Home Equity Loans Mark Exception to Easing Credit Standards

More banks are easing their underwriting standards as they adapt to changing economic conditions and competition the Office of Comptroller of the Currency (OCC) said today as it released results of its 19^th Annual Survey of Credit Underwriting.  Banks are relaxing underwriting for both commercial and retail products, with large banks as a group reporting the highest share of eased standards.  Some loan products, such as home equity loans, instead saw tighter standards.

The survey, a compilation of examiner observations and assessments, included 86 of the largest national banks and federal savings associations and covers the 18-month period ending June 30, 2013.  The survey covered loans totaling $4.5 trillion representing approximately 87 percent of total loans in the national bank and federal savings association system.  Eleven categories of commercial lending were addressed and seven categories of retail products including residential first mortgages, affordable housing, and both conventional and high loan-to-value (LTV) home equity lending.

OCC said its examiners reported banks' increasing risk appetite and greater market liquidity were factors that contributed to easing standards with indirect consumer products, large corporate loans, credit cards, asset-based lending, international lending, and leveraged loans benefiting most.  Despite their conclusions about easing, examiners reported that most banks maintained good or satisfactory adherence to underwriting standards.

Seventy-eight or 91 percent of the surveyed banks originated residential real estate loans and 76 percent reported their residential lending standards were unchanged.  Eleven percent said their standards had eased, up from 10 percent in 2012, while 13 percent said they had tightened requirements compared to 25 percent in the previous survey and 40 percent in 2011.  

Examiners reported that the level of risk in loan portfolios had decreased or remained unchanged at 87 percent of the banks.  OCC notes that although the housing market has experienced a noticeable recovery since the last survey two banks had exited the residential real estate business but none of the remaining banks indicated they planned to do so in the coming year. 

Conventional home equity lending moved a bit in the opposite direction, with loosening of standards reported at 5 percent of banks and tightening at 22 percent while 73 percent reported no change.  However, in 2012 standards were eased by 18 percent and only tightened by 14 percent.

It was high LTV home equity lending which saw the most tightening.  In 2012 standards were eased at 17 percent of institutions; in the most recent survey no institutions reported relaxing lending standards.    Instead they were tightened by 50 percent (down from 66 percent) and unchanged at 50 percent (compared to 17 percent in the previous survey).

"This year's survey showed a progression toward easing underwriting standards as the economic environment stabilizes," said John Lyons, Senior Deputy Comptroller and Chief National Bank Examiner.  He went on to indicate "that as banks ease standards to improve margins and compete for limited loan demand, examiners will continue to monitor underwriting standards to ensure they are prudent and are applied consistently regardless of whether loans are underwritten to hold or distribute."

The survey indicates that 70 percent of examiners responding expect that the overall level of credit risk will either remain unchanged or increase over the next 12 months, a decline from last year's survey, which indicated that 77 percent of examiner responses showed an expectation for no change or an increase in the level of credit risk over the next 12 months. Where examiners expect risk to increase they based their responses on expectations of changes in the state of the economy and continued strong competition.

Underwriting standards, as presented in this report, refer to the terms and conditions under which banks extend or renew credit, such as financial reporting and collateral requirements, repayment programs, terms, pricing, and covenants.  A conclusion that underwriting standards for a particular loan category eased or tightened does not necessarily indicate an adjustment in all of the standards for that particular product but an easing or tightening of the aggregate conditions under which banks extended credit.

TARP-Related Convictions Double in 2 Years

The Special Inspector General (SIG) for the Toxic Asset Relief Program (TARP) just released its January 2014 Quarterly Report to Congress on the status of TARP.  SIGTARP is the lead law enforcement agency investigating rescue fraud which includes bank, mortgage, and securities fraud and money laundering as well as crimes that prey upon people or institutions seeking help from TARP's recue program.  More than six years after TARP was implemented in the wake of the financial crisis SIGTARP says it is still investigating fraud and in fact has ratcheted up enforcement over the last two years.

The investigative agency says that in 2012-2013 it nearly doubled the number of defendants that were criminally charged from the numbers in 2009-2011 and also more than doubled the number who were convicted.  As of the end of 2013 its investigations have resulted in criminal charges against 174 defendants, 112 of which were senior officers of companies.  Already 122 of these have been convicted and others are awaiting trial.  Seventy-two have received prison sentences with 37 receiving those sentences in 2013 compared with 13 in 2012. 

Because the financial crisis was caused by toxic mortgage assets and TARP's original purpose was to remove those assets from bank balance sheets, SIGTARP said it is not surprising that most of the fraud it investigates is mortgage related.  The mortgage process is complicated with many participants and multiple moving parts the report says, and fraud can seep into the process at each stage. SIGTARPS investigations have detected fraud at origination, during the life of risky mortgages, and at the sale of defective mortgages on the secondary market.

SIGTARP mentions as one of its recent signal achievements the October 2013 conviction of Bank of America/Countrywide Financial for defrauding the U.S. Government through a process known as High-Speed Swim Lane or "Hustle."   Another was the multiple year prison sentences handed down on Jun 28, 2013 to the CEO and a vice president of American Mortgage Specialists for defrauding TARP recipient BNC National Bank. 

SIGTARP said it is focusing on several types of crime.  The two prosecutions listed above are examples of rescue fraud cases involving TARP banks.  It is also targeting rescue fraud involving mortgage modification schemes targeting homeowners including Internet-based scams and those that target victims either through the Internet, radio, or direct mail.   Other types of fraud attempt to take advantage of TARP by manipulating bankruptcy laws or charging homeowners for phony foreclosure prevention assistance.

SIGTARP says it currently has more than 150 open investigations and that "Treasury's current status in recovering TARP funds has no bearing on SIGTARP's enforcing the law for TARP related crime.  A company's repayment of TARP must not serve as a shield to criminal liability."  It will continue, the report says, to open new investigations of ongoing suspected rescue fraud and to detect other rescue fraud by or against TARP institutions that had been hidden.

Mortgage Applications Flat During Holiday Week

Whether it was the weather, the Martin Luther King Holiday which shortened the business week, or consumers practicing patience as mortgage rates drift lower, there wasn't much happening in the way of mortgage application activity last week.  The Mortgage Bankers Association (MBA) said today that applications for both purchase mortgages and refinancing were essentially flat during the week ended January 24.  

MBA's Market Composite Index, a measure of application volume, was down 0.2 percent from the previous week on a seasonally adjusted basis and with an additional adjustment to account for the holiday.  On an unadjusted basis the index decreased 9 percent from the week ended January 17.

The Refinance Index dipped by 2 percent from the week before and the refinance portion of applications fell to 62 percent from 64 percent.  This was the lowest share for refinancing since September. 

The seasonally adjusted Purchase Index increased 2 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 12 percent lower than the same week one year ago.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index was down 4 percent from the previous week.  The unadjusted index was up 2 percent week-over-week but was 15 percent lower than the same week in 2012.

Purchase Index vs 30 Yr Fixed

Contract and effective rates for all fixed-rate mortgage products (FRM) slipped during the week, with contract rates at their lowest levels since the week ended November 29.  Rates for adjustable rate mortgages (ARMs) rose slightly.  The contract rate for 30-year FRM with conforming balances of $417,000 or less decreased from 4.57 percent with 0.36 point to 4.52 percent with 0.40 point.  The rate for the jumbo 30-year FRM (balances above $417,000) decreased to 4.47 percent with 0.27 point from 4.57 percent and 0.18 point. 

The contract interest rate for 30-year FRM backed by the FHA decreased to 4.18 percent with 0.33 point.  The prior week the contract rate was 4.24 percent with 0.23 point.

Contract rates for the 15-year FRM decreased 9 basis points to an average of 3.59 percent.  Points decreased to 0.26 from 0.29.   

The average contract interest rate for 5/1 ARMs increased to 3.25 percent from 3.23 percent, with points decreasing to 0.33 from 0.37 and the effective rate decreased.  ARM's held on to a 7 percent share of mortgage applications, the same as the previous week

MBA's data comes from the Weekly Mortgage Application Survey it has conducted since 1990.  The survey covers over 75 percent of all U.S. retail residential mortgage applications and respondents include mortgage bankers, commercial banks and thrifts.  Base period and value for all indexes is March 16, 1990=100.  Rates are surveyed for loans with an 80 percent loan-to-value ratio and points include the origination fee.

CFPB Offers Guidance to Consumers on Debit, Credit Card Data Theft

The number of major chains reporting breaches of data security since the start of the Christmas holidays continues to grow with Michaels the latest to announce problems late last week.   Almost anyone who uses credit or debit cards has to worry that their personal or credit information has been compromised.  Some stores have even reported thefts of data from customer email or mailing lists.  Today the Consumer Financial Protection Bureau (CFPB) published tips to help consumers protect themselves from fraud and pointing them toward help should they have a problem.

"Consumer financial products often involve significant amounts of consumer data," said CFPB Director Richard Cordray. "In light of recent data breaches, we want to be sure that consumers know how to protect themselves and where to turn if they do suspect fraud."

The CFPB advisory calls payment cards - credit and debit cards including prepaid versions - as among the most commonly used consumer financial products.  Nearly three-quarters of Americans have at least one credit card and debit cards are used even more frequently for purchases.  The recent data breaches may have exposed millions of payment card accounts to potential fraud and millions of consumers could have had personal information stolen separately from card information.    

CFPB offers the following guidance to help consumers protect themselves from data theft:

• Review accounts regularly. Check frequently on-line if possible, but at a minimum review monthly printed statements. CFPB said thieves often test accounts by making small purchases so watch for and report these as well as major expenditures. Problems can occur months after an actual data breach so continued vigilance is important.

• Consumers should consider changing their pin numbers even if there is no indication they were stolen.

• Alert the bank or card provider immediately if fraud is suspected. Under federal law the consumer is generally not responsible for unauthorized debits or charges as long as they are reported quickly.

• Keep any evidence of fraud and record when and how it was reported it to the card provider. Follow-up to be sure proper corrections are made.

• Be alert for phishing. A legitimate bank or card provider will never ask for account information by mail or email. If requests for card numbers, pin numbers, Social Security numbers, or other information is requested report it to the card provider. If an email directs a consumer to a website where information is requested be aware that site may not be legitimate and contact the provider.

CFPB also reminded consumers that its staff is available to assist consumers if they are not satisfied with how their own bank or card provider responds to a report of fraudulent card use.  Complaints can be submitted by phone at (855) 411-CFPB (2372) or TTY/TDD phone number at (855) 729-CFPB (2372), by fax at (855) 237-2392, or online at www.consumerfinance.gov/complaint

Official Argues Against Short-Sale/Foreclosure Deficiency Counting as Income in 2014

Official Argues Against Short-Sale/Foreclosure Deficiency Counting as Income in 2014

In a speech given recently to a housing industry group Michael Stegman assistant Treasury Secretary for Housing Finance Policy made a plea for renewal of the Mortgage Forgiveness Debt Relief Act, which expired at the end of the 2013.  The act, first passed in 2007 and extended in 2009 and 2011, is what is commonly called a "tax extender."  Under the legislation a homeowner for whom some portion of his mortgage balance is forgiven through a loan modification or following a short sale, a deed-in-lieu, or a completed foreclosure does not have to treat that forgiven debt as income for purposes of federal taxes.

Stegman said, "Failing to extend this provision could force struggling families to settle for a less effective mortgage modification, or choose foreclosure over better alternatives for families and their community Congress should do the right thing and extend this targeted tax forgiveness now."

With the law no longer in effect, here is a rough example of what could happen.  A homeowner who has lost his job is no longer able to maintain payments on his mortgage on a home he purchased in 2004 for $200,000.  His original mortgage has been paid down to $150,000 but $8,000 in unpaid interest, late fees, penalties, and legal fees has accrued. The house, in an extremely distressed part of California, is now valued at $130,000.   The homeowner is able to find a buyer for the home at the current market value and the proceeds after real estate commissions, back taxes, and other costs results in a payment to the bank of $122,000.   At the conclusion of the short sale transaction the lender writes off the remaining balance of $36,000 and gives the seller a 1099 showing that amount as unearned income for the year.  On April 15 of the following year the IRS will expect the homeowner, even if he had no other income for the year, to pony up over $1,000 in taxes on that forgiven debt.

Two bills authorizing extension of the law were introduced last summer.  HR 2788, sponsored by Joe Heck (R-NV) is currently sitting in the House Ways and Means Committee and S1187 sponsored by Debbie Stabenow has been referred to the Senate Finance Committee.  In his appeal for passage of the extensions Stegman notes, "Congress often passes tax extenders late in the year and makes them retroactive to the beginning of the tax year. While this is generally well understood and incorporated into firms' decision-making, it does not work for families in danger of losing their homes today."

Critics of the bill note that the debt forgiveness costs the government a lot of tax money and that the worst of the crisis has passed so homeowners no longer need relief.  Supporters claim that the crisis is far from over.  While the level of distress has certainly abated from its peak, RealtyTrac says that 1.2 homes are still in the process of foreclosure.  Many of those homeowners will find the ultimate resolution of their situation will result in a mortgage deficiency balance.   Perhaps more of a reason for extending the law are the estimated 6.4 million homeowners nationwide (13 percent of all mortgaged homes) who CoreLogic says remain underwater on their mortgages and another 1.5 million who have less than 5 percent equity in their homes.  Any one of these people could have an event triggering a default on their mortgage or forcing them to sell their home at a loss and thus face a tax liability.

Beyond the economic hardship, Stegman alludes to another potential result of failing to extend the law.  If a tax liability looms at the end of the road, a homeowner may lose some enthusiasm for working through the process of a loan modification.  There is even less reason for giving a deed-in-lieu or completing a short sale because at the end of those sometimes difficult negotiations the homeowner might have a tax bill but no longer has his home.   Either of these outcomes could result in a higher rate of default as homeowners decide they have little to lose by simply walking away.

Edward J. DeMarco, an opponent of allowing Fannie Mae and Freddie Mac to use principal reduction as a loan modification tool, was recently replaced as head of the Federal Housing Finance Agency by Mel Watt who favors it.   In addition, some recent legal actions such as JP Morgan's $13 billion settlement with the Justice Department contain provisions requiring principal reductions.  Therefore, while it is possible we will see an increase in the use of principal reduction it is conceivable that any impact on default and foreclosure rates it may have will be muted by the potential of homeowners being taxed on the result.    

Heck, in a video prepared for his constituents (Nevada has an estimated 32.5 percent negative equity rate) calls forgiven debt "shadow income" and says of his reason for sponsoring the extension, "This isn't income.  The homeowner never sees a dime of that money.  The government should not tax income never actually received."

Existing Home Sales dip Further into One-Year Lows

December existing home sales edged up 1.0 percent to a seasonally adjusted annual rate of 4.87 million from 4.82 million in November and were 0.6 percent below the 4.90 million unit pace in December 2012 according to The National Association of Realtors® (NAR).   The November number is a substantial revision from the original estimate of 4.90 million.  Last month's numbers--the worst in a year--already represented a 4.2 percent drop from October. and broke a 29 month streak in which sales outpaced those of the same month the year before.  

Despite the fact that the month-over-month numbers can technically be labeled an improvement, December is now the second consecutive month showing deterioration in the year-over-year figures. 

NAR is focusing on the positive, saying that existing home sales for 2013 were the strongest in seven years and median prices maintained strong growth through the year.  NAR reports that for all of 2013, there were 5.09 million existing home sales, which is 9.1 percent higher than 2012. It was the strongest performance since 2006, the last year of the housing boom, when sales reached 6.48 million.

For the entirety of 2013 the national median existing-home price was $197,100, which is 11.5 percent above the 2012 median of $176,800, and was the strongest gain since 2005 when it rose 12.4 percent. 

Lawrence Yun, NAR chief economist, said housing has experienced a healthy recovery over the past two years. "Existing-home sales have risen nearly 20 percent since 2011, with job growth, record low mortgage interest rates and a large pent-up demand driving the market," he said. "We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population."

In addition to summary information on sales for the past year, today's NAR release contained its regular monthly statistics on existing home sales.  In  including sales of single-family houses, condominiums, townhouses, and cooperative apartments,

Single-family home sales in December rose 1.9 percent to a seasonally adjusted annual rate of 4.30 million from 4.22 million in November, but are 0.7 percent below the 4.33 million-unit pace in December 2012.  Existing condominium and co-op sales fell 5.0 percent to an annual rate of 570,000 units in December from 600,000 units in November, and are unchanged from a year ago.

The median existing-home price for all housing types in December was $198,000, up 9.9 percent from December 2012.  Single-family homes had a median price of $197,900, up 9.8 percent from a year ago and the condo price was $198,600, 10.9 percent above December 2012.

Foreclosures accounted for 10 percent of December sales and short sales for 4 percent, unchanged from aggregate distressed sales of 14 percent in November but a drop of 10 percentage points from December 2012.  Foreclosures sold for an average discount of 18 percent below market value in December, while short sales were discounted 13 percent.  NAR said the shrinking share of distressed sales accounts for some of the overall price growth.

Total housing inventory at the end of December fell 9.3 percent to 1.86 million existing homes available for sale, which represents a 4.6-month supply at the current sales pace, down from 5.1 months in November. Unsold inventory is 1.6 percent above a year ago, when there was a 4.5-month supply.  Homes took a median of 72 days to sell in December compared to 56 days in November but about the same as in December 2012.   Twenty-eight percent of homes sold in December were on the market for less than a month, down from 35 percent in November, which NAR said appears to be a result of the weather.

NAR President Steve Brown said that with jobs expected to improve this year, sales should hold even despite rising home prices and higher mortgage interest rates. "The only factors holding us back from a stronger recovery are the ongoing issues of restrictive mortgage credit and constrained inventory," he said. "With strict new mortgage rules in place, we will be monitoring the lending environment to ensure that financially qualified buyers can access the credit they need to purchase a home."

First-time buyers accounted for 27 percent of purchases in December, down from 28 percent in November and 30 percent in December 2012.  Investors purchased 21 percent of homes, down two points from November but the same percentage as a year earlier, and accounted for many of the 32 percent of December transactions which were all cash sales.

Regionally, existing-home sales in the Northeast slipped 1.5 percent to an annual rate of 640,000 in December, but are 3.2 percent higher than December 2012. The median price in the Northeast was $239,300, up 3.6 percent from a year ago.

Existing-home sales in the Midwest fell 4.3 percent in December to a pace of 1.11 million, and are 0.9 percent below a year ago. The median price in the Midwest was $150,700, which is 7.0 percent higher than December 2012.

In the South, existing-home sales increased 3.0 percent to an annual level of 2.03 million in December, and are 4.6 percent above December 2012. The median price in the South was $173,200, up 8.9 percent from a year ago.

Existing-home sales in the West rose 4.8 percent to a pace of 1.09 million in December, but are 10.7 percent below a year ago. Inventory is tightest in the West, which is holding down sales in many markets, and multiple bidding is causing it to experience the strongest price gains in the U.S. The median price in the West was $285,000, up 16.0 percent from December 2012.

Distressed, Institutional Sales Increased in 2013

Sales of distressed properties made up a larger share of home sales in 2013 than in 2012 RealtyTrac said today.  Short sales and sales of bank-owned real estate (REO) together made up 16.2 percent of residential sales during the year, an increase from both 2012 (14.5 percent) and 2011 (15.2 percent.) 

REO sales during the year totaled more than 436,000 units or 9.3 percent of all U.S. residential sales, up from 9.1 percent in 2012 and 8.7 percent in 2011.  There were more than 256,000 short sales (where the lender agrees to accept less than the outstanding balance of the seller's loan) accounting for 5.8 percent of all sales compared to 4.9 percent of all sales in 2012 and 6.0 percent in 2011.

"It may surprise some to see distressed sales rising in 2013 given that new foreclosure activity dropped to a seven-year low for the year," said Daren Blomquist, vice president at RealtyTrac. "And while short sales did trend lower in the second half of the year, there are still more than 1.2 million properties in the foreclosure process or bank-owned, providing a sizable pool of inventory that the housing market is in the process of absorbing. Meanwhile, non-distressed sellers have not listed their homes for sale in droves, helping to keep the distressed share of sales at a stubbornly high level."

In addition to short sales and REO more than 48,000 properties sold to third parties at foreclosure auction in 2013.  This was 1.0 percent of residential sales compared to 0.5 percent in the two prior years.

Along with annual statistics RealtyTrac's U.S. Residential & Foreclosure Sales Report included data for December.  Sales of single-family homes, condos and townhomes during the month were at a seasonally adjusted annual rate of 5.17 million, less than a 1 percent increase from November and a 10 percent jump from December 2012.   

Sales of REO accounted for 9.3 percent of December sales compared to 8.7 percent in November and 9.2 percent a year earlier.  Short sales had a 5.7 percent market share, up from 5.1 percent in November but a full percentage point lower than in December 2012.   Sales at foreclosure auctions accounted for 1.2 percent of sales in December, up from 1.1 percent in November and 0.8 percent in December 2012.

The national median sales price for residential properties in December was $168,391, virtually unchanged from November and up 2 percent from December 2012. The median price of a distressed property was $108,494, 38 percent less than the median price of a non-distressed property, $174,401.

Institutional investment in residential properties continued to rise with 7.3 percent of sales in 2013 going to investors who purchased 10 or more properties within a year.  This was an increase from 5.8 percent in 2012 and 5.1 percent in 2011. In December institutional investors accounted for 7.9 percent of sales, up from 7.2 percent in November.

Mortgage Applications Continue Higher as Rates Retreat to 2014 Lows

The volume of mortgage applications increased again during the week ended January 17 according to information released this morning by the Mortgage Bankers Association (MBA).  The MBA's Market Composite Index, a measure of that volume, increased 4.7 percent on a seasonally adjusted basis from one week earlier and was up 7 percent on a non-adjusted basis.

The Refinance Index increased 10 percent and the share of applications that were for refinancing rose from 62 percent the week ended January 10 to 64 percent.  This was the largest market share for refinancing in a month.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index was down 4 percent from the previous week.  The unadjusted index was up 2 percent week-over-week but was 15 percent lower than the same week in 2012.

Purchase Index vs 30 Yr Fixed

Both contract and effective rates decreased during the week to levels last seen before the New Year.  Thirty-year fixed rate mortgages (FRM) with conforming balances of $417,000 or less had an average contract rate of 4.57 percent with 0.36 point compared to 4.66 percent with 0.33 point the previous week.

The jumbo 30-year FRM (balances in excess of $417,000) also had a contract rate of 4.57 percent, down from 4.58 percent.  Points decreased from 0.24 to 0.18.  Both the conforming and the jumbo 30-year mortgages last saw rates at this level in November.

FHA-backed 30-year FRM had a contract rate of 4.24 percent, also the lowest rate since November, compared to 4.29 percent the previous week.  Points increased from 0.17 to 0.23.

Fifteen-year FRM had an average rate of 3.68 percent, down 4 basis points from the previous week and the lowest rate since December.  Points decreased from 0.37 to 0.29.

Seven percent of applications during the week were for adjustable rate mortgages (ARM), slightly lower than the week before.  The average contract rate for the 5/1 ARM decreased to 3.23 percent with 0.37 point from 3.28 percent with 0.47 point.  The new rate was the lowest so far in 2013.   

MBA's survey covers over 75 percent of all U.S. retail residential mortgage applications, and includes information from mortgage bankers, commercial banks and thrifts. It has been conducted since 1990 and the base period and value for all indexes is March 16, 1990=100.  Interest rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee.

CoreLogic asks if Poor Construction Hiring is New Normal

Data presented by CoreLogic in its new edition of MarketPulse raises an interesting question about employment in the construction sector.  Is the slow pace of hiring the result of a fundamental change in the construction industry or is the industry self-correcting to a more sustainable level of employment?

Thomas Vitlo, author of "Hesitation in the Construction Industry," says that, while overall construction spending has increased since the end of the recession, construction employment has not kept pace.  He based his analysis on the Census Bureau's "Value of Construction Put in Place Survey" and the Bureau of Labor Statistics "Job Openings and Labor Turnover Survey.  Vitlo used a six-month moving average to iron out the strong seasonality of activity in the construction industry. 

In the resulting chart it is clear that, before the Great Recession, the two series were fairly well correlated.  Construction hiring fell as spending declined and rose as spending increased.  Then in early 2010 the two diverged.  Spending fell to a low of 16.8 percent in December 2009 and increased to a peak of 9 percent year-over-year in October 2012.  Total construction hires, however peaked at 14.6 percent in June 2010 and have been decreasing by 8 percent year-over-year as of October 2013.  "Therefore," Vitlo says, "as spending has generally increased over the past few years, construction hires have declined, averaging only a 1 percent increase since June 2010."

Coinciding with the shift in the relationship between hiring and spending is a reversal in construction employment.  The BLS employment figures show that in the eight years before the recession construction employment averaged 7.1 million but since September 2008 the average has been 5.8 million.   Even more intriguing, Vitlo says, is the share of employment going to construction.  Pre-recession construction employment averaged 5.1 percent share and it is now 4.1 percent.  After the peak-to-trough decline the share has plateaued for 50 months.

Are We There Yet? Freddie Mac Says Recovery Has Ways to Go

The housing market turned the corner in 2012 Freddie Mac's economists said today, and the recovery was fully underway in 2013.  But despite the positive trends in home price indexes, housing starts, and home sales, when can we say that housing has fully recovered?  Chief Economist Frank E. Nothaft and Deputy Chief Economist Leonard Kiefer attempt to answer that question in the January edition of Freddie Mac's U.S. Economic and Housing Outlook.

The two say that for the economy and housing market to be functioning normally we need to see four positive indicators; a healthy jobs market with low and stable unemployment, mortgage delinquencies back near historical averages, home prices that are consistent with an affordable mortgage payment-to-income ratio, and home sales in line with historical norms. 

Since the recession the labor market recovery has been modest with a December unemployment rate of 6.7 percent, high by historical standards but moving down.  Most economists agree that the rate should be between 5 and 6 percent for an economy at its long-run potential.  Nothaft and Kiefer say it may be another two years before that is achieved.

Mortgage delinquency rates have been falling rapidly recently but remain well above historical norms of less than 2 percent, standing at 5.88 percent in the third quarter of 2013.  The two say that with continued improvement in the labor market and increasing house prices the delinquency rate should continue to fall but will not be back to normal for some time. 

The economists say that we saw in the last decade that home prices that rise too rapidly are not sustainable; they should instead rise more or less in line with income.  As mortgage payments are a factor of both home price and interest rates, increases in either will affect the price of a house a typical family can afford.  As the chart below shows, between 1999 and 2006 the payments on a hypothetical 30 year fixed rate mortgage increased by 50 percent more than incomes did, in large part because of house price appreciation.  Right now the payment-to-income ratios are only 60 percent of the level that existed in 1999 suggesting that fixed rate loans will generally remain manageable for a typical family's budget even with some additional increases in prices and rates.

Home sales have increased over the past two years but are still way below sales a decade ago.  Historically home sales have averaged a rate of about 6 percent of the housing stock each year but rose to 9 percent during the housing boom then dropped to 4 percent with the housing crisis.  The economists expect a pace of 5.7 percent for 2013 but homes for sale are constrained in some areas as potential sellers remain without sufficient equity to sell.  This is holding back the recovery of the overall sales market.  Many of the home sales in the last few years have been cash so even as sales climb the lending recovery has been muted.

So, Nothaft and Kiefer say, we aren't there yet; the housing market hasn't fully recovered, some markets are recovering faster than others, and the recovery is likely to slow as interest rates move higher.  But it is moving in the right direction, they say, and they will continue to monitor the four key indicators in the coming year.

California Sales Higher in December, Lower Year-Over-Year

Sales of new and existing homes in California rose slightly in December.  DataQuick reports that there were a total of 39,949 homes sold statewide, a 4.5 percent increase from November's total of 33,429 units.  Last month's sales however were a substantial 12.1 percent lower than a year earlier when 39,760 transactions closed. 

Of the existing homes sold in December 2013 6.7 percent were homes that had been foreclosed within the previous year and 15.5 percent were short sales.  In November the respective numbers were 6.8 percent and 12.5 percent and in December 2012 15.8 percent of the existing homes sold were previous foreclosures and 26.7 were short sales.  DataQuick did not provide a breakdown on the split between new and existing units.

DataQuick said that December residential sales have averaged 43,547 over the 26 years the San Diego company has tracked them, varying from a low of 25,585 in 2007 to a high of 66,503 in 2003.  Last month's sales were the lowest for a December since 2007. California sales haven't been above average for any particular month in more than seven years.

The median price paid for a home in California last month was $365,000, up 1.4 percent from $360,000 in November and up 22.1 percent from $299,000 in December 2012. Last month was the 22nd consecutive month in which the state's median sale price rose year-over-year, and the 13th straight month with a gain exceeding 20 percent. California home prices peaked at a median of $484,000 in the period of March through May 2007 and bottomed out at $221,000 in April 2009.

Mortgage Applications Bounce Back

After just barely moving off 12 year lows in the previous week, Mortgage Applications bounced back in the first full week after the holiday season, increasing 11.9 percent on a seasonally adjusted basis during the week ended January 10.     The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage application had been adjusted for the previous week, ended January 3, to account for the New Year holiday. The unadjusted index posted an increase of 61 percent.

The Refinance Index rose 11 percent and applications for refinancing fell to 62 percent of total applications from 63 percent the previous week.  This was the lowest share for refinancing since last September.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index increased 12 percent and the unadjusted index was up 66 percent from the previous week and was 10 percent lower than in the same week in 2013.  MBA said the adjusted Purchase Index was at a level similar to that of mid-November.

Purchase Index vs 30 Yr Fixed

Interest rates started the new year on the downslope with both contract and effective rates decreasing.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming balances of $417,000 or less decreased to 4.66 percent with 0.33 point from 4.72 percent with 0.28 point.  The jumbo version of the 30-year FRM (loan balances above $417,000) had an average rate of 4.58 percent with 0.24 point compared to 4.66 percent with 0.12 point the previous week.

The contract rate for 30-year FRM backed by the FHA decreased to 4.29 percent from 4.36 percent, with points increasing to 0.17 from 0.15.

The average contract interest rate for 15-year fixed-rate mortgages fell 5 basis points to 3.72 percent.  Points increased to 0.37 from 0.34.

The volume of adjustable rate mortgages (ARMs) remained at an 8 percent share during the week.  The average rate for the 5/1 ARMs decreased to 3.28 percent from 3.33 percent, with points increasing to 0.47 from 0.44.

MBA's Weekly Mortgage Application Survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted since 1990.  Respondents include mortgage bankers, commercial banks and thrifts. 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.

 

Common Short Sale Myths Dispelled

Thanks to key changes in the program, completing a short sale through Freddie Mac is taking less time than ever before.  The company's Senior Vice President Tracy Mooney, writing in Freddie Mac's Executive Perspectives Blog, said that despite the improvements and that short sales are an important tool for helping distressed homeowners avoid foreclosure and eliminate their mortgage debt, they remain a mystery to many who might benefit from them.  In her occasional column "Dispelling the Myths" Mooney lays out eight misconceptions about short sales and the facts she says every distressed homeowner should know.

The first myth is that the homeowner will be responsible for the entire amount owed on the mortgage.  Under the company's Standard Short Sale program, borrowers who complete a short sale in good faith and in compliance with all laws and Freddie Mac policies will not be pursued for the after-sale mortgage balance.  However, if a borrower has the financial ability he/she may be asked to make a one-time payment or sign a promissory note for a portion of that balance.

Many homeowners think a short sale is not possible for an investment property or second home.  Mooney said the important factor is whether the borrower meets the program's eligibility requirements, not the status of the property itself. 

The third myth is that a homeowner must be delinquent on the mortgage to be eligible for a short sale.  A homeowner who is current must meet the general eligibility requirements for the program and have a debt-to-income ratio greater than 55 percent.  In addition, in this case the property must be the homeowner's primary residence.

Homeowners sometimes presume they won't qualify because of their servicer's strict guidelines about short sales.  But Mooney says that Freddie Mac has increased the authority of its servicers to approve short sales for qualifying financial hardships for homeowners who are past due or current on their mortgage.  Servicers also now have independent authority to approve short sales without a separate and potentially time-consuming review by the mortgage insurance company.

Myth #5 is that a short sale will affect a homeowner's future eligibility for a mortgage.  If the financial difficulties arose from circumstances outside the borrower's control such as job loss or a health emergency he/she may be eligible for a new Freddie Mac mortgage with a minimum of 24 months acceptable credit after the short sale.  If the short sale was necessitated by personal financial mismanagement the buyer might need 48 months of acceptable credit to obtain a new Freddie Mac loan.  Mooney advises all homeowners to begin discussions with a lender two years after the short sale closes to find out about specific requirements in their individual case. 

Many people think that short sales can take a long time but Mooney reiterates that under the new guidelines timelines are shorter than ever.  Servicers now have 30 days to make and communicate a decision once they receive a completed application and, once approved, the sale should take less than 60 days to close.  She says that working with an experienced real estate agent might further speed the process

It is also a mistaken belief that having a second mortgage will make a short sale impossible.  If other eligibility requirements are met a second mortgage is not necessarily a barrier because Freddie's short sale program can offer second lien holders up to $6,000 to release their lien and extinguish the underlying debt

The final myth is that a short sale will ruin a homeowner's credit. While only the credit reporting agencies can determine how a credit score will be computed it is possible that a short sale could be less damaging than a foreclosure.  Even if this isn't the case a short sale can give a homeowner time to arrange other housing and exit homeownership gracefully.

Mooney says a homeowner should consider a short sale if

• He/she does not qualify for any options to keep the home;
• Needs to move in order to keep or obtain employment.
• Doesn't think the home will sell at a price that will cover the outstanding mortgage amount.

The first step in the process is to determine if Freddie Mac owns the mortgage by using its  Loan Look-up Tool.   If it does the next step is to contact the mortgage servicers.  Contact information, Mooney says, should be listed on the monthly mortgage statement or in the coupon book.

Fannie Mae, CFPB in Sync on Servicer Rules

A recent article for Fannie Mae's Housing Industry Forum makes the point that when it comes to the new servicing rules which go into effect today, Fannie and the Consumer Financial Protection Bureau (CFPB) are on the same page.  The new rules were promulgated and will be enforced by CFPB and Jeff Bounds, writing for Fannie Mae, says it can't give servicers advice on how to comply with them.  However, the company's own servicing standards are being updated to more or less mirror those of CFPB.

In June 2011, even before CFPB was up and running, Fannie Mae and Freddie Mac (the GSEs) issued new standards for their own servicers.  These standards specifically dealt with servicing the GSEs' delinquent loans, managing them, helping to prevent defaults, and setting timeframes for handling foreclosures.  The standards require more consistency in how servicers communicate with homeowners, modify loans, offer other workouts, and handle foreclosures.  Servicers who do not comply with the GSE guidelines can face penalties.

Bounds said that the GSEs had published announcements for servicers to get their policies in line with those of CFPB in October and November of last year and those updates also go into effect this month.

The changes that Fannie Mae and the CFPB are making are with the aim of helping struggling homeowners avoid foreclosure Bounds said.  CFPB has expressed dissatisfaction with the servicing industry's practices and record-keeping even before the mortgage crisis and has said that many servicers were not prepared for the influx of delinquencies when times got rough.

Improving the servicers' communications with borrowers is central to many of the changes from both the GSEs and CFPB, with an emphasis on earlier and more frequent contact. Bounds said that Fannie Mae will keep in place many of its existing delinquency management standards, however, because they already meet or exceed the CFPB's minimum requirements.

Fannie Mae, for instance, requires its servicers to attempt to establish live contact when a borrower misses a monthly payment.  A solicitation letter including a package of information relating to Fannie Mae's workout options and requesting that the borrower supply financial information must be sent between the 31^st and 35^th day of delinquency with a follow-up if necessary between days 61 and 65.

Fannie Mae's new guidelines require that servicers acknowledge in writing receipt of the borrowers response package within five business days.  Previously they could give a verbal acknowledgement within three days of receiving the package. Servicers of Fannie Mae's loans were also given updated guidelines on handling incoming borrower contact and notifying borrowers of payment changes.

The new rules do not allow services to refer a delinquent loan for foreclosure before the 121^st day of delinquency in order to allow borrowers whose loans are secured by their principal residence adequate time to submit their response package and have it reviewed for a workout option. 

Also under both new Fannie Mae and CFPB rules, loans that are secured by a primary residence cannot be referred for foreclosure if: 

• The borrower has submitted a completed response package and the servicer has yet to extinguish the 30-day period for evaluating it.
• The servicer has extended a workout option, and the borrower has remaining time in which to respond.
• The borrower has been approved for mortgage assistance under the "Hardest Hit Funds" initiative.
• The borrower is performing under the terms of a workout option that the servicer extended.
• The borrower has requested an appeal in a timely fashion for which an appeal is under review, or the borrower's response on the decision is still outstanding.

Even if a loan was already referred to foreclosure the servicer can hold off on the next step in the process. This can be done under conditions such as there are at least 38 or more days before a foreclosure sale date.

The new rules also change how a borrower may contest servicers' decisions, particularly the denial of certain loan modifications.  Bounds says that at the moment, Fannie Mae defines an "escalation process," which servicers can follow in resolving borrower disputes.  However, instead of the escalation process the company reminds servicers of their obligations to respond to borrower inquiries and disputes and has set forth a new appeals process for loans secured by principal residences under which borrowers will be allowed an independent review of loan modification denials.  The guidelines also lay out the amount of time the servicer has to complete their review of a borrower's appeal and what happens to the loan during that time.

Bounds said that lenders and servicers have been hurrying to comply with both the new CFPB rules and Fannie Mae guidelines.  Fannie Mae has held several web seminars for servicers as well as addressing the changes at its second annual Servicer Total Achievement and Rewards (STAR^TM) Strategy Summit in Washington, DC, last September.

Less Financially Secure Borrowers More Likely to Choose Adjustable Mortgages

Three staff member of the Federal Reserve Bank of San Francisco have published, on the Bank's website, results of a study about what drives the mortgage choices of borrowers.  The three, Fred Furlong, David Lang, and Yelena Takhtamanova looked at the question of whether lower-rated borrowers paid less attention to loan pricing and interest-rate-related factors because house prices were rising rapidly. 

They developed a model to account for the factors that influence mortgage choice.  Earlier research has found that mortgage pricing and other interest-rate-related fundamentals are key but they also looked at housing market conditions and borrower characteristics, such as degree of financial constraint, attitudes towards risk, and mobility. Research has shown that financially constrained borrowers, or those with lower credit ratings tend to favor adjustable rate mortgages (ARMs) as do homebuyers who expect to only stay in a house a short time because ARMs have lower introductory interest rates.

Fixed-rate mortgages (FRM) initially tend to have higher interest rates than ARMs because they are tied to long-term interest rates which include a term premium to compensate investors for tying up their money longer. Both FRM and ARM rates include lender margins, that is, mark-ups reflecting general credit supply conditions, regional economic and housing market conditions, and individual borrower characteristics. Relative shifts in FRM and ARM margins can affect financing choices.

How much risk borrowers are willing to accept also can influence mortgage choice. Borrower risk tolerance can affect sensitivity to loan pricing, income volatility, and affordability in choosing mortgages. Borrowers with low credit ratings may be less sensitive to risk, for instance, because of lower cost of default. Research shows that more risk-averse borrowers tend to favor FRMs or option ARMs because they prefer to avoid the risk of future sharp rate increases possible with volatile adjustable-rate financing.

Thus, a mortgage choice model should include measures of the term premium, expected short-term interest rates over time, FRM and ARM margins, and interest rate volatility. In general, borrower preference for basic ARMs should increase as the term premium, expected short-term interest rates, and FRM margins rise, and ARM margins and interest rate volatility fall.  In other words, the more affordable ARMs become by comparison, the more they're favored.  No surprises here...

Research also shows that the faster house prices are rising, the greater the probability that homebuyers will choose ARMs. In addition, rising house prices can affect the importance of interest-rate-related fundamentals when borrowers choose financing.

The researchers say that one view is that the housing boom was a bubble in which financing decisions for some borrowers were divorced from traditional fundamentals while another is that borrowers paid less attention to fundamentals during the housing boom, but that such a shift is consistent with rational decision-making models, given expectations of further house price appreciation. According to this view, with little or no change in house prices, homeowner decisions about moving or terminating a mortgage would generally reflect life-cycle events, such as illness, retirement, and job changes.

Rapid house price gains might change that.  During the boom homeowners expected to gain home equity as prices rose, allowing them to refinance even if they didn't plan to move or expected to flip houses soon after buying them.  Such short-term mortgages might make ARMs more attractive and reduce borrower sensitivity to interest-rate-related fundamentals.  In other words, they didn't care as much about the riskier nature of the loans because they planned on being out of them relatively quickly.

Finally, studies suggest that borrower financial literacy may affect mortgage choice.  Borrowers who choose ARMs appear more likely to underestimate or not understand how changes in interest rates would affect their loans. Hence, systematic differences in levels of financial literacy among borrowers at different risk levels could affect sensitivity to fundamentals. 

The study's model of mortgage choice allows for an examination of how these factors affected the decisions of borrowers at different credit risk levels. The authors studied a sample of about 9 million first-lien mortgages originated between January 1, 2000, and December 31, 2007 allowing for three mortgage choices: FRMs, basic ARMs, and option ARMs.  Key model determinants are FRM and ARM margins, the 10-year Treasury term premium, expectations for short-term interest rates over time, and interest rate volatility. Controls included loan-to-value ratios, borrower credit risk, the two-year average change in house prices, and a measure of house price volatility. Finally, credit risk groups were defined by FICO scores: low, 660 or below, high, 760 or above, and medium 661 to 759.

The model allows the impact of interest-rate-related fundamentals to change as house prices rise. The estimates show that rising house prices have a sizable influence on the effect these fundamentals have on mortgage choice. The size of this effect differs according to borrower credit ratings.

Fig. 1

Figure 1 shows the impact of margins and term premiums on the probability of borrowers choosing an ARM.  The green bars indicate those factor's marginal effects if house prices are static.  A higher margin makes ARMs less attractive so the marginal effects are negative.  The low FICO group shows a greater effect indicating they are more sensitive to ARM mortgage pricing than the higher FICO cohort.  "Specifically, if house prices were flat, a 0.8 percentage point increase in the ARM margin would reduce the probability of low FICO borrowers choosing an ARM 13 percentage points and high FICO borrowers 8 percentage points. It is useful to compare this with the ARM share of mortgage originations, shown in Figure 2, which peaked at 50%."

The two year average house price appreciation was 16 percent.  The red bars show the offsetting effects of this with a reduction of one-third in the ARM margin to 8 percentage points for low FICO borrowers and 5 points for high FICO borrowers.  Similarly, house price appreciation reduces the impact of increases in the FRM margin and term premium on mortgage choice. Thus, even accounting for the influence of house price gains, lower FICO borrowers generally were at least as sensitive, if not more sensitive, to fundamentals as the high FICO borrowers.

Fig. 2

But, if low and high FICO borrowers gave similar consideration to interest- rate-related fundamentals, why were low FICO borrowers more likely to select ARMs during the housing boom?  Credit risk measures, including FICO scores and lender designation of borrowers as subprime, explain most of the difference in ARM shares. The authors considered whether borrowers would have made the same mortgage choice if, all else equal, they had different credit ratings. In Figure 3, for each month in the sample, they replaced the actual FICO score and subprime designation of each borrower in the low FICO group with the average score and subprime share of the high FICO group. The results of this hypothetical exercise, shown by the green line, suggest that the low FICO group's ARM share would have been closer to that of the high FICO group had their credit risk been similar.

Fig. 3

One could interpret the results as credit risk measures being associated with borrower level of financial sophistication or the findings could reflect economic decisions related to risk aversion, credit constraints, or differences in how quickly borrowers expect to refinance.  The authors conclude rising prices during the housing boom muted the influence of interest rate fundamentals on borrower mortgage choice, especially among borrowers with lower credit ratings.  But when house prices rose rapidly, those borrowers responded at least as strongly as higher-rated borrowers to changes in fundamentals. "This suggests," they say, "that the greater propensity of low FICO borrowers to choose ARMs is more consistent with mortgage choice reflecting economic considerations rather than lack of financial sophistication among low FICO borrowers."

Wells and Others Gear up For Non-QM Lending

With new rules defining Qualified Mortgages (QM) slated to kick in on Friday at least two lenders have indicated they will make room for loans that don't quite fit the government mandated mold.  The two, Wells Fargo and Bank of the West, plan to write at least some of the loans, retaining them for their own portfolios. 

Bank of the West, headquartered in Omaha says it will continue to offer interest only loans to its customers even though the loans fall outside the guidelines established by the Consumer Financial Protection Bureau.  Paul Wible, Senior Executive Vice President and Head of the bank's National Finance Group said in a statement this week, "We extensively reviewed the CFPB's rules and found them broadly consistent with how Bank of the West has always done business. At the same time, we know that interest-only loans can fulfill the mortgage needs of many of our customers. Therefore, even though they do not fit the CFPB's definition of a QM, we will continue to offer them as before."

Wible said that the bank's analysis confirmed its belief that a well-underwritten, interest only loan could be good for its customers and safe for the bank to hold on its balance sheet.  These loans, he said, meet the needs of certain customers such as the self-employed and that the bank will continue to require that such borrowers meet its prudent underwriting criteria.

Bank of the West, a subsidiary of BNP Paribas, has assets of $65 billion and operates 600 retail and commercial banking locations in 19 states.

On a much larger scale, Wells Fargo, the country's largest home lender is reported to be readying a group to handle nothing but portfolio loans.  Bloomberg says the bank has created "a swat team" of about 400 underwriters who will originate mortgages for the bank to hold.  As many as 40 percent of the loans are expected to be outside of new government guidelines. 

Bloomberg said they were told by Brad Blackwell, head of portfolio lending at the bank that the group will review loans that do not qualify for the safe harbor protections of new CFPB rules as a way to increase lending without losing control of quality.   

'"We have separated the underwriting group into a separate team that only underwrites loans" for the bank's own balance sheet,' Blackwell told Bloomberg.  '"We found it impossible to achieve our objectives" with the two groups together, he said.'

The bank's portfolio held $72.4 billion in non-conforming mortgages at the end of the third quarter, 14.5 billion of which Wells Fargo added in the second and third quarters of 2013. 

Mortgage Applications Rise Just Slightly from 12 Year Lows

The Mortgage Bankers Association (MBA) released data on mortgage application volume for the week ending January 3, 2014 which included summary information for the week ended December 27 when no report was issued.  Each week included adjustments to account for holidays, Christmas and New Years respectively. 

MBA's Market Composite Index increased 2.6 percent on a seasonally adjusted basis during the most recent week and 45 percent on an unadjusted basis.  The Refinance Index was up 5 percent for the week ended January 3 after falling 9 percent the week before.  Refinancing had a 63 percent share of the total application volume both weeks.

Refinance Index vs 30 Yr Fixed

The seasonally adjusted Purchase Index rose 2 percent the week of the Christmas holiday and decreased 1 percent the following week while the unadjusted Purchase Index increased 42 percent during the most recent period and was 20 percent lower than in the same week in 2012-2013.

Purchase Index vs 30 Yr Fixed

Rates were largely unchanged over the two week period and those given are for the week ended January 3.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming balances of $417,000 or less remained at 4.72 percent with 0.28 point.  The effective rate increased. The jumbo version of the 30-year FRM was also unchanged at 4.66 percent with points decreasing to 0.12 from 0.27.  The effective rate decreased.

Thirty-year FRM backed by the FHA had a rate increase from 4.35 percent to 4.36 percent with points unchanged at 0.15.  The effective rate increased from the previous week.

The contract rate for 15-year FRM increased to 3.77 percent from 3.73 percent.  Points decreased to 0.34 from 0.40 and the effective rate increased.

Adjustable rate mortgages (ARMs) held an 8 percent market share both weeks.  The contract rate of the 5/1 ARM increased to 3.33 percent with 0.44 point from 3.31 percent with 0.46 point and the effective rate increased.

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

Yellen Confirmation Vote Possible Tonight

The New York Times is reporting that, weather permitting, the Senate may vote Monday night on the nomination of Janet L. Yellen to lead the Federal Reserve.  The confirmation of Yellen, currently the Fed's vice-chairwomen would be historic as she would become the first woman to head the central bank in the U.S. although a number of women have held such positions in other countries.  She would also be the first Democrat Chairman since Paul Volcker was picked by Jimmy Carter in 1979.

If confirmed Yellen will replace Ben Bernanke who has served two terms as Fed Chairman after being nominated by George W. Bush.  Yellen has been a close ally of Bernanke and supported his accommodative monetary policies but did join with all but one of her colleagues in a December policy vote to begin winding down the Fed's asset purchase program.

A macroeconomist specializing in employment issues, she holds a Ph.D. in economics from Yale granted in 1971. She graduated summa cum laude from Brown, also in economics, in 1967 and was a member of the faculty at Harvard University and is a Professor Emeritus at the University of California at Berkeley where she was the Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics.  She became Fed Vice-Chair in 2010.

As MND reported at the time of her nomination by President Obama in October, Yellen was among the first to warn of the dangers of a housing bubble, doing so while President of the Federal Reserve Bank of San Francisco in 2005. 

(Read More: Yellen Brings Impeccable Foresight and Soothing Continuity as Fed)

At that time she said there were several reasons why monetary policy might not be the best tool to deflate that bubble.  "For one thing, no one can predict exactly how much tightening would be needed, or by exactly how much the bubble should be reduced. Beyond that, a tighter policy to deflate a housing bubble could impose substantial costs on other sectors of the economy that would lead to equally unwelcome imbalances. Finally, it's possible that other strategies, such as tighter supervision or changes in financial regulation, would not only be more tailored to the problem, but also less costly to the economy.  Her bottom line, she said, was that monetary policy should react to rising home prices or prices of any other asset "only insofar as they affect the central bank's goal variables-output, employment, and inflation"

She also warned of a possible credit crunch and ensuing recession when the Board of Governors met to discuss the looming financial crisis in 2008.  The "shadow banking system was freezing up, she said, and the economy was likely to slow significantly.

The Times said Yellen needs only the votes of a simple majority of senators and no Republican support when the vote is called.  Several Republican senators, notably Rand Paul (R, KY) had threatened to put a hold on her nomination but that threat has apparently been lifted.

New FHA Alternative Boosts Low Down-Payment Options

As Fannie Mae and Freddie Mac eliminated their 100% and 97% purchase loans following the housing meltdown, FHA financing once again became a preferred low down payment option.  FHA loans offer a minimum 3.5% down payment, which can be gifted from a close family member.  Thus, buyers whose sales contracts specify seller paid closing costs and who use the gift down payment, can often purchase a home with minimal out of pocket expenses. 

FHA allows borrowers with credit scores as low as 580 to put just 3.5% down (those with lower scores face increased down payment requirements), and routinely approves higher debt loads than Fannie Mae or Freddie Mac.  The combination of marginal credit scores and low (or no) buyer financial investment contributed to FHA's default rates as the housing market crashed.  As a result, FHA has raised MI significantly and has long since eliminated seller-paid down payment assistance programs.
 
Fannie Mae also allows down payment funds to be gifts from close family members for single family principal residences, with down payments as low as 5% for qualified borrowers.  Until recently, however, private mortgage insurance (required for loans exceeding 80% of sales price) vendors required buyers to contribute at least 2% of their own funds in a transaction in addition to any  gift funds.  PMI provider United Guaranty recently altered their guidelines and now allow down payments to be exclusively gifts, a move likely soon adopted by competitors.  The announcement gives eligible buyers a distinct advantage over FHA's considerable MIP costs.

FHA's upfront MIP fees are now 1.75% of the loan size added to the loan balance ($1750 on a $100,000 loan, 3.5% down), with an additional monthly charge of $108.33, which applies for the life of the loan.  Conventional PMI costs vary slightly, but have NO upfront fee.  United Guaranty's pricing engine returned a price quote of $64.17/mn for a 720 score, 5% down borrower, a substantial savings of $4,399 over just the loan's first 5 years compared with FHA's fees.

The more conservative underwriting guidelines for Fannie Mae gift-funded down payments aim to ensure only qualified applicants receive these loans.  Credit scores of 720 or higher (versus minimum scores of 620 for loans without gifts) are required.  Debt ratios are limited to a 41% of applicants' gross income, an even stricter restriction than non-gifted loans.  The home must be a primary residence for all those on the loan, and no second mortgages, balloon notes, or temporary interest rate buy downs are allowed.  The credit score, debt ratio, and other limitations set Fannie's 5% down program apart from FHA's less stringent standards and should result in far fewer defaults.

It is important to note, however, that many lenders have restrictions on gift funds, despite Fannie Mae's acceptance.  Shopping for this program may be challenging.  Here's a few steps to start the process:  if you have a preferred lender, call and ask whether they offer this program; if you need a lender, contact a loan officer in your area.  You might have to shop around to find a lender offering the program with no overlays.

Here's How Declining Landlord Profitability Benefits the Rental Market

While investors placing their money and hopes on single family houses is not a new phenomenon, CoreLogic in its current issue of MarketPulse, says it was an important one in the successful recovery of the housing market.  What was different about single family investment post-recession was the "aggregation and professional management of large portfolios of properties and, most importantly, the availability of institutional investor capital to fund the acquisition of properties." 

CoreLogic's chief economist Mark Fleming, in an article titled Slow Money is Replacing Fast Money, asks "Where would prices be today if investors had not been willing to buy distressed properties in the dark days of the housing market just a few years ago?"  But now he says the market is changing. 

The maturation of the market combined with rising home prices is challenging the profitability of large scale single-family investment.  To demonstrate this Fleming computed rental cap rates for a number of markets where this type of investment was a significant activity in both 2012 and 2013 using August-over-August rates as that month signals the end of the home-buying season. 

Fleming used market-level single-family rental rates, assumed one-month's vacancy, one month's leasing costs, an 8 percent management fee and 2 percent maintenance.  Acquisition cost was based on the average single-family sales prices discounted 30 percent under the assumption it was a distressed sale and assuming a 5 percent cost to rehab.

Out of the 10 markets Fleming examined eight had declining cap rates with only Charlotte, North Carolina and Houston increasing.   The declines, Fleming said, were largely due to the increase in home prices outpacing any increases in rents.  Nonetheless, the implied return he said is still strong, especially if one factors in capital appreciation from rising home prices.

Fleming spoke with investors attending a first-of-its-kind REO-to-Rental Forum held recently in Arizona and found participants had a positive attitude toward continuing this asset class for long-term rental cash flow even aside from any capital appreciation.  He found them talking continually about how to select the right properties, buy them at the right price, and to find operational management efficiency and gain economies of scale. 

Fleming says that as the single-family residential rental asset class matures, the "slow money," i.e. investing for extended income return, is replacing the "fast money" and that this is a good sign for the long-term success of this asset class.

Homeowners Blindsided with Stratospheric Flood Insurance Rates

In its monthly e-magazine Foreclosure Report RealtyTrac takes a look at the current and potential impact of legislation designed to rescue the nation's flood insurance program.  Within that legislation RealtyTrac says there may be looming another demonstration of the theory of unintended consequences.

The National Flood Insurance Program (NFIP) was created by an act of Congress in 1968 to help deal with the escalating cost of the government's emergency response to flood disasters.  Because there was little shared risk, i.e. persons who live outside of flood prone areas do not purchase the insurance, private companies were either pulling out of insuring in high risk areas or raising premiums to the point of unaffordability, leaving government to clean up and repair damages after a disaster.  The program provides a government subsidy to keep premiums more affordable and as of April 2010 insured about 5.5 million homes, the majority of which were in Texas and Florida.

High-cost flooding disasters such as Hurricane Katrina drained the coffers of the program which is administered by the Federal Emergency Management Agency (FEMA) so in July 2012 Congress passed the Biggert-Waters Flood Insurance Reform Act to help stabilize the program's finances.  The changes required NFIP to "raise rates to reflect true risk." 

These rate changes are being phased in and currently affect only homeowners who purchased their first flood insurance after July 6, 2013 with full-risk rates starting on October 1, 2013.  Virtually all lenders have long required mortgaged homeowners who reside in a flood plain to carry the insurance so it is primarily new homeowners and those who take on a mortgage after previously owning a home free and clear who are initially being affected by the new rates.  However flood plains are periodically redrawn and with the increased intensity of weather in some areas, more long-time homeowners may find themselves required to purchase coverage.

RealtyTrac's article Private Industry Bridges Gap for Skyrocketing Flood Insurance, written by company vice president Daren Blomquist, says that Biggert-Waters "intentionally exempted FEMA from providing any meaningful disclosure to the insurance, mortgage and real estate industries - not to mention consumers - prior to the implementation of the law earlier this year." Thus the rate increases blindsided many of those affected by them.  The article looks specifically at areas on Florida's Gulf Coast and towns such as New Port Richey, in Pinellas County, interviewing homebuyers, lenders, and real estate agents.

One new homeowner, George McLaughlin, purchased a future retirement home in Port Richey in 2012 and paid a $3,300 premium for his first year of coverage.  When he received his new bill for $24,300 both he and his insurance agent assumed it was a clerical error.  It was not.  Even his bank was unaware of the pending increase when they wrote the loan.  RealtyTrac says this was "certainly a big oversight for that bank given the additional risk of default that comes with such a dramatic increase in the cost of flood insurance."

McLaughlin, who purchased the Florida property while still employed and owning a home in Maryland is now carrying two mortgages and facing the insurance bill due November 2 which he still has not paid.  Thus he is technically in default on the Florida mortgage.  The bank has given him 40 days (which would have taken him into early December) to provide proof of coverage and have told him that forced placed insurance will cost as much as $60,000.

Blomquist says the skyrocketing flood insurance premiums "have shocked the entire real estate ecosystem in and around New Port Richey."  He quotes local real estate agent Colleen Monagas as saying the rate quotes started hitting in October and absolutely came as a surprise.  She predicts that the new law could ultimately lead to more foreclosures in the area as homeowners decide to walk away from their homes rather than pay the insurance bills.  At the very least she expects the law to cause home prices to drop in high risk flood zones.  She said she has already had buyers abandon plans to purchase such houses in favor of those outside the zones, others won't even look at houses affected by the rates.

"Monagas cautioned that although many rumors are floating around about how to mitigate the impact of the Biggert-Waters legislation, the short term impact of the law is to hobble the nascent recovery in her local housing market, which she said hit bottom around July 2012 and really heated up in the spring of 2013.  'This spring we were chasing houses,' she said. 'I had buyers if you weren't there in two or three days it was already under contract'."

Blomquist calls Pinellas County "the epicenter" of the Biggert-Waters impact but says other areas are affected as well.  He cites the popular retirement city of Hilton Head, South Carolina which he says has never experienced a hurricane or flood in recorded history, as well as coastal areas of Louisiana and Texas.

Of course the counterparties to buyers who don't wish to buy in an area are the sellers who won't be able to sell.  Hilton Head real estate broker Frank Moriarty said, "People who have been here a long time...and need to move on, that house is no longer your safety net."  He predicted that values could decrease on the roughly 30 percent of Hilton Head homes located below the 14-foot elevation requirement needed to avoid high cost insurance and cautioned that the biggest issue could be a fear of rules changing again and pushing more homes into that category.  "'Some people are saying it might not even be 14 feet, it might be 16 feet or something like that,' he said." That would be devastating he points out, as that would include 70 percent of the properties on the island.

Pinellas County insurance agent Jake Holehouse told RealtyTrac that the elimination of an entitlement program like subsidized flood insurance represents a broken promise by the federal government which said, it would back these risks if the cities enforced the flood zone requirements.   Holehouse was referring to the 1968 implementation of the NFIP that grandfathered in flood insurance for homes built prior to Jan. 1, 1975. "'But now 45 years later they are going back on that'," he said.

But there may be hope.  Holehouse points to the venerable underwriter Lloyd's of London which has written flood insurance for 320 years.   Previously it could not compete with FEMA's rates but now, Holehouse says, "'Lloyd's rates look really good."    His company has been working with Lloyds to come up with flat rate coverage and can offer insurance in Pinellas's highest risk areas for $4,000 where he has seen FEMA quotes as high as $60,000.

Lloyds is still reviewing premiums on a case-by-case basis in an attempt to avoid what Holehouse called the "rampant fraud" he believes was the downfall of the FEMA program.  Lloyd's, he said, is being careful but are also hungry and want to underwrite a lot of flood. 

If Lloyd's leads, other companies will undoubtedly follow and they could find an expanding market.  With areas such as Boulder, Colorado experiencing first-time severe flooding, lenders may look at requiring the insurance in locations outside of traditional flood plains.  Cautious homeowners may also be receptive to subscribing to flood insurance if they can do so at a cost that accurately reflects their risk histories.  This increase in the pool would also help to lower premiums for higher-risk homeowners.