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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Consumer Advocacy Group Weighs in on AG Settlement

Rumors have been circulating for some
time that the Obama Administration is pressuring the 50 state attorneys general,
the Justice Department and the Department of Housing and Urban Development to
settle with major banks over issues relating to errors in servicing and
foreclosure abuses including the robo-signing uproar.  The settlement has been controversial and several
attorneys general including those in California, Delaware, and New York have opted
out of the settlement and/or launched independent lawsuits of their own,
claiming the settlement is not sufficient to the offense.  The rumors have intensified over the last few
days based on a theory that the President hopes to announce the settlement
during his State of the Union Address tonight.

Today the Center for Responsible Lending
which has been an early and outspoken critic of mortgage lending came out in
favor of the settlement saying, while it isn’t perfect, it would represent an important
step forward in addressing foreclosure abuses

“The settlement would include key reforms to clean up unfair mortgage
servicing practices,” the statement from the Center said.  “It would also provide an important template
for ways banks can use principal reduction to reduce unnecessary foreclosures
and put the country back on a path to economic recovery.”

While the Center admits that not all
details of the settlement are available as yet, but based on current
information, the key reforms include:

  • The
    elimination of robo-signing as banks would agree to individually review
    foreclosure documents according to the law.
  • Adoption
    of practices that would improve communication with services and end servicer
    abuses including fairer treatment for homeowners who are late on mortgage
    payments.
  • More
    sustainable loan modifications including a requirement that banks “get serious”
    about reducing principal balances.
  • While
    the state AGs would be prohibited by the settlement from pursuing further
    actions against the banks, the Center said that nothing in the settlement would
    prevent homeowners from suing on an individual basis nor would the settlement
    shield the banks from prosecution for criminal activities or from claims based
    on mortgage securities violations, fair lending suits or claims against the
    Mortgage Electronic Registration System.
  • The
    settlement would be enforceable in court by an independent monitor.

The Center said that its research
indicates that the country is only about half-way through the mortgage crisis,
but the proposed settlement would wrap up a year-long investigation into
robo-signing and other abuses and is “crucial to containing the damaging
effects of foreclosures on our economy.” 
It stresses, however, that additional policy actions on multiple fronts
is a necessary addition to the settlement.

…(read more)

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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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Study: No Additional Restrictions on QRM Needed

The proposed down payment standards
for new mortgages might push 60 percent of potential borrowers into high-cost
loans or out of the housing market altogether according to a paper released
today by the Center for Responsible Lending.  The paper,
Balancing Risk and Access:  Underwriting
Standards for Qualified Residential Mortgages
, is the result of a study to
weigh the effects of proposed underwriting guidelines for qualified residential
mortgages (QRM)
, mortgages that are exempt from the risk retention requirements
laid out in the Dodd-Frank Wall Street Reform Act.

The Center, a nonprofit, nonpartisan
research and policy organization with a stated mission of “protecting
homeownership and family wealth by working to eliminate abusive financial
practices” has, along with other consumer and industry groups, raised concerns
about a potential disproportionate impact of restrictive QRM guidelines on
low-income, low-wealth, minority and other households traditionally underserved
by the mainstream mortgage market.  The
study examines the way different QRM guidelines may affect access to mortgage
credit and loan performance and estimates the additional impacts on defaults
resulting from guidelines above and beyond QM product requirements.

The researchers, Roberto G. Quercia,
University of North Carolina Center for Community Capital, Lei Ding, Wayne
State University, and Carolina Reid, Center for Responsible Lending used
datasets from Lender Processing Services (collected from servicers) and
Blackbox (data from loans in private label securities collected from investor
pools.)  They identified from among 19
million loans originated between 2000 and 2008 the 10.9 million that would meet
the current QRM guidelines, i.e. loans with full documentation that have no
negative amortization, interest only, balloon, or prepayment penalties.  Adjustable rate mortgages must have fixed
terms of at least five years and no loans over 30 years duration. 

The default rate for the universe of
loans was 11 percent, for prime conventional loans, 7.7 percent, and for loans
(regardless of type) that would have met the QM product feature limits, 5.8
percent.  In other words, the research “suggests
that the QM loan term restrictions on their own would curtail the risky lending
that occurred during the subprime boom and lead to substantially lower
foreclosure rates without overly restricting access to credit.”

The next step was to apply some of
the suggested additional criteria for QRM to the loans; a minimum down payment
of 20 percent, a range of higher FICO scores, and lower debt to income (DTI)
ratios.  The goal was to determine the
benefit of each as measured by an improvement in default rates without an undo reduction
in borrowers able to qualify for an affordable loan.

When various permutations of
loan-to-value (LTV), FICO scores, and DTI ratios were applied to the loans lower
default rates were achieved.  These
improvements, however, were accompanied by the exclusion of a larger share of
loans.  As Figure 4 shows, some of the restrictions
resulted in the exclusion of as many as 70 percent of loans.   

To quantify this, the authors
developed two additional measures.  The
first, a benefit ratio, compares the percent reduction in the number of
defaults to the percent reduction in the number of borrowers who would have
access to QRM loans with the proposed guidelines.  For example, an underwriting restriction that
resulted in a 50 percent reduction in foreclosures while excluding only 10
percent of borrowers would have a higher benefit ratio than one with the same
reduction in foreclosures that excluded 20 percent of borrowers.


One finding was that LTVs of 80 or
90 percent resulted in particularly poor outcomes while an LTV of 97 percent
had added benefits of reduced defaults relative to borrower access.  This suggests that even a very modest down payment
may play an important role in protecting against default while excluding a
smaller share of borrowers than would a higher down payment requirement.

Since underwriting is unlikely to
impose restrictions in isolation, the study analyzed a combination of possible
QRM restrictions.  They found that the
strictest guidelines produced the worst outcomes and that none of the patterns
of proposed restrictions performed as well as the QM restrictions on their own.

The second measure, an exclusion
ratio, looks at the number of performing loans a certain threshold would
exclude to prevent one default.  In this
measure, the number of excluded loans can be viewed as a proxy for the number
of “creditworthy” borrowers who would be excluded from the QRM market.

Imposing 80 percent LTV requirements
on the universe of QM loans would exclude 10 loans from the QRM market to
prevent one additional default.  Adding
to this a FICO above 690 and 30 percent DTI ratio would exclude 12 creditworthy
borrowers to prevent one default.

The current QRM criteria are more
restrictive for rate-term and cash-out refinancing than for purchase
loans.  The study found that the QM
product restrictions are the most effective in balancing the demand between reducing
defaults and ensuring access to credit.

The study also found that imposing
additional LTV, DTI, and FICO underwriting requirements
on QM loans had
disproportionate effects on low-income borrowers and borrowers of color.  Just over 75 percent of African-American
borrowers and 70 percent of Latino borrowers would not qualify for a 20 percent
down QRM mortgage and significant racial and ethnic disparities are evident for
FICO requirements as well.  At FICO
scores above 690, 42 percent of African-Americans and 32 percent of Latino
borrowers would be excluded against 22 percent of white and 25 percent of Asian
households.  At the most restrictive
combined thresholds (80 percent LTV, FICO above 690, DTI of 30 percent) approximately
85 percent of creditworthy borrowers would not qualify with African American
and Latino disqualifications each above 90 percent.

The Center says in conclusion that
its research provides “compelling evidence that the QM product loan guidelines
on their own would curtail the risky lending that occurred during the subprime
boom and lead to substantially lower foreclosure rates, while not overly
restricting access to credit.”

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Mortgage applications surge amid record-low rates

Mortgage loan applications surged 23% last week, according to the Mortgage Bankers Association, as record-low interest rates convinced many homeowners it was time to refinance into lower-cost loans.