Posts Tagged ‘National Association of Realtors’

Existing-House Sales Spike in April

Tuesday, May 29th, 2012

If you want to sell a product, price it correctly. That theory at long last appears to be working in the U.S. housing market.  The National Association of Realtors (NAR) reported that sales of existing homes rose 3.4 percent in April when compared with March.  One reason is that asking prices were remarkably affordable.  The interest rate on a 30-year fixed-rate mortgage was 3.79 percent, the lowest since record-keeping began in 1971, according to Freddie Mac.  The Realtors’ index of affordability hit a record high in the 1st quarter and factors in sales prices of existing homes, mortgage rates, and household income, which is gradually strengthening as the labor market improves.

The average sales price was 10.1 percent higher when compared with one year ago.  That has the potential to lure buyers who decide they can’t wait for even cheaper prices.  “Today’s data provide further evidence that the housing sector is turning the corner,” said economist Joseph Lavorgna of Deutsche Bank Securities.  The numbers could see more improvement in coming months.  Action Economics Chief Economist Michael Englund said that “The existing home sales data generally continue to underperform the recovery in the new home market and other indicators of real estate market activity.”  But, he added, “the trend is upward.”

Owner-occupied houses and condominiums dominated the market, a change from all-cash deals by investors snapping up distressed properties.  Employment gains and record-low mortgage rates may make houses affordable Americans, eliminating a source of weakness for the world’s largest economy just as risks from the European debt crisis rise.  “We are making incremental progress,” said Millan Mulraine, a senior U.S. strategist at TD Securities, Inc., who correctly forecast the sales pace.  “People are becoming more confident about job prospects and about taking on mortgages.  This is all positive for the economy.”

Even with this uptick, sales are well below the nearly six million per year that economists equate with healthy markets.  The mild winter encouraged some people to buy homes, which drove up sales in January and February, while making March weaker.

First-time buyers, a key segment critical to residential recovery, rose in April and accounted for 35 percent of sales, up from 32 percent in March.  “First-time homebuyers are slowly making their way back,” said Jennifer Lee, an economist at BMO Capital Markets.  “That is still below the 40-to-45 percent range during healthy times, but the highest in almost half a year.”  Homes at risk of foreclosure accounted for 28 percent of sales.  That’s approximately the same as was seen in March sales statistics, but down from 37 percent of sales in April 2011.

Wall Street analysts expressed caution about seeing the increase as a sign that home values are about to make a big comeback.  NAR’s price calculations may have been skewed by larger homes coming onto the market, analysts said.  According to NAR economist Lawrence Yun, seasonal factors might have played a role in the price increase because families tend to buy in the spring, which means bigger homes comprise a larger share of total sales.  “It does echo the message sent by most other related measures that have shown house prices stabilizing or firming,” said Daniel Silver, an economist at JPMorgan.  Home prices, according to the S&P/Case Shiller composite index, have fallen by approximately one-third since the middle of 2006.  “Although the data seem to imply that there is a relative good balance between buyers and sellers, it is unlikely that home prices can recover on a sustained basis until the number of distressed properties is more significantly reduced,” said Steven Wood, chief economist at Insight Economics.

The housing inventory climbed 9.5 percent to 2.54 million, representing a 6 ½-month supply.  CoreLogic estimates that the shadow inventory — homes that aren’t on multiple listing services that are either seriously delinquent, in foreclosure or real-estate-owned — totaled 1.6 million units as of January.

CNBC’s Diana Olick is unimpressed with the price spike.  “The median price of an existing home that sold in April of this year was $177,400, an increase of just over 10 percent from a year ago.  That is the biggest price jump since January of 2006.  The difference between now and then, though, is the 2006 price jump was real, this latest spike is not.  As we reported here on the Realty Check last month, a lack of distressed supply, that is foreclosures and short sales, is pushing overall home sales lower.  That’s because the majority of the sales action for the past few years has been on the low end of the market.  Now, as banks try to modify more delinquent loans to comply with the recent $25 billion mortgage servicing settlement, and as investors rush in to buy distressed properties and take advantage of the hot rental market, the distressed market is drying up.  The share of home sales in the $0 — 250,000 price range made up over 73 percent of all sales in February; that has already dropped to 67 percent in April.  If you look at sales by price category, you see the most startling evidence of this shift in what’s selling on the low end out west.  Sales of homes $0 — 100,000 dropped over 26 percent out west in April, but rose 21 percent in the $250 — 500,000 price range.”

House Prices At 2002 Levels

Monday, May 14th, 2012

The S&P/Case-Shiller home price index of 20 cities revealed a 3.5 percent decline when compared with last year.  Home prices are now at their lowest levels since November 2002.  “Nine (housing markets) hit post-bubble lows,” said David Blitzer, spokesman for S&P, including Atlanta, Charlotte, Chicago, Las Vegas and New York.  “While there might be pieces of good news in this report, such as some improvement in many annual rates of return, February 2012 data confirm that, broadly-speaking, home prices continued to decline in the early months of the year,” Blitzer said.

The primary challenge continues to be foreclosures and other distressed property sales, according to Pat Newport, an analyst for IHS Global Insight.  “We still have six million homeowners who are late on their payments,” he said.  “We’ll still have lots of foreclosures, which will depress prices.”  The good news is that some of the worst hit of the index’s 20 cities appear to be on the mend.

“Some (cities) which have declined considerably over the last five to six years now have begun to exhibit an uptick in home prices,” said Luis Vergara, a director with Mission Capital Advisors.  Phoenix prices climbed 3.3 percent year-over-year.  Miami recorded a gain of 0.8 percent over 2011.  Even Las Vegas appears to be turning more positive, with home prices down only 8.5 percent, compared with a drop of nine percent in January.

The weakening may be due to the typical pattern of minimal interest during winter and greater interest in housing during the spring and summer. According to S&P, the unadjusted series is a more reliable indicator.  House prices have fallen by more than one-third from their peak when the bubble burst.  The glut of distressed properties on the market have slowed the market, as has the unemployment rate and tough credit conditions, which have offset the benefit of mortgage rates near or at record lows.

“The broad prospect for home prices is at best flat over the course of the year,” said Tom Porcelli, chief economist at RBC Capital Markets.  “And as much as we have had progress with the supply and demand imbalance, it is still a challenge to gather any momentum here.”

According to the Commerce Department, March home sales fell 7.1 percent to a seasonally adjusted 328,000-unit annual rate.  February’s sales pace was revised higher to 353,000 units, the best showing since November of 2009, from the previously reported 313,000 units.  “The conditions in housing are still extremely weak, but there are some very subtle, less negative, signs suggesting stabilization there,” said Sean Incremona, economist at 4Cast Ltd.

Stabilizing home values are necessary for a sustained rebound in the housing industry by giving prospective buyers confidence. Near record-low borrowing costs and additional hiring may help the market absorb foreclosures, which may mean housing will no longer hinder economic growth.  “Mortgage rates are very, very low, but you really need to see strong job growth,” said Scott Brown, chief economist at Raymond James & Associates, Inc.  “It’s still a very long way to go before we get a full recovery.”

The latest reports indicate that homebuilders are still trying to get back on their feet.  The National Association of Home Builders/Wells Fargo sentiment index in April declined to a three-month low.  This measure of anticipated sales for the next six months was not good news.  Sales of existing houses fell in March for the third time in the last four months.  Home purchases fell 2.6 percent to a 4.48 million annual rate from 4.6 million in February, according to the National Association of Realtors.  The average rate on a 30-year fixed-rate mortgage hit an all-time low of 3.87 percent in February and was little changed at 3.90 percent in the week ended April 19, according to Freddie Mac.

Writing for the Index Universe website, Cinthia Murphy says that “A number of encouraging economic indicators such as an improving job market and slowly growing demand for homes loom as factors that some hope should start to help underpin housing values, even if consumer confidence remains low for now.  A clear recovery in housing is deemed crucial for a full-fledged economic recovery in the U.S. after the credit crisis of 2008 sent housing as well as the financial markets sharply lower.  U.S. housing was at the center of that crisis, and much of the developed world remains mired in slow, debt-constrained, growth.

Michael Feder, CEO of Radar Logic, a real estate data and analytics firm, thinks Case-Shiller is underselling the momentum in the housing recovery. Radar Logic’s 25-city index, which tracks daily activity, is expected to show a month-over-month increase of nearly two percent during February, Feder said.  The difference frequently comes when the market is turning, though Feder acknowledges that the mild winter may have created some demand.  Another thing to look at is investment buyers coming into the market, which Feder believes could create something of a “mini-bubble” in prices given their willingness to pay premiums.  News of that willingness spreads pretty quickly.  While it can draw in some fence-sitters who have been waiting for a bottom, there is little evidence of that to date, Feder said.

Pending Home Sales Rose Two Percent in January

Monday, March 12th, 2012

The Pending Home Sales Index grew by two percent during January from the previous month to 97.0 — considerably above the 1.1 percent growth forecast by economists.  The index has risen eight percent when compared with one year ago.  Relaxed mortgage lending criteria, historically low interest rates and an improving labor market contributed to this growth in pending home sales, said Ian Shepherdson, High Frequency Economics‘ chief U.S. economist.  The index measures the quantity of sales contracts signed on existing home sales.  Created by the National Association of Realtors (NAR), it’s considered a leading indicator that predicts growth throughout the broader residential market.

“Given more favorable housing market conditions, the trend in contract activity implies we are on track for a more meaningful sales gain this year,” said NAR chief economist, Lawrence Yun.  “With a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”  Pending home sales rose impressively in the Northeast and South, but declined in the Midwest and West.

“Housing demand has bottomed, and we should see some gradual improvement in sales,” said Yelena Shulyatyeva, an economist at BNP Paribas, who predicted a two percent gain in pending sales.  “The dark side of the story is still the oversupply and the expected pickup in foreclosures.  That’s what policymakers really need to think about.”  On the downside, lower appraisals and rejected mortgage applications have broken down more deals.  In January, one-third of Realtors said they experienced contract failures, an increase when compared with the nine percent who said so one year ago, according to the association.

Existing home sales rose to 4.57 million a year in January.  While it was the best report since May of 2010, distressed properties constituted the largest portion of all purchases since April.  Additionally, the median price fell two percent when compared with January of 2011.  “We’re optimistic,” Doug Yearley, CEO at Horsham, PA-based Toll Brothers, said.  “We have orders that are up significantly.  We’re seeing deposits up, we’re seeing traffic up.”

Borrowing costs are still affordably low. The average rate on a 30-year fixed loan was little changed at 4.09 percent in mid-February, , according to the Mortgage Bankers Association. It averaged 4.05 percent the week of February 3, its lowest reading on record since 1990.

Another reason why home sales may be on the rise is because of an April deadline for higher mortgage application fees for Fannie Mae and Freddie Mac-backed home loans.  The government-controlled mortgage buyers own or guarantee approximately 50 percent of all U.S. mortgages and 90 percent of new loans and have been telling customers to submit their applications now.  Even with the good news, analysts warn that the damage from the housing bust is deep and the industry is years away from full recovery.

According to Paul Dales, senior U.S. economist at Capital Economics, prices are unlikely to stop falling until the second half of 2012, having dropped 34 per cent over the last five years.  This, and the decline in the supply of homes on the market, which fell last month to the lowest since January 2006, will provide support to the housing recovery.

Federal Regulators Floating the Idea of 20 Percent Downpayment Mortgages

Thursday, November 10th, 2011

Is a 20 percent downpayment on a house or condominium on the horizon?  If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate.  Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.

Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers.  If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule.  John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”  According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing.  “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees.  “Properly aligned economic incentives are the best check against lax underwriting,” she said.  The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement.  The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks.  One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.

Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand.  “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said.  Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall.  “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.

Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.”  An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.  “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.

Housing Prices Still Weak, But Show Welcome Improvement

Tuesday, September 13th, 2011

Home prices revived somewhat during the 2nd quarter, but the housing market is still struggling.  Prices climbed an impressive 3.6 percent, compared during the three months ending March 31.  Despite the upbeat news, home prices are still down 5.9 percent compared with the 2nd quarter of 2010.  The rise in home prices came after three straight quarters of drops, the S&P/Case-Shiller national index — a recognized gauge of residential real-estate markets — reported.  The year-over-year decline was slightly more than the than the 4.7 percent drop that had been forecast by a consensus of experts at  A separate monthly index of home prices in 20 major metro areas reported a month-over-month gain of 1.1 percent for June, and a 4.5 percent decline compared with last year.

The quarter-over-quarter price increase may be the last one for a while, said Stan Humphries, chief economist for the real estate website Zillow. He expects prices will weaken again.  “The August turmoil of credit rating downgrades, negative GDP revisions, stock oscillations and European debt woes are likely to leave a mark on both August home sales and home value appreciation,” according to Humphries.  “Monthly home value appreciation in June may mark the last hurrah before beginning to weaken in the back half of this year,” Humphries said.

Foreclosures still constituted a higher proportion of sales throughout the winter and spring as families took a break from home shopping; cash-rich investors dominate the market.  Nationally, home prices have returned to their 2003 levels.

Chicago, Minneapolis, Washington and Boston saw the largest monthly increases.  Cities hit hardest by the housing crisis, such as Las Vegas and Phoenix, reported small seasonal increases.  Housing has remained a drag on the economy and is one of the most important reasons why it is still struggling to recover two years after the recession officially ended.  Home sales in 2011 are likely to be at the lowest level in 14 years.  Home prices in many cities have reached their lowest points since the market bubble burst more than four years ago.  Home prices in Cleveland, Detroit, Las Vegas, Phoenix and Tampa are at 2000 levels.  “These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together,” said David M. Blitzer, chairman of the S&P’s index committee.  “This month’s report showed mixed signals for recovery in home prices. No cities made new lows in June 2011, and the majority of cities are seeing improved annual rates,” Blitzer said.  “Looking across the cities, eight bottomed in 2009 and have remained above their lows.  These include all the California cities plus Dallas, Denver and Washington D.C., all relatively strong markets.”

“There’s no theoretical floor for prices. If the economy worsens, housing will get into a vicious cycle of falling prices and foreclosures,” said Mark Zandi, chief economist at Moody’s Analytics. “When prices fall, confidence wanes.”

Foreclosures and short sales — when a lender sells for less than what is owed on a mortgage – accounted for approximately 30 percent of all home sales in July, an increase from about 10 percent reported in normal years.  Nearly 1.7 million potential foreclosures are being delayed, according to real estate firm CoreLogic, either by backlogged courts or lenders waiting for the conclusion of state and federal investigations into questionable foreclosure practices.

“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto.  “Most people think that when the downturn ends the recovery will be pretty good, but that’s not going to be the case at all.”

 “Consumer confidence is still weak, and the housing sector remains in a fragile state,” According to Robert Toll, chairman of Toll Brothers, Inc. the nation’s largest luxury homebuilder.  “The nation’s economy continues to suffer from the lack of jobs in housing construction and the related manufacturing and service sectors that a decent new-home market would typically generate.” 

Federal Reserve Chairman Ben Bernanke said “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” are hurting the housing market.

Lawrence Yun, chief economist at the National Association of Realtors, described the activity as “underperforming.  The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said.  “We also need to be mindful that not all sales contracts are leading to closed existing-home sales.  Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”

Contract Cancellations Sour Home Sales

Wednesday, August 24th, 2011

A new phenomenon has emerged that is depressing the sales of existing homes. Contract cancellations are surging, dashing hopes that the distressed housing market is showing signs of improvement.  According to the National Association of Realtors (NAR), sales fell 0.8 percent in June compared with May to an annual rate of just 4.77 million units, the lowest since November, and falling for the third consecutive month.  Economists had expected sales to climb to a 4.90 million-unit yearly pace.  “Buyers and sellers are increasingly running up against conservative appraisals, which often cause deals to fall through or be delayed,” said Mark Vitner, senior economist at Wells Fargo Securities.  In fact, the market is unlikely to improve in the near term, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“A variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” NAR chief economist Lawrence Yun said.  Fully 16 percent of NAR members reported a sales contract was cancelled in June, up from four percent in May.  “The underlying reason for elevated cancellations is unclear,” Yun said, suggesting possible problems like tight credit for buyers and low home appraisals.

Writing for the Wall Street Pit, Dirk van Dijk says that “Regionally sales were down on the month in two of the four Census regions.  All four regions were down year over year.  The Northeast fared the worst, with sales down 5.2 percent for the month and down 17.0 percent from a year ago.  The West had a month to month decrease, with sales falling 1.7 percent, down 2.6 percent from a year ago.  In the Midwest, sales rose one percent for the month but are down 14.0 percent year over year.  The South, the largest of the four regions, saw a 0.5percent rise on the month, but a 5.6 percent year-over-year decline.  After all, it is better to simply sell the house and get something for it, rather than let the bank take it and get nothing for it.  The more people under water, and the deeper they are, the higher foreclosures and strategic defaults are going to be.  A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective.  If you have a house that could only sell for $150,000 in the current environment, and you owe $200,000 on the mortgage, in effect you have the option of ‘selling’ the house to the bank for $200,000 simply by not writing the checks.  Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of a tarnish on your Fico score.  If the difference is only $5000, then the hit to your credit score makes less sense, and there are lots of non economic factors (a house is after all a home, not just an investment) that come into play.”

Despite the disappointing existing house data, homebuilders appear to have more confidence than buyers, because May housing starts climbed to a five-month high, according to the Department of Commerce.  The month was the first time in five years that more homes were started than completed.  A majority of the buyers were investors, with 29 percent of the transactions being all cash.

Writing for The Hill, Vicki Needham says that “Distressed homes — foreclosures and short sales generally sold at deep discounts — accounted for 30 percent of sales in June, compared with 31 percent in May and 32 percent in June 2010.  Foreclosures have flooded the market, providing good deals for some potential homebuyers but hindering new construction.  Mortgage rates for a 30-year, conventional, fixed-rate mortgage were 4.51 percent in June, down from 4.64 percent in May.  The rate was 4.74 percent in June 2010, according to Freddie Mac.”

“With record high housing affordability conditions thus far in 2011, we’d normally expect to see stronger home sales,” said NAR President Ron Phipps.  “Even with job creation below expectations, excessively tight loan standards are keeping many buyers from completing deals.  Although proposals being considered in Washington could effectively put more restrictions on lending, some banking executives have hinted that credit may return to more normal, safe standards in the not-too-distant future, but the tardiness of this process is holding back the recovery.

Phipps noted that lower mortgage loan limits, which are scheduled to go into effect October 1, already are having an effect.  “Some lenders are placing lower loan limits on current contracts in anticipation they may not close before the end of September,” he said.  “As a result, some contracts may be getting canceled because certain buyers are unwilling or unable to obtain a more costly jumbo mortgage.”

Fannie and Freddie to Marry?

Tuesday, August 2nd, 2011

Mortgage finance giants Fannie Mae and Freddie Mac might find themselves merged into a single government-run entity.  Representative Gary Miller (R-CA) is set to unveil a bill that would create a utility-like entity and phase out government-controlled Fannie Mae and Freddie Mac.  The new company would buy mortgages and repackage them as government-backed securities.  The major difference from Fannie and Freddie lies in the fact that it would not have shareholder investors.  The National Association of Homebuilders and the National Association of Realtors are expected to support the proposal, which reflects concerns by the industry, consumer groups and some policymakers that a complete withdrawal of government support for home lending could make the housing recession go further downhill.

A competing proposal by Representatives Gary Peters (D-MI) and John Campbell (R-CA) would create a minimum of five private companies to replace the two co-called government-sponsored enterprises, or GSEs.  The point of contention for many lawmakers is whether to provide a government backstop for mortgages and on what terms to provide the guarantee.  House Financial Services Committee Chairman Spencer Bachus (R-AL) is trying to forge a consensus among Republican members.  Any bill that is generated by Bachus’ committee and is passed by the Republican-led House would likely still be in jeopardy once it reaches the Democratic-controlled Senate.

“There was the idea that people were so tired of taxpayer losses related to housing that the traditional housing lobby would not be able to retaliate effectively,” said Jim Vogel, chief of agency debt research at Memphis-based FTN Financial. “It’s time to start waving the housing flag again.”

That would represent a sea change from February, when the Treasury Department recommended selling off Fannie Mae and Freddie Mac holdings within 10 years; Jeb Hensarling (R-TX) wanted to do it in half that time.  Since then, homebuilders, real estate agents, investment banks, civil rights leaders and consumer advocates have lobbied to retain a government role — including the unspoken federal guarantee behind Fannie Mae and Freddie Mac.  Congress created the programs as private companies to expand home ownership.

Already, the government is slowing its efforts to prop up the housing market.  Beginning this fall, the cap on Fannie and Freddie-backed mortgages — loans where taxpayers are on the hook if borrowers don’t pay — will decline in some regions.  At the height of the housing crisis, Congress raised the cap to $729,750 in areas where homes are most expensive.  After October, that will fall to $625,500.  The limit varies by county.  Mortgages that are too expensive to get backing from Fannie and Freddie are called jumbo loans and usually have higher interest rates and require larger downpayments.  That maximum was set by Congress in 2008 in an attempt to ensure that borrowers could continue to obtain loans in particularly expensive housing markets during the credit crunch, especially in prime real estate locations, such as New York, Los Angeles and Washington, D.C.

The Deal Book column in the New York Times thinks that the idea of merging Fannie and Freddie is not as outrageous as it may at first seem.  “Consider the math: For the first six months of this year, both companies spent $1.825 billion in overhead costs combined; on an annualized basis, that means the companies are spending about $3.65 billion.  Given that the companies do pretty much the same thing – buying mortgages from banks, insuring them and creating mortgage-backed securities – there might be opportunities for savings if many of their managers and staff are, to put it politely, redundant.  Conservatively, a combined Fannie and Freddie could probably cut a third of its overhead and staff, saving some $1.2 billion annually.  The way Wall Street values companies, that means – presto – billions more in value, perhaps as much as $18 billion or $19 billion, could be created overnight.”

“It would instill a huge amount of confidence. The market will know that both entities combined will have much more consistent, stable margins,” John Lekas, chief executive of Leader Capital, an investment firm, said on CNBC last week. He added that it “doesn’t cost taxpayers one nickel.”

Additionally, Fannie and Freddie are on track in 2011 to spend about $1.8 billion on what is known as “foreclosure costs,” which means maintaining and selling thousands of homes that became part of their ownership portfolios after the owners were unable to pay the mortgage.  The costs are staggering, given that Fannie and Freddie together own approximately 153,000 foreclosed homes. “This is just one of the costs that Fannie and the rest of us will pay to dig out of a very big hole,” says Karen Petrou, of Federal Financial Analytics.  When she says “the rest of us,” she is telling the truth.  Fannie Mae’s tab to American taxpayers is up to $86 billion since September 2008 when it was taken into government conservatorship.  During the 1st quarter of 2011, Fannie racked up $488 million in foreclosure-related expenses, including holding costs (insurance, taxes and maintenance); valuation adjustments for changes in market value; gains/loss when the property is sold; legal fees; eviction costs; weatherization costs to prevent pipes from bursting; costs to secure the property; and repair costs.

“We want to make sure that we’re comparable with the market or with the neighborhood,” said Elonda Crocket, a Fannie Mae executives who is part of the management team of its massive portfolio of foreclosed properties.  The goal is to stabilize the neighborhoods where there are foreclosed homes and get the properties to a condition where first-time homebuyers want to purchase them.  “We want to make sure that we can maximize our return on the investment,” she said.  In 2010, Fannie Mae repaired 87,000 foreclosed homes.

“It makes them — I think — indisputably the largest purchaser of paint and general appliances for these homes they’re fixing up,” said Guy Cecala, publisher of Inside Mortgage Finance.  “If they don’t maintain the houses, then the neighborhoods go downhill, other people are put at risk and the housing crisis gets worse because you have still more downward pressure on overall house prices,” Petrou said.

HUD Head Says Housing Bottoms Off

Wednesday, July 20th, 2011

American home prices may start rising as soon as the 3rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan.  “It’s very unlikely that we will see a significant further decline,” Donovan said.  “The real question is when will we start to see sustainable increases.  Some think it will be as early as the end of this summer or this fall.”  Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.

“In the long run, it’s a good time to buy,” Donovan said.  “It’s so affordable today compared to where it’s been for generations.”  Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR).  Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low.  Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities.  An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.

Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year.  Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression.  According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be.  We still have a ways to go.”

On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront.  “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners.  We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.

Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic.  In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out.  According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way.  Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide.  Then a funny thing happened on the way to the housing recovery.  The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak.  Excess inventories piled up due to overbuilding and mounting foreclosures.  In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements.  As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years.  And that’s bad news for the economy, which has softened in recent months.  Excess inventories are the mortal enemy of housing prices.  Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers.  The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”

The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive.  As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1st quarter of 2011 – the exact same level as in late 1998.  As homeownership loses its luster, rental apartments are gaining.  The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize.  That means approximately 4.5 million new renters in coming years.  Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.

Equity Loans Putting Homeowners Under Water

Thursday, June 23rd, 2011

Homeowners who took out second mortgages, or borrowed against their homes to use the money as a cash advance,  may regret their decisions.  Close to 40 percent are now underwater on their loans — owing more than their home is worth, according to CoreLogic Data.  The data show 38 percent of borrowers who took second mortgages are now under water, compared with 18 percent of mortgage holders who haven’t taken out home equity loans.  The study did not examine how the cash was used.  This type of negative equity can result from increased mortgage debt, a decline in home value — or both.  Additionally, the report found that during the 1st quarter of 2011 the number of underwater homeowners fell to 22.7 percent from 23.1 percent in the 4th quarter of 2010.   Although this decrease may seem like good news, it is due to the fact that completed foreclosures lessened the total number of homeowners in the market.

The study illustrates the consequences of easy borrowing amid the housing boom’s inflated prices.  Home-equity loans, which total approximately 10 percent of the mortgage market, have been a problem for both homeowners and lenders.  Second mortgages are any loan taken out on a property that is in addition to the first mortgage; they include home-equity loans and lines of credit.  Second mortgages are taking a toll on a fitful recovery, in which housing has been the weakest spot.  The S&P/Case-Shiller National Index recently showed that home prices fell another 4.2 percent nationally in the 1st quarter, its third straight quarter of price declines after a modest recovery in early 2010.  Across the country, prices have fallen 34 percent since peaking in 2006.  The inventory of unsold homes will take more than nine months to sell, according to the National Association of Realtors.  This is approximately 50 percent longer than is considered a healthy market.  “When a homeowner’s house is under water, “it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan,” said Mark Zandi, chief economist at Moody’s Analytics.  “There are all sorts of little, pernicious effects that you don’t necessarily think about.”

Writing on the Mortgage Rates &Trends:  Mortgage Blog, Michael Kraus says “Unsurprisingly, there is a strong correlation between negative equity and home equity loans.  Thirty-eight percent of borrowers with home equity loans are under water.  Those with negative equity and HELOCs (home equity lines of credit) are down $98,000 on average, compared to $52,000 for those without HELOCs.  Intuitively, this makes a ton of sense and serves to illustrate the danger of using your home equity as an ATM.  Hindsight being 20/20, of course.  The negative equity problem remains the most acute in all the same places.  Nevada leads the nation in negative equity, with an incredible 63 percent of Nevada homeowners with mortgages under water.  Fifty percent of mortgaged Arizona homes are upside down, followed by Florida (46 percent), Michigan (36 percent), and California (31 percent).  These figures have changed relatively little since the last report on home equity, and negative equity will likely remain a massive problem in these markets for years to come.  Also of interest is the amount that the average borrower with negative equity is underwater.  Across the country, the average person who has negative equity is $65,000 underwater.  The highest average negative equity is in New York ($129,000), followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).  These areas typically have the highest home prices, so the high amounts of negative equity make sense.”

Treating your home as an ATM by taking out a second loan puts owners in the position of being more than twice as likely as single-mortgage homeowners to owe more than it’s worth.  This scenario isn’t what economic leaders had pictured.  During the housing market’s boom years, Federal Reserve chairman Alan Greenspan promoted second mortgages and home-equity loans as a way to tap homeowners’ most valuable asset to pay bills or buy a car.  Then the bubble burst.  Because home values are still falling, those loans have now become just another burdensome payment.

Reinventing Fannie and Freddie

Thursday, June 2nd, 2011

The initial steps to dismantle Fannie Mae and Freddie Mac are underway with the introduction of a bipartisan bill in the House of Representatives that would replace the mortgage giants with a minimum of five companies that would issue mortgage-backed securities with significant federal regulation.  The compromise legislation proposed by Representative John Campbell (R-CA) and Representative Gary Peters (D-MI) is likely to be the only plan that will attract sufficient support from both parties on a politically volatile subject, especially at a time when gridlock looms over issues such as how to curb federal spending.  The bailout of the two companies has cost taxpayers upwards of $100 billion.

According to Representative Campbell, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law.  The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”  Other policymakers, such as Treasury Secretary Timothy Geithner, have discussed the merits of a limited but unambiguous government guarantee of securities backed by certain types of mortgages.  The new entities – similar to Fannie and Freddie — would be limited to purchasing loans that meet certain standards, including size caps.  The difference would be that the firms would be required to hold much more capital than Fannie and Freddie.  Only the mortgage-backed securities that they issue –not the companies themselves — would enjoy federal guarantees.  The companies would operate similarly to public utilities and likely will not have exchange-listed shares.

Critics say the proposal risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that harmed taxpayers.  “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley.   Government insurance programs, he says, inevitably lead to “a catastrophe.”  Advocates argue that taxpayers will be less exposed to losses because borrowers will have to make significant downpayments.  Additionally, the new firms will have to hold more capital.  Additionally, the firms will be required pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corporation levies fees and handles bank failures.

The mortgage and housing industry support a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The agencies are still hemorrhaging money.  For example, Fannie Mae reported a loss of $8.7 billion for the 1st quarter of 2011, which included a $2.2 billion dividend payment to the Treasury Department.  The loss was significantly less than the $13 billion reported one year ago.  “We need to manage our credit book — our old legacy book very vigorously,” said Fannie Mae President and CEO Michael Williams.  But that is not in conflict with helping distressed homeowners.  “Helping people to avoid foreclosure is a good thing,” Williams said.

Action must be taken to keep the mortgage market afloat and provide securitization for investments.  According to a Washington Post editorial,  “The housing market is still in deep trouble.  Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again.  The resulting hit to household wealth may hinder the recovery, which is already sluggish.  Small wonder that various advocates for housing are once again asking Washington for help.  But in at least one area, the prescription would be worse than the disease.  We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control.  Congress ‘temporarily’ raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September.  At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.  But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie.  The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end.  Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.”