The governor of West Virginia, Joe Manchin, announced the implementation of a groundbreaking mortgage program that includes a 30 year fixed rate mortgage with a ridiculously low mortgage rate of 3.5 percent.
In addition to this great mortgage rate the program also has zero percent down payment and closing assistance loans. The program, which is going to be run by the West Virginia Housing Development Fund, is funded by a $35 million dollar bond issue. Continue Reading…
The Mortgage Bankers Assocation (MBA) released their Weekly Mortgage Applications survey today. Mortgage application volume for the week ending July 23, 2010 decreased by 4.4 percent on a seasonally adjusted basis from the previous week. On an unadjusted basis applications decreased by 4.2 percent from one week earlier.
Not only does the index measure the total volume of applications but also the amount of purchasing and refinancing applications. The refinance index went down by 5.9 percent on a seasonally adjusted basis from a week ago. Applications for purchases actually increased by 2 percent from a week earlier, marking the highest point the survey has seen since the end of June. Continue Reading…
There is a great article in this morning’s New York Times by Harvard economics professor Edward Glaeser that discusses mortgage securitization, and it dovetails nicely with the topic of reforming Fannie Mae and Freddie Mac. As far as I can see, increased regulation of mortgage securitization should be part and parcel with Freddie and Fannie reform.
There are definite pros and cons to mortgage securities, at least as they are currently constituted. Bundling mortgages into securities helps to keep the cost of borrowing lower than it otherwise would be. It also protects smaller lenders from interest rate risk, and helps to more evenly distribute the risk of default.
There are, however, significant downsides to mortgage securitization. Glaeser cites a study that demonstrates that securitized mortgages are more likely to default. Securitization also makes it far more difficult to renegotiate with a borrower who defaults on a mortgage. Lastly, it appears that securitization allowed/enabled mortgage originators to take risks with underwriting standards they probably would not have taken had they been forced to keep the loan themselves.
Glaeser does a pretty good job of laying out both sides of the argument. From the article:
“The pre-2006, conventional narrative about the rise of securitization ran something like this. Once upon a time, local bankers — all of whom looked and talked like George Bailey — received deposits from their neighbors and then lent this money back to other neighbors who wanted to buy homes. These bankers had a lot of local knowledge, but they were vulnerable to swings in interest rates or the local housing market. We should never forget what happened to the savings and loan industry when it was ensnared by rising interest rates.”
As to the future of Freddie and Fannie, Glaeser says:
“That relatively positive view of securitization does not imply that the government should subsidize securitization, as it implicitly did through Fannie Mae and Freddie Mac. I didn’t like the Fannie and Freddie model before the bust, and I don’t like it any more today. If these agencies are to continue, they need to be far more conservative, charging high fees and taking few risks, and they need to be purely public agencies. Securitization has a role to play, but that role doesn’t merit vast public support.”
I think the last part is key, taxpayer dollars should not be used to encourage people to take significant risks knowing there are no real ramifications if they fail.
In the upcoming week a lot of data is coming out that could affect the housing market and the mortgage industry. Later today, information about new home sales is set to be released. It will be interesting to see how the expiration of the first-time homebuyer tax credit affected new home sales in June.
On Tuesday, the S&P Case-Shiller Home Price Index is going to be released. This is probably the most important indicator of home prices nationwide. Later on in the day, data on consumer confidence will be released. Both the Home Price Index and information on consumer confidence could play a big role in the direction mortgage rates move. Continue Reading…
There was a good article on Bloomberg.com yesterday by Jody Shenn that says that Fannie Mae and Freddie Mac may be able to force mortgage sellers to buy back $30 billion worth of bad loans they were sold before the real estate crash.
According to the article, the Federal Housing Finance Agency (FHFA) issued 64 subpoenas for underwriting and other documentation for mortgage securities purchased by Fannie Mae or Freddie Mac. FHFA is attempting to discover if there was shoddy underwriting or any other issues with the securities that could trigger buyback clauses in their sales contracts. When a mortgage held by Fannie or Freddie goes bad, they review the file and may force the seller to buy back the mortgages if documentation or underwriting is lacking.
In the first quarter of 2010, Fannie and Freddie forced lenders to buyback $3.1 billion worth of bad mortgage loans. A key quote from the article:
Almost 38 percent of subprime mortgages contained in non- agency bonds are at least 60 days late, in foreclosure or already have been turned into seized property, according to Bloomberg data, which doesn’t cover liquidated debt. For loans deemed Alt-A because they fell between prime and subprime in terms of expected defaults, the figure totals almost 29 percent.
“With what’s happened in the mortgage sector, we realize there was a great deal of fraud involved,” William Sidford, a senior vice president at AllianceBernstein LP, which manages almost $200 billion in fixed-income assets, said July 15 at the Securities Industry and Financial Markets Association conference in New York. “That being said, investors aren’t in a position to enforce the claims on those reps and warranties, rather we’re relying on the trustees and servicers to take action for us.”
Even if Fannie or Freddie are able to force some loan buybacks, it will likely be a drop in the bucket compared to the amount of money taxpayers have poured into the two companies. At this point the tab for the bailout of the two mortgage giants is close to $150 billion, and some believe the total will end up between $400 billion and $1 trillion before all is said and done. Even so, it is nice to know that some of the purveyors of bad mortgages may be forced to pay for some of the junk they effectively pawned off on U.S. taxpayers.
Those appear to be load-bearing 2x4s.
We have all known for a long time that foreclosed and distressed properties sell at a discount versus non-distressed homes for a variety of reasons. Some are in less than pristine condition, and others are priced to move because the lender wants to dump the property. Whatever the case may be, they also force sellers of non-distressed properties to drop their prices in order to compete with their low prices, and they cause home values to drop just by virtue of adding to the housing supply.
Today MITnews published an article by Peter Dizikes that quantifies the effect foreclosed homes have on other home prices. According to the article, one in 12 homes with mortgages under $1 million are in foreclosure. The article cites a study “Forced Sales and House Prices” by MIT researcher Parag Pathak, and Harvard researchers John Campbell and Stefano Giglio. After studying 20 years of data from the Massachusetts real estate market, the researchers determined that a foreclosure knocks 27 percent off of the value of a home.
The researchers found this to be in stark contrast to other types of forced sales, such as death or bankruptcy. Those types of forced sales only reduce the value of a home from 3 to 7 percent. The study determined that the difference in price is due to foreclosed homes typically being in poor shape compared to other homes on the market.
The study further finds that the value of a house near a foreclosure drops 1 percent if it is within 250 feet of the foreclosed house. I actually found this somewhat surprising, as I thought the decrease in value would be more than that.
This is the first study I have come across that scientifically quantifies the effect that foreclosure has on property values. While it really only confirms what we all already sort of knew, it is interesting nonetheless, and I recommend taking a look if you have the time.
More Americans filed initial claims for state unemployment benefit for the week ending July 17. The amount of first-time jobless claims rose by 37,000, to a seasonally adjusted 464,000. This is the largest increase in initial jobless claims since early this year in February. 
The jump in jobless claims is greater then the amount projected by economists who thought that claims would rise to 445,000. The increase in claims wipes out last weeks decline in claims for state unemployment benefits, which was partly attributed to companies like General Motors reporting less temporary layoffs than they normally would during this time of year.
Most analysts agree that the 4-week moving average is a better indicator of initial jobless claims. The average increased by 1,250 to 456,000. The number of people still receiving jobless benefits fell by 223,000 in the week ending July 10th, moving that figure to 4.49 million Americans. This does not include those who receive extended benefits as part of a federal program.
Chairman of the Federal Reserve, Ben Bernanke, spoke yesterday saying that it will take a “significant amount of time” to recover the amount of jobs lost between 2008 and 2009.
The report on jobless claims is just one of many indicators that have been released recently that indicate that economic recovery is beginning to slow down. So long as unemployment remains down consumer spending will be limited. It will be interesting to watch what affect this economic news has on mortgage rates and the housing industry as a whole.
POP!
Uh-oh, this could be bad. I mentioned a few months back that there is a property bubble in China that exists on a scale that dwarfs the housing bubble we experienced in this country. This story has not been too widely disseminated in the mainstream media, possibly because we are in the midst of our own economic issues in the United States, or possibly because the media is somewhat myopic in its choice of coverage, or possibly because data coming out of the People’s Republic is sketchy at best. In any case, a collapse of the Chinese residential property market would have potentially devastating effects on the global economy, the general availability of credit, and the U.S. economy in particular.
Today, Mish from Global Economic Trend Analysis has a lengthy post on the Chinese real estate bubble, which I absolutely recommend reading. Within the article, he shows evidence that Chinese property values have been propped up by a massive Ponzi scheme that government officials and real estate developers are complicit in. According to the article, the typical Beijing home goes for 22 times the average income level, prices which are clearly not sustainable.
Adding to the evidence that the bubble is about to burst, demand for homes is down substantially this year, often one of the first signs of a bursting bubble. The article goes on to cite sources that suggest Chinese banks could be left with hundreds of billions of dollars in bad mortgages if/when prices deflate. Due to the way news out of China is controlled by the government, it may be some time before we get a clearer picture of what exactly is going on with the Chinese housing market.
One thing that seems evident is that the Chinese economy has largely been sustaining global growth for much of the past year or more. China is also one of the largest holders of U.S. government debt. We have seen what the European sovereign debt crisis is doing to worldwide markets. A serious disruption to China’s economy will pose at least as great a threat to worldwide financial stability, and it is definitely something to be aware of moving forward.
If only we could identify phase 2....
Today President Obama is expected to sign the Financial Regulatory Reform bill into law, and while there are differing opinions on the possible effectiveness of the bill (personally I feel it is lame political grandstanding, full of sound and fury, signifying nothing), there is one area that is curiously untouched by the legislation, and that is housing financing. This is odd because certain practices in the mortgage industry undoubtedly contributed/partially caused the economic mess we are in now.
In today’s Washington Post, Zachary Goldfarb writes an article that speculates that the next area of reform the Obama Administration will focus on is the housing market. One illuminating quote from the article:
“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”
Bostic, who has published leading scholarship on homeownership, added that owning a home has a lot of value, but “what we’ve seen in the last four years is that there really is an underside to homeownership.”
The administration’s narrower view of who should own a home and what the government should to do to support them could have major implications for the economy as well as borrowers. Broadly, the administration may wind down some government backing for home loans, but increase the focus on affordable rentals.
The subject of how exactly to reform the housing market has been discussed quite a bit of late. Patrick Lawler, Chief Economist for the FHFA suggested that we might be wise to follow the Canadian model of mortgage lending, which eschews the long term fixed rate mortgage in favor of shorter-term adjustable mortgages.
None other than the interim head of Housing and Urban Development, Shaun Donovan suggested that Freddie Mac and Fannie Mae’s futures are in question after they were delisted from the New York Stock Exchange after their stock price fell below the minimum threshold for listing.
You may recall that Fannie Mae and Freddie Mac, who were seized by the Federal Government in 2008 in order to stabilize the housing market have been the recipients of $145 billion worth of taxpayer money thus far. Total costs for the bailout of the mortgage giants run between $400b-$1t dollars. Just for emphasis: $1,000,000,000,000! This backdoor bank bailout shows no signs of slowing down any time soon.
So while there is a consensus that something must be done to reform the country’s housing market, there is no consensus whatsoever as to what or how it should be done.
What do you think should be done? Let us know in the comments section below.
At this point, it is abundantly clear that we have far too much housing in this country. We are on pace for 3 million foreclosures in the United States this year alone, many of which will eventually make it to the market as real estate owned (REO) or short sales. These distressed properties drive down housing prices across the board, and it will likely take many years to get rid of all of them and for home values to recover.
Today an article from Austin Kilgore at REO Insider discusses a novel use for some of these distressed properties. Habitat for Humanity, using funds from the Department of Housing and Urban Development’s Neighborhood Stabilization Program plans to purchase REO homes and renovate them for use as low-income housing. Bank of America, Wells Fargo, GMAC, Fannie Mae, Freddie Mac, Chase, and Citigroup are among lenders that have agreed to allow Habitat for Humanity a chance to look through REO inventory before it goes on the wider market.
Typically Habitat for Humanity constructs affordable housing from scratch, but the large amount of distressed property on the market provides a great opportunity for the non-profit group to re-use existing structures while fighting blight, revitalizing neighborhoods, and providing affordable housing for people who need it.
While this program alone is certainly not going to solve to foreclosure problem or even make a sizable dent in the overhang of housing supply, it does demonstrate that with some outside the box thinking we may be able to create some positives from the foreclosure crisis.
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