Private capital is returning to the mortgage market

Shrinking spread between jumbo and conforming mortgages is a positive indicator

The spread between jumbo and conforming mortgages is shrinking. And that’s a good thing for the mortgage market. It means that private capital is coming back into the market, according to analysis from Capital Economics.

“We think that the decline in the jumbo-conforming mortgage interest rate spread is a positive sign for the future of the mortgage market,” Capital Economics Property Economist Paul Diggle said.

The spread between jumbo and conforming mortgages has progressively fallen since the early part of 2013, even turning negative for a brief period in February. Diggle says this is due to two factors:

  • The guarantee fees which Fannie Mae and Freddie Mac charge lenders for buying or guaranteeing mortgages, and which lenders pass on to borrowers in the form of higher rates, have increased. Put-back risk, as well as a 10-basis-point premium mandated by the Treasury, has been behind the rise in guarantee fees. But guarantee fees do not apply to jumbo mortgages, meaning that the increase in fees has served to close the jumbo-conforming spread.
  • The tapering of the Fed’s asset purchase program, which includes purchases of agency mortgage-backed securities, has driven an increase in conforming mortgage rates. The Fed has been buying only those mortgage bonds issued by the GSEs, which are by definition made up of conforming mortgages. So while the winding down of the program has led to an increase in conforming mortgage rates, it has hardly affected jumbo mortgage rates.

Diggle says that the shrinking spread is a positive for mortgage lending. “After all, the spread is one indicator of the willingness or ability of private capital to compete with GSE money in the mortgage market,” he said.

“Consistent with that, the evidence suggests that jumbo mortgages are becoming increasingly available. In addition, the tight spread is an encouraging step towards the goal of running down the role of Fannie Mae and Freddie Mac in the mortgage market. That’s arguably the single most important reform which would put the US housing market on a long-term sustainable path.”

Renewal of federal tax breaks for homeowners facing bumpy road

Homeowner benefits such as mortgage debt forgiveness may not stand up to a planned rigorous evaluation by Rep. Dave Camp, the House’s most influential tax legislator.

WASHINGTON — Renewal of important expired federal tax benefits for homeowners took a major step forward recently, but the route to final congressional approval is beginning to look longer — and potentially bumpier — than previously expected.

Here’s why. The Senate Finance Committee overwhelmingly approved a package of tax code goodies that includes a two-year reauthorization of the Mortgage Forgiveness Debt Relief Act, plus similar extensions for deductions of mortgage insurance premiums and energy-saving improvements to homes.

Mortgage debt relief is crucial for thousands of underwater owners who receive cancellation of a portion of their principal balances from banks in connection with loan modifications, short sales and foreclosures. Without an extension retroactive to Jan. 1 — which the Senate Finance Committee package includes — these owners would be hit with federal income taxes on the mortgage amounts canceled.

Now for the bumps: The full Senate must still pass the so-called extenders bill containing the housing provisions. That vote could happen relatively soon — this spring — or could be put on a back burner based in part on the level of urgency the Senate leadership detects from the House side.

And here’s the message that Senate Majority Leader Harry Reid (D-Nev.) is certain to get from the House’s most influential tax legislator, Ways and Means Committee Chairman Dave Camp (R-Mich.): Cool it. We’re not rushing. Camp says he’s more interested in reforming the entire federal tax code for the long haul rather than reapproving tiny pieces of it year after year.

He wants to look at the 50-odd special interest tax benefits in the extenders bill — one by one — to determine whether they merit a place in the code. Among the breaks he plans to evaluate apart from the housing-related ones: Should the federal tax code provide financial subsidies to owners of racehorses? TV and film producers? Auto race tracks? Rum producers in the Caribbean?

He’s got a point. Are all the now-expired tax subsidies for niche groups and industries, which sometimes cost billions of dollars in lost revenue to the Treasury, cost-effective? Do they benefit the economy as a whole, or are they simply sops to well-shod lobbies? If they can be justified on the merits, fine, we’ll keep them. If not, they should disappear.

To achieve this analysis, Camp plans to conduct months of hearings and markups — a challenge given Congress‘ already tight pre-election schedule. At the end of the process, it’s likely that there will be fewer special-interest tax benefits in the House’s bill than the Senate’s. Republicans may also insist that whatever short-term special interest provisions are approved be offset by revenue-raising measures — cutbacks in tax benefits — elsewhere in the code.

How well will homeowner benefits — such as mortgage debt forgiveness, mortgage insurance premiums and energy-conservation deductions — stand up to Camp’s planned rigorous evaluation?

It depends. At one level, mortgage debt forgiveness tax relief looks like a solid bet to make it into any final package. Since its enactment in 2007, it has helped thousands of owners who, often through no fault of their own, faced staggering tax bills on what amounts to phantom income — money that the tax code says they “earned” simply because a mortgage lender decided to subtract it from the principal debt the owner owed on the loan.

To illustrate, say the value of your home dropped sharply, not because you failed to keep it in good repair but because the economy went into deep recession. Your employer cut back on your work hours and you found it increasingly difficult to make full, on-time payments on your mortgage.

To help you past these problems, your lender agreed to reduce the amount you owed as part of a loan modification. It canceled $80,000 of your debt. Without the protection of the 2007 mortgage forgiveness relief provisions, the Internal Revenue Service could demand more than $22,000 in income taxes on the $80,000 that your lender wrote off — “income” you never pocketed and probably don’t have on hand.

(In California, owners who sell homes through short sales are not subject to taxation on the amounts forgiven because of protection provided by state law, a legal interpretation confirmed by the IRS.)

Mortgage forgiveness debt relief has strong bipartisan support in the Senate and some support in the House. But if Camp and the Republican majority in the House demand “pay fors” elsewhere in the tax code as the price of retaining it — the estimated revenue “cost” of this provision alone is $5.4 billion over 10 years — negotiations could get complicated.

Ditto for mortgage insurance premium deductions and home energy conservation. The political odds in an election year still favor their survival, but it’s likely to get messy along the way.

Foreclosure sales drop to lowest level since 2007

Loan modifications remain steady

February’s foreclosure sales and starts dropped significantly from January’s totals to a level not seen since 2007. There were only 36,000 foreclosure sales in February, down 24% from 48,000 in January.

In addition, there were approximately 69,000 foreclosure starts in February, down from 75,000 in January, according to data released by HOPE NOW, the voluntary, private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors. Those figures marked the lowest since the initiative began recording data in 2007.

Delinquencies of 60 days or more were under 2 million forthe second straight month. That marks a decrease of over 2 million since December 2009.

February’s loan modifications were down slightly from January, dropping from 44,000 to 42,0000. This total includes modifications completed under both proprietary programs and the government’s Home Affordable Modification Program.

That figure was made up of 12,455 HAMP modifications and approximately 30,000 proprietary loan modifications.

Fannie and Freddie’s steep fees hurting home buyers, critics say,0,7914991.story#ixzz2yJM2qb2r

WASHINGTON — When you’re raking in tens of billions of dollars in profits by helping credit-elite borrowers buy homes, couldn’t you lighten up on fees a little for everyday folks who’d also like to buy?

That’s a question increasingly being posed to government-controlled home mortgage giants Fannie Mae and Freddie Mac and their federal regulators.

Though most buyers are unaware of the practice, Fannie and Freddie — by far the largest sources of mortgage money in the country — continue to charge punitive, recession-era fees that can add thousands of dollars to consumers’ financing costs. This is despite the fact that the companies are enjoying record profits, low delinquency rates and rising home values, plus are protecting themselves from most losses with insurance policies paid for by consumers.

Critics say that by making conventional mortgages more expensive, these fees are partially responsible for declines in home purchases in recent months, especially among moderate-income, first-time and minority buyers. The add-on fees can raise interest rates for some borrowers from the mid-4% range to more than 5%. Since Fannie and Freddie operate under federal conservatorship and send their profits to the government, the fees amount to a federal surtax on home buyers.

Last year, the two companies had combined pre-tax income of $64 billion. By contrast, the entire private mortgage industry — big banks, small banks, mortgage companies, brokers, servicers and others — had $19 billion in pre-tax income, according to new data compiled by the Mortgage Bankers Assn.

Fannie and Freddie got into deep financial trouble acquiring and backing poorly underwritten loans during the boom years. But under regulatory supervision since 2008, they have improved their performances, primarily by severely tightening their credit standards.

As part of that effort, they created a series of fees known as “loan level pricing adjustments” designed to charge borrowers more if they have certain perceived risks. The fees generally are added to the base interest rate paid by borrowers.

Small down payments, for example, get hit with higher add-on fees than large down payments. Applicants with low credit scores are assessed much higher fees than those with pristine records. Buyers of condominium units who make down payments of less than 25% get charged a hefty extra fee no matter what their scores.

Fannie and Freddie also charge lenders fees to guarantee mortgage bonds — again ladled onto borrowers’ bills — and those have doubled since 2011.

But critics such as Mike Zimmerman, senior vice president of MGIC, a major private mortgage insurance company that does business with Fannie and Freddie, calls the companies’ add-ons “arbitrary” and excessive in view of current market conditions.

For some borrowers, he says, the fees can increase the monthly cost of a 5% down payment loan on a $220,000 house up to 7%, and lead to thousands of dollars of extra expenses. But since Fannie and Freddie are already insured against most losses on low-down-payment loans by private insurance policies, he argues, these add-ons are unnecessary, covering risks that are already covered.

Fannie and Freddie could save consumers a lot of money, say industry experts, by reducing or getting rid of the add-ons and deepening their mortgage insurance coverage. Zimmerman estimates that borrowers could see reduced interest rates of between one-quarter of a percentage point to nearly nine-tenths of a percentage point if the companies moved in this direction.

A spokesperson for the two corporations’ regulator — the Federal Housing Finance Agency — declined to comment on the issue of add-on fees. The agency has a new director, former Rep. Mel Watt (D-N.C.), who has made virtually no public statements since he took over effective control of Fannie and Freddie in January. He is said to be studying options regarding key policy issues but is not ready to announce changes, if any.

David Stevens, chief executive of the Mortgage Bankers Assn., says the companies’ excessive fees are thwarting home purchases. “We’re seeing significant declines in purchase applications because we have priced out a lot of Americans,” especially in the under-$417,000 segment dominated by Fannie and Freddie.

“It’s a wonderful thing to be a duopoly,” said Stevens in an interview, but the two companies’ total fees are out of line with their real risks and are hurting homeownership.

Could all this change and borrowers get a break? It’s up to Watt and, at least for the time being, he is mum.,0,7914991.story#ixzz2yJM9fCiv

CoreLogic economist: 3 reasons you should be rationally exuberant on housing

Supply and demand matter more than bubbles and affordability

April 8, 2014

Have you noticed that there is a cacophony of opinion and conflicting information on the health of the housing market this spring?

Rising rates and regulation will stifle demand. Housing is suddenly unaffordable and there is risk of another bubble.

Aren’t these contradictory arguments?  If demand is going to be stifled, then how can we have another bubble?

After all, an asset bubble is defined by irrational exuberance as exhibited by excess demand. Isn’t the rule, you can’t have your cake and eat it too?

Either demand is stifled or there is a bubble, but not both.

Instead, here are the three things that, in my mind, really matter this spring.

1. Availability of Credit

The housing market runs on the availability of credit. Most of us can’t buy a home without it. Analysis of the credit profiles of recent purchase transactions tells us that the only real dimension in which credit availability is “tight” right now is with credit scores. Under more normal circumstances in the early aughts, a little more than 10 percent of purchase originations had credit scores below 620.

At the moment, only 0.3% of purchase mortgage originations have credit scores below 620. There are good signs this spring, however, that standards are relaxing in this dimension as lenders are announcing reductions in minimum credit score requirements. Before you lament the resurgence of the disastrous subprime loan, remember that lending to borrowers with lower credit scores can be done successfully if you don’t also layer on payment shock risk and high leverage.

2. Pent-Up Supply

Most homebuyers are also first home sellers. Even in the best of times, first-time homebuyers account for well less than half of home purchases. The existing homeowner who sells and then buys (we call this housing turnover) is the lifeblood of the housing market. Yet, many still are under-equitied, meaning they’re underwater or have less than a 20% equity stake.

The impressive gains in home price appreciation in many of the hardest hit markets have created a virtuous cycle though, relieving more homeowners’ under-equitied situations and putting them in the position to become sellers and then buyers again this spring.

3. The Fear of “Bubbles”

Does anyone really think that house prices can’t go down? Assuming that prices couldn’t go down was the fundamental premise upon which the last bubble formed. If you believed in ever-rising prices, then it didn’t really matter whether the borrower was qualified. But I am hard pressed to find anyone now who believes house prices can never fall, and rising rates and increasing supply will slow price appreciation over the coming months.

The days of financially engineered loans of ever-larger amounts, keeping pace with rising prices while holding monthly payments low, are a thing of the past. The lack of access to “unreasonable” credit should, alone, act as a governor of the risk of bubbles.

As we enter the spring buying season, talk of bubbles and affordability crisis is overblown, in my opinion. What really matters is good old-fashioned supply and demand. Expect more supply as the virtuous cycle of price appreciation unlocking pent-up supply continues. Expect increasing purchase originations as credit standards relax modestly and help to stimulate more demand. I am rationally exuberant, and that’s a bubble I don’t want to pop.

Here’s what investor trends mean for the housing market

Is the party over?

March 31, 2014

Purchase activity by investors – particularly institutional investors – has slowed down in the housing market, but hasn’t stopped.

The slowdown is partly due to the fact that there are fewer distressed assets available for purchase as foreclosure rates slow down. But it’s also partly due to the fact that there’s just not much inventory of any kind on the market. Most parts of the country still have less than 6 months’ supply, and many of the markets where investors were initially buying (California, for example) have even less.

Other reasons for the slowdown are that some of the investors have already spent the capital they’ve raised for their single family rental initiatives and, in some cases, they’re trying to get the properties they’ve already purchased repaired and rented out.

Investors are still buying, though – they’ve simply shifted where and what they buy.

We see a lot of investor purchase activity at foreclosure auctions, for example. This is one of the reasons that there are fewer bank-owned homes on the market: investors are buying them before the banks repossess them. We’re also seeing investors move into different geographic markets – especially in the Southeast and Midwest – where their dollars will go farther, and where they can generate healthier returns on rental income.

Some of the larger investors, such as Blackstone and Cerberus, are also moving from asset purchasing to asset financing – offering loans to smaller investors who are interested in buying and renting out single family homes. So some of the inventory that institutional investors would have purchased is now being purchased by individual investors instead.

There is still a big market for rental units, though. Occupancy rates are still north of 95%, and rent prices are still rising in many markets, albeit a bit more slowly. Household formation has slowed down, and a higher than normal percentage of the households that are being formed are renters rather than home buyers.

While all of this could mean less competition for first time homebuyers, don’t expect to see a huge wave of buying activity from owner/occupants as investors scale back.

What’s keeping first time buyers on the sideline isn’t competition from investors, it’s other factors: lack of jobs for the 25-35 year old cohort that typically makes up most of the buyers; a mountain of student loan debt that makes it difficult for these folks to afford a loan – or qualify for a QM/ATR loan; tight credit overall, which makes it hard to get loans in general; and the lack of inventory.

On that last note, new home inventory is near a 40-year low (and much of the available inventory is made up of larger, more expensive “move-up” homes); distressed inventory is lower than expected; and a high percentage of existing home owners are either underwater or don’t have enough equity to sell their current homes.

This all adds up to weak demand – especially weak demand at the lower end of the market – and could lead to home prices weakening in some of the markets where price growth was accelerated by investor activity last year.

That should help from an affordability standpoint in those markets, especially as interest rates inch up, and eventually enable the next generation of home buyers to enter the market.


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