Industry news + analysis of loan-product trends from scotsmanguide.com
As published in Scotsman Guide's Residential Edition, July 2011.
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JULY 12
Home Prices Continue to Sink
By Mitch Siegler, senior managing partner, Pathfinder Partners LLC
Notwithstanding the ebullience of stock-market bulls and this past April’s 244,000 job gains, the economic ship still has one gaping hole in its hull: housing.
This past May, real estate valuation website Zillow announced that 28 percent of American homeowners with a mortgage — more than 7.5 million — were underwater this past first quarter. This is an increase from 27 percent in the fourth quarter of 2010 and from 22 percent the previous year — a direct result of the 8.2 percent decline in average home values in the past year, according to Zillow.
This chart — derived from data compiled by Yale University professor of economics Robert Shiller of Case-Shiller Home Price Index fame and updated by Steve Barry for Barry Ritholtz’ The Big Picture blog — shows home-value trends dating back to the late 19th century (adjusted for inflation). The chart illustrates the fallout from the recent über-bubble in housing, which peaked in July 2006 and has been deflating precipitously since.
Looking at a few cities, the situation is better than the national average in San Diego, where the underwater rate is 26 percent (up from 22.3 percent in the same period in 2010 but still below California’s 32 percent level).
Zillow gives the gold medal in this dubious category to Phoenix at 68.4 percent with Tampa, Fla., taking silver at 59.8 percent and Atlanta bringing home the bronze at 55.7 percent.
According to Stan Humphries, Zillow’s chief economist:
“With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011 … underlying demand, post-tax credit, as well as rising foreclosures and high negative equity rates make it almost certain that we won’t see a bottom in home values until 2012 or later.”
Bloomberg reports that there were 3.87 million previously owned homes listed for sale this past April and another 2 million homes in foreclosure or in some stage of default. With the robosigning scandal behind them, banks are now steaming ahead to foreclose. Add it all up and the total inventory, including shadow inventory overhanging the housing market, likely is in the 7.5 million to 8 million range.
By all accounts, banks and loan servicers are slashing asking prices to move through the inventory. We have moved out of the peak spring selling season into the summer and fall doldrums. We’ve been seeing lower traffic counts at for-sale projects in the past couple of months, and various data points suggest a weaker-than-usual summer home-selling season.
Zillow expects prices nationwide to fall by another 8 percent by year end. As the chart shows, it could be worse. We remain 40 percent above the long-term trend line — a level to (or below) which prices have a nasty habit of reverting following a bubble.
Guest blogger Mitch Siegler
is senior managing director of Pathfinder Partners LLC. Prior to co-founding Pathfinder in 2006, he founded and served as CEO of several companies and was a partner with an investment-banking and venture-capital firm. Reach him at msiegler@pathfinderfunds.com.
JULY 7
What We're Reading: July 7
Going against the trend of advocating less government involvement in the mortgage market, two House members plan to introduce a bill that would replace Fannie Mae and Freddie Mac with an entity run by the government that would buy and securitize home loans and guarantee the mortgage-backed securities, according to Bloomberg Businessweek.
“Two members of the House Financial Services Committee, Gary Miller, a California Republican, and Carolyn McCarthy, a New York Democrat, plan to introduce legislation today that would create a government-run replacement for the two mortgage finance companies, which originally were chartered by Congress.
“The measure directly challenges House Republican leaders, who have backed bills that would do away with the two companies and aim to minimize the risk that taxpayers will have to bail out future mortgage failures. Fannie Mae and Freddie Mac have cost the Treasury Department about $130 billion since they were seized by regulators in September 2008.
“The Miller-McCarthy legislation is endorsed by the National Association of Realtors and the National Association of Homebuilders. It reflects concerns by the industry, consumer activists and some policymakers that a complete withdrawal of government support for home lending could deepen the housing recession.
“The Miller-McCarthy bill would create a ‘secondary market facility’ for residential mortgages, in essence a federal utility that would buy home loans, pool them into bonds, and insure their principal and interest payments. The utility would be governed by a presidentially appointed board.
“Income from the bond sales would finance the company’s operation, according to a draft copy of the legislation.”
-- Dan Yeh
JULY 6
What We're Reading: July 6
Federal agency loan limits are set to revert back to lower limits on Oct. 1, making for an interesting test case to see how private capital responds to the government’s gradual withdrawal from the mortgage market, according to The Wall Street Journal [subscription required].
“Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency. The bulk of the affected loans —about 60%—are in California, with another 20% in Massachusetts, New York and New Jersey.
“Parts of the country with less expensive homes also would be affected; their limits are scheduled to fall as low as $417,000 for Fannie and Freddie loans and as low as $271,050 for FHA loans.
“Limits for Fannie and Freddie-eligible mortgages will fall in 250 counties, and FHA limits will drop in about 600 counties. While that is a fraction of the nation's 3,000 counties, economists at the National Association of Home Builders say those densely populated areas account for 27% and 59% of the nation's housing stock, respectively.
“The possibility of lower loan limits is causing considerable anxiety in coastal California and other high-end housing markets that will serve as test cases for how the government's withdrawal from housing will affect the market and local economies.”
Mark Zandi, chief economist of Moody's Analytics, noted in the article, "It'll be a real test of private lenders and their ability to fill the void.”
-- Dan Yeh
JULY 6
Reply Rates Fall
In the past few posts, we looked at borrowers’ preferences for various mortgage products. In this post, we take a different angle and look at lender preferences on Scotsman Guide Loan Post. The chart below shows reply rates by Loan Post category for the past 17 quarters.
(Note: The FHA/VA/Govt category was added to Loan Post in February 2009, so our reply-rate tracking for the category begins in the second quarter of 2009.)
Reply rates for most of the categories have pulled back over the past few quarters. The Other/Niche category had the biggest declines, with a drop of 27 percentage points from fourth quarter 2010 to this past first quarter. Given that most of the deals in this category are typically out-of-the-box and can be hard to fund, this is not unexpected.
A bit more surprising are the declines in the Prime and FHA/VA/Govt categories, which ended with average reply rates of 43 percent and 31 percent, compared to an average reply rate of 67 percent for the Hard Money category in this past first quarter. Although housing prices are continuing to pull back, there seems to be some evidence that the housing market will improve later this year. Perhaps that will revive wholesale lenders’ appetite for deals. In the interim, it appears that there is an opportunity for more aggressive lenders to grab market share while others are being cautious.
-- Dan Yeh
JULY 5
Welcome new lenders
We would like to welcome the following new residential lenders to Scotsman Guide for our July online update [brackets denote which matrix(es) you can find the advertiser’s programs in]:
-- Dan Yeh
JULY 1
What We're Reading: July 1
Calculated Risk reports that the CoreLogic Home Price index rose 0.8 percent from this past April to May, its second consecutive monthly increase.
“CoreLogic ... today released its May Home Price Index (HPI) which shows that home prices in the U.S. increased on a month-over-month basis. According to the CoreLogic HPI, national home prices, including distressed sales, increased by 0.8 percent in May 2011 compared to April 2011, the second consecutive month-over-month increase. On a year-over-year basis, home prices declined by 7.4 percent in May 2011 compared to May 2010 after declining by 6.7 percent in April 2011 compared to April 2010. Excluding distressed sales, year-over-year prices declined by 0.4 percent in May 2011 compared to May 2010 and by 0.8 percent in April 2011 compared to April 2010. Distressed sales include short sales and real estate owned (REO) transactions.”
-- Dan Yeh
JUNE 30
What We're Reading: June 30
MetLife has replaced Bank of America as KB Home's preferred mortgage lender as the insurer continues to scale up its mortgage business, according to Bloomberg.
"MetLife's banking unit agreed to become the 'preferred mortgage lender' of KB Home, the Los Angeles-based homebuilder that targets first-time buyers. The deal, announced yesterday by KB Home, comes as the builder winds down a mortgage joint venture with Bank of America, the biggest U.S. bank by assets and deposits.
"MetLife is lending more as near-record low interest rates pressure returns on insurance products. Employment at its MetLife Bank unit have surged, while lenders like Bank of America scale back amid losses on loans issued during the pre- 2008 housing boom. MetLife's growth may explain why KB Home (KBH) selected the company instead of a bank with a more recognized brand, said Michael G. Smith, an analyst with JMP Securities."
MetLife also has been growing its reverse mortgage business, a business which Bank of America and Wells Fargo both have exited:
"MetLife jumped ahead of Bank of America this year to become the second-biggest U.S. seller of reverse mortgages, which are home equity-backed loans to borrowers aged 62 or older. Bank of America exited that business in February, saying the staff and resources used by the operation were needed in other parts of the company. New York-based MetLife ran commercials for reverse mortgages this week on CNBC and Fox Business channels."
-- Dan Yeh
JUNE 29
What We're Reading: June 29
Pending home sales jumped 8.2 percent from this past April to May, the highest monthly gain since November 2010 and an indication the second half of this year will show improved housing sales, according to the National Association of Realtors.
"The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 8.2 percent to 88.8 in May from an upwardly revised 82.1 in April and is 13.4 percent higher than the 78.3 reading in May 2010. The data reflects contracts but not closings, which normally occur with a lag time of one or two months.
"This is the first time since April 2010 that contract activity was above year-ago levels, and the monthly gain was the strongest increase since last November when the index rose 10.6 percent."
All regions showed gains from last year:
"The PHSI in the Northeast rose 7.3 percent to 69.2 in May and is 4.4 percent above a year ago. In the Midwest the index jumped 10.5 percent to 82.8 and is 17.2 percent higher than May 2010. Pending home sales in the South increased 4.1 percent to an index of 95.0 in May and are 14.6 percent higher than a year ago. In the West the index surged 12.9 percent to 100.6 and is 13.5 percent above May 2010."
-- Dan Yeh
JUNE 28
What We're Reading: June 28
Home prices increased from this past March to April, according to the latest S&P/Case-Shiller housing report. On a seasonally adjusted basis, however, prices are still falling from the previous year.
David M. Blitzer, chairman of the Index Committee at S&P Indices, said:
“In the monthly details, we saw home prices increase in April over March. The 10-City was up 0.8% and the 20-City rose 0.7%. Only seven cities experienced lower prices compared to 18 in March. However, the seasonally adjusted figures saw less dramatic improvement. The annual rate of change for the 10-City remained the same at -3.1%; whereas the 20-City fell further from -3.8% reported for March to -4.0% for April. For a real recovery we would need to see several months of increasing home prices, large enough to shift the annual momentum to the positive side. In short, better news, but still a lot of questions and a long way to go.”
For a good explanation of the seasonal versus not seasonally adjusted numbers, see Calculated Risk.
-- Dan Yeh
JUNE 28
Five-Year ARMs Attracting Prime Borrowers
In our
June 21 post, we looked at the difference between average FICO scores for 15-year and 30-year fixed-rate mortgages. In this post, we look at FICO differences among adjustable-rate mortgages (ARMs). The graph below displays FICOs for 2/28, 3/27 and 5/25 ARMs on
Scotsman Guide Loan Post during the past 17 quarters.
This past first quarter, 5/25 ARMs had the highest average FICO score (732). The 3/27 and 2/28 products came in at 688 and 642, respectively.
In our June 23 post, we noted the average interest rate on 5/25 ARMs was roughly 1.35 percentage points less than the traditional 30-year fixed-rate mortgage. As such, it appears 5/25 ARMs are being used primarily as a cheaper alternative to 30-year fixed mortgages by prime borrowers.
On the other hand, 2/28 ARMs — with an average FICO score that has never exceeded 670 — appear to be staying closer to their roots as an affordability product.
-- Dan Yeh
JUNE 27
What We're Reading: June 27
Mortgage pioneer Lewis Ranieri believes conditions are right for nontraditional lenders, particularly subprime lenders, to re-enter the market, according to The Wall Street Journal [subscription required]:
"Mr. Ranieri believes now is the time for nontraditional lenders to enter the market. While the bank-lending standards that created the mortgage crisis were too loose during the housing boom, they are now too tight, Mr. Ranieri says, reducing the supply of mortgages to average borrowers and opening a door for lenders like Shellpoint Partners LLC, a mortgage-finance company he recently founded with two partners.
"'The pendulum has swung too far in the other direction,' Mr. Ranieri, 64 years old, said in an email comment. 'Former traditional prime borrowers with good credit scores who could comfortably make mortgage payments are being precluded from home ownership due to banks' rigid criteria.'
"Few on Wall Street are as closely tied to the mortgage market as Brooklyn, N.Y.-born Mr. Ranieri, a onetime star bond trader at Salomon Brothers who helped to pioneer mortgage-backed securities in the 1980s. More than two decades later, the market developed by Mr. Ranieri and a handful of financial whiz kids came to a screeching halt. As mortgage bonds, which are backed by millions of Americans' home-loan payments, defaulted in droves, the ripple effects spread through the global economy, ushering in a devastating financial crisis. Mr. Ranieri also faced a setback in 2008, when a Texas bank he had acquired failed and was seized by regulators.
"Since 2007, he has headed Ranieri Partners, a private-equity fund that helped to raise $100 million in equity last year to start Shellpoint. Earlier this month, Shellpoint acquired New Penn Financial, which originates conventional mortgages backed by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants. New Penn plans to begin this month to also originate nonprime loans."
-- Dan Yeh
JUNE 24
What We're Reading: June 24
Residential construction dropped 7 percent from this past April to May, led by single-family housing declines in the West, Northeast and South Atlantic regions, according to McGraw-Hill Construction.
“Residential building, at $116.5 billion (annual rate), dropped 7% in May. Single family housing slipped an additional 2%, as it has generally receded during the early months of 2011. The May slide was due to this behavior by region – the West, down 3%; the Northeast and South Atlantic, each down 2%; and the Midwest and South Central, no change from the prior month. [McGraw-Hill Construction VP Robert Murray] noted, ‘Although mortgage rates have edged downward, helping to lift affordability, the ongoing decline in home prices in early 2011 has led to more homebuyer uncertainty, which has stalled for now any recovery for single family housing.’ Multifamily housing in May dropped 25%, retreating after April’s improved activity. The five largest multifamily projects that reached groundbreaking in May were apartment buildings, as opposed to condominiums, and were located in San Diego CA ($60 million), Weymouth MA ($35 million), Sacramento CA ($30 million), Austin TX ($30 million), and Wakefield MA ($30 million).”
-- Dan Yeh
JUNE 23
What We're Reading: June 23
Attracted by low interest rates relative to fixed-rate mortgages, borrowers are showing interest in adjustable-rate mortgages (ARMs) again, with the share of ARMs increasing from 9 percent to 12 percent of all new originations from the fourth quarter of 2010 to the first quarter of 2011, according to The New York Times.
"The rate on a 5/1 adjustable-rate mortgage — that is, a loan where the interest rate is fixed for the first five years and adjusts annually thereafter — is 3.23 percent on average, or about 1.35 percentage points less than a traditional 30-year fixed-rate mortgage, according to HSH.com, which publishes mortgage and consumer loan information.
"Lured in by the attractive rates, about 12 percent of the $325 billion in new mortgages made were adjustable-rate loans, known as ARMs, in the first quarter."
-- Dan Yeh
JUNE 22
What We're Reading: June 22
Shadow inventory has fallen from one year ago, according to CoreLogic. But don't expect that to translate into a housing recovery anytime soon, says Diana Olick. There are still more than six million loans in distress and more than nine months' supply of homes on the market. Instead, expect flat home prices for the next few years.
"There are more than six million properties in distress, a third of those in foreclosure. According to yesterday's monthly home sales report from the National Association of Realtors, less than five million homes will sell this year, at the current sales pace. There are currently 3.72 million existing homes for sale, representing a 9.3 months supply; that does not include newly built homes nor does it include that six million number.
" … The group of 69 panelists who are currently forecasting a 2011 turning point predict less than two percent average annual growth in nominal home prices over the five-year period ending December 2015. [Economics professor Robert Shiller] added, 'If it were to materialize, such a scenario might be better described as a forecast of price stability rather than a rebound. A 2 percent-a-year home price increase will not inspire a lot of consumer confidence. Given prevailing inflation expectations, this forecast implies virtually no change in real home values going forward.'"
-- Dan Yeh
JUNE 21
What We're Reading: June 21
Existing-home sales fell 3.8 percent from this past April to May, in part because of higher gas prices and severe weather — particularly in the Midwest — according to the National Association of Realtors (NAR).
"Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3 percent below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit."
According to Lawrence Yun, NAR chief economist, sales in the second half of 2011 should pick up:
"Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May … Current housing market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are likely to mitigate the impact going forward. The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year."
The NAR release continues to highlight constrained credit conditions:
"Yun said the market also is being constrained by the lending community. 'Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards,' he said. 'There's been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction — this overreaction is clearly holding back the recovery.'"
Distressed sales also continued to weigh down prices:
"The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. Distressed homes — typically sold at a discount of about 20 percent — accounted for 31 percent of sales in May, down from 37 percent in April; they were 31 percent in May 2010."
The NAR release also highlighted the current proposed qualified-residential-mortgage requirements as a possible risk:
"NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. 'We're concerned about the flow of available capital, including a possible rule that would effectively raise minimum downpayment requirements to 20 percent,' he said. 'We don't need to throw the baby out with the bath water — increasing downpayment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.'"
-- Dan Yeh
JUNE 21
15-Year Mortgage FICOs Widen Lead
In our
June 20 post, we saw many homeowners opting for 15-year mortgages rather than 30-year mortgages to build up their home equity more quickly. With that in mind, we decided to look at credit comparisons for fixed-rate mortgage products. The graph below shows average FICO scores for 15-year and 30-year fixed-rate mortgages on
Scotsman Guide Loan Post during the past 17 quarters.
During the first quarter of 2011, the average FICO score for 15-year fixed-rate mortgages on Loan Post was 786, compared to the 30-year average of 720.
Although 15-year fixed-rate mortgages historically have had higher average FICOs, in the first quarter of 2011 the difference between the two hit its widest point (66 points). Though average credit scores for both 15-year and 30-year products have improved recently, it appears the credit metrics for 15-year mortgages are pulling away.
This isn't surprising, given that 15-year fixed-rate mortgages have become an attractive choice for borrowers with strong credit and the ability to handle higher monthly payments. In fact, the credit gap could get even wider as income disparities in the United States continue to grow larger, according to The Washington Post.
-- Dan Yeh
JUNE 20
What We're Reading: June 20
Cash-in refinances and 15-year mortgages are surging in popularity among borrowers with strong credit who are looking to build equity in their homes, according to Bloomberg.
“The rationale for equity building when foreclosure isn’t a threat is simple. The future interest payments homeowners can forgo by reducing the length of their loan or pumping cash into the deal is greater than what they’d otherwise earn in safe investments such as a bank account or money-market fund, SMR’s Feldstein said. As an added incentive, the 15-year fixed mortgage is the cheapest relative to the 30-year loan than it’s ever been.
“The portion of borrowers refinancing in January who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic Inc., a real estate information firm in Santa Ana, California. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009.
“The share of cash-in refinancings reached a record 44 percent in the fourth quarter, according to data from Freddie Mac dating to 1985. While the share fell to 21 percent in the first quarter as mortgage rates climbed, it was almost double the quarterly average over the past 26 years.”
-- Dan Yeh
JUNE 17
What We're Reading: June 17
Bloomberg reports Wells Fargo has announced it's exiting the reverse mortgage business because of declining home prices, following Bank of America, which left the business this past February.
"Wells Fargo & Co., the largest U.S. home lender, said it was exiting the business of reverse mortgages because of the possibility that property values will decline further, displacing as many as 1,000 employees."
This statement from Terry Wakefield, a mortgage-industry consultant in Wisconsin, sums up lenders' outlook on the business:
"Why be in the reverse mortgage business if the equity that you're lending, your collateral, is disintegrating?"
-- Dan Yeh
JUNE 15
What We're Reading: June 15
Caught between a flood of distressed homes on the market and increasing raw material costs, builder confidence fell off a cliff, dropping 3 points to 13, according to the National Association of Home Builders (NAHB).
"After holding at a low but steady level for the past six months, builder confidence in the market for newly built, single-family homes declined three points in June to a reading of 13 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The last time the index was this low was in September of 2010."
According to NAHB Chairman Bob Nielsen:
"Builders are being squeezed by the continuing weakness in existing-home prices – against which they must compete -- as well as rising material costs … In addition to the ongoing impacts of distressed property sales on home prices, appraisal values and consumer confidence, rising costs for materials such as roofing, copper, wallboard, vinyl siding and other components have made it extremely difficult to construct a new home and sell it at a price that covers the costs."
There was little good news in the report, with the Northeast being the only region to show a gain:
"Every component of the HMI fell in June. The component gauging current sales conditions and the component gauging traffic of prospective buyers each fell two points, to 13 and 12, respectively. The component gauging sales expectations in the next six months fell four points to tie its record low score of 15 set in February and March of 2009.
"The Northeast was the only region to post a gain in its HMI score for this June, rising two points to 17. Meanwhile, the Midwest dropped three points to 11, South dropped two points to 14 and the West posted a four-point decline to 12."
-- Dan Yeh
JUNE 14
What We're Reading: June 14
Bloomberg reports additional trouble for Bank of America. According to the U.S. Department of Housing and Urban Development, Bank of America hindered a review of its foreclosures by providing incomplete information and slow responses to requests.
"Bank of America Corp., the largest U.S. lender, ‘significantly hindered’ a federal review of its foreclosures on loans insured by the Federal Housing Administration, the U.S. said.
"The bank was slow in providing data and offered incomplete information, according to the U.S. Department of Housing and Urban Development inspector general’s office, which conducted the review.
"‘Our review was significantly hindered by Bank of America’s reluctance to allow us to interview employees or provide data and information in a timely manner,’ William Nixon, an assistant regional inspector general for the agency, said in a sworn declaration.
"The filing, dated June 1 and obtained yesterday by Bloomberg News, was submitted as an exhibit in a lawsuit by the state of Arizona against the Charlotte, North Carolina-based bank. Arizona, which is seeking to interview former Bank of America employees, accused the bank of misleading homeowners who were seeking mortgage modifications."
-- Dan Yeh
JUNE 14
Sand States Continue Recovery
In our May 26 post, we saw that 28 percent of all home sales in the first quarter of 2011 were foreclosures, according to RealtyTrac. With that in mind, we thought we'd take another look at the Sand States — Arizona, California, Florida and Nevada. Those four states tend to have some of the highest foreclosure rates in the nation.
The graph below shows average FICO scores for the Sand States compared to the rest of the country, as taken from 17 months of data on
Scotsman Guide Loan Post.
In the first quarter of 2010, average FICO scores for new deals for the rest of the country caught up with those of the Sand States but have subsequently fallen back, ending at 694 in the past first quarter.
During the same time frame, average FICO scores appeared to have recovered in the Sand States, hitting 708 in the past first quarter, slightly below their all-time high.
Although foreclosures continue to constitute a large percentage of sales in the Sand States, outside of the foreclosure market borrower credit appears to be rebounding. Unfortunately, the same can’t be said about the rest of the country.
-- Dan Yeh
JUNE 13
What We're Reading: June 13
Bank of America may face an additional $27 billion in losses from mortgages, which could require them to raise additional capital in the future, according to Bloomberg.
“Bank of America Corp., the largest U.S. lender, may face a further $27 billion of housing-related losses between now and 2013 amid increasing regulation as the economic recovery slows, analysts at Sanford C. Bernstein said.
“The losses would be in addition to the $46 billion the Charlotte, North Carolina-based lender has already recorded, analysts led by John E. McDonald wrote in a note to clients today.
“As long as Bank of America’s housing related losses don’t exceed $55 billion, twice Bernstein’s estimate, it should manage to boost Tier 1 capital to 8.5 percent by 2013 and avoid raising more, the analysts said. About 44 percent of Bank of America’s total lending is linked to housing, compared with 34 percent at its competitors, Bernstein’s McDonald said.
“The bank may need to raise capital in a share sale if housing losses wipe out earnings, Paul Miller, a bank analyst at FBR Capital Markets, said today in an Bloomberg Television interview with Betty Liu on ‘In the Loop.’ Ultimately, the company cobbled together by Moynihan’s predecessor, Kenneth D. Lewis, may be dismantled, Miller said.”
-- Dan Yeh
JUNE 10
What We're Reading: June 10
The comment period for proposed risk-retention rules and qualified residential mortgages (QRMs) related to the Dodd-Frank Act has been extended to Aug. 1. From the Mortgage Bankers Association:
"Federal banking agencies … issued an extension to a comment period on controversial proposed rules to implement credit risk retention requirements required by the Dodd-Frank Act. The comment period now ends August 1; the original deadline had been [today], June 10. The Mortgage Bankers Association, other industry trade groups and consumer advocacy groups had pressed the agencies to extend the comment deadline. MBA President and CEO David Stevens said additional time was necessary for lenders, servicers and other stakeholders to analyze the proposed rules' full scope and potential impact."
-- Dan Yeh
JUNE 9
What We're Reading: June 9
Housing and residential construction continue to drag on the U.S. economy, and mortgage credit is still tight, according Fed Chairman Ben Bernanke's speech at the International Monetary Conference in Atlanta. This was the same conference where JP Morgan Chase CEO Jamie Dimon asked Bernanke if excessive regulation was killing the economic recovery.
Bernanke:
"Virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like."
In related news, the latest Fed Beige Book release showed continued weakness in housing with no districts reporting increases in home prices, although sales activity did pick up in several districts.
"Residential real estate sales markets showed continued weakness in most Districts, while rental markets strengthened. Most Districts indicate that home prices have declined since the last report: Boston, Philadelphia, Richmond, Atlanta, Kansas City, and San Francisco all report some downward drift in selling prices, while reports from the New York and Cleveland Districts indicate that prices have been steady, on balance. No district indicates a general increase in home prices. Sales activity, though widely reported to be at low levels, picked up somewhat in the Philadelphia, Atlanta, Chicago, and Kansas City Districts. Dallas indicated that improved traffic has raised prospects of improved sales in the second half of 2011, and Boston observed signs that the market is stabilizing. Sales activity was characterized as mostly steady in the New York, Cleveland, Dallas and San Francisco Districts, but declining in the St. Louis and Minneapolis Districts. Those Districts reporting on the residential rental market--specifically, New York, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco — all indicate that conditions have strengthened. In terms of residential construction, activity has remained generally depressed, with a number of Districts reporting a large overhang of distressed properties. However, a number of Districts — New York, Cleveland, Atlanta, Chicago, and San Francisco — report improved prospects for development of multi-family rental properties."
-- Dan Yeh
JUNE 8
What We're Reading: June 8
Bloomberg reports Jamie Dimon, CEO of JP Morgan Chase, believes too much regulation has held back the banking system and economy — and that his bank will originate but no longer hold mortgages under proposed higher capital rules.
“JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon asked Federal Reserve Chairman Ben S. Bernanke whether regulators have gone too far by reining in the U.S. banking system and are slowing economic growth.
“Dimon asked whether the central banker has measured the cumulative effects of new capital requirements, mortgage standards and other rules imposed on the system in the wake of the U.S. financial crisis. Dimon, 55, spoke yesterday in a question-and-answer session after Bernanke addressed a conference of bankers in Atlanta.
“Dimon asked Bernanke if he ‘has a fear like I do’ that overzealous regulation ‘will be the reason it took so long that our banks, our credit, our businesses and most importantly job creation to start going again. Is this holding us back at this point?’
“Dimon’s points are valid, Bernanke said at the American Bankers Association’s International Monetary Conference. The central bank doesn’t have the quantitative tools to study the net impact of all the regulatory and market changes over the last three years, he said.”
Dimon's comments on holding mortgages under the proposed regulation were made at an earlier conference:
“Dimon told investors at a conference in New York on June 2 that his bank, the most profitable in the U.S., probably will not hold mortgages on its books under a plan to require the largest lenders to hold extra capital.
“JPMorgan won’t make ‘an adequate return’ on certain products under the proposed rules and will have to reduce portfolio assets, including mortgages, that require higher levels of capital, Dimon said.
“‘Why would we own mortgages if you can own them at 7 percent capital and I have to own them at 10 percent?’ Dimon said. The New York-based bank will still originate mortgages, ‘I just don’t own them,’ he said.”
-- Dan Yeh
JUNE 7
What We're Reading: June 7
Borrowers with second mortgages have higher rates and deeper levels of negative equity compared to borrowers without them, according to The Wall Street Journal [subscription required].
"Almost 40% of homeowners who took out second mortgages—extracting cash from their residences to cover everything from vacations to medical bills—are underwater on their loans, more than twice the rate of owners who didn't take out such loans.
"The finding, in a report to be released Tuesday by real-estate data firm CoreLogic Inc., illustrates the consequences of easy borrowing amid the housing boom's inflated prices. The report says 38% of borrowers who took cash out of their residences using home-equity loans are underwater, or owe more than their home is worth. By contrast, 18% of borrowers who don't have these loans were underwater.
"CoreLogic found that borrowers with second mortgages had deeper levels of negative equity—an average of $83,000 compared with $52,000—than borrowers without second mortgages. In many cases, borrowers withdrew cash from their properties using home-equity loans or lines of credit, a type of second mortgage. The CoreLogic report doesn't include cash-out refinancing, a common practice during the boom, where borrowers opted to extract cash while refinancing their first mortgage."
-- Dan Yeh
JUNE 7
New-Mortgage Equity Continues to Improve
In our June 3 post, we blogged that several consumer advocacy groups were concerned that the 20 percent proposed equity rule for qualified residential mortgages (QRMs) would have a lasting negative impact on minorities and the working class. With that in mind, we thought it would be good to look at equity levels on Scotsman Guide Loan Post.
The graph below shows average loan-to-value ratios (LTVs) by region during the past 17 quarters.
Three out of four regions — the Midwest being the exception — ended with average LTVs at or near all-time lows during the most recent quarter. The Northeast had the lowest average LTV at 59 percent, while the Midwest had the highest average LTV at 68 percent.
Although negative equity on existing homes and mortgages as been
hitting new highs recently, borrowers seeking new mortgages are at least entering the market with realistic equity expectations.
-- Dan Yeh
JUNE 6
What We're Reading: June 6
A Bank of America branch gets foreclosed on after incorrectly foreclosing on a Florida couple's home — which didn't have a mortgage — and failing to pay their legal fees, according to WinkNews.com.
"The foreclosure nightmare started when Warren and Maureen Nyerges paid cash for a home owned by Bank of American [sic] in the Golden Gate Estates. They never had a mortgage whatsoever. But, the bank fouled it up and wound up issuing a foreclosure through their attorney.
"The couple took their case to court and after a year and a half nightmare the foreclosure was dropped. A Collier County judge said Bank of America has to pay the couple's $2,534 legal fees for the error. After more than five months the bank still hadn't paid up. So, the homeowners' attorney did just what the bank would do to get their money, legally seize their assets."
-- Dan Yeh
JUNE 3
What We're Reading: June 3
The proposed 20 percent downpayment rule for Qualified Residential Mortgages (QRMs) would impact minorities and the working class the most and could create a class of long-term renters, according to Bloomberg.
"Minorities and the working class may find it harder to buy homes under a U.S. plan that would require larger down payments to qualify for lower-cost mortgages, according to lenders, consumer groups and lawmakers.
"Bankers and consumer advocates, often at odds on policy issues, united today to make the case for revising the government proposal and released data that they said shows the rule would deny loans to millions of borrowers while doing little to reduce defaults.
"The rule could lead to 'long-term rental entrapment' for 'large numbers' of Americans who would need at least a decade to save for a 20 percent down payment, said David Stevens, president of the Mortgage Bankers Association. It would take at least a decade for a family to save that much in Los Angeles, Philadelphia, Seattle, and Birmingham, Alabama, he said, citing U.S. and industry data on household incomes and home prices.
"The Heritage Foundation, in a May 31 letter to regulators, called the 20 percent down payment requirement 'utterly at odds with the realities of today's housing market,' where only 16 percent of first-time buyers in 2010 would have met the standards for a lower-cost qualified mortgage.
"The National Urban League said the plan would create a category of 'high-risk' borrowers formerly known as the responsible middle class."
-- Dan Yeh
JUNE 2
What We're Reading: June 2
The Miami downtown area is rebounding -- due primarily to renters moving into the area. New condo occupancy increased to 85 percent from 74 percent last year, according to The Wall Street Journal [subscription required].
“A February report by the Miami Downtown Development Authority found that 85% of new condo units, those built since 2003, were occupied, up from 74% in 2010 and 62% in 2009. The residential population of downtown—which, broadly defined, stretches from the emerging Wynwood arts neighborhood in the north to the gritty CBD to the flashier Brickell financial district in the south—now numbers about 70,000, compared with 40,000 a decade ago. Another 10,000 people are expected to move in by 2014, according to the Development Authority.
“Ambitious new projects are on the way. In April, Hong Kong-based Swire Properties unveiled plans for Brickell CitiCentre, a five-million-square-foot development with a hotel, residences, office towers and retail outlets. Construction is expected to begin next year. Last week, Genting Malaysia Berhad, of Kuala Lumpur, Malaysia, announced a deal to buy 14 acres of waterfront property where the Miami Herald building currently sits. The company plans to build a complex with restaurants, entertainment venues and, if the Florida legislature authorizes it, casino gambling.”
-- Dan Yeh
JUNE 1
Welcome new lenders
We would like to welcome the following new residential lenders to Scotsman Guide for our June online update. [Brackets denote which matrix(es) you can find the advertiser’s programs in.]
-- Dan Yeh
JUNE 1
Unemployment Driving Cash-Outs?
In our May 27 post, we saw pending home sales slowing because of uncertainty about the economy and higher gas prices. With that backdrop in mind, let’s take a look at loan purposes and FICO scores on Scotsman Guide Loan Post.
The graph below shows average FICO scores by loan purposes for the past 17 quarters:
Although sales have been slowing, average FICO scores for purchases and rate-and-term refinances have continued to improve, hitting 708 and 736, respectively, during the most recent quarter. In other words: Fewer people are buying, but those who are have healthier credit profiles.
Average FICO scores for cash-out refinances, on the other hand, have been declining since hitting a peak during the second quarter of 2010. FICOs for the category dropped 22 points from the fourth quarter of 2010 to the first quarter of 2011 and are down 11 points from a year ago. This could reflect unemployed workers attempting to draw equity from their homes. With first quarter
gross domestic product coming in below estimates, we'll keep our eye on this development.
-- Dan Yeh
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