Archive for December, 2010
The housing market has remained at the center of the nation's economic troubles throughout 2010. The housing market started the year flat on its back, and it's ending the year in nearly the same condition.
Home sales are still depressed, home-building remains near a 50-year low, and home prices are still about 30 percent below their peak.
Part of the problem this year has clearly been high unemployment. But the ongoing foreclosure crisis also keeps glutting the market with unsold homes. Meanwhile, the government's efforts to prevent foreclosures over the past year were a pretty big disappointment to many people.
Financial experts suggest that borrowers should apply for a new mortgage loan, or refinance their home loan when the time is right for their individual needs, rather than attempt to time the market. While risk takers may be enthusiastic about waiting until the last minute to lock in a low mortgage interest rate, most homeowners and homebuyers prefer to observe general mortgage market trends and focus more intently on their own finances. (If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you. See 4 Alternatives To A Traditional Mortgage.)
We can fix housing. There, someone finally said it. It will not be easy or obvious, but there are solutions to every problem.
We all know the various problems with housing — over-supply of homes, underwater mortgages, strategic defaults and rampant foreclosures. We get it already. Every pundit in the Western world has spent the last three years identifying and dissecting everything wrong in the world of housing.
But has anyone offered a solution?
Initially, economists said to simply build fewer new homes and let the market find its equilibrium. Three years later, new home starts have been reduced to all-time lows, and remain 75% below peak levels. However, home prices continue to deteriorate due to the ever-mounting tide of foreclosures and short sales. According to CoreLogic, about 10.8 million homes were underwater as of Sept. 30. This represents 22.5% of all mortgages. As homeowners find themselves deeper underwater, they eventually can no longer justify paying a mortgage based on a principal balance that does not reflect the value of the home, and they consider a strategic default.
Supply-and-demand issues
I am not sure if the traditional supply-and-demand formula works in housing. True, we could continue to allow supply to work off until the equilibrium is reached. However, as this supply works off, and my neighbors allow their homes to fall into foreclosure, the value of my own home is diminished. And as more homes in my neighborhood default, the value of my home falls even lower.
This cumulative effect only occurs in real estate. If my neighbor allows his car to be repossessed, the value of my car is not directly affected. If I have a neighbor who defaults on their Visa, the balance on my Visa is not affected. Yet if my neighbor allows his house to go into foreclosure, the value of my home is directly affected. According to a Morgan Stanley report last week, home prices may drop as much as 11% through the first quarter of 2011. That is the danger of this contagious downward spiral. As prices continue to decline, more people are forced to walk away, causing home values to decline further.
One statistic that I often hear is that we have 6 million or 7 million homes in the foreclosure pipeline. Where did all these households go? Did they move in with family or friends? I am sure that some small percentage did find this as a temporary solution. Did they move into an apartment? Occupancy rates in the multifamily sector remain below historic averages. I believe that many households simply walked away from their home (voluntarily or otherwise) and rented or purchased another one.
Oftentimes, the houses that are being rented are homes that previously went through a short sale or foreclosure. This may be a great opportunity for the investor and family in question, but this is the devastating part of the formula. The Federal Housing Administration insures these mortgages from the banks and further facilitates the decline. As home prices decline, more people default and move into this infinite supply of affordable housing. The banks get paid from Freddie or Fannie and take a charge off on their books. The former homeowners rent another house in the same city, same school district and the same neighborhood. It is all too easy.
Develop a Residential RTC
We need to stop the downward spiral by bringing back the Resolution Trust Corp. The RTC was created in 1989 with the intent to manage and resolve all formerly FSLIC-insured institutions placed in receivership. The creation of a newly formed Residential Resolution Trust Corp. could do just that. Instead of managing and resolving institutions, it would manage and resolve mortgages as held or insured by Fannie Mae or Freddie Mac. As it stands now, Fannie and Freddie own or insure a staggering portion of all residential mortgages. Both institutions have been placed into the conservatorship of the U.S government, and both institutions are hemorrhaging cash. The government already owns these lenders of last resort. The question is what to do with them.
We are embarking on a quantitative easing program to purchase $600 billion in mortgage-backed securities, and we continue to force-feed Fannie and Freddie hundreds of billions of dollars. Why? We have been trying these solutions for three years, and the market continues to decline. An RRTC could instantly stabilize the industry and could do it with little additional funding. This entity could be organized under the FHA with an oversight board to limit fraud and corruption. Key aspects of this new RRTC would include:
* Limited life of the new entity RRTC (five years)
* All homeowners with mortgages owned or insured by the FHA would have the option to refinance their homes at the current appraised value
* This option would be extended depending on whether or not the borrower was current on his or her mortgage.
*Interest rates would be predetermined for all borrowers at a fixed rate of prime plus 5.5%
*Borrowers that refinance under this new program would be precluded from selling the house for three years
* Borrowers that refinance under this new program would agree to split the gains evenly on any future sale of the home
* Borrowers that refinance under this new program would be precluded from obtaining a home equity loan on the property
* The new mortgage would be equal to the new appraised value
* Existing second mortgages or equity loans would be first in line to take a haircut due to the new adjusted principal balance of the home
*These mortgages are already federally insured. We would not need to drag out the process by prequalifying the homeowners. We are all already on the hook and it is in all of our best interest to keep people in their homes.
I believe that this program could instantly stabilize the housing market and the U.S. economy. It would stop a huge percentage of the short sales and looming foreclosures.
Most people love their homes. That is why they bought them in the first place. They want to stay in their homes and live the American dream. They just want it to make sense. We overextended ourselves as a nation, and it is time to rebalance. We would not just be saving these homeowners; we would be saving the American economy.
PJ Tyler is president of Diversified Builder Supply in Gilbert, Ariz.
Bank of America routinely takes longer than its peers to answer phone calls from borrowers with distressed home loans and loses the highest percentage of calls, too, six months of Treasury Department reports show.
BofA's answering time has averaged 40 seconds or more each month since May, when Treasury began collecting call-center data from the eight largest servicers in its mortgage modification program. BofA, the largest U.S. bank and the largest mortgage servicer, had the slowest answering speed in four of the six months.
OneWest topped BofA in July and October, the latest month in Treasury's reports.
A look at stories across HousingWire's holiday weekend desk, with more coverage to come on bigger issues:
The Federal Housing Finance Agency sent three final rules and one advance notice of proposed rule making to the Federal Register last week, pertaining to Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
The first rule aims at reducing the maximum number of mortgage portfolio holdings that each government-sponsored enterprise can keep on its balance sheet. As of Dec. 31, 2009, Fannie Mae and Freddie Mac can hold $900 billion worth of mortgage assets. As of Dec. 31, 2010, each is required to reduce its holdings by 10% of the previous maximum limit.
According to the rule, the limit will be reduced by 10% each year until the limit hits $250 billion. "At that point, no further reduction in the maximum limit is currently required," the rule states.
The second rule submitted by the FHFA requires Fannie Mae, Freddie Mac and the Federal Home Loan Banks to include women, minorities and individuals with disabilities in all functional activities. It also establishes an Office of Minority and Women Inclusion in each organization.
The third rule says the Federal Home Loan Banks must establish housing goals, consistent with those of the FHFA, Fannie Mae and Freddie Mac.
The FHFA said it is undertaking a review of its regulations governing federal membership to the Home Loan Bank circuit, "to identify provisions that may need to be updated to ensure that they remain consistent with the statutory provisions" concerning bank membership and the overall mission of the Federal Home Loan Banks. Possible amendments to the requirements may be made next year, the FHFA said.
Ernst & Young said it plans to "vigorously defend" itself against civil claims brought by New York Attorney General Andrew Cuomo.
Last week, Cuomo sued the accounting firm alleging it helped hide Lehman Brothers' financial problems. The case was reported by Reuters as, "the first major government legal action stemming from the (Lehman's) 2008 downfall."
Ernst & Young said there is "no factual or legal basis for a claim to be bought against an auditor in this context," where accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles.
"We look forward to presenting the facts in a court of law," Ernst & Young said in an official statement.
General Electric's finance unit, GE Capital, said it would sell its Mexican consumer mortgage division to Spanish banking giant Santander. According to an article in The New York Times, the deal priced at $2 billion pesos, or $162 million, plus debt.
Santander will take over GE Capital's consumer mortgage unit in Mexico, according to the Times article, including a $2 billion loan portfolio. The deal is expected to close in the first half of next year.
Mortgage rates decreased slightly for the week ended Dec. 23. According to the Freddie Mac Primary Mortgage Market survey, the interest rate for a 30-year, fixed-rate mortgage was 4.81%, down from 4.83% the previous week. One year ago, the mortgage interest rate was 5.05%.
A 15-year, fixed-rate mortgage also dropped to 4.15% from 4.17%. The rate for a 5-year, Treasury hybrid adjustable-rate mortgage was 3.75% and the rate for a one-year, Treasury ARM was 3.4%.
No banks were closed over the holiday weekend by the Federal Deposit Insurance Corp. A total of 157 banks have been shuttered this year.
The FDIC did, however, sell $603 million in home mortgages from failed banks to RoundPoint Financial Group. According to Bloomberg, RoundPoint acquired 40% of the equity of the loan pool.
This is the second deal RoundPoint has made with the FDIC concerning mortgage assets from failed banks.
Write to Christine Ricciardi.
Despite the drag of the housing crisis, the underlying economics of the servicing business remain strong, especially for large banks operating on a grand scale. This is because the higher costs associated with defaulted loans, while real, are outweighed by servicer profits from efficient collection of on-time mortgage payments, industry data and interviews suggest.
Because the lion's share of compensation is derived from loans that cause no problems, competently handling nonperforming loans is not a compelling business model. Being big is.
