Generally Good News in the Housing Market; No Change to Conforming Loan Limits

A new housing brief from the U.S. Census Bureau shows that median home values in many small counties across the nation held steady after the most recent recession, while values in large counties declined. These findings come from the Census Bureau’s recently released brief, which uses the American Community Survey three-year estimates to focus on homeownership rates and home values for smaller areas. Contained in the report is some pretty interesting data for Wednesday-morning economists.

The gathered statistics show that in 67% of the 1,038 smaller counties (with populations between 20,000 and 65,000) the median home value in the post-recession period of 2010-2012 was not statistically different from the recession period of 2007-2009. Similarly, the median home values in 37 of the 50 smallest counties of this size were not statistically different from the recession period. In contrast, median home values in 43 of the 50 largest counties declined over the same period. Nationally, the median home value was $174,600 in the post-recession period, a $17,300 decline from the recession period of 2007-2009. New York County, NY had the highest median home value at $812,300 in 2010–2012. Santa Clara County, CA had the second highest median home value at $634,000, followed by Honolulu County, HI ($556,400) and Kings County, NY ($556,300), which were not significantly different from each other.

For the folks who like to look at the negative side of things, there is a little bit of dour news. In the third quarter, investment in home improvements was $178 billion, while construction spending on new single family (SF) houses and townhouses was $172 billion, each about one percent of GDP. Similarly, in Q1 spending on home improvements was $161 billion, slightly above the $157 billion spent building new SF structures. Normally new SF construction spending is double spending on improvements. Worse, to date in 2013, new SF construction spending is flat. Still, Home Depot isn’t complaining.

The mortgage market is a complex web of supply and demand, over multiple instruments, coupled with an assumption that buyers, sellers, and investors will all behave rationally. It is this belief in ‘rationality’ that confuses many outside the industry. Over the past few years “under water” has gone mainstream; no longer belonging to submariners and mortgage banking veterans. It’s a word few wish to hear, and a word few homeowners wish to repeat. Over the past few years as markets have found their equilibriums, however, and rates have remained synthetically low, there may be hope for struggling homeowners. According to a recent Bloomberg article, the number of Americans who are underwater on their mortgage fell at the fastest pace on record in the third quarter of this year as home prices rose. They write, “The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter….the share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place.” If this somehow means home owners are more likely to sell their properties, or somehow are more likely to refinance their properties, I don’t know. What I do know is the conversation to sell, or the conversation to refinance, after years of forced payments certainly may be irrational. (read more...)

Part of the recovery is due to lending, and thus the agencies, and a couple weeks ago Fairholme Capital Management announced its proposal to purchase the insurance businesses of Fannie Mae & Freddie Mac. “So what?” you ask? The plan calls for the creation of new state-regulated insurance companies followed by those entities purchasing the insurance businesses of the GSEs. The new entities would be capitalized with about $35 billion of restricted capital from the conversion of existing GSE junior preferred stock into common equity in the NewCo, and a $17 billion rights offering for new cash equity. The GSEs’ retained investment portfolio and legacy guarantees would be left in the old entities and run-off.

Those who know about these things believe that little or nothing will come of this – but it is somewhat interesting to think about anyway.  The White House has repeatedly reiterated its belief that the GSEs should be liquidated. For example, in one speech (the “Housing Speech in August) President Obama stated: “one of the key things to make sure it doesn't happen again is to wind down these companies that are not really government, but not really private sector -- they're known as Freddie Mac and Fannie Mae.” Furthermore, James Stock reaffirmed the White House’s preference to wind down the GSEs. So it would seem that the White House, and therefore the Treasury Department, has little to no interest in any GSE reform plan that is not predicated on the liquidation of the GSEs. Also, Congress rarely gives power away if it can help it – and it prefers to think that the fate of F&F is in its hands. The Fairholme proposal states that its purchase would “catalyze reform” since the core tenets of the plan are consistent with outstanding reform proposals. True, but GSE reform efforts have taken significant steps forward during this Congress and analysts are skeptical that lawmakers will embrace a proposal which would seemingly limit their legislative optionality in the future. The Fairholme proposal goes to great lengths to note that its plan can be consummated without Congressional approval but we believe that lawmakers will openly oppose this concept and that the political pressure from Capitol Hill will continue playing a key role in this conversation. Every quarter that the GSEs make billions, every quarter that the quality of their portfolio improves, every quarter that they further the agenda of the current administration, merely pushes back GSE reform until 2015, after the 2014 election, if not until 2017, after the next presidential election.

The industry has one less concern – for now. “With Single-Family Seller/Servicer Guide (Guide) Bulletin 2013-25, we are announcing that our 2014 base conforming loan limits will be maintained at the existing 2013 levels. The loan limits in designated high-cost areas will also remain unchanged with the exception of some counties where the loan limit will increase.

The Guide Bulletin is in line with the Federal Housing Finance Agency (FHFA) announcement today regarding the 2014 conforming loan limits. It is important that you review the information on the FHFA website for the 2014 loan limits permitted for specific counties in high cost areas. Super conforming mortgages that you intend to sell to Freddie Mac are subject to the loan limits set by FHFA for designated high-cost areas.” So noted Freddie Mac to its clients, as did Fannie.

The timing of the loan amount announcement harkens back decades – it was always announced around Thanksgiving. Although the announcement provides some certainty, and some relief, it is hardly a surprise. With the change to the filibuster rules, detracting from the Senate’s power while adding to Obama’s, it is generally believed that he will use this to further his agenda. And part of his agenda is Janet Yellen and Mel Watt. And Mel Watt, among other things, appears to prefer leaving limits where they are - so his predecessor Ed DeMarco (assuming Watt is confirmed in December) was very considerate and left things alone. (Why change something like that, only to have it changed back in three weeks?)

While we’re yammering about Mr. Watt, many in the industry are looking forward to his confirmation, although some of that might be misguided. There is a lot that might happen under his watch. Guarantee fees, for example, might be reduced – after all, the perceived risk of current originations is down dramatically. And not a week goes by without someone asking me about the possibility of HARP 3.0. Geez! The folks “in the know” believe that changes could be made to the program eligibility date, the amount of paperwork, the ability to refinance an existing HARP loan, or requiring portfolio lenders such as banks to refinance loans. Yes, changing the date range will help, as will allowing borrowers to refinance an existing HARP loan. But do we really want the government telling banks that they must allow changes to their portfolios. (Talk about a slippery slope of government interference in the private sector!) And paperwork…wow, imagine having to do paperwork to obtain a mortgage?! And, although I don’t have the numbers in front of me, most think that tweaking the current program will certainly not result in another huge wave of refinances as the industry saw in 2011, 2012, and the first half of 2013.

Folks who follow agency-activity think that there might be a flurry of activity regarding the FHFA heading into the holidays. Isaac Boltansky with Compass Point Research & Trading, LLC writes, “We expect there to be a flurry of FHFA-related activity heading into the end of the year including: (1) the confirmation vote of Rep. Watt between December 9 and 20, 2013; (2) the release of proposed PMI capital rules; and (3) the release of the FHFA’s 2014 Conservatorship Scorecard.”

Compass Point Research & Trading also observes, regarding the FHA’s loan amounts, “It is important to note that the FHA’s high cost ceiling loan limit for certain areas will be reduced at the end of the year without Congressional action. Specifically, the high cost ceiling of $729,750 will be reduced to $625,500 beginning on January 1, 2014 unless there is a sudden shift on Capitol Hill. Our sense is that neither lawmakers nor the White House will push to maintain the FHA’s high cost ceiling. Notably, the White House has publicly stated its support for the FHA and GSE high cost loan limits being realigned. An August 2013 White House fact sheet states: ‘we recommend allowing FHA loan limits to fall at the end of 2013 as currently scheduled.’ We expect the GSE and FHA high cost loan limits to be aligned once again beginning in January 2014.”

Turning our collective gaze to rates, while you’re sitting around the table tomorrow here’s a bit of trivia that you can throw out: the Federal Open Market Committee has kept short-term interest rates unchanged for five years. Of course, short term rates don’t directly influence 30-yr rates, but you get the point.

Not that anyone is going to be locking many loans until next week, yesterday we learned that both September and October Building Permits numbers came in higher than expected. But the surge was focused in multi-family dwellings. (Housing Starts for both months will be released on December 18 due to the government shutdown.) And on top of that, RealtyTrac reported that residential property sales, including single-family homes, condominiums and townhomes rose 0.2% in October from September and up 13% from October 2012.  Case Shiller reported that its 20-city Index year-over-year rose by 13.3% in September and just above the 13.0% expected, up from 12.8% in August to the largest yearly gain in 7 1/2 years.

For this morning and today, given the weather and the holiday, don’t expect much from the markets. The MBA applications index showed a slight drop last week, to the lowest level in 10-weeks, confirming what many lenders are seeing. We had weekly Jobless Claims for the period ending 11/23 (-10k to 316k) as well as October Durable Goods orders (-2%, as expected). At 9:45AM EST comes the November Chicago PMI, followed by the November University of Michigan survey 10 minutes later and then at 10AM EST completes the releases with October Index of Leading indicators (+0.7 last). The Treasury the gets the jump on the holiday by auctioning $29 billion 7yr notes at 11:30am, 90 minutes prior to the more customary 1PM time slot. The markets will be closed tomorrow, and although they will be open Friday, don’t look for much – the folks manning the trading desks won’t want to be there anyway.