— Aesop: Was a creator of fables in Ancient Greece
Timothy Geithner: Wind down Fannie Mae and Freddie Mac. Treasury Secretary Timothy Geithner told Congress yesterday that they must proceed with housing finance reform legislation, including winding down of Fannie Mae and Freddie Mac, within the next two years or else risk another financial crisis. “The administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit,” Geithner said in his prepared opening statement. “We believe the government’s primary role should be limited to several key responsibilities: consumer protection and robust oversight; targeted assistance for low- and moderate-income homeowners and renters; and a targeted capacity to support market stability and crisis response.”
Values are going up! At least farmland values – they have doubled, on average, in the last 10 years! Given all the thousands of banks that lend on farm land. The FDIC will host a half-day symposium to discuss farmland value issues, titled “Don’t Bet the Farm: Assessing the Boom in U.S. Farmland Prices,” on March 10th in Virginia. The worry is, of course, about a farmland bubble.
While we are chatting about the FDIC, commercial banks and savings institutions insured by it reported an aggregate profit of $21.7 billion in the fourth quarter of 2010, a $23.5 billion improvement from the $1.8 billion net loss the industry reported in the fourth quarter of 2009. It is the sixth consecutive quarter that earnings registered a year-over-year increase, and had four straight quarters of positive earnings.” Apparently 62% of all institutions reported improvements in their quarterly net income from a year ago. Note that as has been the case in each of the past five quarters, reductions in provisions for loan losses were responsible for most of the year-over-year improvement in earnings. You can see the numbers for yourself at FDICShiningStars
Here is a list you don’t want to be on: the FDIC’s orders of administrative enforcement actions taken against banks and individuals in January. The FDIC processed a total of 61 matters in January, with 24 consent orders, 4 removal and prohibition orders, 20 civil money penalties, 2 prompt corrective actions, 8 orders terminating consent orders and orders to cease and desist, and 3 orders terminating supervisory prompt corrective action directive. Visit the FDIC’s Web page at InTroublewiththeFDIC
Whether it is too much hassle to obtain a loan, or no one likes rates, buying with cash on the courthouse steps, or the expected rate of return on real estate is better than the 0% at the bank, about 31% of California home sales were paid for with cash in January. DataQuick points out that it beats December’s number of 28.9% and 27.8% share a year ago. That helps liquidity, but doesn’t directly help those in the mortgage biz.
The FHFA has a number of choices regarding HARP. “We see the following four broad choices for FHFA regarding HARP: Let the program expire, extend the program as is until the HAMP expiration date (December, 2012) with some minor operational adjustments, extend the program for a short period (6 months) and require lenders to demonstrate that they have taken action to improve the effectiveness of the program before they extend it for longer (another 1 year), or extend and expand the program as recommended by MBA.” Merrill evaluated each of the options and looked at the key drivers for each of these choices. “We think that the simple extension is the most likely scenario but from the policy perspective, we think that FHFA should use this opportunity to push for increased focus by lenders to improve effectiveness.”
Yesterday, Ben Bernanke said that he doesn’t see unemployment return to “normal” for years. He also sees “temporary inflation gain from commodity prices,” and that the “housing sector remains exceptionally weak.” “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” His comments did not shake up the markets too much, nor did the economic news that came out. Construction Spending dropped .7%, and the ISM Manufacturing number came out at “61.4%” which was as expected and up for 19 months in a row. But unrest is still very real – gold is up near record highs, and oil prices continue upward – and that sent stocks down while fixed-income prices moved back to unchanged during the day. The 10-yr closed out at 3.41% and MBS prices finished Tuesday at Monday’s levels.
This morning we had the MBA index show a decrease of 6.5% , with refi’s down 6.5% and purchases down 6.1%. The refinance share of mortgage activity stands at about 65%, and the ARM share of apps sits at 5.5%.
Today is a new day, although once again Chairman Bernanke will head to Capitol Hill to repeat his Semiannual Monetary Policy Report, this time to the House Financial Services Committee beginning at 9AM CST. The February ADP number was released, showing private payrolls were up 217,000. Last month, as has happened many times since ADP numbers started coming out, the numbers had little predictive ability for the official employment numbers that come out two days later. But the ADP numbers show that small business employment has increased every month for the last year, which does point to a trend. Later we’ll have the Fed’s Beige Book with economic anecdotes from around the 12 Districts in preparation for the March 15 FOMC meeting. The 10-yr’s yield is about 3.44% and MBS prices are down about .125.
FOR BUYERS: THE FINANCIAL OPPORTUNITY OF A LIFETIME?
We often point out that a buyer should be more concerned about the COST of a home rather than the PRICE. Price obviously is a component of cost. However, unless you buy all-cash, you must also be concerned about the financing of the purchase. The price and the financing together determine the cost of a home. Today, we want to look at only the financing piece.
An opportunity exists today because of recent government involvement; an opportunity that may never again be available in our lifetimes. There has been much discussion about what role the federal government should have in supporting homeownership. We will leave our opinions on the debate for another time. However, we want to alert you to two advantages available to a purchaser today that may disappear in the future:
Historically low interest rates
The ability to lock in these rates for thirty years
Because of the financial crisis, the government stepped in and instituted a series of programs which pushed mortgage interest rates to historic lows. If we look at 30 year mortgage interest rates before and after government intervention we see the impact these programs had.
According to Freddie Mac, from 2006 to the start of the financial crisis (the fall of 2008), the average rate was 6.29%. Since then, the average rate has been 4.92%.
A purchaser can still get a 30 year-fixed-rate-mortgage at approximately 5%. However, interest rates this low may soon disappear. The government has questioned its role in supporting homeownership. In the administration’s REFORMING AMERICA’S HOUSING FINANCE MARKET: A REPORT TO CONGRESS they are very strong in voicing their thoughts on this issue:
…our plan also
dramatically transforms the role of government in the housing market. In the past, the government’s financial and tax policies encouraged housing purchases and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market.
Going forward, the government’s primary role should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response…
Under our plan, private markets…will be the primary source of mortgage credit and bear the burden for losses.
What are the probable results of this decision?
“The (government) currently provides 95% of housing finance in the U.S.; any reductions of their involvement in supporting mortgages mean
interest rates will have to go up to induce private lending.”
AnnaMaria Andriotis, writer for SmartMoney:
“In the proposals were changes that will mean more expensive mortgages, with higher fees and, probably, higher interest rates, larger down payments and, in the near term, fewer lenders to choose from.”
The day of a 5% rate seem to be coming to an end.
Locking in a rate for thirty years
We must also realize that having the ability to lock-in a rate for 30 years may soon be a thing of the past.
There are a growing number of people who think that our mortgage industry should imitate those of other industrial countries around the world. If we do start limiting government support for the mortgage process, the 30-year-fixed-rate mortgage may disappear. Other countries, like Canada, only allow a purchaser to lock in a rate for a five year term. After that, the borrower must renegotiate a new mortgage at current rates. Could that happen here? Mark Zandi, Chief Economist of Moody’s Economics.com addressing the administration’s recent report:
“A private system would likely mean the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing finance. A privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate mortgages. Based on the experience overseas, the fixed-rate share in the U.S. would decline to an average of between 10% and 20% of the mortgage market compared with a historical average of closer to 75%.”
The COST of a home is dramatically impacted by the mortgage component. Today, we can get a 5% mortgage and lock it in at 5% for the next thirty years!! Both of these opportunities may disappear in the future. You should take this into consideration if you’re looking to purchase a home.
CONSUMER GROUP DEFENDS LOW DOWN PAYMENTS
Full underwriting and reasonable debt-to-income ratios are a better way to “get back to basics” in mortgage lending than requiring homeowners to make down payments of 10 to 20 percent, the Center for Responsible Lending argues in a policy brief.
The Obama administration’s proposal to shrink Fannie Mae and Freddie Mac’s role in mortgage markets calls for higher down payment minimums heading toward 10 percent. Lawmakers are drawing up their own plans that could be even more drastic.
While the Federal Housing Administration’s 3.5 percent minimum down payment requirements remain in effect for now, underwriting standards have been tightened and premiums raised in an effort to reduce FHA’s market share. Some lawmakers advocate raising FHA down payment minimums to 5 percent.
Mandating larger down payments would harm the economy, housing markets and middle class families, Center for Responsible Lending lobbyist Susanna Montezemolo argues in a policy brief.
Low down payments have been a “significant and safe part of the mortgage finance system for decades,” Montezemolo says, with more than 27 million mortgages taken out between 1990 and 2009 with down payments of less than 20 percent.
That number — which excludes FHA and VA loans — represents nearly a quarter of loans purchased by Fannie Mae and Freddie Mac during that period, and 13 percent of all mortgage originations.
Those loans generally performed well, producing limited losses for lenders, investors and taxpayers, while expanding the middle class, Montezemolo maintains. It was risky loan terms and weak underwriting standards that drove record defaults in subprime lending, she argues.
If homebuyers are required to put 10 to 20 percent down when they take out a mortgage, that will shrink the pool of eligible homebuyers a lot, with only marginal improvements in loan performance, Montezemolo writes.
Crunching the numbers, she figures it will take a family that saves $3,000 a year 14 years to save up enough for a 20 percent down payment on a $172,100 home. That’s a savings rate of 7.5 percent a year for an average middle class family with about $50,000 in annaul income — well above the current 5.8 percent savings rate for U.S. households.
Homeownership “remains a key driver of personal and national economic prosperity, and will be fostered by responsible low down payment loans,” Montezemolo concludes. She suggests mortgage loan performance will improve under new origination standards in the Dodd-“Frank Wall Street Reform and Consumer Protection Act, without having to raise down payment requirements.
HUD RAMPS UP GRANTS TO FAIR HOUSING GROUPS
Federal housing regulators are boosting grant funding by 48 percent to fair housing groups and nonprofit agencies that educate the public about housing and lending discrimination laws and help catch violators.
The U.S. Department of Housing and Urban Development today awarded $40.8 million to 108 fair housing organizations and nonprofit agencies in 36 states and the District of Columbia through HUD’s Fair Housing Initiatives Program, up from $27.6 million last year.
The grants are used to investigate allegations of housing discrimination, educate the public and the housing industry about their rights and responsibilities under the Fair Housing Act, and to promote equal housing opportunities.
Most of the money — $28 million — is earmarked for private enforcement initiatives, in which fair housing organizations investigate alleged housing discrimination. This year’s award includes $10 million to fund activities that address lending discrimination, including mortgage rescue scams, HUD said.
Another $6.8 million in awards are to be used to educate the public and housing providers about fair housing laws, and $6 million was set aside for groups serving rural and immigrant populations lacking existing fair housing organizations.
HUD published a list of groups receiving grant funding on its website, including the National Community Reinvestment Coalition, the National Fair Housing Alliance, and San Francisco Consumer Action.