“One can have no smaller or greater mastery than mastery of oneself.” – Leonardo da Vinci
NEWS & HEADLINES
This Friday is Good Friday. But today is not so “good” for our government, as S&P cut its US debt rating to a “negative outlook” given the debt & debt ceiling debate, pushing markets this morning. Religious sentiment aside, Good Friday falls into one of those “pseudo-holiday” categories, since the markets are closed, but many originators are open. Most are taking locks, but can’t hedge them, or they sell the loans to investors at what could be termed “conservative” prices.
The FDIC recently updated its loss, income, and reserve ratio projections for the Deposit Insurance Fund (DIF) over the next several years. The projected cost of FDIC-insured institution failures for the five-year period from 2011 through 2015 is $21 billion, compared to estimated losses of $24 billion for banks that failed in 2010 alone. The future is never certain, but most believe that the fund should become positive this year (it has increased for four consecutive quarters) and reach 1.15 percent of estimated insured deposits in 2018. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the fund reserve ratio reach 1.35 percent by September 30, 2020.
Last October the FHA increased its MIP’s from 55 basis points to 90 basis points, and today is increasing the monthly fee to 115 basis points for higher LTV loans. The FHA insurance premiums are not “grandfathered in,” so a borrower who is currently paying low MIPs will have to pay higher MIPs if he/she were to refinance. This is a pretty clear example of what is bad for one group (originators, borrowers) is good for another (investors in existing Ginne Mae securities).
(Also note that starting today FHA systems will require mortgagees to certify at the time of requesting a case number that they have an active application for the borrower and property, and provide the borrower’s name and social security number for all new construction. And FHA systems will automatically cancel any uninsured case number where there has been no activity for 6 months since the last action except for loans where an appraisal update has been entered and/or loans where the UFMIP has been received.)
“Fannie Mae told mortgage servicers to halt a practice that could help them avoid repurchasing flawed home loans. In a notice to banks today, the company said servicers are prohibited from entering into loss-sharing or indemnification agreements with mortgage insurers. The deals help servicers avoid having their policies revoked.” FannieServicers
Looking back to Friday, agency mortgage-backed securities had a nice little improvement: .5-.625 depending on coupon. Volume picked up a little, which is nice to see in a rally, although for the week volumes were below normal. (We’ll probably see this in Wednesday’s MBA app index.) The 10-yr notes rallied by more than .5 in price, closing around 3.41%. Interestingly, this happened in spite of inflation coming in about as expected, Industrial Production increasing .8% in March and Capacity Utilization hitting 77.4% (the highest since August 2008), and the University of Michigan’s preliminary index of consumer sentiment moving up to 69.6, higher than forecast.
Unlike last week, this week will be shortened by a holiday and will be a light week for economic data. We have some type of housing index data today, unlikely to move rates. But tomorrow we’ll have the excitement of Housing Starts and Building Permits. Existing Home Sales will come out on Wednesday, and the Philly Fed numbers, Leading Economic Indicators, and another house price index are scheduled for Thursday. Mortgage markets will close early on Thursday and will be closed on Friday in observance of Good Friday. The 10-yr is down to 3.38%, and agency MBS prices are better by about .125.
BANKS GET FAILING GRADE IN FORECLOSURE HANDLING
Banks continue to receive backlash for their handling of a flood of foreclosures across the country. A new report released this week by federal regulators finds that banks failed to do a good job in handling foreclosures and sometimes evicted home owners when they clearly should not have.
The problems were “significant and pervasive” and added up to “a pattern of misconduct and negligence,” according to the Federal Reserve. The Fed says it soon plans to announce monetary penalties against mortgage servicers.
The report revealed several cases “in which foreclosures should not have proceeded due to an intervening event or condition,” such as families in bankruptcy or home owners who were eligible for a loan modification or even in the process of doing a loan modification.
The report also noted that banks had inadequate and poorly-trained staffs and improperly submitted paperwork to the courts.
In response to the report, several mortgage servicers signed a consent agreement this week, agreeing to changes that include new oversight procedures of foreclosures and reimbursing home owners who were wrongly foreclosed upon. One of the servicers signing the agreement, JPMorgan Chase, says it would add up to 3,000 employees to meet the new regulatory procedures.
“The banks are going to have to do substantial work, bear substantial expense, to fix the problem,” says John Walsh, the acting comptroller of the currency.
About two million households are in foreclosure, and several million home owners have already lost their home to foreclosure.
More Penalties Coming
The banks still face punishment and settlement talks with other agencies. The state attorneys general are conducting their own probe into shoddy foreclosure procedures and working with the Obama administration to overhaul the foreclosure process to prevent future abuses.
HOUSE FLIPPERS RETURN, STILL FINDING PROFITS
Banks continue to receive backlash for their handling of a flood of foreclosures across the country. A new report released this week by federal regulators finds that banks failed to do a good job in handling foreclosures and sometimes evicted home owners when they clearly should not have.
The problems were “significant and pervasive” and added up to “a pattern of misconduct and negligence,” according to the Federal Reserve. The Fed says it soon plans to announce monetary penalties against mortgage servicers.
The report revealed several cases “in which foreclosures should not have proceeded due to an intervening event or condition,” such as families in bankruptcy or home owners who were eligible for a loan modification or even in the process of doing a loan modification.
The report also noted that banks had inadequate and poorly-trained staffs and improperly submitted paperwork to the courts.
In response to the report, several mortgage servicers signed a consent agreement this week, agreeing to changes that include new oversight procedures of foreclosures and reimbursing home owners who were wrongly foreclosed upon. One of the servicers signing the agreement, JPMorgan Chase, says it would add up to 3,000 employees to meet the new regulatory procedures.
“The banks are going to have to do substantial work, bear substantial expense, to fix the problem,” says John Walsh, the acting comptroller of the currency.
About two million households are in foreclosure, and several million home owners have already lost their home to foreclosure.
More Penalties Coming
The banks still face punishment and settlement talks with other agencies. The state attorneys general are conducting their own probe into shoddy foreclosure procedures and working with the Obama administration to overhaul the foreclosure process to prevent future abuses.
IRS LOSES $513M TO TAX CREDIT CHEATERS
More investors are taking on the risk of flipping homes, despite falling home prices and sluggish real estate markets across the country. But investors say there are still profits to be made in the house flipping business.
Nearly 1 million homes were bought as investment properties in 2010, according to the National Association of REALTORS®, and a record number of buyers purchasing properties with cash currently are flooding the market.
Flipping homes for profit is easier in rising markets, but not many markets are reporting increases in home prices, analysts say. In Washington, D.C., Justin Konz of RestorationCapital says his clients are going through four of five properties a month and are making gross profit margins of 35 percent or higher.
Where to Find the Deals
Flippers mostly are finding their homes through foreclosures auctions, REOs, and short sales. They seek homes at rock-bottom prices that will have low fix-up costs, no more than about 5 percent or 10 percent of the purchase price.
In Florida, where investors are finding it more difficult to flip homes because of the drastic drop in prices and high inventories, flippers are targeting inner-city properties that are being sold at steep discounts. For example, some of houses are selling for $30,000 when they once sold for $200,000.
Perry Henderson, a real estate agent and investor in Austin, Texas, says the biggest opportunities in flipping are the “ugly” houses that have lingered on the market or “old houses that somebody’s grandma lived in for 40 years and didn’t do anything to. Now, she’s passed away and her family wants to sell quickly.”
Real estate investor Brian Fuller, who with partners buys and sells more than 200 properties a year in the San Diego area, says he’s drawn to the “biggest eyesore on the block.” He says they then – turn it into the best looking house there. We’re helping pull up values in the neighborhood.”
TIME FOR THE U.S. ECONOMY TO LIVE WITHIN ITS MEANS
Inflation fears this week abruptly gave way to concern for the economy, with long-term rates and stocks dipping accordingly. Overriding all financial news: The miraculous outbreak of an authentic effort to repair the nation’s finances.
One at a time: By the end of last week, inflation worrywarts had begun to expect Federal Reserve tightening this year. On Monday, Federal Reserve Board Vice Chairman Janet Yellen and New York Federal Reserve President Bill Dudley blew them up altogether. Fed tightening now is inconceivable.
Forecasters have called for 4 percent-plus U.S. Gross Domestic Product growth, but a crowd is elbowing for the exit, revising suddenly as low as 1.5 percent. March retail sales were soggy, a 0.4 percent gain and only 0.1 percent ex-gasoline.
New claims for unemployment insurance spiked 27,000 to 412,000 last week, the highest in two months. The March survey of small business, by the National Federation of Independent Business, retreated from all gains since last October — in sharp contradiction to the Fed’s Beige Book, brimming with happy-talk fairytales from inflation-hawk regional Fed presidents.
Aside from the ideal structures of taxation and spending priority, NCFRR has one crucial insight and discipline: We must settle on the size of government as measured by percent of GDP. We must no longer tolerate in ourselves the right’s perpetual dodge of taxation, starving revenue from necessary spending; nor can we tolerate the left’s perpetual burglary, committing future spending without revenue.
NCFRR suggests 21 percent of GDP, revenue and spending in approximate balance — 21 percent is the baseline for spending ever since WWII. I don’t care, give or take a couple of points. Go much lower and government will become a cold and pinched vision of Calvin Coolidge. Go much higher and we’ll be lost in bureaucratic bloat, inefficiency, and confiscatory redistribution.
Small imbalances are OK: deficits in the 1 to 2 percent range (each percent is about $150 billion). Today’s spending is 24 percent of GDP, in the early stages of unfunded entitlement explosion headed above 30 percent. Tax revenue today is 15 percent of GDP.
It’s a big hole. However, revenue has been suppressed about 3 percent by the Great Recession.
Obama’s proposal is harder to figure because his behavior has been so odd. He ignored the NCFRR report when released, then dismissed it in his State of the Union, then in February brought an as-is budget, and has since refused to engage the matter. Then on Wednesday, he delivered a hurried, no-detail proposal in a peculiarly timed 1:30 p.m. speech.
He had this key line: “If we truly believe in a progressive vision of our society, we have the obligation to prove that we can afford our commitments.”
No, sir. Not that way. That is the old, corrupt way. Henceforth we cannot make commitments until we have agreed on what we can afford.
The most important thing: There is going to be a deal. The electorate is exhausted with living beyond its means. To the consternation of financial hyenas now salivating at the prospect of U.S. default … ain’t gonna happen.
As markets process the news of many fewer new Treasurys ahead, great benefits from sacrifice will accrue.
QRM: THE OTHER SIDE OF THE ARGUEMENT
There is little doubt that the ease in which mortgage money was issued early in the last decade was one of the major reasons for the housing crash. What constitutes a “quality residential mortgage” (QRM) definitely should be redefined. However, several organizations see the newly suggested guidelines going too far.
The newly proposed QRM definition offered by the government addresses four main issues:
- Type of mortgages that would qualify
- The ratios between a purchaser’s income and their payment/overall debt
- The amount of down payment which should be required (20% is being proposed)
- The minimum FICO score for a borrower
The National Association of Realtors (NAR), the Center for Responsible Lending (CRL), the Mortgage Bankers Association (MBA), the National Association of Home Builders (NAHB), the Community Banking Mortgage Project and the Mortgage Insurance Companies of America (MICA) issued a white paper on the subject titled:Proposed QRM Harms Creditworthy Borrowers and Housing Recovery
The paper only challenges the potential down payment requirement (eventually the organizations will address the remaining three conditions in updates to this original white paper). Let’s look what the report says:
In the midst of a very fragile housing recovery, the government is throwing a devastating, unnecessary and very expensive wrench into the American dream. First time homebuyers will have to choose between higher rates today or a 9-14 year delay while they save up the necessary down payment…
High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates. The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.
Will Higher Down Payments Substantially Decrease Defaults?
The report actually studies the impact a higher down payment would have had on the default rates of loans written from 2002 through 2008. The report states:
They actually break it down:
…moving from a 5 percent to a 10 percent down payment on loans that already meet strong underwriting and product standards reduces the default experience by an average of only two- or three-tenths of one percent…Increasing the minimum down payment even further to 20 percent… (creates) small improvement in default performance of about eight-tenths of one percent on average.
Will Higher Down Payments Impact a Buyer’s Ability to Purchase?
The white paper looks at three separate areas the proposed QRM would impact:
- The reduction in eligible buyers caused by an increase in down payment
- The time it would take to save a 20% down payment
- The cost of financing for a non-qualified mortgage
1.) The reduction in eligible buyers caused by an increase in down payment
As it did when looking at defaults, the paper studies the impact a higher down payment would have had on buyer demand from 2002 through 2008. The breakdown:
…moving from a 5 percent to a 10 percent down payment on loans that already meet strong underwriting and product standards…would eliminate from 7 to 15 percent of borrowers from qualifying for a lower rate QRM loan. Increasing the minimum down payment even further to 20 percent, as proposed in the QRM rule, would amplify this disparity, knocking 17 to 28 percent of borrowers out of QRM eligibility.
2.) The time it would take to save a 20% down payment
This section of the report was eye-opening. Here is the time it would take a family to save for the newly suggested down payment.
Based on 2009 income and home price data, it would take almost 9 years for the typical American family to save enough money for a 10 percent down payment, and fully 14 years to save for a 20 percent down payment. A 20 percent down payment requirement for the QRM means that even the most creditworthy and diligent first-time homebuyer cannot qualify for the lowest rates and safest products in the market. Even 10 percent down payments create significant barriers for borrowers, especially in higher cost markets. This will significantly delay or deter aspirations for home ownership, or require first-time buyers to seek government-guaranteed loan programs or enter the non-QRM market, with higher interest rates and riskier product features.
3.) The cost of financing for a non-qualified mortgage
Remember, the QRM does not set mandatory requirements for ALL loans. What it does is define the loans that are deemed less risky. The less risky loans will not add additional costs to the banks issuing them. Loans that are not eligible for this category will still be written but at a greater expense to the purchaser to cover the increased costs to the banks. How much greater? According to the study:
(T)oday’s 5 percent market would become an 8 percent interest-rate market. While that estimate may be high, even a one-percentage point increase in interest rates could be devastating to a fragile housing market. According to estimates from the National Association of Home Builders, every 1 percentage point increase in mortgage rates (e.g., from 5 percent to 6 percent) means that 4 million households would no longer be able to qualify for the median-priced home. A 3-percentage point increase would price out over 12 million households.
Bottom Line
Loan qualifications needed to become more stringent than they were five years ago. There is no argument about that. However, the QRM seems to set a down payment requirement (20%) that has a minor impact on default rates yet a major impact on a purchaser’s ability to buy. We should look long and hard at this issue before deciding.
Coops Coffee 