Home prices continued to stabilize in 18 of the 20 metropolitan areas surveyed in July, an industry survey showed Tuesday. Thirteen of the 20 metro areas have seen prices increase for three or more consecutive months, indicating that the deflationary spiral in the housing market has likely come to an end. (Well, assuming you don't live in Las Vegas...)
“No matter how you measure it, house prices looked to have bottomed, which is the much-needed ingredient required to bake this housing market recovery,” said Jennifer Lee from BMO Capital Markets.
The S&P Case-Shiller Home Price Index said averages prices improved by 1.6% in July. That puts the annual decline in the 20-city composite at -13.3%, an improvement from the -15.4% print in June and the record -19.0% print in January. To put that in perspective, July’s prices are roughly similar to prices in the autumn of 2003.
“The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets” said David Blitzer, chairman of the S&P’s Index Committee.
Each of the 20 metro areas showed an improvement in the annual rates of decline. And when compared to June, only two cities ― Seattle and Las Vegas ― continued to see prices fall. The crisis is Las Vegas is particularly stark: since peaking in August 2006, home prices there have deflated 54.8%, including a 1.15% drop in July.
On average, prices in the 20-city composite have fallen 32.6% since peaking in Q2 2006.
Looking ahead, Blitzer was generally optimistic that prices bottomed out earlier in the year, but there are still lingering concerns that the new floor could be broken once the government unwinds various incentive programs.
“These figures continue to support an indication of stabilization in national real estate values, but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures,” Blitzer said.
TD economist Ian Pollick was similarly cautious on whether prices would continue to climb.
“To the degree that the housing market was the culprit behind the entire credit crunch, it is encouraging to see another monthly improvement in the headline index,” he said. “However, the U.S. housing market still has a long way to go before fully cleansing itself.”
Tuesday, September 29, 2009
Friday, September 25, 2009
New Home Sales Up as Old Invenmtory Purged
New home sales increased for the fifth straight month in August, but the 0.7% gain didn’t match the median estimate of +1.6%. The annual pace of sales is now 429,000, 3.4% below the August 2008 rate.
Not only were sales lower than expected, they were also so lopsided that only one of the four areas even experienced growth. Sales in the West jumped 12.1%, but sales fell 16.3% in Northeast and 5.8% in the Midwest, activity in the South was flat.
There was some good news though: five months of sales increases has caused excess inventory to dwindle. At the current sales place there are just 7.3 months’ worth of supply on the market, compared with 7.6 months’ in July and 12.4 months’ at the beginning of the ear.
“Virtually all of the remaining excess is in completed homes, rather than in homes still under construction,” said analysts from Nomura. They also noted that with raw inventory at 262k units, overhang is at the lowest level in 25 years.
The cutback has come at a price though . . . literally. The median sales price of new houses sold in in the month dropped to $195,200, a significant decline from the $215,600 price in July. Since its peak, prices have deflated 25.7%.
Elsewhere in the report, revisions added 1.8% to the sales pace for May and June, but July’s dramatic 9.6% surge was trimmed to 6.5%.
“The recovery road, as is glaringly evident today, is fraught with bumps and potholes,” said Jennifer Lee, economist at BMO. “But, we are still on that road.”
Not only were sales lower than expected, they were also so lopsided that only one of the four areas even experienced growth. Sales in the West jumped 12.1%, but sales fell 16.3% in Northeast and 5.8% in the Midwest, activity in the South was flat.
There was some good news though: five months of sales increases has caused excess inventory to dwindle. At the current sales place there are just 7.3 months’ worth of supply on the market, compared with 7.6 months’ in July and 12.4 months’ at the beginning of the ear.
“Virtually all of the remaining excess is in completed homes, rather than in homes still under construction,” said analysts from Nomura. They also noted that with raw inventory at 262k units, overhang is at the lowest level in 25 years.
The cutback has come at a price though . . . literally. The median sales price of new houses sold in in the month dropped to $195,200, a significant decline from the $215,600 price in July. Since its peak, prices have deflated 25.7%.
Elsewhere in the report, revisions added 1.8% to the sales pace for May and June, but July’s dramatic 9.6% surge was trimmed to 6.5%.
“The recovery road, as is glaringly evident today, is fraught with bumps and potholes,” said Jennifer Lee, economist at BMO. “But, we are still on that road.”
Thursday, September 24, 2009
Existing Home Sales Slide in August Unexpectedly
The National Association of Realtors said sales of existing homes fell 2.7% in August, pushing the annual rate to 5.10 million units from 5.24 million in July.
Compared to 12 months ago that pace is up 3.4%, but analysts were expecting a 2.1% boost this month due to low mortgage rates and the soon-expiring tax credit for first-time homeowners.
The monthly slide in the index, which tracks sales of single-family homes, town homes, condominiums and co-ops, follows four months of gains that saw a cumulative 15.2% gain in sales.
Single-family home sales fell 2.8%, the first monthly decrease since March, while condominium and co-op sales slipped 1.6%.
Jennifer Lee, economist at BMO, called the numbers “disappointing” but added that the broad story of improvement hasn’t changed. “Given the six-month streak of increases in pending home sales, look for some retracement in the September data,” she predicted.
Regionally, sales fell in all four areas. Sales in the Northeast declined 2.2%, while those in the Midwest fell 6.6%. In the South, existing home sales were down 3.1%, and in the West sales declined 2.7%.
“Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus,” said Lawrence Yun, chief economist at the NAR. Despite the monthly slide, Yun said the tax credit was “having the intended impact.”
Indeed, 30% of all sales were from first-time homebuyers. Foreclosure-related sales also accounted for nearly a third of sales.
“The decline demonstrates we can’t take a housing rebound for granted,” Yun added. He attributed the monthly decrease to “rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process.”
If there was good news in the report, it was that inventories were slashed by 10.8% to 3.62 million, marking the biggest cutback in 10 months. At the current sales pace there are now 8.5-months of supply on the market, which is the lowest level of overhang since April 2007, and not far above the healthy ratio of 6 months.
Prices too have been stabilizing. Still, homebuyers continue to benefit from a deflated market as the median price for all housing has fallen 12.5% since August 2008. It’s unlikely prices will go up any time soon, especially as the foreclosure crisis continues (yesterday, the Wall Street Journal reported there were at least 1.2 million loans 90 days delinquent, none of which had entered the foreclosure process.)
Compared to 12 months ago that pace is up 3.4%, but analysts were expecting a 2.1% boost this month due to low mortgage rates and the soon-expiring tax credit for first-time homeowners.
The monthly slide in the index, which tracks sales of single-family homes, town homes, condominiums and co-ops, follows four months of gains that saw a cumulative 15.2% gain in sales.
Single-family home sales fell 2.8%, the first monthly decrease since March, while condominium and co-op sales slipped 1.6%.
Jennifer Lee, economist at BMO, called the numbers “disappointing” but added that the broad story of improvement hasn’t changed. “Given the six-month streak of increases in pending home sales, look for some retracement in the September data,” she predicted.
Regionally, sales fell in all four areas. Sales in the Northeast declined 2.2%, while those in the Midwest fell 6.6%. In the South, existing home sales were down 3.1%, and in the West sales declined 2.7%.
“Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus,” said Lawrence Yun, chief economist at the NAR. Despite the monthly slide, Yun said the tax credit was “having the intended impact.”
Indeed, 30% of all sales were from first-time homebuyers. Foreclosure-related sales also accounted for nearly a third of sales.
“The decline demonstrates we can’t take a housing rebound for granted,” Yun added. He attributed the monthly decrease to “rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process.”
If there was good news in the report, it was that inventories were slashed by 10.8% to 3.62 million, marking the biggest cutback in 10 months. At the current sales pace there are now 8.5-months of supply on the market, which is the lowest level of overhang since April 2007, and not far above the healthy ratio of 6 months.
Prices too have been stabilizing. Still, homebuyers continue to benefit from a deflated market as the median price for all housing has fallen 12.5% since August 2008. It’s unlikely prices will go up any time soon, especially as the foreclosure crisis continues (yesterday, the Wall Street Journal reported there were at least 1.2 million loans 90 days delinquent, none of which had entered the foreclosure process.)
Tuesday, September 22, 2009
July FHFA Home Price Index Marginally Improved
Home prices bottomed out in the second quarter but prices are not rising as quickly as forecasters had assumed, an industry survey said Tuesday.
The Federal Housing Finance Agency’s House Price Index, which compiles data on single-family homes, rose by 0.3% in July, half the pace expected by analysts. The previously reported 0.5% advance in June was trimmed to just +0.1%.
Despite the revisions, the overall story hasn’t changed. July marks the third consecutive month that prices have gone up, meaning the median price bottomed out in April. Since its peak in April 2007, prices fell 11.5% over two years. Over the past 12 months, the index has slid 4.2%.
Those figures are relatively modest when compared to the Case-Shiller index, whose peak-to-trough ratio saw home prices fall by one-third. Markets put more weight on the Case-Shiller index because it is more comprehensive, whereas the FHFA only reports on homes whose mortgages have been guaranteed by Freddie Mac or Fannie Mae, the government-sponsored entities that buy and securitize mortgages.
“The FHFA index misses all of the homes in places such as California and Florida which had significant non-traditional financing, such as subprime, alt-A, adjustable rate or jumbo mortgages,” said Joseph LaVorgna, chief US economist at Deutsche Bank.
Looking forward, prices should remain firm. With credit tight and the unemployment rate at 9.7%, few are expecting the housing re-inflate any time soon. Indeed, if the government fails to stop the ongoing crisis of foreclosures, the decline in home prices could resume.
Monthly prices from June to July by region:
Pacific: +1.6%
Middle Atlantic: +1.0%
South Atlantic: +0.6%
Mountain: +0.3%
West North Central: +0.3%
East South Central: -0.9%
East North Central: -0.3%
West South Central: -0.2%
New England: -0.1%
The Federal Housing Finance Agency’s House Price Index, which compiles data on single-family homes, rose by 0.3% in July, half the pace expected by analysts. The previously reported 0.5% advance in June was trimmed to just +0.1%.
Despite the revisions, the overall story hasn’t changed. July marks the third consecutive month that prices have gone up, meaning the median price bottomed out in April. Since its peak in April 2007, prices fell 11.5% over two years. Over the past 12 months, the index has slid 4.2%.
Those figures are relatively modest when compared to the Case-Shiller index, whose peak-to-trough ratio saw home prices fall by one-third. Markets put more weight on the Case-Shiller index because it is more comprehensive, whereas the FHFA only reports on homes whose mortgages have been guaranteed by Freddie Mac or Fannie Mae, the government-sponsored entities that buy and securitize mortgages.
“The FHFA index misses all of the homes in places such as California and Florida which had significant non-traditional financing, such as subprime, alt-A, adjustable rate or jumbo mortgages,” said Joseph LaVorgna, chief US economist at Deutsche Bank.
Looking forward, prices should remain firm. With credit tight and the unemployment rate at 9.7%, few are expecting the housing re-inflate any time soon. Indeed, if the government fails to stop the ongoing crisis of foreclosures, the decline in home prices could resume.
Monthly prices from June to July by region:
Pacific: +1.6%
Middle Atlantic: +1.0%
South Atlantic: +0.6%
Mountain: +0.3%
West North Central: +0.3%
East South Central: -0.9%
East North Central: -0.3%
West South Central: -0.2%
New England: -0.1%
Friday, September 18, 2009
FHA Announces Several Policy Changes
The Federal Housing Administration (FHA) today announced several significant policy changes that are intended to improve their exposure to risk. The changes, effective January 1, include:
- Modification of Procedures for Streamline Refinance Transactions
Adoption of Home Valuation Code of Conduct Guidelines (some not all)
Updated Appraisal Validity Period
New Appraisal Portability Regs
New Requirement of Lenders to Submit of Audited Financial Statements for Review
Adjustments to the Approval Process for Participation in FHA Loan Origination
Increased Net-Worth Requirements for Lenders
Grabbing the attention of mortgage professionals was FHA's decision to adopt language from HVCC appraisal guidelines. The HVCC, which has been the subject of heated debate within the industry, was implemented by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA decided not to adhere to the policy. This undoubtedly increased demand for FHA loan products as originators quickly learned of the multitude of problems associated with HVCC. The new requirements will prohibit any commissioned based lender staff member from ordering an FHA appraisal.
FHA will not require the use of AMCs or other third party organizations for appraisal ordering, if lenders do use AMCs and/or other third party organizations FHA-approved lenders must ensure that:
- FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report.
FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.
The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal.
Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing.
AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.
FHA issued five new mortgage letters explaining the policy changes. Here are links to each mortgagee letter:
Mortgagee Letter 09-28: Appraiser Independence
Mortgagee Letter 09-29: Appraisal Portability
Mortgagee Letter 09-30: Appraisal Validity Periods
Mortgagee Letter 09-31: Strengthening Counter Party Risk Periods
Mortgagee Letter 09-32: Revised Streamline Refinance Transactions
Here are a few other notable changes...
(Excerpts taken directly from Mortgagee Letters)
Appraisals
In cases where a borrower has switched lenders, FHA did not allow a new appraisal to be ordered. Instead the first lender was required, at the borrower’s request, to transfer the case to the second lender. This guideline generally slowed the loan process as the original lender often times was unwilling to transfer the case in a timely manner.
The new guideline, effective January 1, allows a second appraisal to be ordered by the second lender under the following limited circumstances:
1. The first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender.
2. The appraiser performing the first appraisal is on the second lender’s exclusionary list of appraisers.
3. Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower.Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees.
FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation. Today's announcement reduces that period from six months to four.
Advertising
FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs. HUD registered business names include any alias or “doing business as” (DBA) on file with FHA. FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two years from the date that the materials are circulated or used to advertise.
Who can work with FHA and FHA originated loans
A lender or mortgagee shall not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:
(1) currently suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under part 25 of title 24 of the Code of Federal Regulations, 2 Code of Federal Regulations, part 180 as implemented by part 2424, or any successor regulations to such parts, or under similar provisions of any other Federal agency;
(2) under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;
(3) subject to unresolved findings contained in a Department of Housing and Urban Development or other governmental audit, investigation, or review;
(4) engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
(5) convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry—(i) during the 7-year period preceding the date of the application for licensing and registration; or (ii) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;
(6) in violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of State law; or
(7) in violation of any other requirement as established by the Secretary.
Streamline Refinance Transactions
At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.At the time of loan application, the borrower must exhibit an acceptable payment history as described below.
1) For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.
2) For mortgages with a 12 months payment history or greater, the borrower must have:
a) Experienced no more than one 30 day late payment in the preceding 12 months,
AND
b) Made all mortgage payments within the month due for the three months prior to the date of loan application.
The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as:
- reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
OR
reducing the term of the mortgage
If a credit score is available, the lender must enter the credit score into FHA Connection. If more than one credit score is available, lenders must enter all available credit scores.If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.
For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.
Revised Streamline Refinance Transactions WITHOUT an AppraisalThe maximum insurable mortgage cannot exceed:
The outstanding principal balance minus the applicable refund of the UFMIP,
PLUS
The new UFMIP that will be charged on the refinance.
Revised Streamline Transaction WITH an AppraisalThe maximum insurable mortgage is the lower of:
- 1) Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance;
OR
- 2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance.Discount points may not be included in the new mortgage. If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
Further Changes Currently Being Considered:
Modify Mortgagee Approval and Participation in FHA Loan Origination
Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility.
These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.
Increase Net-Worth Requirements for Mortgagees
The FHA plans to propose to increase the net worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1,000,000 that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.
Tuesday, September 15, 2009
Bernanke says recession is very likely over
WASHINGTON — Federal Reserve Chairman Ben Bernanke said Tuesday the worst recession since the 1930s is probably over, although he cautioned that pain — especially for the nearly 15 million unemployed Americans — will persist.
Bernanke said the economy likely is growing now, but he warned that won't be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 percent, from rising.
"From a technical perspective, the recession is very likely over at this point," Bernanke said in responding to questions at the Brookings Institution. "It's still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was."
The recession, which started in December 2007, has claimed a net total of 6.9 million jobs.
With expectations for a lethargic recovery, the Fed predicts that unemployment will top 10 percent this year. The post-World War II high was 10.8 percent at the end of 1982.
Some economists say it will take at least four years for the jobless rate to drop down to a more normal range of 5 percent.
Even if the economy logs "moderate" growth in 2010, unemployment is likely to stay elevated, Bernanke suggested. "Unfortunately, unemployment will be slow to come down. It will come down but it may take some time," he said. "Obviously, that's a very serious concern."
Drugmaker Eli Lilly & Co. said Monday that it will cut 5,500 jobs over the next two years, 14 percent of its work force, as it restructures the company into five units.
Still, Bernanke's declaration that the recession likely ended marked his most optimistic assessment yet of the economy. And his remarks came on the same day that the government report that retail sales jumped 2.7 percent in August, the most in more than three years.
Last month, Bernanke told a Fed conference in Wyoming that economic activity appears to be "leveling out" after declining sharply at the end of last year and into the beginning of this year. He also said that the global economy was just "beginning to emerge" from recession.
Bernanke's speech to at Brookings was identical to the one he delivered at the Fed conference.
Analysts predict the U.S. economy is growing in the current quarter, which ends Sept. 30, at an annual rate of 3 to 4 percent. It shrank at a 1 percent pace in the second quarter, much slower than in previous quarters.
Bernanke said the economy is coping with "ongoing headwinds," including hard-to-get-credit for consumers and businesses, and households saving more, spending less and trimming their debt. Those forces can weigh down the recovery, he said.
Other analysts worry that falling house prices could hamper the broader rebound, especially if they cause consumers to tighten their belts.
While many on Wall Street have been encouraged by early signs of stabilization in U.S. home prices and hope the housing market may have hit bottom, others aren't so sure.
Deutsche Bank analyst Karen Weaver on Tuesday predicted that national home prices won't stop sliding until next summer and likely will fall another 10.5 percent from this summer's levels. Bigger declines are expected in cites like New York, Salt Lake City, Fort Lauderdale, Fla., and Baltimore.
Against that backdrop, Michael Williams, dean of Touro College's Graduate School of Business, disagreed with Bernanke's assessment that the recession probably ended. Williams maintains that troubles in both the residential and commercial real-estate markets are prolonging the downturn.
Williams believes the economy is still shrinking and won't turn around until later next year. "This recession lingers," he said.
Meanwhile, Bernanke said he is optimistic that Congress will enact a revamp of the nation's financial rule book to prevent a future crisis from happening.
"I feel quite confident that a comprehensive reform will be forthcoming," Bernanke said.
President Barack Obama on Monday urged Congress to enact legislation this year.
"This has just been too big a calamity and too serious a problem" over the past year, with the near meltdown of the U.S. financial system, for Congress not to take action, Bernanke added.
He spoke one year after Lehman Brothers filed for bankruptcy, the largest in U.S. history. It's collapse roiled financial markets worldwide, nearly halted the flow of credit and almost brought down the entire U.S. financial system
Bernanke said the economy likely is growing now, but he warned that won't be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 percent, from rising.
"From a technical perspective, the recession is very likely over at this point," Bernanke said in responding to questions at the Brookings Institution. "It's still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was."
The recession, which started in December 2007, has claimed a net total of 6.9 million jobs.
With expectations for a lethargic recovery, the Fed predicts that unemployment will top 10 percent this year. The post-World War II high was 10.8 percent at the end of 1982.
Some economists say it will take at least four years for the jobless rate to drop down to a more normal range of 5 percent.
Even if the economy logs "moderate" growth in 2010, unemployment is likely to stay elevated, Bernanke suggested. "Unfortunately, unemployment will be slow to come down. It will come down but it may take some time," he said. "Obviously, that's a very serious concern."
Drugmaker Eli Lilly & Co. said Monday that it will cut 5,500 jobs over the next two years, 14 percent of its work force, as it restructures the company into five units.
Still, Bernanke's declaration that the recession likely ended marked his most optimistic assessment yet of the economy. And his remarks came on the same day that the government report that retail sales jumped 2.7 percent in August, the most in more than three years.
Last month, Bernanke told a Fed conference in Wyoming that economic activity appears to be "leveling out" after declining sharply at the end of last year and into the beginning of this year. He also said that the global economy was just "beginning to emerge" from recession.
Bernanke's speech to at Brookings was identical to the one he delivered at the Fed conference.
Analysts predict the U.S. economy is growing in the current quarter, which ends Sept. 30, at an annual rate of 3 to 4 percent. It shrank at a 1 percent pace in the second quarter, much slower than in previous quarters.
Bernanke said the economy is coping with "ongoing headwinds," including hard-to-get-credit for consumers and businesses, and households saving more, spending less and trimming their debt. Those forces can weigh down the recovery, he said.
Other analysts worry that falling house prices could hamper the broader rebound, especially if they cause consumers to tighten their belts.
While many on Wall Street have been encouraged by early signs of stabilization in U.S. home prices and hope the housing market may have hit bottom, others aren't so sure.
Deutsche Bank analyst Karen Weaver on Tuesday predicted that national home prices won't stop sliding until next summer and likely will fall another 10.5 percent from this summer's levels. Bigger declines are expected in cites like New York, Salt Lake City, Fort Lauderdale, Fla., and Baltimore.
Against that backdrop, Michael Williams, dean of Touro College's Graduate School of Business, disagreed with Bernanke's assessment that the recession probably ended. Williams maintains that troubles in both the residential and commercial real-estate markets are prolonging the downturn.
Williams believes the economy is still shrinking and won't turn around until later next year. "This recession lingers," he said.
Meanwhile, Bernanke said he is optimistic that Congress will enact a revamp of the nation's financial rule book to prevent a future crisis from happening.
"I feel quite confident that a comprehensive reform will be forthcoming," Bernanke said.
President Barack Obama on Monday urged Congress to enact legislation this year.
"This has just been too big a calamity and too serious a problem" over the past year, with the near meltdown of the U.S. financial system, for Congress not to take action, Bernanke added.
He spoke one year after Lehman Brothers filed for bankruptcy, the largest in U.S. history. It's collapse roiled financial markets worldwide, nearly halted the flow of credit and almost brought down the entire U.S. financial system
Friday, September 11, 2009
Why it's time to invest in real estate - SmartMoney
Passing through the Fort Myers, Fla., airport a few weeks ago, I noticed people eagerly signing up for a free bus tour of foreclosed real estate -- with all properties offering water views. During the ride to my hotel, the young driver volunteered that he'd just bought his first house, paying $65,000 for a foreclosed property in nearby Cape Coral that had last sold for more than $250,000. He said he'd never expected to be able to buy anything on a driver's salary, let alone something that nice.
Late last month, Standard & Poor's reported that its S&P/Case-Shiller U.S. National Home Price index of real-estate values increased this past quarter over the first quarter of 2009, the first quarter-on-quarter increase in three years. Its index of 20 major cities also rose for the three months ended June 30 over the three months ended May 31, with only hard-hit Detroit and Las Vegas experiencing declines. The week before that, the National Association of Realtors reported that sales volume of existing homes was up 7.2% in July from June.
In short, the data suggest that real-estate prices hit a bottom some time during the second quarter and have now begun to rise. There's no way to be certain that this marks the end of the long, painful correction that followed the real-estate bubble, but clearly prices are no longer in free fall.
That means if you've been sitting on the fence, it's time to act.
Trying to buy at a bottom
Ordinarily I'd never try to time the real-estate market, but I can understand why buyers have been cautious. Few want to buy in down markets, just as stock buyers avoid bear markets. And for most people, of course, buying a house is a much bigger decision than buying a stock.
But with real-estate prices nationally now down about 30% from their 2006 peak and showing signs of turning up, the prices aren't likely to go much lower. Every real-estate market is local, and so there may be a few exceptions. Overall, though, I can't imagine a better time to buy than right now.
In addition to bargain prices, buyers should find plenty of homes to choose from. The inventory of unsold homes was 4.09 million units in July, up 7.3% from June, according to the National Association of Realtors. And mortgage rates this week were at a two-month low of close to 5%.
Even the stricter appraisal process is working to the advantage of buyers. Appraisals are coming in far lower than most sellers have been expecting, forcing them to face the new reality of sharply lower prices. And with stricter standards, lenders aren't going to let buyers borrow more than they can afford, which protects buyers and helps to keep prices down.
The flipping days are over
Unless you're really prepared to accept the demands (and headaches) of being a landlord, I don't recommend direct ownership of real estate as an investment. The days of buyers lining up to buy and flip Miami Beach and Las Vegas condos are mercifully gone. There are much easier ways to make money in real estate, such as buying into real-estate investment trusts or buying shares in homebuilders and other housing-related businesses, such as Home Depot.
Historically, the mean rate of return on real estate has been around 3%, according to research from Yale economist Robert Shiller, who co-developed the Case-Shiller index. Shares in REITs and other stocks have often done much better.
But there's a good reason homeownership has been such a central part of the American dream. It delivers security, pride of ownership, a sense of community and decent investment returns as a bonus.
I felt glad for my driver in Florida. He represents the other side of the foreclosure crisis. For every hardship story, and no doubt there are many, others are realizing their dreams of homeownership and getting what may well turn out to be the deals of their lives.
By James B. Stewart, SmartMoney
Late last month, Standard & Poor's reported that its S&P/Case-Shiller U.S. National Home Price index of real-estate values increased this past quarter over the first quarter of 2009, the first quarter-on-quarter increase in three years. Its index of 20 major cities also rose for the three months ended June 30 over the three months ended May 31, with only hard-hit Detroit and Las Vegas experiencing declines. The week before that, the National Association of Realtors reported that sales volume of existing homes was up 7.2% in July from June.
In short, the data suggest that real-estate prices hit a bottom some time during the second quarter and have now begun to rise. There's no way to be certain that this marks the end of the long, painful correction that followed the real-estate bubble, but clearly prices are no longer in free fall.
That means if you've been sitting on the fence, it's time to act.
Trying to buy at a bottom
Ordinarily I'd never try to time the real-estate market, but I can understand why buyers have been cautious. Few want to buy in down markets, just as stock buyers avoid bear markets. And for most people, of course, buying a house is a much bigger decision than buying a stock.
But with real-estate prices nationally now down about 30% from their 2006 peak and showing signs of turning up, the prices aren't likely to go much lower. Every real-estate market is local, and so there may be a few exceptions. Overall, though, I can't imagine a better time to buy than right now.
In addition to bargain prices, buyers should find plenty of homes to choose from. The inventory of unsold homes was 4.09 million units in July, up 7.3% from June, according to the National Association of Realtors. And mortgage rates this week were at a two-month low of close to 5%.
Even the stricter appraisal process is working to the advantage of buyers. Appraisals are coming in far lower than most sellers have been expecting, forcing them to face the new reality of sharply lower prices. And with stricter standards, lenders aren't going to let buyers borrow more than they can afford, which protects buyers and helps to keep prices down.
The flipping days are over
Unless you're really prepared to accept the demands (and headaches) of being a landlord, I don't recommend direct ownership of real estate as an investment. The days of buyers lining up to buy and flip Miami Beach and Las Vegas condos are mercifully gone. There are much easier ways to make money in real estate, such as buying into real-estate investment trusts or buying shares in homebuilders and other housing-related businesses, such as Home Depot.
Historically, the mean rate of return on real estate has been around 3%, according to research from Yale economist Robert Shiller, who co-developed the Case-Shiller index. Shares in REITs and other stocks have often done much better.
But there's a good reason homeownership has been such a central part of the American dream. It delivers security, pride of ownership, a sense of community and decent investment returns as a bonus.
I felt glad for my driver in Florida. He represents the other side of the foreclosure crisis. For every hardship story, and no doubt there are many, others are realizing their dreams of homeownership and getting what may well turn out to be the deals of their lives.
By James B. Stewart, SmartMoney
Wednesday, September 9, 2009
As Loan Modifications Fall Short, Foreclosures Loom
Only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and millions more foreclosures are coming, the Treasury Department said on Wednesday.
A Treasury report showed 360,165 people had their monthly payments reduced through August, up from 235,247 through July, but a senior Treasury official conceded much more must be done to soften the impact of a severe and prolonged housing crisis.
Treasury has begun releasing monthly reports on the loan modification program, called the Home Affordable Modification Program or HAMP.
In July, it said that just 9 percent of the estimated number of homeowners eligible had had their loans modified, so Treasury's assistant secretary for financial institutions, Michael Barr, was able to claim modest progress in August.
He told a House Financial Services subcommittee that the program launched in February, which brings banks and loan servicers together with at-risk homeowners, was on target to help a half million Americans homeowners by November 1.
But that is a small start on a huge problem at the heart of U.S. economic woes.
Barr said that "even if HAMP is a total success, we should still expect millions of foreclosures" as administration and industry efforts continue to stabilize a crisis-stricken housing sector.
Barr said a strong housing market was "crucial" to a sustained U.S. economic recovery and described the slump in prices and demand in the housing sector as being "at the center of our financial crisis and economic downturn."
He noted that analysts anticipate more than six million Americans could lose their homes in the next three years.
"Much more remains to be done and we will continue to work with other agencies, regulators and the private sector to reach as many families as possible," Barr said.
The Treasury report showed that some lenders had not helped any of their borrowers who were eligible for loan modifications. Others had helped varying numbers of those who were 60 or more days delinquent on their mortgages, ranging up to 100 percent for one bank that only had one eligible borrower.
A Treasury report showed 360,165 people had their monthly payments reduced through August, up from 235,247 through July, but a senior Treasury official conceded much more must be done to soften the impact of a severe and prolonged housing crisis.
Treasury has begun releasing monthly reports on the loan modification program, called the Home Affordable Modification Program or HAMP.
In July, it said that just 9 percent of the estimated number of homeowners eligible had had their loans modified, so Treasury's assistant secretary for financial institutions, Michael Barr, was able to claim modest progress in August.
He told a House Financial Services subcommittee that the program launched in February, which brings banks and loan servicers together with at-risk homeowners, was on target to help a half million Americans homeowners by November 1.
But that is a small start on a huge problem at the heart of U.S. economic woes.
Barr said that "even if HAMP is a total success, we should still expect millions of foreclosures" as administration and industry efforts continue to stabilize a crisis-stricken housing sector.
Barr said a strong housing market was "crucial" to a sustained U.S. economic recovery and described the slump in prices and demand in the housing sector as being "at the center of our financial crisis and economic downturn."
He noted that analysts anticipate more than six million Americans could lose their homes in the next three years.
"Much more remains to be done and we will continue to work with other agencies, regulators and the private sector to reach as many families as possible," Barr said.
The Treasury report showed that some lenders had not helped any of their borrowers who were eligible for loan modifications. Others had helped varying numbers of those who were 60 or more days delinquent on their mortgages, ranging up to 100 percent for one bank that only had one eligible borrower.
Housing Market Recovery Bound
Recent data illustrating steady house prices and rising sales for weeks have led economists and analysts alike to indicate a perceived bottom — or stabilization, at the least — in the US housing market.
New market analysis out of Credit Suisse suggests the US residential housing sector may be past the point of stabilization and is now recovering vital signs.
Demand is returning on higher affordability and the federal first-time homebuyer tax credit, according to Martin Bernhard, of Credit Suisse’s private banking, investment services and products divisions.
“On a national level, we think that the turning point could have been reached,” he said.
But several factors including unemployment rates and foreclosure levels post-moratoria may pressure these positive developments, Bernhard said in market commentary last week.
The US unemployment rate rose to 9.7% in August, posing an ongoing risk to the recovering in housing demand as consumers remain financially pressured.
New house supply is low as housing construction slips. Weak demand for new houses may reduce inventory in the months ahead, Bernhard said.
The existing house side of the market — which is about 10 times as large as the market for new homes, according to Credit Suisse — remains pressured by levels of foreclosure inventory. Foreclosure sales, which weigh on overall resale house prices, may further depress the market.
The risks posed by the foreclosure pipeline may pressure prices in the short term, but the pricing correction achieved poses long-term investment benefits.
“Given the sharp correction in house prices over the last three years, we think that there now exist interesting investment opportunities in the US housing sector,” Bernhard said. “But risks remain due to rising unemployment and foreclosure sales. We thus recommend investors to concentrate on regions with relative robust housing market fundamentals and positive long-term outlooks such as Texas.”
Other regional US existing home markets where increasing levels of supply outweigh weak demand may not bottom quite so early. Overall US financials continue to appear strong, however.
The US Q209 earnings season surprised global financial market observers, contributing to an overall expectation that the global recession is nearing an end.
New market analysis out of Credit Suisse suggests the US residential housing sector may be past the point of stabilization and is now recovering vital signs.
Demand is returning on higher affordability and the federal first-time homebuyer tax credit, according to Martin Bernhard, of Credit Suisse’s private banking, investment services and products divisions.
“On a national level, we think that the turning point could have been reached,” he said.
But several factors including unemployment rates and foreclosure levels post-moratoria may pressure these positive developments, Bernhard said in market commentary last week.
The US unemployment rate rose to 9.7% in August, posing an ongoing risk to the recovering in housing demand as consumers remain financially pressured.
New house supply is low as housing construction slips. Weak demand for new houses may reduce inventory in the months ahead, Bernhard said.
The existing house side of the market — which is about 10 times as large as the market for new homes, according to Credit Suisse — remains pressured by levels of foreclosure inventory. Foreclosure sales, which weigh on overall resale house prices, may further depress the market.
The risks posed by the foreclosure pipeline may pressure prices in the short term, but the pricing correction achieved poses long-term investment benefits.
“Given the sharp correction in house prices over the last three years, we think that there now exist interesting investment opportunities in the US housing sector,” Bernhard said. “But risks remain due to rising unemployment and foreclosure sales. We thus recommend investors to concentrate on regions with relative robust housing market fundamentals and positive long-term outlooks such as Texas.”
Other regional US existing home markets where increasing levels of supply outweigh weak demand may not bottom quite so early. Overall US financials continue to appear strong, however.
The US Q209 earnings season surprised global financial market observers, contributing to an overall expectation that the global recession is nearing an end.
Option ARM Shoe Set to Fall?
More bad mortgage news may be lurking around the corner according to information released on Tuesday by Fitch Ratings.
The ratings firm revealed that some $134 billion in ARM Residential Mortgage Backed Securities (RMBS) are due to recast by the end of 2010, raising the possibility of another wave of mortgage defaults among a group of loans that have already demonstrated a good deal of weakness.
The loans in question are Option ARMs; those mortgages in which the borrower has a monthly choice, make a full payment of principal and interest, a payment equivalent to interest only, or a payment less than the total amount of interest due. In the later case, the unpaid interest balance is added to principal. 94 percent of Option ARM borrowers have utilized the minimum monthly payment and allowed their loans to negatively amortize.
This negative amortization feature of options has made them a cause for concern for some time, one reason that Fitch has only rated about 5 percent of the $189 billion of Option ARMs outstanding. As the homeowner continues to make minimum or minimal payments and the principal balance increases, the loan eventually hits a pre-set cap of 110 to 125 percent of the original loan balance, and event that triggers a recast. When the loan recasts, the required monthly payment on the loan immediately changes from the minimum permitted under the option to a payment amount sufficient to amortize the principal and interest. This new payment is, on average, 63 percent higher than the original minimum payment and may be as much as 100 percent higher depending on the type of loan, the amount of the cap, interest rate behavior and other variables. Under the terms of Option ARM loans, even if regular payments are made, the loan automatically recasts at 60 months.
Fitch reports that, of the 88 percent of Option ARMs originated between 2004 and 2007 have not yet recast. In spite of the fact that the original payments are in effect, 37 percent of these are either 90 days or more delinquent, in foreclosure or already foreclosed. Of the entire universe of Option ARMs 46 percent are running 30 days delinquent or more even though only 12 percent have recast.
Fitch Managing Director and U.S. RMBS Group Head Huxley Somerville said on Tuesday, “Having not demonstrated their ability to make payments at the full rate, option ARM borrowers are at the greatest risk of default resulting from payment shock.”
Lenders have already modified approximately 3.5 percent of the one million option loans in anticipation of payment shock. Modifications have included term extensions, interest rate cuts, conversion to interest only loans and other changes. The 90+ day delinquency rate among those modified loans is running at a lower pace of 24 percent but Fitch expects that large numbers of these loans will also default when they recast because monthly payments will still drastically increase.
Fitch had expected losses on the loans to range between 35%-45%, depending on the collateral quality of the underlying mortgage loans. In addition to expectations of higher defaults, severities have also contributed to higher expected lifetime losses. Fitch has observed that loss severities on Option ARMs have increased significantly to an average of approximately 60% from 40% a year ago. Exacerbating the problem is the high concentration of the option loans in states where home prices continue to decline. 75 percent of the loans are on collateral located in California, Florida, Nevada, and Arizona where home prices have declined an average of 48 percent since early 2006. Loan-to-value ratios have increased from the original average of 79 percent to 126 percent today, meaning that many of these borrowers will be unable to refinance to avoid upcoming rate shock.
Fitch Ratings also announced launch of new Credit Default Swaps of Asset Backed Securities broad market indices for U.S. subprime assets. The company said it is issuing the five new indices as home prices and subprime asset values show signs of stabilization.
Fitch's total market U.S. subprime Index stood at 8.34 as of Sept. 1. Though higher than the all-time low of 7.27 on May 1, the index is still significantly lower than the opening value of 42.56 on Nov. 1, 2007.
According to Fitch, the five new indices, which are presented as cash prices, will provide a total market view of all vintages as well as vintage specific indices. They will be made available within Fitch Solutions ABCDS pricing service.
'In general, the synthetic subprime market is still seeing more activity than its cash equivalent and hence can be used as an effective proxy for asset values,' said Author and Managing Director Thomas Aubrey. 'Fitch Solutions' new indices will fill a gap by helping market participants with broader trend analysis and improving relative valuation techniques across different asset classes.'
The ratings firm revealed that some $134 billion in ARM Residential Mortgage Backed Securities (RMBS) are due to recast by the end of 2010, raising the possibility of another wave of mortgage defaults among a group of loans that have already demonstrated a good deal of weakness.
The loans in question are Option ARMs; those mortgages in which the borrower has a monthly choice, make a full payment of principal and interest, a payment equivalent to interest only, or a payment less than the total amount of interest due. In the later case, the unpaid interest balance is added to principal. 94 percent of Option ARM borrowers have utilized the minimum monthly payment and allowed their loans to negatively amortize.
This negative amortization feature of options has made them a cause for concern for some time, one reason that Fitch has only rated about 5 percent of the $189 billion of Option ARMs outstanding. As the homeowner continues to make minimum or minimal payments and the principal balance increases, the loan eventually hits a pre-set cap of 110 to 125 percent of the original loan balance, and event that triggers a recast. When the loan recasts, the required monthly payment on the loan immediately changes from the minimum permitted under the option to a payment amount sufficient to amortize the principal and interest. This new payment is, on average, 63 percent higher than the original minimum payment and may be as much as 100 percent higher depending on the type of loan, the amount of the cap, interest rate behavior and other variables. Under the terms of Option ARM loans, even if regular payments are made, the loan automatically recasts at 60 months.
Fitch reports that, of the 88 percent of Option ARMs originated between 2004 and 2007 have not yet recast. In spite of the fact that the original payments are in effect, 37 percent of these are either 90 days or more delinquent, in foreclosure or already foreclosed. Of the entire universe of Option ARMs 46 percent are running 30 days delinquent or more even though only 12 percent have recast.
Fitch Managing Director and U.S. RMBS Group Head Huxley Somerville said on Tuesday, “Having not demonstrated their ability to make payments at the full rate, option ARM borrowers are at the greatest risk of default resulting from payment shock.”
Lenders have already modified approximately 3.5 percent of the one million option loans in anticipation of payment shock. Modifications have included term extensions, interest rate cuts, conversion to interest only loans and other changes. The 90+ day delinquency rate among those modified loans is running at a lower pace of 24 percent but Fitch expects that large numbers of these loans will also default when they recast because monthly payments will still drastically increase.
Fitch had expected losses on the loans to range between 35%-45%, depending on the collateral quality of the underlying mortgage loans. In addition to expectations of higher defaults, severities have also contributed to higher expected lifetime losses. Fitch has observed that loss severities on Option ARMs have increased significantly to an average of approximately 60% from 40% a year ago. Exacerbating the problem is the high concentration of the option loans in states where home prices continue to decline. 75 percent of the loans are on collateral located in California, Florida, Nevada, and Arizona where home prices have declined an average of 48 percent since early 2006. Loan-to-value ratios have increased from the original average of 79 percent to 126 percent today, meaning that many of these borrowers will be unable to refinance to avoid upcoming rate shock.
Fitch Ratings also announced launch of new Credit Default Swaps of Asset Backed Securities broad market indices for U.S. subprime assets. The company said it is issuing the five new indices as home prices and subprime asset values show signs of stabilization.
Fitch's total market U.S. subprime Index stood at 8.34 as of Sept. 1. Though higher than the all-time low of 7.27 on May 1, the index is still significantly lower than the opening value of 42.56 on Nov. 1, 2007.
According to Fitch, the five new indices, which are presented as cash prices, will provide a total market view of all vintages as well as vintage specific indices. They will be made available within Fitch Solutions ABCDS pricing service.
'In general, the synthetic subprime market is still seeing more activity than its cash equivalent and hence can be used as an effective proxy for asset values,' said Author and Managing Director Thomas Aubrey. 'Fitch Solutions' new indices will fill a gap by helping market participants with broader trend analysis and improving relative valuation techniques across different asset classes.'
Tuesday, September 8, 2009
FHA Does Not Need Congressional Help
In the face of rumors that its capital reserve ratio is nearing the danger point, the head of the Federal Housing Administration (FHA) says that his agency does not need help from Congress.
The Wall Street Journal reported this morning that the agency, part of the U.S. Department of Housing and Urban Development (HUD), might fall below the 2 percent capital reserve ratio demanded by Congress because of rising defaults on mortgage loans it insured.
Responding to the Journal article, FHA Commissioner David Stevens this morning said, "Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent."
Mortgage loans insured by the government have soared to the highest levels in two decades as borrowers have taken advantage of down payment requirements for FHA loans which are lower than those for other mortgages.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
At the same time, defaults in FHA insured loans are depleting its reserves. According to the Journal, 7.8 percent of FHA loans were 90 days or more late or in foreclosure. This is comparable to the national average, but because of the low down payment requirement, sometimes as low as 3.5 percent, a borrower is less likely to hang on and try to save his home and FHA takes a bigger hit.
Should the reserve funds fall to dangerous levels, the FHA could either raise the premiums that borrowers pay for the agency guarantee or petition Congress for taxpayer funds to boost agency reserves
"FHA's full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement," Stevens said, adding that FHA continued to generate income for taxpayers.
Department of Housing and Urban Development Secretary Shaun Donovan said in June, "there's a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we'll more than likely to stay out of a broader need for any taxpayer funding."
According to the Journal, the only thing the agency is obligated to do is notify Congress if it falls below capital requirement. This could, however lead to a demand that FHA reduce its lending which is credited with helping to improve house sales.
The FHA's mandated 2 percent reserve means a minimum of $3 billion during the current fiscal year and $4 billion next year. The agency's assets have increased from $27 billion to around $31 billion in the past year. A recent audit put the value of the fund at $12.9 billion last year or around 3 percent of all FHA backed loans.
The Wall Street Journal reported this morning that the agency, part of the U.S. Department of Housing and Urban Development (HUD), might fall below the 2 percent capital reserve ratio demanded by Congress because of rising defaults on mortgage loans it insured.
Responding to the Journal article, FHA Commissioner David Stevens this morning said, "Even if that level falls below 2 percent, FHA continues to hold more than $30 billion in its reserves today, or more than 5 percent of its insurance in force. Given this reserve level, FHA will not need a congressional subsidy even if the congressional capital reserve calculation falls below 2 percent."
Mortgage loans insured by the government have soared to the highest levels in two decades as borrowers have taken advantage of down payment requirements for FHA loans which are lower than those for other mortgages.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
At the same time, defaults in FHA insured loans are depleting its reserves. According to the Journal, 7.8 percent of FHA loans were 90 days or more late or in foreclosure. This is comparable to the national average, but because of the low down payment requirement, sometimes as low as 3.5 percent, a borrower is less likely to hang on and try to save his home and FHA takes a bigger hit.
Should the reserve funds fall to dangerous levels, the FHA could either raise the premiums that borrowers pay for the agency guarantee or petition Congress for taxpayer funds to boost agency reserves
"FHA's full faith and credit insurance means that there is no risk to homeowners or bondholders independent of the congressional capital reserve requirement," Stevens said, adding that FHA continued to generate income for taxpayers.
Department of Housing and Urban Development Secretary Shaun Donovan said in June, "there's a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we'll more than likely to stay out of a broader need for any taxpayer funding."
According to the Journal, the only thing the agency is obligated to do is notify Congress if it falls below capital requirement. This could, however lead to a demand that FHA reduce its lending which is credited with helping to improve house sales.
The FHA's mandated 2 percent reserve means a minimum of $3 billion during the current fiscal year and $4 billion next year. The agency's assets have increased from $27 billion to around $31 billion in the past year. A recent audit put the value of the fund at $12.9 billion last year or around 3 percent of all FHA backed loans.
Friday, September 4, 2009
The new math of FICO credit scores
By MarketWatch
Even the most responsible borrowers slip up sometimes.
Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used.
With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.
Under the updated scoring model, called FICO 08, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.
Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO, which developed the FICO scoring system.
"There's more flexibility with missing a payment," said Careen Foster, the director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late . . . you're more likely to get penalized for that."
If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.
The new system has been available at all three credit bureaus -- Experian, TransUnion and Equifax -- since last month.
The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, the president of consumer education for Credit.com, a consumer education and advocacy site. FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.
With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.
FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.
"It was a practice to . . . misrepresent what your credit looks like to your bank," Foster said.
FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.
Not all lenders use the model
Borrowers shouldn't expect their credit to be graded by this new scale on every loan application. Not all lenders have adopted the new model, though more than 400 lenders are using or testing FICO 08, the company said.
In a statement, Equifax said, "Currently, many lenders and businesses are validating the new score within their systems, and adoption will vary by financial institution based on business requirements and market need."
Many credit-card companies, auto lenders, regional banks and credit unions may have already adopted FICO 08, Ulzheimer said. But for mortgages, lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae likely haven't made the move yet, he said. That's because they're waiting for Freddie and Fannie to approve its use. Freddie Mac and Fannie Mae "are essentially the lender . . . they're the ones that set the underwriting criteria," he said.
Ulzheimer said he expects Freddie and Fannie to adopt FICO 08 by the end of the year. Fannie declined to comment on FICO 08; Freddie wasn't able to provide a comment prior to publication.
Be proactive about your credit
While FICO 08 will help consumers' credit scores in some cases, people still should take steps to improve their credit. Granted, it's impossible for consumers to calculate their FICO scores themselves, said Rodney Anderson, of Rodney Anderson Lending Services in Plano, Texas.
"It's almost like the Coca-Cola formula. No one has access to the Coca-Cola formula, no one has access to the FICO formula," he said.
But by being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.
Some suggestions:
Monitor your credit reports and correct errors. Don't just look for negative events on your record; also examine your credit limits to make sure they're accurate. Credit limits that appear lower on the report than they actually are have the potential to hurt your score, Anderson said.
Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score, Foster said. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.
Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score, Foster said.
This article was reported by Amy Hoak for MarketWatch.
http://articles.moneycentral.msn.com/Banking/YourCreditRating/the-new-math-of-FICO-credit-scores.aspx
Even the most responsible borrowers slip up sometimes.
Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used.
With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.
Under the updated scoring model, called FICO 08, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.
Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO, which developed the FICO scoring system.
"There's more flexibility with missing a payment," said Careen Foster, the director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late . . . you're more likely to get penalized for that."
If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.
The new system has been available at all three credit bureaus -- Experian, TransUnion and Equifax -- since last month.
The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, the president of consumer education for Credit.com, a consumer education and advocacy site. FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.
With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.
FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.
"It was a practice to . . . misrepresent what your credit looks like to your bank," Foster said.
FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.
Not all lenders use the model
Borrowers shouldn't expect their credit to be graded by this new scale on every loan application. Not all lenders have adopted the new model, though more than 400 lenders are using or testing FICO 08, the company said.
In a statement, Equifax said, "Currently, many lenders and businesses are validating the new score within their systems, and adoption will vary by financial institution based on business requirements and market need."
Many credit-card companies, auto lenders, regional banks and credit unions may have already adopted FICO 08, Ulzheimer said. But for mortgages, lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae likely haven't made the move yet, he said. That's because they're waiting for Freddie and Fannie to approve its use. Freddie Mac and Fannie Mae "are essentially the lender . . . they're the ones that set the underwriting criteria," he said.
Ulzheimer said he expects Freddie and Fannie to adopt FICO 08 by the end of the year. Fannie declined to comment on FICO 08; Freddie wasn't able to provide a comment prior to publication.
Be proactive about your credit
While FICO 08 will help consumers' credit scores in some cases, people still should take steps to improve their credit. Granted, it's impossible for consumers to calculate their FICO scores themselves, said Rodney Anderson, of Rodney Anderson Lending Services in Plano, Texas.
"It's almost like the Coca-Cola formula. No one has access to the Coca-Cola formula, no one has access to the FICO formula," he said.
But by being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.
Some suggestions:
Monitor your credit reports and correct errors. Don't just look for negative events on your record; also examine your credit limits to make sure they're accurate. Credit limits that appear lower on the report than they actually are have the potential to hurt your score, Anderson said.
Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score, Foster said. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.
Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score, Foster said.
This article was reported by Amy Hoak for MarketWatch.
http://articles.moneycentral.msn.com/Banking/YourCreditRating/the-new-math-of-FICO-credit-scores.aspx
Foreclosure Starts Increase
Foreclosure starts increased to 283,682 in July from 251,340 a month earlier, outnumbering the 253,673 workout plans offered to borrowers during that, according to foreclosure prevention group Hope Now. Both repayment plans and loan modification plans slipped during the month, with the latter falling from 93,921 in June to 80,167; repayment plans declined to 173,506 from 211,882.
The alliance attributed the fall to the implementation of Obama’s Home Affordable Modification Program (HAMP); the Treasury reported that servicers initiated 230,000 trial modifications in July. “Successful trial loan modifications that complete the 90 day Home Affordable Modification Program (HAMP) payment terms and completely documented as final modifications will be included in future HOPE NOW modification data,” HAMP said in a release. “It is anticipated that modification numbers will increase in HOPE NOW industry survey reports in the coming months. The industry remains committed to the administration’s goal of completing 500,000 loan modifications by November 1, 2009.”
Completed foreclosure sales decreased slightly form 92,661 to 89,173 in July, but 60-day plus delinquencies climbed to 5.9 percent, representing 3.1 million homeowners. Fewer than 40 percent of foreclosure starts resulted in a foreclosure sale last month, an improvement from the near-50 percent seen a year earlier. Last month, 211,714 of the 283,682 foreclosure starts were considered “prime” loans; similarly, 59,341 of the 89,173 foreclosure sales were deemed prime.
The alliance attributed the fall to the implementation of Obama’s Home Affordable Modification Program (HAMP); the Treasury reported that servicers initiated 230,000 trial modifications in July. “Successful trial loan modifications that complete the 90 day Home Affordable Modification Program (HAMP) payment terms and completely documented as final modifications will be included in future HOPE NOW modification data,” HAMP said in a release. “It is anticipated that modification numbers will increase in HOPE NOW industry survey reports in the coming months. The industry remains committed to the administration’s goal of completing 500,000 loan modifications by November 1, 2009.”
Completed foreclosure sales decreased slightly form 92,661 to 89,173 in July, but 60-day plus delinquencies climbed to 5.9 percent, representing 3.1 million homeowners. Fewer than 40 percent of foreclosure starts resulted in a foreclosure sale last month, an improvement from the near-50 percent seen a year earlier. Last month, 211,714 of the 283,682 foreclosure starts were considered “prime” loans; similarly, 59,341 of the 89,173 foreclosure sales were deemed prime.
Thursday, September 3, 2009
MBA proposes alternative to Fannie and Freddie
SAN FRANCISCO (MarketWatch) -- Fannie Mae and Freddie Mac should be turned into smaller, private companies that create mortgage securities with an explicit guarantee from the government, the Mortgage Bankers Association said Wednesday.
Fannie and Freddie shares fell more than 15% after the MBA released its proposal Wednesday morning.
The proposal would create of a new type of mortgage-backed security with two parts. The first would have a loan-level guarantee provided by the new privately owned companies, which would be government chartered and regulated as mortgage credit-guarantor entities, or MCGEs, the association said.
The second part of the mortgage-backed security would have an explicit government guarantee focused on the credit risks embedded in them, the MBA said.
Fannie and Freddie's infrastructure, including their technology, staff, standard documents and relationships, could be used as the foundation for one or more MCGEs, the industry group added.
The proposal would change the current system, in which Fannie and Freddie package home loans into securities and guarantee them. As the companies grew, investors were comforted by an assumption that the U.S. government would bail the companies out if they ran into trouble.
But some foreign investors lost confidence in that implicit government backing last year as Fannie and Freddie strained under the weight of rising mortgage defaults and foreclosures, along with losses from huge mortgage-related investment portfolios the companies had accumulated.
The implicit backing finally became explicit as the government bailed out Fannie and Freddie last year. The two companies are now controlled and owned by the government, but they have become an even more important part of the U.S. mortgage market as private lenders have pulled back.
The MBA said Wednesday that its proposal is an effort to revive the private, secondary mortgage market.
"It's now been more than two years since the secondary mortgage market collapsed," Michael Berman, MBA's vice chairman, said in a statement. "Rebuilding the secondary market is critical to restoring liquidity and confidence."
"The government has an important, limited role to play to ensure a stable flow of funds for mortgages," he added
Fannie and Freddie shares fell more than 15% after the MBA released its proposal Wednesday morning.
The proposal would create of a new type of mortgage-backed security with two parts. The first would have a loan-level guarantee provided by the new privately owned companies, which would be government chartered and regulated as mortgage credit-guarantor entities, or MCGEs, the association said.
The second part of the mortgage-backed security would have an explicit government guarantee focused on the credit risks embedded in them, the MBA said.
Fannie and Freddie's infrastructure, including their technology, staff, standard documents and relationships, could be used as the foundation for one or more MCGEs, the industry group added.
The proposal would change the current system, in which Fannie and Freddie package home loans into securities and guarantee them. As the companies grew, investors were comforted by an assumption that the U.S. government would bail the companies out if they ran into trouble.
But some foreign investors lost confidence in that implicit government backing last year as Fannie and Freddie strained under the weight of rising mortgage defaults and foreclosures, along with losses from huge mortgage-related investment portfolios the companies had accumulated.
The implicit backing finally became explicit as the government bailed out Fannie and Freddie last year. The two companies are now controlled and owned by the government, but they have become an even more important part of the U.S. mortgage market as private lenders have pulled back.
The MBA said Wednesday that its proposal is an effort to revive the private, secondary mortgage market.
"It's now been more than two years since the secondary mortgage market collapsed," Michael Berman, MBA's vice chairman, said in a statement. "Rebuilding the secondary market is critical to restoring liquidity and confidence."
"The government has an important, limited role to play to ensure a stable flow of funds for mortgages," he added
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