Archive for June, 2010
Following the 2000 Dot Com crash, then Fed Chair Alan Greenspan brought Fed Funds rates down to ultra-low levels. Under 2% for 3 years, and 1% for more than a year.
Rates this low — and for that long — were simply unprecedented. They wreaked havoc with the traditional fixed income market. Bond managers scrambled for yield, and found it in investment grade, triple A rated residential mortgage-backed securities (RMBS). This better interest rate was created by securitizing mortgages with an unhealthy slug of higher yielding, riskier, sub-prime mortgages.
More aggressive modifications in recent quarters somewhat offset lower "quality" of borrowers after Q309 as the number of months delinquent at the time of modification grew, according to Barclays Capital (BarCap) researchers.
Macroeconomic factors, the extent of modification and borrower pay history act as the largest drivers of re-defaults, researchers said. And the middle determiner — extent of modification — has grown more aggressive since the beginning of the Administration's Home Affordable Modification Program (HAMP).
BarCap researchers expect re-default rates on all 2008 modifications to be near 80-90%, although modifications done in 2009 should generally perform much better.
For HAMP-specific modifications, the performance should be helped by the program's required three-month trial period. Barring any "material changes" to HAMP guidelines, BarCap expects an overall re-default rate of 60-65% in the program.
BarCap expects house prices to drop another 7% nationally before beginning a slow recovery. This stable housing should help re-default rates.
And, since forbearance modifications historically perform better than simple rate reductions, more aggressive modification programs are likely to help performance in the future. The degree to which payments are reduced through forbearance plays a big role in determining the performance of the modification:
"The question is if more aggressive modifications result in improved performance. On a given loan, the answer has to be an unequivocal yes," researchers wrote in a recent securitization research report. " However, when looking at pools, one could argue that more aggressive modifications are a sign of greater borrower distress or need for a bigger reduction in payment for the borrower to perform."
The "quality" — or degree of delinquency — among borrowers in HAMP is likely to improve in the future, as HAMP "is running out of delinquent loans" and will accept newly delinquent borrowers in the future who managed to remain current during 2008 and 2009, analysts said.
Write to Diana Golobay.
House prices across 25 metropolitan statistical areas (MSAs) rose 1% in April compared to one month earlier, and 2.4% compared to a year earlier, according to the latest from Radar Logic. An oversupply of housing and wave of distressed inventory, however, could drag down house prices later this year.
Prices in the Midwest MSAs led overall monthly gains, rising 3.5% from March, although they are down 8.8% from a year earlier. Prices in the western MSAs grew 1% from a month ago and 7.5% from a year ago.
Although prices show recent upward trends, Radar Logic warned that housing oversupply represents a major source of distress for the housing market.
Prices started stabilizing at the beginning of 2009 due to a pickup in demand as house prices were declining from relative highs. But Radar Logic noted that demand could reach "exhaustion" soon. And the inventory overhang of distressed and non-distressed homes is affecting prospective homebuyers' hopes for future appreciation.
"Given the unprecedented number of homes in default, foreclosure, or REO inventory, and barring some unforeseen exogenous boost to housing demand, the price stability we saw in 2009 will likely come to an end in the second half of this year," Radar Logic said.
Radar Logic noted the volume of houses in real estate owned (REO) status or a state of serious delinquency is steadily rising.
The national REO inventory is more than 478,000 homes. Of that total, Fannie Mae (FNM: 0.00 N/A) owns 23%, Freddie Mac (FRE: 0.00 N/A) owns 11% and the Department of Housing and Urban Development (HUD) owns 10%. Radar Logic estimates another 1 to 2% is owned by the Department of Veterans Affairs (VA). All together, the government owns about 46% of the total REO inventory.
After adding in seriously delinquent mortgages, Radar Logic estimated 3.1m homes either in the government's REO inventory or headed toward it. With an assumed average mortgage balance of $200,000, the value of these distressed assets could reach $614bn:
Since REO inventory, by nature of being distressed, tends to sell at a discount, the government (read: taxpayers) are on the line to lose billions. Radar Logic estimated that, at an average REO liquidation rate 40% lower than book value, taxpayers could lose $246bn.
Assuming another 25% of the government's distressed pipeline ends up in short sale — at an average 40% discount — Radar Logic noted taxpayers could lose an additional $88bn on the assets. Taken together, REO and short sales could cost the government $333bn.
Write to Diana Golobay.
Disclosure: the author holds no relevant investments.
Kermit Baker is the chief economist for the American Institute of Architects (AIA) in Washington, D.C. In this capacity, he analyzes business and construction trends in the US economy and examines their impact on AIA members and the architectural profession.
For this edition of In This Corner, Baker sits down to talk about that impact on new design trends and the intense battles over new projects.
How has the typical American family home changed from a design perspective in the last few years?
I think the biggest change has been size and amenities. Part of that was overblown by the boom we had in the housing market up to 2005. Very dramatic increase in size and the accessories that households were including in their homes. I think having to do with the financial environment. Credit was cheap. House prices were appreciating pretty rapidly. It made sense to over invest in your home in that period.
We’ve certainly seen the pendulum swing in the other direction, probably even further back than where it started at over the last five years. Homes have gotten smaller. There is much more emphasis on not over investing or over improving. There’s a greater concern over affordability. What can I sell this for when I want to sell it and not trying to over extend the household in this economic environment.
Those are not really design issues, but those are the underpinnings for how the design is playing out. When homes were getting bigger, more square footage and more rooms were added. In our survey, we spend a fair amount of time trying to figure out what special function rooms are being put in. Wine cellars, entertainment rooms, media centers, hobby rooms and things like that. Now, we’re seeing less of that and more of the general purpose space, more open space in design, more flexible space. I think households have less of it, and they want as much flexibility as they can.
Looking at your bio, you have a master’s degree in urban planning from Harvard University. What are you seeing from cities like Detroit that are trying to restructure their residential and urban layouts?
There’s a lot of different examples of that. Detroit is an extreme example of home prices plummeting in a central area. The planning efforts are trying to develop some economic stabilization there, something to build off of, something to generate some growth. But it’s very different from other areas that have seen rapid drops. Las Vegas and Phoenix have seen problems but qualitatively very differently from what’s happening in Detroit because of the level of growth they’ve been seeing.
How painful was the housing crisis for architects and what business strategies have you seen used in attempts to survive moving forward?
They’ve not been faring well. They’ve taken a huge hit, according to the Department of Labor information we get. Payrolls at architecture firms are down 25% since their peak in the middle of 2008. Just a very dramatic downturn in payroll losses about four or five times of what we’re seeing in terms of national trends. Construction is a very cyclical industry. I like to say architects have to place to hide. There are really very few options.
More firms are looking internationally, but during the steepest part of this downturn, there wasn’t anything going on really anywhere across the world. And secondly, it’s very difficult for firms to turn on a dime, to have a very local base and say, “Now I’m going to do work in China or India or something like that.”
You don’t start doing that tomorrow. That’s a several year plan to start developing those international connections. Firms try to diversify, internationally, across the country in different types of facilities. A typical architecture firm is fairly small, 10, 15, 20 people do work often in one or two types of facilities. They do schools, healthcare, offices. They try to diversify as much as they can both geographically and by facilities.
With fewer projects, then, are bidding wars growing more intense?
Again, there aren't many options, and what that generated was stories we kept hearing about just amazing competition for whatever projects materialized. I heard from many firms who would go to a bidders conference on a project four or five years ago, and they’d see four to five competitors. Last year and earlier this year, they’re now seeing 30 or 40 of them.
Everyone was desperate to get whatever they could from stimulus-funded projects, but there turned out to be not a lot of those on the building side. The ones that were there, at least early on, were fairly large government work. When it filtered down to the state and local government, there were more opportunities there because there was smaller projects. A lot of them were renovation, energy retrofits.
But, again, it’s hard to turn on a dime for midsized firms to go from doing schools or commercial space to suddenly bid on a government project where they’re very much into credentialing and things like that.
These firms had been faring very poorly, and there were not any strategies that really have helped them. They’ve downsized and downsized fairly dramatically, trying to do what they can to keep a little work in house and wait for the market to improve.
Write to Jon Prior.
Mortgage servicers on Thursday told US House lawmakers that consecutive changes to the US Treasury Department's foreclosure prevention program have made it increasingly difficult to keep distressed borrowers in their homes.
Real-estate financial services consultant Edward Pinto described the Home Affordable Modification Program (HAMP) in two words: "numbing complexity."
"At last count, HAMP had 800 requirements and servicers are expected to certify compliance," he said. "With ever changing regulations, a constant need to re-evaluate past decisions in light of new regulations, and multiple appeals, it is no wonder that the HAMP pipeline became clogged through no substantial fault of servicers."
Senate negotiators working on the financial-regulatory bill today rejected a proposal from House Republicans that would make big banks liable for the costs of winding down Fannie Mae and Freddie Mac.
The proposal would have made the government-controlled home loan companies, which own or guarantee more than half of the $11trn US mortgage market, part of a Wall Street-financed "rainy day" fund that would be used to pay for the liquidation of large failed companies.
Home-builder stocks, seen as a leading indicator for housing, have fallen 24% since peaking in late April.
On Wednesday, the Commerce Department said sales of new homes fell by a third in May to a record low.
Yet builders as a group managed to rise on Wednesday as the Federal Reserve reiterated its pledge to keep interest rates near zero to stimulate the economy. One positive in the Commerce Department report was a reduction in inventory.
For the first time in two years, fewer homeowners are missing mortgage payments, Treasury Department regulators reported Wednesday, but foreclosures are surging as many loan-modification efforts fail.
Three years have passed since the mortgage debacle made most sub-prime and nontraditional loans unavailable, and most loans since have been "plain vanilla" fixed-rate mortgages to prime-credit borrowers.
