TEAM EMPOWERMENT MORTGAGE CHATTER: January 13: MBA Suite against US DOL, Feedback on reverse mortgages, Jobless Claims, Why Prices Will Soften in 1st half of 2011, CO-BRANDED STATEMENTS

“You may have a fresh start any moment you choose, for this thing that we call “failure” is not the falling down, but the staying down.” – Mary Pickford

Mortgage Bankers Association filed suit against the U.S. Department of Labor under the Administrative Procedure Act which seeks to “set aside DOL’s Wage and Hour Division Administrator’s Interpretation No. 2010-1 that reversed and withdrew a 2006 opinion letter from DOL to MBA. The 2006 opinion letter interpreted DOL’s own regulations and concluded that typical loan officers were exempt from Fair Labor Standards Act (FLSA) requirements for overtime payments under the ‘administrative exemption’.” If you’re interested, check out MBASuit

I mentioned a drop in reverse mortgage business yesterday, and received, “I think one of the major reasons there was such a huge drop in the reverse mortgage product is simply a lot of people use this product to stop the monthly payments on the existing mortgage(s). If there is not enough equity to pay off the existing loans, there is no reason for the reverse mortgage. The drop in reverse volume is not reflected in desire, but more the property values.”

Income verification verbiage from The Frank-Dodd legislation: “A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability, including expected income or assets, by reviewing the consumer’s Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.” Notice the “income or assets.”

MBS prices finished the day flat. Given that prices started off the day being worse than Tuesday’s close, some investors issued price improvements, especially after the Fed’s Beige Book showed continued economic weakness – especially in housing. One trader wrote, “We are going to look to get ‘long’ mortgages outright as we approach the long bond auction tomorrow with 3.5s and 4s our favorite coupons to express the long in.” Mortgage-backed security volume picked up a little, although it was still below “normal,” and the 10-yr, after hitting a high of 3.42% and the auction, closed the day around 3.36%.

Turning for a moment to the Fed’s latest Beige Book report on the recent state of the economy across the 12 districts, it generally was as expected. The report will be used for the next Fed meeting during the last week of January. There are signs of further expansion in the economy and even labor markets since the last report (which led stocks higher), but the real estate sector remained weak across all the Districts with a few reporting further weakness.

For today’s excitement, we’ve already had Jobless Claims, which were up 35k to 445k, continuing claims dropped, and the 4-week moving average was +5,500. December’s PPI came in at +1.1%, about as expected, and ex-food & energy it was +.2%. (Year-over-year this number is up 4%, relatively strong.) Lastly the Trade Balance figures came in at $38.3 billon. Later we have the $13 billion 30-yr auction. All of that has led to…not much. The 10-yr yield is still at 3.36% and MBS prices are roughly unchanged.

WHY PRICES WILL SOFTEN IN THE 1ST HALF OF 2011

The big question facing real estate in 2011 is which direction are home prices headed. We agree with most experts who believe prices will continue to soften for the first half of the year. Supply and demand will determine this. Let’s look at where real estate sits entering this year compared to the beginning of 2010.

Demand

1.) Last year, The Home Buyers Tax Credit was both extended to the end of April and expanded to include move-up buyers. This increased demand to some degree. However, most now believe that the tax credit simply dragged demand forward from later in the year. What took place was a surge in sales prior to the deadline and then a dramatic fall off after April. This year, there is no such tax credit in place to drive demand. It also seems that there is no political will to revisit a homebuyers’ tax credit at this time.

2.) Last year, the Fed‘s purchase of mortgage-backed-securities was extended to the end of March. That increased demand by guaranteeing low interest rates through the first quarter. And economic conditions forced interest rates to new lows even after the Fed backed off the purchases. There was a full six months of historically low rates to bolster demand. This year, interest rates are rising as we enter January and are projected to continue their upward climb. The National Association of Realtors, the Mortgage Bankers’Assoc and PMI are all calling for rates to continue to rise through the first half of 2011.

Supply

1.) Last year, the administration was taking the initial steps in implementing a comprehensive loan modification program. This program limited the number of foreclosures coming to the market at discounted prices. It also delayed the entrance to the market of many more distressed properties. According to the OCC and OTS Mortgage Metrics Report, we enter 2011 with “newly initiated home retention actions” down 32.4% from the same time last year. This year, the administration is touting their new ‘short sale’ program. This will increase the number of distressed properties hitting the market.

2.) Last year, state and local governments were declaring foreclosure moratoriums thereby limiting the number of foreclosures entering their markets. There doesn‘t seem to be the same political will to revisit moratoriums in 2011. This year, though the robo-signing mess will initially delay the entrance of some distressed properties to the market, most believe there will be a wave of discounted properties coming in the first quarter.

CNBC reported on economist Nouriel Roubini‘s predictions on this issue:

“There has been an effective moratorium on foreclosure,” said Roubini. And the beginning of the end of that moratorium means more housing supply is about to become available on the market. “The shadow inventory of not-yet-foreclosed homes”due to the moratorium” will surge in the next year,” Roubini says.

Bottom Line

Without the programs that encouraged buyers last year, we see a steady but slow growth in demand.

Without a strong commitment to limiting distressed properties, we believe that there will be a wave of discounted real estate entering the market in the form of ‘short sales‘ and foreclosures.

A limited increase in demand and a surge in supply will equate to lower home prices as we move into the year.