Monday Morning Cup of Coffee: Mortgage rates to set more record lows

A look at stories across HousingWire’s weekend desk, with more coverage to come on bigger issues:

Mortgage rates after likely to grind lower as originators continue trying to attract the marginal borrowers who are increasingly less responsive. Last week, rates dropped to their lowest point ever.

Originators with significant infrastructure such as Wells Fargo adjust their capacity to meet demand, it’s still a process that takes months to conduct.

Barclays Capital points out that originators could hire a significant number of temporary workers. However, the firm says, most prefer to keep critical tasks such as credit decisions with in-house employees, and training those employees is a time-consuming process.

“We believe that originators will take time to ramp up their capacity, precluding a sharp drop in mortgage rates in response to the drop in the current coupon,” analysts at Barclays say. “In the meantime, rates are likely to grind tighter as originators continue trying to attract the marginal borrowers who are increasingly less responsive, given that a new lifetime low in mortgages rates has been almost continuously on offer for more than three years.”

However, any streamline refinancing program that targets post-HARP borrowers can change the picture significantly. “This need not be a new program, but just a reinstatement of the one that was replaced with HARP,” analysts add. “This would make the process more efficient and, hence, allow originators to process more loans using existing capacity.”

There are no indications the Federal Housing Finance Agency will announce such a program.

The housing market must experience a 15% reduction in mortgage debt over the next five years to return to optimal homeowner equity as a share of total housing value. That’s assuming aggregate home prices rise 20% in that time, Michelle Meyer, Bank of America Merrill Lynch housing economist says.

Prior to the mortgage crisis, home equity made up 60% of the nation’s total housing value (see graph below). Since then, it has since fallen to 43%. Throughout the past two quarters, the 4.5% gain in home values combined with the 1.3% drop in mortgage debt pushed the ratio up three percentage points.

However, much of the decline in mortgage debt is a result of foreclosure, or unintentional deleveraging, Meyer acknowledges. As foreclosures are processed, mortgage debt will continue to be reduced.

Outstanding mortgage debt has declined $1.05 trillion from the $10.6 trillion peak in the first quarter of 2008. The deleveraging process will continue even after the foreclosure backlog is fully processed, BofAML says. And tighter credit standards will likely necessitate larger down payments than in the past decade.

But home prices rose 3% to 4% in the first six months of 2012, across four different home price series — Case Shiller, CoreLogic, FHFA and CoreLogic distressed excluded — which could reduce the share of all-cash buyers. It’s the first time in six years that home prices have risen across all of these series in the first half of the year.

Even though distressed inventory issues remain, some economists are optimistic that home prices will rise about 4% annually for the coming years.

Paul Ashworth and Paul Dales, housing economists at Capital Economics, are not convinced that housing starts will leap to the 1.3 million touted by the recent surge in the National Association of Home Builders index. After all, they say, “this index has a tendency to be too optimistic during housing recoveries.”

But they contend that starts should continue to edge higher in the fourth quarter and throughout next year.

At the same time, households may continue to carry out home improvements. Based on retail sales of building materials in July and August, it looks as though home improvement investment in the third quarter will hardly rise at all.

“But if the damage to homes caused by Hurricane Issac at the end of August forces households to undertake urgent repairs, then retail sales of building materials may rise sharply in September,” Ashworth and Dales say.

The upshot they say is that residential investment will continue to rise, building on the gains in every quarter since the start of 2011, a marked turnaround from the situation a few years ago when residential investment fell in every quarter for three-and-a-half years.

Regulators shut down one bank over the weekend, raising the 2012 total to 43. This time last year, 74 had failed.

Crete, Ill.-based First United Bank was shut down. The Federal Deposit Insurance Corp. entered into a purchase and assumption agreement with New Lenox, Ill.-based Old Plank Trail Community Bank to assume all of First United’s $328.4 million in total assets and $316.9 million in total deposits.

The FDIC and Old Plank Trail entered into a loss-share transaction on $172.7 million of First United’s assets. The FDIC estimates the closure will cost the deposit insurance fund $48.6 million.

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