Closing the door on housing 2011

2011 was to be the year the U.S. economy turned the corner and started growing with housing leading the way. After all, the recession ended in July 2009, according to the National Bureau of Economic Research.

Around Thanksgiving, the Commerce Department revised its GDP growth estimate for the third quarter of 2011 down to 2% from a prior reading of 2.5%. That’s on top of the anemic rates of 1.3% growth seen in during the three months ended June 30, and the 0.4% during the first quarter of 2011.

The average annual rate of GDP growth since just after WWII is about 3.25%. Achieving that rate for 2011 seems unlikely.

And home price are back at levels last seen in 2003. The Standard & Poor’s/Case-Shiller home price index showed the average price of a single-family home for the quarter ended Sept. 30 fell 3.9% from a year earlier.

Prices in nearly all metropolitan statistical areas tracked by widely watched index are down from 2010 levels, as the market continues to bounce along the bottom.

Zillow reported U.S. home values at the end of October decreased 5.1% from the year earlier to $147,900. The average home value is down almost 25% from the peak in May 2007.

After rising nearly uninterrupted the past four years, the number of foreclosures began to slow somewhat in 2011. TransUnion now expects the rate to decline to about 5% by the end of this year.

“If things go as expected, there are no additional negative shocks to the U.S. economy and the average borrower’s situation, mortgage delinquencies could fall as much as 16% in 2012 compared to 2011,” according to Tim Martin, group vice president of U.S. housing for TransUnion.

But unemployment is still elevated despite dipping lower to 8.6% in November, the ongoing European debt woes keep stalling any recovery stateside, and more than one-fifth of all U.S. mortgages are underwater.

Major developments of the past 12 months 

The economy just never found a foothold in 2011. And in August, Standard & Poor’s downgraded the U.S. credit rating to AA+ after Congress rushed to raise the nation’s debt ceiling to avoid a possible default.

S&P analysts weren’t impressed by the super committee formed as part of the compromise to find an additional $1.2 trillion in deficit cuts.

The committee eventually failed to do anything by its Thanksgiving deadline, resulting in more painful budget cuts for the military and federal social programs. But any projected effect the downgrade had on Treasurys was delayed by the struggles in Europe, as investors fled to safer Treasury bonds as a result of the worsening debt crisis across the Atlantic.

And Europe may only be a precursor for a crisis stateside if a gridlocked Congress can’t find a solution soon.

Congress wasn’t able to settle on the structure of the new Consumer Financial Protection Bureau either.

The new federal regulator opened its doors July 21, albeit without a director, as the Obama Administration wants, or a board of directors, as Republicans demand.

The agency’s powers granted under the Dodd-Frank Act, make it the de facto regulator for the mortgage industry, from origination through servicing.

But lawmakers didn’t anticipate the industry backlash, claiming the new rules and increased oversight would constrict an already tight mortgage market. Republicans responded, effectively blocking a vote of President Obama’s nomination for director in December.

Without a director, the list of new federal rules expected to be proposed and finalized in 2012 will be delayed. Nonbank financial institutions such as payday lenders will go without oversight. But the CFPB is still at work developing new mortgage and credit card forms to simplify terms for borrowers.

President Obama needed 60 votes to have his nomination to head the CFPB, former Ohio Attorney General Richard Cordray, be put to a vote by the Senate. But the right side of the aisle filibustered the debate and only 53 senators voted to bring his nomination to the floor for an up-down vote. Legislation passed a House committee that would install a five-member commission instead of a director. The GOP also wants to make it easier for the Financial Stability Oversight Council to veto any CFPB rule with a majority, rather than a two-thirds, vote under the Dodd-Frank Act. The bureau’s budget should also be subject to a congressional appropriations committee, according to their demands, rather than being funded by the Federal Reserve.

President Obama said he would veto any legislation that “defangs” the bureau. There is a possibility the president would make a recess appointment of Cordray while Congress was away from the capitol in January.

GSEs still in limbo

The state and fate of Fannie Mae and Freddie Mac remained in flux throughout 2011.

In February, the Treasury Department released its white paper on the future of housing finance outlining three options to replace the government-sponsored enterprises.

The expectation was that Congress would work toward either a fully private model, one with only the Federal Housing Administration, or another that guaranteed the securities paid for by the private firms.

Since the white paper was released, a few proposals were made, but a committee never voted on one. Instead, House Republicans passed several reforms that were highly duplicative of the conservatorship agreements in place since 2008. Each side of the aisle blamed the other for not coming up with a plan, which means the market will probably have to wait until after the November elections for Congress to figure out the next step.

Then in April, the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to align their mortgage servicing guidelines for delinquent mortgages.

Under the new requirements, the foreclosure process cannot begin if the borrower and servicer are working toward solving the delinquency in a good-faith effort, effectively prohibiting the practice of what’s known as dual tracking. Servicers are required to consider a borrower for foreclosure alternatives up to the 120th day of delinquency. Servicers must also perform a formal review of the case to confirm the borrower was considered before starting foreclosure. Even then, servicers are required to continue work with the homeowner on other alternatives.

Servicers for Fannie and Freddie will be rewarded and penalized the same under the new guidelines.

The FHFA stressed the move isn’t a first step to merging the two mortgage giants entirely. But it can be seen as a preliminary step and a possible framework for the upcoming servicing standards industrywide this year.

Meanwhile, two mortgage groups sued the Federal Reserve earlier in the year to try and block the central bank’s final rule governing how loan officers are paid.

The new federal mandate comes from the Dodd-Frank Act and prohibits a mortgage originator from receiving compensation based on the interest rate or other loan terms or from receiving payments from the borrower and lender simultaneously. It was meant to limit the practice of paying originators more when they steered a borrower into a higher rate than the lender required.

In March, the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals argued it wasn’t constitutional to dictate how originators are paid, claiming the rule would harm smaller firms. The trade groups were not successful in blocking the rule, but they did get it delayed to help some lenders catch up on compliance.

Lenders were forced to comply and adapt to the new rule. As the housing market continues to heal, it’s not yet clear how the rule will affect smaller mortgage brokers, but the hypothesis is that more business will simply flow toward the largest banks. The NAIHP called the rule “one of the most anti-consumer, anti-small business rules the board has ever promulgated.”

Further handcuffing the GSEs in 2011 was the expiration of the elevated conforming loan limits on Oct. 1.

As a result, the government could not insure or guarantee mortgages larger than $625,500 in the most expensive neighborhoods. In 2008, Congress raised the limit to $729,750 as credit markets froze and private capital dried up.

A political fight over whether to extend the higher limits lasted for months. Industry trade groups said millions of homeowners especially along the coasts would be shut out. The Fed and even some bankers suggested the effect would be limited. And no one expected the compromise that came in November, when Congress lawmakers restored the higher limits for just the Federal Housing Administration.

Industry lobbyists backtracked from earlier in the year and began pushing lawmakers eager to reduce the government’s role in housing to reinstall the higher limits for the GSEs, as well, because the housing market hadn’t healed enough. A group of lawmakers in the House tried to restore the higher limits for Fannie and Freddie, too, but were unsuccessful.

Fannie and Freddie are the only securitizers of residential mortgage-backed securities left, outside of Redwood Trust in California — which has offered three private deals since the crisis — and Ginnie Mae. Redwood said it was able to buy more mortgages for an upcoming RMBS issue as a result of the limit drop. But can other players join the game?

No one really knew what was going to happen when the limits dropped for Fannie, Freddie and the FHA. But leaving the limits for just the FHA is tricky. The regulator’s insurance fund slipped in the third quarter to a dangerously low 0.24% — well below the 2% ratio mandated by Congress. And everyone agrees its current market share is unsustainable. With lawmakers effectively directing almost all jumbo loan business directly to the FHA, the effect is simply unknown even to those running it.

AG group splinters as servicers meet with regulators over consent orders

The 14 mortgage servicers that signed consent orders with the Office of the Comptroller of the Currency and the Federal Reserve met with the agencies several times in May to hash out what they’re expected to do about borrowers directly affected by the robo-signing scandal.

Here’s what they came up with: They hired third-party consultants without disclosing any previous business about their prior relationships to review up to 4.5 million foreclosure files between Jan. 1, 2009, and Dec. 31, 2010. Borrowers are allowed to apply for a review if they feel they have been harmed by the problems, but as of December, neither the servicers nor the agencies had an answer for how they would reimburse the borrowers for any harm done.

The reviews are expected to last until April. Then, the servicers will spend the rest of the year notifying borrowers about their results. Whether they get a check in the mail or some other form of compensation remains unclear. Also, don’t forget the consent orders left room for a fine to the servicers, which could get nailed down early in 2012.

Also, Iowa Attorney General Tom Miller lost two more foreclosure-heavy states from the collaborative effort to reach a settlement with the largest mortgage servicers over robo-signing and other foreclosure problems.

At the end of August, he removed New York AG Eric Schneiderman from the negotiation panel to allow him to pursue his own claims. At the end of September, California AG Kamala Harris removed herself, and then joined with Nevada AG Catherine Cortez Masto in early December to pursue a joint investigation.

A group of Republican AGs didn’t support the coalition from the beginning including Florida AG Pam Bondi. Massachusetts AG Martha Coakley split to pursue claims over liabilities the state has with the  Mortgage Electronic Registration Systems, or MERS. She filed the first lawsuit stemming from the robo-signing scandal in December.

Banks weren’t giving enough in the settlement talks to satisfy the more activist AGs. As a result, they now face potential lawsuits and charges from all sides. Had they given a bit more, they might have been able to avoid this piecemeal approach, which will only increase already heightened litigation costs. Look for the talks and the robo-signing scandal to continue well into 2012.

Banks continue to grapple with legacy assets

Early in 2011, Bank of America agreed to pay $3 billion to Fannie Mae and Freddie Mac to settle major repurchase and warranty claims brought against it.

But that hardly brought the banking giant out of the woods as far as resolving its mortgage issues, even with the GSEs. At the end of the third quarter, BofA said it still faced roughly $11.7 billion in unresolved rep and warranty claims from Fannie and Freddie, up from $10.7 billion just before the settlement was struck.

There’s still outstanding claims from private investors in other RMBS deals, as well. The Charlotte, N.C.-based bank spent $3.8 billion in litigation expenses in the first nine months of 2011, up from $1.2 billion over the same period a year earlier.

Bank of America has the most exposure to the mortgage problems of the past because of its Countrywide acquisition. It’s important to monitor how the mega bank works through its issues because the closer it gets to settling its problems, the closer the industry gets. Ron Sturzenegger, who heads up the legacy asset servicing division at BofA, told HousingWire in December that the bank was on track to settling all issues in the next couple of years.

The number of bank failures slowed to about 100 in 2011, which was down from the roughly 150 in each of prior two years. The list of problem banks compiled by the Federal Deposit Insurance Corp. is shrinking but remains elevated, and the overall health of the banking sector is improving, the regulator said in a third-quarter report. As a result, stress placed on the FDIC deposit insurance fund should subside some this year.

In June, the DIF returned to positive territory after spending seven quarters in the red.

The DIF hit a low point in 2009 with a balance of negative $20.9 billion. The FDIC estimated the fund would take $19 billion in losses over the next five years, but that would be less than the $23 billion hit it took in 2010 alone.

In addition to fewer bank failures, the FDIC was able to charge larger banks a higher premium for insured deposits under the Dodd-Frank Act.

While there were some bright spots on the road to recovery, the U.S. economy still has numerous milestones to pass before we return to pre-recession levels.

And a recovery in the housing market should help speed that process.

In December, Credit Suisse told investors and asset managers to expect a bumpy stabilization in U.S. residential home prices in 2012.

“U.S. homes now appear fairly valued compared with median family income,” said Martin Berhard, global real estate analyst at the Swiss financial services giant. “Furthermore, the interest rate environment is likely to remain accommodative for the foreseeable future. We therefore expect housing demand to recover gradually in 2012.”

So maybe this is the year the economy finally turns the corner.

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