If you find yourself in an awkward situation and somebody else is there to witness it, you hope they aren’t too quick to judge. Ameriquest Mortgage Company thankfully went out of business but they left us with a series of funny ads to enjoy. If you find yourself in an awkward situation always try to find the humor.
A clear bifurcation of risk emerged between mortgaged homes purchased relatively recently versus those bought early in or prior to the pandemic: Black Knight
(Connie Kim) Home price corrections exposed a growing pocket of equity risk concentrated among purchase mortgages originated in 2022, Black Knight said in its latest mortgage monitor report. Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater.
Of the 450,000 underwater borrowers at the end of the third quarter, nearly 60% of the mortgages originated in the first nine months of 2022, according to Black Knight. In total, 5% of all mortgages originated so far this year are now marginally underwater, with another 20% in low equity positions.
The U.S. along with most other countries are moving towards implementation of central bank digital currencies. With this comes concerns related to privacy, political overreach, and discrimination.
This means your new next door neighbor and their extended family from, pick any third world country, might have gotten in with a zero down, zero interest, 100 year mortgage from the Fed to provide much needed diversification to your neighborhood and community.
(Arnie Aurellano) Rep. Ilhan Omar, D-Minnesota, has introduced the Rent and Mortgage Cancellation Act, a bill that would cancel rents and mortgage payments nationwide through the duration of the COVID-19 pandemic.
MICHAEL BROCHSTEIN/ECHOES WIRE/BARCROFT MEDIA/GETTY IMAGES
The legislation would constitute full payment forgiveness, with no accumulation of debt for renters or homeowners and no negative impact on their credit rating or rental history. Just as significantly, it would also establish relief funds for mortgage holders and landlords to cover the losses incurred from such payment cancellations.
(Christopher Whalen) Watching the talking heads pondering the next move in US interest rates, we are often amazed at the domestic perspective that dominates these discussions. Just as the Federal Open Market Committee never speaks about foreign anything when discussing interest rate policy, so too most observers largely ignore the offshore markets. Yen, dollar and euro LIBOR spreads are shown below.
Zoltan Pozsar, the influential money-market strategist at Credit Suisse (NYSE:CS), warns that the short-end of the US money markets are likely to be awash in cash over the end-of-year liquidity hump. Unlike the unpleasantness in 2018, for example, we may see instead a surfeit of lending as banks scramble for yield in a wasteland bereft of duration. Would that it were so.
The Pozsar view does not exactly fit well with the rising rate, end of the world scenario popular in some corners of the financial media ghetto. The 10-year note is certainly rising and with it the 30-year mortgage rate. Indeed, Pozsar reminds CS clients that yen/$ swaps are now yielding well-above Treasury yields for seven years. Hmm.
We believe short-term rates will remain low in the US, even as offshore demand for dollars soars. If the 10-year Treasury backs up much further, then we’d look for the FOMC to act on some calls by governors to buy longer duration securities. That is, a very direct and large scale increase in QE and particularly on the long end of the curve.
We expect that Chairman Powell knows that underneath the comfortable blanket of low interest rates lie some truly appalling credit problems ahead for the global economy, the US banking sector and also for private debt and equity investors. We expect the low interest rate environment to drive volumes in corporate debt and residential mortgages, even as other sectors like ABS languish and commercial real estate gets well and truly crushed.
“The pandemic is putting unprecedented stress on CMBS markets that even the Fed is having difficulty offsetting,” writes Ralph Delguidice at Pavilion Global Markets.
“Limited reserves are being exhausted even as rent collection and occupancy levels remain serious issues… Bondholders expecting cash are getting keys instead, and in our view, ratings downgrades and significant losses are now only a formality.”
We noted several months ago that the resolution of the credit collapse in commercial mortgage backed securities or CMBS will be very different from when a bank owns the mortgage. As we discussed with one banker this week over breakfast in Midtown Manhattan, holding the mortgage and even some equity in a prime property allows for time to recover value.
With CMBS, the “AAA” tranche is first in line, thus the seniors have no incentive to make nice with the subordinate investors. The deals will liquidate, the property will be sold and the junior bond investors will take 100% losses. But as Delguidice and others note with increasing frequency, this time around the “AAA” investors are getting hit too. More to come.
Meanwhile, over in the relative calm of the agency collateral markets, large, yield hungry money center banks led by Wells Fargo & Co are deploying liquidity to buy billions of dollars in delinquent government loans out of MBS pools.
The bank buys the asset and gives the investor par, with a smidgen of interest. Market now has more cash, but less cash than it had before buying the mortgage bond in the first place. Why? Because it likely took a loss on the transaction. Buy at 109. Prepayment at par six months later. You get the idea.
In fact, if you look at the Treasury yield curve, rates are basically lying flat along the bottom of the chart out to 48 months. Why? Because this nice fellow named Fed Chairman Jerome Powell, along with many other buyers, are gobbling up the available supply of risk free assets inside of five years.
Spreads on everything from junk bonds to agency mortgage passthroughs are contracting, suggesting that the private bid for paper remains strong. When you look at the fact that implied valuations for new production MBS and mortgage servicing rights (MSR) have been rising since July, this even though prepayment rates are astronomical, certainly implies that there is a great deal of cash sitting on the sidelines.
Remember that the price of an MSR is not just about cash flows and prepayments, but it’s also about default rates and the relationship with the consumer. We described in our last missive for The IRA Premium Service (“The Bear Case for Mortgage Lenders”), that a rising rate environment could generate catastrophic losses for residential lenders, particularly in the government loan market. We write:
“For both investors and risk professionals operating in the secondary mortgage market, the next several years contain both great opportunities and considerable risks.We look for the top lenders and servicers to survive the coming winter of default resolution that must inevitably follow a period of low interest rates by the FOMC.The result of the inevitable consolidation will be fewer, larger IMBs.”
Don’t get distracted by the rising rate song from the Street. We don’t look for short or medium term interest rates to rise in the near term or frankly for years. Agency 1.5% coupons “did not find a place in the latest Fed’s purchase schedule. It is possible (they) are included in the next update,” writes Nomura this week. This seems a pretty direct prediction of lower yields. But as one veteran mortgage operator cautions The IRA: “Not just yet.”
We don’t think that the Fed is going to take its foot off the short end of the curve anytime soon, in part because the system simply cannot withstand a sustained period of rising rates. In fact, we note that our friends at SitusAMC are adding 1.5% MBS coupons to forward rate models this month. But that does not necessarily mean that mortgage rates will fall any time soon.
We hear that the Fed of New York has bought a few 1.5s in recent days, but supply is sorely lacking. You see, the mortgage industry is not quite ready to print many new 1.5% MBS coupons and will not do so anytime soon. As the chart above suggests, mortgage rates are in fact rising. Why? Is not the FOMC in charge of the U.S mortgage market?
No, the market rules. Today you can make more money selling a new 1-4 family residential mortgage into a 2.5% coupon from Fannie, Freddie or Ginnie Mae at 105. You book a five point gain on sale and are therefore a hero. And a year from now, after the liquidity does in fact migrate down to 1.5s c/o the beneficence of the FOMC, you can again be a hero.
Specifically, you call up that same borrower and refinance the mortgage into a brand new 1.5% Fannie, Freddie or Ginnie Mae at 105. You take another five point gain on sale. Right? And who paid for this blessed optionality? The Bank of Japan, Peoples Bank of China, and PIMCO, among many other fortunate global investors.
These multinational holders of US mortgage bonds may not like negative returns on risk free American assets, but that’s life in the big city. And thankfully for Chairman Powell, it’s not his problem. Many years ago, a friend in the mortgage market said of loan repurchase demands from Fannie Mae: “What do you want from me?”
(Bloomberg) — Tension is rising in the messy fight over commercial rent payments.
With stores shuttered, struggling retailers are skipping rent and asking for concessions, while landlords are demanding payment and having their own tricky conversations with lenders.
There are no easy answers as officials ponder how to safely get the economy back open. So far this month, some mall owners and other retail landlords collected as little as 15% of what they were owed, according to one estimate. And it’s expected to get worse, with more than $20 billion in rent payments coming due in May.
“It’s all over the map what’s happening out there,” said Tom Mullaney, a managing director in restructuring at Jones Lang LaSalle Inc. “More and more defaults are coming in every single day.”
Companies across the U.S. — from small mom-and-pop operations to giant corporations — have missed April payments or sent out relief requests citing store closures because of the pandemic.
Landlords have been pitching rent deferment, saying tenants can make reduced payments now as long as they pay the balance at some point. Some businesses are pushing back on that option and asking for rent cuts even after stores are open again.
U.S. retail landlords typically collect more than $20 billion in rent each month, according to data from CoStar Group Inc.So far, April rent collection has ranged from 15% to 30% for landlords with higher concentrations of shuttered businesses, according to an estimate from brokerage firm Marcus & Millichap.
Landlords, who are facing their own debt defaults, are getting frustrated. Some are complaining that large corporations are using the crisis to skip out on rent. Others say they’re not responsible for bailing out tenants and that the federal government or insurance companies should cover the costs instead.
“The landlords are triaging the battlefield,” said Gene Spiegelman, vice chairman at Ripco Real Estate Corp. “The super powerful and strong are not going to get any help and the ones that’ll die anyways, landlords will say why would I help them?”
To be sure, some landlords and tenants are working out deals on a case-by-case basis. And some companies are paying rent for their stores. That includes AT&T Inc. and T-Mobile USA Inc.according to people familiar with the matter. J.C. Penney also said it paid for April.
Ross Stores Inc. and fitness chain Solidcore, meanwhile, are among those standing firm on requests for rent abatements and asking for additional concessions. Williams-Sonoma Inc. is another chain that has stopped paying rent, according to people familiar.
Ross has told landlords that after the shutdown ends their rent on some stores should be cut until sales rebound. Solidcore hasn’t agreed to rent deferral and said it likely won’t be able to pay the same rent as it was before pandemic.
“We’re not going to be bullied by the landlords during this time,” said Anne Mahlum, the fitness company’s founder and chief executive officer said. “We have some leverage here. What are they going to do, say get out and then have vacancy for months on end?”
The firm, which owns more than 1,700 properties, has seen requests for rent relief since the crisis started. But several of those tenants ended up paying, according to Hsieh.
One agreed to pay after getting loans from the government’s relief package, while another did so after being asked to provide financial information. A discount retailer and a company in the auto industry paid after Spirit refused to consider their rent deferral requests.
“If a tenant just says I’m not going to pay, fine, I’ll default you, I’m going to go to the courts, and you have 30 days to pay or quit,” Hsieh said. “I don’t want to be negative, but we own the building.”
Many landlords are rushing to work out deals with lenders to stave off their own defaults. Banks and insurance companies are negotiating deals on a case-by-case basis, but borrowers in commercial mortgage-backed securities have fewer options.
About 11% of U.S. CMBS retail property loan borrowers have been late on April payments so far, according to preliminary analysis by data firm Trepp. If that number holds up, $13 billion worth of CMBS loans could miss payments for the month.
“The banks are a little more fluid and often there’s recourse,” said Camille Renshaw, CEO brokerage firm B+E. “But many large properties have CMBS debt and when there’s a crisis, no one is there to pick up the phone to negotiate.”
It’s just not retail stores that are suffering. Office space is a ghost town thanks to the Wuhan (bat) virus outbreak. But with tools like Zoom, Webex, Microsoft Teams, GotoMeeting, Skype, etc., one wonders if the days of massive office building demand is over. Other than for socializing and monitoring employees (as Bill Lumbergh did in “Office Space.”)
The cascading failures that have been set into motion by this “coronavirus shutdown” are going to make the financial crisis of 2008 look like a Sunday picnic. As you will see below, it is being estimated that unemployment in the U.S. is already higher than it was at any point during the last recession. That means that millions of American workers no longer have paychecks coming in and won’t be able to pay their mortgages. On top of that, the CARES Act actually requires all financial institutions to allow borrowers with government-backed mortgages to defer payments for an extended period of time. Of course this is a recipe for disaster for mortgage lenders, and industry insiders are warning that we are literally on the verge of a “collapse” of the mortgage market.
Never before in our history have we seen a jump in unemployment like we just witnessed. If you doubt this, just check out this incredible chart.
Millions upon millions of American workers are now facing a future with virtually no job prospects for the foreseeable future, and former Fed Chair Janet Yellen believes that the unemployment rate in the U.S. is already up to about 13 percent…
Former Federal Reserve Chair Janet Yellen told CNBC on Monday the economy is in the throes of an “absolutely shocking” downturn that is not reflected yet in the current data.
If it were, she said, the unemployment rate probably would be as high as 13% while the overall economic contraction would be about 30%.
If Yellen’s estimate is accurate, that means that unemployment in this country is already significantly worse than it was at any point during the last recession.
As measures to slow the pandemic decimate jobs and threaten to plunge the economy into a deep recession, young adults such as Romero are disproportionately affected. An Axios-Harris survey conducted through March 30 showed that 31 percent of respondents ages 18 to 34 had either been laid off or put on temporary leave because of the outbreak, compared with 22 percent of those 35 to 49 and 15 percent of those 50 to 64.
As I have documented repeatedly over the past several years, most Americans were living paycheck to paycheck even during “the good times”, and so now that disaster has struck there will be millions upon millions of people that will not be able to pay their mortgages.
A broad coalition of mortgage and finance industry leaders on Saturday sent a plea to federal regulators, asking for desperately needed cash to keep the mortgage system running, as requests from borrowers for the federal mortgage forbearance program are pouring in at an alarming rate.
The Cares Act mandates that all borrowers with government-backed mortgages—about 62% of all first lien mortgages according to Urban Institute—be allowed to delay at least 90 days of monthly payments and possibly up to a year’s worth.
Needless to say, many in the mortgage industry are absolutely furious with the federal government for putting them into such a precarious position, and one industry insider is warning that we could soon see the “collapse” of the mortgage market…
“Throwing this out there without showing evidence of hardship was an outrageous move, outrageous,” said David Stevens, who headed the Federal Housing Administration during the subprime mortgage crisis and is a former CEO of the Mortgage Bankers Association.
“The administration made a huge mistake bringing moral hazard in and thrust extraordinary risk into the private sector that could collapse the mortgage market.”
Of course a lot of other industries are heading for immense pain as well.
At this point, even JPMorgan Chase CEO Jamie Dimon is admitting that the U.S. economy as a whole is plunging into a “bad recession”…
Jamie Dimon said the U.S. economy is headed for a “bad recession” in the wake of the coronavirus pandemic, but this time around his company is not going to need a bailout. Instead, JPMorgan Chase is ready to lend a hand to struggling consumers and small businesses.
“At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” Dimon, the CEO of JPMorgan Chase, said Monday in his annual letter to shareholders.
And the longer this coronavirus shutdown persists, the worse things will get for our economy.
Sunday on New York AM 970 radio’s “The Cats Round Table,” economist Stephen Moore weighed in on the potential impact of the coronavirus to the United States economy.
Moore warned the nation could be “facing a potential Great Depression scenario” if the United States stays on lock down much past the beginning of May, as well as an additional amount of deaths caused by the raised unemployment rate.
The good news is that the “shelter-in-place” orders all over the globe appear to be “flattening the curve” at least to a certain extent.
The bad news is that we could see another huge explosion of cases and deaths once all of the restrictions are lifted.
Unlike in the 2008 financial crisis when a glut of subprime debt, layered with trillions in CDOs and CDO squareds, sent home prices to stratospheric levels before everything crashed scarring an entire generation of home buyers, this time the housing sector is facing a far more conventional problem: the sudden and unpredictable inability of mortgage borrowers to make their scheduled monthly payments as the entire economy grinds to a halt due to the coronavirus pandemic.
And unfortunately this time the crisis will be far worse, because as Bloomberg reports mortgage lenders are preparing for the biggest wave of delinquencies in history. And unless the plan to buy time works – and as we reported earlier there is a distinct possibility the Treasury’s plan to provide much needed liquidity to America’s small businesses may be on the verge of collapse – an even worse crisis may be coming: mass foreclosures and mortgage market mayhem.
Borrowers who lost income from the coronavirus, which is already a skyrocketing number as the 10 million new jobless claims in the past two weeks attests, can ask to skip payments for as many as 180 days at a time on federally backed mortgages, and avoid penalties and a hit to their credit scores. But as Bloomberg notes, it’s not a payment holiday and eventually homeowners they’ll have to make it all up.
According to estimates by Moody’s Analytics chief economist Mark Zandi, as many as 30% of Americans with home loans – about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.
“This is an unprecedented event,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. She also points out another way the current crisis is different from the 2008 GFC: “The great financial crisis happened over a number of years. This is happening in a matter of months – a matter of weeks.”
Meanwhile lenders – like everyone else – are operating in the dark, with no way of predicting the scope or duration of the pandemic or the damage it will wreak on the economy. If the virus recedes soon and the economy roars back to life, then the plan will help borrowers get back on track quickly. But the greater the fallout, the harder and more expensive it will be to stave off repossessions.
“Nobody has any sense of how long this might last,” said Andrew Jakabovics, a former Department of Housing and Urban Development senior policy adviser who is now at Enterprise Community Partners, a nonprofit affordable housing group. “The forbearance program allows everybody to press pause on their current circumstances and take a deep breath. Then we can look at what the world might look like in six or 12 months from now and plan for that.”
But if the economic turmoil is long-lasting, the government will have to find a way to prevent foreclosures – which could mean forgiving some debt, said Tendayi Kapfidze, Chief Economist at LendingTree. And with the government now stuck in “bailout everyone mode”, the risk of allowing foreclosures to spiral is just too great because it would damage financial markets and that could reinfect the economy, he explained.
“I expect policy makers to do whatever they can to hold the line on a financial crisis,” Kapfidze said hinting at just a trace of a conflict of interest as his firm may well be next to fold if its borrowers declare a payment moratorium. “And that means preventing foreclosures by any means necessary.”
“I don’t know how I’m going to pay my mortgage and my condo dues and still be able to feed myself,” Habberstad said. “I just hope that, once things open up again, we who are impacted by Covid-19 are given consideration and sufficient time to bring all payments current without penalty and in a manner that does not bring us even more financial hardship.”
Borrowers must contact their lenders to get help and avoid black marks on their credit reports, according to provisions in the stimulus package passed by Congress last week. Bank of America said it has so far allowed 50,000 mortgage customers to defer payments. That includes loans that are not federally backed, so they aren’t covered by the government’s program.
Meanwhile, Treasury Secretary Steven Mnuchin has convened a task force to deal with the potential liquidity shortfall faced by mortgage servicers, which collect payments and are required to compensate bondholders even if homeowners miss them. The group was supposed to make recommendations by March 30.
“If a large percentage of the servicing book – let’s say 20-30% of clients you take care of – don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments,” QuickenChief Executive Officer Jay Farner said in an interview. But not Quicken, of course.
Quicken, which serves 1.8 million borrowers, and in 2018 surpassed Wells Fargo as the #1 mortgage lender in the US, has a strong enough balance sheet to serve its borrowers while paying holders of bonds backed by its mortgages, Farner said, although something tells us that in 6-8 weeks his view will change dramatically. Until then, the company plans to almost triple its call center workers by May to field the expected onslaught of borrowers seeking support, he said.
Ironically, as Bloomberg concludes, “if the pandemic has taught us anything, it’s how quickly everything can change. Just weeks ago, mortgage lenders were predicting the biggest spring in years for home sales and mortgage refinances.”
Habberstad, the bar manager, was staffing up for big crowds at the beer garden, which is across from National Park, home of the World Series champions. Then came coronavirus. Now, she’s dependent on her unemployment check of $440 a week.
“Everybody wants to work but we’re being asked not to for the sake of the greater good,” she said.
Update (1500ET): A top U.S. regulator is exploring whether to throw a lifeline to mortgage servicers stressed by the coronavirus pandemic by tapping a program meant to address natural disasters.
Bloomberg reports that, in order to prepare for an expected wave of missed payments as borrowers deal with the economic fallout from the virus, officials at Ginnie Mae are considering using relief programs most often activated in the wake of hurricanes, floods and other calamities, according to people familiar with the matter.
Mortgage-industry lobbyists unsuccessfully tried to get Congress to include some sort of liquidity facility for servicers in the stimulus bill. Still, many servicers expect the Treasury Department and the Federal Reserve to create a lifeline for servicers out of other money in the $2 trillion package.
Earlier this week,ZeroHedge highlighted the fact that numerous mortgage-related companies were facing considerable – and in some cases existential – crises in their day-to-day operations amid margin calls, illiquidity, and a drying up of demand for non-agency products thanks to The Fed’s intervention.
First, its was AG Mortgage Investment Trust which last Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. Then, on Monday it was first Invesco, then ED&F Man Capital, and then the mortgage mayhem took down MFA Financial, which stated “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”
And now that mortgage-mayhem has impacted one of the largest U.S. mortgage firms catering to riskier borrowers.
Earlier in the week, we mentioned Angel Oak Mortgage Solutions – which specializes in so-called non-qualified mortgages that can’t be sold to Fannie Mae or Freddie Mac – pointing out that the company would pause all originations of loans for two weeks “due to the constant shifts and the inability to appropriately evaluate credit risk.”
And now Sreeni Prabhu, co-chief executive officer of the firm’s parent, Angel Oak Cos., is slashing 70% of the comany’s workforce (almost 200 of its 275 employees).
“The world has dramatically changed,” Prabhu said.
“We have to slow down and re-underwrite in the new world that we’re in. That’s going to take some time.”
Bloomberg reports that Angel Oak is primarily known for its riskier lending arm, which is one of the leaders in funding non-qualified mortgages. Such loans include those made to borrowers who verify their incomes with bank statements instead of tax returns and others who may have recently filed for bankruptcy or had a previous foreclosure that hurt their credit scores.
Angel Oak Mortgage Solutions funded some $3.3 billion of non-QM loans in 2019, making it one of the biggest lenders in the space. In January, Angel Oak’s mortgage units said they planned to fund more than $8 billion of home loans in 2020, but the total is now likely to be perhaps a quarter of that, Prabhu said.
The coronavirus pandemic has brought non-QM lending to a virtual standstill industrywide. Many non-QM borrowers are self-employed, making them among the hardest hit by a broad slowdown in business activity.
Add this halting of originations to the margin calls of the fund side, and it all sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
(ZeroHedge) We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields…
At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning.
Well, they are not alone.
As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government).
And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls.
Flagstar Bancorp,one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans.
One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”
Things escalated over the weekend, according to Bloomberg, when some firms rushed to raise cash by requesting offers for their bonds backed by home loans.
“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”
And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter.
The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public.
ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said.
As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.
It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website.
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
“The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department.
“But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.”
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
(John Rubino) There are trillions of dollars of bonds in the world with negative yields – a fact with which future historians will find baffling.
Copenhagen Mint Images/Getty Images
Until now those negative yields have been limited to the safest types of bonds issued by governments and major corporations. But this week a new category of negative-yielding paper joined the party: mortgage-backed bonds.
(Investing.com) – At the biggest mortgage bank in the world’s largest covered-bond market, a banker took a few steps away from his desk this week to make sure his eyes weren’t deceiving him.
As mortgage-bond refinancing auctions came to a close in Denmark, it was clear that homeowners in the country were about to get negative interest rates on their loans for all maturities through to five years, representing multiple all-time lows for borrowing costs.
“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry.
For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.
The record-low mortgage rates, which don’t take into account the fees that homeowners pay their banks, are the latest reflection of the global shift in the monetary environment as central banks delay plans to remove stimulus amid concerns about economic growth.
Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years. That’s considerably less than the U.S. government.
The spread of negative yields to mortgage-backed bonds is both inevitable and ominous. Inevitable because the current amount of negative-yielding debt has not ignited the kind of rip-roaring boom that overindebted countries think they need, which, since interest rates are just about their only remaining stimulus tool, requires them to find other kinds of debt to push into negative territory. Ominous because, as the world discovered in the 2000s, mortgages are a cyclical instrument, doing well in good times and defaulting spectacularly in bad. Giving bonds based on this kind of paper a negative yield appears to guarantee massive losses in the next housing bust.
Meanwhile, this is year ten of an expansion – which means the next recession is coming fairly soon. During recessions, the US Fed, for instance, tends to cut short-term rates by about 5 percentage points to counter the slowdown in growth.
… this imminent slide in interest rates will turn the rest of the global financial system Danish, giving us bank accounts and bond funds that charge rather than pay, and very possibly mortgages that pay rather than charge.
Anyone who claims to know how this turns out is delusional.
“A Crack in The Foundation?” Part 2: Three Decades of Red Flags — Mortgage Policy & Praxis, 1970-1999
Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.
Part 2 begins at the start of the 1970s and follows the uneasy path of government policy and economic turmoil as we creep towards the end of the century. (Missed Part 1?Read it here). This section will follow the astronomical growth in the secondary market, the mounting government pressure put on Fannie and Freddie to increase their offerings to lower- and moderate-income borrowers, as well as a widespread shift towards deregulation in the market that (spoiler alert) will prove to have disastrous consequences as the new millennium begins.
“A Crack in The Foundation?” Part 1: Fannie & Friends — The Evolution of Mortgage Policy from 1930-1960
Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.
Part I starts at the turn of the 20th century and traces the establishment of the Federal Housing Administration (FHA), as well as the birth of Fannie and Ginnie, to look at the inception of the modern mortgage and its impact on home ownership.
Mortgage rates have been dropping since November, yet mortgage purchase applications dropped in for the latest week. Very likely this was the displacement of purchase applications was simply the “start of the year” effect after a sleepy holiday season.
Ditto for mortgage refinancing applications. Despite mortgage rates declining. there was “start of the year” surge. But continued rate decreases have resulted in generally declining purchase applications after the surge.
On a long term view, purchase applications have remained sedate following the financial crisis and new regulations.
Mortgage refinancing applications remain in Death Valley.
Fannie Mae and Freddie Mac are bankrolling significantly fewer loans this year, reflecting the general slowdown in the residential U.S. mortgage market.
In the nine months through the third quarter, the government-sponsored enterprises (GSEs) purchased a combined 2.47 million home loans, down 9 percent for the same nine months in 2017, the companies reported last week in quarterly reports.
The GSEs bankroll around 45 percent of all residential mortgages, according to the Urban Institute, by purchasing loans from lenders, wrapping them with a government guarantee and securitizing most of them for sale in the secondary market.
The combined balance of these loans through the third quarter was $577 billion, down 7 percent from the 2017 level for the same nine months.
GSE funding activity has dropped for the second consecutive year.
The 2018 year-to-date counts and volume balances were down 16 percent and 15 percent, respectively, compared to same nine months in 2016.
During a conference call last week, Fannie Mae Chief Financial Officer Celeste Brown alluded to tough conditions for lenders.
“At a high level, what I see is that our customers are facing a lot of headwinds in the market,” she said. “Rates are up, volumes are down, and margins are tight, so lender profitability is challenged. New housing supply is up but not all the supply has been created where it’s needed. While we do see income growth nationally, in many markets home-price growth has outstripped income growth so affordability for home buyers remains a challenge,” Brown said.
The numbers have waned as a result of the big drop in refinancing activity. The combined GSE refinance counts totaled 909,000, down 26 percent from the 1.23 million refinance loans acquired by the GSEs through the first nine months of 2017. The GSE reports indicate that cash-out refinancing levels have remained fairly stable, whereas rate-reduction and term refinances are falling steeply.
Meanwhile, the home-purchase market hasn’t grown at anywhere near the pace that refinance activity has been falling.The combined GSE home-purchase loan counts through the third quarter totaled 1.56 million, up 5 percent over the 2017 level.
U.S. home sales are expected to be flat this year or even decline marginally due to rising prices; a lack of affordable, entry-level homes for sale; and rising rates.
“Our expectations for housing have become more pessimistic,” Fannie Mae Chief Economist Doug Duncan said in October. “Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time home buyers, remains atop the list of challenges facing the housing market.”
Fannie Mae’s most recent forecast calls for the origination volume for the entire market to fall 10.5 percent year over year in 2018, to $1.63 trillion. Refinance volume is predicted to decline by 30 percent over the 2017 level to $454 billion. Purchase volume in 2018 will remain essentially flat with the 2017 level at $1.18 trillion, Fannie forecasts.
With purchase applications tumbling alongside the collapse in refinancings, the headline mortgage application data slumped to its lowest level since September 2000 last week.
This should not be a total surprise asWells Fargo’s latest resultsshows the pipeline is collapsing – a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis.
But in the month since those results, mortgage rates have gone higher still… (this is now the biggest 2Y rise in mortgage rates since 2000)…
Sparking further weakness in the housing market…
And absent Christmas weeks in 2000 and 2014, this is the weakest level of mortgage applications since September 2000…
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
The economist, who predicted the 2007-2008 crisis,told Yahoo Financethat current data shows “a sign of weakness.”
“This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,”
Housing pivots take more time than those in the stock market, Shiller said, adding that:
“the housing market does have a momentum component and we’re seeing a clipping of momentum at this time.”
The Nobel Laureate explained:
“If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession.”
When reminded that 2006 predated the greatest financial crisis in a lifetime,RT notesthat Shiller acknowledged that any correction would likely be far less severe.
“The drop in home prices in the financial crisis was the most severe drop in the US market since my data begin in 1890,” the Yale economist said.
“It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”
(ZeroHedge) When we reported Wells Fargo’s Q1 earningsback in April, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”
Then, a quarter ago a glimmer of hope emerged for the America’s largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.
However, it was not meant to last, because buried deep in its presentation accompanyingotherwise unremarkable Q3 results(modest EPS miss; revenues in line), Wells just reported that its ‘bread and butter’ is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.
Yet while the mortgage pipeline has not been worse in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered recently in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, dropping $4BN sequentially from $50 billion to just $46 billion. And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.
That said, it wasn’t all bad news for Wells, whose Net Interest Margin managed to post a modest increase for the second consecutive quarter, rising to $12.572 billion. This is what Wells said: “NIM of 2.94% was up 1 bp LQ driven by a reduction in the proportion of lower yielding assets, and a modest benefit from hedge ineffectiveness accounting.” On the other hand, if one reads the fine print, one finds that the number was higher by $80 million thanks to “one additional day in the quarter” (and $54 million from hedge ineffectiveness accounting), in other words, Wells’ NIM posted another decline in the quarter.
There was another problem facing Buffett’s favorite bank: while true NIM failed to increase, deposits costs are rising fast, and in Q3, the bank was charged an average deposit cost of 0.47% on $907MM in interest-bearing deposits, nearly double what its deposit costs were a year ago.
Just as concerning was the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion. This was driven by consumer and small business banking deposits of $740.6 billion, down $13.7 billion, or 2%.
But even more concerning was the ongoing shrinkage in the company’s balance sheet, as average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY driven by “driven by lower commercial real estate loans reflecting continued credit discipline” while period-end loans slipped by $9.6BN to $942.3BN, as a result of “declines in auto loans, legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans.” This is a problem as most other banks are growing their loan book, Wells Fargo’s keeps on shrinking.
And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $11.3BN Y/Y across most product groups.
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
Chase, one of the biggest home lenders, announces cutting employees in Florida, Ohio, Arizona.
J.P. Morgan Chase CEO Jamie Dimon, Getty Images
JPMorgan Chase & Co. is laying off about 400 employees in its consumer mortgage banking division as parts of the market slow down, people familiar with the matter said.
The bankJPM, -0.56%one of the largest mortgage lenders with about 34,000 mortgage-banking employees, is in the midst of laying off employees in cities including Jacksonville, Fla.; Columbus, Ohio; Phoenix and Cleveland particularly as mortgage servicing has fallen, the people said.
Home sales have slowed as the rise in mortgage rates has been compounded by a lack of homes for sale, increasing prices and a tax bill that reduced some incentives for home ownership. Rising interest rates have also discouraged homeowners from either refinancing their current mortgage or moving and having to get a new mortgage.
JPMorgan isn’t the only bank to lay off mortgage employees. Wells Fargo & Co.WFC, -0.60%the largest U.S. mortgage lender, said in August it is laying off about 650 mortgage employees who mainly work in retail fulfillment and mortgage servicing “to better align with current volumes.”
You’d think the previous decade’s housing bust would still be fresh in the minds of mortgage lenders, if no one else. But apparently not.
One of the drivers of that bubble was the emergence of private label mortgage “originators” who, as the name implies, simply created mortgages and then sold them off to securitizers, who bundled them into the toxic bonds that nearly brought down the global financial system.
The originators weren’t banks in the commonly understood sense. That is, they didn’t build long-term relationships with customers and so didn’t need to care whether a borrower could actually pay back a loan. With zero skin in the game, they were willing to write mortgages for anyone with a paycheck and a heartbeat. And frequently the paycheck was optional.
In retrospect, that was both stupid and reckless. But here we are a scant decade later, and the industry is headed back towards those same practices. Today’s Wall Street Journal, for instance, profiles a formerly-miniscule private label mortgage originator that now has a bigger market share than Bank of America or Citigroup:
Its rise points to a bigger shift in the home-lending business to specialized mortgage lenders that fall outside the banking sector. Such non-banks, critically wounded in the housing crisis, have re-emerged to become the market’s dominant players, with 52% of U.S. mortgage originations, up from 9% in 2009. Six of the 10 biggest U.S. mortgage lenders today are non-banks, according to the research group.
They symbolize both the healthy reinvention of a mortgage market brought to its knees a decade ago—and how the growth in that market almost exclusively has been in its less-regulated corner.
Post crisis regulations curb bank and non-bank lenders alike from making the “liar loans” that wiped out many lenders and forced a wave of foreclosures during the crisis. What worries some industry participants is that little has changed about non-bank lenders’ structure.
Their capital levels aren’t as heavily regulated as banks, and they don’t have deposits or other substantive business lines. Instead they usually take short-term loans from banks to fund their lending. If the housing market sours, banks could cut off their funding—which doomed some non-banks in the last crisis. In that scenario, first-time buyers or borrowers with little savings would be the first to get locked out of the mortgage market.
“As long as the good times roll on, it’s fine,” said Ed Pinto, co-director of the Center on Housing Markets and Finance at the American Enterprise Institute. “But all I can say is, we’re in a boom, and you cannot keep going up like this forever.”
Freedom was just a small lender in the last crisis. When it became hard to borrow money, Freedom Chief Executive Stan Middleman embraced government-backed loans on the theory they would offer more stability.
As Quicken Loans Inc., the biggest and best-known non-bank, grew with the help of flashy technology and advertising campaigns, Freedom stayed under the radar, buying smaller lenders and scooping up other companies’ huge portfolios of loans, often made to relatively risky borrowers.
Mr. Middleman is fond of saying that one man’s trash is another man’s treasure. “I always believed that, if somebody is applying for a loan, we should try to make it for them,” says Mr. Middleman.
One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage’s office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.
Freedom is nowhere near the size of behemoths like Citigroup or Bank of America; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.
What does this mean? Several things, depending on the resolution of the lens you’re using.
In the mortgage market it means that emerging private sector lenders are taking market share – presumably by being more aggressive – which puts pressure on the relatively stodgy brand-name banks to lower their own standards to keep up. To grasp the truth of this, just re-read the last sentence in the above article: “I always believed that, if somebody is applying for a loan, we should try to make it for them.” That is fundamentally not how banks work. Their job is to write profitable loans by weeding out the applicants who probably won’t make their payments.
Now, faced with competitors from the “No Credit, No Problem!” part of the business spectrum, the big guys will once again have to choose between adopting that attitude or leaving the business. SeeBad Bankers Drive Out Good Bankers: Wells Fargo, Wall Street, And Gresham’s Law.Since the biggest mortgage lender is currently Wells Fargo, for which cutting corners is standard practice, it presumably won’t be long before variants of liar loans and interest only mortgages will be back on the menu.
From a broader societal perspective, this is par for the late-cycle course. After a long expansion, most banks have already lent money to their high-quality customers. But Wall Street continues to demand that those banks maintain double-digit earnings growth, and will punish their market caps if they fall short.
This leaves formerly-good banks with no choice but to loosen standards to keep the fee income flowing. So they start working their way towards the bottom of the customer barrel, while instructing their prop trading desks and/or investment bankers to explore riskier bets. Miss allocation of capital becomes ever-more-common until the system blows up.
The signs that we’re back there (2007in some cases,2008in others) are spreading, which means the reckoning is moving from “inevitable” to “imminent”.
Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.
What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.
Interest Only Period
In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.
That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.
For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.
Australian Government Rolls Out Universal Reverse Mortgage Plan
The Australian government has proposed a wide-ranging reverse mortgage plan that would make an equity release program available to every senior over the age of 65.
Previously restricted to those who partially participate in the country’s social pension program, the government-sponsored plan will extend to any homeowner above the age cutoff, according to areportfrom Australian housing publication Domain.
Under the terms of the government-sponsored plan, homeowners can receive up to $11,799 each year for the remainder of their lives, essentially taken out of the equity already built up in their homes. Domain gives the example of a 66-year-old who can receive a total of $295,000 during a lifetime that ends at age 91.
As in the United States, older Australians have a significant amount of wealth tied up in their homes; the publication cited research showing that homeowners aged 65 to 74 would likely have to sell their homes in order to realize the $480,000 increase in personal wealth the cohort enjoyed over the previous 12-year span.
In fact, the Australian government last year attempted to encourage aging baby boomers to sell their empty nests to free up the properties for younger families. Under that plan, homeowners 65 and older could get a $300,000 benefit from the government, a powerful incentive in a tough housing market for downsizers — and in a government structure that counts income against seniors when calculating pension amounts.
“Typically, older homeowners have been reluctant to sell for both sentimental and financial reasons,” Domainreportedlast year. “Often selling property is costly, and funds left over after buying a smaller home could then be considered in the means test.”
But the baked-in reverse mortgage benefit represents a shift toward helping seniors age in place instead of downsizing. The Australian government’s “More Choices for a Longer Life” plan also expands in-home care access by 14,000 seniors,accordingto the Financial Review, while boosting funding for elder physical-fitness initiatives and other efforts to reduce isolation among aging Australians.
The reverse mortgage plan will offer interest rates of 5.25%, which Domain noted is less than most banks, and will cost taxpayers about $11 million through 2022. Loan-to-value ratios are calculated to ensure that the loan balance can never exceed the eventual sale price of the home.
Greens leader Richard Di Natale has proposed a radical overhaul of Australia’s welfare system through the introduction of a universal basic income scheme, but critics believe this would only increase inequality.
Di Natale gave a speech at the National Press Club on Wednesday, outlining why he thought Australia’s current social security system was inadequate.
“With the radical way that the nature of work is changing, along with increasing inequality, our current social security system is outdated,” Di Natale said.
“It can’t properly support those experiencing underemployment, insecure work and uncertain hours.
“A modern, flexible and responsive safety net would increase their resilience and enable them to make a greater contribution to our community and economy.”
To address this, Di Natale called for the introduction of a universal basic income scheme, which he labelled a “bold move towards equality”.
“We need a universal basic income. We need a UBI that ensures everyone has access to an adequate level of income, as well as access to universal social services, health, education and housing,” he said.
“A UBI is a bold move towards equality. It epitomises a government which looks after its citizens, in contrast to the old parties, who say ‘look out for yourselves’. It’s about an increased role for government in our rapidly changing world.
“The Greens are the only party proudly arguing for a much stronger role for government. Today’s problems require government to be more active and more interventionist, not less.”
However Labor’s shadow assistant treasurer Andrew Leigh, responded on Twitter that Australia had the most targeted social safety net in the world and that Di Natale’s plan would increase inequality.
Aust has the most targeted social safety net in the world. Replacing it with a universal basic income, as @RichardDiNatale suggests, would increase inequality. Why give the same amount to billionaires as battlers? #auspolpic.twitter.com/aHefpfWJpn
Leigh was unavailable for comment when contacted by Pro Bono News, but in aspeechgiven at the Crawford School of Public Policy in April last year, he explained why he opposed a UBI.
“As it happens, using social policy to reduce inequality is almost precisely the opposite of the suggestion that Australia adopt a ‘universal basic income’,” Leigh said.
“Some argue that a universal basic income should be paid for by increasing taxes, rather than by destroying our targeted welfare system. But I’m not sure they’ve considered how big the increase would need to be.
“Suppose we wanted the universal basic income to be the same amount as the single age pension (currently $23,000, including supplements). That would require an increase in taxes of $17,000 per person, or around 23 percent of GDP. This would make Australia’s tax to GDP ratio among the highest in the world.”
Liberal Senator Eric Abetz described Di Natale’s plan as “economic lunacy”.
“Its catastrophic impact would see the biggest taxpayers in Australia, the banking sector, become unprofitable and shut down and his plan for universal taxpayer handouts would see our nation bankrupted in a matter of years,” Abetz said.
“This regressive and ultra-socialist approach of less work, higher welfare and killing profitable businesses has been tried and failed around the world and you need only look at the levels of poverty and riots in Venezuela.
“Senator Di Natale must explain… who will pay for this regressive agenda when he runs out of other people’s money.”
Despite this criticism, welfare groups said they welcomed a conversation on a “decent income for all”.
Dr Cassandra Goldie, the CEO of the Australian Council of Social Service, indicated that a UBI would be discussed among their member organisations.
“We are very glad a decent income for all is being discussed. Too many people lack the income they need to cover even the very basic essentials such as housing, food and the costs of children,” Goldie told Pro Bono News.
“We will be discussing basic income options with our member organisations.
“Our social security system has a job to protect people from poverty and help with essential costs and life transitions such as the costs of children and decent housing. It is failing at this. The basic minimum allowance for unemployed people is just $278 per week.
“Budget cuts – including the freezing of family payments – have made matters worse.”
Goldie said that working out if a basic income proposal would increase or reduce inequality depended on the detail.
“We don’t oppose universal payments on principle, but reform of social security should begin with those who have the least. This must be the first priority,” she said.
“The principle that everyone should have access to at least a decent basic income is a good starting point for reform. Let’s have that debate.”
The convenor of the Anti-Poverty Network SA, Pas Forgione, told Pro Bono News that a UBI would only address inequality if payments were set to an adequate level.
“If universal basic income means that everyone gets the same income that people on Newstart gets, roughly $260 a week, then I don’t think that’s going to do much to alleviate poverty,” Forgione said.
“It needs to be set at an adequate level. And I think that involves looking at what it takes to have a reasonable standard of living and a reasonable quality of life in a country like Australia. So it depends on the details.
“If it is set at an adequate level, than it would be a terrific thing for the quality of life for a number of very low income people. I’m not saying that it’s a panacea… but I think you could make a very strong case for looking at a UBI.”
Di Natale’s speech also called for the creation of a nationalised “People’s Bank”, to give more people access to affordable banking services and to add “real competition” to the banking sector.
“A people’s bank, along with more support for co-operatives and mutuals, would inject some real competition into the banking sector,” he said.
“We have a housing crisis that has been created by governments.
“So now is the time for government to step in: through a People’s Bank, by ending policies skewed in favour of investors like negative gearing and the capital gains tax discount, and through a massive injection of funds for social and public housing.”
The Mortgage Bankers Association returned from its holiday hiatus today, issuing its first update on mortgage applications’ activity since that for the week ended December 16. The results thus include data for the last two weeks and an adjustment to account for the Christmas holiday.
The Market Composite Index, a measure of application volume, for the week ended December 30 was down 12 percent on a seasonally adjusted basis compared to the December 9 summary. Before the adjustment, the drop in application activity was 48 percent.
The Refinance Index decreased 22 percent from two weeks earlier and the seasonally adjusted Purchase Index declined by 2 percent. The unadjusted Purchase Index was 41 percent lower than the two-week old reading and lost 1 percent when compared to the same week in 2015.
Purchase Applications vs. 30-Year Rates:
Its difficult to say at what point consumers thrown in the towel on new home purchases as a number of factors are in play.
Refinance Window Closing Fast:
Refis show a clear pattern. Only those whose interest rate is above the red dotted line is likely to refi. Given closing costs, it’s only profitable to refi when rates are substantially above the red line.
Bear in mind this data is for a slow holiday period. Nonetheless, refi applications behave as expected.
Mortgage Application Activity Wraps Up 2016 on a Down Note
Residential loan application activity continued its post-election slump, declining for the sixth time in the eight weeks, according to the Mortgage Bankers Association’s survey for the week ending Dec. 30. The results included adjustments to account for the Christmas holiday.
The Market Composite Index, a measure of mortgage loan application volume, decreased 12% on a seasonally adjusted basis from two weeks earlier, the last time the MBA conducted its Weekly Application Survey. On an unadjusted basis, the index decreased 48% compared with two weeks ago. The refinance index decreased 22% from two weeks ago.
The seasonally adjusted purchase index decreased 2% from two weeks earlier, while the unadjusted purchase index decreased 41% compared with two weeks ago and was 1% lower than the same week one year ago.
The refinance share of mortgage activity increased to 52.2% of total applications from 51.8% over the previous seven-day period.
Interest rate comparisons are made with the period ended Dec. 23. The adjustable-rate mortgage share of activity decreased to 5.4%, while the Federal Housing Administration share increased to 11.6% from 10.7% the week prior.
The VA share decreased to 12.3% from 12.4% and the USDA share increased to 1.1% from 1% the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.39% from 4.45%. For 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000), the average contract rate decreased to 4.37% from 4.41%.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 4.22%, while for 15-year fixed-rate mortgages backed by the FHA, the average decreased to 3.64% from 3.7%.
The average contract interest rate for 5/1 ARMs decreased to 3.28% from 3.41%.
Big banks have drastically reduced their share of the Federal Housing Administration market, a massive shift that has big implications, according to new analysis by the American Enterprise Institute.
Large banks — which had a 60% share of FHA refinancings in late 2013 — had a 6% share as of May 31, according to Stephen Oliner, a resident scholar at AEI. Nonbank lenders currently originate 90% of FHA-insured refinancings, according to new data released by the group.
Large banks also had a 65% share of the FHA purchase market in 2012, which is now down to 20%, according to AEI.
“The shift away from large banks to non-banks and mortgage brokers has been truly massive,” Oliner said.
The recent drop in interest rates is expected to spur another surge in refinancings due to Britain’s unexpected decision to leave the European Union.
But the large banks have decided that refinancing FHA loans is “not a good business” due to the regulatory environment and litigation risk, Oliner said.
“They are getting out,” he said, noting that many FHA lenders have been sued under the False Claims Act and had to pay huge fines to the Justice Department.
Banks also don’t get Community Reinvestment Act credit for refinancings. “So this is pretty much a lose-lose business for them,” Oliner said.
Apparently the biggest banks in the US didn’t learn their lesson the first time around…
Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!
I’m sure you remember how this all blew up back in 2008.
Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.
With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.
Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.
Fast forward eight years and the banks are dusting off the old playbook once again.
Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.
Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.
At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.
I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.
But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.
In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.
The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.
In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.
Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.
[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]
Now, here’s the craziest part: the US government is in on the scam.
The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.
Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.
They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”
Because that’s precisely what happens.
The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.
This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.
You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.
Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.
In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.
Today interest rates are barely above zero, and the Fed is technically insolvent.
Back in 2008 they were at least able to -just barely- prevent an all-out collapse.
This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.
Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.
But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.
So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…
… especially when they’re only paying you 0.1% interest anyhow. What’s the point?
There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.
You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.
(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)
There are even a number of cryptocurrency options.
Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.
The purpose of the Federal Housing Administration is “to help creditworthy low-income and first-time home buyers“, individuals and families often denied traditional credit, to obtain a mortgage and purchase a home.” This system has been successful, and has aided in promoting home ownership. However, the FHA loan program and its related benefits are under threat as the Department of Justice continues to bring investigations and actions against lenders under the False Claims Act.
Criticism of the DOJ’s approach is that the department is using the threat of treble damages available under the False Claims Act to intimidate lenders into paying outsized settlements and having lenders admit guilt simply to avoid the threat of the enormous liability and the cost of a prolonged defense. If the DOJ wanted to go after bad actors who are truly defrauding the government with dishonest underwriting practices or nonexistent quality control procedures, then that would be acceptable to the industry.
But the DOJ seems to be simply going after deep pockets, where the intentions of the lenders are well-placed and the errors found are legitimate mistakes. Case in point: as of December 2015, Quicken Loans was the largest originator of FHA loans in the country, and they are currently facing the threat of a False Claims Act violation. To date Quicken has vowed to continue to fight, and stated they will expose the truth about the DOJ’s egregious attempts to coerce these unjust “settlements.”
When an originator participates in the FHA program, they are operating under the Housing and Urban Development’s FHA guidelines. As HUD cannot, and does not, check each and every loan guaranteed by FHA to confirm unflawed origination, the agency requires certification that the lender originating the file did so in compliance with the applicable guidelines. If the loan defaults, the lender submits a claim and the FHA will pay out the balance of the loan under the guarantee.
The False Claims Act provides that any person who presents a false claim or makes a false record or statement material to a false claim, “is liable to the United States Government for a civil penalty of not less than $5,500 and not more than $11,000…plus 3 times the amount of damages which the Government sustains because of the act.”
The DOJ argues that when a loan with known origination errors is certified by the lender to the FHA, with a subsequent claim submitted by the lender to the FHA after a default, the lender is in violation of the False Claims Act — because they knew or should have known the loan had defects when they submitted their certification, and yet still allowed the government to sustain a loss when the FHA paid out of the loan balance.
In the mortgage space the potential liability is astronomical because of the aforementioned penalties. The major issues in a False Claims Act violation can be boiled down to two major points: lack of clarity and specificity around what the DOJ considers “errors;” and what constitutes knowing loans were defective under the DOJ’s application of the act.
To the first point: are the errors of the innocuous, ever-present type found in a large lender’s portfolio, or egregious underwriting errors knowingly committed to increase production while offsetting risk through the FHA program? Obviously, lenders are arguing the former.
Prior to Justice’s aggressive pursuit of these settlements, if the FHA identified an underwriting error the lender would simply indemnify the FHA and not process the claim, effectively making it a lender-owned loan. This was an acceptable risk to lenders, as an error in the origination process could not become such an oversized loss. The liability would be capped to any difference between the borrower’s total debt at the time of foreclosure sale and what the lender could recoup when the property was liquidated. The DOJ’s use of the False Claims Act now triples a lender’s risk when originating FHA loans by threatening damages that are triple the value of the amount paid out by FHA.
In his letter to all JPMorgan Chase & Co. shareholders in April, Chief Executive Officer Jamie Dimon outlined the bank’s reasons for discontinuing its involvement with FHA loans. This perfectly illustrates how the DOJ is basically restoring all the lender risk to FHA-backed originations. Banks originating FHA loans are left with two choices: price in the new risk of underwriting errors into and pass the cost to the end borrower, making the product so costly it becomes pointless to offer; or cease or severely limit FHA offerings. If lenders take either approach, the DOJ will have negated the purpose of the FHA by limiting borrowers’ access to credit.
Walking away from FHA lending is not as simple as it sounds. Most FHA borrowers tend to have lower credit scores and/or require lower down payments. Most FHA loans also tend to be for homes located in low- and moderate-income neighborhoods. Any decline in an institution’s FHA offerings most likely will have a negative impact on an institution’s Community Reinvestment Act ratings. One has to think the DOJ is well aware of this fact and believes it will keep lenders in the FHA business even with the elevated risk, and can simply continue to strong-arm lenders into settlements.
If the Justice Department continues to aggressively utilize the False Claims Act, originators will be forced to evolve and create a product that they can keep as a portfolio loan or sell privately that can reach the same borrowers the FHA-insured products currently do. Again, there is a high likelihood that these products will not have as attractive terms as the FHA loans that borrowers are currently enjoying.
Large lenders will continue to step away from FHA originations, and smaller lenders originating FHA loans should be strongly aware of the risk they are taking on by continuing to originate FHA loans and increasing their portfolios as the larger banks exit the FHA market. Many large lenders have faced or are currently facing these actions, and from the Justice Department’s recent statements it does not appear they will abate anytime soon.
It’s 9:30 a.m. on a recent sunny Friday, and 60 people have crammed into an airport hotel conference room in Northern Virginia to hear Kevin Shortle, a veteran real estate professional with a million-watt smile, talk about “architecting a deal.”
Some have worked in real estate before, flipping houses or managing rentals. But the deals Shortle, lead national instructor for a company called Note School, is describing are different: He teaches people how to buy home notes, the building blocks of housing finance.
While titles and deeds establish property ownership, notes — the financial agreements between lenders and home buyers — set the terms by which a borrower will pay for the home. Financial institutions have long passed them back and forth as they re-balance their portfolios.
But the trade in delinquent notes has exploded in the post-financial-crisis world. As government entities like Fannie Mae and Freddie Mac have struggled with the legacies of the housing bust, they’ve sold billions of dollars’ of delinquent notes to big institutional investors, who resell them in turn.
A sign outside a foreclosed home for sale in Princeton, Ill, in January 2014.
And people like the ones in the Sheraton now pay good money to learn how to pursue what Note School calls “rich rewards.” The result: a marketplace where thousands of notes are bought and sold for a fraction of the value of the homes they secure.
A buyer can renegotiate with the homeowner, collecting steady cash. Or she might offer a “cash for keys” payout and seek a tenant or new owner. If all else fails, she can foreclose.
For some housing market observers, the churn in notes is a sign that the financial crisis hasn’t fully healed — and a fresh source of potential abuses. But the people listening to Shortle saw opportunity as he explained how they can “be the bank” for people with mortgage-payment problems.
“You can make a lot of money in the problem-solving business,” Shortle said.
How home notes move through a healing housing market
Since most people buy homes using mortgage financing, notes can be thought of as another name for mortgage agreements. After the home purchase closes, banks and other lenders usually sell them to government entities like Fannie Mae, Freddie Mac, and the Federal Housing Administration.
The housing market has improved since the bust, but hasn’t healed fully. There were 1.4 million foreclosures in 2015, according to real estate data firm RealtyTrac, and more than 17% of all transactions last year were deemed “distressed” — more than double pre-bust levels — in some way.
As the dust has settled, government agencies have begun selling delinquent notes to big institutional investors like Lone Star Funds, Goldman Sachs GS, +2.76% and Fortress Investments FIG, +3.96% as well as some community nonprofits, in bulk. The agencies have sold more than $28 billion in distressed loans since 2012, according to government data.
The big investors then sell some to buyers such as Colonial Capital Management, which is run by the same people who run Note School. Colonial, which buys about 2,000 notes a year, sells most of them one by one to people like the ones who gathered in the Virginia Sheraton.
It’s difficult to know how much this happens and what it has meant for homeowners.
Anyone who buys notes from the government must follow reporting requirements that include information on how the loans perform. Those requirements stay with the notes if they’re resold; they expire four years after the government’s initial sale. But nobody tracks note sales that weren’t made by the government, and even the government’s records don’t link outcomes and note owners.
March data from the Federal Housing Administration only hint at a broad view of how post-sale loans perform. The FHA has sold roughly 89,000 loans since 2012; less than 11% of those homeowners now pay their mortgages on time. Many are simply classified as “unresolved.” More than 34% had been foreclosed upon.
Fannie Mae and Freddie Mac, which began selling notes in 2014, were supposed to report similar data by the end of March. A spokeswoman for the agencies’ regulator said she did not know when that report, still incomplete, would be submitted.
And not all notes are initially sold by the government, making comprehensive oversight of the marketplace even harder. Banks and other lenders often sell notes directly; Colonial doesn’t buy notes from the government, according to Eddie Speed, founder of both Note School and Colonial.
For investors, a cleaner deal than the world of ‘tenants and toilets’
Note buying has attractions for both investors and the communities where the homeowners live.
Delinquent notes can be bought cheaply, often for about a third of a home’s market value. Note buyers get an investment that’s more like a financial asset — and less dirty than the landlord’s world of “tenants and toilets.”
Meanwhile, investors can often afford to cut homeowners a significant break, avoiding foreclosure while still making a profit.
And there’s government money for the taking in the name of helping homeowners. Since the housing crisis, the federal government has allocated nearly $10 billion to states deemed hardest-hit by the bust. Those states funnel the money to borrowers, often to help them reach new agreements with their lenders.
That can help municipalities that lose out on property taxes when homeowners don’t make payments, and which benefit from having more involved owners, Speed says.
When Tj Osterman, 38, and Rick Allen, 36, who have worked together as real-estate investors for about 10 years in the Orlando area, first explored note buying, they thought it little different than flipping abandoned houses.
But when they realized homeowners were often still in the picture, they changed their approach to try to work with them. Some of their motivation came from personal experience: Allen went through foreclosure in 2007. “It was a tough time,” he said. “I wish there was someone like me who said, let’s help you keep your house.”
They can buy notes cheaply enough that they can reduce the principal owed by homeowners “as much as 50%, and still turn a nice profit, pay back taxes, [and] get these people feeling good about themselves again,” said Osterman.
They now have a goal of helping save 10,000 homeowners from foreclosure. “I’m so addicted to the socially responsible side of stuff,” Osterman said. “We talk with borrowers like human beings and underwrite to real-world standards.”
‘There’s a system out there that’s broken’
Some housing observers have concerns about drawing nonprofessionals into an often-opaque market. A recent example Shortle used as a case study during the Virginia seminar helps explain why.
A note on an Atlanta-area home was being sold for $24,360; according to estimates from Zillow and local agents, its market value was between $50,000 and $70,000.
Some back taxes were owed, and a payment history showed that while the homeowner was making erratic or partial payments on her $500 monthly mortgage, she hadn’t quit. She had some equity built up in the house, another sign of commitment.
Real-estate investment firm Stonecrest sold her the home in 2012; she had used Stonecrest’s own financing at 9%. Her payment record was spotless until 2014. Stonecrest sold the note to Colonial in 2015 and Colonial offered it for resale in early 2016.
Most notes underpin mortgages. But this one was linked to a land contract, a financial agreement more typical when the seller is offering financing. Land contracts are sometimes criticized for being almost predatory: If a buyer skips a payment, the house and all the money he’s put toward it can be taken away.
And buyers don’t hold the deeds to the home, so the homes can be taken more quickly if they’re delinquent. Note School often steers students to scenarios where government programs like Hardest Hit can be tapped, but those programs don’t apply to land contracts.
Shortle walked his class through different strategies. The new note owner could foreclose; they could also induce the home buyer to walk. “It may be time to give this person a little cash for keys to move on,” he told the class. “They can’t afford it.”
Other data indicated that the house would rent for roughly $750. It might make sense, Shortle suggested, to remove the homeowner, fix up the house, rent it out, then sell the entire arrangement to a cash investor.
If a new note owner took that tack, the note would change hands four times in about as many years—even as the homeowner changed just once. The homeowner might never notice.
Some analysts see evidence of a still-hurting housing market behind all that activity.
By diffusing distressed loans out into a broader marketplace, lenders avoid the negative publicity that comes with foreclosing on delinquent homeowners. That masks “a layer of distress in the housing market that’s being overlooked,” said Daren Blomquist, vice president at RealtyTrac.
“This has been a way to push aside the crisis and sweep it under the rug,” Blomquist told MarketWatch.
Some analysts see evidence of a still-hurting housing market behind all that activity.
By diffusing distressed loans out into a broader marketplace, lenders avoid the negative publicity that comes with foreclosing on delinquent homeowners. That masks “a layer of distress in the housing market that’s being overlooked,” said Daren Blomquist, vice president at RealtyTrac.
“This has been a way to push aside the crisis and sweep it under the rug,” Blomquist told MarketWatch.
Osterman, left, and Allen
Note investors say they can offer a service others can’t or won’t. “There’s a real issue with how we’re treating hardships,” said Osterman. “There’s a system out there that’s broken and needs to be disrupted in a good way.”
Note School’s founder says the goal is a ‘win-win’
While newer investors like Osterman and Allen have a sense of mission forged during the recent housing crisis, Speed has been in the note business for more than 30 years. He is adamant that it’s in Note School’s best interest to teach students to observe regulation and treat homeowners respectfully. There’s no reason it can’t be a “win-win,” he said.
‘”We’re not teaching people to go and do ‘Wild West investing.’
Colonial Funding doesn’t make buyers of its notes go through Note School, but it does require them to work with licensed mortgage servicers. Note School offers connections to armies of vendors offering services for every step of the process: people who will assess the property’s real market value, “door-knockers” who will hand-deliver letters to homeowners, title research companies, insurers, and more.
“We’ve been in the note buying business for 30 years,” said Speed. “We’re not teaching people to go and do ‘Wild West investing.’”
Speed believes buying distressed notes is a process tailor-made for people with an entrepreneurial approach to doing well by solving problems — and maintains that he is mindful of the postcrisis environment in which they work.
“I’m walking into where the disaster has already happened,” he said. “If I walk into a loan where the customer has vacated, they probably want out. Common sense tells us if the borrower can deed it over to the lender and walk away with dignity, that seems like a good deal for him. We’re trying to do everything we can to reach resolution.”
Fewer homes bought, more refinances, and older mortgages lead to principal balance declines
Shadows from the financial crisis and Great Recession still linger in Americans’ personal finances, researchers at the New York Fed found.
Mortgage debt outstanding nearly doubled in the period from 2000 and 2006, but has risen only about 1% since 2012, according to data compiled in the regional bank’s quarterly report on household debt and crisis.
Put another way, in 2008 just as the subprime crisis was coming to a head, Americans had $12.68 trillion in debt outstanding, of which housing debt made up $10 trillion, or 79% of the total. In the fourth quarter of 2015, there was $12.12 trillion in total debt, and housing’s share had dwindled to 72%, or $8.74 trillion.
One of the biggest contributors to the decline in mortgage debt is that Americans aren’t taking equity out of their homes at nearly the same rate as in the prior decade. Cash-out refinances and home equity lines of credit rose at a rate of more than $300 billion every year from 2003-2007. In 2015, such debt grew only by $30 billion.
“In fact,” the researchers note on their blog, “the small amount of cash-out refi going on is almost completely offset by people repaying second mortgages and HELOCs.”
But it’s not just a newfound frugality that’s keeping a lid on mortgage debt. The pace of home buying has slowed even as Americans are paying down their home loans.
The total amount paid against mortgage debt in 2015 was $288 billion, or 3.5% of the total outstanding. The last time the total amount of mortgage debt outstanding was $8.25 trillion was 2006, the height of the boom, the researchers noted. That year, consumers paid down only $170 billion, or 2.1% of the balance.
In recent years, much of the pay down has come thanks to lower interest rates. New mortgages are being lent with lower rates, and existing homeowners have been refinancing. The researchers also note that as credit standards have remained tight, most new mortgages are going to people with excellent credit, enabling them to pay lower rates.
Those factors have taken the weighed average interest rate on the outstanding mortgage debt balance from 7.65% in 2000 to 3.85% in 2015.
There’s another factor contributing to the higher pace of pay downs. The existing inventory of mortgage debt outstanding has aged significantly over the past decade as the pace of buying and selling slowed. That means mortgage payments are further along in their amortization process and principal, rather than interest, is being paid down.
Since 2008, the researchers note, aggregate mortgage payments have fallen 8% but principal payments have risen 41%.
The shrinking mortgage debt is a good thing, the New York Fed researchers conclude. Principal pay-down is a form of saving for borrowers, so in the face of rising home prices this means strengthening balance sheets for mortgagors. This is important, of course, as we learned in 2008 just how crucial household debts can be.
But some analysts worry that Americans’ equity is too concentrated in real estate assets. Another lesson from the 2008 crisis is that it can be very dangerous when the price of those assets plummets.
The rise in rents and home prices is adding additional pressure to the bottom line of most California families. Home prices have been rising steadily for a few years largely driven by low inventory, little construction thanks to NIMBYism, and foreign money flowing into certain markets. But even areas that don’t have foreign demand are seeing prices jump all the while household incomes are stagnant. Yet that growth has hit a wall in 2016, largely because of financial turmoil. We’ve seen a big jump in the financial markets from 2009. Those big investor bets on real estate are paying off as rents continue to move up. For a place like California where net home ownership has fallen in the last decade, a growing list of new renter households is a good thing so long as you own a rental.
The problem of course is that household incomes are not moving up and more money is being siphoned off into an unproductive asset class, a house. Let us look at the changing dynamics in California households.
Many people would like to buy but simply cannot because their wages do not justify current prices for glorious crap shacks. In San Francisco even high paid tech workers can’t afford to pay $1.2 millionfor your typical Barbie house in a rundown neighborhood. So with little inventory investors and foreign money shift the price momentum. With the stock market moving up nonstop from 2009 there was plenty of wealth injected back into real estate. The last few months are showing cracks in that foundation.
It is still easy to get a mortgage if you have the income to back it up. You now see the resurrection of no money down mortgages. In the end however the number of renter households is up in a big way in California and home ownership is down:
So what we see is that since 2007 we’ve added more than 680,000 renter households but have lost 161,000 owner occupied households. At the same time the population is increasing. When it comes to raw numbers, people are opting to rent for whatever reason. Also, just because the population increases doesn’t mean people are adding new renter households. You have 2.3 million grown adults living at home with mom and dad enjoying Taco Tuesdays in their old room filled with Nirvana and Dr. Dre posters.
And yes, with little construction and unable to buy, many are renting and rents have jumped up in a big way in 2015:
This has slowed down dramatically in 2016. It is hard to envision this pace going on if a reversal in the economy hits (which it always does as the business cycle does its usual thing).
Home ownership rate in a steep decline
In the LA/OC area home prices are up 37 percent in the last three years:
Of course there are no accompanying income gains. If you look at the stock market, the unemployment rate, and real estate values you would expect the public to be happy this 2016 election year. To the contrary, outlier momentum is massive because people realize the system is rigged and are trying to fight back. Watch the Big Short for a trip down memory lane and you’ll realize nothing has really changed since then. The house humping pundits think they found some new secret here. It is timing like buying Apple or Amazon stock at the right time. What I’ve seen is that many that bought no longer can afford their property in a matter of 3 years! Some shop at the dollar store while the new buyers are either foreign money or dual income DINKs (which will take a big hit to their income once those kids start popping out). $2,000 a month per kid daycare in the Bay Area is common.
If this was such a simple decision then the home ownership rate would be soaring. Yet the home ownership rate is doing this:
In the end a $700,000 crap shack is still a crap shack. That $1.2 million piece of junk in San Francisco is still junk. And you better make sure you can carry that housing nut for 30 years. For tech workers, mobility is key so renting serves more as an option on housing versus renting the place from the bank for 30 years. Make no mistake, in most of the US buying a home makes total sense. In California, the massive drop in the home ownership rate shows a different story. And that story is the middle class is disappearing.
The six-bedroom mansion in the shadow of Southern California’s Sierra Madre Mountains has lime trees and a swimming pool, tennis courts and a sauna — the kind of place that would have sold quickly just a year ago, according to real estate agent Kanney Zhang.
Zhang is shopping it for a discounted $3.68 million, but nobody’s biting. Her clients, a couple from China, are getting anxious. They’re the kind of well-heeled international investors who fueled a four-year luxury real estate boom that helped pull America out of its worst housing slump since the 1930s. Now the couple is reeling from the selloff in the Chinese stock market and looking to raise cash to shore up finances.
In the Los Angeles suburb of Arcadia, where Zhang is struggling to sell the six-bedroom home, dozens of aging ranch houses were demolished to make way for 38 mansions built with Chinese buyers in mind. They have manicured lawns and wok kitchens and are priced as high as $12 million. Many of them sit empty because the prices are out of the range of most domestic buyers, said Re/Max broker Rudy Kusuma, who blames a crackdown by the Chinese on large sums leaving the country.
Well, I have some more bad news for mansion-flipping Chinese nationals.
Europe’s biggest lender HSBC will no longer provide mortgages to some Chinese nationals who buy real estate in the United States, a policy change that comes as Beijing is battling to stem a swelling crowd of citizens trying to get money out of China.
An HSBC spokesman in New York told Reuters on Wednesday that the new policy went into effect last week, roughly a month after China suspended Standard Chartered and DBS Group Holdings Ltd from conducting some foreign exchange business and as authorities try to limit capital outflows.
Realtors of luxury property in cities like New York, Los Angeles, and Vancouver, said more than 80 percent of wealthy Chinese buyers have ties to China.
Luxury homes news website Mansion Global, which first reported the HSBC policy change, said it would affect Chinese nationals holding temporary visitor ‘B’ visas if the majority of their income and assets are maintained in China.
HSBC’s pivot away from lending to some Chinese nationals abroad comes as other international banks clamor to lend more to wealthy Chinese.
The Royal Bank of Canada scrapped its C$1.25 million cap on mortgages to borrowers with no local credit history last year in a bid to tap into surging demand for financing from wealthy immigrant buyers.
Movie sequels are rarely as good as the original films on which they’re based. The same dictum, it appears, holds for finance.
The 2008 housing market collapse was bad enough, but it appears now that we’re on the verge of experiencing it all again. And the financial sequel, working from a similar script as its original version, could prove to be just as devastating to the American taxpayer.
The Federal National Mortgage Association (commonly referred to as Fannie Mae) plans a mortgage loan reboot, which could produce the same insane and predictable results as when the mortgage agency loaned so much money to people who had neither the income, nor credit history, to qualify for a traditional loan.
The Obama administration proposes the HomeReady program, a new mortgage program largely targeting high-risk immigrants, which, writes Investors.com, “for the first time lets lenders qualify borrowers by counting income from non-borrowers living in the household. What could go wrong?”
The question should answer itself.
The administration apparently believes that by changing the dirty words “subprime” to “alternative” mortgages, the process will be more palatable to the public. But, as Investor’s notes, instead of the name HomeReady, which will offer the mortgages, “It might as well be called DefaultReady, because it is just as risky as the subprime junk Fannie was peddling on the eve of the crisis.”
Before the 2008 housing bubble burst, one’s mortgage fitness was supposed to be based on the income of the borrower, the person whose name would be on the deed and who was responsible for making timely monthly payments. Under this new scheme — and scheme is what it is — the combined income of everyone living in the house will be considered for a conventional home loan backed by Fannie. One may even claim income from people not living in the home, such as the borrower’s parents.
If, or as recent history proves, when the approved borrower defaults, who will pay? Taxpayers, of course, not the politicians and certainly not those associated with Fannie Mae and Freddie Mac, whose leaders made out like the bandits they were during the last mortgage go-round. As CNN Money reported in 2011, “Mortgage finance giants Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis. And nearly $100 million of those tax dollars went to lucrative pay packages for top executives, filings show.”
In case further reminders are needed of the outrageous behavior of financial institutions that contributed to the housing market collapse and a recession whose pain is still being felt by many, Goldman Sachs has agreed to a civil settlement of up to $5 billion for its role associated with the marketing and selling of faulty mortgage securities to investors.
Go see the film “The Big Short” to be reminded of the cynicism of many in the financial industry. It follows on the heels of the HBO film “Too Big to Fail,” which revealed how politicians and banks were part of the scam that harmed just about everyone but themselves. According to The New York Times, only one top banker, Kareem Serageldin, went to prison for concealing hundreds of millions in losses in Credit Suisse’s mortgage-backed securities portfolio. Many more should have joined him.
Under the latest mortgage proposal, it’s no credit, no problem. An immigrant can qualify with a credit score as low as 620. That’s subprime. And the borrower has only to put 3 percent down.
Investor’s reports, “Fannie says that 1 in 4 Hispanic households share dwellings — and finances — with extended families. It says this is a large ‘under served’ market.”
Is this another cynical attempt by Democrats, along with protecting illegal immigrants, to win Hispanic votes without regard to the potential cost to taxpayers? Wasn’t that the problem during the last housing market collapse? Could it happen again? Sure it could. Do politicians care? It doesn’t appear so.
The U.S. Supreme Court ruled on Monday that an underwater second mortgage cannot be extinguished, or “stripped off,” as unsecured debt for a debtor in bankruptcy, according to the Supreme Court‘s website.
In the cases of Bank of America v. Caulket and Bank of America v. Toledo-Cardona, Florida homeowners David Caulkett and Edelmiro Toldeo-Cardona had filed for Chapter 7 bankruptcy and had second mortgages with Bank of America extinguished by a bankruptcy judge following the housing crisis of 2008 based on the fact that they were completely underwater. On Monday, just more than two months after hearing arguments for the case, the Supreme Court ruled in favor of the bank.
When the Supreme Court heard arguments for two cases on March 24, attorneys representing Bank of America contended that the high court should uphold a 1992 decision in the case of Dewsnup v. Timm, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. Attorneys for the debtors argued that the Dewsnup decision was irrelevant for the two cases.
Bank of America appealed the bankruptcy judge’s ruling for the two cases, but the 11th Circuit U.S. Court of Appeals upheld the bankruptcy court’s decision in May 2014, going against the Dewsnup ruling by saying that decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The bank subsequently appealed the 11th Circuit Court’s ruling.
The Supreme Court ruled on Monday that the second mortgages should not be treated as unsecured debt, hence upholding the Dewsnup decision. Justice Clarence Thomas, in delivering the opinion of the court, wrote that, “Section 506(d) of the Bankruptcy Code allows a debtor to void a lien on his property ‘[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.’ 11 U. S. C. §506(d). These consolidated cases present the question whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. We hold that a debtor may not, and we therefore reverse the judgments of the Court of Appeals.”
“The Court has spoken, and we respect its ruling,” said Stephanos Bibas, an attorney for defendant David Caulkett, in an email to DS News. “But we are disappointed that the Court extended its earlier precedent in Dewsnup v Timm, even though it acknowledged that the plain words of the statute favor giving relief to homeowners such as Messrs. Caulkett and Toledo-Cardona. We hope that in the near future, the Administration’s home-mortgage-modification programs will offer more relief to homeowners in this situation struggling to save their homes.”
A Bank of America spokesman declined to comment on Monday’s Supreme Court’s ruling.
Click here to read the complete text of the Court’s ruling.
The Federal Reserve did it — raised the target federal funds rate a quarter point, its first boost in nearly a decade. That does not, however, mean that the average rate on the 30-year fixed mortgage will be a quarter point higher when we all wake up on Thursday. That’s not how mortgage rates work.
Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.
The bigger deal for mortgage rates is not the Fed’s headline move, but five paragraphs lower in its statement:
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.”
When U.S. financial markets crashed in 2008, the Federal Reserve began buying billions of dollars worth of agency mortgage-backed securities (loans backed by Fannie Mae, Freddie Mac and Ginnie Mae). As part of the so-called “taper” in 2013, it gradually stopped using new money to buy MBS but continued to reinvest money it made from the bonds it had into more, newer bonds.
“In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS,” wrote Matthew Graham, chief operating officer of Mortgage News Daily. “Over the past few cycles, that’s been $24-$26 billion a month — a staggering amount that accounts for nearly every newly originated MBS.”
At some point, the Fed will have to stop that and let the private market back into mortgage land, but so far that hasn’t happened. Mortgage finance reform is basically on the back-burner until we get a new president and a new Congress. As long as the Fed is the mortgage market’s sugar daddy, rates won’t move much higher.
“Also important is the continued popularity of US Treasury investments around the world, which puts downward pressure on Treasury rates, specifically the 10-year bond rate, which is the benchmark for MBS/mortgage pricing,” said Guy Cecala, CEO of Inside Mortgage Finance. “Both are much more significant than any small hike in the Fed rate.”
Still, consumers are likely going to be freaked out, especially young consumers, if mortgage rates inch up even slightly. That is because apparently they don’t understand just how low rates are. Sixty-seven percent of prospective home buyers surveyed by Berkshire Hathaway HomeServices, a network of real estate brokerages, categorized the level of today’s mortgage rates as “average” or “high.”
The current rate of 4 percent on the 30-year fixed is less than 1 percentage point higher than its record low. Fun fact, in the early 1980s, the rate was around 18 percent.
Mortgage delinquency rates are low as long as home prices are soaring since you can always sell the home and pay off the mortgage, or most of it, and losses for lenders are minimal. Nonbank lenders with complicated corporate structures backed by a mix of PE firms, hedge funds, debt, and IPO monies revel in it. Regulators close their eyes because no one loses money when home prices are soaring. The Fed talks about having “healed” the housing market. And the whole industry is happy.
The show is run by some experienced hands: former executives from Countrywide Financial, which exploded during the Financial Crisis and left behind one of the biggest craters related to mortgages and mortgage backed securities ever. Only this time, they’re even bigger.
PennyMac is the nation’s sixth largest mortgage lender and largest nonbank mortgage lender. Others in that elite club include AmeriHome Mortgage, Stearns Lending, and Impac Mortgage. The LA Times:
All are headquartered in Southern California, the epicenter of the last decade’s subprime lending industry. And all are run by former executives of Countrywide Financial, the once-giant mortgage lender that made tens of billions of dollars in risky loans that contributed to the 2008 financial crisis.
During their heyday in 2005, non-bank lenders, often targeting subprime borrowers, originated 31% of all home mortgages. Then it blew up. From 2009 through 2011, non-bank lenders originated about 10% of all mortgages. But then PE firms stormed into the housing market. In 2012, non-bank lenders originated over 20% of all mortgages, in 2013 nearly 30%, in 2014 about 42%. And it will likely be even higher this year.
That share surpasses the peak prior to the Financial Crisis.
As before the Financial Crisis, they dominate the riskiest end of the housing market, according to the LA Times: “this time, loans insured by the Federal Housing Administration, aimed at first-time and bad-credit buyers. Such lenders now control 64% of the market for FHA and similar Veterans Affairs loans, compared with 18% in 2010.”
Low down payments increase the risks for lenders. Low credit scores also increase risks for lenders. And they coagulate into a toxic mix with high home prices during housing bubbles, such as Housing Bubble 2, which is in full swing.
The FHA allows down payments to be as low as 3.5%, and credit scores to be as low as 580, hence “subprime” borrowers. And these borrowers in many parts of the country, particularly in California, are now paying sky-high prices for very basic homes.
When home prices drop and mortgage payments become a challenge for whatever reason, such as a layoff or a miscalculation from get-go, nothing stops that underwater subprime borrower from not making any more payments and instead living in the home for free until kicked out.
“Those are the loans that are going to default, and those are the defaults we are going to be arguing about 10 years from now,” predicted Wells Fargo CFO John Shrewsberry at a conference in September. “We are not going to do that again,” he said, in reference to Wells Fargo’s decision to stay out of this end of the business.
But when home prices are soaring, as in California, delinquencies are low and don’t matter. They only matter after the bubble bursts. Then prices are deflating and delinquencies are soaring. Last time this happened, it triggered the most majestic bailouts the world has ever seen.
The LA Times:
For now, regulators aren’t worried. Sandra Thompson, a deputy director of the Federal Housing Finance Agency, which oversees government-sponsored mortgage buyers Fannie Mae and Freddie Mac, said non-bank lenders play an important role.
“We want to make sure there is broad liquidity in the mortgage market,” she said. “It gives borrowers options.”
But another regulator isn’t so sanguine about the breakneck growth of these new non-bank lenders: Ginnie Mae, which guarantees FHA and VA loans that are packaged into structured mortgage backed securities, has requested funding for 33 additional regulators. It’s fretting that these non-bank lenders won’t have the reserves to cover any losses.
“Where’s the money going to come from?” wondered Ginnie Mae’s president, Ted Tozer. “We want to make sure everyone’s going to be there when the next downturn comes.”
But the money, like last time, may not be there.
PennyMac was founded in 2008 by former Countrywide executives, including Stanford Kurland, as the LA Times put it, “the second-in-command to Angelo Mozilo, the Countrywide founder who came to symbolize the excesses of the subprime mortgage boom.” Kurland is PennyMac’s Chairman and CEO. The company is backed by BlackRock and hedge fund Highfields Capital Management.
In September 2013, PennyMac went public at $18 a share. Shares closed on Monday at $16.23. It also consists of PennyMac Mortgage Investment Trust, a REIT that invests primarily in residential mortgages and mortgage-backed securities. It went public in 2009 with an IPO price of $20 a share. It closed at $16.64 a share. There are other intricacies.
According to the company, “PennyMac manages private investment funds,” while PennyMac Mortgage Investment Trust is “a tax-efficient vehicle for investing in mortgage-related assets and has a successful track record of raising and deploying cost-effective capital in mortgage-related investments.”
The LA Times describes it this way:
It has a corporate structure that might be difficult for regulators to grasp. The business is two separate-but-related publicly traded companies, one that originates and services mortgages, the other a real estate investment trust that buys mortgages.
And they’re big: PennyMac originated $37 billion in mortgages during the first nine months this year.
Then there’s AmeriHome. Founded in 1988, it was acquired by Aris Mortgage Holding in 2014 from Impac Mortgage Holdings, a lender that almost toppled under its Alt-A mortgages during the Financial Crisis. Aris then started doing business as AmeriHome. James Furash, head of Countrywide’s banking operation until 2007, is CEO of AmeriHome. Clustered under him are other Countrywide executives.
It gets more complicated, with a private equity angle. In 2014, Bermuda-based insurer Athene Holding, home to other Countrywide executives and majority-owned by PE firm Apollo Global Management, acquired a large stake in AmeriHome and announced that it would buy some of its structured mortgage backed securities, in order to chase yield in the Fed-designed zero-yield environment.
Among the hottest products the nonbank lenders now offer are, to use AmeriHomes’ words, “a wider array of non-Agency programs,” including adjustable rate mortgages (ARM), “Non-Agency 5/1 Hybrid ARMs with Interest Only options,” and “Alt-QM” mortgages.
“Alt-QM” stands for Alternative to Qualified Mortgages. They’re the new Alt-A mortgages that blew up so spectacularly, after having been considered low-risk. They might exceed debt guidelines. They might come with higher rates, adjustable rates, and interest-only payment periods. And these lenders chase after subprime borrowers who’ve been rejected by banks and think they have no other options.
Even Impac Mortgage, which had cleaned up its ways after the Financial Crisis, is now offering, among other goodies, these “Alt-QM” mortgages.
Yet as long as home prices continue to rise, nothing matters, not the volume of these mortgages originated by non-bank lenders, not the risks involved, not the share of subprime borrowers, and not the often ludicrously high prices of even basic homes. As in 2006, the mantra reigns that you can’t lose money in real estate – as long as prices rise.
The ranks of real estate appraisers stand to shrink substantially over the next five years, which could mean longer waits, higher fees and even lower-quality appraisals as more appraisers cross state lines to value properties.
There were 78,500 real estate appraisers working in the U.S. earlier this year, according to the Appraisal Institute, an industry organization, down 20% from 2007. That could fall another 3% each year for the next decade, according to the group. Much of the drop has been among residential, rather than commercial, appraisers.
Some say Americans are unlikely to feel the effects right now, as it’s mostly confined to rural areas and the number of appraisal certifications — many appraisers are licensed to work in multiple states — has held relatively steady. Others say it’s already happening, and rural areas are simply the start.
Since most residential mortgages require an appraiser to value a property before a sale closes, they say, a shortage of appraisers is potentially problematic — and expensive — for both home buyers, who rely on accurate valuations to ensure that they aren’t overpaying, and sellers, who can see deals fall through if appraisals come in low.
“As an appraiser, I should be quiet about this shortage because it’s great for current business,” said Craig Steinley, who runs Steinley Real Estate Appraisals in Rapid City, S.D. But “what will undoubtedly happen, since the market can’t solve this problem by adding new appraisers, [is] it will solve the problem by doing fewer appraisals.”
A shrinking and aging pool
As appraiser numbers are falling, the pool is aging: Sixty-two percent of appraisers are 51 and older, according to the Appraisal Institute (http://www.appraisalinstitute.org/), while 24% are between 36 and 50. Only 13% are 35 or younger.
Industry experts blame an increasingly inhospitable career outlook. Financial institutions used to hire and train entry-level appraisers, but few do anymore, according to John Brenan, modirector of appraisal issues for the Appraisal Foundation (http://www.appraisalfoundation.org/), which sets national standards for real estate appraisers.
That has created a marketplace where current appraisers, mostly small businesses, are fearful of losing business or shrinking their own revenue as they approach retirement. Many have opted not to hire and train replacements.
The requirements to become a certified residential appraiser have also increased over the past couple of decades. Before the early 1990s, a real estate license was often all that was needed. Today, classes and years of apprenticeship are required for certification.
And this year marked the first in which a four-year college degree was required for work as a certified residential appraiser. (It takes only two years of college to become licensed, but that limits the properties on which an appraiser can work. Some states, meanwhile, only offer full certification, not licensing.)
“If you come out of college with a finance degree, you can work for a bank for $70,000 [or] $80,000 a year with benefits,” said Appraisal Institute President Lance Coyle. “As a trainee, you might make $30,000 and get no benefits.” For some, especially those with student loans to pay, the choice may be easy.
“There were definitely easier options of career paths I could have chosen,” said Brooke Newstrom, 34, who became an apprentice for Steinley Real Estate Appraisals earlier this year. She networked for a year and a half, cold calling appraiser offices and attending professional conferences, before getting the job.
For residential appraisers, business isn’t as lucrative as it once was. Federal regulations in 2009 led to the rise of appraisal management companies, which act as a firewall between appraisers and lenders so appraisers can give an unbiased opinion of a home’s value.
But those companies take a chunk of the fee, cutting appraiser compensation. Some community lenders don’t use appraisal management companies, according to Coyle, but they are often used by mortgage brokers and large banks.
Appraiser numbers appear poised to continue shrinking, and as appraisers continue to get multiple state certifications they may be stretched more thinly, industry experts say.
For now, any shortages are likely regional, Brenan said. “There are certainly some parts of the country — and primarily some rural areas — where there aren’t as many appraisers available to perform certain assignments that there were in the past,” he said.
Elsewhere, however, the decrease in appraisers isn’t felt as acutely. In Chicago, according to appraiser John Tsiaousis, it may be difficult for young appraisers to break in but customers in search of one shouldn’t have a problem.
“I don’t believe they will allow us to run out of appraisers,” Tsiaousis said. “Some changes will be made [to the certification process]. When they will be made, I don’t know.”
Longer waits, more expensive appraisals, and quality questions
The effects of an appraiser shortage could be substantial for individuals on both sides of a real estate transaction, experts say.
Fewer appraisers means longer waits, which could hold up a closing. That delay means that borrowers might have to pay for longer mortgage rate locks, according to Sandra O’Connor, regional vice president for the National Association of Realtors (http://www.realtor.org/). (Rate locks hold interest rates firm for set periods of time and are generally purchased after a buyer with initial approval for a loan finds a home she wants.)
Longer waits also affect sellers who need the equity from one sale to purchase their next home. When they can’t close on the home they’re selling, they can’t close on the one they’re buying.
A shortage also means appraisals will likely cost more, which some say is already happening in rural areas. Appraisal fees are generally paid by borrowers.
“Appraisal fees in areas where there aren’t enough appraisers are higher than those areas where there are plenty of people to take up the cause,” said Steinley, who holds leadership roles in the Appraisal Institute and the Association of Appraiser Regulatory Officials (http://www.aaro.net/).
There is a quality issue, too: In some areas, appraisers come in from other states to value homes. While there are guidelines for these appraisers to become geographically competent, they could miss subtleties in the market, Coyle said.
And if the shortage isn’t addressed, and lenders are unable to get appraisers to value homes, lenders might ask federal regulators to relax the rules governing when traditional appraisals are needed, allowing more computer-generated analyses in their place, according to Steinley.
Automated valuation models, which are less expensive and quicker, are rarely used for mortgage originations today, Coyle said. They’re sometimes used for portfolio analysis, or when a borrower needs to demonstrate 20% equity in order to stop paying for private mortgage insurance, he added. They might be used for low-risk home-equity loans, Brenan said.
Currently, appraisers are required for mortgages backed by the Federal Housing Administration, Fannie Mae and Freddie Mac. Those mortgages make up about 70% of the market by loan volume and 90% of the market by loan count, according to the Mortgage Bankers Association (https://www.mba.org/).
And computer-generated appraisals can’t match the precision of one conducted by someone who has seen the property, and knows the area, many in the industry say.
The industry is beginning to address the issue. Last month, the Appraisal Foundation’s qualifications board held a hearing to gather comments and suggestions, Brenan said.
One of the options being discussed: Creating a set of competency-based exams that could shorten the time people spend as trainees. That way, someone with a background in real estate finance could become certified more quickly, Steinley said. The board is also looking to further develop courses that would allow college students to gain practical experience before graduation, Brenan said.
Proper education is important “because real estate valuation is hard to do, and you need to get it right,” Coyle said. But the unintended consequences of the current qualifications are just too much, he added. “It’s almost as if you have some regulators trying to keep people out.”
-Amy Hoak; 415-439-6400; AskNewswires@dowjones.co
Copyright (c) 2015 Dow Jones & Company, Inc.
Four Federal Home Loan Banks have recruited 74 members to participate in their new Mortgage Partnership Finance jumbo loan program.
The program, under which jumbo loans are packaged together and sold to Redwood Trust, a mortgage real estate investment trust, recently launched at the Atlanta, Boston, Chicago and Des Moines banks, with another two FHLBs also approved to offer it to their members.
The four banks “began ramping up their marketing efforts to their members in the third quarter,” according to a Redwood Trust letter to shareholders.
Redwood will purchase jumbo loans with balances as high as $1.5 million.
As of Sept. 30, “the MPF Direct program has purchased loans from only Chicago participating financial institutions, but we have active loan locks from members in other districts,” a Chicago FHLB spokeswoman said in a written response to questions.
Under MPF Direct, members can sell their jumbo loans to the Chicago FHLB, which in turn sells them to Redwood Trust. The Mill Valley, Calif., mortgage REIT prefers to package jumbos into private-label securities for sale to investors.
But that is not the best execution in the current market, according to Redwood president Brett Nicholas.
As a result, Redwood has shifted to bulk and whole loan sales to maintain its margins on jumbo loans.
“In short, a strong portfolio bid for whole loans from banks currently results in a more favorable loan sale execution for us versus securitization,” Nicholas said during a Nov. 5 conference call to investors and equity analysts.
“As a leader in private-label securitization,” Nicholas said, Redwood remains committed to issuing PLS under its Sequoia brand “to the extent the economics make sense.”
Planning to buy a fixer-upper, or make improvements to your existing home? The FHA 203k loan may be your perfect home improvement loan.
In combining your construction loan and your mortgage into a single home loan, the 203k loan program limits your loan closing costs and simplifies the home renovation process.
FHA 203k mortgages are available in California in loan amounts of up to $625,500.
About FHA Mortgages
The Federal Housing Administration (FHA) is a federal agency which is more than 80 years old. It was formed as part of the National Housing Act of 1934 with the stated mission of making homes affordable.
Prior to the FHA, home buyers were typically required to make down payments of fifty percent or more; and were required to repay loans in full within five years of closing. The FHA and its loan programs changed all that.
The agency launched a mortgage insurance program through which it would protect the nation’s lenders against “bad loans”.
In order to receive such insurance, lenders were required to confirm that loans met FHA minimum standards which included verifications of employment; credit history reviews; and, satisfactory home appraisals.
These minimum standards came to be known as the FHA mortgage guidelines and, for loans which met guidelines, banks were granted permission to offer loan terms which put home ownership within reach for U.S. buyers.
Today, the FHA loan remains among the most forgiving and favorable of today’s home loan programs.
FHA mortgages require down payments of just 3.5 percent; make concessions for borrowers with low credit scores; and provide access to low mortgage rates.
The FHA has insured more than 34 million mortgages since its inception.
What Is The FHA 203k Construction Loan?
The FHA 203k loan is the agency’s specialized home construction loan.
Available to both buyers and refinancing households, the 203k loan combines the traditional “home improvement” loan with a standard FHA mortgage, allowing mortgage borrowers to borrow their costs of construction.
The FHA 203k Loan Comes In Two Varieties.
The first type of 203k loan is the Streamlined 203k. The Streamlined 203k loan is for less extensive projects and cost are limited to $35,000. The other 203k loan type is the “standard” 203k.
The standard 203k loan is meant for projects requiring structural changes to home including moving walls, replacing plumbing, or anything else which may prohibit you from living in the home while construction is underway.
There are no loan size limits with the standard 203k but there is a $5,000 minimum loan size.
The FHA says there are three ways you can use the program.
1. You can use the FHA 203k loan to purchase a home on a plot of land, then repair it 2. You can use the FHA 203k loan to purchase a home on another plot of land, move it to a new plot of land, then repair it 3. You can use the FHA 203k loan to refinance an existing home, then repair it
All proceeds from the mortgage must be spent on home improvement. You may not use the 203k loan for “cash out” or any other purpose. Furthermore, the 203k mortgage may only be used on single-family homes; or homes of fewer than 4 units.
You may use the FHA 203k to convert a building of more than four units to a home of 4 units or fewer. The program is available for homes which will be owner-occupied only.
203k Loan Eligibility Standards
The 203k loan is an FHA-backed home loan, and follows the eligibility standards of a standard FHA mortgage.
For example, borrowers are expected to document their annual income via federal tax returns and to show a debt-to-income ratio within program limits. Borrowers must also be U.S. citizens or legal residents of the United States.
And, while there is no specific credit score required in order to qualify for the 203k rehab loan, most mortgage lenders will enforce a minimum 580 FICO.
Like all FHA loans, the minimum down payment requirement on a 203k rehab loan is 3.5 percent and FHA 203k homeowners can borrow up to their local FHA loan size limit, which reaches $625,500 in higher-cost areas including Los Angeles, New York City, New York; and, San Francisco.
Furthermore, 203k loans are available as fixed-rate or adjustable-rate loans; and loan sizes may exceed a home’s after-improvement value by as much as 10%. for borrowers with a recent bankruptcy, short sale or foreclosure; and the FHA’s Energy Efficiency Mortgage program.
What Repairs Does The 203k Loan Allow?
The FHA is broad with the types of repairs permitted with a 203k loan. However, depending on the nature of the repairs, borrowers may be required to use the “standard” 203k home loan as compared to the simpler, faster Streamlined 203k.
The FHA lists several repair types which require the standard 203k:
• Relocation of loan-bearing walls • Adding new rooms to a home • Landscaping of a property • Repairing structural damage to a home • Total repairs exceeding $35,000
For most other home improvement projects, borrowers should look to the FHA Streamlined 203k . The FHA Streamlined 203k requires less paperwork as compared to a standard 203k and can be a simpler loan to manage.
A partial list of projects well-suited for the Streamlined 203k program include :
• HVAC repair or replacement • Roof repair or replacement • Home accessibility improvements for disabled persons • Minor remodeling, which does not require structural repair • Basement finishing, which does not require structural repair • Exterior patio or porch addition, repair or replacement
Borrowers can also use the Streamlined 203k loan for window and siding replacement; interior and exterior painting; and, home weatherization.
For today’s home buyers, the FHA 203k loan can be a terrific way to finance home construction and repairs.
As part of its mission to reform the mortgage industry in favor of home buyers, the Consumer Financial Protection Bureau replaced the industry’s existing lending forms with more simplified documents. These documents took effect in early October, as part of the CFPB’s “Know Before You Owe” initiative.
Here are five things to learn about these new disclosure forms.
Four forms become two.
When applying for a mortgage, you used to receive the Good Faith Estimate and Truth-in-Lending Act statements. Before closing, you were given the HUD-1 settlement and final TILA statements.
These days, you only have to worry about two mortgage documents instead of four: the Loan Estimate, which is given to you within three days of applying for a home loan, and the Closing Disclosure, which is sent to you three days before your scheduled closing.
The CFPB says the new forms, which were a few years in the making, are easier to understand and use.
The Loan Estimate helps you better compare loans …
One of the most important aspects of home buying, aside from finding the right house for you and your family, is choosing a mortgage that best suits your circumstances.
The Loan Estimate makes it easier for you to compare loan offers from multiple mortgage lenders by giving you a thorough idea of the many expenses related to a loan, including:
Your interest rate and whether it’s fixed or adjustable.
Your monthly payment amount.
What the loan may cost you over the first five years.
You get this three-page form with every mortgage application, which helps you make an apples-to-apples comparison among different loans.
… and lenders, too.
Each lender has its own set of origination charges, which include an application fee, underwriting fee and points. These charges are outlined on the second page of the Loan Estimate.
Lender fees are among the few costs over which you actually have control, meaning you can shop around for the source of your home loan. As a rule of thumb, apply for mortgages with at least two or three lenders.
‘Cash to close’ isn’t a mystery.
The first page of the Loan Estimate lists information about the approximate amount of money you should bring to the closing table to seal the deal on your home purchase.
The “Estimated Cash to Close,” as it’s called on the form, includes the closing costs attached to the loan transaction. If any of the closing costs are added to your loan amount that would also be noted on the Loan Estimate.
The cash to close amount also includes your down payment, minus any deposit you made or seller credits you’re given, and also any additional adjustments or credits.
Your closing costs can’t vary by much.
The fees listed on the Closing Disclosure – the form you receive three days before your closing – may not look identical to your Loan Estimate, but the two documents should be similar.
There are three categories of closing costs: those that cannot increase, those that can increase by up to 10 percent and those that can increase by any amount, according to the CFPB.
Lender fees and the services you aren’t allowed to shop for can’t increase, while fees for services you can shop for, such as homeowners or title insurance, can increase by any amount. Fees for certain lender-required third-party services and also recording fees can increase by up to 10 percent.
However, if your circumstances have changed significantly since you applied for a mortgage, you will probably be given a new Loan Estimate, which would restart this part of the home buying process.
The Mortgage Bankers Association announced this week at their annual national conference in San Diego that they expect to see $905 billion in purchase mortgage originations during 2016, a ten percent increase from 2015.
In contrast, MBA anticipates refinance originations will decrease by one-third, resulting in refinance mortgage originations of $415 billion. On net, mortgage originations will decrease to $1.32 trillion in 2016 from $1.45 trillion in 2015.
For 2017, MBA is forecasting purchase originations of $978 billion and refinance originations of $331 billion for a total of $1.31 trillion.
“We are projecting that home purchase originations will increase in 2016 as the US housing market continues on its path towards more typical levels of turnover based on steadily rising demand and improvements in the supply of homes for sale and under construction. Despite bumps in the road from energy and export sectors, the job market is near full employment, with other measures of employment under-utilization continuing to improve,” said Michael Fratantoni, MBA’s Chief Economist and Senior Vice President for Research and Industry Technology. “We are forecasting that strong household formation, improving wages and a more liquid housing market will drive home sales and purchase originations in the coming years.
“Our projection for overall economic growth is 2.3 percent in 2016 and 2017 and 2 percent over the longer term, which will be driven mainly by consumer spending as households continue to buy durable goods, such as cars and appliances. The housing sector will contribute more to the economy than it has in recent years. We are forecasting a 17 percent increase in single family starts in 2016 and a further increase of 15 percent in 2017. Weaker growth abroad will mean fewer US exports, which will be a drag on growth over the next couple of years. Recurring flights to quality, a demand for safe assets from investors abroad, will keep longer-term rates lower than the domestic growth environment would warrant.
“Coincident with a strengthening economy, we expect the Federal Reserve will begin to slowly raise short-term rates at the end of 2015. At some point after liftoff, the Fed will begin to allow their holdings of MBS and Treasury securities to run off, likely beginning in late 2016. Even with these actions, we expect that the 10-Year Treasury rate will stay below three percent through the end of 2016, and 30-year mortgage rates will stay below 5 percent.
“We forecast that monthly job growth will average 150,000 per month in 2016, down from about 200,000 per month in 2015, and that the unemployment rate will decrease to 4.8 percent by the end of 2016, returning to 5.0 percent in 2017 and 2018. The slight rebound will be driven by an increase in labor force participation rates to more typical levels.
“Refinance activity will continue to decline as there are few remaining households that can benefit from an interest rate reduction and because rates will gradually begin to rise from historic lows in the coming years. Home equity products may see an increase in demand as home prices continue to increase at a decelerating rate,” Fratantoni said.
Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move to a different house? Could your growing debt — for autos, student loans and credit cards — make it tougher to come up with all the monthly payments you owe? Absolutely.
And some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.
New debt taken on to finance autos accounted for 81 percent of the increase — a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup truck in April was $33,560, according to Kelley Blue Book researchers.
Student-loan debt is also contributing to strains on owners’ budgets. Balances are up more than 55 percent since 2006.Credit-card debt is another factor, but it has not mushroomed like auto and student loans have. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration and Veterans Affairs home loans. These borrowers — who typically have lower credit scores and make minimal down payments (as little as 3.5 percent for FHA, zero for VA) — now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads — an average $22,414 — but typically have much higher credit scores and have made larger down payments.
Is there reason for concern? Bruce McClary, vice president at the National Foundation for Credit Counseling, thinks there could be if the pattern continues.
Some people have lost sight of the ground rules for responsible credit and are “pushing the boundaries,” he said.
Auto costs — monthly loan payments plus fuel and maintenance — shouldn’t exceed
15 to 20 percent of household income, he said. Yet some people who already have debt-strained budgets are buying new cars with easy-to-obtain dealer financing that knocks them well beyond prudent guidelines.
According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by
10.5 percent during the past 12 months. Of all auto loans originated through April, 23.5 percent were made to consumers with subprime credit scores.
Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads might look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30-day delinquencies on mortgages are just 2.3 percent, he said, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.
But Graboske agrees that other consequences of high debt totals could limit homeowners’ financial options: They “are going to have less wiggle room” in refinancing their current mortgages or obtaining a new mortgage to buy another house.
Because debt-to-income ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student-loan and credit-card debt you have along with other recurring expenses such as alimony and child support, the tougher it will be to refinance or get a new home loan.
If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refinancing or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.
Bottom line: Before signing up for a hefty loan on a new car, take a hard, sober look at the effect it will have on your debt-to-income ratio. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, might be the way to go.
Read more inThe Columbus Dispatchwhere author Kenneth R. Harney covers housing issues on Capitol Hill for the Washington Post Writers Group. email@example.com
Home buyers trying to purchase a pricey property will probably need a jumbo loan—a mortgage that exceeds government limits. But there are different types of jumbos, and some are a little easier and cheaper to get than others.
But first, a handy breakdown for those befuddled by the confounding terminology of the mortgage business:
Conforming mortgages are capped at $417,000 and backed by government agencies, such as Fannie Mae,Freddie Mac, the Federal Housing Administration (FHA) and the Veterans Administration (VA).
Conforming jumbo mortgages exceed $417,000 and can go up to $625,500—the exact limit depends on housing costs in your area. The loans are sometimes called “super conforming loans” or “agency jumbos” because they’re still guaranteed by government agencies.
Jumbo mortgages exceed government limits and, thus, are typically held by the lender as part of its portfolio or bundled and sold to investors as mortgage-backed securities.
Borrowers typically pay lower interest rates on conforming loans than on non-conforming jumbo mortgages. (Rates and qualification requirements vary by lender.)
Escalating home-sales prices are pushing more buyers into both conforming and non-conforming jumbos, says Tim Owens, who heads Bank of America’s retail sales group.
Jumbo mortgage volume totaled about $93 billion in the second quarter of 2015, up 33% over the first quarter, according to Inside Mortgage Finance, an industry publication.
The volume of government-backed conforming jumbos also saw brisk growth, increasing 32% between the first and second quarters to $34.2 billion—more than double since a year ago, Inside Mortgage Finance data show.
“The agency jumbo market is firing on all cylinders—purchase, refinance and every loan program,” says Guy Cecala, publisher of Inside Mortgage Finance. The biggest jump was in FHA jumbo mortgages, with volume up 136% between the first and second quarters, he adds.
The spike in FHA mortgages, in particular, comes after the agency on Jan. 26 reduced its required mortgage insurance premiums, Mr. Cecala says. Premiums dropped from 1.35% to 0.85% of the balance on fixed-rate FHA loans with terms above 15 years.
More lenient credit requirements spur borrowers to prefer agency jumbo mortgages over non-conforming loans, says Mathew Carson, a broker with San Francisco-based First Capital Group. He is working with a professional couple borrowing $511,000 for a home in Petaluma, Calif., where the government’s loan limit is $520,950. The couple, both first-time home buyers, could opt for a conforming or a non-conforming jumbo loan but chose a conforming jumbo backed by the FHA. Why? The FHA mortgage required a 3.5% down payment, whereas lenders for a non-conforming loan could require the standard 20% down payment.
Fannie Mae and Freddie Mac also reduced their minimum down payments to 3.5% of the loan amount in December.
Another benefit to conforming loans is lower credit-score requirements, with minimums in the 600s for Fannie Mae and Freddie Mac mortgages and in the 500s for FHA loans, says Tom Wind, executive vice president of home lending at Jacksonville, Fla.-based EverBank. Most lenders prefer to see 700 and above for their privately held jumbos, he adds.
An increase in the volume of VA mortgages is most likely due to more awareness of the benefit among active military and veterans, says Tony Dias, Honolulu branch manager of Veterans United, which specializes in VA loans. In Hawaii alone, Veterans United’s loan volume for 2015 is projected to reach $320 million, he adds.
Here are a few more considerations when choosing between a conforming and a non-agency jumbo mortgage:
• Mortgage insurance. Fannie Mae and Freddie Mac mortgages with less than a 20% down payment require mortgage insurance, but borrowers can drop the insurance once their loan-to-value (LTV) ratio dips below 80%, meaning the loan amount can’t exceed 80% of the value of the home. FHA borrowers must pay the insurance for the duration of the loan, adding to the lifetime cost of the loan, unless they refinance.
• Bonus for veterans. VA jumbos require no mortgage insurance and no down payment unless the amount borrowed exceeds the area’s conforming-loan limit. Even then, the 25% down payment only applies to the amount above the loan limit, so, for example, a borrower would only have to put down $25,000 on an $821,000 loan in Honolulu where the limit is $721,050, Mr. Dias says.
• Additional lender restrictions. Fannie Mae mortgages can have a debt-to-income ratio (DTI) as high as 50%, meaning the borrower’s monthly expenses can be as high as 50% of her gross monthly income. Most lenders typically stick to 43% DTI (prescribed by federal rules for privately held qualified mortgages) for their conforming jumbos as well, Mr. Carson says.
Consumers taking out a second mortgage will now have to consider the fact that if they encounter financial difficulties and file for bankruptcy, they won’t be able to strip off the additional loan obligation.
The Wall Street Journal reports that the Supreme Court ruled in favor of banks when it came to determining that struggling homeowners can’t get rid of a second mortgage using Chapter 7 bankruptcy protection, even if the home’s value is less than the amount owed on the first mortgage.
Monday’s unanimous ruling involved two cases in which Florida homeowners sought to cancel their second mortgages – issued by Bank of America – under the argument that when both primary and subsequent loans are underwater, the second is worthless.
The homeowners in the cases were previously allowed by lower courts to nullify the second mortgages. Back in 2013, those rulings were affirmed by the Atlanta-based 11th U.S. Circuit Court, the Associated Press reports.
However, Bank of America maintained that the rulings conflicted with Supreme Court precedent, arguing that even if the primary mortgage is underwater, it shouldn’t affect the lien securing the second loan.
According to the bank, there remains a possibility that the second loan would be repaid if the property’s value rose in the future.
The company also claimed that after the Circuit Court ruling, hundreds – if not thousands – of struggling homeowners had moved to nullify their second loans, the AP reports.
Justice Clarence Thomas said on Monday that the SCOTUS decision took into consideration the shifting nature of property, the WSJ reports.
“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the decision.
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