Analysis Blames Slow Recovery on Tight Credit Market

Daily Real Estate News |      Monday, September 17, 2012

High lending standards are preventing a full economic recovery, according to new survey findings and an analysis of historic credit scores and loan performance by the National Association of REALTORS®. The group estimates that the U.S. economy would reap significant benefits if mortgage lending conditions were to return to normal.

“Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year,” said NAR Chief Economist Lawrence Yun.  “The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact.”

This view appears to be shared by real estate professionals as well. According to the REALTORS® Confidence Index, based on more than 3,000 responses by NAR members, there is widespread concern over the tight credit conditions for residential mortgages.  Respondents report that lenders are slow to approve applications, and that banks request information from borrowers that is considered to be excessive.

Some expressed the belief that lenders are focusing only on loans to individuals with the highest credit scores. The survey found that 53 percent of loans in August went to borrowers with credit scores above 740.  From 2001 to 2004, only 41 percent of loans backed by Fannie Mae went to borrowers with FICO scores above 740, while 43 percent of Freddie Mac-backed loans went to such borrowers. In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above.

Yun said the financial industry has not recognized that the market has turned in the wake of an over-correction in home prices.

“There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery. A loosening of the overly restrictive lending standards is very much in order,” he said.

Yun added that lenders’ high aversion to risk was unnecessary because default rates have been abnormally low since 2009.  Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent. The association deemed such rates especially notable due to higher-than-usual unemployment levels.

“These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards,” Yun said.

Source: “Home Sales and Job Creation would Rise with Sensible Lending Standards,” National Association of REALTORS® (Sept. 17, 2012)

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Robo-signing settlement may boost short sales

The government’s $25 billion settlement with the nation’s five biggest mortgage servicers over so-called “robo-signing” practices could boost short sales, as loan servicers will receive credit when they approve sales that include forgiveness of a portion of underwater homeowners’ debt.

Although the settlement is only expected to help a fraction of homeowners who owe more their properties are worth — perhaps one in 20, according to one estimate — it will also help bring certainty back to housing markets by removing some of the obstacles that have been keeping homes stuck in the foreclosure pipeline.

Announced last month, detailed terms of the agreement between mortgage servicers and a coalition of state attorneys general and federal agencies were filed today.

Broadly, the settlement calls for mortgage servicers to pay $5 billion in fines and commit to a minimum of $17 billion in homeowner relief, including principal reductions. Another $3 billion is earmarked for helping underwater borrowers refinance.

“We will see an increase in short sales, because lenders and loan servicers will get the same credit for doing a short sale, as if they did a loan modification or principal reduction,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC.

The Wall Street Journal reported Sunday that the structure of mortgage write-downs was a major point of contention in the year-long negotiations leading to the settlement.

Allowing debt forgiveness on approved short sales to count against the required $17 billion in principal reductions helped secure a settlement that will reach more borrowers, the paper said. Loan servicers will also get partial credit even when it’s investors, rather than the banks themselves, taking the loss, the Journal said.

A researcher at the Brookings Institution told the Journal that the settlement could help about 5 percent of underwater borrowers, or about 500,000 homeowners.

“We will probably see a short-term increase in forcelosure activity, because the servicers and lenders at last have a sense of certainty about what they can and cant do,” Sharga told Inman News. Part of that increase will also be among loans that don’t meet the criteria of the agreement.

For loan servicers to get credit for a principal reduction, a loan must be at least 30 days delinquent, have a pre-modification loan-to-value (LTV) ratio of at least 100 percent, satisfy specified debt-to-income ratios (DTIs), according to an analysis of the settlement by the lawfirm K&L Gates. At least 85 of occupied properties must have had an outstanding principal balance at or below the highest Fannie Mae and Fanni Freddie conforming loan limit cap as of January 1, 2010.

Because servicers won’t get 100 percent credit for all types of relief that are provided, the actual amount of relief provided could total as much as 32 billion, state attorneys general said in announcing the settlement.

“In terms of the overall housing market , our position is this will have very little effect on anything,” Sharga said. “Consumer advocates don’t think it went far enough, and people who look at housing markets realize that the number of properties and the amount of money involved won’t have a measurable effect on markets.”

Federal housing officials addressed those and other concerns today.

“This agreement does not — and is not intended to — solve or resolve all the issues and abuses related to the housing crisis,” officials with the Department of Housing and Urban Development blogged today. “This agreement is very narrow as to what it releases banks from. This settlement is intended to address the servicing aspect of the crisis, which did not cause the housing crisis.”

The settlement doesn’t prevent the government from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group, HUD noted. State and federal authorities can also pursue criminal enforcement actions related to conduct by servicers, including civil rights, fair housing, fair lending and other violations.

Also, if the remaining six to 14 loan servicers sign on to the settlement, it would grow to about $30 billion with more than $45 billion in benefit to homeowners, HUD said.

Cade Holleman, executive director of the Irvine, Calif.-based National Association of Women REO Brokerages, said the day is fast approaching when brokers and agents who have concentrated heavily in real-estate owned properties will have to diversify.

Short sales, refinancings, and loan modifications are each “pulling REO inventory out of the game,” he said.

“You’ve got to keep your eye on that process,” Holleman said.”You can no longer be 80 percent REO,” but must diversify into short sales and property management.

By Inman News, Monday, March 12, 2012.

Inman News®

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HARP Changes Are Coming This Spring

The Federal Housing Finance Agency recently announced changes to the Home Affordable Refinance Program (HARP) that will allow more borrowers to refinance and take advantage of historically low mortgage rates.

These changes to HARP (often referred to as HARP 2.0) are set to rollout this spring. Fannie Mae and Freddie Mac are currently updating their automated loan underwriting software. This is due to be completed in March 2012.

Some enhancements to HARP include:

  • Removing the 125% loan-to-value (LTV) ceiling on fixed-rate mortgages backed by Fannie Mae and Freddie Mac when the automated underwriting software is updated eliminates the need for a new property appraisal. Depending on occupancy type, Prospect’s current LTV ceiling is between 105% and 125% with any HARP 2.0 LTV limitations forthcoming.
  • Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages.
  • Extending the end date for HARP until on or before December 31, 2013.

HARP borrowers must meet the following criteria:

  • The mortgage must have been owned or guaranteed by Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it’s a Fannie Mae loan that was refinanced under HARP from March 2009 to May 2009.
  • The current LTV ratio must be greater than 80%.
  • Borrowers must be current on their mortgage payments with no late payment in the previous 12 months to 24 months, depending on the LTV.

Owner-occupied, secondary residences and investment properties may be considered for HARP refinancing. There are many HARP refinancing scenarios available.

from Prospect Mortgage Industry Insider

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FHA will keep funding flips

For the second year in a row, the Federal Housing Administration is extending a temporary waiver of its “anti-flipping” rule, meaning homebuyers relying on FHA-insured financing will continue to be able to buy homes that have changed hands in the last 90 days.

The waiver is a boon for investors seeking to rehab and flip properties, because it expands the pool of eligible borrowers to include those relying on FHA-backed loans, popular with first-time homebuyers and others who lack the cash to make large down payments.

In extending the waiver through 2012, FHA said all transactions must continue to be arms-length. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will apply only if the lender can document the justification for the increase in value, FHA said.

FHA instituted the anti-flipping rule in 2003 to protect its mutual mortgage insurance program from losses on homes that were merely flipped, rather than rehabbed. Homes repossessed by Fannie Mae, Freddie Mac, and state- and federally chartered financial institutions were exempt from the rule.

In February 2010, the Obama administration waived the waiting period for resales — including homes purchased and rehabbed by private investors — in the hopes of stabilizing home prices and revitalizing communities hit by foreclosures.

It often takes less than 90 days to acquire, rehabilitate and sell properties, the Department of Housing and Urban Development said at the time. Some sellers of rehabbed properties had been reluctant to enter into contracts with FHA buyers because of the cost of holding a property for 90 days, HUD said.

In extending the waiver through 2011, FHA said it insured 21,000 90-day property flip loans worth more than $3.6 billion in 2010 that would otherwise not have qualified for financing.

That number has since grown to nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition.

By Inman News, Wednesday, December 28, 2011.

Inman News®

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Mortgage rates rebound from all-time lows

Mortgage rates surveyed by Freddie Mac bounced back from historic lows this week, but aren’t expected to soar in the New Year.

Rates on 30-year fixed-rate mortgages averaged 3.95 percent with an average 0.7 point for the week ending Dec. 29. That’s up from 3.91 percent last week — an all-time low in records dating to 1971 — but still well below the 2011 high of 5.05 percent seen in February.

The 30-year fixed-rate loan has averaged at or below 4 percent for the past nine consecutive weeks, Freddie Mac noted in releasing the results of its Primary Mortgage Market Survey.

Rates for 15-year fixed-rate mortgages averaged 3.24 percent with an average 0.8 point. That’s up from 3.21 percent last week, an all-time low in records dating to 1991, but down from the 2011 high of 4.29 percent registered in February.

For 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans, rates averaged 2.88 percent with an average 0.6 point. That’s up from 2.85 percent last week, an all-time low in records dating to 2005, but down more than 1 percentage point from the 2011 high of 3.92 percent seen in February.

Rates on 1-year Treasury-indexed ARM loans averaged 2.78 percent with an average 0.6 point. That’s up from 2.77 percent last week, an all-time low in records dating to 1984, but  down from a 2011 high of 3.4 percent in February.

Freddie Mac’s rate survey is based on loans offered to borrowers with good credit scores who will be making down payments of at least 20 percent. Borrowers with damaged credit or making smaller down payments can expect to pay higher rates.

Mortgage rates are largely determined by demand for mortgage-backed securities (MBS), bonds that fund the vast majority of home loans.

The Federal Reserve helped push mortgage rates down in 2009 and 2010 by buying $1.25 trillion in MBS. Since then, the European debt crisis has helped keep mortgage rates down, as investors seek the relative safety of government-backed mortgage bonds, whose payments are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

In a Dec. 20 forecast, economists at Fannie Mae project that rates for fixed-rate mortgages will average 4.0 percent in 2012 and 4.3 percent in 2013, down from 4.5 percent this year and 5 percent in 2009.

The Mortgage Bankers Association predicts rates on 30-year fixed-rate loans will average 4.2 percent in 2012 before rising to 4.7 percent in 2013. The National Association of Realtors projects rates on 30-year fixed-rate loans will hold steady at 4.5 percent in 2012.

By Inman News, Thursday, December 29, 2011.

Inman News®

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FHA will keep funding flips

For the second year in a row, the Federal Housing Administration is extending a temporary waiver of its “anti-flipping” rule, meaning homebuyers relying on FHA-insured financing will continue to be able to buy homes that have changed hands in the last 90 days.

The waiver is a boon for investors seeking to rehab and flip properties, because it expands the pool of eligible borrowers to include those relying on FHA-backed loans, popular with first-time homebuyers and others who lack the cash to make large down payments.

In extending the waiver through 2012, FHA said all transactions must continue to be arms-length. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will apply only if the lender can document the justification for the increase in value, FHA said.

FHA instituted the anti-flipping rule in 2003 to protect its mutual mortgage insurance program from losses on homes that were merely flipped, rather than rehabbed. Homes repossessed by Fannie Mae, Freddie Mac, and state- and federally chartered financial institutions were exempt from the rule.

In February 2010, the Obama administration waived the waiting period for resales — including homes purchased and rehabbed by private investors — in the hopes of stabilizing home prices and revitalizing communities hit by foreclosures.

It often takes less than 90 days to acquire, rehabilitate and sell properties, the Department of Housing and Urban Development said at the time. Some sellers of rehabbed properties had been reluctant to enter into contracts with FHA buyers because of the cost of holding a property for 90 days, HUD said.

In extending the waiver through 2011, FHA said it insured 21,000 90-day property flip loans worth more than $3.6 billion in 2010 that would otherwise not have qualified for financing.

That number has since grown to nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition.

By Inman News, Wednesday, December 28, 2011.

Inman News®

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Fannie Mae and Freddie Mac Update

In September 2008, Fannie Mae and Freddie Mac — two government-sponsored enterprises (GSEs) that facilitate residential lending in the U.S. — were financially rescued by the U.S. government and placed into conservatorship with the Federal Housing Finance Agency (FHFA).

This crisis swayed Congress to gradually reduce the role of Fannie and Freddie in the U.S. housing market. The House of Representatives’ Capital Markets and Government Sponsored Enterprises Subcommittee recently approved a series of bills toward this end.

The legislation seeks to hold Fannie and Freddie to the same standards as any other mortgage market participant with regard to risk retention rules. Cumulatively, the legislation will suspend the compensation packages for executives and place all other employees on a government pay scale; reduce the size of their loan portfolios; gradually increase the fee requirements; and end the companies’ mandates to back mortgages for lower-income people. These bills will now be sent to the House Financial Services Committee in the House of Representatives.

The Treasury Department has also issued a list of recommendations for Fannie and Freddie. These include three options:

  1. Limit tax payer exposure to risks in the mortgage market and relegate the government to more narrowly targeted loan programs, such as the FHA and VA.
  2. Develop a “backstop mechanism” to ensure homeowners had access to credit during a crises.
  3. Have a group of private companies provide guarantees on mortgage securities with the Treasury providing reinsurance on these securities.

Analysts believe comprehensive reform of the two GSEs will be years in the making. Treasury Secretary Tim Geithner said whatever plan Congress chooses, it would take between five and seven years to implement.

– From Prospect Mortgage Industry Insider

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