Bank of America Expands the Innovative “Mortgage to Lease” Program Into California

Yesterday, Bank of America announced that they were expanding their innovative “mortgage to lease” program in California. While the program initially targeted just 1,000 customers, the expansion into California will result in 2,500 customers being invited to take part in the program.

According to CoreLogic, California is the 6th worst state in terms of negative equity after Florida, Arizona, Florida, Georgia and Michigan. Given the lack of evidence on the benefit of principal reductions in preventing default, the Bank of America solution is a compassionate approach to the horror of losing one’s home. The former borrower now rents their home instead of having to move.

The Bank of America mortgage to lease program doesn’t add to the already staggering shadow inventory of housing in the United States.

The mortgage to lease program is a win-win for households who cannot sustain their mortgage payments and Bank of America. While Bank of America would prefer borrowers to continue making their mortgage payments, this solution dominates foreclosure in terms of losses.

I love it when the private sector develops an innovative program to deal with a national problem.

 

Spanish Banks (Bankia, Banco Popular, Bankinter) Cut to Junk – Housing Blues Continues to Inflict Damage on Spain (Bankia Plays “Oliver Twist”)

May 25 (Bloomberg) — Banco Popular Espanol S.A. cut to junk, to BB+ from BBB-, outlook negative.
• Bankinter S.A. cut to junk, to BB+ from BBB-, outlook negative
• Banca Civica S.A. L-T counterparty credit ratings cut to BB from BB+, on watch positive
• Bankia S.A. cut to junk, to BB+ from BBB-, may be cut further
• Banco Financiero y de Ahorros S.A. L-T counterparty credit ratings cut to B+ from BB-, may be cut further
• Banco Financiero y de Ahorros S.A. S-T counterparty credit rating affirmed
• Banco de Sabadell S.A. affirmed, outlook negative
• CaixaBank S.A. S-T counterparty credit rating affirmed
• Confederacion Espanola de Cajas de Ahorros affirmed, outlook to stable from watch negative
• Kutxabank S.A. affirmed, outlook to negative from watch negative
• Banco Santander S.A. affirmed
• Banco Espanol de Credito S.A. affirmed
• Santander Consumer Finance affirmed
• Banco Bilbao Vizcaya Argentaria S.A. affirmed
• Banca Civica S.A. S-T counterparty credit rating, CaixaBank S.A. L-T counterparty credit rating, Caja de Ahorros y Pensiones de Barcelona, Ibercaja Banco S.A. remain on credit watch
• S&P lowered L-T counterparty credit ratings on Bankia S.A., Banco Financiero y de Ahorros S.A., Banca Civica S.A., Banco Popular Espanol S.A. and Bankinter S.A.
• L-T outlooks on Banco Santander S.a., Banco Bilbao Vizcaya Argentaria S.A., Popular, Sabadell, Kutxabank S.A. and Bankinter are negative
• CaixaBank S.A. and parent, Ibercaja Banco S.A. and Bankia and parent remain on watch negative
• Civica ratings remain on watch positive

The exploding Spanish housing bubble continues to degrade.

And their non-performing loans continue to grow.

When combined with slow GDP growth, this is a recipe for bank disaster.

The Bankia group, a Spanish lender nationalized earlier this month, needs 19 billion euros ($23.8 billion) of government money to restructure its business.

“Please Sir, may we have more gruel?”

Of course, government-seized Bankia no longer trades after being suspended by their regulator.

Banco Popular is still traded, but seems to be “Banco UNPopular.”

And their 5 year CDS is rising again after that attempts of the ECB to provide liquidity as a solution to their problems.

The good news? At least Banco Santander’s rating was affirmed! For the moment, that is.

Spanish sovereign yields continue to rise.

Hot fun in The Med!

 

Initial Jobless Claims Same as Mid-December 2011 and Other Government Data Peculiarites

Yes, we have another week when the Bureau of Labor Statistics (BLS) upwardly revised the previous week’s initial jobless claims. Last week jobless claims were 370,000 and the BLS revised them to 372,000. Now this week’s pre-revision jobless claims fell to 370,000.

But the important point is that initial jobless claims are at the same level as 12/16/2011. Essentially, there has been no change in jobless claims other than weekly fluctuations.

At least continuing job claims fell from 3,265,000 last week to 3,260,000 this week. After an upwards revision last week, of course, to 3,289,000.

However, average weeks of unemployment from last month is at an all time high.

Hmm. Continuing jobless claims continue to fall, but average weeks of unemployment hits an all-time high. One shows slow healing of the labor force and the other says it is getting worse.

At least FHFA showed the largest jump in house prices (for conforming loans) in history yesterday.

Let’s see what Case-Shiller says on Tuesday. But FNC’s 20 Metro index is showing a turn up in housing prices as well.

 

My Argument Against Government Loan Modification Programs (HAMP, HARP, etc) – Senate Consider Hatching Another Raptor Egg

The was a housing conference at the Woodrow Wilson Center in Washington D.C. entitled “Are We Becoming a Nation of Renters.” Warning: only Session III appears on the Center’s web site, so you won’t see the interchange between the great Wall Street Journal reporter Nick Timiraos and me in Session II (before lunch).

During our excellent session with Tomasz Piskorski (Edward S. Gordon Associate Professor of Real Estate, Columbia Business School), Mark Palim (Director of Economics, Fannie Mae) and me with Vincent Fiorillo (DoubleLine Capital) as the moderator, we discussed some of the problems with loan modification programs and why they have been a disappointment.

This lively and friendly debate prompted Nick Timiraos to ask me “You seem to imply that HAMP should not have been done by the Administration.”

That is exactly what I was saying.

I answered Nick’s question with the following analogy. “Suppose that Chrysler Motors is known to have lousy performing transmissions in their cars and Jeeps. Should the government step in and require that Chrysler pay for new transmissions for all current Chrysler buyers? Or force Chrysler to change the design?” That answer is no.

So why did the Administration and Congress pass HAMP legislation which threw a massive monkey wrench into the mortgage servicing industry when bank/servicers have historically perform loan modification when deemed appropriate?

Essentially, borrowers and activists were pleading with government to help out. I understand, but the standard boilerplate applies: be careful about opening the Pandora’s Box of government.

Of course, with staggering house price declines followed by surging unemployment, loan modifications would be a tricky proposition at best. So, the government came out with HAMP with was a failure, then keep changing the rules and eventually have put 14 different programs into play, including the infamous Attorneys General Settlement, Super HARP (or HARP II+) and the Obama proposal of principal write downs paid by taxpayers. Again, you asked for help and opened Pandora’s Box. Now the government wants more and more control and … programs.

The sad reality is that most don’t work and get people’s hope up. The Attorneys General Settlement is more like a bank bailout of underfunded State budgets with $1 billion going to the FHA to prevent them from going before Congress like Oliver Twist with an empty bowl of gruel.

So, rather than letting the market correct and heal, we have adopted policies that perpetuate the housing crisis.

We would have been better off doing nothing. But that is not a politically popular strategy.

Coming up on Thursday in the U.S. Senate is the HARP 2.0+ or HARP 3 legislation where Senators Boxer and Menendez are proposing to refinance virtually everyone with a Fannie Mae and Freddie Mac held or insured mortgage. That is, remove all the safeties in place on the housing finance torpedo.

This was my worst fear. HAMP didn’t work, so the government will keep pushing and demanding more control and interference.

Here is Thursday’s lineup. Christopher Papagianis from e21 will likely warn of caution of doing anything more in terms of housing finance stimulus. Mark Zandi from Moody’s will likely agree with Senators Johnson and Menendez (but beware of Zandi’s forecasts for economic stimulus – they are WAY TOO HIGH).

If I was at this hearing, I would have asked everyone the same thing I asked Nick Timiraos: “Where in the Constitution does it give the government ANY authority to do any of this?”

But even if it is Constitutional, we need to stop asking the government to intervene in the private market to solve our problems. Even if well intended. They are lousy at it.

To quote Dr. Ian Malcolm from Jurassic Park, “your scientists economists were so preoccupied with whether or not they could, they didn’t stop to think if they should.”

Economists and Congress members marvel at the creation of yet another government mortgage modification program.

 

MBA Mortgage Purchase Applications FELL 2.96%, New Home Sales Rise, Europe’s Med Problem Continues

The Mortgage Bankers Association released their weekly survey of mortgage lenders this morning.

The good news. Mortgage refinancing application volume continues to rise (although whether it is HAMP, HARP or one of the 12 other Administration programs is unknown). But it does seem that HARP 2.0 is kicking in.

The bad news. Purchase applications declined last week and seem stuck in “the red zone.” That is, since early June 2010, home purchase applications have been stable, but not growing.

New home sales, released today, continue to rise within “the red zone.” So, we are seeing some recovery across the board, but it is still a vulnerable recovery.

With tight credit for the mortgage market, can we have a sustained housing recovery with all cash and investors only?

Depending on Europe’s decision about the exit of Greece, we will see further yield deterioration in The Med (Greece, Spain, Portugal and Italy) and the U.S. 10 year Treasury dropped 5.7 basis points so far this morning.

Let’s see how mortgage rates react this week. But Europe’s ongoing crisis certainly impacts our Treasury, mortgage and … housing markets.

 

Existing Home Sales Rise 3.2% in April, Mostly in Northeast U.S.

According to the National Association of Realtors, existing home sales for April increased by 3.12% with the Northeast U.S. leading the way.

If we look at the numbers in chart form, existing home sales have been generally risk since January 2008.

The “surprise” number in the report is the median house price for existing home sales. It was up 8.3%!

But before you get too excited, notice that this happens in this data periodically. This is mostly because sales of different price point housing occurs in different regions over time.

If we compare a repeat sales index like Case-Shiller or FNC with Realtors Median Price index, we can see how noisy the Realtors index is.

Not bad for a housing recovery where there is a lack of housing finance!

 

Facebook: The Morning After (Facebook Drops to $33-34 Per Share After IPO Price of $38)

I admit, I never saw the attraction of Facebook. I use it, but never click on the ads. But apparently many investors think that people do click on the ads. And that it is going to grow.

But this morning in pre-market trading, Facebook fell below it’s $38 per share, the offer price. “Beware of Geeks Bearing Gifts” seems to be apt.

The NASDAQ CEO blamed the lousy trade execution on Friday on “bad software.”

“Computer systems used to establish the opening price were overwhelmed by order cancellations and updates during the “biggest IPO cross in the history of mankind,” Nasdaq Chief Executive Officer Robert Greifeld said yesterday in a conference call with reporters.

Well, the history of mankind is kind of stretching it. I don’t recall too many IPOs in ancient Greece, Rome, or other cultures. But the important part of the story were the cancellations. After all, IPOs are difficult to value, particularly when it is a social application with uncertain growth prospects.

 

German Brokerage Quoted Latest Facebook Orders at $70 Per Share, Closes at Just Above $38 — “Missed it by that much!”

May 18 (Bloomberg) — Bankhaus Main, making a market for Facebook Inc. shares in Frankfurt before the official start of trading, quoted the latest orders at the equivalent of $70 a share, said Gerion Weber, head of lead brokerage at the firm.

The IPO price per share was $38.

The net income for Facebook has been growing rapidly.

And Q1 2012 Facebook net income continued to grow. You can see why there was excitement to jump aboard the train, especially given near zero interest rates on government bonds and a lackluster stock market that will likely need The Fed to pump up it’s deflating tires using another round of quantitative easing (or twisting).

So, what happened on Friday, May 18th?

Facebook opened at $42 and ended the day at just above … $38 (the IPO offer price). Not quite the $70 per share that some German invetors placed as orders!

As Maxwell Smart used to say, “Missed it by that much!”

The distribution of trade prices centered around $40 per share before closing Friday at just above $38 per share.

The trades were all over the board in terms of volume.

Just goes to show you. Despite the hype about the biggest IPO in history, many missed the boat on the IPO price after opening bell. Is this an example of another dot.com bubble where there is while speculation about the future profitability on an on-line social app for which the future is highly uncertain? Stated differently, are the bond and equity markets so stagnant that investors are willing to pay dearly for a “castle in the sky”?

 

Brookings Institution on Principal Reductions: Wealth Transfer from Taxpayers to Borrowers with Minimal Effect on Foreclosure Prevention

Brookings Institution scholar Ted Gayer and University of Maryland scholar Phillip Swagel had a nice piece on Bloomberg View yesterday regarding the call for mortgage principal reductions. In a nutshell, Gayer and Swagel agree with my view on principal reductions: it’s a wealth transfer scheme that would have minimal effect on foreclosure prevention. There is a good reason that FHFA Acting Director Ed DeMarco has been tentative about freeing Fannie Mae and Freddie Mac to perform principal reductions.

“There are 11.1 million residential properties with underwater mortgages, only about 3 million of which are backed by Fannie and Freddie. Almost 80 percent of those 3 million borrowers, however, are current on their mortgage, demonstrating their commitment and ability to make payments without a principal reduction. Consequently, principal writedowns for them would simply transfer money from taxpayers to the borrowers — with minimal effect on foreclosure prevention.”

“Cry havoc and let slip the dogs of (class) war”

Principal reductions are part of the bigger Administration plan for wealth redistribution from banks and investors to households. As I have discussed before, the Administration has introduced 14 loan modification programs (e.g., HAMP, HARP, Attorneys General Settlement and the proposed principal writedowns from Fannie Mae and Freddie Mac). HAMP has been a disappointment although HARP 2.0 seems to be working in terms of refinancing volume. Yet, the Administration keeps pushing mortgage loan modifications (and pressuring Mr. DeMarco for principal reductions).

Of course, the 14 loan modification programs in the name of stabilizing the housing market and lowering mortgage defaults are actually STIMULUS 2.0 without explicitly calling it another stimulus package. But taking money from banks and investors and giving it to troubled borrowers (HAMP) and borrowers that don’t need help (HARP) makes an assumption that households will take their mortgage payment reduction and spend it, stimulating the economy. My estimates of the stimulus effect (along with Deborah Lucas’ estimates) are minimal as a percentage of Personal Consumption Expenditures.

Throw in the fact that the Attorneys General Settlement turned out to be “State Stimulus in Sheep’s Clothing” is very troubling. California is one of the states using the settlement funds to plug their fiscal holes (caused by excessive government spending). Oh and the FHA avoided slinking into Congress for a bailout since they carved out $1 billion of the AG Settlement for themselves. To quote Gomer Pyle, “Surprise, surprise, surprise!”

Taking The Safeties Off The HARP Torpedo

Laurie Goodman (Amherst Securities) and Chris Mayer (Columbia University) are big fans of removing the safeties from the HARP torpedo. If you believe in the Central government doing another economic stimulus package by allowing everyone to refinance their mortgage at 4%, then the Boyce, Mayer, Hubbard (or Boxer/Menendez proposal) is for you. I call this the “Herbert Hoover Refinancing Proposal” where very smart people are proposing a further intrusion of government into the private sector in the hopes of stimulating the economy. Perhaps it could.

But with mortgage rates at historic lows and 14 competing loan modification programs (and the Administration’s desire to get those principal reductions from Fannie Mae and Freddie Mac), I am very concerned that we could be throwing too much stimulus at the housing market. We have NO IDEA how the 14 loan modification programs will work together. Boyce, Hubbard and Mayer give a point estimate for their HARP proposal, but we know in prepayment modeling that it is unlikely that their point estimate will be correct. But it COULD be correct.

Between The Fed and the Administration throwing so much stimulus at the housing market (which was massively over-subsidized to begin with), we need to proceed with extreme caution.

Senator Jack Reed (D-RI) became angry with me when I made this recommendation at a recent Senate hearing. “People are suffering and you are telling us to do nothing?!” Precisely. We are blind with regard to how this will work and running full speed for an exit if a very dangerous idea.

Furthermore, the housing market is healing (particularly in non-judicial foreclosure states). Please, let the market heal and stop ripping off the bandages and squeezing the wound.

Good job, Gayer and Swagel!

 

Freddie Mac: Mortgage Rates Drop (Again) – Thank Greece, Portugal and Spain!

According to Freddie Mac, mortgage rates in the U.S. fell to a record for a third straight week. The average rate for a 30-year fixed loan dropped to 3.79 percent in the week ended today from 3.83 percent.

Fannie Mae 30 year current coupons (the rate on Fannie Mae MBS) fell as well, but not to the lowest point in recent months.

As Europe continues to experience a financial crisis, investors continue to invest in our Treasury market (driving down yields). 30 year mortgage rates follow the 10 year Treasury yield.

Greece, Portugal and Spain continue to experience problems with excessive debt, Spanish debt (housing-related) and Greek turmoil.

Consumer Comfort and Unemployment Claims

Bloomberg released their consumer comfort index today and it looks like the downside of a big rollercoaster.

And initial jobless claims came in higher than forecast. BUT EQUAL TO THE UPWARDLY REVISED JOBLESS CLAIMS FOR LAST WEEK!

And the Philadelphia Fed has a BIG swing and miss. Survey was for a print of +10.0 and the actual print was -5.8!

Like Col. Kilgore, Fed Chairman Ben Bernanke is smelling QE in the morning.

While I might say to Bernanke that further Fed intervention is futile and dangerous, Bernanke would likely reply “Charlie Don’t Surf!”

 

Spanish Bond Yields Rise, Bankia Has a Bank Run, Moody’s To Downgrade Banks

May 17 (Bloomberg) — Spain sold the maximum amount of notes targeted today as borrowing costs rose and 10-year bond yields approached levels that drove nations including Greece and Portugal into bailouts. Spain sold 2.49 billion euros of bonds, just below its maximum target of 2.5 billion euros, the Bank of Spain said.

Spain sold bonds due in January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were sold in April. It sold bonds due in July 2015 at 4.876 percent, compared with 4.037 percent on May 3 and bonds due in April 2016 at 5.106 percent.

Demand was 4.47 times the amount sold for the January 2015 debt, compared with 2.41 at the last auction and the bid-to-cover for the July 2015 securities was 3.01, compared with 2.88.

I don’t want to split hairs, but it is the massive government spending and entitlements that drove nations in to fiscal fiasco. The bond yields are simply the market’s pricing of the risk of default. And Spain now has considerable debt to roll over at these higher rates (barring a future decrease in market pricing of risk).

The yield curves of Germany (Bund) and Spain sum up the situation quite well. Spanish yields are over 400 basis points higher than Germany’s sovereign yields.

Meanwhile, Spain has seized one bank, Bankia, which just suffered a billion Euro withdrawal by consumers. Better known as a bank run (ala, It’s a Wonderful Life!)

Again, the fall of Spanish housing prices is leading to enormous bank stress.

And this morning, it appears that Moody’s will downgrade Spain’s banks which will have a negative impact on their already struggling bottom lines.

Here is today’s reaction in the bond market.

 

A Recap of our Franco-American Economy Since Mid 2010 (Escargot Speed)

After a flurry of economic data this week that the media tried its hardest to spin, we sit here in the U.S. facing the same predicament facing France, Spain, Italy and Greece: too many entitlements and too much debt. And no end in sight! So, here is a review of our Franco-Mediterranean economy (and you thought only countries that touched The Med had governments that are reckless borrowers and spenders!)

Don’t get me wrong. I love the USA and I love visiting France. Heck, I even like flying Air France! I am concerned about our respective economies and directions of both in terms of not doing anything about their massive debts and entitlements coupled with slow economic growth.

So, how are we doing when we need terrific economic growth in order to pay for our entitlements, government spending and … debt? Let’s look at the recent trend since June 2010. We are apparently “Franophiles” at heart.

Inflation

The Consumer Price Index, a measure of inflation, came out on Monday at … 0.0%. Well, that’s not surprising. Bernanke and The Fed have been TRYING to create inflation and can’t. [You need growth in aggregate demand to get inflation!]

Empire State Manufacturing Survey

The Empire State Manufacturing Survey came out on May 15th as well. It came in at a level BELOW June 2010.

Adjusted Retail Sales

Adjusted retail sales were released on Monday too. 0.1% and not going in the right direction!

MBA Home Purchase Applications

On Wednesday, the Mortgage Bankers Association reported that home mortgage purchase applications declined 2.3% from the previous week and have been fairly flat since early-mid 2010.

Savings Rate

The U.S. personal savings rate has fallen since June 2010.

while consumer credit has increased dramatically:

Even worse, much of the credit increase comes from the Federal government in the form of student loans.

Employment

Since June 2010, 2.2 million people have gone disability while 2.1 million people were taken out of unemployment. And average weeks unemployed hit a high point since the Great Depression. Hmm.

All this despite massive easing by The Federal Reserve, 14 Administration loan modification programs, and the almost $1 trillion stimulus package.

The good news for the US? Our real GDP is higher than France’s. The bad news? They are one of our trading partners.

The US economy is showing strain despite The Fed’s positive view of the economy. We can’t have a recovery based solely on autos sales, government credit, and declining savings rates.

Can we try something else? A snail’s pace isn’t good enough to pay for our entitlements or debt. And running trillion dollars deficits only adds more debt the our taxpayers (although only half of taxpayers actually pay any Federal taxes).

And what would be a “Last Train to Brokesville” post with a screen shot of usdebtclock.org!

EEKS! France has an external debt to GDP ratio of … 272%!

 

Housing Starts Rise Slightly, Mostly Multifamily Starts – Muted Response From Historic Lows in Mortgage Rates

Housing starts increased more than expected in April Starts rose 2.6 percent to a 717,000 annual rate from March’s revised 699,000 pace that was stronger than previously reported, according to the U.S. Commerce Department.

If you look at the chart of housing starts, this is a slow turnaround that is gaining momentum.

But housing starts for single structures (detached) are growing at a slow pace since 2008. This is not surprising given the MBA’s purchase application results today showing a weekly decline in application volume.

Mutlifamily rents in the northeast U.S. has risen sharply since the recession.

As you can see, 5+ unit housing starts (aka, multifamily) are still rising, attempting to meet the demand that has resulted in higher and higher rental rates. Since much of the financing of multifamily is coming from HUD, Fannie Mae and Freddie Mac (the government housing monopoly), we have to be careful about brewing an apartment bubble (the government LOVES to create housing bubbles!).

Building permits, a proxy for future construction, fell from a more than three-year high. This is a small wave rather than the big wave that some were hoping.

While 1 units are slowly making a comeback, multifamily starts are still paving the way to a housing recovery. Even though mortgage rates are at an all time low (10 year Treasury is the blue line, 30 year MBA rate index is the gold line).

 

MBA Purchase Applications Decline -2.38%, Refi Applications Rise 13%: HARP 2.0 Kicks In!

According to the Mortgage Bankers Association survey of lenders, applications for home purchases fell -2.38% last week which mortgage refinancing applications rose 13%.

Purchase applications are still slow by historic standards indicating that the housing “recovery” is still mostly cash purchases and investors.

On the mortgage refi front, you can see a steady increase in applications, thanks in part to HARP 2.0.

Thanks to Europe imploding because of their on-going debt crisis, the 10 year Treasury (blue) is low and the 30 year fixed rate mortgage is at all time lows.

How low can we go?

 

NAHB Home Builder Index Up Slightly

The National Association of Home Builders Market Index printed at 29 after a revision to 24 last month. The survey was for 26. Bear in mind that 50 is the breakeven point on half being optimistic, so we are still far below the breakeven point.

So, we are back to where we were in 2007. And the index is barely higher than it was in February and March. So, no significant change. The reaction in the equity markets for homebuilders was minimal.

 

Plouffe’s “Philadelphia” Explanation of Loan Modifications and Their Benefit (Ignores Costs/Risks) and Who is a “Responsible” Borrower

President Obama’s Senior Advisor, David Plouffe, sent out an email today explaining why loan modifications are “good” and not modifying loans is “bad.”

I felt like Denzel Washington from “Philadelphia” saying “All right, Mr. Laird Plouffe, explain this to me like I’m a four-year-old, okay?”

Well, here is Plouffe’s “Philadelphia” explanation to Americans. Prepare to be spoken down to.

Good afternoon –

Right now, refinancing a home mortgage can be confusing and costly — but it doesn’t have to be that way.

And that’s why President Obama is asking Congress to make things simpler for responsible homeowners as part of his To-Do List for lawmakers.

All over the country, there are Americans who bought houses before the financial crisis, and they’re locked in at high interest rates. Despite staying current with payments, they can’t refinance at today’s rates, which are historically low.

This issue affects you, even if you have a good rate, or don’t have a mortgage at all. Lower monthly payments mean lower foreclosure rates, helping property values in your community. And more money in people’s pockets helps to move our economy forward and create jobs.

By improving this process, responsible folks who work hard will be able to feel a little more secure in their finances and a little more secure in their homes.

Watch one of President Obama’s economic advisers explain how in this quick video.

Lowering the interest rate on your mortgage should be an idea that makes sense for both Republicans and Democrats. Outside the halls of Congress, paying a mortgage isn’t a partisan, political issue.
President Obama has done what he can to make refinancing simpler, but unless Congress acts, there’s a limit to how much we can help responsible homeowners.

Nothing will help to change the debate more than Americans across the country joining the conversation. We saw your impact a few months ago when Congress finally extended the payroll tax cut, keeping an average of $40 in everyone’s paycheck. Now it’s time to for more action – this time to help homeowners all over America.

So I’m asking you to talk to people about this refinance proposal and the other ideas on the To-Do List. You can find more info about them on WhiteHouse.gov:

http://www.whitehouse.gov/todolist

Thank you,
David
David Plouffe
Senior Advisor to the President

That presentation by President Obama’s housing adviser was … “Here you go, dimwits, let poppa tell you what to do.” And grossly misleading. How about talking to us like we are adults?

The Administration has 14 loans modifications programs going on plus the Attorneys’ General settlement. The Administration and Congress are leaning on FHFA Acting Director Ed Demarco to perform large principal reductions for borrowers. Their motto should be “Cry Havoc! And let slip the dogs of (class) war!”

Let us be perfectly clear. These loan modification programs represent a wealth transfer from investors, banks, Fannie Mae and Freddie Mac to borrowers. Nothing is free, despite what some of the loan modification advocates claim. And the biggest loser will be the American taxpayer.

Let me put on my “Philadelphia” hat and talk to you like you are four years old.

“If you have a 6.5% rate mortgage and you get a refi that lowers your rate to 4.0%, you win. But someone pays for that gift – investors in mortgages such as pension funds, banks and Fannie Mae and Freddie Mac.”

I am not opposed per se to mortgage refis as a matter of fiscal policy (the Boyce, Hubbard and Mayer proposal). I just think that it will be too big of a shock to predict the outcome (just like the National Homeownership Strategy coupled with setting capital gains tax rates on housing equal to zero was too much of a policy shock to predict and we had BAD unintended consequences.

From what I heard from Ed Demarco yesterday at the GWU housing conference, HARP 2.0 applications are skyrocketing (although danged if I see it in the MBA Refi Applications data). And if principal reductions become national policy, we could have a “Perfect Storm of Unintended Consequences.”

Unfortunately, Plouffee and Obama’s housing adviser left out that part of the story. 1) SOMEBODY pays for it and 2) it is a RISKY strategy since we don’t know how it will play out.

One more time, I am not opposed to loan modifications ordered by the Administration and Congress. It’s just that they haven’t done enough homework on the risks and possible unintended consequences.

Here is a chart of government and bank holding of Agency MBS. This ignores private label holdings as well as non-government investor holdings.

Point? A big miss could cost us dearly. Proceed with extreme caution, Mr. Plouffe.

This is the same strategy with which Washington D.C. tells us why we need to be regulated. By talking to us like we are four years olds and then inflicting damaging regulations on us.

And in the future, talk to us like we are adults. And read Diane Olick’s piece on the “responsible” borrowers in Reno NV who want a mortgage principal reduction AFTER taking $250,000 out of the home.

Would you explain to a 4 year old why a seemingly responsible homeowner who drained $250,000 out of their house is asking taxpayers for a handout? And the Administration wants to give it to them?

 

LPS Home Prices Rise 0.2% in February (Similar to CoreLogic) and The GWU Housing Finance Conference

JACKSONVILLE, Fla. – May 10, 2012 – Lender Processing Services, Inc. (NYSE: LPS), a leading provider of technology, data and analytics for the mortgage and real estate industries, today announced that its LPS Applied Analytics division updated its home price index (LPS HPI) with residential sales concluded during February 2012.

“Our HPI shows an increase in seasonally adjusted prices this month for the first time since March 2010, and for only the third time in five years,” said Raj Dosaj, vice president of LPS Applied Analytics. “There have been signs of price declines slowing for a few months now, and our estimates for next month are flat to slightly positive. Without a pickup in sales volumes from their current anemic levels, it’s hard to be more optimistic that the market may be nearing the end of its fall.

“Reasons for caution are clear, as we’ve been here before. Non-seasonally adjusted prices increased for a few months in early 2009, 2010 and 2011 – trends that all ended by summer, after which all the gains – and then some – were lost. As is true this month, those temporary increases were on low sales volumes – about 30 percent lower than at any point since 1998. Furthermore, the inventory of distressed homes remains high, which will continue to put a drag on prices.”

This follows on a similar CoreLogic report from a few days ago.

George Washington University Center for Real Estate and Urban Analysis Housing Finance Conference

Speaking of CoreLogic, I was speaking at a conference in Washington D.C. at George Washington University’s Center for Real Estate and Urban Analysis (a sell-out crowd of 250 with an excellent lunch!) and CoreLogic’s Mark Fleming gave his usual excellent presentation pointing to a recovery this year in housing. Mark Zandi from Moody’s Analytics echoed Fleming’s optimism. [Even Bob Shiller seems more optimistic these days!] Laurie Goodman from Amherst Securities chimed in on the state of the market and what needs to be done to return private market mortgage lending.

The lunch keynote speaker was Ed Demarco, the acting FHFA Director, who discussed their strategic plan for Fannie Mae and Freddie Mac conservatorship. I was anxiously waiting for Mr. Demarco to announced plans for principal writedowns from Fannie Mae and Freddie Mac, but alas, it was not to be. Fannie Nae?

The afternoon was devoted to the future of housing finance and what to do with Fannie Mae and Freddie Mac. It was a very interesting panel. Of course, I prefer a private market solution and cautioned everyone to be careful blaming Fannie Mae and Freddie Mac solely for the crisis since the rest of the world experienced a housing bubble and only the U.S. has Fannie Mae and Freddie Mac. [See: Scorcher VI: Global Meltdown (of Housing Prices) – U.S., Canada, Japan, UK, France, Denmark, Australia, Italy, Portugal and Spain]. There was a global housing bubble (or bubbles), so we need to identify the role of Central Banks, capital flows, too much housing subsidization, etc. rather than simply defanging Fannie Mae and Freddie Mac. If we continue to subsidize housing (interest deductions, low down payment loans, government subsidized mortgage rates, etc)., we are likely to create another housing bubble and resulting heart attack.

Andrew Davidson gave his talking points on creating a co-op securitization structure, Hans Bald from 20 Gates Capital pleaded for the government to stop changing the rules (sensible suggestion!) and Adolfo Marzol from Essent Guaranty discussed the return of private mortgage insurance for low down payment borrowers.

It was an excellent conference with fascinating speakers. Kudos to Bob Van Order, Tom Stanton and Rob Valero for organizing it.

The LPS and CoreLogic Numbers

Now on to the housing numbers. Here is the LPS house price report by metro area:

While there are market-to-market differences between LPS and CoreLogic’s measures, they are similar in the aggregate. In fact, LPS’s only negative house price growth in February were in California (LA, SF and San Diego).

CoreLogic, in their recent Market Pulse publication, gave a status update for foreclosures by state. [I wanted to focus on the Sand States of Arizona, California, Nevada and Florida as well states such as New York and Ohio, so I truncated the list. Please contact CoreLogic for the complete list of states]. As foreclosures slow down and housing prices stabilize, we may start seeing a rise in home prices in several market areas within a year.

California has over a quarter of a million pre-foreclosure filings! And Georgia isn’t doing too well either. But as serious delinquencies and foreclosures slow down, we should see a turn around in the housing market.

Consumer Confidence

Like CoreLogic and LPS’s house price indices, the University of Michigan’s Survey of Consumer Confidence is showing increased optimism. Last month’s survey was 76.4, the survey was for 76.0, but the actual print was 77.8.

Of course, we have been here before. February 2011 printed at 77.5 while January 2008 printed at 78.4. Both prints were followed by downturns.

Like house prices, be careful not to over interpret good news. Just because someone agrees to go to the prom with you (elation!) doesn’t mean he or she will be nice.

 

MBA Purchase and Refi Applications Rise, Euro Helps Drive Mortgage Rates to All-Time Low, Fannie Mae DOESN’T Ask Taxpayers For More Money!

According to the Mortgage Bankers Association, increases to the seasonally adjusted Market Composite and Purchase indices were driven by increases in their Conventional components. Application activity within the Government market decreased for both of these measures from last week. Likewise, the Refinance Index increased 1.3 percent from the previous week, driven by a 1.8 percent increase to the Conventional Refinance Index, while the Government Refinance Index decreased 2.3 percent. The seasonally adjusted Purchase Index increased 3.4 percent from one week earlier, spurred by a 5.4 percent increase in the seasonally adjusted Conventional Purchase Index.

First, the MBA purchase application index. It remains low by historic standards and is still stuck in the post May 2010 box.

Second, the MBA mortgage refinancing index was up, but only by 1.8%.

I keep waiting for HARP to kick in. Waiting for Godot … again.

This is surprising given the historic low 30 year mortgage rates

and the plunging U.S. Treasury ten year rate (thanks to Europe’s rebellion against common sense).

The Administration has thrown everything and the kitchen sink at the mortgage market and it is slow to react.

Fannie Mae

The good news today is that Fannie Mae posted a $2.7 billion net income for Q1 2012 and will NOT be asking Treasury for more capital. This came on the heels of Freddie Mac asking for an additional $19 million about a week ago.

May 9 (Bloomberg) — Fannie Mae , the biggest backer of U.S. home loans, said it won’t seek Treasury Department aid after reporting net income of $2.7 billion for the first quarter. The company has drawn a total of $117.1 billion in aid while under government control.

Stabilizing home prices are certainly helping Fannie Mae, but $117.1 billion in aid AND required dividend payments to Treasury make it virtually impossible for Fannie Mae to repay their aid to taxpayers.

Sing along with The Beatles, “Thhings are getting better all the time” for Fannie Mae. And hopefully for Freddie Mac too.

 

CoreLogic: Home Prices Rise (Barely) – Phoenix Re-Bubbles, Chicago/Atlanta Continue Tanking

CoreLogic released their March home price report today showing a +0.6% increase in home prices nationally. Before you do a victory dance for the Great Housing Revival, the variation across the country is palpable.

Thanks to low prices (post bubble) and being a non-judicial state where foreclosures actually go fairly quickly, Phoenix is experiencing a rising from the ashes. Or re-bubbling.

Hot ‘Lanta (aka, Atlanta GA) remains stone cold at -8.1% along with Not-So-Sweet Home Chicago at -8.8%.

New York/White Plains/Wayne showed a 2% rise in home prices while Dallas in fast growing, low tax Texas experienced a 1.1% rise.

Los Angeles and Riverside CA fell again by -2.4% and -3.2%, respectively.

On a state by state basis, Delaware was the big loser at -10.6%.

And “Sweet Home Alabama” doesn’t look so sweet as the moment.

Highlights as of March 2012
• Including distressed sales, the five states with the highest appreciation were: Wyoming (+5.9 percent), West Virginia (+5.3 percent), Arizona (+5.1 percent), North Dakota (+4.7 percent) and Florida (+4.5 percent).
• Including distressed sales, the five states with the greatest depreciation were: Delaware (-10.6 percent), Illinois (-8.3 percent), Alabama (-8.0 percent), Georgia (-7.3 percent) and Nevada (-5.8 percent).
• Excluding distressed sales, the five states with the highest appreciation were: Idaho (+5.4 percent), North Dakota (+5.1 percent), South Carolina (+4.7 percent), Montana (+3.5 percent) and Kansas (+3.4 percent).
• Excluding distressed sales, the five states with the greatest depreciation were: Delaware (-7.6 percent), Alabama (-4.1 percent), Nevada (-3.9 percent), Vermont (-3.9 percent) and Rhode Island (-2.9 percent).
• Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to March 2012) was -33.7 percent. Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -24.5 percent.
• The five states with the largest peak-to-current declines including distressed transactions are Nevada (-59.9 percent), Arizona (-48.6 percent), Florida (-48.1 percent), Michigan (-45.1 percent) and California (-42.7 percent).
• Of the top 100 Core Based Statistical Areas (CBSAs) measured by population, 57 are showing year-over-year declines in March, eight fewer than in February.

So, we have stabilization in much of the country.

 

Bank of America Begins Efforts On Principal Reduction to Borrowers (AG Settlement Kicks In)

Bank of America Home Loans has begun reaching out to customers who may be eligible for forgiveness of a portion of the principal balance on their mortgage under terms of a recent settlement among five major banks, 49 state attorneys general and the federal government. The first letters in a targeted outreach to more than 200,000 potential candidates for this assistance are arriving in homes this week; most of the letters will be mailed by the third quarter of this year. The bank estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program.

Do not contact me about BoA’s principal reductions. Contact BofA, please!

Bank of America actually began making principal reduction offers under the program guidelines in March, initially concentrating on homeowners who were already in the modification review process. So far under this early initiative, about 5,000 trial modification offers have been mailed, providing a potential total of more than $700 million in forgiven principal. Homeowners are required to make at least three timely payments before the modification can become permanent.

The wave of mailings beginning this week will reach a broader base of customers who may be eligible for this principal reduction program. The letters provide each homeowner with a description of the program and an invitation to provide financial information to begin the review process. To be eligible for this program, a homeowner must meet certain criteria, including:
 Owes more on the mortgage than the property is worth today.
 Was at least 60 days behind on payments on January 31, 2012.
 Has a contractual monthly payment for principal, interest, property taxes, hazard insurance and any applicable homeowner association fees totaling more than 25 percent of gross household income.
 Has a loan that is owned and serviced by Bank of America, or serviced for another investor that has given the bank delegated authority to do such modifications.

Fannie Mae, Freddie Mac and FHA/VA are not participating in the principal reduction program, but other modification programs which may provide comparable reductions in monthly payments are available on those loans. [I am speaking at a Future of Fannie Mae and Freddie Mac conference on Thursday where FHFA Director Ed DeMarco is the keynote speaker - if he reports any news of Fannie Mae and Freddie Mac principal reductions, I will let you know.]

A key goal of mortgage modifications is to provide an affordable monthly payment, based on borrower’s ability to pay. Most modification plans begin with a reduction of the interest rate, then an extension of the number of years to pay off the mortgage, then if necessary, interest-free forbearance of principal to be paid back at the end of the loan. Bank of America has offered principal forgiveness, but in more limited, targeted situations to eligible borrowers with certain types of mortgages.

Under the terms of the government settlement, the bank will strive to provide an affordable payment to qualified under-water homeowners by first reducing the principal balance to as low as 100 percent of the current property value, then lowering the interest rate and forbearing additional principal, as necessary, to reach the target payment. The settlement terms require a final calculation to determine that the cost incurred by the mortgage investor to modify the loan does not exceed the expected loss to the investor if it goes to foreclosure instead, commonly known as positive net present value.

Their trial program had the aim of reducing borrower’s mortgage payment by 30%. It is best to focus on that number rather than the dollar amount of the principal writedown.

The Attorneys General Settlement is one of 14 Administration loan modification programs, so let’s see how well this particular one works in terms of responses and slowing defaults. Bear in mind that the AG Settlement revolved around the infamous “Robo-signing” where borrowers were not harmed since they would eventually have been evicted anyway. However, the banks/investors were harmed by borrowers defaulting on their loans and staying in the house after default.

And to see why Fannie Mae and Freddie Mac are NOT doing principal reductions (as of today), look at the Reuters’ Mortgage Writedown Calculator. Principal reductions are very expensive with questionable results, although some servicers have allegedly had success with principal writedowns on a small scale. It is when there is a “gold rush fever” for writedowns that it becomes problematic. The AG Settlement may have created moral hazard risk for servicers if current borrowers decide to go 90 days late on their mortgage if hopes of getting their loan written down to 100 percent of the current property value. [Bank of America will undoubtedly be checking for this problem, so my advice is don't go 90 days late in the hope of a principal reduction!]