also exempted from the appraisal requirement are streamlined refinances as long as the loans do not feature negative amortization or interest only terms and the 'credit risk holder' (which can either mean the lender or the insuring agency) remains the same on the new loan as on the old.

The final rule also contains special provisions for manufactured homes which will be exempted from the appraisal requirements until July 18, 2015.  After that data loans secured by an existing manufactured home and land will be subject to an interior inspection and written appraisal.  A loan secured by a new manufactured home and land will not require a physical inspection of the interior of the home and a loan secured only by the manufactured home without land can be valued by methods other than an appraisal such as by use of a book value. 

The clarification to the appraisal rule was issued by the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and the Office of the Comptroller of the Currency

Federal Registrar Notice

Foreclosure Crisis Enters 9th Inning; Outcome All But Guaranteed -RealtyTrac

Foreclosure starts reached a 95 month low in November.  RealtyTrac, in its November U.S. Foreclosure Market Report, said that a total of 52,826 properties entered formal foreclosure for the first time in November, down 10 percent from the previous month and 32 percent from a year ago.  This was the smallest number of foreclosure starts since December 2005, when 49,236 mortgages were put into the foreclosure process.

The slowing rate of starts drove overall foreclosure activity for the month of November down by 15 percent from October's levels.  A total of 113,454 or one in every 1,155 housing units received a default notice, notice of a scheduled auction, or were subject to a bank repossession during the month. The month-over-month drop was the largest since November 2010 when reactions to the robo-signing scandal forced a drop of 21 percent. November's activity was down 37 percent from one year earlier.

Foreclosure starts continued to rise on an annual basis in 15 states and scheduled auctions which equate to starts in some states increased in 19 states.  Some of the increases were dramatic; scheduled auctions increased by 726 percent in Oregon, 217 percent in Massachusetts; Utah was up 214 percent and Connecticut 199 percent.  Foreclosure starts in Delaware were up 104 percent.   

Bank repossessions or completed foreclosures (REO) numbered 30,461 nationally, down 19 percent from October and 48 percent from November 2012.  It was a 76 month low for REO which were last at this level in July 2007.

Only five states posted year-over-year increases in REOs with Delaware (up 179 percent) and Maryland (a 41 percent increase) again among the most active. 

States with the highest foreclosure rates were Florida, Delaware, Maryland, South Carolina, and Illinois. Activity in Florida was down 15 percent from the previous month and 23 percent from one year earlier but despite four consecutive months of annual decreases the state still leads the nation in foreclosures with one filing for every 392 housing units.

Delaware foreclosure activity spiked 56 percent from October to November and was up 141 percent year-over-year, boosting the state's foreclosure rate to second highest in the country. One in every 480 Delaware housing units had a foreclosure filing during the month, and foreclosure activity in Delaware has now increased on an annual basis in seven of the last nine months.

Despite a 16 percent monthly decrease, Maryland foreclosure activity continued to increase on annual basis in November, up 42 percent from a year ago, helping the state post the nation's third highest state foreclosure rate: one in every 618 housing units with a foreclosure filing. November marked the 17^th consecutive month where Maryland foreclosure activity increased on an annual basis.

Rounding out the top five states were South Carolina (one in every 660 housing units with a foreclosure filing), and Illinois. Other states with elevated heavy activity were Ohio, Connecticut, Nevada, Iowa, and Utah.

Among metro areas with a population of 200,000 or more, those with the highest foreclosure rates were the Florida cities of Jacksonville, Miami, Port St. Lucie and Palm Bay, along with Rockford, Ill.

 "While some of the decrease in November can be attributed to seasonality, the depth and breadth of the decrease provides strong evidence that we are entering the ninth inning of this foreclosure crisis with the outcome all but guaranteed," said Daren Blomquist, vice president at RealtyTrac. "While foreclosures will likely continue to stage a weak rally in certain markets next year as the last of the distress left over from the Great Recession is dealt with, it is highly unlikely that there will be a foreclosure comeback that poses any major threat to the solid housing recovery that has now taken hold."

Mortgage Applications Break 6 Month Losing Streak; ARMs Surge

The slight rise in mortgage application volume during the week ended December 6 was the first increase in six weeks. The Mortgage Bankers Association said that its Market Composite Index was up 1 percent on a seasonally adjusted basis from the previous week and 43 percent on an unadjusted basis.  The week that ended November 29 had included the Thanksgiving holiday and applications were down by 40 percent during that week.

The Refinance Index increased 2 percent from Thanksgiving week but was down 16 percent from the more typical week previous to that.  Sixty-five percent of all applications were for refinancing compared to a 63 percent share the previous week.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index increased 1 percent from the previous week and was 3 percent lower than the week prior to Thanksgiving.  The unadjusted Purchase Index was up 37 percent on a week-over-week basis but down 10 percent year-over-year.

Purchase Index vs 30 Yr Fixed

Rates across the board, both contract and effective, were higher across the board with all fixed rates rising to their highest level since last September.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances below $417,000 increased to 4.61 percent from 4.51 percent.  Points decreased 0.26 from 0.38.  

The contract rate for jumbo 30-year FRM (loan balances above $417,000) increased 10 basis points to 4.59 percent, Points decreased to 0.15 from 0.24.

The rate for 30-year FRM backed by FHA jumped to 4.30 percent from 4.17 percent and points increased to 0.38 from 0.36.

Fifteen-year FRM had an average rate of 3.66 percent compared to 3.56 percent the week before.  Points decreased from 0.32 to 0.31. 

The share of applications for adjustable rate mortgages (ARMs) has been slowing rising from the 3 percent range where it has languished for years.  Last week ARMs received 8.1 percent of applications, the largest share since July 2008. The average rate for a 5/1 ARM increased to 3.11 percent from 3.09 percent and points increased to 0.35 from 0.28.

Rates and application volume information are derived from MBA's Weekly Mortgage Applications Survey which has been conducted since 1990. Information is provided by mortgage bankers, commercial banks and thrifts and covers over 75 percent of all U.S. retail residential mortgage applications.   Interest rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee.  The base period and value for all indexes is March 16, 1990=100.

Nitty Gritty Details on GSE's Expected Fee Hike and State-Level Changes

As part of the Strategic Plan for the conservatorships, FHFA announced another installment of increased Guarantee fees ("G-Fee") for Fannie Mae and Freddie Mac today.  Given the time that has transpired since the last G-Fee hike (over a year) in conjunction with the agency's stated goals (and law!) of gradual increases, if anything about it's timing is surprising, it's that it did NOT come sooner.

(Read More: FHFA Considers Higher Mortgage Fees)

The changes take effect beginning on April 1st, 2014 for loans securitized as MBS and on March 1st 2014 for whole loans sold for cash.  Vital details are broken down below--essentially all of which were both expected and well-telegraphed

(Read More: DeMarco: Guarantee Fees will Continue Gradual Rise).

Base  (ongoing) G-Fee Changes and Considerations

• The base G-Fee for all mortgages will increase by 10bps or 0.1%.  
• The base G-Fee does not appear as an additional charge on rate sheets or consumer quotes and comes out of every payment for the life of the loan.
  
• The base G-Fee increase simply makes interest rates higher without explaining (to the consumer) why.
• The current base G-Fee average is around 50bps, up from 20-25bps historically
  
• Actual G-Fees per loan can be on either side of the average depending on loan characteristics
• The last time the G-Fee was raised by 10bps across the board, it equated to a 30-50bp increase in price/costs and a .125-.25% increase in rates. (Read More: Tax Cut Extension Now Officially Raising Mortgage Rates)
• The law mentioned above is as follows: 
  • 12 USC § 4547 (B) The amount of the increase required under this section shall be determined by the Director to appropriately reflect the risk of loss, as well  [1] the cost of capital allocated to similar assets held by other fully private regulated financial institutions, but such amount shall be not less than an average increase of 10 basis points for each origination year or book year above the average fees imposed in 2011 for such guarantees. The Director shall prohibit an enterprise from offsetting the cost of the fee to mortgage originators, borrowers, and investors by decreasing other charges, fees, or premiums, or in any other manner.

Changes in Risk-Based G-Fee Pricing

• Up-front G-Fee will be updated to better align with risk
• G-fee values haven't been commensurate with their risk.  This has been discussed previously by the FHFA and OIG and is referred to as "cross subsidization"
• Read More about Cross Subsidization
• The FHFA has already taken steps to reign in cross-subsidization in previous g-fee hikes and even in changing the upfront "grids"
  
• Fannie and Freddie publish "grids" at more frequent intervals than G-fees are changed.
• These grids dictate how much a GSE will pay for loans with a higher rate than the intended MBS coupon and how much they will charge for loans with a lower rate than the intended MBS coupon*
• The implication is that it will be increasingly expensive to buydown the G-fee on higher risk loans (or to have the GSEs buy-up excess interest).

Changes in Adverse Market Fee For All but 4 States

*In other words, assuming G-fee comes out to 0.5% and servicing to .25%, and assuming a loan at a note rate of 4.5%, we have

4.5 - .5 - .25 = 3.75%

3.75% is the amount of monthly coupon "clip" that would be passed through to the MBS investor, but 3.75% can't be securitized (because MBS coupons are in 0.5 increments), so we either have to move down to 3.5% or up to 4.0%.  Fannie/Freddie grids are like the the rate sheets for determining the price to do either of those things.

If you go to 3.5% in this scenario, Fannie/Freddie "buys up" your excess .25% (referred to as "strip")

If you go to 4.0% in this scenario, you have to buydown the G-fee deficiency because if you're collecting 4.0% on what was supposed to have been 3.75%, Fannie and Freddie are missing out on .25% in interest that would otherwise be going toward their G-fee. 

FHA Lowers Loan Limits for 650 High Cost Areas

The Department of Housing and Urban Development (HUD) announced late Friday that the maximum loan eligible for a Federal Housing Administration (FHA) guarantee will be reduced from 2013 levels in a number of areas of the country starting January 1.  While the standard FHA loan limit for areas considered to have low housing costs will remain at the current $271,050 level, 650 of the areas deemed higher cost will have their maximum loan sizes reduced. 

FHA loan limits are calculated according to a formula prescribed by the Housing and Economic Recovery Act (HERA) based on median home prices.  Most of the limits apply on a county by county basis.  The new maximum loan limit for high-cost areas will drop on January 1 from $729,750 to $625,500.  Loan limits that fall between the standard limit and the high-cost limit will also be affected.

"As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play," said FHA Commissioner Carol Galante. "Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved."

This will be the first time calculations authorized by HERA will be fully implemented.  The higher limits that have been in place for the last six years were authorized by the Economic Stimulus Act of 2008 as an emergency measure.  Congress had extended the higher limits in subsequent years.    

Eighty-one areas are at the new upper limit and four, all in Hawaii, have dispensation to exceed the limit with loans in Urban Honolulu limited at $721,050.  Eleven of the highest cost areas are in California with most of the remainder in the greater New York/New Jersey area or in counties in Maryland and Virginia surrounding the nation's capital.  There are also a smattering of counties with limits at the $625,500 level in Idaho, Wyoming, Colorado, and North Carolina, mostly in popular outdoor recreation areas. 

The mortgage loan limits for FHA-insured Home Equity Conversion Mortgages (HECM) popularly known as reverse mortgages will remain unchanged at a maximum of $625,500 however actual loan limits will be calculated on an individual basis in accordance with the property value, the borrower's age, and current interest rates. Borrowers with existing FHA insured mortgages may continue to utilize FHA's Streamline refinance program regardless of their loan balance. 

The Federal Housing Finance Agency announced on November 26 that limits for loans eligible for purchase or guarantee by Freddie Mac or Fannie Mae would remain at 2013 limits for 2014.  The standard limit is $417,000; limits in high cost areas range up to $625,000.

Loan Profits Plummet with Declining Volume, Increased Compliance Cost

Mortgage profits took a big hit in the third quarter of 2013, dropping by more than half of that reported in the second quarter.  The Mortgage Bankers Association (MBA) said independent mortgage banks and mortgage subsidiaries of chartered banks reported an average of $743 per loan profit in the third quarter compared to $1,528 for each loan originated in the second quarter.  The average production income fell from 75 basis points to 38, marking the fourth consecutive quarter that productions profits have declined.  

"Third-quarter profits were reduced by half because of several factors: per-loan production expenses that reached study-highs, declining production volume and reduced secondary marketing income," said Marina Walsh, MBA's Associate Vice President of Industry Analysis.  "Historically, mortgage bankers have struggled to control fixed costs and right-size in a declining market, and the increasing costs of compliance and quality control only exacerbate an already difficult situation."

Secondary marketing income declined to 244 basis points in the third quarter, compared to 263 basis points in the second quarter.

Companies reported an average production volume of $391 million per company compared to $439 million in the second quarter as loan volume fell from an average of 1,921 loans to 1,788. As volume decreased total loan production expenses including commissions, compensation, occupancy, equipment and corporate allocations increased to $6,368 per loan from $5,818 in the second quarter.  Third quarter 2013 production expenses were the highest recorded in any quarter since the MBA's Quarterly Mortgage Bankers Performance Report began in the third quarter of 2008.

The "net cost to originate" was $4,573 per loan in the third quarter, up from $4,207 in the second quarter.  The "net cost to originate" includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.

Firms had an average of 259 production employees compared to 261 in the second quarter.  Among those companies reporting in both quarters the average dropped from 269 to 259.   Productivity fell from 2.9 loans per employee per month to 2.5 loans.   Personnel expenses averaged $4,130 per loan in the third quarter against $3,808 in the second.

The purchase share of total originations, by dollar volume, increased to 67 percent in the third quarter of 2013, up from 52 percent in the second quarter.  For the mortgage industry as whole, MBA estimates the purchase share at 49 percent in the third quarter of 2013, up from 34 percent in the second quarter.

MBA said that 324 companies responded to its third quarter survey, 74 percent of which were independent mortgage companies.

Home Price Gains Continue to Slow

CoreLogic said today that month-over-month increases in home prices slowed to fractional numbers in October even as year-over-year increases continued for the 20^th consecutive month.  The company's Home Price Index (HPI) which includes both equity and distressed sales was up 0.2 percent from September to October and was 12.5 percent higher than one year earlier.

Increases in the HPI peaked in April when prices rose 2.68 percent on a month-over-month basis.  The increases have slowed every month since.  The increase from July to August was 0.67 percent and from August to September 0.5 percent.  

CoreLogic's HPI which excludes distressed sales increased by 0.4 percent in October and by 11.0 percent compared to October 2012.  Distressed sales include short sales and sales of lender-owned (REO) property

Nine states had annual price increases (including distressed sales) that exceeded the national HPI.  Nevada continued to lead with the largest increase at 25.9 percent followed by California (22.4 percent,) Georgia (14.2 percent,) Michigan (14.1 percent,) and Arizona (14.0 percent.)  New Mexico was the only state where this HPI depreciated from one year ago, declining by a half percent.

The HPI excluding distressed sales increased across all states with eleven having increases above the national average. Nevada and California were also number one and two on this scale with increases of 22.5 percent and 18.5 percent respectively.  Utah's HPI increased by 13.3 percent, Florida's by 13 percent, and New York by 12.4 percent.

The HPI including distressed transactions is now 17.3 percent below the peak reached in April 2006, and the HPI excluding distressed sales is 13.1 percent lower.   The five states which are still posting the largest declines from their respective peaks are, in declining order, Nevada, Florida, Arizona, Rhode Island, and West Virginia.  The changes range from -40.7 percent to -28 percent

Ninety-six of the top 100 Core Based Statistical Areas (CBSAs) measured by population showed year-over-year increases in October 2013.  Five CBSAs exceeded the national average increase; Riverside-San Bernardino-Ontario (+24.1 percent), Los Angeles (22.1 percent), Atlanta (16.4 percent), Phoenix (15.9 percent), and Chicago (12.3 percent).

Prices are expected to remain essentially unchanged in November according to CoreLogic's Pending HPI.  The index, based on Multiple Listing Service Data, indicates that prices including distressed sales will remain at October levels while the November index is expected to show double digit growth, 12.2 percent, year-over year.  When distressed sales are excluded the November HPI will increase 0.4 percent from October and 11.3 percent compared to October 2012.

"In October, the year-over-year appreciation rate remained strong, but the month-over-month appreciation rate was barely positive, indicating that house price appreciation has slowed as expected for the winter," said Dr. Mark Fleming, chief economist for CoreLogic. "Based on our pending HPI, the monthly growth rate is expected to moderate even further in November and December. The slowdown in price appreciation is positive for the housing market as almost half the states are now within 10 percent of their respective historical price peaks."

"In terms of home price appreciation, the housing market appears to be catching its breath as we head into the final months of 2013," said Anand Nallathambi, president and CEO of CoreLogic. "The deceleration in month-on-month trends was anticipated as strong gains in home prices over the spring and summer slow in line with normal seasonal patterns and the impact of higher mortgage interest rates."

Fannie and Freddie Overhaul Mortgage Insurance Master Policy Requirements

Fannie Mae and Freddie Mac have completed a major overhaul of their master policy requirements for private mortgage insurance the Federal Housing Finance Agency (FHFA) announced today.  The changes meet one of FHFA's 2013 Conservatorship Scorecard goals for the two government sponsored enterprises (GSEs), aligning their individual policy requirements.  The changes are the first made to the master policies in many years FHFA said

Private mortgage insurance is required of borrowers who provide less than a 20 percent downpayment on a home purchase.   While the premiums are paid by the borrower, the insurance covers losses for the lender or the loan's owner should the homeowner default on payments.  Mortgage insurance master policies specify the terms of business interaction between seller-servicers and mortgage insurers.  FHFA said the GSEs have worked with the mortgage insurance industry to identify and fix gaps in the existing master policies and the new policies will, among other things, facilitate timely and consistent claims processing.

The changes include a requirement that the master policies support various loss mitigation strategies that were developed during the housing crisis to help troubled homeowners and establishes specific timelines for processing claims, including requests of additional documentation.  The changes also seek to address a frequent source of complaints from homeowners, setting standards for determining when and under what circumstances the mortgage insurance must be maintained or can be terminated.  The changes are also designed to promote better communication among insurers, servicers, and the GSEs.

"Updating the mortgage insurance master policy requirements is a significant accomplishment for Fannie Mae and Freddie Mac," said FHFA Acting Director Ed DeMarco. "The new standards update and clarify the responsibilities of insurers, originators and servicers and they enhance the insurance protection provided to Fannie Mae and Freddie Mac, which ultimately benefits taxpayers."

The changes will be incorporated by mortgage insurance companies into new master policies which will be filed with state insurance regulations for review and approval.  FHFA said it expects the master policies will go into effect in 2014. 

Andrew Bon Salle, Fannie Mae's Executive Vice President, Single-Family Underwriting, Pricing, and Capital Markets said of the changes, "Mortgage insurers are an important part of the mortgage finance system and these changes help lay the foundation for a stronger system going forward. These updates will help us better manage our credit risk, which we believe will ultimately benefit Fannie Mae, mortgage insurers, homeowners and taxpayers."

Bank of America, Freddie Mac Settle Repurchase Claim

Bank of America has settled another claim for loans it either originated during the housing boom or acquired through its purchase of another lender.  The latest in the series of settlements was announced today by Freddie Mac and will cost the Bank $404 million less a credit of $13 million for loan repurchases already made and other accounting adjustments.

Under terms of the recent agreement, Freddie Mac will release Bank of America from certain existing and future purchase obligations for approximately 716,000 loans purchased by Freddie Mac.  The loans were mainly originated between 2000 and 2009.  The money compensates Freddie Mac for certain past losses and potential future losses relating to denials, rescissions, and cancellations of mortgage insurance.

While information released by Freddie Mac was sketchy, it appears this is the final agreement arising out of discussions widely reported in mid-November.  Those negotiations involved more the $1.4 billion in allegedly defective mortgages and sources at that time said Bank of America was anxious to finalize the agreement before the end of the year.

This would be at least the second settlement between the Bank and Freddie Mac since 2011.  The original source of the loans was not announced, but many of the legal problems faced by Bank of American have arisen out of the bank's purchase of Countrywide Mortgage shortly before the housing boom began to unwind. 

"We are pleased to have reached this agreement with Bank of America, which now allows both companies to move forward," said Freddie Mac CEO Donald H. Layton. "We continue to make very good progress in recovering funds that are due to the American taxpayer, as well as resolving Freddie Mac's legacy repurchase issues."