(Edition April 15, 2009) Vol. 95
In This Week's "Good News":
Federal Reserve Continues to Buy Fannie/Freddie Debt - Good for Interest Rates
The Federal Reserve continued its latest policy of purchasing Fannie Mae, Freddie Mac and Federal Home Loan Bank's debt this week.
The Fed on Monday purchased $5.15 billion of Fannie Mae, Freddie Mac and the Federal Home Loan Bank's debt. This is the eighth purchase of government securities since a buyback policy was announced in last month.
With maturity dates between April 2010 and March 2011, dealers presented nearly $8 billion for consideration in the Federal Reserve's purchase of debt.
As part of an effort to help lower borrowing costs, the Fed has purchased approximately $60 billion, so far, of the estimated $200 billion it stated it would buy by the end of 2009.
Following the Feds completion of the eighth purchase of agency debts, Treasuries advanced as the government attempted to revitalize the weakening economy.
Since March 25, the central bank has purchased $43.9 billion of Treasuries.
The Fed proposes to purchase as much as $300 billion in U.S. debt over a six month span.
The purchase of this debt will, likely, help mortgage interest rates stay relatively low over the next few months.
In This Week's "Take It How You Will" News:
Good News for Foreclosed Borrowers
Good news according to the Wall Street Journal, if you recently got foreclosed on and are back in the rental market.
Apartment owners and other landlords are beginning to overlook foreclosure-blemished credit reports when considering a new tenant.
Oddly enough, it seems that many landlords are actually targeting potential renters because of a recent foreclosure record.
In one case, a property group owner out of Las Vegas buys lists containing information of borrowers on the verge of losing their homes as a kind of lead service.
Another property group, which controls 13,192 units in nine states nationwide, has changed its scoring algorithm for potential renters so foreclosures don't automatically disqualify them.
However, it is not good news all around, others still see a foreclosure on a credit report as a big red flag, concerned that it reveals an unacceptable credit risk.
Given my last statement, I do not know how long landlords and major property groups that take this stance will last given the fact that the U.S. apartment sector has seen compound annual total returns fall by more than 50% for the 12 months ended March 31, and occupancy levels are at their lowest in years.
Barclays Capital estimates 2.8 million foreclosure starts this year, with 3 million expected by 2010, so clearly landlords will have to be more flexible.
It will be interesting to see if the three major consumer credit repositories, will adjust their algorithms to reflect the increased number of foreclosures, which one would think must mean less than they used to based on the sheer volume.
U.S. Home Prices - Have We Hit Bottom?
According to Integrated Asset Services, LLC (IAS360), a provider of default management and residential collateral valuations, U.S. housing prices continued on a downward slide in February. In the report released Tuesday, it showed a 3% month-over-month drop in home prices.
Statistically, U.S. house prices have now fallen 14.4% on a year-over-year basis and a whopping 17.9% since the height of the real estate bubble in 2006, according to IAS360 data.
According to Dave McCarthy, president and CEO of Integrated Asset Services "We have seen no indication of a positive turn in the housing markets we track, if anything the rate of decline in some areas has increased".
The IAS360 tracks home sales down to the neighborhood level, and then rolls up local totals in 360 counties, nine census divisions, four regions and the nation overall.
The most recent IAS360 numbers for the four U.S. regions look like this:
Northeast: 12.8% decline across the last 5 months and 4.6% drop in February.
South: Down 12.8% for the last 5 months and 3% for the month of February.
West: Decline of 10.2% and 2.5% for the same respective periods.
Midwest: Down 8.9%, and was the only region that did not experience a double digit drop.
According to the index and its accompanying report, six of the ten largest metropolitan statistical areas (MSAs) in the U.S. have experienced double-digit declines since the economy's downturn. "No markets seem to be completely immune from the housing crisis," McCarthy says.
The hardest hit metropolitan areas were Boston, San Francisco, and Miami; down 20.3%, 19.3%, and 18.1% respectively.
The Boston area fell 10.3% in February alone. Within Boston's metropolitan area, Essex, MA plunged at an astonishing rate of 22.8% in February, while Suffolk, MA followed closely, with a drop of 19.3% for the month.
In This Week's "Wait and See" News:
Of significance this week were the numbers reported today for Crude Oil Inventories, which are up approximately 5 fold from last week's numbers. Good news should not be too far behind when it comes to pump prices in the near future.
For the rest of the week look for Building Permit, Housing Start and Initial Jobless Claim numbers (April 16) to have a moderate to high impact across the DOW and S&P, as numbers will probably be worse than expected - this will likely cause a great deal of volatility.
Markets ended today like this: DOW up @ 8029.62 (+109.44), NASDAQ up @ 1626.80 (+1.08) and the S&P up @ 852.06 (+1.25).
Of significance for next week: Expect Leading Economic Indicators (April 20) and Existing Home Sales (April 23) numbers to create a somewhat negative sentiment across major U.S. markets -- This sentiment will likely aid in keeping mortgage interest rates down.
Next week's Economic Calendar:
Week of April 20 - April 24
Date | ET | Release | For | Consensus | Prior |
Apr 20 | 10:00 | Leading Indicators | Mar | NA | -0.4% |
Apr 22 | 10:35 | Crude Oil Inventories | 04/17 | NA | +5670K |
Apr 23 | 08:30 | Initial Jobless Claims | 04/18 | NA | NA |
Apr 23 | 10:00 | Existing Home Sales | Mar | NA | 4.72M |
Apr 24 | 08:30 | Durable Goods Orders | Mar | -1.4% | 3.4% |
Apr 24 | 08:30 | Durable Goods Orders, Excluding-Auto | Mar | -0.8% | 3.9% |
Apr 24 | 10:00 | New Home Sales | Mar | NA | 337K |
* Remember, typically, weaker than expected news is beneficial to a mortgage rate decrease and an increase in bond yields, and more positive than expected news will cause mortgage rates to increase and stocks to increase in value.
In This Week's "Not So Good Right Now" News:
Boston Fed Report Shows Leading Cause of Mortgage Defaults - It's Not the Monthly Payment
Last week's report released by the Boston Fed found an interesting fact about mortgage delinquencies. It found that home price depreciation is a leading cause of mortgage defaults, challenging the most common notions that mortgage defaults and delinquencies are due to unaffordable mortgage payments.
Interestingly, the report stated: "We find that the DTI ratio (Debt-to-Income) at the time of origination is not a strong predictor of future mortgage default." The report went on to state that "A simple theoretical model explains this result."
The report went on to state; "While a higher monthly payment makes default more likely, other factors, such as the level of house prices, expectations of future house price growth and intertemporal variation in household income, matter as well."
The economists estimated that a 10 percentage-point increase in the debt-to-income ratio increases the probability of 90-day delinquency by only 7 to 11 percent.
Conversely, a one percentage-point increase in unemployment rate raises this probability by 10 to 20 percent, and a 10 percent fall in house prices raises the probability of a 90-day delinquency by more than 50 percent.
The findings of this report are particularly important due to the fact that current ‘streamlined loan modification' programs currently focus only on getting a struggling borrower's housing payment down to a specific debt ratio (DTI).
These findings could also explain why re-default rates are extremely high, and puts into question the benefit of a loan modification versus foreclosure.
The report stated that mortgage loan modification efforts should focus on addressing job loss and other adverse life events, rather than making loans more "affordable" on a long-term basis.
The report cited: "For example, the government could replace a portion of lost income for a period of one or two years, through a program of loans or grants to individual homeowners."
Also of note, it stated; "For more permanent and very large setbacks, a good policy might help homeowners transition to rentership through short sales or other procedures."
Of course, it cannot be said if these proposals would actually offset the fact that a home is no longer viewed as an investment due to the property's value -- which seems to be why so many borrowers are simply walking away.
More Bad News for FHA
Following up on past "Mortgage Market Weekly" updates on FHA, I thought that I would report on the latest news by the Wall Street Journal (who did the analysis).
Slightly more than 10 percent of borrowers who took out FHA loans in the first quarter of 2008 were at least two months behind within the first 10 months.
That's up from the 9.4 percent rate seen a year earlier, indicating that more recent vintages of mortgages are performing increasingly poorly.
And about 12.3 percent of FHA loans made in 2007 were at least 90 days late, including four percent that were in foreclosure or bankruptcy.
Many economists believe that FHA is teetering on the brink of insolvency and inching closer to needing government assistance to operate, as you might remember, a first in its 75-year history.
The major cause for such an increase in delinquencies is likely due to the fact that FHA lending has accounted for more than one-third of all residential mortgage originations recently, up sharply from the two-percent level seen two years earlier.
Remember, that FHA is one of the only loan outlets left for those mortgage borrowers with less than perfect credit, and a minimal down payment.
On top of these rising delinquencies, higher loan limits have exposed the agency to riskier parts of the country, such as Florida, where 14 of the 50 markets with the highest FHA default rates are located.
As many would-be home buyers are becoming aware, as well as those attempting to refinance through FHA loan programs, the FHA is attempting to re-vamp it's seemingly out-of-control lack of risk analysis, by stamping out seller down payment assistance loans and slashing the maximum cash-out loan-to-value to 85 percent.
Mortgage Rate Trends:
The Week's National* Conforming Loan Averages (overnight BankRate avg.):
30 year fixed: 4.96% Down
15 year fixed: 4.81% Up
5/1 ARM: 4.75% Down
30 year Jumbo: 6.32% Down
15 year Jumbo: 5.82% Down
* Keep in mind that these rates are national averages', rates may be lower in your region of the country. If you would like a ‘real time' quote, give me a call, or drop me an e-mail.
Good news this week for FHA/VA 30 year fixed rate loans !!! Expect rates to be in the range of 4.875 to 5.125 percent.
Rural Housing rates continue to stay low: look for the 30 year fixed to be in the range of 5.00 to 5.25 percent.
If you have a client(s) that you are having trouble getting qualified through your normal channels, or questions/comments regarding any information contained in this newsletter, please feel free to contact me.
Sincerely,
Richard Shreeve, Editor
Direct: 480-332-4547
Toll Free Direct: 1-800-466-1809 (Your AZ Lender of Choice)
The purpose of this newsletter is to help all real estate professionals, their potential clients and current mortgage borrowers stay up-to-date with current market news. So, feel free to post this newsletter to your website (all I would ask is that you post it in its entirety).
The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.