LPS: Mortgage Originations Among Highest Quality Ever in 2010-2011

The Lender Processing Services (LPS) Mortgage Monitor Report for December show
improvement in a number of the metrics it tracks. Many measures of delinquency
rates are down, inventories are clearing in some states, and recent loan
originations are “among the best quality on record.”

The overall delinquency rate did not
change from November, remaining at 8.15 percent but is down 7.7 percent since
December 2010.  Seriously delinquent
loans, those 90 or more days overdue or in foreclosure decreased 0.6 percent to
7.67 percent, a -5.9 percent change from one year earlier.

The foreclosure rate which was 4.16
percent in November fell to 4.11 percent in December and is down 1.0 percent
year-over-year.  Foreclosure starts
showed the most dramatic change.  There
were 159,092 starts in December compared to 165,205 in November, a -3.7 percent
change and starts were 38.7 percent below the level in December 2010.   This is the lowest level of foreclosure starts
since at least 2008.

While 90+ day delinquencies are about
the same in judicial and non-judicial states there remains a large distinction between
these states in other measures of foreclosure activity.  LPS found that half of all loans in
foreclosure in judicial states have not made a payment in more than two years
as the foreclosure process drags on.  The
foreclosure sales rate in non-judicial states is four times that in judicial
states (6.8 percent vs. 1.6 percent). 
Foreclosure inventories stand at about 3.5 percent nationwide; in
non-judicial states those inventories are about 2 percent while in judicial
states they are 2.5 times greater – over 6 percent.  Still, pipeline ratios (the time it would
take to clear through the inventory of loans either seriously delinquent or in
foreclosure at the current rate of foreclosure sales) has declined
significantly from earlier this year in judicial states while remaining flat in
non-judicial states.


Loan
originations
(month ending November 11) numbered 537,720 compared to 597,888 in
October, a decline of 10.1 percent and 29.3 percent below originations one year
earlier.  The loans originated over the
last two years
, however, are among the best quality on record according to
LPS.  2010-11 vintage originations showed
90-day default rates below those of all other years, going back to 2005.
December origination data also shows that recent prepayment activity – a key
indicator of mortgage refinances – has remained strong, with 2008-09
originations, high credit score borrowers and government-backed loans having
benefited the most from recent, historically low interest rates.

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Remodelers See Business Improving

Like their home-building counterparts, remodelers
who are members of the National Association of Home Builders (NAHB) are
displaying more confidence in their industry than they have in years.  The NAHB’s Remodeling Market Index (RMI) for
the fourth quarter of 2011 which measures remodelers’ sentiments about their
business climate rose to 46.6 its highest level in five year.  In the third quarter the Index was 41.7.

Like the Home Builders Index (HMI) the measures
responses from home builders, the RMI surveys NAHB members who are involved in
remodeling about current market conditions and about indicators of future
conditions.  Scores above 50 for the HMI,
the RMI or their component indices indicate that more respondents view the
market as good than view it as fair.  In
January the HMI hit a 54 month high of 25.

The RMI component measuring current market conditions rose to 48.4 from 43.0
and two of the categories within that index rose significantly.  Market activity related to major additions
rose from 45.2 to 52.3 and minor additions from 45.7 to 50.1

The component measuring future market indicators of
remodeling business rose to 44.8 from 40.4 in the previous quarter and two of
its categories rose over the 50 mark; calls for bids increased from 45.4 to 50.7
and appointments for proposals to 50.1 from 43.3.   The third category, work committed for the
next three months rose only slightly to 31.5 from 29.9.

 “As more consumers remain in their
homes rather than move in this economy, remodelers benefited from a gradual
increase in home improvement activity, taking us to a five-year high,” said
NAHB Remodelers Chairman Bob Peterson, CGR, CAPS, CGP.  “2011 ended on a strong note for the
remodeling industry.”

Scores improved for both future market indicators and current market
conditions in all four regions of the country.  

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Pending Home Sales Decline in December, Remain Above a Year Ago

Pending home sales fell off of the
19-month high reached in November according to figures released on Wednesday by
the National Association of Realtors® (NAR), but were still higher than one
year ago.  NAR’s Pending Home Sales Index
(PHSI) dropped from 100.1 in November to 96.6 in December, a decline of 3.5 percent.  December pending home sales were still 5.6
percent above the December 2010 index of 91.5.

The PHSI is a measure of signed
sales contracts for home purchases where the transaction has not closed.  It is considered a forward indicator as the
sale is usually finalized within one or two months of contract signing.  An index
of 100 is equal to the average level of contract activity during 2001.

Lawrence Yun, NAR chief economist, said the trend line remains
positive.  “Even with a modest decline, the preceding two months of
contract activity are the highest in the past four years outside of the
homebuyer tax credit period,” he said.  “Contract failures remain an
issue, reported by one-third of Realtors® over the past few months,
but home buyers are not giving up.”

Yun said some
buyers successfully complete the sale after a contract delay, while others stay
in the market after a contract failure and make another offer.  “Housing
affordability conditions are too good to pass up,” he said.  “Our hope is
lending conditions will gradually improve with sustained increases in closed
existing-home sales.”

On a regional
basis results were mixed with three regions showing increases on a year to year
basis but only one increasing during the December.

Pending Home Sales by Region

Region

Index in

December

Chg Nov to
Dec.

(%)

Chg Dec.
2010 to

Dec. 2011
(%)

Northeast

74.7

-3.1

-0.8

Midwest

95.3

+4.0

+13.3

South

101.1

-2.6

+4.9

West

107.9

-11.0

+3.7

U.S.

96.6

-3.5

+5.6

NAR also issued an economic forecast which predicts a healthy growth in
both real and nominal GPD over the next two years with real GDP growing in a historically
normal range of around 3 percent and the unemployment rate falling under 8
percent by 2013. 

Housing starts are expected to improve to around 750,000 in 2012 and
reach a million the next year – both figures well below the historically
typical 1.5 million.  Housing sales, both
new and existing, will remain relatively flat with new home sales reaching a
half million by the end of 2013.  
Existing home sales are estimated to have totaled 4.26 million in 2011
and will rise gradually to 4.45 million and 4.62 million in 2012 and 2013
respectively. 

Inventories are not projected into the future, but the supply of existing
homes is trending down and is now around 2.25 million.  The inventory of new homes has declined to a
nearly negligible level, however given the pace of sales, both inventories
represent about a six month supply.

NAR expects
median prices of both new and existing homes to rise only slightly from current
levels of$223,400 and $166,100 during 2012 but will rise more rapidly during
2013 to a median level of $235,800 and $172,600 by year end.

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Applications Fall 5% during Holiday Shortened Week

Mortgage applications were down during
the week ended January 20 according to the Weekly Mortgage Applications Survey
conducted by the Mortgage Bankers Association (MBA).  The Market Composite Index, a measure of
application volume fell 5 percent on a basis that was adjusted seasonally and
to account for the week shortened by the Martin Luther King holiday.  On a non-seasonally adjusted basis the
Composite fell 13.8 percent from the previous week which ended January 13.

The
seasonally adjusted Purchase Index was down 5.4 percent and the unadjusted
Purchase Index 9.7 percent.  The latter
was 6.5 percent lower than during the same week in 2011.  The index measuring applications for
refinancing was down 5.2 percent. 

The
four week moving averages for all indices remained positive.  The Composite Index was up 4.12 percent, the
Refinance Index increased 4.85 percent and the seasonally adjusted Purchase Index
rose 0.47 percent.

Refinancing
continued to represent the majority of mortgage activity, falling slightly from
82.2 percent of all applications the previous week to 81.3 percent.  Applications for adjustable rate mortgages
were at a 5.3 percent level compared to 5.6 percent a week earlier. 

Looking
back at the month of December, MBA found that refinancing borrowers applied for
30-year fixed-rate mortgages (FRM) in 56.6 percent of cases and 24.3 percent of
applications were for a 15-year FRM.   ARMs represented 5.3 percent of applications in
December.  The
share of refinance applications for “other” fixed-rate mortgages with
amortization schedules other than a 15 or a 30-year term was 13.8 percent of
all refinance applications.

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

The average contract interest rate for 30-year FRMs with
conforming loan balances of $417,500 or less increased to 4.11 percent from
4.06 percent with points down one basis point to 0.47 point.  The effective rate increased from the
previous week.  The rate for jumbo
30-year FRM with balances over $417,500 decreased from 4.40 percent with 0.37
point to 4.39 percent with 0.40 point. 
The effective rate also decreased. 
The rate for FHA-backed 30-year FRM rose to 3.97 percent from 3.91
percent while points were down from 0.59 to 0.57 point.  The effective rate increased.

The
average rate for 15-year FRM increased to 3.40 percent from 3.33
percent, with points increasing to 0.40
from 0.39 and the effective rate increased as well. The rate for the 5/1 hybrid ARM was
up one basis point to 2.91 percent with points decreasing to 0.41l from
0.45.  The effective rate increased.

All
rates quoted are for 80 percent loan-to-value mortgages and points include the
application fee.

 The
MBA survey covers over 75 percent of all U.S. retail residential mortgage
applications, and has been conducted weekly since 1990.  Respondents
include mortgage bankers, commercial banks and thrifts.  Base period and
value for all indexes is March 16, 1990=100.

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DeMarco Outlines Justification against GSE Principal Reduction

Acting Federal Housing Finance Agency (FHFA)
Director Edward J. DeMarco responded Friday to a request from 16 House
Democrats to explain the statutory authority that DeMarco has claimed prohibits
FHFA from offering principal reduction as part of loan modifications on loans
it owns or guarantees.  The request was
made last November after DeMarco told the House Committee on Oversight and
Government Reform that his agency had concluded that “the use of principal reduction within the context of a loan
modification is not going to be the least-cost approach for the taxpayer.”  When a committee member pointed out that several
banks are already implementing principal reduction programs in an attempt to
help delinquent or underwater homeowners and citing specific examples, DeMarco said “I believe that the decisions that we’ve made with regard
to principal forgiveness are consistent with our statutory mandate,” and committed
to providing documentation of that statutory authority to the Committee.

In
a letter sent to the Committee’s ranking member Elijah Cummings (D-MD) DeMarco laid
out the statutory requirements as originating in three congressional mandates;
first FHFA’s role as conservator and regulator of the government sponsored
enterprises (GSEs) which requires it to preserve and conserve the assets and
properties of the GSEs; second, maintaining the GSE’s pre-conservatorship missions
and obligations to maintain liquidity in the housing market; and third, under
the Emergency Economic  Stabilization Act
of 2008 (EESA), FHFAs statutory responsibility to maximize assistance to
homeowners to minimize foreclosure while considering the net present value
(NPV) of any action to prevent foreclosures.

The focus of the letter, however, is not
the statutory framework but rather why FHFA has decided that principal
forgiveness does not meet its core responsibility within that framework to
preserve and conserve the assets of the GSEs.

DeMarco’s rationale relies on an internal
analysis provided to him in December 2010 and updated in June 2011 which shows
that the use of principal reduction as a loss mitigation measure for GSE loans
under with the Making Home Affordable (HAMP) program or the FHA Short Refi
program would cost the Enterprises more than the benefits derived and
recommended that, instead the GSEs should more aggressively pursue propriety
loan modifications
that reduce the interest rate, extend the mortgage term, and
provide for substantial principal forbearance and promote HARP refinance
transactions for borrowers who are current on their mortgages but underwater in
respect to their equity. 

The GSEs collectively guarantee or hold
about 30 million loans and, using the FHFA Home Price Index to estimate home
values it appears that less than two million of these loans are secured by
properties valued at less than the outstanding debt; i.e. underwater.  Of these loans, more than half are performing
and about one-half million are severely delinquent or in foreclosure.  The table below clearly shows that high LTV
loans are only a small proportion of the GSE’s loans and that most of the loans
are either current or severely delinquent.

Using the Treasury HAMP NPV model the
FHFA study team compared the economic effectiveness of forgiving principal down
to a mark-to-market LTV (MTMLTV) level of 115 percent versus forbearance of the
same amount of principal for all loans with a MTMLTV greater than 115 percent.  The model suggested no better result from principal
reduction than from forbearance and showed the latter as slightly more
effective in reducing GSE losses.  The
team also evaluated the accounting and operational implications of the
principal reduction to measure those costs against benefits to borrowers.  The costs were found to include, in addition
to the immediate losses, the costs of modifying technology, providing training
to servicers, and the opportunity cost of diverting attention away from other
loss mitigation activities.

Principal forbearance, in
contrast, requires no systems changes and is a common approach in government
credit programs, including FHA. The borrower is offered changes to the loan
term and rate as well as a deferral of principal, which has the same effect on
the borrower’s monthly payment as principal reduction, but provides the investor
with potential recovery. The forborne principal is paid in full or part upon
sale of the property or payoff of the loan. This traditional approach would
minimize the Enterprise losses and treat GSE borrowers in a manner that is
consistent with other government programs.

Given the large portion of the
high LTV borrowers that are current on their mortgages, a principal reduction
program for this segment, such as the FHA Short Refi program, simply transfers
performing GSE borrowers over to FHA, at a cost to the GSEs. A less costly
approach for the Enterprises to assist these borrowers is to provide a GSE
refinance alternative, such as HARP. Clearly, the HARP program has been
underutilized to date, suggesting that the program features should be revisited
to remove barriers to entry wherever possible.

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