Short Sales Fall Sharply in First Quarter

The Federal Housing Finance Agency said on Friday that Freddie Mac and Fannie Mae continue to complete thousands of foreclosure prevention actions in each reporting period.  The two assisted homeowners with a combined total of 88,800 loan modifications, forbearances, and other assistance. This brings the total to 3.2 million since the two government sponsored enterprises (GSEs) were put in conservatorship in 2008.  That total includes 1.6 million loan modifications. 

Foreclosure previous actions have helped more than 2.6 million borrowers stay in their homes and another half-million have been helped to exit home ownership without a foreclosure.  Those home forfeiture actions include short sales and deeds-in-lieu.  FHFA noted that short sales dropped by 26 percent in the first quarter compared to the previous one.  

Fannie Mae and Freddie Mac's foreclosure prevention arsenals include the Home Affordable Modification Program (HAMP), a joint effort by FHFA and the Treasury Department, and proprietary programs offered by each of the GSEs.  In the first quarter of 2014 there were 10,764 borrowers in active HAMP trials compared to 13,551 in the fourth quarter of 2013.  The number of active permanent modifications increased from 431,503 in the fourth quarter to 431,677 in the first. 

Since HAMP was initiated in April 2009, there have been 1.1 million trial modifications extended to troubled homeowners and approximately 620,400 of them have been granted permanent HAMP modifications.   At the end of the first quarter there were nearly 10,800 homeowners in a HAMP trial.

Non-HAMP modifications however accounted for most of permanent loan modifications in the first quarter, nearly 44,800.  Since the housing crisis began, modifications through the GSEs proprietary programs have totaled more than 844,400.

The number of seriously delinquent borrowers with GSE loans decreased 8 percent during the quarter and the serious delinquency rate fell to 2.2 percent compared to 6.7 percent for FHA loans, 3.6 percent for VA loans, and a 5.0 percent industry average. 

While the total number of troubled borrowers continued to decline, 31 percent of these borrowers remained deeply delinquent at the end of the first quarter.  Florida, New York and New Jersey have the highest number of deeply delinquent loans (365+ days).

Third-party sales and foreclosure sales fell slightly to 47,300 while foreclosure starts decreased 25 percent in the first quarter.

The GSE's inventory of real estate owned (REO) declined by 3 percent in the first quarter as property dispositions outpaced acquisitions 9 percent to 6 percent.  REO located in Florida, which comprises a significant portion of the GSEs' inventory, increased by 9 percent during the quarter.

Pending Home Sales Rise at Fastest Pace Since 2010

There was encouraging home market news from the National Association of Realtors® (NAR) this morning.  The association's Pending Home Sales Index surged in May, increasing 6.11 percent from pending sales in April.  The index, a forward-looking indicator based on home purchase contracts moved from a value of 97.9 in April to 103.9.  Sales resulting from those contract signings are generally expected to close in about 60 days.

The gain was broad based with all four regions of the country experiencing an uptick in contract signings.  It was also the largest month-over-month increase since April 2010 when an influx of first-time buyers rushed to take advantage of the homebuyer tax credit.  The gain at that time was 9.6 percent.  Still the May index remained 5.2 percent below the 109.6 reading of May 2013.

Lawrence Yun, NAR chief economist said contract signings in May could be a harbinger of a better second half of the year.  "Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation," he said. "However, second-half sales growth won't be enough to compensate for the sluggish first quarter and will likely fall below last year's total." 

Affordability and access to credit are still concerns for first-time buyers, Yun said.  That sector of the market accounted for only 27 percent of existing home sales in May and typically are limited in their access to credit because of student loan debt and lower credit scores.

Yun expects existing-homes sales to be down 2.8 percent this year to 4.95 million, compared to 5.1 million sales of existing homes in 2013. The national median existing-home price is projected to grow between 5 and 6 percent this year and in the range of 4 to 5 percent in 2015.

"The flourishing stock market the last few years has propelled sales in the higher price brackets, while sales for homes under $250,000 are 10 percent behind last year's pace. Meanwhile, apartment rents are expected to rise 8 percent cumulatively over the next two years because of tight availability," said Yun. "Solid income growth and a slight easing in underwriting standards are needed to encourage first-time buyer participation, especially as renting becomes less affordable." 

While the PHSI increased month-over-month in every region only in the Northeast was it higher than a year earlier.  In that region the index jumped 8.8 percent to 86.3 in May, and is 0.2 percent above the level in May 2013.  

In the Midwest the index rose 6.3 percent to 105.4 in May, but is still 6.6 percent below the previous year. Pending home sales in the South advanced 4.4 percent to an index of 117.0 in May, 2.9 percent below a year ago. The index in the West rose 7.6 percent in May to 95.4, but remains 11.1 percent lower than in May 2013.

Housing Improving but Rental Crisis Looms

The U.S. housing recovery should regain its footing, but also faces a number of challenges.  Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are responsible for moderating growth and keeping millennials and other first-time homebuyers out of the market according to the latest edition of The State of the Nation's Housing released today by the Harvard Joint Center for Housing Studies.

 "The housing recovery is following the path of the broader economy," says Chris Herbert, the Center's research director. "As long as the economy remains on the path of slow, but steady improvement, housing should follow suit."

The report takes an in depth look at the housing markets and their demographic drivers, homeownership, rental housing, and finally the challenges facing housing.    We will briefly summarize the report's findings here then report on each of the above categories in greater detail over the next few days. 

The report notes that even though housing started out 2013 with a bang the market slowed noticeably in the second half of the year as home starts and sales of both new and existing homes slowed.  Higher interest rates following the Federal Reserve announcement that it was considering tapering its purchases of long-term and mortgage-backed securities was partially to blame as were the retreat of investors from the market, limited inventories of homes for sale and affordability issues following rapid home price increases.  But the report says the slow recovery of single-family housing largely reflects the steady but unspectacular return of jobs.

Household growth has remained subdued both as a result of a slowdown in immigration and lower headship rates among the millennial generation, many of whom continue to live in their parents homes.  It was hoped that many of the latter group would move out and form their own households once the labor marked revived but it has not yet happened.  Still it is likely that the current generation will follow historic patterns and form households by their early 30s, providing a strong lift to the rental and starter home markets.

Homeownership rates declined for the ninth straight year in 2013 and are at their s lowest levels since 1995, but the decrease last year was the smallest since before the housing crash.  The Joint Center sees many of the conditions holding homeownership down as improving; steady employment growth, rising home values creating a sense of urgency, and a lower share of distressed homeowners.

Still the homebuying market faces headwinds; higher home prices and interest rates making a purchase more of a stretch for many families as is falling income.  In addition, many would-be homebuyers are burdened with huge levels of student debt.  Adding to these financial pressures, qualifying for mortgage loans is still a challenge-especially for those with lower credit scores.

Rental markets continue to be strong.   The number of renter households rose last year, and while the rate of the growth is slowing it still remains above long-term averages.  With this demand vacancy rates continued to fall and rents to rise  Nationwide rents rose 3 percent in 2012 but in some markets, generally the ones that have also seen rapid rises in home prices like Denver and the San Francisco Bay area, the increase has averaged twice that.

The ramp-up in multifamily construction also continued in 2013; starts increased 25 percent, surpassing the 300,000 mark the first time since 2007.  The number of these units intended as rentals was at the highest level since 1998.  While multifamily construction in almost half of the 100 largest metros is back to average 2000s levels and has set new peaks in some markets those areas that experienced the sharpest booms and busts remain depressed.

From 2010 through early 2012 apartments in investment grade properties seemed to be renting faster than new units were added, bringing down vacancies and lifting rests. Supply and demand appear to have returned to balance in the last quarter of 2013. 

The report says however there is a crisis of affordability.  The share of cost-burdened renters (those paying housing costs in excess of 30 percent of their income) rose every year but one between 2001 and 2011 and now is over 50 percent.  More than a quarter of households are severely cost burdened with half or more of their income spent on shelter. On the homeowner side the situation has improved as owners have refinanced at lower rates and many have existed homeownership because of foreclosures. However the share of cost-burdened homeowners it still higher than at the beginning of the last decade.  

Looking ahead, the Center says the future course of homeownership will depend largely on the cost and availability of mortgage financing.  Looser underwriting standards may help bolster the housing market recovery and the government appears to be taking steps to buoy the market with newly announced programs to lower FHA premiums, provide homebuyer counseling, and encourage lending to properly documented lower credit score buyers

The Center, however, views the prospects for improving rental housing affordability as bleak.  Absent income growth or an easing of rents, rental assistance is the only option. Without expanded federal funding to aid the neediest households, millions  of  US  families  and  individuals will continue to live in housing that they cannot afford or that is inadequate, or both.

Banks' Efforts to Turn Profits are Risky -OCC

The Office of Comptroller of the Currency's (OCC) National Risk Committee (NRC) pronounced the financial position of federally chartered institutions "improved" last year in its Semiannual Risk Perspective issued on Wednesday.  The federal banking system set a new record level of net income that was only $5 billion or 5 percent higher than the previous pre-financial crisis record set in 2006 and it took seven years and $1.5 trillion or a 20 percent growth in assets to achieve it.  This, the report said, highlights the slow pace of the recovery.

The Perspective presents data in five main areas: the operating environment; the condition and performance of the banking system; key risk issues; elevated risk metrics; and regulatory actions.  It focuses on issues that pose threats to the safety and soundness of banks rather than opportunities that banks may encounter at the same time. The report reflects data as of December 31, 2013.

While conditions overall showed improvement in the second half of 2013, the OCC reports that credit risk is building in supervised national banks and federal savings associations following a period of improving credit quality and problem loan clean-up. Competitive pressures, and strategic and operational risks top the list of supervisory concerns.  Essentially, the OCC is saying banks' efforts to make a profit in light of increased regulatory costs and low-volatility market conditions are risky.

Return on assets and on equity remain below their pre-recession peaks.  The federal system as a whole returned almost 10 percent on equity but small institutions are lagging behind large ones.  Revenue was down as lower net interest income more than offset slightly higher noninterest income and sluggish loan growth and low interest rates weigh on net interest margins.  Improvements in earnings are still coming more from lower noninterest and provisions expenses rather than real growth. In addition, banks continue to face competitive pressure from nonbank firms seeking to expand into traditional banking activities.

Intensifying competition for lending opportunities is causing banks to loosen underwriting standards especially in commercial loans, indirect auto, and leveraged lending.  Risk layering is also a concern in commercial loans.  While not widespread, some examiners have noted multiple policy and underwriting exceptions on individual credit decisions which OCC and Federal Reserve Board surveys of lending practices have confirmed.

The increase in long term interest rates in 2013 underscores the need to understand and quantify banks' vulnerability to rising interest rates.  Some banks have reached for yields to boost interest income with decreasing regard for interest rate or credit risk. For example, banks that extend asset maturities to increase yield could face significant earnings pressure, especially if relying on the stability of non-maturity deposit funding in a rising rate environment,

Slow economic growth is pushing banks to reevaluate business models, capital deployment, and risk appetites and some are on taking on additional risks by expanding into new, less familiar, or higher risk products.  OCC says its examiners will focus on strategic business and new product planning to monitor risk management processes.

Some banks are lowering overhead expenses, often by reductions in control functions, exiting less profitable businesses, closing offices, and outsourcing critical control functions to third parties, in some instances without appropriate levels of due diligence.

Cyber-threats continue to evolve, requiring heightened awareness and appropriate resources to identify and mitigate the associated risks.

Financial asset prices have experienced very low volatility for an extended period. As a result, measures of price risk, such as value-at-risk, are at very low levels. The reduced willingness of dealers to hold securities in inventory, due to capital and other concerns such as a change in monetary policy, could contribute to greater price swings going forward and increased price risk.

Bank Secrecy Act (BSA) and anti-money laundering (AML) risks remain serious concerns as money-laundering methods evolve and the volume and sophistication of electronic bank fraud increases.  These risks have grown among community banks during the last few years because of increases in the number of higher-risk, cash intensive customers and internationally oriented transactions.  BSA programs at some banks have failed to evolve or to incorporate appropriate controls into new products and services. 

The report makes only a few brief mentions of the residential loan sector, citing shrinking refinancing activity as a risk factor for smaller banks and that charge-offs of residential loans has decreased while delinquencies among HELOCs has increased.  The one section devoted to residential mortgages notes that the decline in new foreclosure activity has helped to offset slowing mortgage origination activity.  Foreclosure starts for both prime and subprime loans fell indicating that the market is stabilizing but also attributed in part to the improving economy and aggressive foreclosure prevention actions. 

Mortgage originations started out the year strong but rising interest rates caused activity to falter starting in May.  With improvements in job creation, income growth, and household formation lagging, demand for mortgages remains low.

Fannie Economist Sees Rates Rising to Top of Range

Almost one year ago Mark Palim, Fannie Mae's Vice President of Applied Economic and Housing Research, analyzed what impact rising rates might have on the housing recovery.  When he wrote about this for the company's website last July, rates which had recently (in May) bottomed out at 3.35 percent had increased by 116 basis points to 4.51 percent. 

At that time Palim said there was no historical precedent for knowing the impact on the housing market of an interest rate change, either up or down, because of a Federal Reserve policy of quantitative easing but we could review the history of large interest rate movements.  He examined two such periods since 1990; a 14-month period from October 1993 to December 1994, when mortgage rates increased by 237 basis points (from 6.83 percent to 9.20 percent) and a longer period with a smaller rate increase, October 1998 to May 2000, when rates increased by 180 basis points (from 6.71 percent to 8.51 percent).  Palim concluded that that rate changes don't have much impact on pries but do contribute to a decrease in home purchase volume and an increase in the use of adjustable rate mortgages (ARMs.)  That latter change, he said, might be muted this time by the new Qualified Mortgage (QA) rule.   

Rates continued to rise through that summer, reaching 4.57 percent in September.  Since then they have oscillated in a relatively low range to a low of 4.10 percent and last week stood at 4.17 percent. This week the economist revisited his analysis in an article for Fannie Mae's FM Commentary titled "Mortgage Rates and the Housing Recovery - A Year Later" to see what the impact has and will have on the housing market and if his July 2013 assessment was correct.  

Home price and sales data through last April, he said, shows a general pattern consistent with history and his expectations in 2013; a sharp adjustment to higher mortgage rates tends to precipitate a reduction in the volume of sales rather than a decline in prices. Chart 1 shows that rising rates (80 basis points from May 2013 to April 2014) were met with a drop in existing single family homes sales of 7.7 percent.  There has been an ever larger drop, 14.5 percent, from their recent high in July 2013 of 4.75 million units.

In April 2013 home prices according to several national readings including Case-Shiller and CoreLogic, were rising by double digits.  Prices have continued to rise since then but the annual appreciation is no longer accelerating.  Chart 1 shows the year-over-year change in home prices in April 2014 was 10.5 percent having peaked at 11.9 percent in February 2014 (CoreLogic HPI). The continued strong appreciation in home prices occurred during a period when mortgage rates rose by 80 basis points. 

During recent earlier periods of sharply rising interest rates, the ARM share of mortgage applications according to the Mortgage Bankers Association rose to over 40 percent by dollar volume.  This time, Palim says, the rise in the ARM share is nowhere near that.  Since April 2013, the ARM share has risen from 11.2 percent to 18.0 percent in April 2014.  "We believe this is likely due to tighter underwriting standards for ARMs, including the impact of the Ability-To-Repay rules, and recognition by some borrowers that if they opt for an ARM today, when their rate resets they are more likely to be paying a higher rate when interest rates rise to levels more consistent with historical norms."

Looking forward to the remainder of this year, Palim expects that mortgage rates will rise to the upper end of the range established over the past year as the economy recovers from what he calls a soft patch during the first quarter of 2014.  Tight inventories and investor demand kept home prices rising well ahead of the growth in household income in 2013 but he expects that dynamic to wane of the course of 2014.  The Federal Housing Finance Agency (FHFA) purchase-only home index which forms part of the Fannie Mae Economic and Housing Outlook, forecasts an increase of about 5 percent in home prices in 2014 compared to a 7.6 percent gain in 2013.  Palim said that home sales, despite the rebound from recent lows earlier this year, will post a small decline, its first in four year, compared to 2013.

Existing Homes in May: Stronger Sales, Moderating Price Gains

There were some healthy signals from the existing home market in May, as sales rose strongly and price growth moderated.  The National Association of Realtors® (NAR) said all four regions of the country experienced a month-over-month improvement in sales but prices fell slightly in the Northeast.  

Sales of existing homes, condos, and coops rose 4.9 percent to a seasonally adjusted annual rate of 4.89 million units in May, the largest month-over-month gain since August 2011.  Despite the strong showing the May rate was still 5.0 percent lower than the 5.15 million pace one year earlier.  NAR revised its original figures on April sales upward from 4.65 million to 4.66 million.

Single-family home sales rose 5.7 percent to a seasonally adjusted annual rate of 4.30 million in May from 4.07 million in April, but remain 5.7 percent below the 4.56 million pace a year ago. Existing condominium and co-op sales in May were at a seasonally adjusted annual rate of 590,000, the same figure as for both April and for May 2013.  

Lawrence Yun, NAR chief economist credited several factors for the rebounding market coming out of a weak first quarter. "Home buyers are benefiting from slower price growth due to the much-needed, rising inventory levels seen since the beginning of the year," he said. "Moreover, sales were helped by the improving job market and the temporary but slight decline in mortgage rates." 

The median existing-home price for all housing types in May was $213,400 a 5.1 percent gain from the median in May 2013.  The annual increase in April was 5.2 percent.  The May number continues the downward trend in appreciation from the double digit increases which were common last year.  In May 2013 the annual increase was 11.0 percent and during the first three months of 2014 the average increase in the median price was 8.6 percent.   

The single-family home price rose 4.9 percent from one year earlier to a median of $213,600.  The median existing condo price was $212,300 in May, which is 6.6 percent higher than a year ago.

Total housing inventory at the end of May climbed 2.2 percent to 2.28 million existing homes available for sale, a 5.6-month supply at the current sales pace.  There was a 5.7 month supply in April. Unsold inventory is 6.0 percent higher than a year ago, when there were 2.15 million existing homes available for sale.

Earlier this month, NAR reported that the construction of new homes is insufficient to meet demand in most of the country and some areas could face persistent housing shortages and affordability issues until construction catches up with local job creation.  Yun referred to this, saying "Rising inventory bodes well for slower price growth and greater affordability, but the amount of homes for sale is still modestly below a balanced market. Therefore, new home construction is still needed to keep prices and housing supply healthy in the long run."

Distressed homes sales accounted for 11 percent of May sales compared to 18 percent a year earlier.  Eight percent of sales were foreclosures which sold at an average discount of 18 percent and 3 percent of sales were short sales which were discounted an average of 11 percent.

The percent share of first-time buyers continued to underperform, representing less than one- third of all buyers at 27 percent in May, down from 29 percent in April; they were 29 percent in April 2013.  The investor share declined to 16 percent from 18 percent in April and in May 2013.  Sixty-eight percent of investors paid cash in May and cash sales accounted for 32 percent of all transactions.

NAR President Steve Brown said housing fundamentals are showing slight improvement in markets across the country. "Many potential buyers were left on the sidelines beginning last summer as affordability declined amidst rising home prices and interest rates.  The temporary pause in rising interest rates and more homes for sale is good news - especially for first-time home buyers - who likely have a better chance in upcoming months to make a competitive offer that's in return accepted by the seller."

Homes were on the market a median of 47 days in May, one day less than in April but longer than the 41 day marketing time in May 2013.  Short sales took a median of 125 days to close, foreclosures 57 days, and non-distressed homes 44 days.  Forty-one percent of homes sold in May were on the market for less than a month.

Regionally, existing-home sales in the Northeast rose 3.3 percent to an annual rate of 620,000 in May, but are 3.1 percent below a year ago. The median price in the Northeast was $256,700, down 0.9 percent from May 2013.

In the Midwest, existing-home sales jumped 8.7 percent to an annual rate of 1.13 million in May, but are still 7.4 percent below May 2013. The median price in the Midwest was $165,900, up 4.0 percent from a year ago.

Existing-home sales in the South increased 5.7 percent to an annual level of 2.05 million in May, but are down 0.5 percent from May 2013. The median price in the South was $184,800, up 4.4 percent from a year ago.

Existing-home sales in the West rose 0.9 percent to an annual rate of 1.09 million in May, and are 11.4 percent below a year ago. The median price in the West was $297,500, which is 8.4 percent above May 2013.

Persistently Hot Rental Market a Pleasant Surprise

Look up into any window of the closest apartment building and odds are you'll see someone living there. National apartment occupancy in May soared to the highest level in at least six years, according to Axiometrics, an apartment data and research company. Ninety-five percent of all units are filled, even as thousands of new units are becoming available.

"It's a pleasant surprise because it's coming at a time when new supply is flooding the market," said Stephanie McCleskey, Axiometrics' director of research. "One reason occupancy is rising is that, not only are people moving into these new units, but they're also moving into Class B units at a lower price point."

It is especially a surprise to investors, who pulled out of multifamily real estate investment trusts (REITs) last year, as all eyes focused on surging home sales. The S&P index of residential REITs is now up nearly 14 percent from a year ago and up nearly 20 percent year-to-date. Some of the top performers in the sector: Preferred Apartment Communities (NYSE MKT: APTS), Essex (Grey Market: ESSFP) and AvalonBay (NYSE: AVB). Weakening affordability in the homebuying market is clearly favoring rentals.

"The rent-buy math remains generally favorable for our Apartment coverage universe," wrote researchers at Deutsche Bank in a recent report. "Though pending supply remains a concern for certain apartment markets in 2014 and 2015, recent revenue growth trends were better-than-expected suggesting that strong demand, buoyed by improving rent-buy dynamics, is helping to offset increases in supply."

About 180,000 new apartment units have become available throughout the U.S. in the past 12 months, according to Axiometrics. Still, growth in rental prices in May was the strongest it's been in 16 months, at 3.5 percent.

"The year-to-date effective rent growth numbers portray an apartment market that may be having its strongest year since the Great Recession ended," said Jay Denton, vice president of research at Axiometrics.

Despite the slow recovery in home sales, several factors still fall in favor of renting. Younger Americans are faced with weaker employment, high levels of student debt and general lack of confidence in housing as an investment, at least in the short term.

"We see a number of strong long-term driving forces increasing the rental population and creating demand. Employment rates for millennials draw closer to the national average; the housing recovery is gaining traction, which will push home prices higher; and shorter job tenures create a need for housing mobility," notes Kevin Finkel, an executive vice president with Philadelphia-based Resource Real Estate, an investment firm.

"On the supply side, increasing building material costs will put pressure on the construction of new properties. If interest rates start to trend with economic recovery, added borrowing costs will also inhibit new construction."

Strength in the rental market is fueling a flood of new apps and websites. Swapt, deemed by its creators as the Yelp of apartment rentals, will likely launch out of beta this month. It combines property listings with reviews from renters in a rental search system. It comes on the heels of start-ups like RadPad, PadMapper, HotPads, Apartment Finder, Comfy Rentals and Lovely.

All aim to simplify the rental process, giving landlords and tenants easier access to listings and offering the ability to pay monthly rent on a mobile device.

"If you look at the rental market, it's the most competitive it's been ever," said Eric Wolfe, CEO of Swapt and a former multifamily analyst at Citi. "The reviews are designed to give people the confidence they need to rent and rent quickly. There is a good amount of money to be made on lead generation."

Wolfe, 31, and a renter himself, does believe demand will soften as the echo boom generation ages into its late 30s and turns to homebuying. He also believes new supply will soften rent growth.

"Demand is still going to be there," he added. "I do think there is room for more unique sites in the space."

-By CNBC's Diana Olick

Purchase Originations Picking Up Despite Lower Rates

The balance between loans originated for purchase and for refinancing shifted further toward the purchase side in May according to the Ellie Mae Origination Insight Report.  The 33 percent/66 percent split were new low and high marks for Ellie Mae which began reporting data in 2011.  Refinance and purchase originations had respective shares of 37 and 63 percent in April and 58 and 42 percent in May 2013.

If we consider other recent reports agree that all-cash purchases have also been increasing, an even more pronounced increase in overall purchase share is implied (because this report is derived from data in Ellie Mae's LOAN origination software).

The gap was even wider for loans originated for FHA; only 19 percent of those loans were for refinancing while 81 percent were purchase mortgages.  Conventional loans split 40 and 59 percent.

Twenty-two percent of all originations were FHA loan and 64 percent were conventional.  Both percentages were unchanged from April and the FHA shares has remained the same for four straight months.  Nine percent of loans were backed by the VA and 5 percent were classified as "other."

The profile of a closed loan remained largely unchanged from April and has varied little all year.  The average FICO score was up one point from the previous month to 727 while the loan-to-value and debt-to-income rations were unchanged at 81 percent and 24/37 respectively.

It took an average of 40 days to close a loan in May and that timing was essentially the same regardless of the loan purpose or for whom it was originated.  The average for all of 2013 was 45 days.

To get a meaningful view of lender "pull-through," Ellie Mae reviewed a sampling of loan applications initiated 90 days prior (i.e., the February 2014 applications) to calculate an overall closing rate of 57.8% in May compared to 55.0 in April.  There was a substantial difference in the pull-through rate for refinancing, 52.3 percent, compared to purchase loans at 61.6 percent.  Both rates were higher than in April when pull-through was 49.6 percent and 58.8 percent

Ellie Mae's report comes from a sample of application data that runs through its mortgage management system which handled approximately 3.5 million applications in 2013. 

CFPB Webinar Begins Clarifying TILA-RESPA Questions

As we noted last week the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve have scheduled a series of web seminars on implementation of the final TILA-RESPA Integrated Disclosure Rules that go into effect next summer.  The sessions are designed to help lenders, settlement agents, and others involved in the mortgage process become familiar with the rules and the changes they will entail.   The first webinar was held Tuesday and was primarily a presentation by CFPB staff of the basics of the rule and the new disclosure forms.

Several questions at the end of the session were viewed by Marc Patterson, an attorney with the Ballard Spahr law firm as worthy of further discussion.  Ballard Spahr closely tracks Bureau activities for its clients and Patterson reviewed the questions on the firm's CFPB blog.  

According to Patterson the CFPB staff, in answer to one question, explained that there are six pieces of information that constitute an application (name, income, ssn, address, estimated value, and loan amount).  A lender can request other information from the borrower but those are not considered elements of the application and have no impact on disclosure deadlines.  Once the six pieces of data are received, the clock is ticking on the three business day timeframe to issue the Loan Estimate. 

A creditor does not, however, have to collect the six pieces of information all at once.  The order in which the information is collected can be sequenced so that the lender controls triggering the obligation to issue a Loan Estimate.  For example, CFPB staff said a lender could delay asking for a consumer's Social Security number to run the credit report until after it has received the other five pieces of information.

(As an aside, Patterson suggested that the six elements that constitute an application could be increased to seven by adding an "other information" category.  This would be more straightforward than providing information on how to sequence the six.)

Lenders must follow pre-disclosure restrictions such as the prohibition on requiring consumers to provide verifications or imposing fees before providing the Loan Estimate.  A fee is considered to be imposed when a method of payment is requested such as a credit card number or a check even if the creditor states there will be no attempt to collect on them until after disclosures are provided and the customer elects to proceed.  The one exception is a bona fide and reasonable fee for obtaining a credit report.  Were there or are there a lot of lenders out there who were charging for quotes?!

The final rule permits creditors to provide an early estimate to consumers as long as there is a disclaimer to differentiate it from the required Loan Estimate.  The small entity compliance guide that states this disclaimer is also required for advertisements but staff said this was a "glitch" and clarified that the disclaimer is only necessary when a written estimate is given specific to that customer.

Subsequent sessions on the TILA-RESPA Rule and disclosures will be structured entirely as question and answer sessions.  CFPB said in its earlier announcement that it believed the webinars will be more efficient and beneficial to stakeholders than relying on private, one-to-one conversations with CFPB staff or waiting for updates to the rule or its commentary.

Originators May be Overlooking This Niche

A housing industry that remains focused on originating safe primary mortgages may be overlooking a new purchase money niche "ready for the tapping."  According to Fannie Mae's Housing Industry Forum, second home mortgages may be safer loans, with lower delinquency and default rates than is found in the traditional primary home market.

Necole Peralta, writing for the Forum says that while many homeowners continue to struggle with payments on their mortgages, those with means are taking advantage of low interest rates and stagnant inventories to purchase a second home in vacation markets.  Sales of homes that are neither primary residences nor investment properties have averaged 4.76 percent of sales over the last 16 years but there has been a recent uptick in those sales.  The National Association of Realtors (NAR) found that vacation home sales, which experienced a severe decline in the housing downturn, jumped 29.7 percent from 553,000 in 2012 to 717,000 in 2013. 

NAR says in its 2014 Investment and Vacation Home Buyers Survey that "A diverse set of buyers and property types comprise the second-home sector and opportunities for second-home buyers exist in nearly every market, even in nontraditional, non-resort markets."  NAR identifies an average buyer as being 47 and in a two income household.  At least 61 percent use a mortgage to purchase their second home and downpayments tend to be large.  

Peralta said these buyers may present a new and under-tapped opportunity for servicers and lenders whose main post-crisis response has been to tighten credit standards, keep loans on their portfolios longer and increase securitization.  While the tendency is to originate loans with very high credit scores which in theory present little default risk, a sound loan and a good credit score can turn on a dime in the face of job loss and extended  unemployment in the current volatile job market..  

Fannie Mae's Economic & Strategic Research group (ESR) recently examined second home data and found that second home mortgages tend to be safer loans, with lower delinquency and default rates than other purchase mortgages. 

Geographically, the majority of second home purchases correlate to areas that experienced a higher decline in home prices during and after the recession.  Florida, California, and Arizona each experienced home price declines of 40 to 46 percent between 2006 and 2012  An abundance of lower-priced properties now makes these states the top three for second home purchases, accounting for 34 percent of such mortgages originated last year.

Fannie Mae's Business Analyst David Kopita says, "By combining financial wealth data with home price and population data, findings suggest that the outlook for second home sales is positive in the near term, as those who have enjoyed appreciation in financial wealth now find themselves able to buy homes in popular second home destinations at a comparatively low cost."  "Further, as the population continues to age in the coming years more people will find themselves in this position, assuming investment patterns remain similar," he adds.

Of course record low interest rates, not necessarily always a boon to persons of means, is another positive factor feeding second home sales.

Rising Prices Increasingly Deterring Sales in California

Information from the California Association of Realtors (C.A.R.) on Tuesday echoing the trend if not the absolute numbers of data released last week from DataQuick.  Both surveys show home sales falling while prices continued a more than two-year upward trajectory.  

(Read More: California Home Sales Dip, Prices Don't)

C.A.R. said sales in May were at a seasonally adjusted annual rate of 391,030 units, 0.6 percent below the April rate of 393,480.  DataQuick reported sales on a monthly basis at 37,988, a decline of 0.7 percent from the month before. C.A.R. said that this was the seventh consecutive month that annualized sales figures were below 400,000 and the tenth time sales were down year over year, falling this time by 9.5 percent from a revised figure of 432,140 in May 2013.  DataQuick put the annual slide at 14.4 percent. 

The realty group said that a shortage of homes and housing affordability concerns probably held back some would-be buyers in Ma, accounting for the slipping sales.  Nonetheless, median prices rose for the third straight month on both a month-over-month and year-to-year basis.

May's median price was $465,960, a 3.7 percent increase from the April median of $449,360 and 11.7 percent higher than the $417,140 recorded in May 2013.   While C.A.R. and DataQuick agreed it was the 27^th straight month of price increases and the highest median price since December 2007 they differed substantially on the median price with DataQuick pegging it at $386,000, a 0.8 percent increase from April and 14.5 percent compared to May 2013.  C.A.R. said it was the 23rd straight month of double-digit annual gains.

"While home price increases have tempered over the past few months, prices are still nearly 12 percent higher than a year ago, which is presenting affordability challenges to home buyers," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  "And though housing inventory is up from last year, it's still half of what is considered normal, with some of it being overpriced.  A tempering in home price increases and the recent drop in mortgage rates, however, should help spark the market in the upcoming months."

C.A.R. President Kevin Brown said, "Generally speaking, buyers are feeling less urgency to buy as affordability has become more of an issue and lending standards continue to remain tight.  However, a recent surge in mortgage applications, due partially to declining interest rates, may indicate that higher housing demand can be expected in the coming months.  

Housing inventory was unchanged in May at 3.6 months.  In May 2013 there was a 2.6 month supply of existing single family homes available.  A six to seven month supply is considered typical.  The median number of days it took to sell a single-family home fell to 31.6 days in May, down from 33.8 days in April but up from 27.1 days in May 2013.

C.A.R gathers its information from more than 90 local Realtor associations and Multiple Listing Services and reflects sales of only single family detached homes. 

SunTrust Settles Servicing Abuse Claims with AGs, Feds

SunTrust Mortgage, has agreed to pay a total of nearly $1 billion to settle various complaints alleging abuses in mortgage origination, servicing, and foreclosure procedures including so-called robo-signing of foreclosure documents.  SunTrust, the nation's seventh largest mortgage servicer, will pay $968 million in both fines and restitution in the two part settlement.  

One portion of the settlement was announced by the Consumer Financial Protection Bureau (CFPB), Department of Justice (DOJ), Department of Housing and Urban Development (HUD), and attorneys general in 49 states and the District of Columbia.  The group filed a proposed federal court order requiring the company to provide $500 million in loss-mitigation relief to underwater borrowers, $40 million to approximately 48,000 consumers who lost their homes to foreclosure and $10 million to the federal government.  In addition to the financial settlement the order requires SunTrust to establish additional homeowner protections, including protections for consumers in bankruptcy.

Specifically the court order alleges that SunTrust:

• Failed to promptly and accurately apply payments made by borrowers and charged unauthorized fees for default-related services.

• Deceived homeowners about foreclosure alternatives and improperly denied loan modifications

• Engaged in illegal foreclosure practices, provided false or misleading information to consumers about the status of foreclosure proceedings where the borrower was in good faith actively pursuing a loss mitigation alternative also offered by SunTrust. The company also robo-signed foreclosure documents, including preparing and filing affidavits whose signers had not actually reviewed any information to verify the claims.

The bank did not participate in the $25 billion 2012 servicing settlement with the same government entities over similar servicing abuse charges.   The nation's five largest banks were parties to that agreement.

"Deceptive and illegal mortgage servicing practices have pushed families into foreclosure and devastated communities across the nation," said CFPB Director Richard Cordray. "Today's action will help homeowners and consumers harmed by SunTrust's unlawful foreclosure practices. The Consumer Bureau will continue to investigate mortgage servicers that mistreat consumers, and we will not hesitate to take action against any company that violates our new servicing rules."

SunTrust also allegedly violated mortgage origination practices between January 2006 and March 2012 by underwriting mortgages for insurance from the Federal Housing Administration that did not meet the agency's requirements, according to documents provided by the Justice Department.  A second and parallel mortgage lending court filing announced by DOJ will require SunTrust to pay a $418 million penalty.

SunTrust is a wholly-owned subsidiary of Atlanta-based SunTrust Banks, Inc. and is headquartered in Richmond, Virginia.  The bank told its stockholders last October it had set aside $1.2 billion to settle the probe.  

CFPB said the settlement administrator will be in touch with eligible consumers who lost their homes to foreclosure between Jan. 1, 2008 and Dec. 31, 2013.  Consumers who are interested in loss mitigation should contact SunTrust Mortgage.

Uptick in Rates Provokes a Big Drop in Volume

There was a significant drop in mortgage applications, especially for refinancing, during the week ended June 13 the Mortgage Bankers Association (MBA) reported today.  Results of MBA's Weekly Mortgage Applications Survey showed a decline in the Market Composite Index, a measure of application volume, of 9.2 percent from the previous week on a seasonally adjusted basis and 10 percent unadjusted.

Refinancing slipped from a 54 percent share of all mortgage applications during the week ended June 6 to a 52 percent share and the Refinancing Index fell 13 percent compared to the earlier week.  The seasonally adjusted Purchase Index decreased 5 percent.  On an unadjusted basis applications for purchase mortgages were down 6 percent week-over-week and were 15 percent lower than during the same week in 2013.

Refinance Index vs 30 Yr Fixed

Purchase Index vs 30 Yr Fixed

"Interest rates increased relative to the previous week, as incoming economic data continues to suggest a pickup in the pace of growth," said Mike Fratantoni, MBA's Chief Economist. "Although the average rate for the week was up only a few basis points, the increase was matched by a large drop in refinance volume, and purchase application volume also declined. Some lenders continue to report that they have pre-approved borrowers who have been unable to find a property given the tight inventory in certain markets."

As Fratantoni pointed out, interest rates moved up slightly on all products with the 15-year fixed-rate mortgage (FRM) making the largest move with an increase of 7 basis point to 3.50 percent.  Points decreased to 0.16 from 0.22 and the effective rate increased. 

The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) increased to 4.36 percent from 4.34 percent, with points increasing to 0.24 from 0.16.  The effective rate increased from the previous week.

Jumbo 30-year FRM (loan balances greater than $417,000) increased to 4.32 percent from 4.27 percent.  Points decreased to 0.09 from 0.12 but the effective rate still increased.

Thirty-year FHA-backed FRM saw am average rate increase of one basis point to 4.07 percent.  Points decreased to -0.39 from -0.03 and the effective rate decreased.

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) increased to 3.20 percent from 3.18 percent, with points decreasing to 0.27 from 0.35. The effective rate remained unchanged from last week.  ARMs continued to hold an 8 percent share of mortgage applications as they have for nearly all of 2014.

MBA's survey covers over 75 percent of all U.S. retail residential mortgage applications and has been conducted since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100 and information on rates assumes a loan with an 80 percent loan to balance ratio.  Points include the origination fee.

Whistleblowers Invited to Testify on CFPB "Discrimination and Retaliation"

The House Financial Services Committee (FSC) Oversight and Investigations Subcommittee appears to be picking up the pace in its investigation of alleged racial and gender discrimination at the Consumer Financial Protection Bureau (CFPB).  Today the subcommittee voted to subpoenas two more whistleblowers who have come forward asking to testify about alleged discrimination and retaliation. According to FSC's press release, CFPB Examiner Ali Naraghi and former Bureau employee Kevin Williams asked to be subpoenaed "in order to protect their interests and guard against further retaliation by the Bureau."

The subcommittee has held two earlier hearings on the discrimination claims.  On April 2 there was testimony from two whisleblowers, Angela Martin a current CFPB Senior Enforcement Attorney employee and Misty Raucci a former investigator from the Defense Investigators Group who claimed CFPB had what they termed "a culture of racial and gender discrimination and retaliation against its employees."  

Martin presented lengthy testimony at the hearing about the discrimination she claims to have faced and about alleged retaliation for filing complaints over that discrimination.   Raucci, whose company was hired to investigate Martin's complaint, said she had submitted extensive documentation to CFPB suggesting a pervasive disregard for employee rights and that "the corrosive environment of the CFPB workplace was engendered by the bureau's perpetual failure to uphold its own EEO policies."

In a second hearing on May 21, the Subcommittee heard testimony from two subpoenaed witnesses: Liza Strong, the Director of Employee Relations at the CFPB, and Ben Konop, Executive Vice President of Chapter 335 of the National Treasury Employees.  Strong said the Bureau had investigated Martin's complaints on several occasions including hiring the Defense Investigators Group to conduct an independent assessment.  Their work, Strong said, did not even meet "minimal standards" and the Bureau was, at the time of the hearing, still trying to fill the gaps in Raucci 's final report.

Strong said that the Bureau worked very hard to accommodate Martin's demands, paying her a monetary settlement and twice essentially creating positions for her in two different divisions at the same pay and grade, attempting to design each to Martin's specifications.  She declined one, Strong said, and is now dissatisfied with the other.

Konop testified that women and minority employees were being underpaid when compared to similarly situated white male colleagues. "To date, the Bureau has denied each of these grievances at all stages, often using inconsistent reasoning, despite what I feel is convincing evidence of low pay for numerous women and minority workers."

However, Konop said, in recent days CFPB Director Richard Cordray had acknowledged for the first time that "there were broad-based disparities in the way performance ratings were assigned across our employee base in both 2012 and 2013.  In particular, Director Cordray agreed with the union's findings that there was a "broad-based, statistically significant disparit in many areas, including race/ethnicity, age, [and] bargaining unit membership eligibility..."   

Konop said the directive retroactively compensates the majority of employees harmed by the evaluation system and was a solid first step in the Bureau's process of accountability.

In a press release announcing the new subpoenas Oversight and Investigations Subcommittee Chairman Patrick McHenry (R-NC) said, "When allegations of discrimination at the CFPB were first uncovered, my subcommittee committed to investigating these claims and providing all affected Bureau employees a forum to share their stories of mistreatment by agency leaders.  We are continuing these important efforts by subpoenaing two more employees who have experienced both discrimination and retaliation while at the Bureau. This behavior has no place in our government and my subcommittee will not rest until we have exposed those CFPB leaders responsible."

Builder Confidence Highest Since January

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index narrowed the gap with positive territory this month with a jump of four points.  After lagging in the low to mid-40s for months, the index rose to 49 in June, one point shy of what is considered the threshold for perceptions of a good home building environment.

"After several months of little fluctuation, a four-point uptick in builder sentiment is a welcome sign and shows some renewed confidence in the industry," said NAHB Chairman Kevin Kelly. "However, builders are facing strong headwinds, including the limited availability of labor." 

NAHB and Wells Fargo derive their HMI from a survey of new home builders now in its 30^th year.  The survey attempts to gauge builder perceptions of the market for new single family homes now and in the near future. Builders are asked to quantify their expectations for current sales and sales over the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

There was positive news from all three underlying scores as well.  Current sales conditions gained six points to 54 and the component measuring future prospects rose three to 59.  Buyer traffic perceptions rose three points but still lags badly at 39.

"Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase," said NAHB Chief Economist David Crowe. "Builders are reacting accordingly, and are moving cautiously in adding inventory."

The main HMI figure came in above expectations.  Reuters said its survey of analysts had a consensus of 47, two points below the actual number.

Looking at the three-month moving averages for regional HMI scores, the South and Northeast each edged up one point to 49 and 34, respectively, while the West held steady at 47. The Midwest fell a single point to 46.

For Originators in Q1, Breaking Even was a Win

The Mortgage Bankers Association is reporting a net per-loan loss was suffered by those independent mortgage banks and mortgage subsidiaries of chartered banks which participated in its first quarter performance survey.  Banks reported that the $150 profit per loan they netted in the fourth quarter of 2013 turned into a net loss of $194 in the first quarter of 2014.

"The significant overall production volume decline in the first quarter hurt mortgage bankers," said Marina Walsh, MBA's Vice President of Industry Analysis.  "Purchase volume did not pick-up, while refinancing volume dropped and costs continued to rise.  Given these conditions, companies that managed to break even in the first quarter should consider that a reasonable outcome."

MBA's Quarterly Mortgage Bankers Performance Report showed average production loss during the quarter was 8.31 basis points compared to a production profit of 8.72 basis points the previous quarter.  This was the sixth consecutive quarter of declining production income.

Companies had an average production volume of $274 million on an average loan volume of 1,248.  This is a significant downturn from the $367 million from 1,641 loans that were the averages in the fourth quarter of 2013.  

MBA said that 331 companies reported production data for the first quarter.  Seventy-five percent were independent mortgage companies and the remaining 25 percent were subsidiaries and other non-depository institutions. 

The purchase share of total originations, by dollar volume, was relatively flat at 68 percent in the first quarter of 2014.   For the mortgage industry as a whole, MBA estimates the purchase share at 51 percent in the first quarter of 2014, from 47 percent in the fourth quarter of 2013.

Total loan production expenses including commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations, increased to $8,025 per loan in the first quarter from $6,959.  These expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008.  Personnel expenses averaged $5,048 per loan in the first quarter compared to $4,385 in the fourth quarter.

The "net cost to originate" was $6,253 per loan. This includes all production operating expenses and commissions, minus all fee income, but excluding secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread. This line item averaged $5,171 per loan in the fourth quarter of 2013.  Secondary marketing income increased to 277 basis points in the first quarter, compared to 248 basis points in the fourth quarter of 2013.

Companies originated 1.7 loans per production employee per month in the first quarter, down from 2 loans in the fourth quarter of 2013.

Including all business lines, 54 percent of the firms in the study posted pre-tax net financial profits in the first quarter of 2014, down from 58 percent in fourth quarter of 2013, and 94 percent in the first quarter of 2013.

Lenders Invited to Webinar on GFE/TIL Changes

Lenders, settlement agents, and others who are affected by the new TILA-RESPA Integrated Disclosures Rule may wish to note the first in a series of recurring live webinars being conducted by the Consumer Financial Protection Bureau (CFPB).  The initial session, scheduled for June 17, will be part broadcast as part of the Federal Reserve System's audio conference series to address the new rule as creditors, mortgage brokers, settlement agents, software developers, and other stakeholders work to implement it over the next year.

As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, CFPB has consolidated the Good Faith Estimate (GFE) and the initial Truth-in-Lending Act disclosure into a single new form, the Loan Estimate Form.  It is designed to provide information that will be helpful to consumers in understanding the key features, costs and risks of the mortgage loan for which they are applying. 

Second, the HUD Real Estate Settlement Procedures Act form and the final TILA disclosure form have been combined into the new Closing Disclosure designed to provide disclosures that will inform consumers about all of the costs of the loan transaction.

CFPB has designed the forms using clear language and with the intent to make it easier for consumers to locate key information, such as interest rate, monthly payments, and costs to close.  The forms also provide additional information to help consumers determine if they can afford the loan and to facilitate comparisons among different loan offers. 

CFPB says it anticipates a substantial volume of compliance and interpretive questions as lenders prepare for the rule and the forms' implementation on August 15, 2015 and plans to use these webinars to consolidate and address those questions in a way that promotes consistent understanding of the rules and provides a resource that stakeholders may reference. The CFPB believes this approach will be more efficient and beneficial to stakeholders than relying on private, one-to-one conversations with CFPB staff or waiting for updates to the rule or its commentary.

The first session will provide an overview of the final rule and the new disclosures and address a few basic compliance questions, while subsequent webinars will address specific implementation and interpretive questions about the rule provided to the Bureau. The CFPB plans to host these webinars periodically throughout implementation, regularly soliciting feedback and additional questions in the interim.

The first session will be conducted next Tuesday from 2:00 p.m. to 3:00 p.m. EDT.  Interested parties can registers for the webinar at:   http://www.webcaster4.com/Webcast/Page/48/4689

More Individual NMLS Licenses among Fewer Companies in Q1 2014

The first quarter 2014 report of the National Mortgage Licensing System (NMLS) released today states there were 15,246 entities that held a total of 34,054 licenses to operate as a mortgage company. This represents a decrease in the number of companies holding licenses of 1.8 percent from one year earlier.   There were 19,493 branches holding licenses to issue mortgages.

Licenses to operate as a mortgage loan originator (MLO) were held by 117,674 individuals at the end of the first quarter, an increase of 4.2 percent from the first quarter of 2013.  Licensed companies had an average of 7.4 loan originators.

NMLS received a total of 1,521 applications for company licenses during the quarter and approved 1,383.  Only a handful (five) of applications were denied; 283 applications were withdrawn.  At the same time more than double that number of licenses were revoked (16), surrendered (607), or terminated (2,018), a total of 2,641 license expirations.

There were 29,129 applications submitted for licenses as mortgage originators in the first quarter.  A total of 29,168 applications (counting carryover prior to Q1) were approved, 177 denied, and 2,592 withdrawn. 

There were 10,336 institutions holding federal mortgage registrations in the first quarter and 392,896 individuals.  The number of individuals decreased by 0.2 percent year-over-year. Ninety-six companies and 3,585 MLOs held both federal registration and one or more state licenses.

NMLS's Mortgage Call Report estimates that a total of about $100 billion in mortgage loans were originated in the first quarter of 2014.  This was a decrease of 53 percent from the first quarter of 2013.

NMLS handles licensing for most of the nation with the exception of Missouri and a single licensing entity in both Texas and Utah. 

Refi and Purchase Apps Bounce Back After Holiday Week

Mortgage applications surged by 10.3 percent during the week ended June 6.  The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of application volume increased by that amount on a seasonally adjusted basis and was up 22 percent compared to the previous week which had been shortened by the observed Memorial Day holiday. 

The increase was across the board with applications for both purchase mortgages and refinancing making healthy gains.  The Refinance Index was up 11 percent from the previous week and the seasonally adjusted Purchase Index rose 9 percent.  The unadjusted Purchase Index was 19 percent higher than the week before but 13 percent below the level during the same week in 2013.  The refinance share of applications increased to 54 percent from 53 percent.

Refinance Index vs 30 Yr Fixed

Purchase Index vs 30 Yr Fixed

Application activity increased despite a jump in interest rates.  All rates reported by MBA from its Weekly Mortgage Application Survey were up on both a contract and effective basis from the previous week. 

"When we consider the seemingly illogical behavior of rates and applications moving higher together, it's important to keep in mind that there were only really 2 days in the previous week with significantly lower rates than those seen last week," notes Mortgage News Daily's Matt Graham.  "It's pretty normal for borrowers to get geared up for a mortgage while rates are falling, but to hold off on locking until it looks like the lows are in.  That's exactly what last week gave us."

The contract interest rate for 30 year fixed-rate mortgages (FRM) with conforming balances of $417,000 or less moved from an average of 4.26 percent with 0.13 point to 4.34 percent with 0.16 point.  The jumbo version of the 30-year FRM (balances above $417,000) had an average rate of 4.27 percent compared to 4.22 percent the previous week and points increased to 0.12 from 0.11.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.06 percent from 3.99 percent.  Points increased to -0.03 from -0.46.

 Rates for 15-year FRM averaged 3.43 percent with 0.22 point.  The previous week the average was 3.39 percent with 0.07 point.  

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) increased to 3.18 percent from 3.11 percent, with points increasing to 0.35 from 0.05.  ARMs continued to hold an 8 percent share of the application volume.

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

National Foreclosure Rates Drop but 21 States Buck Trend

Foreclosure activity dipped significantly in May RealtyTrac reported on Tuesday with a decrease of 5 percent in foreclosure filings compared to those in April.  RealtyTrac's U.S. Foreclosure Market Report also noted a 26 percent decrease in filings compared to May 2013.

RealtyTrac reports on three categories of legal filings - notices of default or foreclosure starts, scheduled auctions, and bank repossessions or completed foreclosures.  Aggregate filings in May numbered 109,824 or one filing for every 1,199 U.S housing units.

Foreclosures were started on 49,240 properties in May, a 10 percent decrease from April and 32 percent fewer starts than one year earlier.  It was the fewest starts recorded by RealtyTrac since December 2005, a 101-month low.

Foreclosure auctions were scheduled on 47,085 properties, down 3 percent month over month and 22 percent on an annual basis.  It was the fewest auctions scheduled in a single month since December 2006.

There were 20,373 foreclosures completed during the month, a 6 percent and a 27 percent decrease from the two earlier periods.  It was an 82 month low for completed foreclosures, the fewest since July 2007.

While foreclosure activity was down on a national basis it rose in 21 states compared to April and 11 states saw increases on an annual basis.  The largest annual increases in filings were posted in Massachusetts, up 58 percent from May 2013 to an 18 month high and New Jersey where foreclosure activity has increased on an annual basis for 23 of the last 27 months and was up 27 percent in May.  Other large annual increases were posted by New York (+18 percent), and Indiana (+12 percent).  

Foreclosure starts increased in 17 states compared to April and in 12 states on an annual basis.  There were large annual increases in Massachusetts (+178 percent), Indiana (+67 percent), and Delaware (+26 percent).  Scheduled auctions were up month-over-month in 27 states and increased annually in 16 with Utah, Oregon, and New Jersey jumping 199 percent, 157 percent, and 70 percent respectively. Twenty-five states had more bank repossessions in May than in April and 14 states posted annual increases, most notably New York which has grown annually for 16 out of the last 20 months, this time by 117 percent.  New Jersey increased for the 11^th month out of 12, up 96 percent and Connecticut had a 15^th consecutive increase, up 85 percent.

"It's not surprising that some of the states with the longest foreclosure timelines are those with markets still dealing with increasing foreclosure activity even as the country as a whole continues to hit new lows," said Daren Blomquist, vice president at RealtyTrac. "On the other hand, the increase in bank repossessions in some states with shorter foreclosure timelines like California and Oregon demonstrates there is still some pent-up foreclosure activity in those states as well."

The nation's highest overall foreclosure rate continues to be in Florida.  Even with 10 consecutive months of annual decreases the state still had a foreclosure filing on one in every 436 housing units in May, nearly three times the national average.

Florida was followed by Maryland with a filing on one in every 621 housing units.  The state however did finally see a positive change with overall foreclosure activity down percent on an annual basis after 22 consecutive increases.

Nevada is still in the top three despite eight consecutive months with annual decreases and a 57 percent year-over-year drop in May.  One in every 717 housing unit in the state had a foreclosure filing in May.

Other states in the top five are Illinois, one in 790 housing units; Ohio, one in 805; while New Jersey, Delaware, Indiana, Connecticut, and South Carolina round out the top ten.

Survey Respondents see Home Prices, Interest Rates, and Rents Leveling

No matter how the results of Fannie Mae's National Housing Survey for May are interpreted, it is hard to see them as good short terms news for the housing market.  The company says that Americans' concerns about the direction of the economy and their household income appear to be weighing on housing growth.  It is also possible that the results mean that potential homebuyers see several reasons to return to the wait and see attitude that helped flatten the market in 2011 and 2012.

According to Fannie Mae, the share of respondents who still believe the economy is headed in the wrong direction remained at 57 percent last month while the right track numbers rose from 35 percent to 38 percent. 

"Consumers' lukewarm income expectations and reticence about the economy seem to be holding back housing demand," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "This year's spring and summer home buying season has gotten off to a slow start, even as mortgage rates have trended lower over the past two months. Our National Housing Survey data show that economic conditions continue to be the top concern among consumers who think it's a bad time to buy or sell a home. While recent housing activity suggests that the worst of the housing slump may be behind us, this caution among consumers supports our expectation that the rebound in home sales will likely be too modest to pull sales for all of 2014 ahead of last year."

Or maybe potential homebuyers are putting plans on hold because they think there might be more opportunities ahead, most notably in the area of home values.  Prices have risen rapidly since bottoming out in early 2012, and in some areas such as California this, coupled with higher rates, has dramatically reduced affordability.  In the May survey the share of respondents who say home prices will go up in the next 12 months fell to 48 percent, and the share who say home prices will go down increased to 7 percent.  Among those who expect prices to continue to increase the average increase held steady at 2.9 percent.

At the same time the percentage of those who expect further increases in mortgage interest rates fell from 52 percent to 49 percent.  The number looking for lower rates also went down from 7 to 5 percent while those who expect that rates have stabilized was unchanged at 38 percent for the third consecutive month.  

Those who say it is a good time to buy a house fell slightly to 68 percent, and those who say it is a good time to sell a house increased to 43 percent, a new all-time survey high.

A slight majority of respondents expect rents to increase over the next year.  Just over 50 percent have expressed that since at least last May but the number who expect rents to decline rose this month from 43 to 39 percent.  The average 12-month rental price change expectation decreased slightly to 3.9 percent.

Forty-nine percent of respondents thought it would be easy for them to get a home mortgage today, rising 4 percentage points from last month.  The share who say they would buy if they were going to move increased slightly to 66 percent. 

The percentage of respondents who expect their personal financial situation to get better over the next 12 months fell slightly to 42 percent.    The share of respondents who say their household income is significantly higher than it was 12 months ago decreased 4 percentage points to 21 percent.  At the same time there did seem to be some improvement in household finances.  The share of respondents who said their household expenses had declined significantly rose 3 points while the number who said expenses had risen fell 5 points.  

The most detailed consumer attitudinal survey of its kind, the Fannie Mae National Housing Survey polled 1,000 Americans via live telephone interview to assess their attitudes toward owning and renting a home, home and rental price changes, homeownership distress, the economy, household finances, and overall consumer confidence. Homeowners and renters are asked more than 100 questions used to track attitudinal shifts from month to month dating back to the survey's origination in June 2010.   

City Sues Major Bank for Redlining (What's Redlining?)

In November 2012 then Federal Reserve Board Chairman Ben Bernanke told an audience attending a HOPE Now event in Atlanta that there were two types of discrimination that continue to have particular significance to mortgage markets.  "One is redlining, in which mortgage lenders discriminate against minority neighborhoods, and the other is pricing discrimination, in which lenders charge minorities higher loan prices than they would to comparable nonminority borrowers."

Redlining refers to the practice of refusing to grant home mortgages in areas or neighborhoods deemed poor financial risks.  The practice, which received a lot of publicity in the 1960's was not eradicated but driven underground by the Fair Housing Act of 1968.  Still the government has won major redlining judgments over the years.    In recent years the nature of mortgage discrimination became less a matter of refusing credit and more Bernanke's second example, targeting minority and low income areas for risky subprime mortgages.  Last week the City of Providence Rhode Island joined Bernanke in declaring that old style redlining is back.

On Thursday Providence sued Santander Bank NA accusing it of discriminating against the city's black and Hispanic residents in the granting of mortgages while marketing aggressively to white borrowers.  The suit said that the bank is similarly curtaining lending to minorities in other New England localities including Boston.

Providence Mayor Angel Taveras said in a statement that since 2009 (when it bought the former Sovereign Bank), Santander had deliberately reduced its lending in the city's minority neighborhoods while actively expanding its business in areas that were predominantly white. The lawsuit, filed in the United States District Court for the District of Rhode Island, also alleges that Santander performance stands in stark contrast to many of its peer banks, who have performed far better in minority neighborhoods.

"Santander's practices violate fair lending laws and hurt Providence families," Taveras said. "Many borrowers in minority neighborhoods are qualified for prime loans, but Santander has written them off. That holds down property values and the broad economic recovery that a healthy housing market can help generate in every neighborhood in Providence."

Over the past 18 months the City Solicitor Jeffrey Padwa has led an investigation comparing lending in predominant minority and while neighborhoods both before and after Santander acquired Sovereign.  The city maintains that the bank's average annual mortgage originations have increased substantially over this period in white neighborhoods but declined precipitously in minority neighborhoods. Specifically, they say that, while applications for mortgages have declined across the board due to economic conditions, applications to the Santander for prime loans from minority neighborhoods declined by 61 percent compared to a 37 percent decline in applications to other leading banks.  Providence found the same pattern when analyzing data for the combined metropolitan statistical area that includes Boston, Providence, and much of the remainder of New England.  There originations in minority neighborhoods dropped 7 percent for other major banks after 2009 but 34 percent for Santander.

In its suit the City of Providence alleges that the stark contrast in Santander's mortgage lending activity between white and minority neighborhoods is the result of a deliberate decision to engage in redlining and supports its contention with declarations from officials at three of the city's community development corporations.

Santander Bank spokesman Mary Ellen Higgins said the bank categorically rejects the city's accusations and intends to defend themselves against the legal action.  "However, we are willing to work with the City of Providence to allay its concerns," she said.

Santander may be the biggest bank of which no one has ever heard.  The U.S. bank, headquartered in Boston, is a subsidiary of Spanish bank Banco Santander, S.A which claims to be one of the largest banks in the world with 102 million customers, 14,500 branches and 190,000 employees.   The Santander group of banks was founded in 1857 and has a presence in the United Kingdom, Latin America and Europe.

Providence is seeking "millions in damages" and Taveras said he hopes the suit will encourage the government to step up enforcement against redlining.

FHFA is Ready For Your Comments on Postponed G-Fee Increases

Among Mel Watts first acts as Director of the Federal Housing Finance Agency (FHFA) in January 2014 was to suspend implementation of increases in the fees (g-fees) charged lenders for originating loans guaranteed by Fannie Mae and Freddie Mac (the GSEs).  The fees had been announced the previous month by Watt's predecessor Edward Donovan.  The proposed changes included an across-the-board 10 basis point increase in up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states.  Watt announced that the postponement was to allow time to permit further review.

On Thursday FHFA issued a notice requesting public input on changes to the fees, specifically regarding their optimum level and their implications for mortgage credit availability.  The public notice period is for 60 days or until August 4, 2014.

There are two type of g-fees, ongoing and upfront.  The latter is a one-time payment made by lenders at the time a loan is acquired by a GSE, the ongoing fees are collected each month over the life of the loan.  Both fees serve to compensate the GSE for providing its credit guarantee.  The GSE's have had a preference for upfront fees to reflect differences in risk, based primarily on operational considerations as upfront fees are easier to implement.  Lenders frequently convert upfront fees to ongoing fees and pass them through to the borrower in the form of an increased interest rate.

FHFA, as conservator of the GSEs since August 2008, has used its authority to direct previous guarantee fee increases based on safety and soundness concerns related to the underpricing of mortgage credit risk, equalizing fee charges among lenders of different sizes, and attracting private capital back into mortgage lending.  The fees were also raised by Congress in 2011 (TCCA) as a way of funding the temporary payroll tax cut it authorized in 2011 and 2012.

The fees are used by the GSEs to cover three types of costs; the costs they expect to bear, on average, when borrowers fail to make their payments; the costs of holding economic capital to protect against potentially much larger unexpected default losses; and general administrative expenses.  Collectively these are the estimated costs of providing the credit guarantee.   Of the three the cost of capital is the most significant and the most difficult to project and FHFA has asked the GSEs to set their g-fee levels consistent with the amount of capital they would need to support their business if they were financially healthy and retained capital, something they are not allowed to do under their current conservatorship arrangement.

To determine the estimated fees needed to cover these costs each GSE calculates "gaps."  A positive gap would be the profit the GSE expects to make on a given loan above the target rate of return on capital.  Gaps are calculated by subtracting estimated costs from charged g-fees and are expressed on an annual basis as a percent (in basis points) of outstanding loan balance.   A negative gap does not necessarily mean that the GSE expects to incur a loss on a set of loans, but rather that it expects to earn less than its targeted return on capital.

FHFA provided the following grid of nine LTV and credit score buckets that shows the average g-fee currently charged by both GSEs and the percent of total 1Q2014 loan deliveries accounted for by the bucket in question. The grid also combines somewhat differing assumptions currently used by each GSE regarding the average amount of capital required for each of the nine risk buckets, the target return on this capital, and the average estimated cost of providing the guarantee, including the benefit of private mortgage insurance where applicable.  The amount of capital required by the GSEs' pricing methodology increases with higher LTVs and lower credit scores, as the magnitude of unexpected losses are projected to increase.  Overall estimated costs of providing the guarantee follow the same pattern since the cost of capital is the primary driver of estimated costs. Estimated credit-related costs of borrowers failing to make payments (not shown) also act in the same direction, but with a smaller impact than the cost of capital.  Even in buckets where the estimated cost exceeds the charged g-fee, the GSEs earn a positive return on economic capital, although less than their target return.

Finally, it is noteworthy that increases in g-fees on higher-risk loans may result in originators insuring/securitizing some of these loans with Federal Housing Administration (FHA)/Ginnie Mae rather than one of the GSEs.  While this substitution would reduce the GSEs' footprint in the mortgage markets, it would not reduce the federal government's overall footprint. On the other hand, increases in g-fees for lower-risk loans may make it more profitable for banks or other private market participants to retain these loans rather than selling them to the GSEs.

FHFA's Request for Input lays out 12 specific questions on which they would like public comment although it invites comments that are not directly responsive to those questions.  These questions include the following:

• Are there factors other than expected losses, unexpected losses, and general and administrative expenses that FHFA and the GSEs should consider in setting g-fees? What goals should FHFA further in setting g-fees?
• At what g-fee level would private-label securities (PLS) investors find it profitable to enter the market or would depository institutions be willing to use their own balance sheets to hold loans? Are these levels the same? Is it desirable to set g-fees at PLS or depository price levels to shrink the GSEs' footprints, even if this causes g-fees to be set higher than required to compensate taxpayers for bearing mortgage credit risk and results in higher costs to borrowers?
• If the GSEs continue to raise g-fees, will overall loan originations decrease?
• Should risk-based pricing be uniform across the GSEs or should each manage its own pricing?
• Are there interactions with the Consumer Financial Protection Bureau's Qualified Mortgage definition that FHFA should consider in determining g-fee changes?

The remaining questions as well as a more detailed discussion of the basis of g-fees and the implications of their use can be found in the Request for Input from FHFA.

Negative Equity Still Hasn't Fallen Enough to Stimulate Housing Turnover

U.S. homeowners continue to regain the equity in their homes which was lost in massive amounts during the housing crisis that began in 2007 and 2008.  According to data released today by CoreLogic, more than 300,000 homes returned to a positive equity position in the first quarter of this year.  This leaves approximately 6.3 million homes nationwide still "underwater" while more than 43 million mortgaged homes have some degree of equity. 

Properties in negative equity represented 12.7 percent of homes with a mortgage at the end of the first quarter.  At the end of the fourth quarter of 2013 where were 6.6 million or 13.4 percent of homes with a mortgage balance that exceeded the market value of the property and at the end of Q1 2013 there were 9.8 million homes or a 20.2 percent negative equity share.  

"Prices continue to rise across most of the country and significantly fewer borrowers are underwater today compared to last year," said Anand Nallathambi, president and CEO of CoreLogic. "An additional rise in home prices of 5 percent, which we are projecting will occur over the next 12 months, will lift another 1.2 million properties out of the negative equity trap."

Nationally the aggregate negative equity totaled $383.7 billion at the end of Q1 2014.  This was a decrease of $16.9 billion from approximately $400 billion in the fourth quarter 2013.  

In addition to homes that are considered underwater, approximately 10 million more have less than 20 percent equity, more than 20.6 percent of all mortgage homes.  These properties are considered by CoreLogic to be "under equitied" and their owners could have a difficult time refinancing or obtaining new financing a new home should they sell.  More than 1.5 million of these under equitied homes have less than 5 percent equity and could sink back underwater should home prices fall.

"Despite the massive improvement in prices and reduction in negative equity over the last few years, many borrowers still lack sufficient equity to move and purchase a home," said Sam Khater, deputy chief economist for CoreLogic. "One in five borrowers have less than 10 percent equity in their property, which is not enough to cover the down payment and additional costs associated with a conventional mortgage."

The bulk of home equity for mortgaged properties is concentrated at the high end of the housing market. For example, 93 percent of homes valued at greater than $200,000 have equity compared with 82 percent of homes valued at less than $200,000.

Nevada continues to have the highest share of negative equity properties (29.4 percent) followed by Florida (26.9 percent), Mississippi (20.1 percent), Arizona (20.1 percent) and Illinois (19.7 percent). These top five states combined account for 31.1 percent of negative equity in the United States. The lowest percentages of negative equity are in Texas (3.3 percent), Montana (3.7 percent) North Dakota and Alaska (4.3 percent each), and Hawaii (4.4 percent).

Of the total $384 billion in negative equity, first liens without home equity loans accounted for $200 billion while homes with both loans accounted for $184 billion.  The 3.8 billion borrowers with negative equity and no home equity loan owe an average of $218,000 on their mortgage and have negative equity of $52,000.  The 2.5 million borrowers with both first and second liens have an average combined mortgage balance of $290,000 and are underwater by $75,000.

Lack of equity continues to be a strong indicator of mortgage default.  Nationally, the number of homes with equity had a default rate of 0.6 percent in the first quarter, the same as in the previous quarter. However, homes with negative equity had a default rate of 3.5 percent as of Q1 2014, down from 3.7 percent in Q4 2013.