Friday, March 16, 2012

Mortgage Rates Head Higher on Positive Economic Data

By: Carrie Bay 03/15/2012

Rates for all mortgage loan products headed higher this week as positive employment indicators rolled in, with job growth over the last six months the strongest it’s been since 2006. That, coupled with the Greek debt restructuring on the international front and the results of the Federal Reserve’s stress tests pointing to a stronger financial banking system, boosted investor confidence and drove bond yields higher.

“An upbeat employment report for February caused U.S. Treasury bond yields to increase over the week and mortgage rates followed,” according to Frank Nothaft, Freddie Mac’s chief economist.

Studies from both Freddie Mac and Bankrate showed the same measurable increases across-the-board.

The GSE reports the average rate for a 30-year conforming mortgage at 3.92 percent (0.8 point) for the week ending March 15, up from 3.88 percent last week. Despite the increase, the average 30-year fixed rate mortgage has been below 4.00 percent for 15 consecutive

weeks in Freddie Mac’s study, helping to keep homebuyer affordability high. The GSE averages rate data from 125 lenders across the country.

Bankrate’s study zeros in on rate quotes from the 10 largest lenders in the 10 largest markets. That analysis put the 30-year rate at an average of 4.15 percent (0.40 point) this week, up from 4.11 percent last week.

The average 15-year fixed mortgage stepped up from 3.34 percent last week to 3.38 percent (0.33 point), according to Bankrate, while the jumbo 30-year fixed mortgage jumped to a three-month high of 4.73 percent, soaring 10 basis points from 4.63 percent last week.

Adjustable-rate mortgages (ARMs) were mostly higher as well in Bankrate’s study, with the average 5-year ARM rising to 3.14 percent (0.33 point) and the 7-year ARM climbing to 3.33 percent.

Freddie Mac’s study found the 15-year fixed mortgage averaging 3.16 percent (0.8 point) this week, up from 3.13 percent last week.

The GSE reports the average rate for a 5-year ARM to have ascended 2 basis points to 2.83 percent (0.8 point) this week, and the 1-year ARM posting a 6 basis point increase to 2.79 percent (0.6 point).

Dan Green is a loan officer with Waterstone Mortgage in Cincinnati and a regular blogger on issues affecting the housing market, and mortgage rates in particular. He says rates have been low because of the weak U.S. economy and with the economy now showing signs of strengthening, we should expect mortgage rates to continue to rise.

Foreclosure Inventory Down From a Year Ago, Up From Previous Month

By: Esther Cho 03/15/2012

While foreclosure inventory showed a year-over-year decline for January 2012, REO inventory held by servicers grew faster in January than the pace at which REO properties sold, according to CoreLogic’s National Foreclosure Report for January 2012 released Thursday.

The distressed clearing ratio, which calculates the rate at which REO properties are sold, was 0.69 for January 2012, down from 0.80 in December 2011. The ratio is found by dividing the number of REO sales by the number of completed foreclosures. A higher ratio indicates a faster pace of REO sales relative to the pace of completed foreclosures.

“The pace of completed foreclosures is gradually increasing again, but the clearing ratio is falling as REO sales have slowed in the winter months,” said Mark Fleming, chief economist with CoreLogic, who also added non-judicial foreclosure states completed almost twice as many foreclosures per 1000 active loans as judicial foreclosure states in January.

On a year-over-year basis, the number of foreclosures actually dropped, going from 80,000 in January 2011 to 69,000 in January 2012, according to CoreLogic’s report, which provides monthly data on completed foreclosures, foreclosure inventory, and 90+ delinquency rates. But, compared to the previous month, there was a slight increase, with 65,000 completed foreclosures in December 2011.

Approximately 1.4 million homes, or 3.3 percent of all homes with a mortgage, were in the foreclosure inventory as of January 2012, compared to 1.5 million, or 3.6 percent, in January 2011, according to CoreLogic. For the previous month of December, 3.4 percent of all homes were in foreclosure inventory. Nationally, the number of loans in the foreclosure inventory decreased by 145,000, or 9.5 percent in January 2012 compared to the previous year.

The foreclosure inventory is the stock of homes in the foreclosure process. A property moves into the foreclosure inventory when the mortgage servicer places the property into the foreclosure process after serious delinquency is reached and remains there until the foreclosure is completed.

In total, the number of completed foreclosures for the previous twelve months was 860,128. From September 2008, the start of the economic crises, there have been approximately 3.3 million completed foreclosures.

“We are encouraged by the noticeable progress we are seeing over the last several months in the mortgage industry,” said Anand Nallathambi, CEO of CoreLogic. “During the last several years, the industry has faced enormous challenges working through difficult and complex issues. We are hopeful that these recent improvements are early signals of revitalization in the mortgage market.”

The share of borrowers nationally that were more than 90 days late on their mortgage payment, including homes in foreclosure and REO, decreased to 7.2 percent in January 2012, compared to 7.8 percent a year ago, but remained unchanged compared to December 2011.

Five states with the largest number of completed foreclosures over 12 months as of January 2012

California (155,000), Florida (86,000), Arizona (65,000), Michigan (65,000), and Texas (57,000)

These five states account for 49.7 percent of all completed foreclosures nationally.

Five judicial states with the highest percentage of foreclosure inventory

Florida (11.8 percent), New Jersey (6.4 percent), Illinois (5.3 percent), Maine (4.3 percent), and Connecticut (4.2 percent)

Five non-judicial states with the highest percentage of foreclosure inventory

Nevada (5 percent), New York (4.7 percent), Kentucky (2.8 percent), Oregon (2.8 percent), and Mississippi (2.7 percent)

Five states with the highest foreclosure rates

Florida (11.8 percent), New Jersey (6.4 percent), Illinois (5.3 percent), Nevada (5.0 percent), and New York (4.7 percent)

Five states with the lowest foreclosure rates

Wyoming (0.7 percent), Alaska (0.8 percent), North Dakota (0.8 percent), Nebraska (1.1 percent), and Texas (1.3 percent)

FHFA Criticized for Arguments Used Against Principal Reduction

By: Esther Cho 03/15/2012

The FHFA’s decision to not allow for principal reductions on Fannie Mae and Freddie Mac loans due to taxpayer costs and other issues came under sharp criticism during a Senate subcommittee hearing Thursday.

John DiIorio, CEO of 1st Alliance Lending, a mortgage origination firm, argued in support of principal reduction, even when analyzing the benefits from a bottom-line perspective, not simply as a form of aid.

“Again, let me emphasize – these investors and mortgage holders that we work with agree to principal reduction in these situations voluntarily,” said Dilorio in his written testimony. “Moreover, they make the decision to do principal reduction not out of a sense of charity, but because they believe it is in their best financial interest to do so. They are sophisticated, and are doing these transactions to maximize asset value.”

Dilorio also called principal reduction the best economic option for the holder of the mortgage when done correctly and in a targeted manner.

Laurie Goodman, senior managing director of Amherst Securities, said there were a number of flaws in an FHFA study used to defend the decision to not apply principal forgiveness, and discussed three major criticisms and “technical flaws.”

For one, Goodman said the study was based on a hypothetical model rather than actual HAMP results.

As one of the technical flaws, Goodman said in her testimony that “the results were done on a portfolio level, not an individual loan level. Thus, the FHFA did not consider the possibility of following a forgiveness strategy for some borrowers and a forbearance strategy for others.”

Goodman also pointed that the FHFA did not differentiate between loans with mortgage insurance versus loans without it, and further explained that, “when there is mortgage insurance, it is generally not NPV-positive to the GSEs to do principal forgiveness – forbearance creates the preferred outcome, as the MI does not cover the forgiven amount.”

The study Goodman referred to was used by Edward DeMarco, FHFA acting director, to respond to a request from the House Committee on Oversight and Government Affairs on whether principal forgiveness on GSE loans would be in the interest of taxpayers.

“I would suggest that they if they have doubts about the value of principal reduction, they need not commit wholesale to principal reductions, but could start by dipping their feet into the water on a pilot or limited basis, to test out how and whether principal reduction is effective,” said Dilorio.

Mark Calabria, director of financial regulation studies at the Cato Institute, shared a different opinion on principal reduction, and cited industry facts from Fitch Ratings to support his opinions.

“The vast majority of underwater borrowers are current on their mortgages,” said Calabria. “Even the majority of deeply underwater borrowers are current. For prime borrowers with loan-to-values over 125 percent, over 75 percent are current. Over half of deeply underwater subprime borrowers are current.”

Calabria also pointed that GSE loans display a smaller percentage, just 9.9 percent of underwater loans, compared to private label securities, with 35.5 percent of loans underwater.

Citing a CoreLogic report which stated 22.8 percent of all residential properties with a mortgage are in negative equity, Calabria explained that the situation is concentrated in five states: Nevada, Arizona, Florida, Michigan, and Georgia, with those states having an average negative share of 44.3 percent, compared to 15.3 percent for the remaining states.

“Any taxpayer efforts to reduce negative equity would largely be a transfer from the majority of states to a very small number,” said Calabria.

In response to criticism FHFA has been receiving, Calabria said Acting FHFA Director DeMarco should be commended.

“Given FHFA’s estimate that a broad based program of principal reduction would cost almost $100 billion, the argument that an unelected, unappointed, acting agency head should, in the absence of statutory authority, spend $100 billion on taxpayer money is simply inconsistent with our system of government,” said Calabria, who also stressed that $180 billion in taxpayer dollars has been used to rescue the GSEs.

The moral hazard issue was also addressed during the hearing, which is the fear that offering incentives such as principal reduction will lead to borrowers purposely defaulting to reap benefits.

“We understand that the primary issue in the mind of the FHFA is that more than 90 percent of GSE loans are current,” said Goodman, who offered two solutions.

“The first solution is to require that the borrower be delinquent as of a certain date, so performing borrowers do not intentionally go delinquent in order to get the principal reduction,” said Goodman. “The other choice is to establish a series of frictions so that only those borrowers who need the principal reduction take advantage of the program. This could involve the inclusion of a shared appreciation feature or other frictions to default.”

Goodman’s example and explanation for a generally negative NPV when applying principal forgiveness for loans with mortgage insurance

- Assume a borrower has a $100,000 loan, on a house worth $75,000, and the GSEs have mortgage insurance from a mortgage insurer, which covers any loss down to $70,000.

- The borrower defaults, and the GSE offers the borrower $20,000 of principal reduction, which reduces the loan balance to $80,000, and gives the loan a 75% chance of eventual success. If the loan does not re-default (there’s a 75percent chance of that happening), the GSE ends up losing the $20,000 principal amount they gave up.

- But if the loan re-defaults and the house then sells for $70,000 (25 percent chance), the mortgage insurance pays $10,000 to the GSE for the lost principal, in which case the GSE still loses $20,000.

GSEs Prohibited From Purchasing Mortgages With Private Transfer Fees

By: Krista Franks Brock 03/15/2012

The Federal Housing Finance Agency (FHFA) released its final rule regarding private transfer fees Thursday. After reviewing the 4,200 comments it received in response to its proposed guidance, the FHFA is issuing a rule that restricts Fannie Mae, Freddie Mac, and the Federal Home Loan Banks from taking on mortgages “encumbered by certain types of private transfer fee covenants and in certain related securities,” the FHFA stated Thursday.

Private transfer fees, also known as Wall Street home resale fees, require property owners to pay either a fixed amount or a percentage of sale price when they sell their property. These fee covenants are often enacted by property developers or homeowner associations and may be effective for terms of 20 years or 99 years after construction.

The FHFA is allowing some exceptions to its rule. When private transfer fees go to homeowner associations or other organizations that use the fees “to benefit the property,” the rule will not apply.

On the other hand, “Fees that do not directly benefit the property are subject to the rule, and would disqualify mortgages on the property from being sold to Fannie Mae or Freddie Mac, or used as collateral for Federal Home Loan Bank advances,” FHFA stated in its final rule.

The GSEs and the Federal Home Loan Bank have until July 16 to enact the rule, which will apply “with limited exceptions” to transfer fee covenants created after February 8, 2011, the date the FHFA released its proposed rule.

In its proposed rule, the FHFA expressed concerns mirrored by many throughout the industry-“that private transfer fees may be used to fund purely private continuous streams of income for select market participants” and that they “may not benefit homeowners or the properties involved.”

In addition to the question of whom the fees are benefiting, many throughout the industry are concerned with how the fee covenants are managed and disclosed to homeowners.

“Private transfer fee covenants create myriad problems for consumers and lenders alike,” the American Land Title Association (ALTA) said in its response to the proposed rule last fall. “When attached to a property, these fees infect every part of a real estate transaction, including the insurance of a mortgage.”

In fact, the ALTA points out that the Federal Housing Administration has refused to insure mortgages with private transfer fee covenants since 2010.

Often, transfer fees do not apply to the initial purchase and thus are not recorded at the time. When the homebuyer later sells the property, the transfer fee often comes as a surprise, according to the FHFA.

Unpaid transfer fees result in liens preventing properties from being sold.

In its final rule, the FHFA made clear that it is not prohibiting private transfer fees in the market, but instead it is instructing the GSEs that purchasing or investing in properties that hold private transfer fee covenants “is an unsafe and unsound practice in which they shall not engage.”

Thursday, March 15, 2012

Gov't Programs on Housing, Lending Need Forethought

When the stock market crashed in 1929, the severe economic depression that followed over the next decade was prolonged unnecessarily by government policies such as the Smoot-Hawley Tariff and over-manipulation of the money supply, says Timothy Dwyer, founder and CEO of Entitle Direct Group.

Now, the wrong kinds of government interventions into housing could cause a protracted slump in real estate and the broader economy, Dwyer says. For example, Dwyer characterizes potential changes to the mortgage interest deduction and certain proposals around the qualified residential mortgage (QRM) as intrusions that would harm housing by preventing the market from clearing supply.

“Private equity firms are moving investment dollars into foreclosed homes,” says Dwyer, a former investment banker. “But I believe that certain government policies would inhibit that clearing mechanism.”

These proposals stem from good intentions — specifically, to avoid the overheating of the housing market similar to what happened in the earlier part of the last decade.

“In the period from 2002 to 2007, the pendulum swung very badly to a side where people who should not have been obtaining mortgages were by no-doc loans and no-income-verification loans,” Dwyer says. “All of those things allowed people who shouldn’t have had homes to buy them.

New government legislation and initiatives designed to prevent that from happening again may seem admirable, but possible unintended consequences — such as responsible, creditworthy borrowers being locked out of loans — need to be considered more than they are now. As the example of the Great Depression demonstrates, the wrong moves could produce stagnation and decline despite their noble intent.

“People should be able to purchase homes in this market, but they’re unable to because the credit markets seized up,” Dwyer says. “Now we have this overhang of [current and proposed] government policies that further impede creditworthy people from taking advantage of this market.”

By Brian Summerfield, REALTOR® Magazine

Most Home Owners Unaware of Gov't Aid Programs

More than 70 percent of home owners are unaware of government mortgage modification programs to help underwater borrowers, according to a new survey by, an online credit servicer.

Underwater home owners--those who owe more on their home than it’s currently worth--are at risk of falling behind on their mortgage payments or falling into foreclosure. The government offers several programs aimed at helping underwater home owners refinance their loans or obtain a loan modification to make their monthly payments more affordable.

Seventy-two percent of the 300 survey respondents said they had never heard of such programs as the Home Affordable Modification Program (HAMP) or the Home Affordable Refinance Program (HARP). In fact, only 13 percent of the respondents said they had heard of both HAMP and HARP.

The two government programs provide struggling borrowers a way to refinance into today’s ultra-low mortgage rates.

“Prior to these plans, underwater home owners, whose mortgages were worth more than their homes, had little recourse but to either pay the higher mortgage rate on the devalued property or ultimately foreclose,” according to “The programs help underwater home owners avoid foreclosure by allowing borrowers to renegotiate the terms of their mortgage, refinance at lower rates, and adjust monthly mortgage payments downward, in line with current market valuations.”


Foreclosures Fall 8%, New Wave Expected

After falling 19 percent in January, foreclosures continued to fall in February with filings dropping 8 percent last month, according to RealtyTrac’s latest report. The big drops in foreclosures have served as a hopeful sign in the housing market that the foreclosure crisis was finally fading.

But housing experts caution that banks haven’t unclogged the pipeline of foreclosures yet, and a new wave of foreclosures is on its way. A $25 billion mortgage settlement among the nation’s five largest banks and state attorneys general is expected to prompt lenders to speed up their foreclosure processing in the months ahead.

The signs are already there: Twenty-one states posted increases in foreclosure filings in February--the highest number since November 2010, RealtyTrac reports. In Florida especially, the numbers dramatically increased in February: In Tampa, Fla., foreclosure filings in February were up 64 percent and spiked by 53 percent in Miami.

"February's numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed," says Brandon Moore, CEO of RealtyTrac.

Source: “Foreclosures Fall, but There’s a ‘Rising Tide’ Ahead,” CNNMoney (March 15, 2012)

Short Sales Get Shorter: New Deadlines to go into Effect

As part of a settlement with state attorneys general, the five largest mortgage servicers are adopting new requirements for short sales, which is expected to speed-up what has been known as a lengthy process.

Here are some of the new requirements for servicers under the settlement:

Servicers must provide borrowers with a decision within 30 days after receiving a short sale package request.
Servicers will be required to notify a borrower, also within 30 days, if any necessary documents are missing to process the short sale request.
Servicers must notify a borrower immediately if a deficiency payment is needed to approve the short sale. They also must provide an estimated amount for the deficiency payment needed for the short sale.
Servicers are also required to form an internal group to review all short sale requests.
Banks will be considered in violation of the settlement requirements if they take longer than 30 days on more than 10 percent of the short sale requests. Violations can carry fines of up to $1 million and $5 million for repeat offenses.

"If a real estate broker can get a checklist from the bank detailing what documentation is needed, everything can be provided up front, and the bank will be required to give a thumbs-up or a thumbs-down within 30 days,” short sale specialist Chris Hanson with the Hanson Law Firm told HousingWire. “That's not a bad deal.”

Source: “AG Settlement Starts the Clock on Short Sales,” HousingWire (March 14, 2012)

Top Five Questions Treasury Officials Need to Ask About the Housing Market

The federal government needs an exit from the housing market, even as it tries to also tackle long-term unemployment, financial reform, and growing fears of deflation.

The sale of new homes has lagged since April, when the first-time home buyer’s tax credit expired. Now taxpayers are on the hook for $148 billion for propping up Fannie Mae and Freddie Mac, the for-profit mortgage companies the federal government took over in September 2008, and, according to new data from ProPublica, only 30 percent of the 1.3 million homeowners who applied for mortgage modifications to stave off foreclosure have received them, thanks to service problems and bureaucracy. “The government is sitting at the Texas Hold 'Em tables, and they’ve gone all in,” says Karl Case, a housing economist and cofounder of the S&P/Case-Shiller Home Price Index.

Can the government worm its way out of this mess? A group of Treasury officials, economists, mortgage-company executives, and bankers will gather in Washington on Tuesday to talk about the ways they can tackle the big policy questions surrounding housing finance. NEWSWEEK informally polled a few economists and academics to pinpoint the five basic questions the group needs to ask.

1. How involved should the government really be in the housing market?

Between Fannie Mae, Freddie Mac, and the Federal Housing Authority, the federal government now controls about 90 percent of the U.S. mortgage market. Even the most vocal big-government proponent agrees that’s too large a share. The government intervened in Freddie Mac and Fannie Mae because, as private entities, they failed. But in the long run, what should these mortgage companies look like? Should they be private entities run like utility companies with the government providing catastrophic insurance? That's what Tom Lawler, former chief economist of Fannie Mae, asks. Should the government ensure the mortgage-backed security rather than the mortgage itself? That question is from Laurie Goodman, an Amherst Securities Group analyst. And if the government is so involved in the housing market and may be for the next two to three years, shouldn’t it be careful about regulating it and who it lends money to?

2. What should be required of people if they’re going to buy a house?

This is a great time to buy a house, provided you’re employed, have great credit, and are willing to make a nice down payment. “The No. 1 question now is whether people are willing to go through the full monty in terms of disclosing assets to get a mortgage,” says Lawler. But those who are willing to submit to increased scrutiny can receive a 30-year mortgage at an interest rate as low as 4 percent. So, while the home buyer with poor credit, a small income, or no down payment may be out of luck, the more conservative home buyer with savings and an income proportional to the mortgage debt is in luck. Is this what we want the requirements to look like moving forward, and how will we regulate them?

Should the government put a limit on the size of the mortgage it’s willing to insure?

The government is on the hook for 90 percent of the mortgages in this country, including loans of up to $750,000 that the Federal Housing Administration insures. "It's hard to say that's a program for low-income to moderate-income people," says Dean Baker, codirector of the Center for Economic and Policy Research. Is there a way for the government to cap its insurance on mortgages—similar to the way the FDIC caps the amount of bank deposits it's willing to insure?

4. What should the future of homeownership look like?

One of President George W. Bush’s legacies was the “homeownership” society that encouraged Americans to purchase homes. That same vision may look much different in the future, if the government regulates the mortgage market more closely or proposes stronger lending requirements. Will everyone feel compelled to own a home as part of the American Dream? Will homeownership become something that only upper-middle-class families can afford, particularly in major metropolitan areas? Or will homeownership lose some of its luster, thanks to the foreclosure crisis, or to the fact that homes are now worth less than their purchase price? Will renting seem more attractive, since it also provides people with mobility—the chance to relocate for work or other personal matters?

5. Finally, do housing conferences accomplish anything?

The Obama administration sponsored a jobs summit, similar to this housing conference, in November 2009, which was largely mocked for its uselessness. It too gathered together prominent thinkers and business leaders to mull job creation. Months later, the national employment rate still stands at 9.5 percent. Is it even worthwhile to talk about the ways the government can and should extricate itself from the housing market when the economy remains so fragile and that possibility is a few years off? “Nothing will happen on reform for years,” Goodman says. “The conference is a big blah, blah, blah.”

Source: US News

Wednesday, March 14, 2012

Western States See Big Drop in Foreclosure Sales

Nevada has long held the No. 1 spot for the most foreclosures in the nation. And while it still does, a dramatic shift is taking place in the state. Foreclosure sales dropped 40 percent in February in Nevada, according to foreclosure data of western states by ForeclosureRadar.

Other western states hard-hit by foreclosures are also seeing big improvements in a reduction to foreclosure sales. Foreclosure sales dropped in Oregon by 32 percent, 22 percent in California, 17 percent in Arizona, and nearly 7 percent in Washington.

Nevada has seen dramatic decreases in its foreclosure sales and filings since the state implemented a new law that says lenders can be held criminally liable for any errors made in the foreclosure process. Other states are considering adopting similar measures.

While states have seen a drop in foreclosure sales, some state are continuing to see an increase in foreclosure filings, a sign that the foreclosure crisis is not completely behind hard-hit western states. For example, foreclosure filings increased 39 percent in Oregon and 6 percent in Arizona in February. However, ForeclosureRadar notes that the spikes were offset by steep declines in the month prior.

Source: “Nevada Foreclosure Filings and Sales Plunge: ForeclosureRadar,” HousingWire (March 13, 2012)

Groups Step Up to Stop ‘Forced’ Homeowners Insurance

Home insurance policies are generally a requirement in order for borrowers to get a home loan, and for those home owners who let their policies lapse or don’t buy it on their own, mortgage companies can do it for them. The result is often pricey homeowners insurance that home owners are then billed for.

Federal and state officials are becoming increasingly concerned about the high cost of these “force-placed insurance” policies, The Wall Street Journal reports.

The Consumer Financial Protection Bureau recently announced that it plans to issue rules “to prevent [mortgage] servicers from charging for this product unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance.”

Fannie Mae is also cracking down on these forced policies because it says that this type of coverage is usually much more expensive and makes it tougher for home owners to afford their payments. If the home owner falls into foreclosure, Fannie Mae then gets stuck with the bill.

“Fannie Mae said it would solicit proposals from insurance companies seeking to compete for its force-placed business,” The Wall Street Journal reports. “If it ultimately decides to do so, it would be a departure from current practice, in which lenders manage their own business relationship with force-placed insurance providers.”

Fannie is to issue further guidance for mortgage servicers on the issue soon.

Source: “‘Forced’ Home Insurance Policies Face New Scrutiny,” The Wall Street Journal (March 7, 2012)

4 of 19 Banks Fail ‘Stress’ Test

Four of the the country’s 19 largest banks do not have enough capital to withstand another economic downturn, if one occurs, according to the Federal Reserve’s latest stress test for banks.

The four banks at risk named in the report are Citigroup, SunTrust, Ally Financial, and MetLife.

The hypothetical stress test, conducted annually by the Federal Reserve but not usually released publicly, analyzes if banks could weather the storm if the economy saw a 21 percent reduction in home prices, 13 percent unemployment, and a 50 percent drop in stock prices. The test aims to see which banks would be able to continue to lend money to individual and businesses even if such catastrophic losses occurred.

For any banks that fail the stress test, the Fed can force them to raise money, such as by selling additional stock or issuing debt.

For the banks that did pass, they are able to raise their dividends and take action in luring more investors to their stocks. This year’s results are "clearly good news — the U.S. banking system can now withstand a quite severe recession without falling over," Douglas Elliott, a fellow at Brookings Institution, told the Associated Press. Among the banks that passed the stress test are U.S. Bancorp, JPMorgan Chase, and Wells Fargo.

Source: “Federal Reserve Annual Stress Test Fails 4 of 19 Big Banks,” The Associated Press (March 12, 2012)

Fed Renews Vow to Keep Rates Low

The Federal Reserve sounded more upbeat about the direction of the economy, citing signs of an improving job market and increased household spending, according to a statement released after the Fed’s annual policy-making committee meeting.

The Fed said they expect “moderate economic growth,” but threats still remain, such as a sluggish housing market. The Fed renewed its commitment at the meeting to keep interest rates at record-lows.

The committee “is clearly shifting its stance away from blanket gloom to something more realistic, but they have a long way to go,” Ian Shepherdson, chief economist at High Frequency Economics, told The New York Times.

The Fed has vowed to continue to keep short-term interest rates near zero until late 2014, possibly longer. The Fed also has been stockpiling Treasury securities, which may even reduce borrowing costs more too. Mortgage rates have been at -- or hovering near -- all-time record lows for several weeks.

Source: “In Otherwise Dour Report From Fed, the Tiniest Touch of Optimism,” The New York Times (March 13, 2012)

Report: Investors Buying Foreclosures on West Coast

By: Esther Cho 03/13/2012

For West coast states, the foreclosure wave is reported to be dying down as third parties, who are typically investors, snatch up foreclosed homes, according to the February 2012 ForeclosureRadar report, which only includes Arizona, California, Nevada, Oregon, and Washington.

While third party sales were down month-over-month, as a percentage of all sales, third parties purchased 37.6 percent of foreclosures, up from 20.3 percent a year earlier, and 2.2 percent in February 2008, according to the report.

From February 2011 to February 2012, foreclosure sales to third parties increased 84.62 percent in Oregon, 61.33 percent in Nevada, 39.72 percent in California, 23.31 percent in Arizona, and 7.35 percent for Washington.

Foreclosure filings dropped in California, Nevada, and Washington on a month-over-month basis, while Arizona saw a 6 percent increase and Oregon jumped 39.4 percent.

“Government intervention into the foreclosure crisis has clearly succeeded in slowing foreclosures. Unfortunately, it has also largely failed to deal with the real problem-negative equity. While principal balance reductions and short sales are friendlier than foreclosures for eliminating negative equity, foreclosures are an extremely effective, if perhaps crude, cure as well.” Stated Sean O’Toole, founder and CEO of ForeclosureRadar.

Even though Nevada’s foreclosure starts dropped 14.5 percent on a month-over-month basis, the foreclosure timelines increased 21.6 percent, going up from 301 days to 366 days. Time to foreclosure is the average number of days between the filing of the Notice of Default (NOD) and the day a property in foreclosure goes to sale at an auction.

“While I believe banks should be strongly encouraged to work with homeowners who fall behind, there will be uncooperative homeowners,” said O’Toole. “Passing laws to essentially eliminate foreclosures, as they appear to have accomplished in Nevada, and are now contemplating with similar draconian measures in California, is likely to do more harm then good.”

Nevada passed a law that took effect on October 1 which forbids trustees that are a subsidiary of a foreclosing bank to handle the foreclosure.

Mike Daniel, ForeclosureRadar marketing director, explained that the law led to stricter requirements on filing new Notices of Default.

“Essentially, banks in this situation have had to restructure their practices in Nevada, and in turn brought NODs to almost a stand still,” said Daniel. “We feel this law specifically targeted ReconTrust, the in-house trustee for Bank of America and Countrywide, which handles a lion’s share of the loans in the state. Without their ability to keep things moving along, the process comes to a halt.”

The time it takes to foreclose also increased on a month-over-month basis in Oregon also by 7.1 percent, with an average of 167 days to foreclosure. California increased by 6.5 percent in February and averaged 264 days to foreclosure. Other West coast states saw a decrease.

Foreclosure sales also dropped on a month-over-month basis in all states, with Nevada seeing the largest drop at 40 percent and Oregon following behind at 32.3 percent.

FOMC Votes 9-1 to Keep Rates Low, Housing Sector Still "Depressed"

Echoing the statement it issued following its January meeting, the Federal Open Market Committee said Tuesday “the economy has been expanding moderately” in the last two months, but the housing sector “remains depressed” in deciding, by a 9-1 vote, to keep the Fed Funds rate at historic low levels.

The Committee said “labor market conditions have improved further…the unemployment rate has declined notably in recent months but remains elevated.”

The FOMC said it “anticipates that economic conditions – including low rates of resource utilization and a subdued

outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Richmond Fed President Jeffrey Lacker cast the sole dissenting vote because he “does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014,” according to an FOMC statement.

“Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook,” the FOMC said. “The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate” of price stability and maximum employment.

The FOMC said it would continue a “highly accommodative stance” for monetary policy: low interest rates. Despite the low rates, housing – arguably the sector most affected by low rates – remains mired in a slump.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Zillow report: Median Rent Prices on the Rise as Home Values Drop

By: Esther Cho 03/13/2012

While homes prices continue to be on the decline, rent prices are actually on the rise and showed a 3 percent increase from January 2011 to January 2012, as opposed to home values, which dropped 4.6 percent during that same period, according to the January Zillow Real Estate Market Reports released today.

“While it seems that rents are rising at the expense of home values, the opposite is true. A thriving rental market will stimulate home sales as investors snap up low-priced inventory to convert to rentals,” said chief economist for Zillow Dr. Stan Humphries in a release.

To clear out the excess of unsold properties, the federal government announced an REO Initiative in August 2011 to sell homes owned by government agencies to investors with the purpose of converting them into rental units. The first block of 2,490 REOs went to sale in February.

When looking at rent prices on a month-over-month basis, January’s median rent prices actually declined slightly, falling 0.3 percent to $1,218, according to the Zillow Rent Index (ZRI). During the same period, home values fell 0.5 percent to $146,200, according to the Zillow Home Value Index (ZHVI).

The states that saw the greatest year-over-year decline in home values were Nevada (-10.3), Illinois (-9.4), Georgia (-9.3), Washington (-7.8), and New Jersey (-7.2), according to the ZHVI.

Based on the ZRI, the states with the greatest increases in median rent over a year were New Jersey (+16.5), New York (+13.7), Kansas (+10.2), Indiana (+10), and Michigan (+10.0).

The ZRI also showed year-over-year gains for 69.2 percent of metropolitan areas covered by the index. For the ZHVI, only 7.3 percent of metro areas saw increases in home values.

For some metros, the increase in rent and drop in home prices were closely matched. In the Chicago metro, the ZRI went up 9.1 percent year-over-year, while home values fell 10.4 percent during the same period. In the Minneapolis-St. Paul metro, rents rose 11 percent as home values dropped 8.1 percent.

“The flourishing rental market is the silver lining to the nation’s housing downturn,” said Humphries. “We haven’t had a good way to quantify what is happening with rental rates until now, and the inaugural Zillow Rent Index shows us a healthy and growing rental market across the majority of the country, even as home values continue to fall.”

Nationwide, foreclosures decreased by 0.3 percent compared to the year before in January 2011, but went up 0.3 percent on a monthly basis compared to December, with 8.4 out of every 10,000 homes foreclosed upon in January 2012.

Foreclosure re-sales went up by 2 percent over a year ending in January 2012 and rose by 1.4 percent compared to the month before. Overall, foreclosure re-sales accounted for 19.46 percent of all home sales in January, and Nevada had the highest percentage of foreclosure re-sales at 49.65 percent. The state also saw a yearly increase of 12.6 percent for foreclosure re-sales.

Tuesday, March 13, 2012

Property Taxes Dropping?

More Americans whose homes have fallen in value may finally see that break on their property taxes that they’ve been waiting for, according to a USA Today analysis.

As home values have fallen, many Americans have wondered why their property taxes have stayed the same or even risen.

"People say, 'Hey, my house value went down. How about my tax bill going down?' But it doesn't work that way," Robert Ross, chief assessment officer for McHenry County, Ill., told USA Today.

Many states base their tax assessments on home values from three, six, or up to 10 years ago. This protects home owners from seeing rapid increases in their taxes if home values dramatically increase, but as the USA Today article points out, it also means that home owners can see lengthy delays to any tax cuts when home values drop.

That help explains why cities, counties, and school districts are still “collecting about 20 percent more in property taxes than they did in 2006, when home values were one-third higher,” the article notes.

But some home owners may soon see their property taxes reflect their current home’s assessment. For the first time since 1995 — and only the third time in 40 years — property tax collections have fallen below the inflation rate, dropping 0.9 percent in 2011, according to USA Today.

Source: “Property Tax Collections to Start Downward Trend,” USA Today (March 12, 2012)

Builders Off to Early Spring Selling Season

The spring selling season is already heating up for home builders, with sales activity increasing and some builders slightly increasing home prices, reports Barclays Capital.

"We believe the spring selling season has arrived strongly enough to kick-start a positive feedback loop in housing for the first time since 2005," Barclays Capital analysts reported.

Analysts with Barclays Capital project 1 million housing starts by 2013. The analysts project that housing starts will return to 1.7 million — a more normal amount by historical standards for the sector — by 2015. Last year marked one of the worst selling years for home builders on record.

Some home builders have already started rising prices slightly by about $1,000 to $3,000 due to the increase in demand.

Analysts attribute some of the pick up in demand to the rise in the nation’s employment rate recently.

"Job creation has been considerably better this fall than it was last year, which we believe will lead to a stronger, more sustained spring selling season," analysts say.

Source: “Homebuilder Spring Selling Season off to Solid Start,” HousingWire (March 12, 2012)

Seniors, Young Adults Will Influence Housing

Aging Baby Boomers and their “Echo Boomer” children will significantly impact trends in the nation’s housing market over the next 20 years. In a new report released by the Bipartisan Policy Center, “Demographic Challenges and Opportunities for U.S. Housing Markets,” researchers at the National Association of REALTORS®, The Urban Institute, and the University of Southern California analyze key demographic trends and their likely influence on housing and homeownership in the United States.

Over the next two decades, the aging baby boomer generation will swell the nation’s senior population by 30 million. That demographic shift will likely help increase the supply of housing, since people over age 65 typically release much more housing than they absorb.

“The Northeast and Midwest are most likely to see a large number of older home owners selling their homes to younger home owners as the baby boomers age,” says NAR Chief Economist Lawrence Yun. “This increased supply could mean additional buying opportunities for Echo Boomers. That generation will absorb 75-80 percent of the available inventory of owner-occupied housing by 2020.”

The Echo Boom generation includes nearly 65 million people born between 1981 and 1995. NAR’s analysis illustrates the potential impact of economic and housing policy on this generation’s demand for homes as they come of age.

“Housing, jobs, and the economy are inextricably connected,” Yun says. “A strong recovery with favorable housing market conditions would encourage substantial growth in Echo Boomer households, which would help absorb the current vacant inventory and stabilize conditions for residential construction. Under a reasonable ‘middle’ recovery scenario, approximately 12 million new households will be formed over the next decade, requiring construction of up to 15 million new housing units.”

NAR President Moe Veissi notes that current market trends favor would-be home owners of all ages. “As the supply of rental housing continues to fall, rents are increasing,” he says. “At the same time, affordability for home owners is at a record high. For buyers who qualify and are ready to assume the responsibilities of owning a home, opportunity is knocking.”

Source: NAR

More Details Emerge in $25B Mortgage Deal

The government vows to closely monitor that the nation’s five largest banks fulfill the aid to home owners outlined in a $25 billion mortgage settlement over foreclosure allegations.

More details emerged in court filings on Monday of the landmark settlement among the nation’s five largest banks and state and federal government officials. The settlement, first announced last month, stems from allegations over banks’ foreclosure practices, although as part of the settlement the banks do not have to admit to any wrongdoing.

Among some of the aid outlined in the $25 billion settlement for home owners:

Banks have agreed to pay about $20 billion to help home owners avoid foreclosure. The majority of that money will be allocated to reducing the mortgage principal and modifying loans for about 1 million underwater home owners.
Banks have agreed to pay $5 billion to federal and state government officials, with a portion of that money going to compensate about 750,000 Americans who have been found to be wrongfully foreclosed upon from 2008 through 2011. Affected home owners will receive $2,000 checks.
Banks will be required to adopt new processing standards for foreclosure. For example, banks will be unable to pursue a foreclosure when home owners are being considered for a loan modification.
Banks must comply with the terms of the settlement or face stiff penalties. Banks are required to complete all loan relief requirements as part of the settlement within three years; 75 percent of it is to be fulfilled within two years. Any bank that violates the agreement will be fined $1 million for each violation, capped at $5 million for repeat violations.
The settlement does not free banks from criminal action. Federal and state officials can still pursue criminal action action against banks for any wrongdoing over foreclosures.

The mortgage settlement only applies to mortgages held privately. It does not apply to mortgages held by Fannie Mae and Freddie Mac.

The banks part of the settlement are Bank of America, Citigroup, JPMorgan, Chase, Wells Fargo, and Ally Financial.

Some banks have negotiated separate requirements so they won’t have to pay as much in penalties to federal and state officials. For example, in return to a reduction in penalties, Ally Financial has agreed to cut the mortgage principal for struggling home owners by 105 percent of the home’s value. Bank of America says it will trim the mortgage principal of more than 200,000 struggling borrowers.

The settlement still must be approved by a judge to be final.

Source: “Feds Promise Tough Oversight in Mortgage Deal,” Reuters (March 12, 2012) and “Gov’t Files $25B Mortgage Settlement; Banks to Provide Relief Without Admitting Wrongdoing,” Associated Press (March 12, 2012)

After More Than a Month, $25B Settlement Filed in Court

By: Esther Cho 03/12/2012

The $25 billion mortgage servicing settlement agreement was filed in federal court Monday, announced the Justice Department, HUD, and 49 state attorneys general.

State and federal officials and five of the largest servicers – Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup, and Ally Financial – settled on February 9, outlining an agreement to address faulty practices in the mortgage industry and to deal with issues regarding wrongful foreclosures.

Oklahoma was the only state to opt out of the agreement, with the state’s Attorney General Scott Pruitt deciding to seek out a separate settlement leading to $18.6 million.

Now, there are court documents to provide the details of the servicers’ financial obligations under the agreement, which include $20 billion in consumer relief, and new servicing standards that will change foreclosure practices for mortgage companies.

The $20 billion in relief will help homeowners through principal reduction and refinancing for underwater homes, principal forbearance for unemployed borrowers, short sales assistance, and additional benefits for service members. An additional $5 bill will go to government officials.

With new servicing standards are new policies for foreclosure prevention. For example, servicers will no longer able to foreclose on a borrower being considered for a loan modification, and servicers are required to have a single point of contact for borrowers.

The settlement also establishes a third-party monitor to oversee implementation of the servicing standards, and if violations are found, the servicer can be penalized up to $1 million per violation or up to $5 million for certain repeat violations.

After federal authorities led investigations on servicing practices, issues were found such as lost paperwork, robo-signing, and unfair fees.
While the settlement has been hailed as a significant landmark agreement that will help millions of homeowners, critics question the real impact considering the settlement does not include Fannie Mae and Freddie Mac, which are said to control more than half of all mortgages in the U.S.

AMI Warns $25B Settlement Will Cost Innocent Investors

By: Esther Cho 03/12/2012

While the top five servicers are known to be paying for the $25 billion settlement, the Association of Mortgage Investors (AMI) stated the settlement is expected to draw billions of dollars from uninvolved investors, which include seniors and unions.

Many public institutions and retiree institutions invested in mortgage-backed securities because they thought they were a safe investment, said AMI Executive Director Chris Katopis.

Unbeknownst by investors would be issues with mortgage servicing addressed through the $25 billion settlement and the high number of underwater homes needing to be rescued.

In a HUD fact vs. myth sheet published Monday, it was argued that the settlement will not cost teachers, firefighters, and others who invested into mortgage-backed securities.

While HUD did acknowledge that the settlement could affect some investor-owned loans, the agency stated that when considering the projected losses from foreclosures on investors, applying loan modifications, including principal reduction, will actually cost less.

HUD further clarified only loans that are delinquent or at imminent risk of default can receive modifications.

Also, the settlement does not override existing contractual agreements between the servicer and investors. If contracts don’t allow for principal reduction, then servicers can’t apply principal reductions.

Despite heavy criticism, Edward J. DeMarco, FHFA acting director, has not approved Fannie Mae and Freddie Mac loans for principal reductions.

AMI also argues against the use of Net Present Value (NPV) to determine eligibility for a loan modification and would like to see the makeup of the formula disclosed.

Shrouded in mystery, NPV is said to provide an estimation of the likelihood of a loan defaulting again even after getting modified, according to

“The NPV model incorporated into the settlement must consider all of a borrower’s debts, be national in scope, transparent, and publicly disclosed,” said AMI in a statement. “An incorrect NPV model likely will lead to further re-defaults and further harm distressed homeowners.”

Katopis said re-defaulting will ultimately leave both investors and homeowners worse off.

While AMI supports the settlement claims against servicers, the association argues that while 49 state attorneys generals, federal officials, and five servicers were involved, investors were left out of the equation when settlement terms were negotiated.

As part of the settlement, we’re critical of the fact that investors are not on the table and no doubt that investors will have to pay, said Katopis, who also said AMI is thoroughly conducting investigations to see what can be done to protect investors.

BofA to Offer Principal Reductions of More than $100K

Some Bank of America borrowers may be in for principal reductions in amounts exceeding $100,000, according to the latest developments in the settlement the bank and four other large servicers made with state and federal regulators.

Of the five servicers participating in the settlement, BofA is set to pay the largest portion of the total $25 billion settlement. The bank will pay $3.24 billion to the government and $8.58 billion to borrowers.

Of BofA’s total, $1 billion is part of a separate settlement regarding loan origination issues for Countrywide, which BofA acquired in 2008.

While the other four servicers in the national settlement are being required to diminish principal so underwater borrowers have loan-to-value ratios of 120 percent or less, BofA will be reducing principal for about 200,000 homeowners to fall in line with current market values.

For some deeply underwater borrowers, this may result in reductions of more than $100,000.

The expanded principal reductions may prevent BofA from paying $850 million in penalties, according to the Wall Street Journal.

Fitch Ratings responded to the news stating that the 200,000 principal reductions will be “neutral to negative for some RMBS bondholders and potentially beneficial for the bank.”

Fitch suggests the loans most likely to qualify for the extended principal reductions will be those originated between 2005 and 2007.

“Because the bank has already reserved for penalties, any reversals could help BAC’s income going forward,” Fitch stated. “While the agreement will help the bank reduce the amount of penalties it owes over time, the aggregate best case benefit is moderate from a financial perspective.”

Monday, March 12, 2012

Facts on the 3.8% Health Care Tax

A 3.8 percent levy on certain investment income was included in healthcare legislation two years ago, and now misinformation about the tax’s application to home sales is being passed along over the Internet and e-mail, throwing some prospective home sellers into a panic. In actuality, very few owners will be affected by the new tax taking effect in 2013.

The tax will only be on investment income of upper income taxpayers. Included in the definition of investment income is capital gains from home sales above a certain amount and for households whose income is above a certain amount. This means individuals who make $200,000 a year or more, or married couples who earn at least $250,000 a year are affected. Additionally, the tax is only applied to home sales if the proceeds exceed $250,000 for an individual, or $500,000 for married couples. And there still are other income and tax particulars that are considered before the 3.8 percent tax is triggered.

The National Association of REALTORS® recommends that members become familiar with the tax, but avoid coaching their clients on the policy because the amount of tax will vary from individual to individual as the elements that comprise adjusted gross income differ from taxpayer to taxpayer. NAR has published a brochure on how the tax works, which is now available online.

Download the 3.8% tax brochure (PDF).

Source:NAR and "Realtors Say Despite Efforts, Tax Rumor Keeps Spreading," Glens Falls Post-Star (NY) (03/10/12)

BofA to Reduce Mortgages of Some Underwater Borrowers

Bank of America announced that it will trim up to $100,000 off the mortgage principal of about 200,000 home owners. The bank’s principal reductions are part of the $26 billion foreclosure settlement between five major banks and state and federal officials.

Borrowers who are eligible must be 60 days or more overdue on their mortgage as well as underwater — owe more on their home than it’s currently worth. Mortgages also must be owned by Bank of America or serviced by the bank’s private investors; mortgages owned by Fannie Mannie, Freddie Mac, the Federal Housing Administration and the Veterans' Administration will not be eligible for the principal reductions.

Bank of America last week also announced a temporary moratorium on foreclosure sales of homes that are covered under the settlement.

Bank of America is the second largest mortgage service carrier, behind Wells Fargo.

Source: “Bank of America Reaches Deal on Housing,” The New York Times (March 8, 2012)

Gov't Trims Half of Its Foreclosure Inventory

The government was able to chip away at its foreclosure inventory in 2011, reducing it by nearly half, HousingWire reports in analyzing financial statements from three government enterprises.

From the end of 2010 to 2011, Freddie Mac, Fannie Mae, and the Department of Housing and Urban Development saw a 49 percent reduction in the number of REO properties it owns. The three government enterprises held about 150,700 properties as of Dec. 31, 2011, compared to 296,000 at the end of 2010.

“The GSEs sold REOs at a record pace in 2011,” HousingWire reports. “Combined, both sold more than 353,000 previously foreclosed property for the year.”

Here’s a closer look by how much the government enterprises trimmed their foreclosure inventories:

HUD: Reduced its foreclosure inventory to about 32,000, a 47 percent drop from more than 62,000 it held at the end of 2010.
Fannie: Reduced its foreclosure inventory to more than 118,000, which is down 27 percent from about 162,000 at the end of 2010.
Freddie: Reduced its REO inventory to 60,500, down 16 percent from more than 72,000 in 2010.

Source: “Government-held REO Halved During Robo-Signing Freeze,” HousingWire (March 9, 2012)