Thoughts on Home Ownership and the FHFA REO Program; Few Argue US Economy Picking Up Some

In a unique combination of "Babe" and "Now Comes Miller Time", if you only watch one video today, make it this one.

Mortgage bankers and brokers are in a tizzy about HARP 2.0, but what about the general population? Someone sent me the results of a recent online survey, but I don't know the exact source: it has come to light that, although 22% of US mortgages are underwater, over 70% of the 300 borrowers surveyed were unaware of the existence of either HARP (Home Affordable Refinance Program) or HAMP (Home Affordability Modification Program).  About 9% had heard of just HARP; a little over 5% were aware of just HAMP. As folks in the biz know, these two programs were designed by the government to help struggling borrowers take advantage of lower interest rates by renegotiating the terms of their mortgages, refinance cost-effectively, and scale down monthly payments.  Chances are they would be more effective if more people knew what they were. Granted, it is an incredibly small survey size, but still...

Here at the MBA's regional conference in New Jersey much of the talk revolved around the potential changes and attitudes toward home ownership. For the past 40 years, the eligibility of homeownership has been supported by increasing leverage of the household balance sheet as well as significant federal sponsorship of financing that leverage. This approach worked as long as the value of the underlying asset, the house, rose consistently in price - but that is no longer guaranteed. Without the certainty of home price appreciation, the extensive leverage of the past decades does not work. Put another way, why would a borrower borrow 90% of a home's price if they thought it was going to drop in value by 10%? Supply and demand has also shifted as lenders are more stringent with credit and potential buyers worry about the asset's value and how it may affect future mobility. Furthermore, the oversized ex-urban home has lost some of its allure with the rise in gas prices over time. The overall trends are very complex and beyond the scope of this commentary, but it is something to keep in the back of our minds.

And no one disagrees when you tell them that oversupply remains among the biggest obstacles to a housing recovery. Interestingly, many builders are seeing solid pickups in their business - nice to see, although the "shadow inventory" is an important measure of housing health. And it does not capture oversupply as borrowers evicted through a foreclosure process typically look for another place to live. The last figure I saw for oversupply was measured by the increase in overall rental + owned vacancies versus historical norms and the estimate came to be about 3.2 million homes. Unless you're Detroit and start tearing down houses, this oversupply can be alleviated only if household formation exceeds newly added housing inventory. And people need a place to live, right?

Which brings us to the proposed FHFA REO rental/sales program, and its impact on the overall market. Many believe that it would do little to reduce oversupply, since foreclosures would continue to create rental demand whether or not such a program was in place. Foreclosed borrowers still need somewhere to live. But there are some benefits. Credit is more accessible to larger, better capitalized investors and economies of scale could reduce some costs, such as broker and management fees. And certain areas would be helped more than others. Regions with good prospects for rental demand (e.g., those with positive net migration) and high current rental yields are likely to benefit most from this program. Its impact will be different in places like Miami/Tampa/Orlando in Florida, Riverside/Stockton in California, and Chicago metro versus that of San Francisco/San Jose in California, as well as Denver and Seattle metros. As a side note, about 85% of the properties in the pilot REO sale by the GSEs already have tenants - that would certainly help its chances of success.

With the Supreme Court considering the Freeman versus Quicken Loan case, and Quicken's public statement regarding its policies, I received this wide-ranging editorial note: "Quicken has never charged unearned fees?  I think the verbiage will be the issue.  My bet is that it collects more in origination than it should. For a broker, if you charge points (which are fees that buy the interest rate down) you cannot get any YSP (credit for the interest rate chosen) - that makes sense. Quicken does not have disclose YSP, therefore, it can charge points and still collect the YSP with the rate it says has points. In the past the big builders that operated their own mortgage banking companies got away with horrible abuse.  They would tell the buyer they would get $1,000 from the builder toward closing costs.  So, they simply said the buyer was getting a rate and the charge for the rate was 2% (points), actually that rate had a 2% YSP.  So, the buyer got $1,000 toward closing costs and the builder collected 2 points from the buyer and got 2 points YSP.  Pretty slick."

The writer goes on: "Many years ago builders were not allowed to own and operate a mortgage company.  A controlled business agreement with a bank was allowed, but the contract was very explicit. Then anything and everything was allowed, and now, nothing is allowed, unless you are a bank or an online lender. Banks and online lenders don't have to disclose how they make their money, or how much they make - is that fair?" (Editor's note: Quicken Loans proved that the loan discount fee in each instance was not unearned at all, because the fee was a component of the loan terms and pricing structure. In Federal Court, the clients could not offer an explanation as to why they were claiming that the fees were entirely unearned, and the facts in this case indicate that the clients freely agreed to pay the loan discount fees after the charges were disclosed to them multiple times before closing. The fees were earned as a component of the price the clients willingly paid in order to obtain the reduced interest rate they wanted. The Supreme Court case focuses on the specific wording of RESPA.)

It is always a good thing to know "the life of a loan" and one lender - Mountain West Financial - is offering a free training session about it which details a loan's course from submission through funding. The webinar is Tuesday, 3/20 at 10AM PST and requires reservations.

China may have weathered the global financial crisis better than most, but it's not immune to slowdown of economic growth.  As annual economic growth in the People's Republic has slipped to the 9% range, loans have dropped to a four-year low, and Beijing has begun easing restrictions on three of the country's four largest banks.  Lenders will be able to use more of their deposits to make loans as the government increases the 2012 loan-to-deposit ratio to 63%.  Up until now, banks' capacity to lend has been somewhat constrained by lackluster deposit growth and a strict regulatory cap on that ratio, but that should change with this recent decree, and the easing of regulations will continue throughout 2012.  Of course, in a regulatory environment with minimal transparency, to say the least, it will be difficult to nail down the specifics.

Remember when Federal Reserve Chairman Ben Bernanke used the term "green shoots" in March 2009 to describe a U.S. economy that was showing signs of pulling out of the Great Recession? It has been three years without much to show for it, and although GDP has been slowly increasing, other economic indicators have been sluggish. But now it would appear that things are picking up a little more.

Yesterday we learned that Initial Jobless Claims for last week fell by 14,000 to 351,000, more than expected although the previous number was revised slightly higher. On top of that the Producer Price Index increased 0.4%, and for those that don't eat food or use energy, the core rate was +0.2%, and the Philly Fed survey showed a slight pickup. Suddenly everyone who didn't lock a week ago are wondering if their pipelines are going to go away entirely, wondering if the sun is going to come up tomorrow.  Treasury securities are seeing their longest losing streak since 2006 and our 10-yr has worsened by .24% this week hitting 2.35%. And based on many rate sheets, 4% 30-yr mortgages have lost about 1.625 in price.

On Thursday, however, things settled down, as eventually everything seems to: the Fed and others were in doing their usual MBS buying (the Fed has been averaging about $1.3 billion per day), and the supply of mortgages dropped back to average levels which helped. The 10-yr closed nearly unchanged from Wednesday at 2.29%. One interesting thing pointed out by Morgan Stanley is that the spread between the primary & secondary markets (e.g., the MBS prices & yields versus actual rate sheet prices and yields) has dropped - so it would appear that many companies are cushioning the blow to borrowers somewhat of the volatile security market.

Today we'll have the Consumer Price Index number for February, Industrial Production/Capacity Utilization, and Consumer Sentiment. And hopefully a day of the markets not doing much.

So two Irishmen walk out of a bar.

Hey - it could happen!