Monday, August 30, 2010

Where Does the Mortgage Market Go from Here?

Original posted on the Cleveland Fed website:

In the first quarter of 2010, it appeared that the mortgage market was running out of steam. An increase in mortgage originations in the second quarter, however, demonstrates that there still is demand for mortgages. According to Inside Mortgage Finance, VA-mortgage originations increased 6.3 percent from the first to the second quarter, originations from the top 25 lenders were up 7.6 percent over the same period, and total originations were up 6.3 percent. In addition, new private mortgage insurance was up 26.6 percent over last quarter. Private mortgage insurance is extra insurance lenders require when the amount of a loan exceeds 80 percent of the home’s value. The increased availability of this type of insurance could make home ownership more accessible to homeowners who don’t have enough for a 20 percent down payment.

According to a recent survey published in Inside Mortgage Finance, the improved second-quarter performance was driven by consumers taking advantage of the favorable interest rate environment and the extension of the homebuyer tax credit. Since October 2008, interest rates on 30-year fixed mortgages have fallen 155 basis points, from 6.39 percent to 4.84 percent. In addition to the favorable rates, many homebuyers decided to take advantage of the homebuyer tax credit, which gave first-time homebuyers a tax deduction of $8,000 and existing homeowners buying a new home a deduction of $6,500. The credit, which was set to expire in November 2009, was extended until April 2010.

While the second-quarter originations provide a glimmer of hope that the housing market is improving, significant challenges still lay ahead. This is evident when examining the number of delinquent mortgages, new foreclosures, and the inventory of foreclosures. Between March 2003 and June 2010, the number of delinquent loans increased from 1.6 million to nearly 4.4 million. Rising even more dramatically is the inventory of foreclosed homes, which increased from 482 thousand to slightly over 2.0 million. As of June 2010, 6.9 million loans are classified as in trouble.

The difficulties involved in attempting to rectify the imbalances in the housing market can be demonstrated by examining the July Home Affordability Modification Program (“HAMP”) Servicer Performance Report. According to the report, even though nearly 3.1 million delinquent loans were eligible for modification and 1.3 million modification trials have been started since May 2009, the number of permanent modifications started since September of 2009 has been a mere 434 thousand. Given that there are currently 4.4 million delinquent borrowers and only 434 thousand permanent modifications in the works, it is likely that the real estate market will remain fragile for some time.

Canada’s Very Own Mortgage Mess: The Laws and Programs Behind a National Dilemma

By Nathan Hume, University of Toronto - Faculty of Law

Abstract: Canadian house prices require explanation. Despite a deep global recession and persistent credit crisis, they remain near record highs while prices elsewhere have plummeted. This article offers an institutional account of that anomaly. The insurance and securitization programs of the Canada Mortgage and Housing Corporation have insulated the Canadian mortgage and housing markets from recent turbulence. These large, unfamiliar programs also distort and may ultimately destabilize the Canadian economy. Arguments about asset bubbles are unproductive. This article explains these programs, their effects and their legal framework so that we can better discuss what to do with them.

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Saturday, August 28, 2010

Redefault Rates on Loan Modifications Improving Says State Foreclosure Prevention Working Group

Washington, DC—According to a report issued today by the State Foreclosure Prevention Working Group, increased use of loan modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications. The number of foreclosures continues to outpace the number of loan modifications being made, but there are reasons to be optimistic about the improvement in loan modification performance. The State Working Group’s data indicate that some recent modifications are performing better than loan modifications made earlier in the mortgage crisis.

In addition, the State Working Group found that modifications which significantly reduce the capital balance of the loan have a lower rate of redefault compared to loan modifications overall. Currently, however, only one in five loan modifications reduce the loan amount, and the vast majority of loan modifications actually increase the loan amount by adding servicing charges and late payments to the loan balance.

Despite these positive developments, the numbers of foreclosures continue to far outpace the number of loan modifications. The State Working Group finds that more than 60% of homeowners with serious delinquent loans are still not involved in any loss mitigation activity. Absent additional improvements in foreclosure prevention efforts, the State Working Group anticipates hundreds of thousands of foreclosures will occur later this year.

“The report certainly indicates there are positive developments with regard to loan modifications,” said Neil Milner, President and CEO of the Conference of State Bank Supervisors. “However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”

The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC, and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued four prior reports. View the reports.

Friday, August 27, 2010

FHFA Releases First Conservator’s Report on the Enterprises’ Financial Condition

Washington, DC - August 26, 2010 - The Federal Housing Finance Agency (FHFA) today released its first Conservator’s Report on the Enterprises’ Financial Condition. The Conservator’s Report provides an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac (the Enterprises) during conservatorship. The report will be released on a quarterly basis following the filing of the Enterprises’ financial results with the Securities and Exchange Commission (SEC).

“FHFA initiated the Conservator’s Report to enhance public understanding of Fannie Mae’s and Freddie Mac’s financial performance and condition leading up to and during conservatorship,” said FHFA Acting Director Edward J. DeMarco.

The report includes information on Enterprise presence in the mortgage market; credit quality of Enterprise mortgage purchases; sources of Enterprise losses and capital reductions; and Enterprise loss mitigation activity. Information presented in the report includes:

• The key driver in the decline of the Enterprises’ capital from the end of 2007 through the second quarter of 2010 was the Single-Family Credit Guarantee business segment, which accounted for 73 percent of the capital reduction over that period. The bulk of this capital reduction was associated with losses from mortgages originated in 2006 and 2007.
• The Investments and Capital Markets business segment (which includes the retained portfolio and credit losses associated with private-label mortgage-backed securities) accounted for 9 percent of the capital reduction over the same period.
• Since the establishment of the conservatorships, the credit quality of the Enterprises’ new mortgage acquisitions has improved substantially. Single-family mortgages acquired by the Enterprises during conservatorship have, on average, higher credit scores and lower loanto- value ratios, resulting in lower early cumulative default rates.

Download the full report here:

Friday, August 6, 2010

A Private Lender Cooperative Model for Residential Mortgage Finance

Authors: Toni Dechario, Patricia Mosser, Joseph Tracy, James Vickery, and Joshua Wright

We describe a set of six design principles for the reorganization of the U.S. housing finance system and apply them to one model for replacing Fannie Mae and Freddie Mac that has so far received frequent mention but little sustained analysis – the lender cooperative utility. We discuss the pros and cons of such a model and propose a method for organizing participation in a mutual loss pool and an explicit, priced government insurance mechanism. We also discuss how these principles and this model are consistent with preserving the “to-be-announced,” or TBA, market – particularly if the fixed-rate mortgage remains a focus of public policy.

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