David Olson

FOCUS ISSUE FOR THE WEEK: The extremely low figures for existing and new home sales surprised most of the forecasters. The media is blaming the low figures solely on the high rate of unemployment, low level of confidence in the economy, and end of the tax credit for home buyers. They are missing two huge other trends—extremely tight underwriting due to fear of repurchases from the GSEs, potential rescissions from FHA, and the continual avalanche of new regulations on lenders. Lenders are spending
lots of money and time working to understand the ramifications of new compliance and
regulations therefore they have less time to focus on expanding their business. Fears
about rate increases are hindering lenders’ willingness to hire more staff even though
volume has risen dramatically in recent weeks. .

MORTGAGE MARKET SUMMARY: Interest rates charged for mortgages and Treasuries keep plummeting but are having little impact on mortgage originations than industry watchers would expect given that mortgage rates are at historical lows. This stems for the loss of so many originators from the market (especially mortgage brokers). The cost of hiring and training new employees has risen, so banks instead are dealing with the surprising fall in interest rates by raising their margins. They don’t want to take on the risk and cost of adding new people. For the week the DJIA fell from 10,213 to 10,150. There were 8 positive trends offset by 15 negative trends.

Positive Trends

• The cost of the 30 year fixed rate mortgage keeps plummeting with the weak economy. It fell to 4.36% this week down from 4.42% the prior week. This is again the lowest rate ever since they started reporting this survey in 1971. Since so many borrowers are being turned down for mortgages we are seeing an increase in cash sales and use of hard money lenders.

• The yield on the ten year Treasury rose from 2.61% last week to 2.64% this week. Early in the week it fell due to the weak news of existing home sales but then recovered. This is down from 2.91% four weeks ago. The rate last week was the lowest rate since 1954.

• Initial claims for unemployment fell to 473,000 this past week, down from 504,000 the prior week. But the four week moving average rose to 487,000 up from 484,000 the prior week. Continuing claims fell to 4,456,000 two weeks ago, down from 4,518,000 a week earlier. Overall, there is little evidence of improvement in unemployment. Even the Obama Administration doesn’t expect the unemployment rate to fall below 9% until after 2011.

• Durable orders rose 0.3% in July, up from a -0.1% decline in June. Excluding transportation, durable orders were down 3.8%.

• Applications for home-purchase mortgages increased last week by 1% according to the Mortgage Banker’s Association.

• The Obama Administration is thinking of reforming the mortgage industry to backing mortgages paid for through fees on the lending industry. Currently 90% of all mortgage loans made are backed by Fannie Mae, Freddie Mac, FHA, or VA. Treasury Secretary Geithner said we should continue offering a federal guarantee but price it to cover the risk of losses and structure it to minimize taxpayer exposure. In recent months FHA has depleted its reserves and risks running out of money. Its reserves have shrunk to $3 billion in 2Q10 from $20 billion in 1Q09. The two GSEs have received $148 billion in taxpayer aid in recent years. The New York Federal Reserve proposed creating a lender-owned cooperative that would replace Fannie and Freddie with a mutualized loss pool to provide guarantees for mortgage-backed securities and members would also pay a reinsurance fee to the government for a separate fund to backstop additional losses.

• CoreLogic reported that the number of homes with negative equity fell slightly in 2Q10 to 11 million down from 11.2 million in 1Q10.

• The Mortgage Bankers Association reported that the share of residential mortgages delinquent or in foreclosure fell to 14.4% in 2Q10, down from 14.7% in 1Q10. But there are still seven million homeowners behind in payments or in foreclosure. There are 4.5 million mortgages that are seriously delinquent or in foreclosure as of second quarter.

Negative Trends

• According to the National Association of Realtors, existing home sales fell 27% to a 3.8 million annual rate in July, down from 5.26 million in June. This was far down from the expected rate of 4.7 million. Both the actual rate and rate of decline were the worst since records began in 1999. Based on the July sales rate there are 12.5 months of supply of unsold houses on the market, up from 8.9 months in June. The number of unsold homes on the market has risen to almost four million in July. The market is depressed by the end of the tax credit for new home buyers in April, rising foreclosures, the high rate of unemployment, and tightened underwriting by lenders. We are now in a double dip in housing which may lead to a double dip in the overall economy. At least there will be a slowdown in GDP growth to 1.5% to 2% in the last half of the year.

• New home sales in July were a disappointing 276,000, down from 315,000 in June. This was much lower than expected by forecasters who predicted 334,000. This was the lowest new home sales on record going back to 1963. Over the past decade they have averaged 800,000 and peaked at 1,400,000 in 2005.

• Zillow Inc. reports that there are 3.8 million sidelined home sellers waiting for price stabilization to put their homes on the market. When that happens prices will decline.

• Briefing.com reports that home builders have so much excess inventory that new home prices will decline 10% this fall and put downward pressure on existing home prices.

• FHA insured $857 billion in mortgage loans at the end of 2Q10, up 24% from a year earlier. But its losses have been increasing rapidly and it is planning in October to raise the annual fees it charges new borrowers to 0.9% from 0.55% currently. This addition to fees will add about $300 million a month to its reserves which are currently $3 billion, down from $20 billion in 1Q09. For the average new borrower the average monthly payment will increase $40. At the same time, FHA will drop the upfront premium that borrowers pay when they take out a mortgage to 1%, from 2.25%. Dave Stevens, head of FHA, has written a letter to lenders proposing to weed out those lenders whose activities are seen as resulting in above-average delinquencies. FHA hasn’t yet received permission from the Senate to eject lenders that it deems are overly exuberant in lending.

• According to a survey by Synovate the average interest rate on credit-card customers surged to 14.7% in the second quarter, the highest rate since 2001. The average credit-card rate is now at its highest level in over twenty years—11% above the benchmark prime rate. This upward trend in rates suggests further declines in credit card usage.

• CoreLogic reported that the value of mortgage fraud originations rose 17% in 2009 to about $14 billion. Most of the increase came from appraisal fraud.

• The median sales price of an existing home (according to the National Association of Realtors) fell 0.2% from June to July. But it increased 0.7% from a year ago.

• The number of bank-owned listings of residential homes increased 12% in August according to Zelman & Associates. Banks are holding more than five million loans that are either seriously delinquent or in foreclosure.

• Newly initiated foreclosures increased 25% in July from June, reaching a six-month high according to LPS Applied Analytics.

• The number of households that missed one payment rose in second quarter to 3.51%. The rise in newly delinquent mortgages was the sharpest with FHA loans. This suggests a tightening in FHA underwriting will be forthcoming.

• The U. of Michigan survey of consumer sentiment for August was lowered to 68.9 in its final estimate, down from 69.6 in its initial estimate. This is up from the estimate for July of 67.8 but lower than in the prior three months—April, May, and June.

• The second estimate for second quarter GDP was reduced to 1.6% from 2.4% in the initial estimate. This was higher than the 1.4% expected by most economists. But it was considerably lower than the 3.7% achieved in first quarter. Estimates for the second half of 2010 range from 1.5% to 2.5%. The MBA predicts 2.3%. Martin Feldstein of the National Bureau of Economic Research sees “a fragile economy that is growing at a slower pace.” He sees a 33% chance of the economy falling into a double dip before this recession is over.

• The DJIA fell to 10,150 this week after reaching nearly 10,700 in early August and 10,213 last week. Back in year 2000, the index reached nearly 12,000 and reached 14,000 in 2007. So stocks have been flat for over the past decade. They have not given a good return to investors. Net inflows into stock mutual funds have been flat since the end of 2008.

• Europe’s economy slowed down slightly in August to 56.1 from 56.7 in July. Any index number over 50 represents expansion. The index is based on a survey of purchasing managers in countries using the Euro. Most of the growth is coming from Germany and France with smaller countries slowing down.

Conclusion: Interest rates continue to plummet but are having little impact on mortgage originations due to tight underwriting and a flood of new compliance requirements on banks. That suggests a very slow recovery in the mortgage market and the economy. Most forecasters now predict a further decline in home prices of at least 5% nationwide. It is being driven by the 12½ months of inventory (4 million homes) and the huge shadow inventory of foreclosed homes owned by banks and 3.8 homes held off the market by sidelined home sellers. The economic recovery is slowing down and is precarious. Even Bernanke admitted that in a speech on Friday and hinted the Fed may take some action but there is little left they can do. Congress appears to have given up which means the unemployment rate will be little changed by November and give the Republicans a big opportunity for gaining seats in Congress. The number one issue in voter’s minds is jobs.
Originator Demographic Survey: Access Mortgage Research has launched a project to support mortgage brokers and bankers. The first step of this project is to measure the size and activity of current and former mortgage brokers and mortgage bankers. A second step is to reduce the challenges of delivering loans to multiple investors and thereby increase loan pull-through rates.
Future meetings run by Access Mortgage Research:
18th Benchmark Study Meeting for the Retail and Consumer Direct Channel – September, 28-30, 2010 in Milwaukee.
18th Benchmark Study Meeting for the Broker Channel – November 2010 in Phoenix.
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. We do customized reports from databases of mortgage lenders. For more details see www.accessmrc.com or phone 410-772-1161

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