Housing/Mortgage/Real Estate

[Crafty_Dog]

Data Watch
________________________________________
New Single-Family Home Sales Rose 5.7% in September To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 10/24/2012

New single-family home sales rose 5.7% in September, to a 389,000 annual rate, coming in slightly above the consensus expected pace of 385,000. Sales are up 27.1% from a year ago.
Sales were up in the Northeast, South and West, but down in the Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.5. The decline was all due to a faster selling pace. Inventories of new homes rose 2,000 units.
The median price of new homes sold was $242,400 in September, up 11.7% from a year ago. The average price of new homes sold was $292,400, up 14.5% versus last year.
Implications: The housing market continues to recover. New home sales rose 5.7% in September and are now at the highest levels since April 2010. Sales are up a very robust 27.1% from a year ago. Meanwhile, as the lower chart to the right shows, overall inventories remain close to record lows. The months’ supply of new homes has now fallen to 4.5, the lowest since October 2005, well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The slight increase in new home inventories was all due to a rise in homes still under construction, showing that home builders are starting to ramp up activity. In the meantime, low inventories are helping push up prices. The median price of a new home was up 11.7% from a year ago in September, the second largest yearly increase since September 2005. One of the reasons for the increase in new home prices is that the high-end buyer is getting more active. Homes priced $400,000+ were 12% of the market in September 2011, but 18% in September 2012. In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.7% in August (seasonally-adjusted), is up 4.8% from a year ago, and is up at an 8.9% annual rate in the past six months. On the factory front, the Richmond Fed index, a survey of mid-Atlantic manufacturers, fell to -7 in October from +4 in September. Manufacturing reports have been mixed and are still consistent with mild plow horse-like growth in that sector and economy as a whole.

[ppulatie]

Now that the New Home Sales have come in, I can finish up a reply on where Housing really stands right now.  It will cover housing starts, etc.  Will take about two days to do, since I have Expert Witness reviews to complete today and tomorrow.

[G M]

Now that the New Home Sales have come in, I can finish up a reply on where Housing really stands right now.  It will cover housing starts, etc.  Will take about two days to do, since I have Expert Witness reviews to complete today and tomorrow.

Thanks Pat.

[Crafty_Dog]

We eagerly await!

[G M]

http://www.reuters.com/article/2012/10/24/usa-economy-mortgages-idUSN9E8KD00S20121024

U.S. mortgage applications slump as borrowing rates riseNEW YORK | Wed Oct 24, 2012 6:59am EDT

NEW YORK Oct 24 (Reuters) - Applications for U.S. home mortgages fell sharply last week, registering the biggest percentage decline in a year as demand for both purchase loans and refinancings tumbled, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell by 12 percent in the week ended Oct. 19.

The seasonally adjusted purchase index, which measures loan requests for home purchases, fell 8.3 percent over the previous week. Demand for purchase loans is a leading indicator of home sales.

The MBA's seasonally adjusted refinance index fell 12.9 percent from the previous week to reach its lowest level since late August. The refinance share of total mortgage activity decreased to 81 percent of total applications from 82 percent the prior week.


Fixed 30-year mortgage rates rose by 6 basis points to an average of 3.63 percent, the highest in a month.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to the MBA. (Reporting by Atossa Abrahamian; Editing by Leslie Adler)

[ppulatie]

I have the first part ready, if I can figure out how to post some charts. 

Help!!!!!!  I am calling from Bengazhi!!!!!!

[Crafty_Dog]

I've emailed a capable friend asking him to help you.

[Spartan Dog]

I have the first part ready, if I can figure out how to post some charts.  

Help!!!!!!  I am calling from Bengazhi!!!!!!

I've emailed a capable friend asking him to help you.

I'd be glad to help post the charts on this board.  Just send me an e-mail with more info, or with the charts themselves.  You can find out my e-mail by clicking on my name, as it appears here.

[Crafty_Dog]

Thank you Kostas 

[ppulatie]

I have given up trying to figure out how to put the graphs up on this website.  So I uploaded everything to my own website, and I can summarize here, and you can check out my website for the graphs.

http://lfi-analytics.com/home/sep-2012-housing-starts-analysis/

What I did was to take the last 12 months of Housing Starts for single family, and also take the New Home Sales for the same period of time. The purpose was to compare both on a monthly basis and by regional basis as well. (Note: I discount Multi Unit because it is not going to overtly affect the Single Family Market, which is where recovery must occur.) What the info shows:

The first chart shows the overall numbers, on a national basis. It suggests that a housing recovery is in process, but when we look at Single Family, it shows that Single Family has stabilized over the last several months. And, with winter setting in, we will see Single Family starts decrease significantly. Notice that while Single Family stabilized, it was only Multi Family that continued to rise.  (Could Multi Family be rising because builders expect a trend away from Single Family Ownership, or because of rental costs?)

Single Family Area Starts shows that only the South is showing any strong growth since the beginning of the year. The other regions experienced some growth beginning at the end of the 1st quarter 2012, but the growth leveled off quickly, and will decrease as winter arrives.  The strength of the South makes one wonder why it is so much stronger, but IMO, it can be a result of three factors:

1.  Cost of homes in the South may be lower.

2.  Replacement of Housing Stock lost by tornados over the last two years.

3.  People moving from the Rust Belt and other areas of low job expectations, to areas where jobs may be more plentiful.

Next, I looked at Monthly New Home Sales.  The New Home Sales number is determined by when the contract is signed, not closed. For a majority of developers, they do not get permits until the contract is signed, so this number, when compared to Starts, is a true indicator of strength.

Again, the South is leading the way with New Home Sales, as with Starts.  The West has half the activity of the South, and the Midwest and Northeast have one quarter the activity. This pretty much fits into the same pattern as with New Home Starts.

Next, I looked at Housing Starts to Sales.  One would expect a close correlation between the two.  Through the end of 2011 and beginning of 2012, a loose correlation did exist, but after Apr 2012, Starts and Sales really begin to diverge. Sales stabilize, but Starts continue to increase. a 20k unit per month gap occurs.  Why?  No effective analysis can be done, but we can make some assumptions.

1.  Build up inventory for sales over the winter when the weather prevents new starts.

2.  Low cost of money makes building and holding until sale less costly, especially if rates begin to increase.

3.  Expectations that demand will not fall much during the winter.

Finally, I compared Starts to Sales on a regional basis.  This revealed any interesting situation. 

1.  The Northeast Sales and Starts were generally in pretty close correlation.  Starts tended to be double the Sales, but when dealing with 2-3k sales per month, this is statistically unimportant. With Sales and Starts having stabilized in the summer, by the winter, I expect to see up to a 50% drop for the winter in Starts.

2.  The West was in almost perfect correlation. Sales strongly tracked with Starts. But both Sales and Starts stabilized in the summer, and will fall in the winter months.

3.  The Midwest was very interesting in that Starts in the middle of the year were far above Sales, uncommonly so.  Why? Could it be the same reasons as in the South?

4.  The South showed a strong correlation between Sales and Starts until Apr 2012, and then Sales tapered off and began to fall while Starts continued to rise. This may be a combination of both tornado replacement, and then building inventory for the winter months.

Based upon what I see, a genuine housing recovery is not in effect.  It would appear on the surface to be occurring, but both regional sales and starts in the Northeast, Midwest and West do not tend to support recovery.

Additionally, there are issues that will affect housing that I have not covered in the Housing Start section, but will do so next.  This includes Shadow Inventory, Existing Sales, Negative Equity, falling income, demographics, and a host of other items.

It is my belief that housing is structurally unsound for at least the next decade, and could be up to two decades. There are just too many negatives pushing down upon the market to expect a realistic recovery in even the intermediate term.  As for me personally, I am renting right now, and have no plans for buying again for at least five years minimum.  There is simply no reason to want to buy, and have the headaches that go with home ownership.  (This is becoming a more common perspective as well.)

[ppulatie]

Existing Home Sales 

In the post on the Sep 12 Housing data, I reviewed Housing Starts and New Home Sales. In it, I postulated that Housing, at least at the New Home Construction stage, was not recovering as claimed, and was able to show that serious questions arise, especially when geographic areas are considered, and also when comparing Monthly Sales to Starts. 
New Housing Starts is only one factor to consider when considering whether Housing is truly recovering or not. Many other factors must be considered as well. Now, it is time to look at the Existing Re-Sale Market and see how it is performing.

To begin, let’s review the Existing Sales Chart for Years 2005 through 2012.. The chart reveals that Sep 2012 sales dropped considerably from the previous Aug 2012 reading.  This drop is approximately 100k units, 21% down Month over Month and 2.2% up Year over Year. 

Monthly Sales 2005-2012



Now, we take a closer look at the last four years, which is typical of the Housing Market since the Housing Crash.

Monthly Sales Volume – 2009 to 2012



Surprisingly, 2009 was a much stronger year for home sales, than the following years. However, much of the sales increase was based upon the $8000 tax incentive offered to “first time” home buyers in 2009 and until Jun 2010. What happened is that the tax incentive “shifted forward” demand by first time home buyers to 2009 and 2010, and then subsequent years sales were poorly affected by lack of first time buyer demand.

Further analysis shows that the years 2010 to Sep 2012 had similar sales activity through the first part of the year, through Jun, and then activity would again fall in response to seasonal demands. August 2012 saw a significant uptick in sales, rising above the years 2009 and 2010, but in Sep 2012, it quickly returned to the seasonal averages for the previous two years.
Looking objectively at the chart would not suggest any real sales activity suggesting a recovering housing market.

The Sep 2012 Year over Year gain of 2.2% has been the latest month which pundits have claimed that the housing recovery is underway. However, even with the 2.2% increase Year over Year, the gain was the smallest gain recorded in 2012 to date. This gain was compared to the Sep 2011 reading, which was still reeling from the 2010 Housing Stimulus.

A drop in Sales typically occurs every Sep, and continues through the remainder of the year. Sep 2012 data is consistent with this pattern.  The bottom line is that there is weak support for housing sales going into the winter months, and we should see significant additional drops in sales through the winter.

Re-Sales by Region

Now, we look at regional activity for Existing Sales from Sep 2011 to Sep 2012.

Monthly Existing Sales Sep 11-Sep 12



As with the New Housing Sales and New Housing Starts data, we find that the activity is once again led by the South. Activity is 50% greater than all other regions singularly.  The Midwest and West Sales figures track almost identically and the Northeast is once again the laggard.  All show the seasonal pattern again developing in Sep with dramatic fall offs in sales.
The end result is that comparing Regions and both Existing Home Sales and New Home Sales, if any one area is experiencing a Housing Recovery to any degree, it would be in the South, and nowhere else.  But even then, going forward, we can expect that the South will experience a drop off in the winter.

What is causing the South to outperform other areas? We can only speculate, but like with new housing starts, it is reasonable to assume that Home Purchases may be a result of (1) people who lost homes in the tornado activity of 2010 and 2011 are buying instead of re-building and (2) the influx of people from the Rust Belt and other areas to the South are driving the market. Nothing else makes sense.

In Summary, as in the Housing Starts and New Home Sales data, there is nothing to indicate that Existing Home Sales is improving, leading to a general Housing Recovery.

[Crafty_Dog]

Folks:

IMHO this is some serious work that Pat is sharing with us. 

[G M]

.

Folks:

IMHO this is some serious work that Pat is sharing with us. 

Yup, I'd like to see a certain hack try to refute it

[DougMacG]

I need to go through Pat's work in more detail to understand the specifics but one of the stunning first impressions is what a waste of time and money the intervening programs were.  2009 'improved' because we were paying public subsidies into the market to prevent a full correction.  When the free money ended the program had no lasting beneficial effect.  Same for cash for clunkers.  In sum the $6 trillion or more of overspending is down the tube, with interest accruing forever, and the effects on the economy of these contrived measures were counterproductive, shielding markets from the real market forces of correction and recovery.

No lessons were learned because the people who didn't agree with market economics then for the most part still don't know about it now.

Housing corrects by allowing the market to operate as freely as it can and then growing national income so that people can pay what they choose to live where they want.  Government intervention programs are designed mostly to do the opposite.

[ppulatie]

DataQuick has just released Housing Sales for the Southern California area. The numbers are being touted as showing that housing is recovering. Typical of how the numbers are being reported is below.  Fortunately, others have already done some analysis, saving me time. 


DataQuick announces that Oct Sales are up, and prices are up.  Mortgage Orb, an industry website, carries the ball to the 1 Yard Line.  Here is how they read the numbers.

http://mortgageorb.com/e107_plugins/content/content.php?content.12748

Southern California Home Sales Up Sharply In October

Southern California home sales experienced a strong increase in October, according to new research released by San Diego-based DataQuick.

DataQuick reports that a total of 21,075 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 18% from 17,859 sales in September, and up 25.2% from 16,829 sales in October 2011. Last month's sales were the highest for the month of October since 22,132 homes sold in October 2009, though they were 11.1% below the October average of 23,709 since 1988, when DataQuick's statistics begin.

The median price paid for a home in the six-county region was $315,000 last month, the same as in September and up 16.7% from $270,000 in October 2011. The September and October medians are the highest since the median was $330,000 in August 2008.

However, the region's lower-cost areas continued to post the weakest sales compared with last year. The number of homes that sold below $200,000 fell 11.2% year-over-year, while sales below $300,000 dipped 0.3%.

Foreclosure resales accounted for 16.3% of the resale market last month, down from 16.6% the month before and 32.8% a year earlier. Last month’s level was the lowest since it was 16% in October 2007.

"Watching the market rebalance itself is fascinating," says DataQuick President John Walsh. "In some categories and in some neighborhoods, demand outstrips supply, pushing up prices. In other areas, the market is still largely dormant. Low interest rates are a huge factor, where mortgages are available, which they aren’t for a lot of potential buyers."


However, Dr Housing Bubble actually looks at the numbers in detail, and with a critical take. He points out the problems with the data.

The Southern California housing market is tearing a path into the fall real estate season.  As we detailed in a previous post many families will have a hard time saving $100,000 for a down payment so the market is being flood with foreign investors, flippers, baby down payment buyers, and big pocket investors.  Let us call this the FFBB crowd.  Since foreclosure resales are making up a smaller part of the selling mix the median price is ripping a path across the mainstream press creating a self-fulfilling vortex feeding into the real estate money piranha machine.  It is an interesting mix because household incomes are stagnant yet a tremendous amount of subsidies and interest is causing prices to move up.  Let us examine the latest sales data for Southern California.

Long live the jumbo loan market

The jumbo loan market is picking up steam.  Jumbo loans as a percent of all sales are now back to levels last seen in December of 2007:



Why the heavy usage of jumbo loans?  Prices are running up because of scant inventory and the low interest rate environment.  Foreign money is flowing into targeted areas while domestic big pocket investors are purchasing up other properties.  Higher priced properties are making a big move:



Sales between $300,000 and $800,000 are up a stunning 41 percent over the last year.  Sales in October for properties priced above $500,000 went up by 55 percent.  These are actual sales and this is occurring in the fall when sales typically edge lower.

A quick preview looks like this:

    All cash buyers:                 32 percent (near peak)

    FHA insured buyers:       25 percent

    Jumbo loan buyers:        21 percent

Welcome back to the California housing market.  Foreign money and big pocket local investors make up the all cash segment.  The resurgence of flippers is now in full force:

Homes sold twice within six months:

    October 2011:                    3.7

    October 2012:                    6.1  (increase of 64 percent)

And we are seeing this flipping activity in many hipster neighborhoods.  I know many people are shocked since they will look at local income figures but keep in mind this is happening because a large pool of money is coming in from outside forces.  This is also happening in many prime cities of Canada.  This hot money will continue flowing as long as the host nation continues to boom.

Since foreclosure resales are now a much smaller part of overall sales, we are seeing the median price move up sharply:



Source:  DataQuick

SoCal home sales are up 25 percent over the year while the median price is up 16 percent.  Keep in mind this is happening at a time when household incomes are stagnant.  As we have mentioned, the FFBB group is the current herd running through the 405 and 101.  To try to personalize:

    -Foreign money – current prices are cheap relative to domestic markets (weak dollar adds even more leverage as a hedge).  Interested in targeted markets (not all of US).

    -Flippers – prices are going up so selling into momentum (musical chairs game starting up again)

    -Baby down payment  buyer – FHA insured going to more local families trying to jump in and play this game.  Paying via much higher mortgage insurance premiums.

    -Big pocket investors – buying up places in areas like the Inland Empire for rentals or flips (yields are being squeezed thanks to competition)

Not exactly the bubble of the 2000s but this is certainly a market fueled by speculation and hot money.  Throw in the Fed’s push for low interest rates via QE3 and you have local families levering up to compete with all these other groups.  The result?  Big jump in sales and prices.  But does this have momentum?


Now do you see why I detest those who simply report the company line without a true analysis of the data? There is simply no reason to believe that a recovery is on the horizon, especially when you look at the monthly and regional data that I posted previously.

Pat

[Crafty_Dog]

Hat tip to Pat for this one:

http://wallstreetexaminer.com/2012/11/13/fed-announces-it-will-buy-35-billion-in-mbs-reinvestment-program-in-next-month/

Fed announces it will buy $35 billion in MBS Reinvestment Program in next month for total purchases of $85 billion

The NY Fed today published its statement of intended MBS purchases for the next month under the MBS Reinvestment Program. It plans to purchase a total of $35 billion in MBS from Primary Dealers. That’s $6 billion more than last month. It will bring the total of cash injected into Primary Dealer accounts for the month to $85 billion.

The MBS purchases are forward contracts normally with a 30 to 60 day settlement.

The Fed will publish the results of its purchases of the past month tomorrow. That will show the schedule of settlements for purchases made in the past month including purchases made under the new QE3 program. The first of the the new combined QE3 and MBS Reinvestment Program settlements, totaling $26.5 billion will come tomorrow. An additional $18.3 billion will settle next week. These purchases add funds to Primary Dealer accounts. They are the conduit for the transmission of monetary policy into the banking system.

Between the new QE3 purchases scheduled at $40 billion per month, the MBS reinvestment program at $35 billion for this month, and the $10 billion more in Treasuries that the Fed will purchase from Primary Dealers than it will sell to them in November under Operation Twist, the Fed will cash out the Primary Dealers to the tune of $85 billion this month. That’s the largest monthly amount of market boosting fuel since QE2 in the first half of 2011.

[ppulatie]

Regarding the FED MBS Purchases

1.  The total dollar amount of Mortgage Loan Originations for 2012 was expected to be $1.3 trillion.

2. 95% of all newly originated loans are Purchase Eligible.

3.  The Fed buys $40b per month new money, for $480b per year.

4.  The Fed Reinvestment Purchase is $35b for the month, $6b above the previous month.  If we take an average of $30b per month reinvestment, that is $360b per year.

5.  Total MBS buys per year by the Fed, $840k.  That is 66% of the new loan originations for the entire year. 


Fed MBS purchases are supporting the entire Mortgage market. Without Fed intervention, there would be little activity.  Why is there little interest in private buying of MBS?

1.  Current interest rates on mortgages are 3.34% for a 30 year fixed.

2.  Servicing and other costs take .75% off the top, leaving a Rate of Return of 2.59% for a 30 year bond. 

3.  Bond yield does not even cover inflation, so why by such a low yield for 30 years.

4.  Underwriting of loans are still deficient, and 30% of new FHA will default, so why take the risk?

5. Fed and bank actions are propping up values, but this is still inflated values for most homes.


What happens when rates begin to increase?  The Death Spiral begins

1. Sales and refinance activity stalls.

2. Higher rates of consumer credit will drag down more borrowers, causing more defaults.

3. Higher rates = less affordability = lower sales = decreasing sales values.

4.  Decreasing values = more defaults.

5. More defaults = greater inventory.

6.  Greater inventory = declining values.

7.  Declining values = more defaults

At some point, the housing market finally bottoms and stalls, and over years, eliminates inventory, financially stressed borrowers, and stabilizes values at a much lower rate.  Homes are more affordable, and buyers come back into the market.

[DougMacG]

Great post by PP! 

Absurd to think we live in an economy mostly based on free enterprise when you look at energy, transportation, healthcare, agriculture or housing.  Take just housing for the moment.  What would the market interest rate be for mortgages if not for federal intervention?  No one knows exactly.

Pat wrote: "3. Higher rates = less affordability = lower sales = decreasing sales values."

Illustrate that with a hypothetical example: 

Assume a house has a 200,000 selling price today with all borrowed money (for simplicity) at 3%. The same payment would only yield a 140,000 price if/when interest rates jump to 6%, 96,000 at 10%, and 76,000 at 1980-83 interest rate levels (13%).  Same house, same buyer, same payment, but 30-62% of the value is lost in some historically possible, rising interest rate scenarios. 

[G M]

Great post by PP! 

 

If you are unlucky enough to live in some place, like the PRK, you now have to worry about the capital controls and confiscatory taxes they'll tack on to anyone trying to flee. The PRK's politboro has now purged all counterrevolutionary elements from positions of power and the state debt grows hungrier every second.

[ppulatie]

Over the next few days, you will be reading about Foreclosure Starts for Oct 2012 and for the 3rd Quarter 2012.  The articles will be mentioning how Foreclosure Starts and Delinquency Rates are falling, Year over Year.  This gives the impression that the Foreclosure Crisis is improving.  For a sample of such articles:

http://www.calculatedriskblog.com/2012/11/mba-mortgage-delinquencies-decreased-in.html

MBA: Mortgage Delinquencies decreased in Q3

The MBA reported that 11.47 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2012 (delinquencies seasonally adjusted). This is down from 11.85 percent in Q2 2012.

From the MBA: Mortgage Delinquency and Foreclosure Rates Decreased During Third Quarter

    The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease of 18 basis points from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
 
    The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. ... The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 20 basis points from the second quarter and 36 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.03 percent, a decrease of 28 basis points from last quarter, and a decrease of 86 basis points from the third quarter of last year.
   
    “Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” observed Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric. Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”

    “The improvement in total delinquency rates was accompanied by a further drop in the foreclosure starts rate, which hit its lowest level since 2007. Moreover, the foreclosure inventory rate decreased by 20 basis points over the quarter, the largest quarterly drop in the history of the survey. The level however, is still roughly four times the long-run average for this series as we continue to see back logs of loans in the foreclosure process in states with a judicial foreclosure system. The foreclosure rate for judicial states decreased slightly to 6.6 percent and the foreclosure rate for non-judicial states showed a steeper drop to 2.4 percent. The difference in the foreclosure rates of the two regimes is at its widest since we started tracking this metric in 2006."

Yes, Foreclosure Rates are down, but here is why.

1.  The OCC 2011 Consent Decree and the Attorney General's Settlement Decree required lenders to change foreclosure and servicing procedures. Additionally, they transcribed new procedures for Loan Modification efforts.  The result of all the changes forced lenders to radically reduce foreclosures while making the changes.  Oct 1, 2012, the changes were required to take effect.

2.  New statutes in many states in 2010 and 2011 forced lenders to either alter foreclosure practices, or in cases like New Jersey and South Carolina, cease foreclosures for 12-18 months. Nevada implemented a modification program that reduced foreclosure starts by 95%, while lenders attempted to comply. 

3. HAMP modification programs are still going on, and the HAMP mods take several months to go from trial to permanent.  And if the mod is denied, then the person can re-apply, extending out further the time in the home without foreclosure starting.  (60% of such permanent mods will fail within two years.)

4. Short Sale attempts also reduce the Foreclosure Starts, and when a Short Sale is actually granted, it permanently reduces the Foreclosure rate. Denied Short Sales will eventually drive up the Foreclosure rate, but only after 6-12 months while the Short Sale is attempted to be worked out.

The bottom line is that Foreclosure Starts have been delayed by all these actions.  Now that new procedures have taken effect, the Rates should begin to increase again.


Mortgage Delinquencies are down Year over Year by 174,000. This is about 14,500 per month.  What factors may be a result of this?

1.  More loan mods being done, which we know is happening.

2.  More Short Sales being completed, which is occurring.

3.  Completed foreclosures, which will be less likely to seriously reduce delinquencies, since the completed foreclosures are being replaced by new filings, though at a decreased rate.

The simple fact is that based upon foreclosure prevention efforts, delinquencies should be down.


Where do we go from here?

Yes, foreclosure start numbers have improved, but likely only temporary.  Foreclosures will begin to increase after the beginning of the year.  This is because the Modification efforts that delay foreclosures will be completed, with increasing frequency. Those denied, and most will be, will  find that the Foreclosure Process is initiated shortly after.  Foreclosures will also begin anew because the state imposed moratoriums will expire, allowing lenders to foreclose in different states.

But this is only the "short term" effects. What else can we expect?

1.  The Alt A loans have now turned adjustable, except for some 7 & 10 year terms.  These loans have current interest rates of no more than 3.25% generally, since they are tied to either the LIBOR or MTA Indexes.  Essentially, they have received "temporary modifications".  As Index values increase, which they will, the loan interest rates increase, so all of these loans will be at risk. 

2.  50% of Subprime loans remain. All are at their Start Rates, since the LIBOR Index is so low. When rates go up, the loan rates will increase again, at 1.5 to 2% per year.  More loans will fail.

3.  Most modified loans, whatever type loan, have been modified at 2% rates for 5 years, and then they go up 1% per year, until they max out at the "contract rate", which up to the last year was between 4 and 6%.  Expect them to begin failing after 5 years.  (This was done by design, simply to delay foreclosures. The Treasury admitted this.)

4.  Prime loans are failing in greater numbers, even though they are 30 year fixed.  They will continue to fail due to lack of or decreasing income.  Liquidity Crunch will doom these borrowers.

5.  Currently, home values are claimed to be rising at a 2% Year over Year rate. This number is absurd because the 2% rate is the Median of all sales. Since higher priced homes are now selling more frequently, the "value" will be higher.  Additionally, in areas of restrained inventory, prices are becoming over inflated again.  (Does anyone seriously believed that 25% Year over Year price increases in Arizona reflect reality? In my own area, 1600 square feet homes in the same neighborhood, all similar, can go from $140k to $220k.  This is no rational for the prices being paid, except that there is a one month supply of homes listed.  Inventory is being held back to force higher prices.)

28% of homes currently have negative equity. As foreclosures increase, values will fall again, creating more negative equity. At 150% negative equity, at least 40% will default strategically default, if they see no likely increase in values.

If honesty in reporting existed, the true nature of housing would be reported.  But that would further depress the market, so you will not hear that.

BTW, I am working on an article which covers where the new buyers, if any, have to come from.  It will show why we should not expect any home sales recovery in the near to intermediate future.






.  Modification procedures before the foreclosure process is started will take at least three months on any loan being considered for a modifications

[ppulatie]

Just took on a new client.  Interesting case.

She was in foreclosure. Trustee Sale scheduled.  She files BK-13, and gets her automatic stay.

She properly notifies the Trustee and Lender who was Aurora.  Trustee attorney tells her that it is only an Adversarial  Proceeding, and that they would foreclose anyway.

The following day, they foreclose and Aurora takes the home.

The Trustee violated the Automatic Stay and thus BK statutes. To foreclose legally, they needed to get a Removal from Stay to foreclose.

Now, she goes into Civil Court with a lawsuit, and the court will overturn the foreclosure.  The BK court can also do so, but since it is Aurora, she needed to get the TRO to prevent Aurora from selling the property to another person before the courts would otherwise rule.  Any sale to another party would complicate her case, since courts are reluctant to rule against a foreclosure if their is a bonafide purchaser.

[Crafty_Dog]

The Latest Taxpayer Housing Bust
With the election over, we learn that the FHA is insolvent..

Vindication is overrated, especially in a losing cause, so it brings no satisfaction to have predicted that the Federal Housing Administration would sooner or later threaten taxpayers. That day has arrived. Safely past the election, the feds announced Friday that the FHA's liabilities exceed its assets by at least $16.3 billion—and the gap could reach $93.7 billion in the worst case.

Yet it's worth recalling that when we warned about FHA's troubles in September 2009, we got an accounting lecture from HUD Secretary Shaun Donovan and a letter from FHA Commissioner at the time, David Stevens, that we were "just plain wrong." He added that, "I can say undoubtedly that the FHA fund is playing a key role in the housing recovery and poses no immediate risk to the American taxpayer."

Taxpayers will "undoubtedly" be pleased to know that the threat wasn't "immediate" but arrived a mere three years later. Can taxpayers claw back the salaries of Messrs. Donovan and Stevens the way Congress has tried to do with those of financial CEOs?

The Administration is trying to spin the FHA's troubles as one more result of the housing bust, which is true but disingenuous. Fannie Mae FNMA +0.37%and Freddie Mac FMCC +3.17%went belly up in 2008 because of the housing boom and bust. At the time, the FHA was in relatively good shape because it had played a minor role during the housing mania.

The FHA got into trouble because it deliberately expanded in 2007-2009 even as the market was crashing. As Mr. Donovan likes to say, the FHA was steered to play "an important countercyclical role in the housing market." The point was to ramp up FHA's loan-guarantee business to prop up housing prices as much as possible during the bust.

While this helped the Obama Administration politically, it arguably prolonged the recovery by failing to let prices find a bottom. Meanwhile, FHA's boom put taxpayers on the hook for tens of billions worth of dubious loans made at the most dubious time. Those are the loans now going bust. According to the new HUD report, FHA loans insured between fiscal 2007 and 2009 "continue to place a significant strain on the [single-family mortgage insurance] Fund and are expected to reach a total of $70 billion in claims."

The ugly math: 25.82% of FHA's 2007 loans, 24.88% of its 2008 loans, and 12.18% of its 2009 loans were seriously delinquent as of June 30. The American Enterprise Institute's Ed Pinto, who also predicted the FHA debacle, estimates that 17.3% of all FHA loans were delinquent as of September 30. That's about one in six loans.

Most businesses would look at these losses and flee such a market. But the FHA, which responds to political rather than market incentives, has literally tried to make it up on volume. In recent years, the FHA has expanded to insure higher-quality loans that by law were supposed to be the preserve of private lenders.

While fewer of these loans are delinquent, the greater lending has caused the FHA's capital ratio to shrink below its 2% minimum mandated by law. In 2009, the agency had $685 billion insurance in force and a capital reserve of 0.53%. Today it has $1.1 trillion in force and capital reserves are a negative 1.44%.

The FHA says its risk models were broken, it was too optimistic about housing prices, and it didn't expect low interest rates to persist. (Low interest rates hurt FHA finances because good borrowers refinance.) If current low interest rates were used in HUD's model, the forecast losses in FHA's single-family business would be $31.1 billion, not $13.5 billion.

You will not be reassured to know that HUD claims that all of this is merely temporary. The FHA says it doesn't currently need a Treasury bailout because it will reduce its losses by raising insurance premiums, expanding short sales, selling some of its distressed loans and helping troubled borrowers modify their mortgages. That's nice, but why wasn't it doing this already?

In any case, this sunny HUD scenario will only hold if the economy grows faster and the housing market continues to improve. If there's another recession, taxpayers are looking at a Fannie Mae-level bath.

The FHA is another case study in how government programs sold with the best intentions are inevitably corrupted. FHA was founded in 1934 to help lower- to middle-income and first-time home buyers obtain a mortgage, but its mission expanded over the years as the housing lobby sought to channel ever more taxpayer-guaranteed money into housing. When the agency opened, its minimum down payment was a prudent 20%. In the 1960s, that number fell to 10%, and now it's 3.5%.

The other issue is accountability. As government program after government program fails, no one takes responsibility. Fannie and Freddie hit taxpayers for $138 billion, the Post Office loses $15.9 billion, and now the FHA is insolvent. We weren't kidding about those salary clawbacks.
==============
Vern McKinley: The Fannie Mae 'Wind Down' That Isn't
The mortgage assets they own are declining, but the overall value of mortgages on their balance sheet has remained about the same..
 
By VERN MCKINLEY
At the height of the presidential election campaign, the Treasury Department issued a press release called "Further Steps to Expedite Wind Down of Fannie Mae FNMA +0.37%and Freddie Mac FMCC +3.17%." It highlighted a new policy to scale back the pair's mortgage-investment portfolio at a rate of 15% per year, as opposed to their stated 10% rate. Reports from the Securities and Exchange Commission, however, suggest that these two government-sponsored enterprises—currently under federal conservatorship—may not be shrinking much at all.

The Treasury announcement, coming near the fourth anniversary of the September 2008 government takeover of the mortgage behemoths, was made during an election campaign with a heavy focus on the health of the economy. The impression it left was that the most expensive of the 2008 bailouts was not much of an issue, as the transition back to stability in the mortgage market is well under way.

We've since learned that the mortgage market is still troubled—given the report on Friday that the Federal Housing Administration, a government agency, faces high losses on its mortgage loans and may need to get billions from the U.S. Treasury to shore up its finances.

Forbes magazine referred to the August Treasury announcement as "Obama's Victory Lap." Fannie and Freddie's caretaker and regulator, the Federal Housing Finance Agency, chimed in that the "faster reduction in the retained mortgage portfolio will further reduce risk exposure and simplify the operations of Fannie Mae and Freddie Mac."

But these comments raise questions when you cross-check the claims against the annual and quarterly reports, Forms 10-K and 10-Q, that Fannie Mae filed with the SEC.

Fannie Mae, by far the larger of the two institutions, has a mortgage balance that has hovered at $2.9 trillion since early 2010, the reports show. Freddie Mac has managed to shrink its mortgages, but only slightly.

Exactly what 10% wind-down rate was the Treasury Department referring to in its press release? Once again, the SEC reports for Fannie are helpful as they explain the basis for some of the comments: "The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly restrict our business activities . . . the maximum allowable amount of mortgage assets [Fannie Mae was] permitted to own on December 31, 2011 was $729 billion."

In other words, when Treasury bailed out Fannie and Freddie, part of that deal was a cap on the mortgage assets they could "own." This cap has gone down 10% per year and will now go down 15%. At least in theory, this mandate could lead to sustained shrinkage in the assets and overall presence of Fannie and Freddie.

But the stated cap for "owned" assets, $729 billion in Fannie's case, represents only a small portion of the $2.9 trillion in mortgages on Fannie's balance sheet.

Fannie and Freddie have a great deal of risk exposure from "guaranteeing" mortgages. Measured as a proportion of Fannie's total mortgage assets, owned assets represent only a little more than 25%, while the bulk of its total mortgage loans fall into the category of loans it guarantees.

Treasury also failed to mention staff levels in its announcement.

Surely Fannie and Freddie are starting to rationalize and reduce their far-flung operations as fully private institutions after four years in government hands. They were placed in a legal conservatorship, after all; so what better way to conserve resources than to reduce excesses in payroll—especially when one considers Fannie's $16.9 billion net loss last year?

"Fannie Mae Laying Off Hundreds," read a Washington Post headline from early 2009, a few months after the government takeover. The headline focused on the Washington, D.C., office. Elsewhere, the article noted that Fannie's Dallas office was hiring, and overall staffing levels were expected to remain flat. Once again, cross-checking the SEC reports undermines any doomsday narrative about staff shrinkage.

Fannie Mae had 5,800 employees in late 2008, shortly after the government takeover. As of early 2012 it had bulked up to 7,000 employees. This was down from a peak of 7,300 employees in 2011, but still up 1,200 since the start of government conservatorship. Again, Freddie Mac has managed to reduce staff slightly, but the amount—about 90 total—pales in comparison to the 1,200-employee bump at Fannie.

These facts expose the Treasury announcement as misleading at best, and confirm that the wind-down mission has not been accomplished.

Certainly, the efforts to date don't deserve a victory lap, although Freddie Mac has made modest progress, which is more than can be said for Fannie Mae. If Treasury wants to trumpet shrinkage, Fannie and Freddie need to downsize their entire mortgage portfolio, owned and guaranteed, and scale back their army of employees.

Then, perhaps, a victory lap might be appropriate.

[Crafty_Dog]

Data Watch
________________________________________
Existing Home Sales Rose 2.1% in October to an Annual Rate of 4.79 Million Units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/19/2012

Existing home sales rose 2.1% in October to an annual rate of 4.79 million units, coming in slightly higher than consensus expectations. Sales are up 10.9% versus a year ago.
Sales in October were up in the West, South and Midwest but down in the Northeast. The increase in sales was due to a faster sales pace in both single-family home sales and sales of condo/coops.
The median price of an existing home rose slightly to $178,600 in October (not seasonally adjusted), and is up 11.1% versus a year ago. Average prices are up 10.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 5.4 in October from 5.6 in September. The decline in the months’ supply was mostly due to a faster selling pace. Condo/coop inventories fell as well.
Implications: There should be no doubt the housing market is in recovery. Despite some negative effects from Hurricane Sandy in the northeast, existing home sales rose 2.1% in October and remain right near the highest level in over two years. Sales are up 10.9% from a year ago while home prices are up 11.1%. Meanwhile, the inventory of existing homes fell to 2.14 million in October from 2.17 million in September, the lowest level since December 2002! Inventories are down 22% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 5.4, the lowest level since February 2006. Just a year ago, the months’ supply was 7.6. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The rise in median prices can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 29 percent of purchases in October versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, and we may see slightly weaker numbers over the next few months as Hurricane Sandy wreaked havoc in the Northeast, but the housing market is definitely on the mend. In other housing news this morning, the NAHB Homebuilders index, a measure of confidence, increased to 46 in November from 41 in October. Confidence among homebuilders is now the highest in six years, another sign that the recovery in housing is gaining traction

[Crafty_Dog]

second post:

________________________________________
Housing Starts Rose 3.6% in October to 894,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/20/2012

Housing starts rose 3.6% in October to 894,000 units at an annual rate, easily beating the consensus expected 840,000 pace. Starts are up 41.9% versus a year ago.
The rise in starts in October was due to an 11.9% gain in multi-family starts. Single-family starts declined 0.2% but are up 35.3% from a year ago, while multi-family starts are up 57.1%.
Starts rose in the Midwest and West, but declined in the Northeast and South.
New building permits fell 2.7% in October to an 866,000 annual rate, slightly beating the consensus expected pace of 864,000. Compared to a year ago, permits for single-unit homes are up 26.6% while permits for multi-family units are up 36.3%.
Implications: Housing starts increased to an 894,000 annual pace in October, crushing consensus expectations and beating the prediction of every single economic forecaster. The consensus expected drop had much to do with Hurricane Sandy affecting the Northeast. Looking at the data, the storm did drive down activity in the area, but the West and Midwest had strong gains in building activity, easily offsetting the loss in the Northeast. Housing starts are up 41.9% from a year ago and builders are now starting homes at the fastest pace since July 2008. All of the gain this month was due to the volatile multi-family sector. Even so, the charts to the right show, both single-family and multi-family starts and permits are trending higher. The total number of homes under construction (started, but not yet finished) are up 22% from a year ago and increased for the 14th straight month, the first time this has happened since back in 1997-98. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015), which means the recovery in home building is still young. That may seem like a big leap over the next few years, but a gain of 20% per year for the next three years gets us up to that level. And that pace of increase is half as large as the gains over the past twelve months. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher.

[ppulatie]

All right, you trying to pull my chain.....

Once again, we have the pundits looking at things from a very narrow perspective. 



I have not yet obtained the NAR non-seasonal data, so I posted the Calculated Risk NAR seasonal data.  Some key points:

1.  Oct Sales did increase over Sep 12, but if you look from May 2012 to Aug 2012, the Oct Sales are down substantially.  Why the increase in Sep Sales, it remains to be seen what is going on.  It certainly is an outlier.

2.  Sep 2012 Sales were revised down, by 6.7%.  How much will Oct be revised down?

3.  Oct sales were on contracts written in Aug and Sep.  Was there a 'lag" in closing that caused the uptick in Oct for sales?  Would this also explain why Oct had a huge drop over Aug sales?  Until the Nov and Dec data comes in, we cannot reasonably say what is going on?

4.  Median sale prices are up Y over Y by 11%, and prices increasing by 10%.  BFD (sarcasm).  It doesn't mean a thing.  Median is the midpoint of all sales. So? Maybe higher priced homes are now being targeted.  It does not mean that values are increasing.  Case Shiller compares existing home resales and finds that prices are up 2.2% Y over Y.  This is the only comparison that makes sense.  (Don't forget how restricted inventory affects pricing.

5.  Why are fewer distressed properties selling?  Because foreclosures have been restricted through the OCC and Ag Settlements, plus the banks have learned that keeping foreclosures off the market and only releasing a few at a time drives up prices.  It does not show an improving market, especially when you realize that rates are at historic lows, and sales are really not improving.

6.  Don't trust the NAR data.  The NAR misrepresents everything. They are the marketing firm for realtors.  (BTW, the US Census data on home sales comes from the NAR so it is circumspect as well.)

Now for Housing Starts:



Single family starts is where any recovery must come from.  Though the chart has too much information, the reality is that if you use non-seasonal data, then housing starts for Oct fell for single family homes, from 52.5 thousand to 48.8 thousand. Multi-unit went from 26.5 thousand to 26.2 thousand, essentially unchanged.  However, the "magical" seasonal number for starts shows seasonal up from 73 thousand to 87 thousand.

This is why I do not like seasonal data. It "rounds" things off and can give an entirely different perspective than what is happening on the ground.

Is Housing in a recovery?  If you want to interpret the data to show it is, then doing a Short Term perspective, you can make an argument that it is.  If you want a more accurate picture, then take a longer view, over a significant historical timeline, and you see a different story.

Add into the equation that the population of the US increases 2 to 3 million per year, and you can judge even better just how well off housing is. 

I am working on another analysis of where any true buyers are, and the issues facing housing, from the negative equity homeowner to the age demographics, and all things between. When finished, it will really show the issues ahead, and why those who are promoting a housing recovery are not looking at the long term trend.

[Crafty_Dog]

Pat:

Sometimes I give our GM the same loving tease; its just a way of encouraging you (and him) to take on here on this forum the conventional wisdom and propaganda to which we are all subjected.

[DougMacG]

Interesting point from Pat that median price can tell more about which homes are selling than whether values going up or down.  Median home price is not a fixed unit of measure like an ounce of gold, bushel of corn or barrel of oil.

Housing starts may help construction employment but lack of housing starts is what bolsters the value of existing homes.  The two different charts seem to confirm that.

A sustained move to multi-unit construction might mean some existing homes will never face increasing demand or recovering values.

I wonder how much of multi-unit construction is driven by public investment and 'public-private partnerships' (meddling) rather than any indicator of a private sector recovery.

An aside, my last multi-unit went the way of a Kelo-style public taking from private ownership to new, subsidized, quasi-private ownership with the non-consensual transfer performed by the big city department of fascism.  Liberals upscale the inner city by using government power and taxpayer funds to force out the working poor.  Making investments that don't even pretend to pay for themselves.  a.k.a. the housing 'market'.

[ppulatie]

I know what you do CD. 

You know how passionate I am about this stuff, and how much the b.s. ticks me off.

I actually get a kick out of your "gentle" nudgings.

[ppulatie]

DougMacG,

Good observations.

Multi Unit is never going to lead the way out of the Housing Crisis. It will simply work to alleviate some of the damaging effects of what is going on elsewhere in the industry, primarily offering low cost housing to the displaced (6 million homes at this time), the displaced to come, another 6 - 10 million, those entering the workforce and not being able to buy homes due to accumulated debt, and 1 million new "legal" immigrants a year.  Multi Unit under these circumstances is a realistic opportunity.

I have been having problems working on my next article. The problem entails how to present an overwhelming amount of data and evidence to support housing depression for decades. Here is my thinking.

We know that the Move Up Buyer (MUB) must lead the way out of our present mess. But at this time, the MUB represents no more than 55% of total sales. And actual sales are really not increasing. Why is this?

1.  28% of current homeowners are Negative Equity, and when you combine them with Near Negative Equity, the number is about 53%.  These people are out of the market for many years, except for a very few who might benefit from 2% appreciation per year. But if values fall further, then the total number could quickly reach 60%.  Anyway, at least 50% of potential MUB are gone for now.

2.  The Fed has been subsidizing lower interest rates, currently at 3.34%. The people who have been refinancing "down", plus the "recent" buyers, are now "locked into" the homes. Don't expect MUB from this sector.  (Thank you Fed for screwing this part up.)

3.  The bulk of homeowners with equity are into their 50's and above. They are not going to become a MUB, instead, as they age, they will much more likely begin to downsize.

4.  Those who have experienced foreclosure or are in foreclosure are out of the market for 10-15 years, contrary to what "official" underwriting guidelines say of 4 years.  The vast majority do not recover and repurchase in under 10 years.

5.  Decreasing wages and higher debt have led to otherwise potential MUB's being debt restricted from qualifying.

6.  There are not enough New Buyers (NB) to purchase the homes that an MUB would sell.  Additionally, the elderly who pass will have the majority of their homes put up for sale, which will attract NB.

7.  The "smart" MUB who says "Hell No!!!  Too risky to take on more debt by moving up.

8.  When rates increase, many potential MUB's get priced out of the market again.

9. General economic conditions.

The simple fact is that the MUB market is very restricted, and there are not enough potential MUB's to lead the way out of the crisis.  So for the market to move, other forces must take the lead..................New Buyers or Investors..................more on them later..............and that is not good either......................

[Crafty_Dog]

That was very helpful Pat, we look forward to the article when you finish it.

Question:

"2.  The Fed has been subsidizing lower interest rates, currently at 3.34%. The people who have been refinancing "down", plus the "recent" buyers, are now "locked into" the homes. Don't expect MUB from this sector.  (Thank you Fed for screwing this part up.)"

I am not following this.  How is this sector prevented from MUBs?

[DougMacG]

Pat, good stuff - always.  Even if the truth is bad news...

My view of housing is simpler.  It is directly tied to personal and national income.  The interventions of the various types may have delayed the correction and held values slightly up to some artificial level, but real recovery in housing comes after people start making more money.  Not in the foreseeable future IMHO.

We just had an election where from my perspective we chose continued stagnation over growth.  Rapid growth later, after 2 or 4 more years of failed economic policies, seems less and less likely if not impossible.  (I'm always ready to be proven wrong!)

Uncertainty in its many forms, of the economy overall, of housing, of personal income, or take home income, of the deductibility of mortgage interest, also contributes greatly to the inaction of those who could be or should be the move up buyers right now.  

[ppulatie]

CD,

Those who are refinancing now into the lower rates are going to stay in their homes when rates go up.  Why go from 3.34% up to 5 or 6%, which was typical during the 2000's?  So, the refi market is doomed, and the MUB demographic severely degraded.

Another factor that I did not mention is that Property Tax considerations will also restrict mobility.

Here is a link to the Fed Paper which covers this in depth.

http://www.newyorkfed.org/research/staff_reports/sr526.pdf

[ppulatie]

DougMacG,

Certainly what you write is a significant part of the equation as well.  But I really look at demographics.   To give you an idea on where new homeowners can come from:


US Homeownership by Age Group (Decennial Census)
                                   1980           1990            2000     2010
15 to 24 years                  22.1%   17.1%   17.9%   16.1%
25 to 34 years                  51.6%   45.3%   45.6%   42.0%
35 to 44 years                  71.2%   66.2%   66.2%   62.3%
45 to 54 years                  77.0%   75.3%   74.9%   71.5%
55 to 64 years                  77.6%   79.7%   79.8%   77.3%
65 years plus                  70.1%   75.2%   78.1%   77.5%
Total    Ownership               64.4%     64.2%   66.2%   65.1%

When we look at homeownership by age, it is readily apparent that the age group from 45 year up has little or no potential to grow the homeownership numbers. Those who can reasonably afford a home have already bought.  Additionally, although there will be some MUB in the 45-54 bracket, this number is severely restricted due to equity issues, income issues, and now, credit issues due to so many having experienced foreclosure.

The 35 to 44 cohort offers some hope over the next 10 years with the potential to increase rates above 70%, but this will be offset by the demise of the 65 plus bracket.

The 25 to 34 cohort is where we have to look currently for growth. But as we know, this is the age group most significantly hampered by debt issues, especially student loans, etc.  Additionally, they are also the ones being most affected employment wise.  Until economic realities change, there is little to suggest a major movement towards homeownership in this group.

The 15 to 24 cohort will be what will at least sustain housing at today's levels, if the income and future debt issues can be resolved.


    Census Population by Age
Age               2010                2000               1990
15-24   43,626,342   39,183,891   36,774,327
25-34   41,063,948   39,891,724   43,175,932
35-44   41,070,606   45,148,527   37,578,903
45-54   45,006,716   37,677,952   25,223,086
55-64   36,482,729   24,274,684   21,147,923
65-74   21,713,429   18,390,986   18,106,558
75+           18,554,555   16,600,767   13,135,273

Age wise, we see the potential that the younger cohorts bring to the table. The 15-24 and 25-34 cohorts have sufficient numbers to increase housing demand, even considering offsetting deaths, but this potential can only be realized by a complete change in economic realities. Until we get employment and income sorted out and sustainable levels and practices, these cohorts will not have the ability to begin a true housing recovery.

Looking at these numbers and weighing in all the various other factors, I can only conclude that we have 15-20 years before things really improve.  And even then, it is based upon a complete economic revival, which under present day leadership from both sides, it will not happen.




 

[ppulatie]

This is an opinion I can get fully behind.

Time to Dump on Housing


    by Martin Hutchinson
    November 26, 2012

The U.S. National Association of Homebuilders Housing Market Index jumped to 46 on Monday, its highest level since May 2006, just before the peak in house prices. In Britain, especially in southeast Britain, house prices remain inordinately high in terms of wages, rents and purchasing power. In the United States house prices are subsidized by innumerable tax and other benefits, including an effective government guarantee of most home mortgages. In both countries, house prices are subsidized by interest rates that have been inordinately low for over four years. In both countries, government budget deficits threaten the stability of the financial system and the economy generally. Overall, it's time to put housing policy into reverse and to reclaim some of the subsidies from the housing sector.

Housing subsidies are largely a product of politicians’ sentimentality. In both the United States and Britain before 1980, house prices were affordable in terms of average incomes and housing finance operations like Jimmy Stewart’s Bailey Building and Loan ("It's a Wonderful Life," 1946) made mortgage loans to middle-income people who had saved a sufficient down-payment. It's likely this idyll could have continued forever but for the inflation of the 1970s, which caused interest rates to rise in both countries so that in Britain mortgages (which generally carried floating interest rates) became unaffordable and in the U.S. the losses on fixed-rate mortgages destroyed the balance sheets and cash flows of the savings and loan associations.

The inflation of the 1970s also affected the public's attitude to housing. In both countries, houses ceased being simply places to live and became investments. From this point, the better-off ceased worrying about the upkeep costs of a large house and began to extend themselves in the mortgage market, hoping to maximize their investment profits. The result was a massive run-up in prices in fashionable areas like London, New York and most of California, which took both housing and local jobs well out of range of ordinary people. I am by most standards quite wealthy, at least in terms of income, but I could no more afford to live comfortably in today's London than I could afford a luxury yacht and its attendant upkeep and crew.

The ideal we should aim at is Germany, where thanks to the admirable Bundesbank there has been little inflation, so home ownership is limited. Only around 43% of the population owns a home and finance is available for at most 80% of the purchase price, normally less. German house prices have been flat or slightly declining in nominal terms for two decades, and only recently, as euro monetary policy has been by German standards excessively lax and euro interest rates have been held down below German inflation, has there been a bump of maybe 10-15% in prices.

It's not a coincidence that Germany has the most successful industrial sector in Europe. Because of its lower house prices less of its savings are wasted in home purchase, even though the rich, like the Victorian British, are substantial investors in rental properties. (They invest little in equities, substantially in bonds and not at all in hedge funds or other worthless excrescences of the Anglo-American capital markets.) Houses are affordable, either to buy or to rent, yet staff are mobile when they are needed to be, since only the oldest and longest established own their homes.

In short, the German housing and house finance market is a good template, and our policies should be aimed at mirroring that market.

In the United States, the home mortgage interest tax deduction should be abolished, providing a sizeable $60 billion annually towards closing the $1 trillion Federal budget deficit. If as is likely a populist president and Congress wimp out of most of the tax increases in the “fiscal cliff,” abolishing the home mortgage interest deduction will at least provide a modest move towards fiscal sanity, even though that particular tax break is not as egregious as the "carried interest" treatment of private equity profits or the tax break for charitable donations, both of which actively encourage economically destructive behavior.

The most egregious housing subsidy in the U.S. system is the effective Federal guarantee of home mortgages through Fannie Mae and Freddie Mac. This grew up almost accidentally, resulting from the development of mortgage securitization techniques in the 1970s and 1980s. It has resulted in the death of the Jimmy Stewart model, and its replacement by a gigantic bureaucracy, which makes the mortgage process far more difficult than it needs to be.

In addition, the Federal Housing Administration  guarantees mortgages itself, a duplication of effort if ever there was one, and has exhausted its capital, having loosened its lending restrictions in 2008 just as everyone else was tightening them. The FHA now supports 15% of all mortgages, up from 5% in 2008, and its stated purpose of enabling the indigent to get mortgages has been stretched to include a maximum guarantee limit of no less than $729,000.

We were informed this week that Fannie Mae has expanded its staff by over 1,000 since its bankruptcy in 2008, although Freddie Mac has cut back slightly. In addition a nominal 15% decrease mandated by Congress in the value of mortgages bought directly by the entities has been effectively ignored.

This subsidy has gone on long enough. With housing recovering, these entities need to be shut down, not over a period of a decade or more but within a year. The U.S. banking system is eminently capable of making home mortgages itself, as it did for decades before 1970, and if the cost of housing finance increases somewhat, so what? It will push people towards lending and away from excessive leverage, both favorable developments for the overall economy.

There are other subsidies that also need to be removed. Under the Basel banking regulations, mortgages are given preferential; treatment in banks’ capital calculations compared with other loans. Experience since 2006 worldwide has shown the risk assumptions behind this to be faulty, as are the even more egregious subsidies given to holding government paper. Changing this is simple; the housing sector does not deserve such consideration.

The final subsidy to remove is that of ultra-low interest rates. These favor investment in long-term assets of limited volatility, such as home mortgages, thereby allowing banks to load up on mortgage assets on a highly leveraged basis while neglecting the far more economically valuable activity of lending to small business. Low interest rates have de-capitalized both the United States and Britain; they have also driven British house prices up to inordinate heights, and will do so again in the U.S. if the current housing recovery is allowed to fester.

Remove these subsidies, and house prices in Manhattan, the fashionable bits of California and South East England will collapse, halving or more in the Russian Mafia-dominated purlieus of central London. That will have a number of beneficial effects. It will cause losses to the more foolish and spendthrift rich, who have overinvested in housing. It will deter young successful people form overinvesting in housing, thereby increasing their investment in equities and especially small businesses. At a less exalted level, it will remove the bias between renting and home ownership, thereby increasing workforce mobility, so that families will tend to buy houses only when they are well established with children, perhaps in their 40s.

Naturally, to get Germany's housing market, the authorities in Britain and the United States will need to adopt Germany's monetary policy (or rather, that of the Bundesbank before 1999). For Britain, this will not be all that difficult; the traditions of the Bank of England include the wholly admirable Montagu Norman and Rowland, Lord Cromer. While there are few if any of the current staff left from the period of those worthies, there is at least no institutional bias against sound money.

In the United States, it will be more difficult. Paul Volcker lasted only eight years and was immensely lucky; one can imagine the fate of his sound policies when matched against a President George W. Bush rather than Ronald Reagan. The legislation governing the Fed needs rewriting, with the "dual mandate" to cover unemployment removed, and provision made so that Fed policy is adequately "Volckerized" in spite of political pressure. Mere independence is not enough; we have seen in the past few years the damage that can be done when an independent Fed is run by a Chairman more populist than Huey Long. Historically, however, even the Gold Standard Fed of the 1920s proved prone to meddling in the wrong direction, creating a surge of speculation in the 1920s followed by an orgy of debt deflation in the early 1930s. Criteria must be set so that future Fed Chairmen are forced to govern by monetary policies that mimic a true "free banking" Gold Standard, in which money creation is automatic and central bank policy meddling minimized.

That's for the long term, and after this month's election results not immediately feasible. However, removing the multiple egregious subsidies to housing is currently feasible, and forms a major element in the lengthy and difficult task of restoring the U.S. and British economies to full health.

 (The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations—8% versus 46.5%, according to recent research. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005)—details can be found on the Web site www.greatconservatives.com and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley—2010). Both now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

[ppulatie]

Here are the latest Foreclosure and Delinquency Stats from LPS. 


LPS: Percent Loans Delinquent and in Foreclosure Process

                                                                                     Oct 2012           Sept 2012          Oct 2011
Delinquent                                                                                 7.03%              7.40%              7.58%
In Foreclosure                                                                         3.61%                3.87%              4.30%

Number of properties:

Number of properties that are 30 or more, and
less than 90 days past due, but not in foreclosure:                    1,957,000     2,170,000         2,219,000

Number of properties that are 90 or more days
delinquent, but not in foreclosure:                                            1,543,000      1,530,000         1,681,000

Number of properties in foreclosure pre-sale inventory:            1,800,000           1,940,000         2,212,000

Total Properties                                                                    5,300,000      5,640,000         6,111,000


My comments:

1.  LPS only covers about 70% of all first mortgages in their data sets.  So, these numbers are below the actual numbers present.

2.  This only applies to 1st Mortgages.  2nds are not considered.  And borrowers are not paying seconds in greater numbers than firsts, because seconds are not generally foreclosing.

The numbers in each category are certainly down. It would appear that the Foreclosure Crisis is beginning to abate. But when additional information is added to explain what is going on, then the perspective begins to change.

1.  Alt A Adjustable Rate loans were tied to either the LIBOR or the MTA Index.  They had Margins of 2.25% or 2.75%. This would be the lowest rate that the loan could have, when the fixed rate periods ended. For the 1 through 5 year loans, which represented over 90% of the loans, the Interest Rates are now down to 2.625% up to 3.25% in most cases. These loans have had defacto modifications with the Fed pushing rates lower.  As rates increase, these loans will begin to default, unless the homeowners refinance into HARP 2.  It is either foreclosure or no longer being a Move Up Buyer.  Either way, these homeowners are out of the housing market in one manner or another......(foreclosure or Move Up Buyer.)

For right now, the foreclosures in this cohort have been "stalled".

2.  HAMP and other modifications that have occurred, especially in the last year, have greatly reduced the number of delinquencies, lowering the numbers. But, it is statistical fact that 60% of the mods fail, so another delay has only occurred.  When the 5 year fixed rate period for the mods expires, then as the loan rates increase, so will more defaults.  For the first HAMP mods, that will begin in 2014.

3.  Lenders are increasingly allowing short sales, which is further decreasing the number of delinquencies and foreclosures.

4.  Compare the 90 plus delinquencies but not in foreclosure to those in foreclosure.  Those loans should all be in foreclosure, but the banks are not foreclosing, either due to attempting loan modifications or short sales prior to initiating foreclosure, or waiting for more foreclosures to occur before initiating foreclosure.  Most of the Non Foreclosure will end up in foreclosure.

Compared to two years ago, total delinquent properties are down about 1 million properties which is an impressive number, for sure. But the reduction must be taken in context with all of the foreclosure prevention programs that have been in place, either delaying foreclosures, or offering modifications to prevent foreclosures.  When these programs are factored in, then the numbers are not nearly so impressive.

When/if the economy crashes further, interest rates increase, or Obamacare begins to get enacted, we can expect that foreclosures will again increase and prevention efforts will fail.

[G M]

Great posts, Pat. Very useful and valuable.


Thanks

[Crafty_Dog]

Indeed.

[ppulatie]

Case Shiller reports Home Values increasing 3.00% Year over Year for Sept 2012.  LPS said 3.6%.  Monthly totals for year...........

Case-Shiller Composite 20 Index
Month   YoY Change
Jan-12   -3.9%
Feb-12   -3.5%
Mar-12   -2.5%
Apr-12   -1.7%
May-12   -0.5%
Jun-12   0.6%
Jul-12   1.1%
Aug-12   1.9%
Sep-12   3.0%

This suggests that an improvement in home valuation is occurring, but it must be viewed with the following considerations.....

1.  Total Inventory of Homes for Sale is 5.8 months of supply.  This shows that there is a shortage of available homes for sale.  Shortages drives prices up.

2.  Interest Rates are at 3.34%, far below "reasonable rates" that should be about 7% to 8% in a "normal" environment.  Lower Rates causes prices to increase.

3.  30% to 40% of home sales are FHA with 3.5% down payments, representing less stringent qualifying standards, and which adds demand that should not exist, which drives up prices.

The simple conclusion is that with all the "artificial" supports put into place by the Fed, and with restrictive inventory, that the Housing Market can only muster a 3% Year over Year increase shows that Housing is truly weak and not responding to efforts to stimulate.

[ppulatie]

Previously, I posted about where new buyers must come from to stimulate housing sales.  I expressed the view that the 24-29 cohort and 30-39 cohort would have to supply the growth. I was quite negative about hopes for this to happen.

US Homeownership by Age Group (Decennial Census)
                                        1980           1990            2000        2010
15 to 24 years                   22.1%        17.1%          17.9%      16.1%
25 to 34 years                   51.6%        45.3%          45.6%      42.0%
35 to 44 years                   71.2%        66.2%          66.2%      62.3%
45 to 54 years                   77.0%        75.3%          74.9%      71.5%
55 to 64 years                   77.6%        79.7%          79.8%      77.3%
65 years plus                     70.1%        75.2%          78.1%      77.5%
Total    Ownership             64.4%         64.2%         66.2%      65.1%

Here is new information coming from Zerohedge that places my concerns into a proper perspective.

The first chart shows how income has changed over a period of years.



For all cohorts except 65 and over, real income has dropped significantly.  Income levels are back to levels seen in the 1990's, in all cohorts except the 19-24 group, which will not be buying homes in any big numbers.  (Plus, income for the 19-24 cohort will not support homeownership in most cases.) Yet, average home values, based upon both LPS and Case Shiller suggest that values are at the 2003 level.  2003 home values were far higher that in the 1990's, so how will any of these cohort be able to increase ownership levels?  It can't happen in any great numbers needed to stimulate housing demand.

The second chart breaks down income into real numbers



With this, we see the actual effects of the income loss.  In the needed cohorts, income levels have dropped from $7k to $9k from peak levels seen in 2000. 

For the 25-34 cohort, with income of $50k, and with the likelihood of high levels of student or consumer debt, there is probably very little to increase ownership rates in the near or intermediate terms.  Only as this group ages, and hopefully achieves greater income growth, can we expect any increase in ownership.

The 35-44 cohort is already at 62% ownership rates. With decreasing income, how can this group be expected to grow further?  (Ownership increases dramatically in this group as people age. Likely, the 39-44 subset is closer to 70% ownership, with 35-38 being much lower than 62%.  Either way, it does not bode well for recovery.)

I ask:  Where are the new buyers going to come from if we have limited Move Up Buyers and we have a younger cohort that cannot afford to buy, even at 2003 prices? 
Can investors and foreign money fuel a housing recovery?  That answer is "No Way".

I have no idea where housing support will come from.  That is why I am in agreement with a previous article that said to let the Housing Market crash and quit trying to support it.

[Crafty_Dog]

Some really insightful stuff Pat.

[ppulatie]

Waiting for CD to post the new Wesbury on Oct Home Sales..............it will be interesting to see what the Kool-Aid Drinker has to say..........

[ppulatie]

Just to predict, Westbury  will say that all is well.

But,

1.  Sep 2012 new home sales were revised down by 20k to an annual rate of 369k, and not 389k as previously reported.  Oct 2012 reported 368k, and expect that this number will be revised down in the Dec report.

2.  Actual Oct 2012 Home Sales, not adjusted, was.....................(drum roll).........................29k. (Sep 2012 was actually 29k as well.)  Multiple 29k by 12 and you have total yearly sales, unadjusted, of 348k.  (See why I hate Adjusted Totals?)

3.  Both the median and average new home price ($237,700 and $278,900) were at the lowest values since June.

4.  The South had about 50% of all sales, at 14k.  The Midwest was 5k, West at 9k, and the Northeast at 2k.

Where is the Housing Recovery?  Am I blind?  I can't see it!!!!

[Crafty_Dog]

New Single-Family Home Sales Declined 0.3% in October, to a 368K Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/28/2012

New single-family home sales declined 0.3% in October, to a 368,000 annual rate, coming in well below the consensus expected pace of 390,000. Sales are up 17.2% from a year ago.
Sales were down in the Northeast and South but up in the Midwest and West.
The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 4.8. The increase was mainly due to a slower selling pace, although inventories of new homes rose 2,000 units.
The median price of new homes sold was $237,700 in October, up 5.7% from a year ago. The average price of new homes sold was $278,900, up 8.0% versus last year.
Implications: New home sales dipped in October but are still in a general rising trend. Although new home sales fell 0.3% in October, and were revised down for last month, they still remain near the highest levels since April 2010. Sales are up 17.2% from a year ago. Meanwhile, as the lower chart to the right shows, overall inventories remain close to record lows. Although the months’ supply of new homes rose to 4.8, it remains near the lowest levels since 2005, well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The slight increase in new home inventories was mostly due to a rise in homes not started. Completed homes also added to inventories. The median price of a new home fell 4.2% in October, but still remains up 5.7% from a year ago, consistent with the positive year over year increases we have been seeing from other house price indices. Not only are prices up, but the median number of months a new home sits on the market before being purchased is now down to 5.9 months from 7.2 just one year ago. This is the lowest level in five years and shows demand is picking up. The road ahead for housing may be bumpy from time to time, but it looks better than it has in years. Look for housing to continue to move higher in 2013.

[DougMacG]

We are getting better info here from PP on housing than Wesbury is getting from his sources, Brian Wesbury should join the list of famous people who read the forum.  )

To repeat, the changing median value of new home sales tells us which types of homes are being built, more than it indicates a movement in value.  You can't build low or mid value houses in populated areas because of the depressed value of existing homes for sale.

Sales volume figures get compared with another point in the crisis, a year ago, but the term recovery (not used in this Wesbury piece) means IMO to compare with pre-crisis levels.
----

-----
For the record, you can buy a 4 bedroom house in the nation's 4th richest metro (http://en.wikipedia.org/wiki/Highest-income_metropolitan_statistical_areas_in_the_United_States) today for $19,900 (http://www.minnesotarealestatesearch.com/mn-homes/listings/minneapolis-real-estate/3110-queen-ave-n/mn-mls-4161095) because of the continuing backlog of foreclosed properties. 

We were warned here that "things will not get easier for housing for an extended period of time" more than a year and a half ago by PP: http://dogbrothers.com/phpBB2/index.php?topic=2167.msg46603#msg46603

[ppulatie]

Just to add more fuel to the fire:

http://www.census.gov/construction/nrs/pdf/soldreg.pdf

If you go to this website, you will find Housing Sales data going back to 1963 on a Monthly Basis.  It provides Adjusted and Non Adjusted Sales.

The data really shows just how bad the New Home Sales really are.  Through most of the 2000's up to 2007, total units sold were over 1m.  Even in 1963, Adjusted Sales Monthly were in the 500's most months.  And, this is with a US population base of  189m. 

In fact, if you look at all the data, the two worst years for Housing Starts ever recorded was 2010 and 2011.  2012 is the 3rd worst on record.

How can anyone be optimistic about a few monthly increases?

[ppulatie]

Today, you will be hearing about Oct Pending Sales Index up by 5.04%.  This means nothing to me.

Pending Sales come from NAR data. It covers signed and accepted Sales offers.  The loans must still close at some point.

Dependent upon the source used, from 48% to 60% of all Pending Sales do not close at this time. Either the borrower cannot qualify in the end, or the Appraisal comes in too low and nixes the deal.  And if it is a Short Sale, then the lender or investor must approve the deal, and this failure rate is far above 60%. (How many of the Pending Sales were the result of prior sales falling through, we do not know.  Would be very interesting if someone kept track of the data.)

Mortgage Banker Association reports that Purchase Application are up, and Refinance Applications are down. Purchase Applications would be the result of the Pending Sales increase, but Refinance Applications are now driven solely by either Interest Rates, or Negative Equity refinancing into HARP.

Here is an interesting tidbit for all:

Ellie Mae is a Loan Processing Engine. Information about the proposed loan is uploaded for further processing, etc.  Ellie Mae handles 20% of the entire lending market, so they have a representative sample of loans that can shed light on the quality of loan applicants.  Here is some relevant information on borrowers.


MONTHLY ORIGINATION OVERVIEW FOR SEPTEMBER 2012 – ELLIE MAE

                  Sep 2012   Aug 2012        June 2012    March 2012

Closed Loans

Purpose
Refinance            65%       61%         54%       61%
Purchase            35%       39%         46%       39%


Type

FHA                    19%       21%         23%       28%
Conventional        72%       70%         67%       64%



PROFILES OF CLOSED AND DENIED LOANS FOR SEPTEMBER 2012

                          Closed First                 Denied Loans
(All Types)

FICO Score (FICO)            750                        704
Loan-to-Value (LTV)            78                         88
Debt-to-Income (DTI)            23/34               27/44


Closed Loans     
                             Sep-12       Aug-12

FHA–REFI

FICO                            716           717 
LTV                               89            89 
DTI                           25/38       25/38 

FHA–PURCH

FICO                             701         700 
LTV                                95          96
DTI                           27/40       27/41


Denied Applications

                                 Sep-12    Aug-12
FHA–REFI

FICO                             670           671
LTV                                89            88
DTI                            28/45       28/43

FHA–PURCH

FICO                              665          670
LTV                                 95            95
DTI                             31/47       31/47


Conventional Closed Loans

                              Sep-12        Aug-12
REFI

FICO                            767            769
LTV                               70              70
DTI                           22/32         22/31


PURCH

FICO                             762           763 
LTV                                79             79
DTI                            21/33        21/33 


Denied Applications

                                Sep-12       Aug-12
CONV–REFI

FICO                              723            727
LTV                                 87             87
DTI                             26/43         27/42 


CONV–PURCH

FICO                               729            734
LTV                                  81              81
DTI                              24/43         25/42

Realtors, Brokers, and the media are all complaining about the tightened lending standards since the Crisis began.  This information provides a good perspective of how much lending standards have tightened.  Though these are averages, we can conclude the following:

For Conventional Loans

1.  Lenders have tightened up on FICO Scores.  Unless you have a large amount of a Down Payment or Equity, do not bother if your FICO is under 700. 

2.  Loan to Value is playing a large role again. LTV's over 85% will be extremely difficult to get approved.  It will depend upon whether you can get PMI coverage.

3.  The real key to approval is the Debt Ratio. Lenders are looking for 36% or less.  No more 45% and above allowed.


For FHA loans

The differences between FHA and Conventional are stark, at the very least.

1.  FHA will allow Debt Ratios up to 41%.  This is regularly approved.  At 38% being the average, it is far greater than the 31% for Conventional loans.

2.  95% LTV average, with 96.5% being commonly approved, far  above conventional as well.

3.  FICO of 700 average, with many loans down to 680 with equity present and lower Debt Ratios.


Looking at the differences in approvals, it is clearly evident why FHA has a current default rate of 16% plus, and is projected to reach 30%.  Yet, the GSEs are under 5% generally.

The government has turned FHA into the GSE subprime. Loans that would have been approved 5 years ago by the GSEs, but would be denied today, are the loans being approved by FHA.  Are these loans "credit worthy"?  When you look at the approval parameters, especially DTI, then it is clearly evident that large numbers of these loans are not "credit worthy" and will default in the next 2-3 years.

 

[Crafty_Dog]

http://www.nytimes.com/2012/12/02/business/widows-pushed-into-foreclosure-by-mortgage-fine-print.html?nl=todaysheadlines&emc=edit_th_20121202

[Crafty_Dog]

second post


DO we have another Fannie or Freddie on our hands — another mortgage giant headed for a rescue?





Department of Housing and Urban Development
 
Carol J. Galante is the acting commissioner of the F.H.A.


Related
 
Times Topic: Gretchen Morgenson

 

Related in Opinion
 
Editorial | The Second Term: The Mortgage Challenge (December 2, 2012)



Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won’t need taxpayers’ help, but we’ve heard that kind of line before.

The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it’s in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion.

Granted, that figure, reported by F.H.A.’s auditor, doesn’t represent actual losses. It’s an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency’s existing capital resources.

But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn’t have the money it needs to cover its expected losses in the coming years.

The F.H.A., a unit of the Department of Housing and Urban Development, is not about to stop insuring mortgages. Its officials say that without the F.H.A., people would have a tougher time getting home loans, and the housing market would suffer. (The F.H.A. insures loans of up to $729,750 in certain areas and requires down payments as low as 3.5 percent.)

But the sharp decline in the fund’s value is a stark reminder that the mortgage mess is still very much with us, even as the real estate market seems to be recovering. In November 2011, for example, the F.H.A.’s auditor projected that the fund’s value would climb to $9.5 billion this year.

The agency acknowledged that its financial position is a hostage to insured loans that still have “significant foreclosure and claim activity yet to occur.”

Whether the F.H.A. will have to turn to the Treasury for help, of course, remains to be seen. That step would be determined by assumptions used in the Obama administration’s 2014 budget proposal, due early next year, and not the auditor’s report.

But neither the F.H.A. nor its auditor has a great record when it comes to forecasting. Its current woes, F.H.A. officials say, stem largely from toxic loans that it insured between 2007 and 2009.

Loans insured since 2010 are performing well, according to the agency. The main reason is that it is essentially catering to a better class of homeowner. In 2008, a quarter of all the loans it insured were made to borrowers with credit scores below 600. (A score of 850 is the highest possible.) In 2010, that figure was 2 percent.

IN an interview on Friday, Carol J. Galante, the acting commissioner of the F.H.A., said that initial data from recent loans, like that for early payment defaults, is showing far superior results over older loans. “We see dramatic improvement that gives us some level of confidence that they are certainly performing much, much better than the older books of business,” she said. Ms. Galante added that higher credit scores also pointed to fewer losses on newer loans.

That may not last. Mortgage experts say it takes three to five years for loans to “season” and for reliable loss patterns to emerge.

Even Barry L. Dennis, the president of Integrated Financial Engineering, the F.H.A.’s auditor, says it is too soon to say with certainty how the recent loans will perform.

“So far, the delinquency statistics on those books are very encouraging,” he said. “But we haven’t gone long enough for the default statistics to prove that those books are better.”

The F.H.A. also predicts that the years ahead will bring fewer losses because the larger loans that it began insuring in 2008 are better performers. The agency insures loans of up to $729,750, well above the $417,000 cap on mortgages guaranteed or bought by Fannie Mae and Freddie Mac.

Whether these loans continue to perform well is another question, given that many are not yet seasoned.

“Our equations assign less risk to a larger loan,” Mr. Dennis said in an interview last week. “But that’s not to say across the board that larger loans are less risky, everything else constant.”

In addition, the F.H.A.’s limited experience with high-balance loans means that it has little data with which it can project losses accurately. Ms. Galante conceded this point, but added that recent increases in premiums levied on borrowers would help offset future losses at her agency. Initial fees rose this year to 1.75 percent of a loan balance, from 1 percent, while ongoing premiums are also going up.

A big question is whether the F.H.A.’s prehistoric technology undermines the accuracy of its data. In 2009, an independent auditor’s report found significant deficiencies in the agency’s aging information systems. Three years later, the agency is still trying to migrate from its creaky Computerized Home Underwriting Management System to a more modern one.

For example, the agency’s system cannot spit out an accurate history of modifications on the loans it insures. As a result, these histories have to be recorded manually.

“The systems are old and antiquated and are in the process of being updated,” Ms. Galante said. “But in terms of the underlying analytics of the performance of the portfolio, that’s not an element of concern.”

The F.H.A. is anticipating a better 2013 for itself and — who knows? — it may be right. But then, Fannie Mae and Freddie Mac played down their troubles for years, and we know how that ended.

[ppulatie]

The problems of surviving spouses as mentioned in the article is a common problem across the US.  But, as with anything housing related, one must look further into the issues presents.

When I read that only the husband was in on title in one case, this indicated that other problems existed not mentioned. When a spouse was omitted from the loan, but kept on the title, this indicated that there would usually be a problem with the spouse, either extensive debt that by not showing her on the loan, would "hide" the debt, or else that credit scores were very low, and would result in a loan denial.  To get around this problem, the spouse would be left off the loan.

This option would work fine, until a death occurred. Then, by the requirements of the original Deed of Trust, anyone assuming the loan (the surviving spouse) would have to requalify. Of course, she could not do so, and then would come foreclosure.  (This also applies to loan modifications.) 

Servicers under different disclosure laws, would not be able to speak to the surviving spouse about the loan, since she was not on it. The only way that this problem would not exist is if the servicer had received an authorization from the borrower prior to death, to speak with the spouse.

In the "real world", the loan should never have been granted, and the couple forced to sell the home, and take the profit, rather than be in a home that they could not truly afford.  (Yes, if the spouse had to be omitted, then the loan should not have been granted.  Likely, for approval, it was also a stated income loan.)

What we see is a "legal trap", created by bad lending practices, and compounded by legal issues.

We see the same issues as above with Reverse Mortgages.  On an RM, if only one of the two parties were 65 or older, then only the older could be on the RM.  The under 65 person was left off.  If the older dies before the younger turns 65, then under the terms of the RM, the RM must be paid off, or the home sold.  Only if the younger has turned 65 can another RM be obtained to solve the problem, if enough equity exists in the home.

Always looke behind the story to find the rest of the story.

[ppulatie]

Regarding the FHA article

1.  Gretchen Morgenson has made a name for herself with the foreclosure crisis.  But, she is a poor "researcher" when it comes to her articles or books.  She makes fundamental errors in reporting that calls into question anything she does.  For example, in one book she wrote which was a Times Best Seller, she writes that the GSE's were doing subprime mortgages as early as 1993.  This was completely false.  That one statement alone was significant to call into question all else that she wrote.

2.  Morgenson has spoken with FHA people, and ones associated with FHA, for their views and comments.  Of course, each are optimistic that with higher FHA standards, loans after 2010 will not default.  She does not speak with others who really have different perspectives, instead of which she simply expresses "doubts".  Here is what she has "missed".

-  Early payment defaults are mentioned as "improved".  It is not mentioned as to whether the Early Payment Defaults are on loans that default within 2 - 3 months of origination, or within the first year.  This distinction is important, in that tightened standards should reduce EPD.  But over the long term, it will not affect loan performance.

-   Loan to Value of 96.5% is paid lip service.  At 96.5%, there is a 16% default rate alone. Yet, FHA continues to use these guidelines.

-   Debt to Income Ratios of 41%.  The GSEs have lower default rates in the 3's at 36%.  Yet FHA continues with 41%.  What happens to FHA as income is further degraded?

-   FHA is generally first time buyers.  This poses a far greater risk because these types do not know the true costs of home ownership.

-   FHA brags about the performance at the higher loan amounts of $729k.  Of course this should be expected.  The higher the income, the more the disposable income at 41% debt ratios.  Performance should be better.

3.  Morgenson does not even mention the FHA Study by Andrew Caplin, in conjunction with the NY Fed.  This report was done using data from literally hundreds of thousands of FHA loans. The conclusion was that 30% of these loans will default within 5 years.  (I agree fully with what I have seen and researched.)

Morgenson's article is like washing one window on the Empire State Building at the ground floor. You can see better from that window, but you really have no idea what is around you, or above you.