The Federal Housing Administration Is NOT Predatory

The Federal Housing Administration (FHA) is sometimes maligned by critics as being “predatory.” I understand the private mortgage insurers (PMI) want to get back into the game and reduce the share of government mortgages insurers like the FHA, Fannie Mae and Freddie Mac. But calling the FHA predatory is downright bizarre.

How about a little history?

The FHA is a United States government agency created as part of the National Housing Act of 1934. In 1965 the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD) where Julian Castro is currently the HUD Secretary.

The mission of the FHA has been to support first time-homebuyers and minority borrowers with limited accumulated equity for a down payment.

And it was the FHA that stepped in during the financial crisis. Its share of mortgage insurance went from 16% pre-financial crisis to 71% during and after the financial crisis. Recently, the FHA share has dropped below 50% (intentionally).


Are mortgages with FHA insurance more expensive? Actually since late 2011, FHA-insured mortgages have run 50 basis points less expensive than the average 30 year rate.


In terms of mortgage spreads, here is a chart of mortgage spreads since late 2011.


How about forgiveness of a mortgage distress? FHA/VA trump Fannie and Freddie.


But how have things been going since late 2011? House prices in Los Angeles and San Diego, for example, have been rising rapidly. So borrowers in Los Angeles in San Diego, particularly with a low down payment loan insured by the FHA, are doing quite well!!


So, with 50 basis points less in interest rates and house prices rising, there isn’t much justification for calling the FHA a predatory institution. True, their insurance costs are higher than Fannie Mae and Freddie Mac, but remember that the FHA’s market is first-time homebuyers and households with lower credit scores and income.

I ask you, is this the face of a predator? (Hint: it is HUD Secretary Julian Castro).


Housing Nirvana Alert! New Home Sales Fall To 1991 Levels

The numbers today on new home sales were pretty grim. In fact, new home sales fell in March by 11.4 percent.


In fact, new home sales fell back to 1991 levels.


Given the relatively poor recovery of wage growth and real median household income, it is not that surprising.


Now, it is true that new home sales in the frozen Northeast fell by one third. But to put that number into context, new home sales since early 2008 have been poor. So the 33.33 percent decline is not demonstrably different than other monthly new home sales since early 2008. But it is always fun to blame global warming. cooling.


Speaking of cold places, here is a photo of “Meals on Wheels” in Alaska.


Existing Home Sales Rise 6.1 Percent In March, Back to 1999-2001 Levels

Good news! Existing home sales rose 6.1 percent in March to reach levels from 1999-2001!


From the National Association of Reators:

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February—the highest annual rate since September 2013 (also 5.19 million). Sales have increased year-over-year for six consecutive months and are now 10.4 percent above a year ago, the highest annual increase since August 2013 (10.7 percent.

Total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, down from 4.7 months in February.


Getting back to 1999-2001 levels is no mean feat given that real median household income and average wage growth is lower today than in 1999-2001. Of course, The Federal Reserve has lowered its target rate for Fed Funds considerably as well.


Yes, it has been a 2001-style Space Odyssey. We are finally back to pre-bubble existing home sales levels.

Below is a picture of The Federal Reserve Board of Governors discovering quantitative easing and Zero Interest Rate policies.


Valley Of Fear: Mortgage Purchase Apps Jump 15.6 Percent YoY, But Remain 6 Percent Lower Than in 2013

I have good news and bad news for this morning’s MBA mortgage applications release. The good news? Mortgage purchase applications are up 15.6 percent YoY! The bad news? Mortgage purchase applications are DOWN 6 percent versus the same week 2 years ago.

Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2015.


The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago. However, the unadjusted Purchase Index remains 6 percent LOWER than the same week in 2013.


Mortgage purchase applications usually peak during the first week of May or a little earlier. So based on historic trends, they are near the peak for 2015.

The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013. We remain in “The Valley of Fear” thanks to lower labor force participation and income.


The Refinance Index increased 1 percent from the previous week. But we are near the end of the 4th Refi Wave since The Fed dropped the Fed Funds Target rate like a loadstone. Unless mortgage rates rise again, the herd is thinning on potential Refis.


The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.83 percent, its lowest level since January 2015, from 3.87 percent, with points decreasing to 0.32 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

It doesn’t take Sherlock Holmes to diagnose that the mortgage market remains in “The Valley of Fear.”


Alarm! Labor Force Participation For College Graduates Keeps Falling

I just spoke at the Realtors/Homebuilders meeting in Washington D.C.  I mentioned declining wage growth and real median household income AND rising home prices as a problem.


For once, the panel of economists and CEOs agreed with me. But then came the “But what about the future?”

Let’s look at the labor force participation trend for college graduates in the USA. It keeps falling.


It is hard to forecast a surge in homeownership rates with declining labor force participation rates.



America’s Secular Stagnation And The Lack Of Middle-class And Housing Recovery

I will be speaking in Washington DC tomorrow discussing the state of the housing recovery along with Nobel Laureate Robert Shiller and other economists and industry leaders. “Economic and Policy Forum: State of the U.S. Housing Market” forum scheduled for Tuesday in Washington, D.C. starting at 9:30 a.m. E.T.. April 21, 2015.


I will be mentioning the problem of “secular stagnation” facing the USA. Despite The Federal Reserve’s historic intervention in financial markets, potential real GDP growth keeps dropping.

secular stagnation GDP_0

And despite the massive expansion of The Federal Reserve’s balance sheet, average wage growth is low and real median household income is still below 2007 levels.


I am sure someone will mention “credit is too tight” for which I will respond “No, it isn’t.” Just look at the chart of average wage growth (nominal) and real median household income. Lower wage growth and real median household income helps explain the lack of housing starts.


While some speakers will undoubtedly tout the major recovery for the remainder of 2015 after the abysmal Q1 GDP (according to The Atlanta Fed’s GDP NOW real-time tracker), the long-term prognosis is weak (according to The Fed’s potential real GDP growth.

gdpnow-forecast-evolution (10)

This is secular stagnation, folks. Real GDP and wage growth are expected to be laconic going forward. On the other hand, there are economists who are forecasting a significant recovery.

And with cash sales making up 39 percent of all home sales in January 2015, there just isn’t a recovery for the middle-class.


Freddie Mac May Move STACR Program Entirely to Actual Loss

I have been wondering when Fannie Mae and Freddie Mac were going to expand their risk-sharing mortgage-backed securities offerings. They have been slowly expanding investor exposure (and reduce taxpayer exposure) to test the waters, so to speak.

Freddie Mac has now taken another small step in the right direction with their STACR program.

(Bloomberg) — All Freddie Mac STACR sales may be moved to the “actual loss” structure from the “fixed-severity” model used since the program’s inception, Kevin Palmer, Freddie Mac VP of Single Family, said during an interview at Freddie’s McLean, Va. headquarters Wednesday.

Palmer said the actual loss deal marketing this week, the 1st of its kind, is a “pilot”

Freddie is discussing the new bond with market participants and has conducted a large scale “listening tour”

“If it goes well, starting in September or October all transactions will be actual loss,” Palmer said

Palmer cites accounting treatment as reason for the shift: traditional STACR transaction requires derivative accounting, mark-to-market

Current accounting structure “not a healthy framework”

Actual loss also allows transfer of more volatility risk

Relatively new STACR and CAS transactions may have gone through “growing pains” last year

Saw period of sharp spread tightening and then widening

In 2013, ~$1b issued, while in 2014 ~$10b was sold; quick ramp-up was a lot for the market to absorb

There’s now “equilibrium” in the market

Freddie changed the way it has syndicated STACR product in reaction to 2014 spread volatility

Now, it markets at a lower size, with flexibility to upsize

Also, Freddie has calibrated offerings:

*Amid good conditions, it can transfer risk though STACR

*If conditions not favorable, Freddie can use Agency Credit Insurance Structure (ACIS) program; it might only transfer half of risk through STACR, and then use reinsurance markets via ACIS

*Strives to be “deliberate and methodical” with STACR; trying to avoid too much customization, wants “one standardized security for all”

Joint Bookrunners: Credit Suisse (str) and Citigroup.
Anticipated Capital Structure
CLS, $AMT(mm), WAL, F/M
M-1, 200.000, 1.89, AA-/A3
M-2, 200.000, 4.33, A/Baa3
M-3, 250.000, 8.17, BB+/B1
B, 70.000, 9.99, NR/NR
Bloomberg Ticker: STACR 2015-DNA1
Increased Seasoning: 28 Months (4Q 2012 Originations)
Class B is now DTC Eligible


Here is the deal structure for STACR 2015-DNA1.


By the way, STARC stands for STRUCTURED AGENCY CREDIT RISK DEBT NOTES. Not to be confused with Burger King’s Stackers!!