Developments Get Back to the Plan

As more financing and private-equity investments begin to flow into residential real estate, some mothballed development plans are being revitalized.

The State of the Mortgage Industry According to MBA

The Mortgage Bankers Association (MBA) provided its annual
assessment of The State of the Mortgage Industry in a press conference Wednesday
afternoon.  Michael Young, MBA Chairman
said that the states that have been hardest hit by the housing crisis are and
will continue to deal with the aftermath but there are signs that in much of
the nation 2012 will bring a recovering market.

One bright spot, Young said, is that the turmoil in the
single family market has actually helped the multi-family sector; the rental
market has tightened and more lenders have moved into the sector, especially
life insurance companies.  In the
residential market, he said, the one topic that is discussed everywhere is the
lack of financing and what can be done about it.

David H. Stevens, MBA President and CEO said that lack of
financing
can be traced to a single factor, market uncertainty.  Part of it is uncertainty about international
markets and how they might ultimately impact the domestic situation but there
is also a tremendous amount of uncertainty about regulation.  Dodd-Frank, he said, has 300 regulations that
have yet to be fully promulgated and the new Consumer Financial Protection
Bureau (CFPB) and other regulators all have or are considering regulations
about how loans can be provided and serviced. 
There is uncertainty surrounding repurchases as well and while MBA
believes lenders should be held accountable for their mistakes, they should not
be held accountable for the loans performance if it failed solely due to
changing economic circumstances.  For
that reason MBA supports a time limit on the repurchase obligation.

Addressing three areas in particular, he said, would
decrease a lot of the insecurity.  New
regulations regarding Qualified Mortgages (QM) and Qualified Residential
Mortgages (QRM) are eminent and QM will in effect, define what loans get
made.  Mortgages which do not meet QM as
laid out by CRPB will simply not get made because lenders will feel there is
too much liability involved.   MBA supports certain parts of the QM such as
the requirement for full documentation but other parts such as the point and
fee cap lack flexibility and will disproportionately affect the pricing of small
loans.  

Most of all, he said, the proposed regulations are too general.  There needs to be specificity in the
underwriting standards such as in the definition of what constitutions “ability
to repay.”  Without a bright line in the
regulations that enable a safe harbor for lenders, he said, any lending is
going to be restricted on the margins and any loans that fall into the gap
between QM and QRM will see significant price adjustments to reflect the
liability.

While MBA also supports risk retention and much of the
intent of the QRM such as eliminating no-docs and interest only and other
exotic loans, regulators are going beyond the intent of Congress by adding debt
to income and loan-to-value ratios.  The
requirement for a 20 percent down payment will create a dual class system under
QRM, with lower income borrowers, unable to amass the down payment; forced into
FHA loans while there will be a private market for upper income borrowers.  Stevens said MBA will be “very aggressive” in
making sure these changes to QRM are pulled back.

Another area of uncertainty is the 50-state settlement with
servicers
.  Borrowers don’t care about
their servicers until they get into trouble with their mortgages but then the
multiple state and federal laws that govern servicing cause stress for the
borrowers and for servicers and investors as well.  The settlement may provide a framework for
national standards which would remove some of the uncertainty in this area.  In the same vein, Stevens said that President
Obama’s new fraud task force must be careful to avoid redundancy with other
investigations and carefully measure how it impacts borrowers or it could
create trepidation among lenders and further reluctance to lend.  

The present structure of the mortgage market with 90 percent
of lending having some government involvement through the GSEs or FHA is simply
unsustainable, Stevens said.  The private
sector must be brought back into the market and the major players in the
industry are close to agreement on what the future of the secondary market
should look like.  This is very close to
a model proposed by MBA some years ago which would have the following
characteristics:

  • Transactions would be funded with private
    capital from a broad range of sources.
  • The federal government should have a role in
    promoting stability and liquidity in the core mortgage market. This role should be in the form of an
    explicit credit guarantee on a class of mortgage-backed securities and the
    guarantee would be paid for by risk-based fees.
  • Taxpayers and the system itself should be
    protected through limits on the mortgage products covered, the types of
    activities undertaken, strong risk-based capital requirement, and actuarially
    fair payments into a federal insurance fund.

In answer to a reporter’s question about the chances of
President Obama’s streamlined refinancing program being approved, Stevens said
it would be an uphill climb.  FHA is
legislatively limited to loans with a maximum LTV of 97.5 percent so to go as
high as 140 percent which Steven’s said he expected the legislation to attempt
will require full approval of Congress.

Jay Brinkmann, Senior Vice President and Chief Economists said
he expects jobs to be created at about a 150,000 per month pace in 2012 but
this will be uneven by location and dependent on an individual’s education.  The length of unemployment hit a record high
in November and persons with a high school education or less are remaining
unemployed longer than those with a college degree.

According to Brinkmann, mortgage originations will drop from
$1.26 trillion in 2011 to $992 billion in 2012 with most of the loss coming in
refinancing.  The purchase market will be
largely unchanged or will rise slightly. 
This does not, however, reflect any changes that might be made in the
HARP program or any unforeseen outside events.

…(read more)

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FHFA Answers Conflict of Interest Charges against Freddie Mac

The
Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a
story
from ProPublic and NPR
that a complicated investment strategy utilized by Freddie Mac had influenced
it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using
Collateralized Mortgage Obligations (CMOs) exist but said they did not impact
refinancing decisions and that their use has ended. (the NPR Story)

Freddie Mac’s charter calls for
it to make home loans more accessible, both to purchase and refinance their
homes but the ProPublica story, written by Jesse
Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades “give Freddie a powerful incentive to do
the opposite
, highlighting a conflict of interest at the heart of the company.
In addition to being an instrument of government policy dedicated to making
home loans more accessible, Freddie also has giant investment portfolios and
could lose substantial amounts of money if too many borrowers refinance.”

Here,
in a nutshell, is what the story (we are quoting from an “updated” version)
says Freddie has been doing.  

Freddie
creates a security (MBS) backed by mortgages it guarantees which was divided
into two parts.  The larger portion, backed
by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest
payments on the mortgages, was riskier, and paid a higher return determined by
the interest rates on the underlying loans. 
This portion, called an inverse floater, was retained by Freddie Mac.

In
2010 and 2011 Freddie Mac’s purchase (retention) of these inverse floaters rose
dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had
interest rates of 6.5 to 7 percent.

In
structuring these transactions, Freddie Mac sells off most of the value of the
MBS but does not reduce its risk because it still guarantees the underlying
mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of
the underlying principal, are also now harder and possibly more expensive to
sell, and as Freddie gets paid the difference between the interest rates on the
loans and the current interest rate, if rates rise, the value of the floaters
falls. 

While
Freddie, under its agreement with the Treasury Department, has reduced the size
of its portfolio by 6 percent between 2010 and 2011, “that $43 billion drop in
the portfolio overstates the risk reduction because the company retained risk
through the inverse floaters
.”

Since
the real value of the floater is the high rate of interest being paid by the
mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried
to deter prospective refinancers by tightening its underwriting guidelines and
raising prices.  It cites, as its sole
example of tightened standards that in October 2010 the company changed a rule
that had prohibited financing for persons who had engaged in some short sales
to prohibiting financing for persons who had engaged in any short sale, but it
also quotes critics who charge that the Home Affordable Refinance Program
(HARP) could be reaching “millions more people if Fannie (Mae) and Freddie
implemented the program more effectively.”

It
has discouraged refinancing by raising fees. 
During Thanksgiving week in 2010, the article contends, Freddie quietly
announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the
GSEs were eliminating or reducing some fees but the Federal Reserve said that “more
might be done.”

If
Freddie Mac has limited refinancing, the article says, it also affected the whole
economy which might benefit from billions of dollars of discretionary income generated
through lower mortgage payments.  Refinancing
might also reduce foreclosures and limit the losses the GSEs suffer through defaults
of their guaranteed loans.

The
authors say there is no evidence that decisions about trades and decisions
about refinancing were coordinated.  “The
company is a key gatekeeper for home loans but says its traders are “walled
off” from the officials who have restricted homeowners from taking advantage of
historically low interest rates by imposing higher fees and new rules.”

ProPublica/NPR says that the
floater trades “raise questions about the FHFA’s oversight of Fannie and
Freddie” as a regulator but, as conservator it also acts as the board of
directors and shareholders and has emphasized that its main goal is to limit
taxpayer losses.  This has frustrated the
administration because FHFA has made preserving the companies’ assets a
priority over helping homeowners.  The
President tried to replace acting director Edward J. DeMarco, but Congress
refused to confirm his nominee. 

The
authors conclude by saying that FHFA knew about the inverse floater trades
before they were approached about the story but officials declined to comment on whether the
FHFA knew about them as Freddie was conducting them or whether the FHFA had
explicitly approved them.”

The
FHFA statement
said that Freddie Mac has historically used CMOs as a tool to
manage its retained portfolio and to address issues associated with security
performance.  The inverse floaters were
used to finance mortgages sold to Freddie through its cash window and to sell
mortgages out of its portfolio “in response to market demand and to shrink its
own portfolio.”  The inverse floater
essentially leaves Freddie with a portion of the risk exposure it would have
had if it had kept the entire mortgage on its balance sheet and also results in
a more complex financing structure that requires specialized risk management
processes.  (Full FHFA Statement)

The
agency said that for several reasons Freddie’s retention of inverse floaters ended in
2011 and only $5 billion is held in the company’s $650 billion retained
portfolio.  Later that year FHFA staff
identified concerns about the floaters and the company agreed that these
transactions would not resume pending completing of the agency examination.

These
investments FHFA said did not have any impact on the recent changes to
HARP.  In evaluating changes, FHFA
specifically directed both Freddie and Fannie not to consider changes in their
own investment income in the HARP evaluation process and now that the HARP
changes are in place the refinance process is between borrowers and loan
originators and servicers, not Freddie Mac.

…(read more)

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Investor Cash Adding Downward Pressure on Home Prices

Cash buyers, principally investors, may
be putting downward pressure on home prices according to the Campbell/Inside
Mortgage Finance Housing Pulse Tracking Survey released Monday.  The survey found that investors with cash in
hand are able to offer something that homeowners dependent on mortgage
financing cannot, a guaranteed sale with a quick closing timeline.  This seems to offset the desirability of a
higher bid with a mortgage contingency.   

The
Housing Pulse survey found that the trade-off between price and speed is
particularly true with offers on distressed properties because the lenders and
servicers liquidating the properties generally prefer transactions that can
settle within 30 days.  The Campbell
report states, “While investor bids may not be the
first offers accepted, they often end up winning properties after other
homebuyers are eliminated because of mortgage approval or timeline problems.
Appraisals below the contracted price are a common reason for mortgage denials.
Most mortgage financing timelines are now in excess of 30 days.”

The
survey reports that 33.2 percent of home buyers in December were cash buyers,
up from 29.6 percent in December 2010. 
However, 74 percent of investors came to the table with cash.  This is especially striking as the survey
found that investors accounted for 22.8 percent of home purchases in December,
changed only slightly from 22.2 percent in November.  But, Campbell says, “Despite their relatively
small share among homebuyers, investors have an outsize effect on home prices because
their bids bring down market prices.”

Real estate agents responding to the
survey commented on the low bids they are seeing from investors.  Campbell quoted anecdotal information from a
few agents indicating they are seeing investor bids 10-20 percent below list
prices, but with quick closings.

The total share of distressed properties
in the housing market in December continued at a three-month moving average of
47.2 percent, the 24th consecutive month that the HousePulse
Distressed Property Index (DPI) was over 40 percent.

The Campbell/Inside Mortgage Finance
HousingPulse Tracking Survey involves approximately 2,500 real estate agents
nationwide each month and provides up-to-date intelligence on home sales and
mortgage usage patterns.

…(read more)

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Momentum Seen for Home Improvement Spending

Spending
on home improvements and remodeling have shown signs of a rebound and the
Remodeling Futures Program at the Harvard Joint Center for Housing Studies is
projecting that sector of the economy will end 2012 on a positive note.

The
Joint Center produces the Leading Indicator of Remodeling Activity (LIRA) each
quarter.  It is designed to estimate
national homeowner spending on improvements for the current quarter and the
following three quarters.  The indicator, measured as an annual rate-of-change
of its components, provides a short-term outlook of homeowner remodeling
activity and is intended to help identify future turning points in the business
cycle of the home improvement industry.

The
figures from the most recent quarter, the fourth quarter of 2011, showed an
estimated four-quarter moving total of $112.4 billion in home improvement
spending compared to $113.8 billion in the third quarter.  This number is expected to dip further in the
first quarter of 2012, to $108.1 billion before starting to build at mid-year.

 “Sales of existing homes have been increasing
in recent months, offering more opportunities for home improvement projects,”
says Kermit Baker, director of the Remodeling Futures Program at the Joint
Center.  “As lending institutions become less fearful of the real estate
sector, financing will become more readily available to owners looking to
undertake remodeling.”

…(read more)

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