Strategic default

Mortgage Industry Update: Rates, News & More

***Smart Financial Weekly Mortgage Update December 4, 2009***

Interest Rates

Retail mortgage rates closed the week about .25% higher than what we started the week with. Could this be the beginning of a more regular uptick in rates? Conventional wisdom has it that the rates will move higher but the move up will be bumpy. Stay tuned.

 

When	Rate
This Week	4.81
1 Month Ago	4.91
1 Year Ago	5.47
2 Years Ago	6.11

Note that actual market rates vary geographically and by lender, credit score and Loan to Value.

Source: Federal Reserve Statistical H.15.

 

Mortgage Industry Update

·         An amendment to HR 4173 the Wall Street Reform and Consumer Protection Act allows bankruptcy judges to modify mortgages. These are a number of big time sponsors for this amendment which could light a fire under banks to move the loan modification process along more quickly. In the past the banking lobby has been able to get similar legislation defeated.

·         A new Hope Now Alliance website lets HUD approved counseling agencies in certain markets submit loan modification applications on behalf of certain distressed borrowers. The program is called Hope Loan Port and GMAC, Chase, Sun Trust, PNC and Saxon Mortgage are part of the pilot program. In a related note Chase Bank says that it has been more successful with its own internal loan modification process than with the Making Home Affordable program. It said that 31% of homeowners offered Trial Modifications under the government plan never sent in a single payment.

·         GMAC announced underwriting changes for buying a home after foreclosure. The timeframe is 5 years with a minimum down payment of 10% and minimum credit score of 680. The minimum timeframe from Chapter 7 bankruptcy is 4 years and Chapter 13 bankruptcy is 2 or 4 years depending on the disposition.

·         Last week one of our sources AmTrust Bank was taken over by the FDIC then quietly but quickly acquired by New York Community Bancorp. So far this year 130 banks have failed compared to 25 in all of 2008.

 

Good News

·         U.S, households wealth rose $2.7 Trillion in the third quarter the second quarterly increase in a row according to the Federal Reserve.

·         Zillow says homeowners will lose about $500 billion in value this year a big improvement from 2008 when $3.6 Trillion was lost.

·         The Business Roundtable said its CEO Economic Outlook Index moved strongly positive to 71.5 from 44.9 in the third quarter.

·         Freddie Mac said that its Home Price Index increased .9% in the third quarter following a 2.0% increase in the second quarter.

·         The Commerce Department reported that wholesale inventory increased by .3% in October the first increase in more than a year. The forecast was for decline of .5%.

·         Retail sales were up 1.3% in November much higher than the forecast of .6%.

·         University of Michigan consumer sentiment index for November increased to 73.4 from 67.4 in October the forecast was for 68.8.

 

Statistics of Interest/Concern

·         Lender Processing Services reported that the combined delinquency and foreclosure rate for all loans thru October was 12.6%.

·         Mortgage Bankers Association said this week that MBS (Mortgage Backed Securities) delinquency (30 days or more late) reached 4.06% in the third quarter.

·         The FDIC said that on loans held by them the 90 day or more delinquency rate was 3.43% in the third quarter up by .51% from the second quarter.

·         According to Real Estate Econometrics LLP unpaid loans on commercial property were 3.4% at the end of the third quarter and could go as high as 5.3% in two years. Of the 35 biggest regional lenders that got TARP money commercial construction loans are 37% of the group’s total loans outstanding.

·         U.S. consumer spending fell by $3.5 billion in October according to the Federal Reserve. The decline was the ninth consecutive monthly decline.

·         A Bloomberg national poll revealed that Americans have become gloomier about the direction of the nation than three months ago.

 

Foreclosure Headlines

·         Foreclosure filings fell 8% in November to 306,627 (ninth consecutive month of 300,000+ filings) according to RealtyTrac. However, this was the fourth consecutive monthly decline in filings. RealtyTrac said they thought the decline was “artificially induced” due to mediation programs that likely postponed the inevitable. Nevada again led the nation with one filing per 119 households Arizona came in at one per 186 households. RealtyTrac said further it estimates a record 3.9 million foreclosures in 2009.

·         According to a study by Experian 18% of foreclosures are “Strategic Defaults”. A Strategic Default is when a homeowner who is current on all of their debt but is upside down in their home walks away.

·         The Treasury Department reported that thru November 30^th Permanent Loan Modifications had increased to 30,650 from 2711 on September 1 this out of 697,026 homeowners in Trial Modification.

·         This week Standard and Poor’s said that MBS (Mortgage Backed Securities) performance continued to deteriorate in October which they think means more foreclosures in the future.

·         The U.S. Court reported that in fiscal year 2009 bankruptcy filings were up over 100% from 2007.

 

Job Market Headlines

·         Initial weekly jobless claims increased by 17,000 to 474,000 while forecast was for 455,000.

·         Four week moving average of weekly claims was 473,750 down slightly from previous week.

·         Continuing jobless claims came in at 5.157 million down 303,000 from previous week.

·         The labor Department reported that job openings in the second quarter were down 26% from a year ago and that layoffs were up slightly in October.

 

Commentary/Observations

Dr. Jay Butler of ASU said in November that previously foreclosed property accounted for 41% of the traditional sales. So I guess the question is are we just churning foreclosed property and if so what does that say about the housing recovery in Arizona?

 

In the November 4^th minutes of the Federal Reserve’s last ten members believe it will be 5 to 6 years before the economy returns to growth, employment and inflation levels consistent with the Boards objectives.

 

In New York a new foreclosure tactic has been noticed. It seems that second mortgage holders are selling the debt to collection firms who are able to freeze bank accounts and/or garnish wages in their efforts to collect.

If you have any mortgage or related questions I can be reached at (602) 803-9660 or by e-mail at burt@gosfm.com.

 

 

 

 

 

 

 

 

 

 

 

 

Strategic default

Mortgage Industry Update: Rates, News & More

***Smart Financial Weekly Mortgage Update September 25, 2009***

Interest Rates

Mortgage rates remained essentially flat this week at near historical lows. The Fed has purchased about 70% of the $1.25 TRILLION in MBS it has committed to. On Wednesday the Fed announced it would slow its purchases to last thru the end of March 2010. As the Fed stays on course with the purchases expect rates to rise gradually as the buying slows then eventually stops. The range of increases in rates is estimated to be between .35% and .75% but no one really knows for certain.

 

When	Rate
This Week	5.04
1 Month Ago	5.14
1 Year Ago	6.09
2 Years Ago	6.42

 

Note that actual market rates vary geographically and by lender, credit score and Loan to Value.

Source: Federal Reserve Statistical H.15.

 

Mortgage Industry Update

·         Another one of our investors announced this week they are increasing their minimum FHA score to 650.

·         FHA loans were 46% of all purchase applications last week the highest number since November 1990.

·         We hear a lot about how home affordability is better now than in many years. However, according to USA Today and the Census Bureau in 2008 40 million people spent more than 30% of their income on housing (data included mortgages, rents & homes without mortgages) which is 600,000 more than in 2007.

·         The FHA Reverse Mortgage program is facing an $800 Million shortfall and Congress is not inclined to cover it.

 

Good News

·         Conference Board said leading economic indicators rose .6% in August to the highest level in 18 months AND increased for the fifth straight month.

·         Federal Housing Finance Agency (FHFA) said its housing index was down 4.2% for the past year BUT the index increased .3% from June to July.

·         The House approved a bill this week extending unemployment benefits another 13 weeks for the 27 states with an unemployment rate greater than 8.5%.

·         Inventory of existing homes fell in August to 8.5 months from July’s 9.3 months.

·         University of Michigan Consumer Sentiment Index increased to 73.5 in September from 70.2 in August.

·         New home sales were up .7% in August which was the fifth consecutive monthly increase. Also, new home inventory for August was 7.3 months.

 

Statistics of Interest/Concern

·         Mortgage delinquency (30 days or more late) on all loans increased to a record 7.58% in August up from 7.32% in July. This was the fourth consecutive monthly increase.

·         Credit card charge offs rose to a record high of 11.49% in August according to Moody’s.

·         Bankruptcy filings increased 32% from last August 2008 to August 2009 which is a slight decline from July’s year over year increase.

·         The projected number of bankruptcy’s in 2009 is 1.45 million filings a 35% increase from 2008 according to the American Bankruptcy Institute.

·         Existing home sales fell 2.7% in August. The first monthly decline in 4 months. Note that distressed sales were 31% of total sales.

·         Durable goods orders fell 2.4% in August after increase of 4.9% in July.

 

Foreclosure Headlines

·         The number of properties in some stage of foreclosure was 240,000 in August 2007, 304,000 in August 2008 and 358,000 in August 2009 says RealtyTrac.

·         A study by Amherst Securities Group suggests that not only will the housing market get worse due to the “shadow” inventory of foreclosures but the President’s loan modification program will have “no lasting effect on keeping loans current”. The group estimates there are 7 million units in the so called shadow inventory and points out that negative equity is “the single most important determinant of default”. See below for more on something called strategic default.

 

Job Market Headlines

·         Initial weekly jobless claims fell 21,000 to 530,000 compared to forecast of 550,000.

·         Continuing jobless claims were down slightly to 6.14 million forecast was 6.18 million.

·         The number of firms laying off 50 or more employees at one time spiked in August after a sharp decline in July according to the Bureau of Labor statistics.

 

Commentary/Observations

 Borrowers have become much more comfortable walking away from mortgage payment obligations on their homes and letting their lenders suffer property-value losses, a recent study suggests.  The practice of walking away from a negative equity position has been dubbed “strategic default.”  Such defaults account for an estimated one-quarter of all defaults. “Given that homes in numerous parts of the country have lost more than 30 to 40 percent of their value, many homeowners say they would simply walk away from their loans — without fear of repercussion,” according to the report, Moral and Social Restraints to Strategic Default on Mortgages, jointly announced last month by the Kellogg School of Management and The University of Chicago Booth School of Business.

 

The research found that once negative equity reached 15 percent, “homeowners start to default at an increasing pace, and walk away massively,” the authors wrote.  The report indicated that an estimated 17 percent of all borrowers would walk away if their negative equity reached 50 percent.  The chances of a strategic default increased 82 percent if the borrower knew someone else who did it. Another factor present with higher rates of borrowers who would walk away was a high level of foreclosures in the same zip code. “Housing policy under the current administration has focused on reducing households’ cash-flow problems in response to the housing crisis [loan modifications], but no one has addressed the negative equity issue as part of public policy regarding housing,” Kellogg School’s Paola Sapienza — who lead the research — said in a statement. The negative equity issue was addressed in the Hope for Homeowners program from last summer (which was a failure) where balance reduction was “voluntary” and the Cram Down revision to the bankruptcy law but the law became so watered down it lost support. Could it be that those in D.C. missed the target in trying to fix the housing crisis?

 

Iran nuclear update: On September 25^th President Obama said Iran is “breaking rules” by secretly building a nuclear fuel plant that is “inconsistent with a peaceful nuclear program”. The President, the French President and the British Prime Minister demanded Iran submit to international demands that it halt uranium enrichment. British PM Gordon Brown said “the level of deception…and the scale of what we believe is the breach of international commitment will shock and anger the entire international community [my emphasis]”.

 If you have any mortgage or related questions please contact me at (602) 803-9660 or by e-mail at burt@gosfm.com.