40 Wall Fortunes Rise Again

About 200,000 square feet of space remains unoccupied, but the flurry of deals in the past six months marks the latest chapter in the story of 40 Wall, one of Mr. Trump’s most successful investments.

Builders Voice Current Optimism; Cautious on Future Gains

The National Association of Home Builder’s
(NAHB)/Wells Fargo Housing Market Index (HMI) ticked up one point this month to
reach its highest point since May 2007.   The HMI is a measure of builder confidence in
the health of the new home market. 

The HMI was at 29 in June compared to a revised
index of 28 in May.  The index is based
on a monthly survey of NAHB’s homebuilder members who are asked to assess the
market using three measures.  What is their
perception of current single family home sales, “good,” “fair,” or “poor?”  What do they expect sales to be over the next
six months on the same scale; and do they rate the current traffic of
prospective buyers as “high to very high,” “average,” or “low to very low?”  Each component is scored separately and also
used to construct the HMI.  A score of 50
on any of the four indices indicate that more builders view the market as good
than poor.

The June increase in the HMI came from increased optimism
over current sales while builders remain cautious about future prospects.  The component measuring current sales rose two
points to 32, the highest score since April 2007.  However, the components measuring sales
expectations over the next six months and current buyer traffic remained unchanged
at 34 and 23 respectively.

“This month’s modest uptick in
builder confidence comes on the heels of a four-point gain in May and is
reflective of the continued, gradual improvement we are seeing in many
individual housing markets as more buyers decide to take advantage of today’s
low prices and interest rates,” said Barry Rutenberg, chairman of NAHB. 

Regionally, the HMI results were
mixed in June, with the Midwest registering a five-point gain to 31 and the
West a four-point gain to 33.  The
Northeast and South each posted two-point declines, to 29 and 26, respectively.

“While the June HMI is in keeping
with our forecast for gradually improving single-family home sales this year,
recent economic reports that have shown some weakening in the pace of recovery
likely factored into the marginal gain,” said NAHB Chief Economist David Crowe.
“In addition, builders across the country continue to report that overly tight
lending conditions and inaccurate appraisals are major obstacles to completing
sales at this time.”

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FHA Stepping up Bulk Sales Volume

Acting
Federal Housing Finance Agency (FHA) Commissioner Carol Galante and Housing and
Urban Development (HUD) Secretary Shawn Donovan announced late Friday afternoon
a new bulk sale program to liquidate some of the reported 700,000 delinquent loans
backed by FHA insurance
.  The Distressed Asset Stabilization Program is an outgrown of a pilot program that
allows private investors to purchase pools of mortgages headed for foreclosure.  The pilot has resulted in sales of more than
2,100 single family loans to date.

Beginning with the September 2012
scheduled sale, FHA will increase the number of loans available for purchase
from approximately 1,800 each year to a quarterly rate of up to 5,000, and add
a new neighborhood stabilization pool to encourage investment in communities
hardest hit by the foreclosure crisis.

According to an article in the Wall Street Journal published before the sale was officially announced, FHA is undertaking
bulk sales in an effort to reduce its growing portfolio of distressed loans and
to avoid the costly process of foreclosure, but also because its own rules
limit ways in which the mortgages can be modified, leaving little room for aggressive
loan modifications like those done by Freddie Mac, Fannie Mae, and proprietary
lenders.  Once sold these strictures
disappear, the new servicer can take more drastic steps to bring the loans back
on line.

Under the new program, the current servicer
can place a loan into the bulk sale loan pool if the borrower is at least six
months delinquent on his mortgage and has exhausted all steps in the FHA loss
mitigation process.  The servicer must
also have initiated foreclosure proceedings and the borrower cannot be in bankruptcy.

Once
accepted from the servicers, the notes are sold competitively at a
market-determined price generally below the outstanding principal balance. To
minimize the chance “vulture investors” will take advantage of the program, potential
investors must agree to hold off foreclosure for a minimum of six months and
work with the borrowers to help find an affordable solution to keep them in
their homes. FHA also seeks to provide some protection to the market by
requiring purchasers to hold back from sale at least 50 percent of the homes
backing the loans for at least three years.

“The Distressed Asset Stabilization
Program offers a better shot for the struggling homeowner and lower losses to
the FHA,” Galante said. “By addressing the growing back log of distressed
mortgages, FHA is helping to mitigate the negative effects of the foreclosure
process as part of the Administration’s broader commitment to community
stabilization.”

“While our housing market has
momentum we haven’t seen since before the crisis, there are still thousands of
FHA borrowers who are severely delinquent today – who have exhausted their
options and could lose their homes in a matter of months,” said HUD Secretary
Shaun Donovan. “With this program, we will increase by as much as ten times the
number of loans available for purchase while making it easier for borrowers to
avoid foreclosure. Finding ways to bring these loans out of default not only
helps the borrower, but helps the entire neighborhood avoid the disinvestment
and decline in value that accompanies a distressed property.”

 “Currently, FHA’s inventory of REO properties
available for sale is at its lowest level since FY 2009,” added Galante. “At
the same time, the inventory of seriously delinquent loans is near an all time
high. With many neighborhoods still fighting to recover from the housing
crisis, going upstream will allow us to help more borrowers before they go
through foreclosure and their homes ever come into the REO portfolio.” 

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Ending Uncertainty is Prescription for Housing Recovery

Federal Reserve Governor Elizabeth A. Duke told attendees at a break-out session of the National Association of Realtors® (NAR) Midyear Legislative Meetings that she wished she had, as the session title suggested a “Prescription for Housing Recovery.”  “I do see policies that I believe will help reduce the shadow inventory of houses in the foreclosure pipeline,” she said.  “I also see policy actions that could be taken to improve credit availability for potential homebuyers and, in turn, demand for houses.”

Duke briefly recounted the toll that the housing market had taken on homeowners and the nation’s housing stock and some of the signs of recovery such as improving delinquency rates, and declining inventories of unsold and foreclosed homes. 

She said there have also been signs that home prices are stabilizing and even improving.  These modest improvements, she said, can only continue if the demand for homes strengthens or the supply fails to meet the weak demand.  “My Realtor friends,” she said, “have taught me that when inventories of houses for sale reach a level equal to six months of sales, then markets are usually in rough balance. And, indeed, just as the inventory of existing homes for sale nationally has approached six months of sales, we have seen a leveling of prices suggesting that some equilibrium is being achieved, albeit at low levels.”

The national data, of course, masks differences in regional markets.  She pointed to Miami and Phoenix where there is actually an undersupply of homes while delinquencies and foreclosures are still high.  “For me, this calls into question the notion that housing prices cannot stabilize until the foreclosure pipeline is worked off. I believe that this reduction in inventory, even in the face of a steady supply of foreclosed homes, is a result of a sharp contraction in normal homeowner activity and an equally sharp expansion of investor activity”. This could mean that discouraged homeowners have pulled homes off the market or that a significant portion of inventory has been absorbed by investors.

Despite some signs of improvement, demand for owner-occupied housing remains what Duke called “stubbornly tepid.”  One driver of demand is household formation which typically falls during economic downturns but has been especially weak in this cycle, running at three-quarters of the normal rate since 2007.  At the same time some homebuyers are delaying home purchases because of uncertainty, others because they expect prices might fall even further.

Some who would like to buy cannot because they are unable to obtain a mortgage.  She pointed to the Feds most recent Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS)  showing that underwriting standards for residential mortgages tightened steadily from 2007 to 2009, “and they do not appear to have eased much since then.” 

Obviously lenders are trying to correct for the lax and problematic lending standards in the years leading up to the crash, but Duke listed other factors causing the problem.

Lenders apparently lack adequate capacity. Some lenders have gone out of business and others have cut staff at the same time that requirements for documentation have increased and lenders have become more cautious over fear they might have to repurchase loans.  This has increased the processing time for mortgages from about 4 weeks in 20008 to around 6 weeks in 2010.   Of course if lenders were eager to originate mortgages they could increase staff and invest in systems but Duke believes uncertainty is inhibiting these investments.

Uncertainty is impacting lenders in other ways. Turning first to macroeconomic uncertainty, Duke said so long as unemployment remains elevated and further house price declines remain possible, lenders will be cautious in setting their requirements for credit.  The continuing effects on house prices of the large number of underwater mortgages and of the mortgages still in the foreclosure pipeline remain unclear. In one recent survey, house price forecasts for 2012 ranged from a decline of 8 percent to an increase of 5 percent.

House price uncertainty and the high volume of distressed sales make the job of residential appraisers and lenders more difficult.  Appraisers may lean toward the conservative in setting a home’s value and, as long a house prices continue to decline lenders may lean toward more conservative underwriting which, taken together could discourage or even disrupt sales and Duke said she hears of that happening.  

Lenders have tended to be conservative in making some mortgages that are guaranteed by government-sponsored enterprises (GSEs)–loans in which lenders do not bear the credit risk in the event of borrower default–which suggests that issues other than macroeconomic risk are affecting lending decisions.

In the April SLOOS  lenders said they are less likely today to originate loans to borrowers in several different categories than several years ago and when asked why about 80 percent cited the difficulty of obtaining affordable private mortgage insurance.  More than half the respondents cited risks associated with loans becoming delinquent as being at least somewhat important–in particular, higher servicing costs of past due loans or the risk that GSEs would require banks to repurchase or putback delinquent loans, their right when lenders are thought to have misrepresented their riskiness. If lenders perceive that minor errors can result in significant losses from putback loans, they may respond by being more conservative in originating those loans. If technology and data standardization can be used to enhance quality control reviews at the time of purchase rather than after the loans became delinquent, it would allow errors to be corrected much earlier, resulting in better outcomes for taxpayers, borrowers, investors, and lenders.

There is also uncertainty about future standards for delinquency servicing and the associated costs.  This was partially resolved by the $25 billion servicing settlement and the consent orders entered into by 14 large servicers. However these agreements cover only about two-thirds of all mortgages and the new Consumer Financial Protection Bureau (CFPB) has declared it will develop servicing rules for all mortgage loans, The conservator of the GSEs are developing a set of servicing protocols for GSE loans and federal regulators are doing the same for banks they regulate.  Also affecting decisions about investing in servicing are new approaches to servicer compensation under consideration by the FHFA and new international capital standards that change the capital treatment of mortgage servicing rights

Two major areas of uncertainty arise out of regulations being written under the Dodd-Frank Act;  rules that will set requirements for establishing a borrower’s ability to repay a mortgage including a definition of a “qualified mortgage” or QM. Mortgages that meet the definition would be presumed to meet the standards regarding the ability of the borrower to repay.  Regulators are also developing a definition for “qualified residential mortgages,” or QRMs, a subset of QM that would be exempt from risk retention requirements in mortgage loan securitizations. Each one of these rules will affect the costs and liabilities associated with mortgage lending and thus the attractiveness of the mortgage lending business.

Other big uncertainty is the potential role of the government in the mortgage market, especially the future of Fannie Mae and Freddie Mac still unreserved more than three years after they were put into conservatorship.  Private capital might be reluctant to enter the market until their future is settled.  

Duke concluded by returning to the theme of the session, writing a prescription for housing recovery which she said would include resolving uncertainty about the strength of the economic recovery, especially the labor market which is affecting both homeowners’ willingness to buy and lenders willingness to lend. The Federal Reserve remains committed to fostering maximum employment consistent with price stability, which should help reduce some of the macroeconomic uncertainty.

The efforts underway to reduce foreclosures and distressed sales will stabilize home prices and mortgage loan modifications and short sales will cut the homes in the foreclosure pipeline as will reallocating some properties to rental use.  Policy changes that increase opportunities to refinance and neighborhood stabilization efforts are other solutions.   

But, she said, perhaps the most important solution is that policymakers move forward with the difficult decisions that will affect the future of the mortgage market.  She listed the future of the GSEs, how to promote a robust secondary market, the form of crucial regulations, “and it is unlikely that anyone will fully agree with the final decisions that are made. Nevertheless, until these tough decisions are made, uncertainties will continue to hinder access to credit, the evolution of the mortgage finance system, and the ultimate recovery in the housing market. I don’t want to diminish the importance of any individual policy decision, but I do believe that the most important prescription for the housing market is for these decisions to be made and the path for the future of housing finance to be set. It’s time to start choosing that path.


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Builder Sentiment Recovers after April Drop

After a bad showing in April the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) has rebounded, hitting its highest reading since May 2007.  The index, which measures home builder confidence, rose five points from its April level to 29 in May.

The HMI derives from a monthly survey of its homebuilder members which NAHB has conducted for 25 years.  The survey gauges builders’ perceptions of current sales of single family homes as “good,” “fair,” or “poor,”; their sales expectations for the next six months on the same scale, and asks them to rate current traffic of prospective buyers as “high to very high,” “average,” or “low to very low.”  Each component is scored separately and also used to construct the HMI.  A score of 50 on any of the four indices indicate that more builders view the market as good than poor.

The three components also improved on their declining numbers in April.  The components gauging current sales conditions and buyer traffic were each up five points to 30 and 23 respectively.  This was the highest level for the traffic component since April of 2007.  The component measuring sales expectations rose 3 points to 34.

“Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April,” said Barry Rutenberg, NAHB chairman. “It seems we have resumed the gradual upward trend in confidence that started at the beginning of this year, as stabilizing prices and excellent affordability encourage more people to pursue a new-home purchase.” 

Three out of four regions registered improving builder sentiment in May. This included a six-point gain to 32 in the Northeast, and five-point gains to 27 and 28 in the Midwest and South, respectively. The West posted a two-point decline, to 29.

“While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back,” said NAHB Chief Economist David Crowe. “The pace of this emerging recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices.”

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