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Monday Morning Cup of Coffee: Goldman's $1B FHFA settlement?

America’s lost decade; FHA fees drag; Mortgage lending, RMBS slow to a crawl

July 28, 2014

Monday Morning Cup of Coffee takes a look at news crossing HousingWire's weekend desk, with more coverage to come on bigger issues.

Word is that Goldman Sachs (GS) has been in talks with the FHFA about resolving a lawsuit over crisis-era mortgages that could see the bank paying in the area of — wait for it — one billion dollars.

According to the Wall Street Journal, with the settlement in the range of $800 million to $1.25 billion, this could be the largest legal payoff Goldman's ever made in its lengthy and much-protected history.

The FHFA sued 18 banks in 2011 for not disclosing the real risks in mortgage bonds sold to the GSEs, Fannie Mae and Freddie Mac. Fourteen of those have settled. Goldman’s trial is set for this September.

The defendants have asked a federal judge to toss out some of the FHFA claims thanks to a recent Supreme Court ruling which may mean the lawsuits were filed too late.

The mortgage market was buffeted in 2013 and 2014 by a number of changes, among them higher fees at the FHA. Since 2010, the FHA has increased the rates it charges for mortgage insurance. On average, responding lenders indicated that 5.7% of originations were lost because of the increase in FHA fees.

The distribution clustered between a response of 1.1% to 2% and 6.1% to 7%. A loss of 5.7% in sales would correlate to roughly 200,000 to 250,000 home sales lost, near the mid-point of estimates NAR Research produced in April. 

When asked how consumers impacted by the increase in mortgage insurance rates responded to the higher costs, 68.4% of originators indicated that they had a client(s) who chose not to buy or put off buying indefinitely. Nearly as many originators found that their client(s) were able to find funding through VA and RHS, but only 42.1% cited having success shifting their client(s) to conventional financing with private mortgage insurance. Only 15.8% of originators cited that a client(s) could absorb the losses while 10.5% indicated that they had a client(s) who waited to save for a larger down payment.

Tracy Alloway at the Financial Times reports on the diverging trends that show corporate-bond issuance is surpassing RMBS.

While housing reform is pending, residential mortgage lending and securitization remain depressed and investors are seeking higher yields. Some warn the commercial debt and collateralized loan market might be overheating.

The national mortgage risk index slipped a little in June, but it’s still a lofty 22.99%. Combined with the other risk factors in loans, that’s a level that risks fueling home price volatility, particularly in lower income and minority areas. AEI’s National Mortgage Risk Index for home purchase loans fell almost half of a percentage point in June to 11.44%. 

This drop reflected declines for three of the four agencies (Fannie Mae, Freddie Mac, and the FHA), as well as a small decline in the FHA's share of purchase loans. The index for the Rural Housing Service hit a new series high at 19.75%.

About 200,000 loans were added to the NMRI in June, as home purchase issuance volume hit the highest level since October 2013. This brings the total number of risk rated loans to 3.11 million. There continues to be little discernible impact from the QM regulations on the share of loans with debt-to-income ratios greater than 43%.

In addition, the data indicate that the FHA is not compensating for the riskiness of these high-DTI loans by tightening other underwriting criteria, while Fannie and Freddie are doing so to a limited extent. FHA lending to subprime credits, as measured by FICO scores below 660, declined modestly. 

Even so, these loans accounted for one-third of the FHA's volume in June. 

Good anime and bad economic policy – Japan had both in the 1990s, and we got them 10 years later. It’s America’s lost decade, complete with a 36% decline in household wealth. Wonder why housing slowed down? There you go.

According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline.

Former Fed Chair Alan Greenspan used to blame a lot of different things for the housing bubble he and the Federal Reserve created. But now he’s changing his tune. Does he blame the Fed’s policies under his watch, or central banks in general since we never had anything like the recessionary cycles and the inflationary bubbles we’ve had since the Fed came on the scene 100 years ago?

No, he blames me. And you. And everyone else. Just not himself.

Yet after all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs:

“I have come to the conclusion that bubbles, as I noted, are a function of human nature.” Greenspan said.

Thanks, everyone.

Pending home sales, construction spending and the employment situation will come out this week, putting a period on the sentence “The second quarter was terrible for housing.” Pending home sales will be out Monday at 10 a.m. EDT.

A story out of Philadelphia this week was a terrible reminder of the dangers faced by real estate agents. A real estate agent showing a home was carjacked, beaten and driven around at gunpoint. In the course of the crime the carjackers ran into a fruit stand and killed three children, then escaped the scene. The National Association of Realtors offers safety tips and more here. Be safe out there.

The Federal Deposit Insurance Corporation reports that one bank, GreenChoice Bank in Chicago, was closed in the week ending July 25.

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