Obama’s $20B Proposal: A Drop in the Bucket

February 28, 2011 (Chris Moore)

Although in the early stages, the battle lines are already being drawn in the sand over the Presidents reported proposal to force mortgage lenders and servicers to either pay fines of over $20 billion or to modify an equal amount of mortgage loans by writing down the principal balances.

On one side you have the mortgage industry, although yet to receive any proposal from the Obama Administration, they are already sounding the warning bell by claiming that writing down principal balances will do little to help the already fragile market recover and that $20 billion is too high. In support of the banking industry claim, they cite that in just over a year since the government loan modification programs began, loan modifications have done little to stop the foreclosure crisis; despite the fact the mortgage industry has privately modified twice as many loans as the governments crown jewel, HAMP. In the first year alone, 20 percent of all loan modifications have already defaulted again with the government projecting that ultimately as many as 60 to 70 percent of loan modifications will default a second time.

And on the other side, we have the always vocal Rep. Maxine Waters (D-Ca), who claims that the President’s proposal does not go far enough. For evidence, Ms. Waters cites the very liberal Center for Responsible Lending estimates that foreclosures between 2009 and 2012 will result in $1.86 trillion in lost wealth for families.

CoreLogic estimates that the nation has an aggregate negative equity of $744 billion. So what’s $20 billion going to do? If the first thing that came to your mind was “nothing,” then we’ve found some common ground. It’s like using a garden hose to put out a house fire…a drop in the bucket.

But isn’t there a bigger moral issue here? Gee it’s ONLY $20 billion, but who’s going to pay for it? According to “people close to the President,” the proposal is being crafted so the taxpayers will not be on the hook for this one. Does anyone besides me really believe that???

They told us the Healthcare Bill would make insurance affordable. I have to buy my own insurance and I can tell you first hand…there’s no truth in that statement. Every month I get a flyer from Blue Cross. In December, the cost of the lowest plan for 18-29 year olds was $84. In January it was $97, and the flyer I received this month was $111. Seriously, who’s really paying the cost for healthcare reform? You are.

And how are you all enjoying the Dodd-Frank Finance Reform Bill? Free checking? Gone. No yearly credit card fees? Gone. So who paid the cost of regulating the banking industry? You did.

And who do you think is going to pay the cost of this proposal? You will.

Government regulation in the free market place only leads to one thing…higher costs and fees passed down to the consumer…you and me.

But the bigger and more moral question is; should we all have to pay for the bad investment decisions made by other people? That’s right. Bad investment decisions. I didn’t stutter. Oh I’m sure that upset some of you, but that’s exactly what it was.

No matter which side of the political spectrum you are on…you’re blaming the other side for the housing crisis. But when you get right down to brass tacks you’re both right, it was both sides. It was the mortgage industry, mortgage brokers, mortgage banks, Wall Street, the banking industry, the Congress, the President, and the Federal Reserve…all were complicit in the makings of the financial and housing crisis we are all now facing. They knew we were in a bubble and they all just let it ride.

But, oops, we left out one very important person in all of this, the person who sat in that escrow office; pen in hand, buying a home they knew they couldn’t afford. You all hate me now, but it’s the truth. We all know them. They are our sisters and brothers, mothers and fathers, sons and daughters, friends and their families who bought homes they knew they couldn’t afford. And we warned them. Lord knows in 2005, 2006, and 2007, everyone who asked me, I told them, the bubble’s going to burst. And I’m sure most of you heard the same response I got, “That’s okay, when the payment goes up and I can’t afford it, I’ll just sell it.”

No. You won’t. You’ll lose it. And they all did. Everyone I knew who bought a home during those years has already lost their homes. Homes lost to low teaser rates that would never be repaid. But the problem was they all thought that if they couldn’t pay for it, with the prices going up, up, up, they’d easily be able to get out of it…and make money! But homes aren’t piggy banks, as many of you now know. Homes are investments, investments in families, in neighborhoods, and prosperous lives. So many people bought into the hype that prices would go up forever; they forgot that history always proves them wrong.

So now I go back to my original question, should we have to pay for other peoples bad investment decisions made by others? And if we should, shouldn’t we be paid for all of our other bad investments?

Seriously.

Shouldn’t everyone who lost money when Wall Street tumbled in 2009 be reimbursed for their losses? I mean after all, the stock market was being manipulated by Wall Street brokers and our own Federal Reserve, shouldn’t we be reimbursed? My poor dear mother lost half of her retirement in 2009. So she’s a bad investor, but shouldn’t she be reimbursed for something that was beyond her control? But you see, she was in control, she could have invested her money more wisely and gotten out of the stock market…but she didn’t. Just like all those people who could have walked out of that escrow office.

If you walk into a casino and drop ten thousand on a blackjack table, shouldn’t you be reimbursed for making a bad investment? When Toyota’s started accelerating on their own and the publicity hype damaged the value of their vehicles, shouldn’t you be reimbursed for the lost value?

And what about all the people who made good financial decisions? What’s their reward? What about my mother who bought her house in 1983 and didn’t fall for the hype, didn’t sell her house and didn’t buy more house than she could afford? Shouldn’t she be entitled to something for making a good decision? If one person has their principal written down…shouldn’t EVERYONE?

I could go on and on. The real question is; when are we going to stop the bailouts? Because that’s exactly what this is.

And some banking analysts claim there are unforeseen risks. Banks price their products based upon risk. Banks would recognize that they have to incorporate the risk of future levies into the pricing of mortgage credit; possibly causing mortgage lending to come to a complete halt by making it so costly that even less people would qualify for a home loan and forcing the government to assume an even larger role in housing finance. A role they are currently trying to get out of.

What would be the best way for banks to minimize these kinds of risks and penalties? Stop making home loans. Isn’t that what we’re already seeing with the extremely tight underwriting standards that the banks are operating under?

The problem with this plan and all of the other government bailout plans is that it never fixes the problem, but always penalizes the wrong people. Should the millions of people who will get nothing be asked to bear the pain in the form of higher costs and fees for the mistakes of others?

I think not.

Tags: bailouts, mortgage lenders, mortgage industry, mortgage loan, Obama proposal, $20 billion, housing bubble, bad investments

Investors Pushing Existing Home Sales Up

February 28, 2011 (Shirley Allen)

Investors and cash buyers drove existing home sales higher in January. Investors bought a whopping 23 percent of all existing homes, while a third of all sales were purchased for cash. January’s annual rate of 5.36 million home sales also represented a 5.3 percent annual gain over January 2010 figures, the first time in seven months that sales figures have exceeded those from one year earlier.

Information released in the National Association of Realtor’s (NAR) January Existing Homes Sales report showed single-family home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.69 million in January from 4.58 million in December, and are 4.9 percent higher than the 4.47 million level in January 2010. Existing condominium and co-op sales increased 4.7 percent to a seasonally adjusted annual rate of 670,000 in January from 640,000 in December, and are 7.9 percent above the 621,000-unit pace one year ago.

"The uptrend in home sales is consistent with improvements in the economy and jobs, which are helping boost consumer confidence,” said Lawrence Yun, NAR chief economist. “The extremely favorable housing affordability conditions are a big factor, but buyers have been constrained by unnecessarily tight credit. As a result, there are abnormally high levels of all-cash purchases, along with rising investor activity.”

January investor sales were up from 20 percent in December and from 17 percent one year earlier. All-cash sales represented 32 percent of all sales, compared to 29 percent in December and 26 percent in January 2010. It’s the highest percentage of all-cash sales reported since the NAR began tracking the figure in October 2008, when they made up only 15 percent of all sales. The average for all of 2009 was 20 percent.

“Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand,” Yun said. “With tight credit standards, it’s not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes.”

Regionally, existing-home sales in the Northeast fell 4.6 percent to an annual pace of 830,000 in January from a spike in December and are 1.2 percent below January 2010. Existing-home sales in the Midwest rose 1.8 percent in January to a level of 1.14 million and are 3.6 percent above a year ago. In the South, existing-home sales increased 3.6 percent to an annual pace of 2.02 million in January and are 8.0 percent higher than January 2010. Existing-home sales in the West rose 7.9 percent to an annual level of 1.37 million in January and are 7.0 percent above January 2010.

The national median existing-home price for all housing types was $158,800 in January, down 3.7 percent from January 2010. The median existing single-family home price was $159,400 in January, down 2.7 percent from a year ago. The median existing condo price was $154,900 in January, which is 10.2 percent below January 2010.

The median price in the Northeast was $236,500, which is 4.0 percent below a year ago. The median price in the Midwest was $126,300, which is 3.2 percent below January 2010. The median price in the South was $136,600, down 2.1 percent from a year ago. The median price in the West was $193,200, down 5.7 percent from a year ago.

Tags: NAR, existing home sales, investors, cash buyers, single family homes, condominiums, median home price

New Home Sales Plummet in January

February 25, 2011 (Chris Moore)

In the latest new home sales report released by the Commerce Department, new single-family homes plummeted 12.6 percent in the month of January to a seasonally adjusted rate of 284,000, a dismal showing following one of the sector’s worst years in half a century.

Overall, new-home sales were down 18.6 percent compared to January 2010. The median sales price for a new home dropped 1.9 percent from December to $230,600. Compared to last January, the median price still was up 5.7 percent.

Two out the four regions, the Northeast and the Midwest, experienced sales increases compared to December 2010, however, sales plummeted in the West by 36.5 percent, while the South saw sales dip 12.8 percent. All regions showed declines from year-over-year sales.

At January’s sales pace, the supply of new homes on the market rose to 7.9 months worth from 7.0 months worth in December. There were 188,000 new homes available for sale last month.

Buyers purchased 322,000 new homes last year, the fewest annual total on record going back 47 years. It was a drop of 14.1 percent from the 375,000 new homes sold in 2009. A glut of foreclosed houses on the market is putting pressure on new home sales, forcing builders to drastically scale back on construction projects.

New-home sales remain at about half the 600,000 a year pace that economists view as healthy.

Tags: Commerce Department, new home sales, single family homes, median sales price, average sales price, construction projects

FHFA Reports Home Prices Fall 3.9% in 4Q 2010

February 25, 2011 (Brian Moore)

The Federal Housing Finance Agency (FHFA) disclosed Thursday in its seasonally adjusted purchase-only house price index that U.S. home prices fell 3.9% in the fourth quarter when compared to a year earlier citing lingering unemployment and an oversupply of homes on the sales market for the price decline.

The Home Price Index HPI, calculated using home sales price information from Fannie Mae and Freddie Mac acquired mortgages, was 0.8 percent lower on a seasonally adjusted basis in the fourth quarter than in the third quarter of 2010.

FHFA’s all-transactions house price index, which includes data from mortgages used for both home purchases and refinancings, decreased 0.8 percent in the latest quarter and is down 1.3 percent over the four-quarter period.

“Lingering unemployment and elevated inventories of for-sale homes contributed to the ongoing decline of house prices,” said FHFA Acting Director Edward J. DeMarco.

Significant findings of the report include:

- The seasonally adjusted purchase-only HPI declined in the fourth quarter in 35 states plus the District of Columbia. Prices rose in the latest quarter in 15 states.
- Of the nine Census Divisions, the East North Central Division and the Mountain Division experienced the most significant price movements in the latest quarter. While prices rose 0.1 percent in New England, prices fell 2.2 percent in the Mountain Division.
- As measured with purchase-only indexes for the 25 most populated metropolitan areas in the U.S., four-quarter price declines were greatest in the Phoenix-MesaGlendale, AZ area. That area saw price declines of 15.3 percent between the fourth quarters of 2009 and 2010.
- Prices held up best in the Denver-Aurora-Broomfield, CO area, where prices rose 3.7 percent over that period.

FHFA also released its monthly report on mortgage interest rates, reporting that the National Average Contract Mortgage Rate for the Purchase of Previously Occupied Homes by Combined Lenders, used as an index in some ARM contracts, was 4.71 percent based on loans closed in January. This is an increase of 0.13 percent from the previous month.

The average interest rate on conventional, 30-year fixed-rate mortgage loans of $417,000 or less increased 24 basis points to 4.85 percent in January. These rates are calculated from the FHFA’s Monthly Interest Rate Survey (MIRS) of purchase-money mortgages. These results reflect loans closed during the Jan. 25-31 period. Typically, the interest rate is determined 30 to 45 days before the loan is closed. Thus, the reported rates depict market conditions prevailing in mid- to late-December.

Tags: FHFA, Freddie Mac, Fannie Mae, U.S. home prices, home price index, home purchases, refinancings, mortgage interest rates, ARM contracts, 30 year fixed rate

House to Vote on Bills to Kill Housing Aid Programs

February 25, 2011 (Brian Michael)

The House Financial Services Committee said the panel will vote on a series of four bills March 3rd that would terminate government-backed loan modification/foreclosure prevention programs that have been called "failed and ineffective."

The first bill would kill the Home Affordable Modification Program (HAMP), which the Committee said has failed to help a sufficient number of distressed homeowners to justify its cost. The committee also will vote on additional bills to shut down a Federal Housing Administration refinancing program and a fund to stabilize neighborhoods suffering from heavy foreclosures, they said. A fourth bill would kill a program to provide 12-month emergency loans to homeowners to stave off foreclosures.

"In an era of record-breaking deficits, it's time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners," committee Chairman Spencer Bachus said in a statement. "These programs may have been well intentioned but they're not working and, in reality, are making things worse.”

The bills face an uphill battle. If they clear the committee, they would have to be approved by the full House as well as by the Senate, which is controlled by Democrats. The Obama Administration also disagrees with the congressman saying they would close the door on struggling homeowners facing the worst housing crisis in generations.

The largest program, HAMP, has provided permanent loan modifications for 521,630 homeowners in the nearly two years it has been operating, but has fallen woefully short of it goal of helping 3 to 4 million borrowers. In addition, almost twice as many people have fallen out of their HAMP trial modifications than those who have completed them, forcing many into the foreclosure process.

HAMP provides cash incentives to mortgage servicing firms to lower monthly payments for borrowers to no more than 31 percent of their income. But only owner-occupants who can meet stringent documentation requirements for employment, income and acceptable overall debt levels can qualify, which has limited the program's reach. Many more borrowers have completed private loan modifications with their mortgage servicer than have received HAMP modifications due to less stricter requirements.

"The administration remains committed to reaching eligible homeowners to give them every opportunity to avoid foreclosure and will continue working to make our programs as effective as possible," an Obama administration spokesperson said.

Tags: HAMP, House Financial Services Committee, government-backed loan modifications, foreclosures, mortgage servicer, documentation requirements

Freddie Mac/Fannie Mae Report Losses; Seek More Aid

February 25, 2011 (Shirley Allen)

Freddie Mac and Fannie Mae both released their financial results for the 4th quarter of 2010 with Freddie Mac reporting a loss of $113 million for the quarter and Fannie Mae reporting a loss of $2.1 billion. Freddie Mac reports that they would have actually earned $1.2 billion had it not been for a required payment of $1.6 billion to the Treasury.

For the full-year 2010, Freddie Mac's total comprehensive income was $282 million, consisting of a full-year net loss of $14.0 billion which was more than offset by an increase in AOCI (net of taxes) of $14.3 billion. The company had a net worth deficit of $401 million at December 31, 2010 due to several contributing factors, including its quarterly dividend payment, which exceeded total comprehensive income for the fourth quarter.

Because of Freddie Mac’s net worth deficit, they reported that they will be asking its conservator, the Federal Housing Finance Agency (FHFA), to request a $500 million draw on the Treasury.

Fannie Mae reported a loss of $21.7 billion for 2010. They also asked for an additional $2.6 billion from FHFA, which was slightly more than their third quarter assistance of $2.5 billion.

The government rescued Fannie Mae and Freddie Mac in September 2008 to cover their losses on soured mortgage loans. It estimates the bailouts will cost taxpayers as much as $259 billion.

An addition to its financial results, Freddie Mac also reported the following:

- New single-family business acquired in 2009 and 2010 continues to demonstrate strong credit quality based on borrower credit scores and loan-to-value ratios.

- Single-family serious delinquency rate of 3.84 percent at December 31, 2010 remains below industry benchmarks.

- Freddie Mac continues to lead efforts to allow borrowers to keep their homes, helping more than 275,000 borrowers avoid foreclosure during 2010, more than double the number of borrowers it helped in 2009.

And in addition to its financial results, Fannie Mae also reported:

- During 2010, Fannie Mae guaranteed or purchased an estimated $856 billion in loans, which includes approximately $217billion in delinquent loans purchased from its single-family mortgage-backed securities trusts.

- Continued to be the largest single issuer of mortgage-related securities in the secondary market in 2010, with anestimated market share of new single-family mortgage-related securities of 44.0 percent.

- Financed approximately 2,712,000 single-family conventional loans, excluding delinquent loans purchased from its MBStrusts, and approximately 306,000 units in multifamily properties in 2010.

Tags: Freddie Mac, Fannie Mae, FHFA, financial results, net worth deficit, mortgage loans, loan-to-value ratios, credit scores

Freddie Mac: Mortgage Rates Back Under 5 Percent

February 24, 2011 (Chris Moore)

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), which shows a drop in long-term fixed rates this week with the 30 year fixed rate mortgage dropping to below 5 percent.

• 30-year fixed-rate mortgage (FRM) averaged 4.95 percent with an average 0.6 point for the week ending February 24, 2011, down from last week when it averaged 5.0 percent. Last year at this time, the 30-year FRM averaged 5.05 percent.
• 15-year FRM this week averaged 4.22 percent with an average 0.7 point, down from last week when it averaged 4.27 percent. A year ago at this time, the 15-year FRM averaged 4.40 percent.
• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.8 percent this week, with an average 0.6 point, down from last week when it averaged 3.87 percent. A year ago, the 5-year ARM averaged 4.16 percent.
• 1-year Treasury-indexed ARM averaged 3.40 percent this week with an average 0.6 point, up from last week when it averaged 3.39 percent. At this time last year, the 1-year ARM averaged 4.15 percent.

Frank Nothaft, vice president and chief economist, Freddie Mac said, "Fixed mortgage rates eased again this holiday week amid mixed inflation data reports. Although the core consumer price index for January rose slightly above the market consensus, house prices fell 4.1 percent in the fourth quarter of 2010 compared to the same period in 2009, according to the S&P/Case-Shiller® National Index. In addition, the level of the index was the lowest since the fourth quarter of 2002.”

30-Year Fixed Rate Mortgages
	US	NE	SE	NC	SW	W
Average	4.95	4.99	4.92	4.99	4.98	4.90
Fees & Points	0.6	0.5	0.8	0.5	0.6	0.7

15-Year Fixed Rate Mortgages
	US	NE	SE	NC	SW	W
Average	4.22	4.25	4.21	4.25	4.29	4.16
Fees & Points	0.7	0.6	0.8	0.5	0.6	0.7

5/1-Year Adjustable Rate Mortgages
	US	NE	SE	NC	SW	W
Average	3.80	3.93	3.63	3.90	3.78	3.70
Fees & Points	0.6	0.6	0.7	0.5	0.6	0.7
Margin	2.74	2.76	2.75	2.72	2.77	2.73

1-Year Adjustable Rate Mortgages
	US	NE	SE	NC	SW	W
Average	3.40	3.51	3.05	3.88	3.38	3.18
Fees & Points	0.6	0.6	0.7	0.4	0.8	0.7
Margin	2.76	2.79	2.75	2.73	2.77	2.75

The National Mortgage Rate Snapshot
	One Year Ago				One Week Ago
	30-YR	15-YR	5/1-YR	1-YR ARM	30-YR	15-YR	5/1-YR	1-YR ARM
Average	5.05	4.40	4.16	4.15	5.00	4.27	3.87	3.39
Fees & Points	0.7	0.7	0.6	0.6	0.7	0.7	0.6	0.6
Margin	N/A	N/A	2.74	2.75	N/A	N/A	2.75	2

Tags: 15 year fixed, 30 year fixed, fixed rate mortgage, freddie mac, interest rates, mortgage rates

Government: Our Way or Pay $20 Billion

February 24, 2011 (Chris Moore)

In what some might misconstrue as blackmail, the Wall Street Journal is reporting that the Obama Administration is trying to push through a settlement over mortgage-servicing breakdowns that would force America’s largest banks to pay for principal writedowns in mortgage loans or face penalties of over $20 billion.

According to people familiar with the matter, the administration is seeking a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth. If a settlement can be reached to the liking of all the state and federal agencies that have been pursuing and considering legal action against the mortgage servicers, the banks would have to pay more than $20 billion in fines or fund a comparable amount of loan modifications for distressed borrowers.

So far most loan modifications have focused on shrinking monthly payments by either lowering interest rates or extending loan terms or both. Forcing the banks to lower principal amounts could result in even more chaos as borrowers who previously have been able to afford there homes could possibly stop paying their mortgages in the hope of being rewarded with a smaller loans.

And as far as we are concerned, it's morally unfair to the many more homeowners who didn’t allow themselves to get in this position in the first place.

The deal doesn’t create any new government programs to implement the principal writedowns but instead relies on the banking industry to devise their own modifications or use the existing government programs like HAMP to meet the government’s requirements.

So far the deal is considered fluid as any agreement would have to be approved by a litany of government agencies, the state attoneys general, bank regulators, and the banks themselves.

"Nothing has been finalized among the states, and it's our understanding that the federal agencies we are in discussions with have not finalized their positions," said a spokesman for Iowa Attorney General Tom Miller, who is spearheading a 50-state investigation of mortgage-servicing practices.

Under the administration's proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors. The settlement proposal focuses on pushing servicers who mishandled foreclosure procedures to eat losses by writing down loans that they service on behalf of clients.

Bank executives point out that principal cuts don’t necessarily improve payment patterns and have told parties involved in the talks that reductions could raise new complications. Banks have been overwhelmed by the amount of foreclosures which lead to the so-called “robo-signing” controversy as they tried to process as many foreclosures as quickly as they could to rid themselves of their toxic housing inventories.

And even though the banks have come under increasing criticism for their handling of the foreclosure crisis, let’s not forget that twice as many private loan modifications have taken place through the banks than those through government programs like HAMP. Banks concerns that principal cuts don’t necessarily equate into improved payment performance can be easily justified as nearly 20 percent of all loan modifications have defaulted within the first year of the modification’s completion with some studies suggesting that as many as 60 to 70 percent of all loan modifications will eventually default again. Will lowering a borrower’s principal really change those patterns?

However, if a single settlement can't be reached, banks could face the prospect of separate civil actions from state attorneys general along with different federal agencies which could seek smaller penalties through regular enforcement channels.

Tags: Obama administration, loan modifications, mortgage servicers, principal writedowns, mortgage loans, foreclosure procedures

Fed Economist Advocates Down Payment Assistance

February 24, 2011 (Brian Michael)

Federal Reserve Bank of Cleveland economist O. Emre Ergungor is advancing the theory that the government can increase long-term housing sustainability by implementing a homebuyer down payment assistance program as opposed to interest rate subsidies.

Ergungor is basing his theory on previous research that suggests that a 1 percent interest rate could create an additional 74,000 homebuyers. But, if a down payment assistance program were to be implemented where buyers would receive $3,200, homeownership could increase by as much as 541,000 new owners over a long time frame at a lower cost.

“To make this simple point, my study assumes that the additional down payment comes from the government,” he said in his economic commentary. “But a higher down payment does not have to be in ‘assistance’ form in its entirety. In fact, one potential policy goal in the future could be to facilitate a return to the old strategy of saving to become a homeowner.”

Research has shown that the greatest barrier to low and moderate income homeownership is a lack of down payment. History has shown that more people become homeowners when down payment restrictions are eased.

“Historically, assistance has taken the form of either interest rate or down payment subsidies, but recent research suggests that down-payment subsidies are much more effective,” Ergungor said. “They create successful homeowners, homeowners who keep their homes, at a lower cost.”

Although there are currently no new housing assistance programs being discussed, nor did the Federal Reserve Bank of Cleveland imply that Ergungor’s research would lead to any such program, Ergungor believes that even after accounting for the cost of the additional new homebuyers, the down payment program is still cheaper than interest rate subsidies and that hopefully many new ideas will likely burgeon out of the ongoing policy debate.

But to add to the debate, we’d like to point out that current history has shown that down payment subsidies, such as those that led to the current housing meltdown in the form of seller assistance with down payments, did not prove to be a very effective means of creating successful homeowners and that probably the best method of creating more homeowners would be to embrace policies that create more jobs. Also, in the past, the “old” strategy of saving to become a homeowner did prove to be rather successful.

Tags: down payment assistance, interest rate subsidies, homeownership, housing assistance

Did Bankruptcy Reform Increase Mortgage Defaults?

February 24, 2011 (Chris Moore)

Recent research and studies are calling into question whether or not the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was a contributor to the ensuing mortgage crisis and economic recession. Researchers in the study claim that immediately following the implementation of the bankruptcy reform, the number of foreclosures increased by 200,000 per year, even before the onset of the financial crisis.

In research done by the Federal Reserve Bank of Philadelphia, followed by a paper, Subprime Foreclosures and the 2005 Bankruptcy Reform, published by the Federal Reserve Bank of New York and written by Donald P. Morgan, assistant vice president of the bank and graduate students Benjamin Iverson of Harvard University and Matthew Botsch of the University of California at Berkley, researchers contend that the bankruptcy reforms may well have shifted the burden of bankruptcy from unsecured creditors to sub-prime lenders.

Prior to BAPCPA, a debtor could choose to file either a Chapter 7 or a Chapter 13 bankruptcy in order to seek protection from creditors. Under Chapter 7 all non-government related unsecured debt could be discharged; under Chapter 13 the debtor established a plan to enable repayment of debt over time. Creditors did have the option of forcing a Chapter 7 filing into Chapter 13 if they felt some recovery was possible.

After the reform, a debtor faced a “means test” to determine which, if either, form of bankruptcy can take place and sets the repayment plan. The new law also required credit counseling, extended the length of time between filing and discharge (to as long as five years), and reduced the types of debt that can be discharged. It also resulted in much higher legal costs to the debtor.

In the report the authors pointed out that prior to bankruptcy reform, credit card debts and other types of unsecured debt could be discharged in bankruptcy, and that by filing for bankruptcy it loosens a homeowners’ budget constraints and allows them to shift funds from paying other debts to paying their mortgages. Bankruptcy thus gave financially distressed homeowners a way to avoid losing their homes when their debts exceed their ability to pay. The availability of debt relief in bankruptcy was widely known; the costs of filing were low; and there was little stigma attached to filing. Even debtors with high incomes and high assets could take advantage of bankruptcy.

After bankruptcy reform, the authors contend BAPCPA raised the cost of filing and reduced the amount of debt discharged which caused bankruptcy filings to fall sharply and that an unintended consequence of the bankruptcy reform was to increase the number of mortgage defaults by closing off a popular procedure that previously helped many financially distressed homeowners to pay their mortgages. The reform, therefore, contributed to the severity of the mortgage crisis by pushing up default rates even before the crisis began.

What the study initially found was that mortgage defaults rose by around 15 percent after the reform went into effect and that the default rates of homeowners with high incomes or high assets, who were particularly negatively affected by bankruptcy reform, rose even more. They estimate that the 2005 bankruptcy reform caused about 200,000 additional mortgage defaults to occur each year, thus adding to the severity of the mortgage crisis when it came.

The study is very extensive and looks at many factors that played a role in the effects of BAPCPA.

But in conclusion, what the study found was that there was no relationship between foreclosures and prime mortgage foreclosure rates. However, the estimated impact on sub-prime foreclosures was found to be substantial. In a state with an average homestead exemption, the authors found that the average sub-prime foreclosure rate over the seven quarters since BAPCPA was implemented was 11 percent higher than the rate before BAPCPA. This translates to about 29,000 more foreclosures in each of those quarters that are attributable to the reform. And ultimately as we all know, the catalyst of the financial downfall started with sub-prime loans.

The researchers observed that BAPCPA still may have very well served its intended first purpose of curbing bankruptcy abuse, but ultimately, it appears to have shifted the burden of bankruptcy from the unsecured creditor to the secured creditor, and in the end, the losses that the banks were trying to prevent under the guise of “abuse,” may have come back to get them in the end in the form of today’s housing crisis.

BAPCPA is just another example of government intervention in the free market place that may have resulted in unintended consequences, just as we feel the Dodd-Frank Financial Reform Bill will also have in the future.

If you would like to read the research paper, you can view it here.

Tags: BAPCPA, bankruptcy reform, unsecured debt, secure debt, prime mortgages, sub-prime mortgages, mortgage defaults, bankruptcy filings

Price Gap for Foreclosures/Non-Foreclosures Increases

February 24, 2011 (Chris Moore)

RealtyTrac released its Year End and Q4 U.S. Foreclosure Sales Report which disclosed that foreclosures accounted for nearly 26 percent of all residential sales nationwide last year. That was a decrease of 29 percent from the year before and 23 percent lower than 2008. The decrease was attributed to the “robo-signing” controversy that slowed foreclosure sales to a crawl at the start of the fourth quarter while lenders reviewed documentation policies. The report also reveals that the average price of a foreclosed property was 28 percent lower than the average price of a property that was not in foreclosure. Traditionally, foreclosures account for less than 10 percent of all home sales.

For the year, a total of 831,574 U.S. residential properties were either owned by the banks or were in some stage of foreclosure, either in default, scheduled for auction, or sold to third parties. That amount was down 31 percent from 2009 and nearly 14 percent from 2008.

For the fourth quarter, 149,303 foreclosure sales were recorded, down 22 percent from the previous quarter and down 45 percent from the fourth quarter in 2009 despite a 21 percent increase in foreclosure sales in December.

“Foreclosure sales in the fourth quarter faced the twin headwinds of the expired homebuyer tax credit — which began to stifle sales volume during the third quarter — and the foreclosure documentation controversy, which hit in the fourth quarter and temporarily froze sales of foreclosures from several major lenders,” said James J. Saccacio, chief executive officer of RealtyTrac. “Given those factors, it’s not surprising that in the fourth quarter foreclosure sales volume hit its lowest level since the first quarter of 2008.”

As one might expect due to the large amount of defaults in the last two years, Nevada, Arizona, and California grabbed the lion’s share of foreclosure sales. Nevada continued to have the highest percentage of foreclosure sales with 57 percent of all residential sales being foreclosures. That was still down from a peak of 67 percent of all sales in 2009.

Arizona followed with foreclosure sales accounting for 49 percent of all sales in 2010, which was still down from 54 percent in 2009. California was third with foreclosure sales accounting for 44 percent of all sales in 2010, down from a peak of 57 percent in 2009.

Rounding out the top ten were Florida (36 percent), Michigan (33 percent), Georgia (29 percent), Idaho (28 percent), Oregon (28 percent), Illinois (26 percent), and Virginia (25 percent).

Ten states also posted foreclosure discounts of over 35 percent in 2010. The highest was Ohio where foreclosures sold for an average of nearly 43 percent less than non-foreclosed properties. Kentucky was next with an average discount of more than 40 percent, with the other eight states being Tennessee, California, Pennsylvania, Illinois, New Jersey, Michigan, Georgia and Wisconsin.

“Still, foreclosures continue to represent a substantial percentage of all U.S. residential sales and continue to sell at an average sales price that is significantly below the average sales price of properties not in foreclosure — the result of a bloated supply of foreclosures and weak demand from homebuyers,” Saccacio continued. “The catch-22 for 2011 is that while accelerating foreclosure sales will help clear the oversupply of distressed properties and return balance to the market in the long run, in the short term a high percentage of foreclosure sales will continue to weigh down home prices.”

Tags: RealtyTrac, foreclosure sales report, residential properties, foreclosures, foreclosure discounts, documentation controversy

Mortgage Applications Rebound, Rates Slide Downward

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The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending February 18, 2011. The Market Composite Index, a measure of mortgage loan application volume, increased 13.2 percent on a seasonally adjusted basis from last week.

On an unadjusted basis, the Index increased 14.8 percent compared with the previous week. The four week moving average for the seasonally adjusted Market Index is up 1.9 percent.

The seasonally adjusted Purchase Index increased 5.1 percent from one week earlier. The four week moving average is up 1.6 percent for the seasonally adjusted Purchase Index. The unadjusted Purchase Index increased 9.6 percent compared with the previous week and was 6.9 percent lower than the same week one year ago.

The Refinance Index increased 17.8 percent from the previous week, the lowest recorded in the survey since the beginning of July 2009. The four week moving average is up 1.8 percent.

The refinance share of mortgage activity increased to 65.7 percent of total applications from 64.0 percent the previous week.

The adjustable-rate mortgage (ARM) share of activity decreased to 5.6 percent from 6.0 percent of total applications from the previous week.

“Ongoing turmoil in the Middle East brought interest rates lower last week. Borrowers took advantage of these lower rates, bringing application activity back near levels from two weeks ago, following sharp declines last week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.

The average contract interest rate for 30-year fixed-rate mortgages declined to 5.00 percent from 5.12 percent last week, with points increasing to 0.97 from 0.85 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.28 percent from 4.34 percent last week, with points decreasing to 0.80 from 0.85 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.

Tags: MBA, home purchase applications, mortgage rates, fixed rate mortgage, adjustable rate mortgage, refinance, interest rate

Home Sales Increase for First Time in Half a Year

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According to the RE/MAX National Housing Report, home sales in the 54 markets surveyed increased for the first time in six months. January 2011 sales increased 0.7 percent from January 2010 as the inventory of homes for sale continued a downward trend and is now 5.6 percent lower than last year. Home prices however, were 4.6 percent lower than this time last year.

“We’re very pleased that sales this January are higher than last January, and we’re hopeful that this indicates even higher sales this spring,” said RE/MAX Chief Executive Officer Margaret Kelly. “Although inventories have been steadily shrinking for months, an increase in foreclosure activity could reverse this trend and produce additional pressure on prices.”

Twenty-seven markets, including some that were hardest hit by the housing crisis, experienced exceptional year-to-year growth in home sales: Miami, Florida up 29.5 percent; Tampa, Florida up 21.8 percent; Richmond, Virginia up 20.5 percent; New Orleans, Louisiana up 16.9 percent and Phoenix, Arizona up 16.5 percent.

January prices dropped 6.6 percent from December and 4.6 percent from January 2010, which represents the largest year-to-year drop since May 2010. Still, 17 metro areas experienced a year-to-year increase in sales prices. Some key markets with rising prices include: Jackson, Mississippi up 20.9 percent; Indianapolis, Indiana up 9.4 percent; Pittsburgh, Pennsylvania up 9.1 percent; Tulsa, Oklahoma up 5.9 percent and Washington, D.C. up 3.3 percent.

The average number of days that a home remained on the market, from listing to signed contract, increased to 99 days which was three days longer than December 2010 and eight days longer than January 2010.

Overall inventory was down 3.6 percent from last month and down 5.6 percent from January 2010. The Months Supply of Inventory in January was 10.1, which has remained above nine for six months and above 10 for the last three months. This does not include the “shadow” inventory of homes that are currently in the foreclosure process.

Tags: RE/MAX, national housing report, home sales, home prices, housing crisis

Distressed Properties Account for Half of Home Purchases

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Calling the latest data released in its January report “an ominous sign,” Campbell/Inside Mortgage Finance reports in this month’s HousingPulse Tracking Survey that a staggering 49.6 percent of home purchase transactions were distressed properties, the highest level in nearly a year.

The share of distressed properties, which includes bank-owned properties (REO) and short sales, was up from 47.2 percent in December, and well above the 44.5 percent share seen back in November.

California broke the bank with an even larger share of distressed purchases, at 66 percent, followed by Florida with 63 percent and it was even worse yet in the combined markets of Arizona and Nevada, where a whopping 72 percent of home sales were distressed properties.

Campbell/Inside predicts if market trends continue the majority of all homes sold in the United States will be distressed properties within just a few months.

Comments from real estate agents collected as part of the HousingPulse survey confirmed the growing share of distressed properties. “I have noticed that less than 40 percent of what is on the market is property that is just ‘For Sale’ and not a short sale or REO,” commented one agent in California. “We are primarily an REO/short sale market with (only) about 20 percent conventional sale at this juncture,” added an agent in Nevada. “Short sales occupy 65 percent of market share, REO's occupy 30 percent of market share, non-distressed are 5 percent or less,” reported another agent in Nevada.

First-time homebuyer activity slipped to 35 percent in January, down from 37.7 percent in December as mortgage rates crept higher and the FHA loans got more expensive. FHA lending garnered just a 27.7 percent share of mortgages, down from 30.2 percent in December.

The survey predicts additional downward pressure on pricing as the amount of distressed properties increases and the amount of first-time buyer’s decreases, especially for the categories of damaged REO properties and move-in ready REO properties.

Over the past 12 months, time on market for the REO categories has strongly increased while the average number of offers has decreased. Also over the past 12 months, average prices for damaged REO have declined by 16 percent while average prices for move-in ready REO have declined 20 percent. Non-distressed prices have declined only 4 percent while the prices for short sales have been nearly flat.

Tags: Campbell/Inside Mortgage Finance, HousingPulse Tracking Survey, distressed properties, REO, first-time homebuyer

FHA REO Inventory Skyrockets

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The Federal Housing Administration (FHA) released its December Monthly Report which showed that the agencies Real Estate Owned (REO) inventory was at 60,739 at the end of December, up 9.5 percent from 55,488 in November, and up 47.5 percent from December 2009.

The report estimates the current value of its REO properties to be $9.1 billion.

Combined with the two GSE’s, Freddie Mac and Fannie Mae, the U. S. Government holds roughly 360,000 REO Properties.

In its annual financial status report to Congress in November, the FHA claimed loans insured before 2009 are responsible for 70 percent of the expected single family loan losses. Though they are now prohibited, so-called “seller-financed down payment assistance loans” produced $6.6 billion in claims to-date and may ultimately cost the FHA $13.6 billion.

The FHA expects to see an increase in the number of REO properties in the future as they have reported that approximately 600,000 properties are in serious delinquency.

Here is a graph of Fannie, Freddie and FHA inventory over the last three years through Q3 2010:



Tags: FHA, REO, single family loan losses, seller financed down payment

Wells Fargo Settles Veterans Housing Fees Lawsuit

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Wells Fargo & Co. has agreed to settle a lawsuit that alleges the bank harmed veterans by charging improperly high fees on mortgages. Wells Fargo has agreed to refund up to $10 million in fees to eligible military veterans who refinanced their mortgage with the bank. Wells Fargo has now joined JP Morgan Chase, who recently apologized for their misconduct, in settling lawsuits brought on by veterans who were allegedly charged excess fees or whose homes were foreclosed on.

The lawsuit filed in the State Court of Troup County, Georgia claimed the bank failed to use "reasonable care" in assessing attorney fees when complying with the Veterans Administration's Interest Rate Reduction Refinancing Loan rules.

Veterans who refinanced with Wells Fargo between Jan. 20, 2004, and Oct. 7, 2010, are eligible for the refunds from the settlement.

"Since the lawsuit allegation was raised, we have diligently worked with our veteran customers who inquired about their fees and we refunded them if there was an error in the third-party charges that were assessed," says Cara Heiden, co-president of Wells Fargo Home Mortgage. "We hope that by settling this matter, we can demonstrate to veterans our steadfast commitment to doing right by them."

Wells Fargo is the second major bank after Chase to settle a lawsuit in which allegations of mishandling mortgages for military families and veterans in violation of laws that are in place to limit interest rates and fees and to protect them from foreclosure.

As we previously reported here, J.P. Morgan Chase has recently apologized for overcharging at least 4,500 active service members and wrongly foreclosing on 18 military families.

Tags: Wells Fargo, JP Morgan Chase, lawsuit, veterans, refinanced mortgage, Veterans Administration, mishandling mortgages, interest rates, fees, wrongly foreclosing

Housing Crisis Hitting Previously Stable Areas

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The housing crisis which has famously ravaged Florida and the Southwest, is delivering a new wave of distress to communities once thought to be immune, where the housing boom was relatively restrained. In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

As with previous recessions and bubble markets, where builders, buyers and banks ran wild, the areas with the greatest extremes usually feel the first and largest affects of the economic downturn and areas of relative restraint feel far lesser pain. This economic downturn has been no different, except now, those areas that had been previously immune are now being tormented by the same housing problems as their famous brethren.

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ ” said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. Mr. Humphries estimates the rest of the country will drop a further 5 and 7 percent.

At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Even a risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.
But this economic downturn has broken all the rules.

“We’re at a period near the bottom but with more volatility than we normally see at this point,” said David Stiff, chief economist of Fiserv. “This sort of double dip is unprecedented for housing.”

Welcome to the party.

Tags: housing crisis, recessions, housing bubbles, economic downturn, real estate, double dip

Is Foreclosure Aid Hurting or Helping?

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Texas Republican Randy Neugebauer, the Chairman of the House Financial Services Oversight Subcommittee, says that he believes that the government needs to come to terms with the fact that its foreclosure prevention efforts are failing and actually making the housing market worse.

The Chairman went on to say that the programs need to be shut down because they are preventing the housing market from bottoming out, which is critical before the recovery can begin.

“I really, truly believe that if we will go ahead and quit trying to throw Band-Aids on this housing market ... this limbo-like state is prolonging the recovery of the housing market," Neugebauer said.

The Treasury Department's Home Affordable Modification Program (HAMP) and other government-sponsored loan modification efforts have ran woefully short of their intended targets. HAMP alone was originally touted by the Treasury Department to have a goal of helping 3 to 4 million homeowners receive loan modifications but based on current estimates will ultimately only result in between 700,000 to 800,000 permanent loan modifications with almost twice as many people dropping out of trial modifications than those who have received permanent modifications.

In a scathing report by the Congressional Oversight Committee, they concluded, “Treasury’s reluctance to acknowledge HAMP’s shortcomings has had real consequences. Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result, an untold number of borrowers may go without help – all because Treasury failed to acknowledge HAMP’s shortcomings in time.”

The Special Inspector General for TARP said in a report that after two years, many of HAMP's goals have been largely unmet.

"It is TARP’s failure to realize its most specific Main Street goal, 'preserving homeownership,' that has had perhaps the most devastating consequences," according to SIGTARP. "Treasury’s central foreclosure prevention effort designed to address that goal — the Home Affordable Modification Program— has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success."

Neugebauer also added, "My perception is right now that most of the people that can keep their homes can keep them, but we are probably postponing the people that long-term aren't going to be able to keep them. ... Some of these crazy programs that we've dreamed up, I think we may have to pull the plug on them: HAMP — no more government modifications.”

Neugebauer is also in favor of privatizing the government-sponsored enterprises as well as remove any government guarantee from the mortgage market.

"Somebody asked me what would be the one thing by the end of 112th Congress that would be the most important thing to get done," Neugebauer said. "I'd have to put getting the mortgage market back on track again and having an overall plan of how we are going to get the taxpayers out of that business."

Maybe Ronald Reagan was right when he famously said that the most dangerous words in America are “I’m from the government and I’m here to help.”

Tags: foreclosure prevention, loan modifications, mortgage market, congressional oversight committee, financial oversight subcommittee, hamp

Fannie Mae: Housing Starts to Triple by 2013

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Despite data indicating otherwise, Fannie Mae is predicting that it expects housing starts to triple by 2013. According to the agency's economic outlook, housing starts are predicted to increase 17.3 percent and hit 710,000 this year, with another 47 percent increase to 1.1 million in 2012 and another gain of 42 percent in 2013 to nearly 1.5 million.

However, based on January’s data, their prediction may be a little over optimistic. Data in January saw housing starts jump 15 percent compared to December for a total of 596,000 seasonally adjusted units, but building permits were down 22.4 percent, which is a sign of future building activity.

The highlight of the January housing report is the robust 80% gain in multi-family housing as single-family home construction dropped 1 percent compared to December. Multi-family construction is expected to increase as the housing crisis and tighter lending standards increase the number of renters.

In 2010, there were approximately 587,000 housing starts, that includes single family and multi-family units.

"We expect a small rise in home sales this year, but significant amounts of supply and shadow inventory of expected foreclosures will continue to hamper a robust housing picture for some time," said Doug Duncan, Fannie Mae's chief economist.

Fannie Mae projects total sales of new and existing homes to climb 4.5% in 2011 to 5.43 million, following an estimated decline of 6% for 2010 to about 5.2 million from 5.53 million for 2009. Mortgage originations will drop to $1.04 trillion this year from $1.53 trillion last year. Fannie Mae also expects mortgage rates will increase in 2011, but with rates remaining under 5.5 percent.

The median new home price in 2011 is expected to drop, as is the median existing home sale price, down 2.1% to $214,500 and 2.1% to $167,900, respectively, due to the large amount of competing foreclosures expected to enter the housing market this year.

Tags: fannie mae, housing starts, new and existing home sales, median home price, mortgage rates, mortgage originations

FNC Index: December Home Prices Hit Record Low

LoanRateUpdate)

Driven in part by rising sales of distressed properties and higher foreclosure-sales discounts, home prices declined for the seventh straight month in December and suffered their largest one-month drop during the year according to FNC’s recently released Residential Price Index (PRI). According to the RPI, 2010 year end prices declined by more than 3.4 percent since January 2010.

Twenty-three out of the 30 major metropolitan markets tracked suffered price declines in December that averaged 2.2 percent.

Home prices dropped in the double digits year-over-year in Atlanta, Chicago, Las Vegas, Orlando, and Phoenix while San Diego, Los Angeles, and San Francisco had the best performing markets during the year with increases of 5.1 percent, 7.8 percent and 8.1 percent, respectively.

The FNC RPI blames the deteriorating trend in home prices from increased sales of foreclosed properties. As a percentage of total homes sold (both new and existing), sales of distressed properties increased to 26.8 percent in the fourth quarter compared to 25.5 percent in the third quarter and 23.5 percent in the second quarter of 2010.

The foreclosure sales discount in the fourth quarter was 40.8 percent compared to 39.2 percent in the third quarter and 36.6 percent in the second quarter of 2010.

The FNC RPI also predicts that more foreclosure sales are expected since lenders announced in December that they would resume foreclosure sales following the “robo-signing” controversy.

Accordingly, FNC anticipates further downward pressure on home prices in the coming months with the upside that the resumption of foreclosure sales will reduce surplus of distressed properties and eventually bring supply to levels in line with weak housing demand, paving the way for a more sustainable housing recovery later.

The Residential Price Index, created by mortgage technology company FNC, is the industry’s first hedonic price index built on a comprehensive database combining public records and real-time appraisals. If you’d like to review the Index, click here.
Tags: FNC RPI, distressed properties, foreclosure sales, home prices, price declines, downward pressure, mortgage technology

Mortgage Loan Defaults Decline in January

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Standard & Poor’s and Experian released their S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, showed a decline in monthly default rates across all credit lines. First mortgage defaults fell to 2.84% and second mortgages, with a monthly decline of over 13%, fell to 1.51% for the month of January, 2011.

“We continue to see improvements in consumers’ financial condition. Default rates fell sharply in all major categories and across the five high-lighted cities. Reflecting the better shape of the consumer, the Federal Reserve reported the first increase in bank card credit outstanding in December 2010 since 2008 while other reports show gains in consumer spending,” says David M. Blitzer, Managing Director and Chairman of the S&P Index Committee. “Two keys to the economic recovery are rebuilding balance sheets and increased spending. The reduced default rates seen here demonstrate that house hold balance sheets are being put back into shape and should support gains in spending.”

Credit card and auto loan default rates showed significant declines, with the former down 8.79 percent from December’s level and auto loan defaults down 6.58 percent for the month. Overall, 6.13 percent of all credit card accounts are presently in default, compared to 1.57 percent of auto loans.

Consumer credit defaults varied across major cities and regions of the U.S. Among the five major Metropolitan Statistical Areas reported each month in this release, Los Angeles and New York experienced a decrease in defaults this month to 2.75% and 2.64% respectively. Chicago followed the trend with a default rate of 2.74%. Dallas had the smallest decrease in default rates to 2.06%. Miami had the biggest decline of 36% to a 6.46% default rate.

S&P/Experian Consumer Credit Default Indices National Indices
Index	January Index Level	Change from December 2010	Change from January 2010
Composite	2.89	-3.68%	-36.64%
First Mortgage	2.84	-2.64%	-37.13%
Second Mortgage	1.51	-13.26%	-54.16%
Bank Card	6.13	-8.79%	-25.33%
Auto Loans	1.57	-6.58%	-38.67%

Source: S&P/Experian Consumer Credit Default Indices
Data Through: January 2011

Tags: standard & poor, experian, consumer credit defaults, first lien mortgage defaults, second mortgage, default rates

Ten Mortgage Mistakes That Will Cost You

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It’s a brave new world out there. There are more homes for sale than political promises, but getting a mortgage loan has never been tougher. The housing crisis has resulted in a boon of new regulations, with new mortgage-lending regulations to protect you from predatory lenders and many new underwriting rules to protect lenders from defaults by borrowers as well.

Knowledge is King and in the world of mortgage lending that knowledge cold save you many thousands of dollars, not only at the time of your closing, but years later in higher payments that could have been lower. If you want to buy a home today without overpaying for a mortgage loan, you’ll have to come to the table with a little mortgage market savvy, a serious job, excellent credit, sufficient liquid assets and limited debt.

Oh and by the way…they don’t take blood or first born anymore. Here is our list of 10 mortgage mistakes that can kill your deal:

1. Check your credit before applying: Long before you begin searching for a mortgage, you should know where you stand in the credit score department. After all, a bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval at all. Be sure you check your credit early on (several months in advance) to check for errors or take care of anything on your credit report that you didn’t know about. Can’t think it won’t happen to you? Think again. Some people have been surprised to find out that unpaid late fees on movie rentals showed up as collection accounts on their credit records…without their knowledge.

2. Applying for new credit alongside the mortgage: Keep your impulses for that new LED TV in check, avoid applying for any other type of credit before and during the mortgage application process. Whenever you apply for new credit, you're seen as a greater credit risk, at least initially. If you happen to apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate. Not only that, new regulations require that your credit record be checked at the beginning of the loan process and at the end to insure this does not happen. They’re going to know so don’t do it.

3. Get an education: Learn everything you can about mortgage loans before you begin. Think about it, you’re going to be applying for a product that someone is going to earn a commission on at the end of the process. Do you think they really have your best interest in mind? There are many honest and carrying mortgage professionals out there, but why test your luck. Luckily today there are far fewer mortgage choices out there and with interest rates so low, most would suggest a fixed rate mortgage. But if you’re on the edge of qualifying, an adjustable rate mortgage (ARM) may be a better fit for you. Stay away from “exotic” loans…that’s how we got where we are today.

4. Not shopping around: Just because you're pre-approved with one bank doesn't mean you need to obtain financing from them. Be sure to shop around with multiple banks and lenders and even consider a mortgage broker. A broker can shop your rate with a number of banks concurrently and find you the lowest rate with the best terms. And don’t be afraid to shop brokers…remember they’re getting paid a commission too! A recent survey by LendingTree revealed that only 40 percent of all mortgage shoppers got more than one quote, yet 96 percent of all shoppers will shop around for anything else. Why wouldn’t you shop around for something that could save you potentially thousands of dollars? And don't forget to factor in closing costs! One thing to watch…different lenders can charge different fees and sometimes use different names for the same fees. Don’t be afraid to ask and negotiate.

5. Failing to look at the total payment: A common mistake made by prospective home buyers is not factoring in their property taxes and insurance premium into their overall mortgage budget. Along with the principal and interest, the debt-to-income ratio (DTI ratio) used to determine if a borrower will qualify for a certain mortgage payment, is calculated by dividing the proposed cost of PITI by gross monthly income. The lender or a real estate agent will be able to estimate the property taxes, but shopping around for homeowners insurance before you look for a home will give you an idea of what insurance will cost. Insurance policy costs can differ greatly.

6. Do not lie on your application: New tougher lending guidelines make the age old practice of fibbing on your mortgage application very difficult. So if you’re a job hopper or get that urge to over-inflate your income…don’t. It could cost you a mortgage. Making false statements on your mortgage application is mortgage fraud, a felony punishable by up to 30 years in federal prison, a $1 million fine, or both. If lenders discover false information they can call the loan due and ruin your credit.

7. Forgetting to lock your rate: Mortgage rates change daily and sometimes several times daily. All those mortgage quotes you obtain are just quotes until you actually tell the bank, lender, or broker to “lock it in.” Once locked, your rate is guaranteed for a certain period of time, be it 7 days, 15 days, or a month. But never assume your rate is locked until you get it in writing! And if you’re going to play the “interest rate” game hoping to lock in the lowest rate, play at your own risk. I’ve seen more lose that have won.

8. Not getting pre-approved: Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A mortgage pre-approval is more robust than a simple pre-qualification because the bank pulls your credit and looks at your income, assets, and employment. Your DTI ratio will also come into play to ensure you know exactly how much you can afford. Having a pre-approval tells sellers your serious about the purchase and may give you an advantage over an unapproved buyer. You can learn more about pre-approvals here.

9. Understand the costs: Scrutinizing loan costs and fees means going beyond just the annual percentage rate (APR), which includes only your actual interest and any additional costs or prepaid finance charges you finance. Extra costs include closing costs, commissions, points and other fees that may or may not be financed with the mortgage. The real costs of homeownership also includes maintenance and repair, annual property taxes, homeownership fees, homeowners insurance, and renovating and remodeling.

10. Reading your loan documents: It's your responsibility to read and accept the terms of your new mortgage. It’s one of the most heard excuses of the housing bust,”I didn’t know.” Sure, it might be a pain to go through all the loan documents at signing, but it's a bigger pain to sign up for something you don't want or agree with. Take the time at closing to ensure you understand everything you're signing, and thereby agreeing to. And don't be afraid to ask questions! Otherwise, you could wind up with a mortgage with predatory terms and no place to turn. If you’re not sure, bring a lawyer! It may cost you a little more, but a bad loan will cost you far more! Don’t trust an escrow company to be unbiased. As I learned in my time in real estate…many escrow companies are owned by real estate agents.

Knowledge is King!

Tags: mortgages, mortgage-lending regulations, housing crisis, lenders borrowers, underwriting rules, credit check, mortgage loans, fixed rate mortgage, adjustable rate mortgage, ARM

FICO Wants You to Know About Your Credit Score

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Fair, Isaac & Co., the folks who originated the closely guarded “FICO” credit score, have launched a website that helps consumers understand how credit scores can affect many areas of your life in this era of new financial regulations. The company also recently opened up about how your activities can influence your credit score.

The recently launched website, scoreinfo.org, explains the importance of credit scores and how they are used in areas other than just obtaining a loan. What many people don’t realize is how credit scores are being used to make decisions by companies that have nothing to do with credit. Even though FICO scores were designed to be used purely for financial reasons, they have now become part of the application process for jobs, car insurance, and health insurance.

There is a lot of mystery surrounding FICO scores as Fair Isaac doesn’t release the formulas that are used in the process of determining your FICO score. FICO creates the score simply by feeding numbers into its formula which FICO says is “based on pure, statistical evidence, with no judgment or evaluation or emotion."

"The FICO score is a measure of a consumer's financial health and creditworthiness," said Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score. It's simply a number, ranging from 300 to 850 -- the higher the better. The average FICO score in the U.S. is about 700, and pretty much every bank in the country uses a FICO score when making lending decisions. But while the scores are important, they're not the be all and end all.

"Scores are meant to be one of several things bankers use in doing what we call sound underwriting," Greene says. Lenders should also be taking into account borrowers' background references, their capacity to repay loans, and collateral.

There are several factors that Fair, Isaac takes into consideration. Some of the main one’s are:

- How much total indebtedness a consumer has.
- How long they've had the debt. "Newer relationships are riskier than things you've been paying over a long period of time," Greene says.
- How much available credit is being used: "If you're close to the edge on your credit cards, that's a danger signal."
- The mix of an applicant's credit portfolio -- is it all credit cards (bad) or a mixture of credit cards, a mortgage, and a car loan (better)?

Greene points out that there are three key elements which people can do to improve their credit scores:

- Pay your bills on time.
- Don’t use more credit than you really need. Keeping your balances close to their limit hurts your score.
- Don’t apply for credit unless you absolutely have too.

The easiest way to avoid a sharp downgrade? Stay current on your mortgage and stay solvent. FICO scores can fall by as much as 150 points when borrowers walk away from mortgages or declare bankruptcy; it can take up to seven years to rehabilitate the rating.

"One thing people should know is that a foreclosed home or personal bankruptcy is the most severe harm that you can do to your credit score," Greene says.

And one of the most asked questions…does every application for a loan hurt your score?

"It depends on the kind of product you're shopping for," says Greene. With car loans, for example, Fair, Isaac understands that people shop for rates. "If you apply for five different car loans within a couple of days, we understand that you're looking to buy one car at the best rate. And there's no adverse impact on your credit score."

However, with credit cards it’s a different story. If you try to open five different credit card accounts in the space of a week, that’s usually an indication of someone trying to open multiple accounts simultaneously in which case a few points would be taken off your FICO score as that sends out a signal that you need too much credit.

We’ve covered the basics, but if you’d like more information, go to scoreinfo.org.

Tags: Fair, Isaac & Co., FICO, FICO score, credit score, loans, mortgages, borrowers, indebtedness, creditworthiness

Foreclosure Inventory Ties All-Time High, Delinquencies Down

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The amount of U.S. homes that were in the foreclosure process at the end of 2010 matched the all time high as mortgage lenders and servicers delayed home foreclosures to investigate improper document charges spawning from the “robo-signing” controversy.

According to the National Delinquency Survey released by the Mortgage Bankers Association (MBA), about 4.63 percent of loans were in foreclosure in the fourth quarter, up from 4.39 percent in the previous quarter. The record-tying rate of homes in foreclosure was last reached in the first quarter of 2010.


Lenders such as Bank of America and Chase temporarily halted property seizures as they reviewed the handling of their court documents which left more homes in the foreclosure process with their status unresolved. Consequently repossessions tumbled 32 percent in the fourth quarter compared to the previous quarter.

“It’s clear that the process issues were driving the increase,” Jay Brinkmann, chief economist of the Washington- based Mortgage Bankers Association, said in an interview. “We would expect the foreclosure inventory to start coming down as that gets resolved and the court situations get cleared up.”

The report also revealed that mortgage delinquency rates dropped sharply as residential mortgage delinquencies fell by 10 percent in the fourth quarter of 2010 with the overall rate of outstanding loans at 8.22 percent, a decline from 9.13 percent in the third quarter.

The report also noted that mortgages only one payment past due, 3.25 percent of all outstanding mortgages, have fallen to the pre-recession levels of late 2007

Combined, the percentage of loans in foreclosure or at least one payment past due was 13.56 percent on a non-seasonally adjusted basis, a 22 basis point decline from 13.78 percent in the prior quarter

"These latest delinquency numbers represent significant, across-the-board decreases in mortgage delinquency rates in the U.S.” said Jay Brinkmann, MBA chief economist. “Total delinquencies, which exclude loans in the process of foreclosure, are now at their lowest level since the end of 2008. Mortgages only one payment past due are now at the lowest level since the end of 2007, the very beginning of the recession.”

Even more significantly, Brinkmann said, serious mortgage delinquencies of 90 days or more have fallen from their all-time high of 5.02 percent in early 2010 to 3.63 percent by year’s end, a 28 percent decline over the course of the year.

“While delinquency and foreclosure rates are still well above historical norms, we have clearly turned the corner,” Brinkmann said. “Absent a significant economic reversal, the delinquency picture should continue to improve during 2011,” he added.

Tags: MBA, mortgage lenders, servicers, foreclosure process, robo-signing controversy, property seizures, foreclosure inventory, mortgage delinquency rate

Florida Has Nation’s Highest Foreclosure Rate

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Florida now has the nation’s highest foreclosure rate accounting for nearly one out of every four foreclosures in the country. More than 14 percent of Florida’s mortgages were in foreclosure in the fourth quarter of 2010 On top of that, an additional 5.2 percent were more than 90 days behind on their payments.

“More than 20 percent of all loans in Florida are somewhere past due or somewhere in foreclosure,” said Mike Fratantoni, vice president of the Mortgage Bankers Association (MBA).

As a sign that Florida’s courts are struggling with the massive amount of foreclosures and the fall-out of the robo-signing controversy, the foreclosure process now takes a total of 742 days in Miami-Dade County and 689 days in Broward County, according to Jacksonville-based Lender Processing Services. That’s nearly twice as long as it took in 2007.

There was a bit of good news as foreclosure starts in the state are down and the number of loans that are seriously past due decreased 0.7 percent from the previous quarter.

Over 24 percent of the loans in Florida are one payment or more past due or in the process of foreclosure, the highest rate in the nation, followed by Nevada at over 22 percent, compared to an average of 13.6 percent for the nation. Only eleven states saw an increase in their foreclosure start rate with Maryland seeing the largest increase.

Areas in Florida with the highest foreclosure rates were Cape Coral-Fort Myers (1 in 8.4), Miami-Fort Lauderdale-Pompano Beach (1 in 7.08), Orlando-Kissimmee (1 in 6.86) and Deltona-Daytona Beach-Ormond Beach (1 in 5.77).

Tags: florida, foreclosure rate, robo-signing controversy, mortgages

LPS “First Look” January Mortgage Report: Foreclosure Inventories Rise, Delinquencies Decline

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Lender Processing Service (LPS) released its monthly “First Look” Mortgage Report for January 2010 yesterday which is derived from its loan-level database of nearly 40 million loans. The month-end data shows a rise in foreclosure inventories with a slight decrease in the delinquency rate.

The “First Look” report contains highlights of the company’s forthcoming Mortgage Monitor report which will provide a more in-depth review including an analysis of data supplemented by in-depth charts and graphs that reflect trend and point-in-time observations.

Early highlights of the report include:

Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure): 8.90%

Month-over-month change in delinquency rate: -0.8%

Year-over-year change in delinquency rate: -18.8%

Total U.S foreclosure pre-sale inventory rate: 4.16%

Month-over-month change in foreclosure presale inventory rate: 0.2%

Year-over-year change in foreclosure presale inventory rate: 7.9%

Number of properties that are 30 or more days past due, but not in foreclosure: (A) 4,719,000

Number of properties that are 90 or more days delinquent, but not in foreclosure: 2,168,000

Number of properties in foreclosure pre-sale inventory: (B) 2,203,000

Number of properties that are 30 or more days delinquent or in foreclosure: (A+B) 6,922,000

States with highest percentage of non-current* loans: FL, NV, MS, GA, NJ

States with the lowest percentage of non-current* loans: MT, WY, AK, SD, ND

*Non-current totals combine foreclosures and delinquencies as a percent of active loans in that state.
Notes:
(1) Totals are extrapolated based on LPS Applied Analytics' loan-level database of mortgage assets
(2) All whole numbers are rounded to the nearest thousand

Tags: LPS, mortgage delinquency rate, foreclosure inventory, non-current loans

Wells Fargo Lowers Credit Requirement for FHA Loans

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Wells Fargo & Co. has dramatically lowered credit score requirements for Federal Housing Administration (FHA) mortgages, the first major lender to do so following pressure from the agency and housing advocates.

Beginning last month, Wells began accepting applications in its retail branches for FHA loans from borrowers with FICO scores as low as 500. Previously, it required a score of at least 600 for retail FHA borrowers. The minimum FICO score remains 640 at the company's wholesale and correspondent channels.

For borrowers with credit scores ranging from 500 to 579, a 10 percent down payment is required, and the down payment may not be a gift or be part of a down payment assistance program.

Borrowers with credit scores of 580 to 599 are required to put down 5 percent, and the down payment may not be a gift or part of a down payment assistance program.

Borrowers with a credit score of 600 or higher are required to have a 3.5 percent down payment, and a gift is acceptable. For all borrowers, seller concessions are limited to 3 percent.

FHA Commissioner David Stevens has been urging lenders in the federal mortgage insurance program to lower their minimum credit score overlays to reach more people.

Tom Goyda, a Wells spokesman, says the bank "is committed to responsibly serving a wide range of borrowers." Wells was one of 17 lenders – including Bank of America and JPMorgan Chase – that agreed to meet with NCRC officials to discuss ways to comply with FHA's requirements.

By accepting lower FICO scores in the retail channel, Wells appears to have struck a compromise that allows big lenders to maintain credit overlays. Other major lenders are expected to follow Wells Fargo’s lead.

Tags: Wells Fargo, credit score requirement, FHA mortgages, housing advocates, FICO score

Did Fannie Mae/Freddie Mac Decision Cause FHA Fee Increase?

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Following the release of the Obama Administrations proposal on how to deal with the demise of Freddie Mac and Fannie Mae, the Department of Housing and Urban Development (HUD) announced that it was increasing fees on all Federal Housing Authority (FHA) insured mortgages. Many of the discussions leading up to that proposal focused on what would happen with FHA-insured loans as the government also wants to get out of that business, with some speculating that fees would be raised in order to discourage FHA loans. That may not be so.

FHA Commissioner David Stevens had this to say about the mortgage insurance premium increase:

I am getting hundreds of emails on the latest fee increase from loan officers and realtors. This is just an explanation as needed.

This week, February 14, I announced an increase in the Mortgage Insurance premium at FHA in the amount of .25% per year. It is important for all to at least understand the reason. I know there may be many responses to this, and I will be unable to respond, but I do think it important for all to understand the obligation.

FHA has suffered greatly from originated loans in years 2006-2008 and fortunately due to the changes we have implemented in the past two years since I was sworn in, we have managed to avoid external intervention into the program that could have forced even more conservative policies to impact your business.

I testify today, Feb 16, to the House Financial Services committee. Some will want, and do what, to eliminate all guarantees from FHA. It is through responsible management that I will argue against the need to intervene.

As I am sure you are aware, FHA has a statutory obligation to maintain a 2% capital reserve. We have been below that now for two annual actuarial reports to congress and this year it actually dropped further than the previous year. While there are reasons for this, like select mortgage Programs that really hurt the fund, it won’t matter much to legislators as their primary concern is that we become compliant with the law and get the reserves back up.

In the last year actuarial, submitted in October, it said that in the base case we would not get above 2% until 2015 and, additionally, there was a 40% risk that we could actually go negative. Going negative would require a direct subsidy from the treasury…….a bailout.

I recommended this increase. I recommended the increase based on my obligation to get the reserves back up. I do understand the concerns of those in the industry. Unfortunately, if we do not get the reserves back up it would be likely that Congress would take their own actions which could make the outcome even worse.

While I do not expect all to agree, I have made these moves to actually protect the program so that it could continue.

Thanks
David H Stevens
Assistant Secretary of Housing &
Federal Housing Commissioner

US Department of Housing and Urban Development
417 7th Street, SW
Washington, DC

Tags: mortgage insurance premium, HUD, FHA, loan officers, realtors, statutory obligations, reserves

Chase to Open 25 More Home Ownership Centers

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JP Morgan Chase has announced that it plans on opening 25 more Home Ownership Centers throughout the United States in 2011. Chase has already opened 51 centers since 2009 to assist customers who have slipped into the foreclosure process or are seriously behind on their mortgage payments.

The centers are not bank branches and are usually open six days a week. They are staffed with counselors who are there to advise borrowers struggling with a job loss, health bills or other issues that have put their mortgages in trouble.

“The best way to help borrowers find ways to stay in their homes is to sit down face-to-face and discuss their individual circumstances,” David Lowman, CEO of Chase Home Lending, said in a statement.

Other banks do help borrowers faced with losing their homes. Chase, however, appears to be the first big lender to set up dedicated full-time centers with counselors.

At the centers, borrowers can drop off applications and supporting documents to get their loan terms changed, from interest rate to principal reduction, or to get advice on preventing foreclosure. Each homeowner is assigned one Chase person to be the contact on the case.

Chase spokeswoman MaryJane Rogers wasn’t able to say how many customers have averted foreclosure with help from Chase centers.

She said representatives have counseled 120,000 borrowers since 2009. The bank has offered more than 1 million temporary modifications and completed 300,000 permanent modifications since then.

Tags: JP Morgan Chase, home ownership centers, mortgage payments, foreclosure process, loan modifications