Think Tank Measures FHA Progress

The American Enterprise Institute’s
(AEI) FHA Watch, a monthly on-line
publication tracking operations of the housing agency, just released its sixth
edition which makes clear the agenda of the conservative think tank.

Watch starts out by
quoting a Federal Reserve estimate that about one-third of the 11.1 million
underwater mortgages in the U.S. are FHA insured, a number which would account
for nearly half of FHA’s 7.4 million outstanding loans.  The Institute concludes that, since about 72
percent of outstanding FHA loans are of post 2009 vintage, about 1.5 million
recent loans must be underwater. 

“This comes as no surprise,” Watch
says, “since the FHA continues to combine minimal down payments (average of 4
percent) with slowly amortizing thirty-year loan terms. As a result, earned
homeowner equity (the combination of down payment and scheduled loan amortization)
amounts to less than 10 percent after four years, or about enough to sell a
home at the break-even point if home prices stay steady. However, prices have
declined nationally about 7 percent since mid-2009, with lower-priced homes
declining even more. When combined with borrowers’ low FICO scores and high
debt-to-income (DTI) ratios, the result is a continuation of the FHA’s
destructive lending-lending that has resulted in 20-25 percent of recent
borrowers facing a 10 percent or greater likelihood of foreclosure.”

In addition to the opening statement, Watch spotlights the following topics:

  • Insolvency: FHA’s Position Worsened in May, with an
    Estimated Current Net Worth of $22.11 Billion and a Capital Shortfall of $41-61
  • Delinquency: Total Delinquency Rate Increased in May to
    16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies;
    Serious Delinquency Rate Ticked Up to 9.43 Percent.
  • Underwater
    Loans: FHA Is Responsible for 1.5
    Million New Underwater Loans.
  • Best Price Execution:
    The Government Mortgage Complex’s Ginnie Brands Demonstrate Continued
    Pricing Dominance over Fannie Mae.
  • The Road Map to FHA Reform: Specific Steps to Reform and the Status
    of Each

The last category sets forth AEI’s goals
for program reform and fiscal reform, steps for accomplishing each, and a
report card on the progress made by FHA and Congress toward the goals.  AEI’s goals for Program Reform are:

  1. Stepping back from markets that the private
    sector can serve to gradually return to a “traditional”10 percent home purchase
    market share.
  2. Stop
    knowingly lending to people who cannot repay their loans.
  3. Help
    homeowners establish meaningful equity.
  4. Concentrate
    on homebuyers who truly need help purchasing their first home.

The only recent improvement acknowledged
by AEI in this area occurred in February with a proposed rule that limits
seller concessions to the greater of 3 percent of the loan or $6,000.  More than a dozen other steps have not been
acted on by the agency.

The Institute has set the following
goals for FHA to achieve in the area of fiscal reform:

  1. Utilize generally accepted accounting
    principles and set rigorous disclosure standards;
  2. Establish and maintain loan loss and unearned
    premium reserves;
  3. Establish and maintain a minimum capital
    requirement of 4 percent of amortized risk in force;
  4. Fund a countercyclical premium reserve.

AEI found that FHA had made a small
amount of progress in this area by requiring application of SEC disclosure
standards to the FHA’s insurance programs and funds and by taking steps toward
retaining an independent third party to conduct a safety and soundness review
under generally accepted accounting standards. 
There was no acceptable progress on the six remaining steps.

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Mortgage Rates Edge Slightly Deeper Into All Time Lows

Mortgage Rates were slightly lower again today after hitting new all-time lows on Friday.  It continues to be the case that different lenders are adjusting rate sheets in different ways in the current environment.  Because of this, an individual lender may not be priced at their all-time lows today, but the average across all the rate sheets we assess fell another 0.01 today, more firmly establishing 3.625% as the current Best-Execution rate for Conventional 30yr Fixed loans.

(Read More:What is A Best-Execution Mortgage Rate?)

The key event for the first half of the week was Sunday’s elections in Greece, which have already mostly played out.  At this point, we’re just waiting for Greece to go ahead and “form a government,” which is something they try to do after elections are held.  Failure to form a government after the last round of elections is one of the key factors that helped rates get to their current levels domestically.

We don’t know how much it might affect rates over the next 2.5 days if Greece is resoundingly successful in this endeavor, but given that officials from the prevailing party have already announced that they will ask the Eurogroup to lessen Greece’s austerity burden, we can’t imagine the formation of a unity government in Greece to take rates anywhere remotely close to “it never happened” levels from April.

Moreover, we’d be expecting the market’s focus to shift toward Wednesday’s official policy announcement from the Fed as well as FOMC member forecasts and Bernanke’s press conference.  There’s much less consensus out there vs last time as to whether or how the FOMC might go about addressing the topic of further fiscal stimulus.  Many believe the Fed will stay on hold until next meeting, while others think they might meet markets half-way and simply extend existing Operation Twist policies.

Long Term Guidance: We’d continue to advocate not trying to “get ahead” of current market movements as a high degree of uncertainty is pervasive.  While it’s a reasonably safe assumption that European concerns will generally help rates stay lower than they otherwise would be, that “otherwise would be” part is very much a moving target.  Best bet is to focus on the fact that rates are at their all time lows, and can change quickly based on events that aren’t “scheduled” or able to be forecast.  Risk vs reward for floating vs locking looks a bit larger than we’d like, but not out of the question for those who understand the risks and have an exit strategy if things don’t go their way.

Loan Originator Perspectives

Aaron Meyer, Mortgage Officer First Bank Financial Centre

Rates haven’t been much lower especially with the uncertainty of a Federal Reserve meeting this week and Greece’s election last night. Lock now and be happy because mortgage capacity is filling up quickly.

Victor Burek, Benchmark Mortgage

Most lenders rate sheets are as good as they have ever been today. With rates at record lows it is difficult to not advise locking; however, I continue to believe the lowest rates are ahead of us.

Ted Rood, Senior Mortgage Consultant,  Wintrust Mortgage

Last week, buzz was that Greek election on Sunday was the big unknown. After the fact today, rate sheets still better as focus swings to rising Spanish debt issues. Bottom line: Europe has more problems than US, and that will keep our rates low. Bigger concern than rates may be lenders fleeing risk. Wells Fargo announced last week they are not participating in the FHA streamline program for non Wells clients, other lenders soon followed.


  • 30YR FIXED –  3.625%
  • FHA/VA -3.5% – 3.75%
  • 15 YEAR FIXED –  3.00%
  • 5 YEAR ARMS –  2.625-3. 25% depending on the lender

Ongoing Lock/Float Considerations 

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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The Appraisal: Colin Beavan, Environmental Activist, Makes a Run for Congress

Colin Beavan, known for his No Impact Man project, is the Green Party candidate for a House seat in Brooklyn.

April Housing Scorecard Shows Progress, but ‘Fragility’ Lingers

The Administration’s Housing Scorecard for April claims progress on both home sales and mortgage delinquencies “but continued fragility overall.”  Delinquencies have now declined for four straight months and sales of existing homes in the first quarter of the year were 5.3 percent higher than in the same period in 2011.

The Scorecard is essentially a summary of data on housing and housing finance released by public and private sources over the previous month and/or quarter.  Most of the data such as new and existing home sales, permits and starts, mortgage originations, and various house price evaluations have been previously covered by MND. 

The Housing Scorecard incorporates by reference the monthly report of the Home Affordable Modification Program (HAMP) and related remediation programs.  Through March HAMP has facilitated 990,000 permanent first lien modifications since it began in April 2009.  These modifications have saved homeowners an estimated $12.2 billion in monthly mortgage modifications – an average of $535 per month. 

During March there were 20,940 trial modifications started and 19,940 trials converted to permanent status. Since the program began there have been over 2 million trial modification offers extended to borrowers and 1,830,000 homeowners who entered into trials.  There are 68,630 active trials and the average trial length is now 3.5 months compared to trials nearly three times that length earlier in the program.

Eight of the 12 largest servicers participating in the HAMP program have now reached the goal of an 85 percent trial to permanent modification conversion rate.  The four which have not are still above an 80 percent rate.

Servicers also continue to improve in the manner in which they contact delinquent borrowers and complete initial HAMP evaluations.  All servicers are now above an 85 percent success rate in making contact with the right party according to program guidelines and most have at least a 75 percent success rate in completing the evaluations

There are a variety of other foreclosure prevention programs run under the HAMP mantle.  Here is the most recent data on several of them.

The Principal Reduction Alternative (PRA) program run under HAMP has been at the center of considerable controversy in recent weeks as the Federal Housing Finance Agency, one of two sponsors of HAMP, refuses to allow Freddie Mac and Fannie Mae (the GSEs) to participate in principal reductions despite considerable pressure from Congress and the other HAMP sponsor, the Treasury Department.  Even without the availability of GSE loans to the program there have now been 77,640 PRA trial modifications started, 52,243 of which have been converted to permanent modifications.  The median principal reduction is $69,083, a median of 31.4 percent of the outstanding principal balance before modification.

The Second Lien Modification Program (2MP) has started modifications on 76,218 junior liens.  There have been 16,599 second liens fully extinguished and 57,097 modified.  The median lien amount of extinguished loans is $61,355 and the median modification is $7,027.

Another program run under the auspices of HAMP is the Home Affordable Foreclosure Alternatives or HAFA which facilitates short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure.  To date there have been 40,252 HAFA transactions completed, almost all short sales.  HAFA completions were largely accomplished with privately held loans (26,660); portfolio loans accounted for 10,994 HAFA transactions and GSEs loans for 2,600.

Modified loans are still performing better than is usually the case.  Even among the oldest of the modifications the serious delinquency rate is 33.5 percent after two full years.  The performance of the modifications has improved over time as can be seen in the table below.

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Chase, Wells Fargo Report Solid Profits, Credit Improvements in Mortgage Portfolios

Two of the nation’s largest banks came in with first quarter earnings above estimates today, due in part to improvements in their respective mortgage portfolios.  Wells Fargo reported record quarterly net income of $4.2 billion on revenue of $21.6 billion and JPMorgan Chase had net income of $5.4 billion on revenue of $27.4 billion. 

Wells Fargo’s revenue was up $1 billion from the fourth quarter of 2011, due the bank said to growth in noninterest income which was also up $1 billion to 10.7 billion driven by increases of $506 million in mortgage banking, $458 million in market sensitive revenue, and $181 million in trust and investment fees.

Mortgage banking noninterest income was $2.9 billion in revenue based on $129 billion of originations compared to $120 billion in the fourth quarter.  The company provided $430 million for mortgage loan repurchase losses compared with $404 million in the fourth quarter.  Net mortgage servicing rights (MSR) resulted in losses of $58 million compared to a $201 million gain in the previous quarter due to a reduction in the value of the MSRs from incorporating a higher discount rate.  The ratio of MSRs to related loans serviced for others was 77 basis points and the average note rate on the servicing portfolio was 5.05 percent.  The unclosed pipeline at the end of the quarter was $79 billion compared to $72 billion at the end of the fourth quarter.

The company had net charge offs during the quarter of $791 million in first mortgage loans and $763 million in junior mortgage liens, 1.39 percent and 3.62 percent of average loans respectively.  In the fourth quarter net charge offs for senior liens were $844 million (1.46 percent) and junior liens were $800 million (3.64 percent.)  Total non-performing assets at the end of the quarter totaled $26.6 billion, up from $26.0 billion and nonaccrual loans increased to $22.0 billion from $21.3 billion “with the increase exclusively tied to industry-wide supervisory guidance pertaining to the junior lien portfolio” in which 1.7 billion of performing junior liens with associated delinquent first liens were reclassified to nonaccrual status in the first quarter.  The bank said this had minimal financial impact as the expected loss content of these loans was already considered in the loan loss allowance.

Wells Fargo’s earnings equaled $0.75 per common share, up 11 percent from the prior quarter.  Bloomberg reported that analysts had expected earnings of $0.73 cents.  The bank also announced it would be increasing its quarterly common stock dividend to $0.22 per share effective with the first quarter.   

Chase’s first quarter net income of $5.38 billion was down from the record $5.56 billion it earned a year earlier.  Income per share however was up to $1.31 per share from $1.28 a year earlier when there were more shares outstanding.  According to Bloomberg, analysts were expecting earnings of $1.17 per share.

Chase reported that its first quarter results included $1.8 billion in pretax benefits from reduced loan loss reserves related to mortgages and credit cards.  The company also reported $1.1 billion pretax benefit from the Washington Mutual bankruptcy settlement and $2.5 billion in pretax expenses for additional litigation reserves primarily related to mortgage-related matters.

Chase’s real estate portfolio generated net income of $518 million compared to a net loss of $162 million a year earlier, primarily from improving credit trends reflected in the provision for credit losses.  Net revenue was 1.1 billion, down 7 percent from the previous year because of a decline in net interest income from lower loan balances due to portfolio runoff.

The provision for credit losses reflected a benefit of $192 million compared to 2.2 billion a year earlier reflecting lower charge-offs and a $1 billion reduction in loan loss allowances as delinquency trends improved. 

Home equity net charge-offs were $542 million (2.85 percent net charge-off rate) compared with $720 million (3.36 net charge-off rate) in Q1 2011.  Subprime mortgage net charge-offs were down to $130 million (5.51 percent) from $186 million (6.8 percent); prime mortgage charge-offs including option ARMS were $131 million (1.21 percent) compared with $151 million (1.32 percent). 

Nonaccrual loans totaled $7.0 billion, unchanged from a year earlier and up from $5.9 billion in the fourth quarter due to the reporting of $1.6 billion in performing junior liens as non-accruing under the same supervisory guidance that impacted Wells Fargo.

There was net income of $461 million from mortgage production and servicing compared to a net loss of $1.1 billion a year earlier.  Mortgage production generated $1.6 billion in revenue, an 80 percent increase from the prior year, partly from the impact of the Home Affordable Refinance Programs (HARP).  Production expenses increased $149 million to $573 million reflecting higher volumes and a “strategic shift” to the Retail channel including branches where origination costs and margins are traditionally higher.    Repurchase losses were down from $420 million to $302 million. 

Mortgage servicing related revenue was $1.2 billion, down 5 percent from the previous year because of fewer third party loans serviced and expense declined by $175 million to $1.2 billion.  Servicing had a pretax loss of $160 million compared to a loss of $1.9 billion a year earlier.

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