The Most Optimistic Housing Forecast Yet

October 13, 2012

From CNN/Money…

The long-battered housing market is finally starting to get back on its feet. But some experts believe it could soon become another housing boom. Signs of recovery have been evident in the recent pick ups in home prices, home sales and construction. Foreclosures are also down and the Federal Reserve has acted to push rates on home loans near record lows. But while many economists believe this emerging housing recovery will produce only slow and modest improvement in home prices, construction and jobs, others believe the rebound will be much stronger.

Barclays Capital put out a report recently forecasting that home prices, which fell by more than a third after the housing bubble burst in 2007, could be back to peak levels as soon as 2015. “In our view, the housing market had undergone a dramatic over-correction during the prior five years, resulting in pent-up demand for housing purchases that would spark a rapid rise in housing starts,” said Stephen Kim, an analyst with Barclays, in a note to clients. In addition to what Kim sees as a big rebound in building, he’s bullish on home prices, expecting rises of 5% to 7.5% a year. Construction is expected to be even stronger, with numerous experts forecasting home construction to grow by at least 20% a year for each of the next two years. Some believe building could be back near the pre-bubble average of about 1.5 million new homes a year by 2016, about double the 750,000 homes expected this year.

“We think the recovery is for real this time around,” said Rick Palacios, senior analyst with John Burns Real Estate Consulting. “If you look across the U.S. economy right now, there are only a handful of industries looking at 20-30% growth over the next 4-5 years, and housing is one of those.” The housing rebound can have a ripple effect that could help get the entire economy growing at a much stronger pace, which will add to more demand for housing. “That turn in the [housing] market is occurring now and it should become a boom by 2015. It will be powerful enough … to lift the entire U.S. economy,” said Roger Altman, chairman of Evercore Partners and former deputy Treasury secretary, in a column for the Financial Times. Altman said he expects housing will add 4 million jobs to the economy over the next five years, as pent-up demand for home purchases drives building and and home prices higher. Source: CNN/Money

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Why Are Mortgage Rates Not At 2.8%?

September 22, 2012

Imagine a 30-year mortgage on which you only pay 2.8 percent in interest a year.

Such a mortgage could already exist, but something in the banking system is holding it back. And right now, few agree on what that “something” is.

Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way.

Right now, borrowers are paying around 3.55 percent for a 30-year fixed rate mortgage that qualifies for a government guarantee of repayment. That’s down from 4.1 percent a year ago, and 5.06 percent three years ago.

Mortgage rates have declined as the Federal Reserve has bought trillions of dollars of bonds, a policy that aims to stimulate the economy. Last week, the Fed said it would make new purchases, focusing on bonds backed by mortgages.

The big question is whether those purchases lead to even lower mortgage rates, as the Fed chairman, Ben S. Bernanke, hopes.

But mortgage rates may not decline substantially from here. Something weird has happened. Pricing in the mortgage market appears to have gotten stuck. This can be seen in a crucial mortgage metric.

Banks make mortgages, but since the 2008 crisis, they have sold most of them into the bond market, attaching a government guarantee of repayment in the process.

The metric effectively encapsulates the size of the gain that banks make on those sales. In September 2011, banks were making mortgages with an interest rate of 4.1 percent. They were then selling those mortgages into the market in bonds that were trading with an interest rate, or yield, of 3.36 percent, according to a Bloomberg index.

The metric captures the difference between the bond and mortgage rates; in this case it was 0.74 percentage points. The bigger the “spread,” the bigger the financial gain for the banks selling the mortgages. That 0.74 percentage point “spread” was close to the 0.77 percentage point average since the end of 2007. Banks were taking roughly the same cut on the sales as they were in previous years.

But something strange has happened over the last 12 months. That spread has widened significantly, and is now more than 1.4 percentage points. The cause: bond yields have fallen a lot more than the mortgage rates banks are charging borrowers.

Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut.

So where might mortgage rates be if the old spread were maintained? At 2.83 percent – that’s the current bond yield plus the 0.75 percentage point spread that existed a year ago.

It’s important to examine why the tight relationship between bond yields and mortgage rates becomes unglued.

One explanation, mentioned in a Financial Times story on Sunday, is that the banks are overwhelmed by the demand for new mortgages and their pipeline has become backlogged. When demand outstrips supply for a product, it’s less likely that its price — in this case, the mortgage’s interest rate — will fall. There are in fact different versions of this theory.

One holds that bank mortgage operations are still poorly run, and therefore it’s no surprise they can’t handle an inundation of new applications. Another says banks deliberately keep rates from falling further as a way of controlling the flow of mortgage applications into their pipeline. If mortgages were offered at 2.8 percent, they wouldn’t be able to handle the business, so they ration through price, according to this theory.

Another backlog camp likes to point the finger at Fannie Mae and Freddie Mac, the government-controlled entities that actually guarantee the mortgages. The theory is that these two are demanding that borrowers fulfill overly strict conditions to get mortgages. Banks fear that if they don’t ensure compliance with these requirements, they’ll have to take mortgages back once they’ve sold them, a move that can saddle them with losses.

As a result, the banks have every incentive to slow things down to make sure mortgages are in full compliance, which can add to the backlog. Once this so-called put-back threat is decreased, or the banks get better at meeting requirements, supply should ease.

But there is a weakness to the backlog theories.

The banks have handled two huge waves of mortgage refinancing since the 2008 financial crisis. During those, the spread between mortgage and bond rates did increase. But not anywhere near as much as it has recently. And the spread has stayed wide for much longer this time around.

For instance, $1.84 trillion of mortgages were originated in 2009, a big year for refinancing, according to data from Inside Mortgage Finance, a trade publication. In that year, the average spread between bonds and loans was 0.89 percentage points. And the banking sector was in a far worse state, which would in theory make the backlog problem worse.

Today, the sector is in better shape, with more mortgage lenders back on their feet. But the spread between loans and bonds is considerably wider. In the last 12 months, when mortgage origination has been close to 2009 levels, it has averaged 1.1 percentage points. This suggests that it’s more than just a backlog problem

Some mortgage banks seem to be having little trouble adapting to the higher demand. U.S. Bancorp originated $21.7 billion of mortgages in the second quarter of this year, 168 percent more than in the second quarter of last year.

Wells Fargo is currently the nation’s biggest mortgage lender, originating 31 percent of all mortgages in the 12 months through the end of June. In a conference call with analysts in July, the bank’s executives seemed unfazed about the challenge of meeting mounting customer demand.

“We’ve ramped up our team members in mortgage to be able to move the pipeline through as quickly as possible,” said Timothy J. Sloan, Wells Fargo’s chief financial officer. He also said that the bank had increased its full time employees in consumer real estate by 19 percent in the prior 12 months. Not exactly the picture of a bank struggling to expand capacity.

But if banks are readily adding capacity, why aren’t mortgage rates falling further, closing the spread between bond yields? Perhaps a new equilibrium has descended on the market that favors the banks’ bottom lines.

The drop in rates draws in many more borrowers. The banks add more origination capacity, but not quite enough to bring the spread between bonds and loans back to its recent average.

The banks don’t care because mortgage revenue is ballooning. But it all means that the 2.8 percent mortgage may never materialize. Source: New York Times


House Passes FHA Bill To Shore Up Finances

September 12, 2012
From Mortgage Daily–This may portend further FHA mortgage insurance increases….

A near-unanimous vote was reached in favor of a bill that would increase liability for mortgagees that commit fraud or knowingly violated policies on government-insured mortgages. The legislation also addresses the solvency of the government’s home loan insurance fund.

H.R. 4264, the FHA Emergency Fiscal Solvency Act of 2012, was passed Tuesday by the House of Representatives by a vote of 402 to seven.

The bill would establish minimum annual mortgage insurance premiums of at least 0.55 percent of the remaining insured principal balance. In addition, it would give the Department of Housing and Urban Development the discretion to charge premiums up of up to 2.0/2.5 percent. The higher premiums would take effect six months after the bill is enacted.

The legislation also requires lenders that commit fraud to reimburse the Federal Housing Administration for related losses.

“If fraud or misrepresentation was involved in the origination or underwriting of the FHA mortgage, HUD could require the mortgagee to indemnify HUD regardless of when an insurance claim is paid,” an executive summary of the bill says.

Mortgagees would be required to indemnify FHA if HUD determines that lenders knew, or should have known, about a serious or material violation of FHA underwriting standards.

Government-insured mortgages that become 90 days delinquent during the first two years could trigger indemnification from lenders.

HUD will be required to set up an indemnification appeals process, issue regulations and report the number of fraudulent or improperly underwritten loans. The housing agency would also be required to report about how indemnification is impacting the FHA Mutual Mortgage Insurance Fund.

FHA lenders would have to report to HUD within 15 days of discovering that another lender is committing fraud or material misrepresentations.

The bill additionally expands HUD’s ability to terminate the authority of poorly performing mortgagees and requires performance tracking by servicer.

One section of the bill provides for the establishment of a chief risk officer for the Government National Mortgage Association, or Ginnie Mae.

Another section directs the HUD secretary to provide Congress an emergency capital plan for the restoration of the FHA’s fiscal solvency within 30 days of the bill’s enactment.

“The plan would provide a detailed explanation of how the FHA’s capital assets are monitored and tracked; how to ensure the FHA’s financial safety without borrowing funds from the U.S. Department of Treasury; and describe how, if necessary, the FHA would draw down funds from the Treasury,” the summary states.

Monthly reports to Congress are required as long as FHA’s capital reserve ratio is less than 2 percent.

Between 2013 and 2017, implementation of the bill is expected to cost $11 million.

“We are pleased that the bill passed by the House includes provisions that will allow FHA to continue its efforts to strengthen its enforcement capabilities in order to protect its insurance fund and American taxpayers,” Acting FHA Commissioner Carol Galante said in a statement. “We look forward to continuing to work with both chambers to enact final legislation to provide FHA with the tools it needs to build on the vital reforms implemented by this administration.”

 

New Short Sale Guidelines

September 8, 2012

The Federal Housing Finance Agency (FHFA) has announced that Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—are issuing new, clear guidelines to their servicers that will align and consolidate existing short sales programs into one standard short sale program. The streamlined program rules will enable lenders and servicers to quickly and easily qualify eligible borrowers for a short sale. The new guidelines, which go into effect Nov. 1, 2012, will permit a homeowner with a Fannie Mae or Freddie Mac loan to sell their home in a short sale even if they are current on their home loan if they have an eligible hardship. Servicers will be able to expedite processing a short sale for borrowers with hardships such as death of a borrower or co-borrower, divorce, disability or relocation for a job without any additional approval from Fannie Mae or Freddie Mac. “These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” said FHFA Acting Director Edward J. DeMarco. “The new standard short sale program will also provide relief to those underwater borrowers who need to relocate more than 50 miles for a job.” The FHFA’s new guidelines:

  • Offer a streamlined short sale approach for borrowers most in need: To move short sales forward expeditiously for those borrowers who have missed several payments, have low credit scores, and serious financial hardships the documentation required to demonstrate need has been reduced or eliminated.
  • Enable servicers to quickly and easily qualify certain borrowers who are current on their mortgages for short sales: Common reasons for borrower hardship are death, divorce, disability, and distant employment transfer or relocation. With the program changes, servicers will be permitted to process short sales for borrowers with these hardships without any additional approval from the GSEs, even if the borrowers are current on their payments. Borrowers will now qualify for a short sale if they need to relocate more than 50 miles from their home for a job transfer or new employment opportunity.
  • Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes: Servicers will evaluate borrowers for additional capacity to cover the shortfall between the outstanding loan balance and the property sales price as part of approving the short sale.
  • Offer special treatment for military personnel with Permanent Change of Station (PCS) orders: Service members who are being relocated will be automatically eligible for short sales, even if they are current on their existing mortgages, and will be under no obligation to contribute funds to cover the shortfall between the outstanding loan balance and the sales price on their homes.
  • Consolidate existing short sales programs into a single uniform program: Servicers will have more clear and consistent guidelines making it easier to process and execute short sales. 
  • Provide servicers and borrowers clarity on processing a short sale when a foreclosure sale is pending: The new guidance will clarify when a borrower must submit their application and a sales offer to be considered for a short sale, so that last minute communications and negotiations are handled in a uniform and fair manner.
  • Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale: Previously, second lien holders could slow down the short sale process by negotiating for higher amounts. Source: National Mortgage Professional

Lenders Required to File Suspicious Activity Reports

August 31, 2012

A government publication provides some guidance about when to file a Suspicious Activity Report. In the fiscal-year ended Sept. 30, 2011, U.S. financial institutions filed 93,508 SARs related to residential loan fraud, according to data from the Federal Bureau of Investigation. Filings jumped from 70,533 in fiscal-year 2010. SARs filed by federally insured financial institutions that suspect mortgage fraud involve lenders that are deceived into approving a loan, foreclosure rescue schemes and loan modification schemes — among other crimes. An advisory was issued Thursday by the Financial Crimes Enforcement Network to help financial institutions better assist law enforcement when filing SARs.

The advisory discussed several types of fraud involving lender deceit including occupancy fraud, income fraud, appraisal fraud and employment fraud. Identity theft, debt-elimination schemes and fraud involving reverse mortgages were also listed. SARs filings should include in the narrative section the Conference of State Bank Supervisors’ National Mortgage Licensing System and Registry unique identifier as required by Section 1503 of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. Branch, company and control person identifiers should also be included. FinCEN outlined a number of red flags that could indicate the need to for further due diligence and a decision whether to file a SAR–

  • Mortgage lenders should be concerned when a younger borrower is purchasing a primary residence in a senior citizen residential development.
  • Short-sale documents with language that says the property could be promptly resold could indicate an illegal flip. Lenders should also be wary of non-arms length relationships between short-sale buyers and sellers or previous fraudulent sale attempts in short-sale transactions. Low appraisal values in these situations should also be suspect.
  • Unlicensed real estate agents used in sales transactions are a red flag.
  • If a borrower or buyer has previously made misrepresentations to secure a loan or short sale, then the lender should be suspicious. In addition, if a previously rejected borrower resubmits an application with key details changed or modified from an individual to a company, fraud could be involved.
  • “This activity may identify the same person attempting to secure a loan fraudulently through a straw-borrower or non-existent person,” the guidance said.
  • Lenders should be concerned when borrowers or buyers provide incomplete file information and are reluctant or fail to provide more information.
  • Borrowers who claim to live in a property even though someone else resides there is a red flag.
  • Falsified certified checks, cashier’s check or non-cash check items that are drawn against a borrower’s account instead of from the account of a financial institution are a reason for concern.
  • One red flag is when a borrower submits invalid documents in order to cancel a mortgage obligation or pay off the balance. Lenders should also be wary when a single notary public or authorized representative prepares, signs and sends packages of nearly identical debt-elimination documents for multiple borrowers who have outstanding loan balances. In addition, suspicion should be aroused when the same notary public or authorized representative is either working with or receiving payments from an unusually high numbers of borrowers.
  • Borrowers who try to hide true asset values or structure currency deposits or withdrawals for modification applications could signal possible fraud.
  • Third parties that solicit distressed borrowers for foreclosure-prevention servicers, especially if the third parties claim to be affiliated with the government, raise the possibility of fraud. A request for advance fees from third-party affiliates for foreclosure-prevention services is also a red flag.

“These only indicate possible signs of fraudulent activity; they do not constitute an exhaustive list of common fraud schemes,” FinCEN stated. “No single red flag will be definitive proof of such activity and many apply to multiple fraud schemes.

“Instead, it is important to view any red flag(s) in the context of other indicators and facts, such as the specific role of the financial institution within mortgage loan-related transaction(s), as well as the institution’s knowledge of any associated fraud schemes.”

Sources: Mortgage Daily and FinCen


Fannie Mae Lowers LTVs For ARMs and Raises Min Credit Scores

August 25, 2012

Loan-to-value ratios on loans with adjustable rates are being reduced by Fannie Mae, while the ratios are being increased on some fixed-rate transactions. Fannie is also making changes to some of its credit score requirements. The maximum LTVs on adjustable-rate mortgages used for purchase or limited cashout transactions on one-unit primary residences have been lowered to 90 percent for both manually underwritten and Desktop Underwriter loans. The current maximum LTV is 97 percent through DU and 95 percent with manual underwriting. On the majority of other ARM transactions, LTVs are being cut by 10 percent, though the lowest LTV will be 60 percent.

The updates were outlined in Selling Guide Announcement SEL-2012-07 and are part of Fannie’s process of reviewing eligibility policies to determine that they are appropriate based on new data and loan performance. ARMs originated in conjunction with community seconds are no longer eligible for a 105 percent combined LTV ratio. But on fixed-rate mortgages used for purchase or limited cashout on two-unit primary residences, the Washington, D.C.-based company is increasing the LTV ratio from 80 percent to 85 percent. Fannie is also eliminating the lower LTV requirements for certain co-op share loans. The same goes for HomeStyle Renovations loans, though they will be capped at 95 percent. Four counties in Hawaii will see LTV ratios rise from 80 percent to 90 percent on fixed-rate loans in excess of $625,500.

The minimum credit score for manually underwritten ARM borrowers is being raised to 640 from 620, though some transactions will require even higher scores. Specific credit score requirements on high-balance loans are being eliminated from DU, and the standard DU minimum credit score will now apply. If at least one borrower on a loan is qualified solely on the basis of nontraditional credit, then the property must be a one-unit primary residence. The loan purpose in such cases is restricted to limited cashout or home purchase. Loans underwritten through DU 9.0 on or after Oct. 20 are subject to the new requirements, while manually underwritten loans with applications dates on or after Oct. 20 will need to be underwritten based on the new requirements. Source: Mortgage Daily


FHA Addresses Using Social Security Income to Qualify For a Mortgage

August 23, 2012

Documentation requirements have been released for Social Security income used to qualify borrowers for loans insured by the Federal Housing Administration. In addition, the minimum term that the income must continue has been addressed.

Questions from lenders about using Social Security income to qualify borrowers for FHA mortgages prompted the Department of Housing and Urban Development to issue clarification about the requirements in such situations.

Lenders can consider all types of earnings from the Social Security Administration when qualifying a borrower for an FHA loan as long as the income has been verified and is likely to continue for at least three years from the date of the application. According to Mortgagee Letter 12-15, eligible Social Security earnings includes supplemental security income, Social Security disability insurance and Social Security income. Income must be verified from either a federal tax return, the most recent bank statement or a proof of income letter.  In addition, the applicant’s Social Security Benefit Statement SSA-1099/1042S is acceptable.

The term of the income needs to be documented through the last notice of award letter or an equivalent document that establishes award benefits to the borrower. If the start date is in the future, then the borrower needs to have other income until the start date such as worker’s compensation or private insurance to qualify for the loan. When no expiration date is indicated, then the lender can use the Social Security income in the loan qualification without limitation. Social Security income that won’t continue for three years can only be considered as s compensating factor. If re-evaluation is pending of medical eligibility, the lender should not take that as an indication that benefit payments will stop.

“The lender should not request additional documentation from the borrower to demonstrate continuance of Social Security Administration income,” HUD stated. “Under no circumstance may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.”

The requirements are immediately effective. Source: Mortgage Daily