“The best way to persuade people is with your ears—by listening to them.” — Dean Rusk: Was secretary of state under Kennedy and Johnson
“Well, at least Fannie & Freddie didn’t blame the brokers for the foreclosure mess!” Foreclosures
Anyone seeing this headline probably did a double take: “FDIC Announces Settlement With World’s Foremost Bank.” It turns out that it is in Sidney, Nebraska – but even the initials could turn some banking heads. “The FDIC announced a settlement with World’s Foremost Bank, Sidney, Nebraska (WFB), for alleged unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act as well as violations of the Truth in Lending Act. The FDIC also issued its list of state nonmember banks recently evaluated for compliance with the FDICCRA
How are short sales in California going? Well, according to Realtors, not so good: ShortSaleDelays
Yesterday’s results of the 3-year note auction were strong, but not strong enough to turn the market around. It drew the highest cover ratio (an indication of demand) since November, and the yield came in at about 1.30%. Slightly lower oil prices, and no market-moving news, the 10-year note lost about .375 (3.55%) while the Dow closed up over 120 points. Overall, MBS volume held below normal.
Today, as with every Wednesday, we saw the MBA’s Mortgage Application Survey for last week. Mortgage applications increased 15.5%, with the refi number up 17% and the purchase number up 12%. “An improving job market is beginning to pave the way for an improving housing market.” Refi’s accounted for about 65% of applications, and ARM loans are up to 6% of apps.
The day’s major highlight, outside of watching oil prices (above $105 per barrel), is the second leg of the latest round of Treasury auctions with $21 billion in 10-year notes at 1:00PM EST (tomorrow is the 30-yr auction). On Friday we have Retail Sales (Feb) and Michigan Sentiment (Mar). We find the 10-yr sitting around 3.53 and MBS prices sitting around unchanged.
HIRE A SMART DUCK
You can learn so much just by observing nature. I was having lunch at an outside table at a restaurant. It was impossible not to notice the ducks that gathered around the tables at the restaurant looking for food. The birds would wait for the people to leave and then they would flock to the tables looking for crumbs that were dropped to the floor. There were dozens of birds fighting over the scraps left behind. Every duck did the same thing; except for one.
This duck was different. Instead of waiting for the couples to leave, this duck would wait only until the food was originally delivered. At the moment the staff delivered the food, the duck would race to the table and look up at the people who were about to eat. Surprisingly, every person immediately took something from their plate and feed it to this duck. They fed the duck BEFORE they began to eat.
This duck didn’t settle for scraps and leftovers. He ate the best food off the plate. This duck didn’t fight with dozens of others. He was alone when the customers fed him.
It was truly amazing.
It made me think about the difference in real estate agents. Some will list a house, put it on MLS and hope for the best. Others will represent a buyer by simply checking the MLS to see if a suitable house is available for sale. They are like many agents in the marketplace. They are waiting for something to happen. Just like all those other ducks.
Then there are agents who will take it upon themselves to make something happen. They will diligently search for the buyer of their new listing. They will knock door-to-door looking for the perfect house for their new client who is dreaming of a new home for their family. They are like that special duck. They are not waiting for the leftovers.
In all of nature, some wait for things to happen and others make things happen. When hiring a real estate agent, look for the later. Donâ€™t settle for scraps.
MORE BORROWERS UNDERWATER: WHY WE SHOULD CARE
Falling home prices at the turn of the year pushed more borrowers into a negative equity position, meaning they owe more on their mortgages than their homes are worth.
In Q4, 23 percent of borrowers nationwide, or 11.1 million, were holding “underwater” mortgages; that’s a collective $750 billion of negative equity, according to the latest survey from CoreLogic (NYSE: clgx). That’s up from 22.5 percent, or 10.8 million, in Q3, again, thanks to falling home prices. To make matters worse, 2.4 million borrowers have less than 5 percent equity in their homes, deemed as “near-negative” equity.
Of course negative equity is concentrated in the hardest hit states: Nevada (65 percent), Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent). This as the consensus among housing watchers is that home prices will fall another 5 to 10 percent this year before slowly climbing back. That means negative equity will climb another ten percentage points.
So why should we care if the bulk of these underwater borrowers can still make their monthly mortgage payments? “Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties,” notes CoreLogic’s chief economist Mark Fleming. “Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish.”
Negative equity will slow the pace of home sales, no question, but it will also provide more problems for policymakers and state and federal regulators. Right now the mortgage market is at the mercy of a huge potential settlement with the state attorneys general and a whole bunch of feds, part of which will be a push for principal write down on troubled loans. With negative equity continuing to rise, the principal write down argument gains strength. I spoke with Missouri state AG Chris Koster yesterday at a conference in DC:
“I think principal write-down is the right way to go. Twenty to 25 billion dollars is a significant amount of money. The big question is are we talking about five banks, 15 banks who chip in on that fund? We don’t know the answer to that until we get through these negotiations, but we’re at the beginning of something serious that could be successful.”
But the head of the new Consumer Financial Protection Bureau, Elizabeth Warren, told a Reuters summit last week, with regards to punishing the banks with a monetary fund or fine, “I don’t think this is about a pound of flesh. I think that’s the wrong way to think about it.” She seems more interested in repairing the market than giving borrowers back equity, the loss of which may or may not have been their own doing.
My concern is that the more borrowers in a negative equity position, the more may intentionally default on their loans in order to try for principal write down. Yes, it’s the moral hazard, slippery slope argument, which I know appears to be losing some steam in Washington at least.
The negative equity issue also comes into play as regulators decide on risk retention rules and what exactly will qualify as a “Qualified Residential Mortgage.” QRM’s will be exempt from risk retention, so banks will not have to hold on to 5 percent of the risk on those loans before securitizing them. Rising negative equity bolsters the case for higher down payments for QRMs, especially as home prices continue to slide.
So yes, it’s just another new number of how a lot of borrowers look on paper. It doesn’t mean every underwater borrower will go delinquent on his or her mortgage. But it does add to risk, which this housing market does not like one bit.
‘SPREAD THE WORD’: HOME OWNERSHIP MATTERS
The day before the National Association of REALTORS® starts its Home Ownership Matters Bus Tour at the Chicago Flower & Garden Show, REALTORS® from the Chicago area gathered at NAR headquarters Friday for a town hall-style meeting. The topic: the state of home ownership in America today.
2011 NAR President-Elect Moe Veissi, in Chicago for the kick-off, encouraged REALTORS® attending the meeting to start talking with peers and clients about how much the U.S. economy is affected by home ownership. “We need to spread the word,” he told the 100 or so REALTORS® in the audience. Key messages he asked members to share:
- The housing market makes up $4 trillion, or about 15 percent, of the total U.S. gross domestic product.
- The housing industry has led the way out of six of the last eight U.S. recessions.
- For every two homes sold in the United States, one job is created.
Veissi asked members to join in the fight by voicing their concerns to their elected officials and by sharing these statistics publicly in their community. “Let’s help the American consumer understand how vital home ownership is to a healthy U.S. economy,” he said, “and how it helps to create the thing we need most right now, jobs.”
One of NAR’s key priorities is preventing any chipping away of the mortgage interest deduction as a means of helping to reduce the federal deficit. The push comes at a time when editorial boards of major newspapers such as The New York Times and The Washington Post have come out in favor of eliminating or reducing this tax benefit, which has been in place for almost 100 years.”Home owners already pay a majority of the taxes in this country,” Veissi said.
“The deduction didn’t cause the deficit problem,” agreed Chicago Association of REALTORS® President Mab Guzman, who joined Veissi for the question-and-answer session. Rather that taking away the deduction, the government needs to look internally at how it can streamline its operations, she said. “Small businesses have been making these kind of cuts for years.”
“It seems so illogical to take away the mortgage interest deduction,” said Joe Siciliano, CRS, after the meeting. “It’s creating jobs, which is important,” said Siciliano, managing broker of Coldwell Banker Residential Brokerage in Chicago. “But also, people bought their home years ago based on this tax benefit. I feel more strongly after hearing Moe speak today that we need to keep this benefit.”
Also top of mind for members was the need to fix the financial system and free up capital for qualified buyers. “The pendulum swung too far in one direction. Now, it’s swinging too far the other way,” Veissi said.
“If we had more financing options, we would sell more real estate today,” agreed Marki Lemons-Ryhal, ABR, CRS, a team leader with Keller Williams Realty in Chicago.
Veissi said NAR strongly favors reforming “rather than eliminating” the government-sponsored enterprises that enable the secondary mortgage market to operate. “The GSEs are broken but they’re fixable,” Veissi said. “Without them, we’ll lose the system that helped many of our parents and grandparents become homeowners. If you privatize the secondary mortgage market, you eliminate the concept of the 30-year mortgage,” he said.
The Home Ownership Matters bus tour is an opportunity for NAR to engage with American consumers on these issues. The bus travels from Chicago to Denver to Portland during the month of March, with a few intermediate stops along the way. The tour’s message is simple but powerful: Home ownership matters to individuals, to communities, and to the country. We hope to see a lot of you as we travel from city to city!
LET’S MAKE A DEAL TO HELP HOMEOWNERS
State attorneys general have launched talks with big banks accused of illegally foreclosing on homeowners with the hopes of reaching a deal that could result in more mortgage modifications, a top negotiator said Monday.
Iowa Attorney General Tom Miller has been leading a 50-state probe into mortgage servicers’ foreclosure practices since October.
The negotiations are between the attorneys general and federal agencies on one side, and the five largest mortgage servicers, which comprise 59% of the market.
The AGs did not indicate which banks they are negotiating with. However, the five largest servicers are Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500),), J.P. Morgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Ally Financial (GJM), according to Inside Mortgage Finance.
Miller refused to confirm reports that the talks have included a proposed $20 billion settlement or a requirement that servicers provide that amount in mortgage modifications to underwater homeowners.
But the final deal could have a major impact on the housing market, making it easier for homeowners to get mortgage modifications, including reductions in the principal amount they owe on their house in some cases, Miller said.
Federal and state officials gave the mortgage servicers a 27-page opening offer late last week but Miller refused to give details of the offer, citing the ongoing negotiations.
So far, the federal government has shied away from forcing banks to offer principal reductions. Instead, the priority has been to lower interest rate payments. And several congressional efforts to pass bills allowing bankruptcy judges to modify loans have all failed.
“We realize the result we come to can have an impact on the housing market and hence the economy,” said North Carolina Attorney General Roy Cooper. “That’s why all of us at the table want it to be a positive impact.”
However, Miller also added that the first offer made to the servicers lacked specifics on the two “most important” things: a proposed settlement figure and a proposal to make way for more mortgage modifications.
The big reason it was missing was because: “We struggled with it.”
“Whatever that proposal is, it’s going to have some limitations and leave some people out,” Miller said.
The government probe of mortgage servicers followed reports that the institutions were using shoddy documentation to improperly foreclose on homeowners. That news prompted several servicers to halt foreclosures for a short period of time.
The attorneys general launched the probe in October to review improper documentation and mortgage modifications.
The government agencies involved include states attorneys general, the Department of Justice, the Department of Housing and Urban Development, the Department of Treasury, the Federal Trade Commission as well as the new Consumer Financial Protection Bureau.