Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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What Should the Government do to Address the Inventory of Foreclosed Properties?

Economists calculate that the decline in home prices has cost American homeowners approximately $7 trillion in home equity. Compounding this problem is the fact that the inventory of homes available for sale remains high and there is potential for a significant volume of “shadow inventory” to hit the market. Intervention is necessary to support the fragile recovery in the housing market and to prevent further declines in home values. What steps must policy makers take to prevent the loss of additional trillions in home equity?

The abundant supply of homes available for sale presents opportunities for first-time homebuyers and “move-up” buyers as affordability is at an all-time high. Many, however, are hesitant to make a move as they wait for values to reach “bottom.” Action is necessary now to establish a balance in the supply and demand for residential housing in America.

Public/Private Partnerships
Federal Deposit Insurance Corporation and the Residential Trust Corporation (FDIC/RTC) experience demonstrates that structured public/private partnerships can be successfully used as a vehicle to convey a large volume of assets of varying types and levels of quality to private-sector ownership and management, in a relatively short period of time, by appealing to a diverse group of investors who intend to employ geographically-targeted asset disposition approaches.

Applying FDIC/RTC experience to Enterprises and Federal Housing Administration (FHA) Real Estate Owned (REO)

As the strategy applies to the Enterprises and FHA, structured transactions would require joint ventures or partnerships between the Enterprises and FHA and private sector entities which are designed to facilitate the disposition and management of distressed real-estate assets.

The Enterprises and FHA make available for bulk sale all one-to-four unit single family homes and condominium REO inventory (properties may be tenant-occupied or vacant at the time of disposition). Bulk buyers are asked to construct custom REO pools (“Pick and Choose”) based on their specific investment objectives.

Once the investor completes the “Pick and Choose” process, the Enterprises and FHA forms an entity (to date, all Limited Liability Corporations or “LLCs”) to which a custom REO pool is conveyed. Under the structured transaction partnership program, the Enterprises/FHA act essentially as a passive participant or limited partner (LP), with a private-sector investor who is responsible for managing the assets and acting as the general partner (GP).

In exchange for contributing REO assets, the GP conveys a shared percentage of cash-equity (50/50 split, for example) ownership back to the Enterprise and FHA. The remainder of the purchase price is then financed through issuance of tax-free Housing Recovery Bonds. These notes would be issued by the LLC as payment to the Enterprise/FHA for the assets conveyed to the LLC by the Enterprise/FHA.

Planned use of properties, with a focus on maximizing returns under strategies tailored to local economic and real estate conditions.

Once assets are purchased by private investors, the use or disposition of those assets will be at the discretion of the buyer’s investment objectives within the constraints of Agency objectives. For example, in the hardest hit localities, where buyer uncertainty is most intense, it would be more appropriate to incentivize long-term ownership through “Rent to Hold” and “Lease to Own” structures. However, in areas where sales comparables are not greatly distorted by an oversupply of distressed assets, the Enterprises/FHA would better meet the stated objective of improving loss recoveries (ultimately improving overall execution as the program evolves) by incentivizing bulk investors who intend to “Rehab and Sell” real-estate assets to first-time home buyers and baby- boomers looking to downsize their housing needs.

Steps taken to ensure that the properties are well maintained and managed during the period they are rented or otherwise held off the market.

One potential option is for the Enterprises and FHA to partner with municipalities who designate dedicated coordinators or teams to inspect properties. In that scenario, states/municipalities would focus on aggressive code enforcement and nuisance abatement, as well as making it easier to reclaim properties by amending receivership and eminent domain laws to make them more effective for the current crisis.

Given the large number of REO properties, many of which have been on the market for extended periods, prompt rehabilitation is critical to maintaining a marketable property. HUD and FHA could also consider allowing investors to utilize the “old” FHA 203(b) and 203(k) programs – which were generally successful but ended in the late 1980’s -for the rehabilitation of single-family homes. Historically, these programs offered a practical solution for homebuyers looking to purchase a home in need of repair.

After a reasonable “first look” offer to owner-occupants, these FHA fixed rate 30 year mortgages could be made to investors to buy up the existing inventory. Individual investors, municipalities, and nonprofits represent a unique and underserved class of prospective homebuyers that require financing. Providing these groups with financing, especially rehabilitation financing like offered through the 203(k) program, would go a long way towards soaking up the excess inventory in the housing market. These investors are capital constrained and more inclined to creating bridges to occupant ownership over time through such mechanisms as “rent to own” programs. Without some sort of bridge or path to occupant ownership the Administration risks creating massive  absentee ownership that could lead to
more blight and damage to communities.

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Distressed Property Sales, Discounts Steady in Third Quarter

Sales of distressed homes, those in some
stage of foreclosure or bank owned (REO), accounted to 20 percent of all U.S.
home sales during the third quarter of 2011
compared to 22 percent of sales in
the second quarter according to information released Thursday by
RealtyTrac.  One year earlier such
distressed sales represented 30 percent of the housing market.

There were 221,536 such distressed
property sales to third parties, 11 percent fewer than revised second quarter
figures and 5 percent fewer than in the third quarter of 2010.  Pre-foreclosure sales (generally referred to
as short sales) totaled 92,824 sales or 9 percent of all sales, down 9 percent
from the second quarter and nearly identical to the number one year earlier
when pre-foreclosure sales represented 12 percent of the market.  Sales of REO totaled 128,712 properties, down
13 percent quarter over quarter and 8 percent from the previous year.  REO sales made up 12 percent of all sales in
the quarter compared to 13 percent in Q2 and 18 percent of sales a year

Prices for distressed homes averaged
$165,322, up one percent from Q2 but down 3 percent from one year earlier.  The average discount from the market price
for distressed properties was 34 percent, the same as in the second quarter of
2011.  The discount one year earlier
averaged 37 percent.  There were
substantial differences, however, between the prices for pre-foreclosure
properties which averaged $191,119, a discount of 24 percent below the average
market price, and REO.  The latter had an
average sales price of $146,437 in the third quarter, a discount of nearly 42
percent, unchanged from Q2 and down from 45 percent a year earlier.  In the second quarter the discount for pre-foreclosed
properties was 23 percent and was it 24 percent in the third quarter of

In six states distressed properties
sales accounted for a larger share of the market than the 20 percent national
average.  The states were Nevada (57
percent), California (44 percent), Arizona (43 percent), Georgia (34 percent),
Colorado (26 percent) and Michigan (23 percent).

The states with the largest
discounts for distressed property sales were Missouri (56.5 percent) and Massachusetts
(51 percent.)

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CoreLogic: Home Prices Show Third Consecutive Monthly Increase

Home prices were up for the third
consecutive month
in May as measured by CoreLogic’s Home Price Index
(HPI.)  The three months of increases were
noted for both annual and month-over-month numbers.

The HPI increased by 1.8 percent
compared to April figures and was 2.0 percent higher in May 2012 than in May
2011.  Those numbers are for all home
sales including those of distressed homes, both short sales and real estate
owned (REO) transactions.

When distressed sales are removed from
the calculation home prices were up year-over-year by 2.7 percent and were 2.3
percent higher in May than in April. 
This is the fourth consecutive month-over-month increase.

CoreLogic’s forward-looking Pending HPI
which is based on Multiple Listing Service data measuring price changes in the
most recent month indicates that house prices, including distressed sales, will
rise by at least 1.4 percent from May to June and by 2.0 percent if distressed
sales are not included.

“The recent upward trend in
U.S. home prices is an encouraging signal that we may be seeing a bottoming of
the housing down cycle,” said Anand Nallathambi, president and chief
executive officer of CoreLogic. “Tighter inventory is contributing to
broad, but modest, price gains nationwide and more significant gains in the
harder-hit markets, like Phoenix.”

“Home price appreciation in the
lower-priced segment of the market is rebounding more quickly than in the upper
end,” said Mark Fleming, chief economist for CoreLogic. “Home prices
below 75 percent of the national median increased 5.7 percent from a year ago,
compared to only a 1.8 percent increase for prices 125 percent or more of the

Since home prices peaked in April
2006 the national HPI including all sales has fallen 30.1 percent and non-distressed
sale prices are down 22.2 percent.

The highest price appreciation
including distressed sales was seen in Arizona (12.0 percent), Idaho (9.2
percent) and South Dakota (8.7 percent). 
When distressed sales are excluded the greatest appreciation was noted
in Montana (9.1 percent), South Dakota (8.5 percent), and Arizona (7.3

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Shadow Inventory Drops to 4-month Supply

appear to be getting a grip on the nation’s foreclosure inventory according to a
report released Thursday by CoreLogic. 
The foreclosure or “shadow” inventory represents the number of
properties that are seriously delinquent, in foreclosure or owned by mortgage
servicers and lenders (REO) but not currently listed for sale on a multiple
listing service.   

inventory fell to 1.5 million units in April, a four month supply at the
current rate of attrition.  This is approximately
the same level that existed in October 2008 and a decrease of 14.8 percent from
April 2011 when there were 1.8 million units in inventory or a six-month
supply.  Shadow
inventory is typically not included in the official metrics of unsold inventory
and the current figure represents just over half of the 2.8 million properties
currently seriously delinquent, in foreclosure or REO. 

The dollar volume of shadow
inventory was $246 billion as of April 2012, down from $270 billion a year ago
and a three-year low.

The flow
of new loans that are seriously delinquent
, that is 90 days or more, into the
shadow inventory has now been approximately offset by the equal volume of
distressed property sales including both sales of REO and pre-foreclosure or
short sales.

Of the 1.5 million properties currently
in the shadow inventory, 720,000 units are seriously delinquent (two months’
supply), 410,000 are in some stage of foreclosure (1.1-months’ supply) and
390,000 are already in REO (1.1-months’ supply).  The foreclosure inventory does not include
loans that are not yet seriously delinquent but may become so. 

“Since peaking at 2.1 million
units in January 2010, the shadow inventory has fallen by 28 percent. The
decline in the shadow inventory is a positive development because it removes
some of the downward pressure on house prices,” said Mark Fleming, chief
economist for CoreLogic. “This is one of the reasons why some markets that
were formerly identified as deeply distressed, like Arizona, California and
Nevada, are now experiencing price increases.”

Serious delinquencies, which are the
main driver of the shadow inventory, declined the most in Arizona (-37.0
percent), California (-28.0 percent), Nevada (-27.4 percent), and Michigan
(-23.7 percent.)

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