Fed: House Flipping Led to Deeper Housing Collapse

There’s been much debate over the root causes of the housing meltdown that catapulted the nation into the worst financial crisis in 80 years – from lax lending and subprime loans to over-leveraging in the secondary market.

A new report from researchers at the Federal Reserve Bank of New York focuses on the sharp run-up and subsequent collapse in housing prices during the 2000s.

It concludes that real estate investors who used mortgage credit to purchase multiple residential properties with the intent of flipping, or reselling them within a short period of time, played a larger role in fueling the housing bubble than previously recognized.

These investors, the Fed researchers say, helped push prices up during 2004-2006, but when prices began to head south, they defaulted in large numbers, which served to intensify the housing cycle’s downward leg.

Fed officials point out in their report that investors are more likely than owner-occupants to walk away from an underwater property. As such, lenders typically factor in that higher default risk by requiring larger down payments from buyers who acknowledge that they won’t be living in the house.

The expansion of the nonprime mortgage market during the 2000s, however, provided the perfect opportunity for optimistic investors to get low-down-payment credit, according to the report. “Buy-and-flip” investors, in particular, were able to make higher bids on houses, even if they had relatively little cash.

At the peak of the boom in 2006, the New York Fed’s researchers found that over a third of all U.S. home purchase lending was made to people who already owned at least one house.

In the four states with the most pronounced boom-and-bust cycles – Arizona, California, Florida, and Nevada – the investor share was as high as 45 percent.

Overall, the investor share of mortgage-financed home purchases roughly doubled between 2000 and 2006, with the largest increases seen among those owning three or more properties, according to Fed data.

In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000, Fed officials report.

“Longstanding tradition in the mortgage lending business and the predictions of economic models hold that investors will quickly default if prices begin a persistent fall. This is what happened starting in 2006,” according to the Fed researchers.

From 2007 to 2009, they found that investors were responsible for more than a quarter of seriously delinquent mortgage balances nationwide, and more than a third in Arizona, California, Florida, and Nevada.

“We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought,” the researchers wrote in a blog post explaining their findings.

They stress that the availability of low- and no-down-payment mortgages in the nonprime sector enabled investors to make highly leveraged bets on house prices, which likely allowed the bubble to inflate further and caused millions of owner-occupants to pay more for their homes.

“In the end, even the value of the 20 percent down-payments made by responsible, prime borrowers was wiped out — leaving the housing market, and the economy, in the vulnerable state we find them in today,” according to the researchers at the New York Federal Reserve.

 

 

Interesting article in DSN today on effects of our Feds excuses and reasoning….

Fannie Mae and Freddie Mac announced temporary foreclosure moratorium on all single-family homes and two-to-four unit properties over the holidays.

Both companies will enforce the moratorium from December 19 through January 2.

“The holidays are meant for families to spend time together, especially if they’ve gone through the stress of financial challenges and foreclosure,” said Terry Edwards, EVP of credit portfolio management at Fannie Mae.

“No family should have to give up their home during this holiday season,” he said.

The moratorium will not affect the pre- or post-foreclosure processes, the GSEs said in their announcements.

Servicers may continue the administrative processes involved in foreclosures, but evictions will be delayed until after the start of the new year.

“If the property is occupied, our foreclosure attorneys will suspend the eviction to provide families a greater measure of certainty during the holidays,” said Tracy Mooney, SVP of servicing and REO at Freddie Mac.

12/01/2011 KRISTA FRANKS

Please contact me, Susan Fixsen with any questions concerning buying or selling a home.

Twenty-one members of Congress sent a letter to Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco urging him to encourage principal reductions on loans backed by Fannie Mae and Freddie Mac.

“We do not urge that the enterprises reduce principal on mortgages as a kindness to homeowners,” the letter stated.

Instead, the congressmen support principal reductions on the basis that they will save taxpayers from some further potential losses.

 

The lawmakers cite first-quarter data from the GSEs stating 17.7 percent of Fannie borrowers are underwater, as are 19 percent of Freddie borrowers. These borrowers, they say, “are obviously at great risk of eventual default.”

With 44 percent of loans modified in the past two years more than three months past due, according to Freddie Mac data cited in the letter, “[t]he performance of the enterprises’ mortgage modifications leaves much to be desired for homeowners, for the housing market, and for taxpayers,” the letter stated.

The representatives urge DeMarco to disregard the short-term effects of principal reductions on the GSEs’ balance sheets in favor of looking at the long-term positive effects these reductions might have.

They point to an Amherst Securities study that negates the “moral hazard” theory, which hypotheses that offering principal reductions encourages homeowners to default.

“Right now, the FHFA is preventing underwater homeowners with mortgages backed by Fannie Mae or Freddie Mac from receiving balance reductions, even when a principal modification would save the investor – in this case meaning taxpayer – money compared to foreclosure,” said George Miller (D-California), one of the representatives who signed the letter.

 

11/30/2011BY: KRISTA FRANKS

 

HomeSteps, the GSE’s REO sales division, will pay selling agents a $1,000 bonus for offers received on Freddie Mac-owned homes in select locations.

Initial offers must be received between November 15, 2011 and January 31, 2012 with escrow closed on or before March 15, 2012. The offer is valid only on HomeSteps homes sold to owner-occupant buyers.

Selling agent bonuses will be offered on HomeSteps sales in the District of Columbia and the following 28 states: Colorado, Connecticut, Delaware, Iowa, Idaho, Illinois, Indiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Montana, North Dakota, Nebraska, New

Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Dakota, Utah, Virginia, Vermont, Wisconsin, West Virginia, and Wyoming.

The GSE is also extending additional incentives to its owner-occupant buyers. Throughout the winter sales promotion, HomeSteps will pay up to 3 percent of the final sales price towards the buyer’s closing costs.

Some HomeSteps homes are also eligible for a two-year Home Protect limited warranty that covers electrical, plumbing, air conditioning, heating, and other major systems and appliances. Home Protect also provides discounts of up to 30 percent on appliance purchases.

Freddie Mac held 59,596 single-family REO homes as of the end of September. According to the company, its HomeSteps properties accounted for about 4.4 percent of the nation’s inventory of foreclosed homes as of September 30, 2011.

The GSE says the pace of REO acquisitions remains slow due to continued delays in the foreclosure process – delays the company expects will continue into 2012. Freddie Mac acquired 24,385 REO homes through foreclosure during the third quarter of this year.

Currently, the GSE is selling more homes than it’s taking in.REO sales totaled 25,387 over the third quarter period.

Seventy-percent percent of HomeSteps homes are purchased by buyers intending to live in the homes as owner-occupants. Freddie Mac says its REOs sell for an average of 94 percent of the estimated market price.

The average 30-year fixed-rate mortgage came in at 3.99 percent this week, according to data released Thursday byFreddie Mac.

 

It’s the second time this year the rate has dropped below the 4.00 percent mark, and is the second lowest reading in the history of the GSE’s survey. It averaged 3.94 percent for the week ending October 6, 2011.

At 3.99 percent (0.7 point) for the week ending November 10, 2011, the 30-year rate shaved off one basis point from last week’s average of 4.00 percent. Last year at this time, the 30-year fixed rate was 4.17 percent, and as recently as February, it was 5.05 percent.

Freddie Mac described rate movement overall as “changing little” from the previous week amid a mix of economic data reports.

The 15-year fixed rate also budged just one basis point, slipping from 3.31 percent last week to 3.30 percent (0.8 point) this week. A year ago at this time, the 15-year rate averaged 3.57 percent.

While fixed rates edged lower, adjustable-rate mortgages (ARMs) moved in the opposite direction.

The 5-year ARM rose to 2.98 percent (0.6 point) in Freddie’s study, up from 2.96 percent last week. Turn the clock back 12 months, and the 5-year ARM was averaging 3.25 percent.

The 1-year ARM posted the biggest change in one week’s time, jumping to 2.95 percent (0.6 point) from 2.88 percent. This time last year, the 1-year ARM averaged 3.26 percent.

Frank Nothaft, Freddie Mac’s chief economist, says these low mortgage rates, combined with soft house prices have kept homebuyer affordability historically high.

He cites data from the National Association of Realtors (NAR), which shows 74 percent of major metros with annual home price declines in the third quarter. Over that same period, Nothaft says 30-year fixed mortgage rates averaged 4.3 percent as opposed to 4.7 percent in the second quarter.

“These factors helped raise September’s NAR Housing Affordability Index to the third highest reading on record which dates back to 1971,” Nothaft said.

Freddie Mac’s regularly weekly rate study draws its results from 125 lenders across the country.

First-time home buyers are snagging up homes at much the same pace they were before the first-time home buyers tax credit created a buying frenzy two years ago. Indeed, for the first seven months of this year first-time home buyers have made up 32 to 36 percent of the market, according to NATIONAL ASSOCIATION OF REALTORS® statistics.

Low interest rates and fallen home values are drawing more first-time home buyers to the market, at a time when rental prices are rising. However, today’s first-time home buyers certainly are being greeted with more market challenges, everything from higher down payment standards, tougher credit requirements, and delays in securing a mortgage.

But first-time home buyers seem to be finding options to curtail some of the challenges. For example, the FHA’s 3.5 percent down payment market share has seen a large increase in the last few years, rising from 3 to 30 percent since 2006, even though tighter credit standards and higher fees took effect a year ago. Also, the USDA guaranteed loan program offers a no-down payment program that more first-time buyers are taking advantage of.

Given fallen home prices and record-reaching interest rates, why aren’t even more first-time buyers taking advantage of home ownership? They lack urgency, particularly since many first-time buyers say they expect home prices to drop further and mortgage rates to stay low. What’s more, they remain concerned about the economy and their personal finances, finds a national housing survey by Fannie Mae.

Administration officials unveiled a highly anticipated program last week aimed at allowing borrowers who owe significantly more than their home is worth take out new loans with lower interest rates.
The initiative has taken the form of a newly revamped Home Affordable Refinance Program (HARP), which has been opened up to any borrower whose loan was sold to Fannie Mae orFreddie Mac prior to April 2009, as long as they are current on their payments and no matter how far underwater they are.

Mark Fleming, chief economist for CoreLogic says the impact ofHARP 2.0 will be targeted to the housing markets and local economies that have suffered the most from the housing collapse.

Nationally, based on CoreLogic’s quarterly analysis, there are more than 20 million borrowers who have insufficient or negative equity positions on their homes, taking into account all outstanding liens. The company says 4.7 million of these households are underwater by 25 percent or more.

Nevada and Florida rank 1st and 3rd for the highest levels of negative equity (60 percent and 45 percent, respectively) and account for 2.3 million – or 21 percent – of the underwater mortgages nationally.

In those same two states, the share of loans that are current in the GSE portfolio is significantly lower than in the overall GSEportfolio, Fleming explained. Florida and Nevada loans held by the GSEs are current at rates of 85 and 87 percent, respectively, compared to 93 percent of loans that are current when looking at the full GSE portfolio.

“It’s not surprising that where insufficient and negative equity is concentrated is also where delinquency levels are higher,” Fleming said. “Therefore, the HARP 2.0 requirement that the borrower must be current reduces eligibility in many of the areas where negative equity presents the biggest impediment to refinancing.”

Fleming says it’s certain that many more borrowers will benefit from HARP 2.0 than would have prior to the new

program revisions. But he says it will not be a panacea for the housing market directly, because it doesn’t address the two biggest downdrafts for housing: distressed borrowers and shadow inventory.

Moving beyond the borrowers themselves, Fleming cites several other ‘winners’ and ‘losers’ under the new refi effort.

He says HARP 2.0 will be positive for the GSEs themselves because it reduces default risk by reducing the mortgage payment and improving the household balance sheet.

The origination market is another winner in the program’s refi push. Fleming estimates that HARP 2.0 will lead to an increase of somewhere around 2 million additional transactions, starting in 2012 and going into 2013. With an average loan amount of $175,000, this equates to $350 billion over two years, although Fleming believes it will be frontloaded in 2012.

If as many as 2 million borrowers refinance and reduce their mortgage payments, HARP 2.0 constitutes a significant economic stimulus on the order of several billion dollars given to borrowers in many of the economically hardest hit areas, according to Fleming. “[T]his represents an effective tax cut on the order of a few billion dollars,” he said.

Bondholders of high coupon GSE mortgage-backed securities (MBS) fall on the losing side of this plan. Fleming says investors will see prepayment speeds increase significantly. They’ll receive their capital back sooner and will have fewer options for investing it at similar rates, he explains.

For the housing market itself, the impact will likely be “neutral,” Fleming says. He explains that refinancing will not significantly reduce the level of negative equity and will be unlikely to effectively reduce strategic default since the program only offers the potential of lower payments but doesn’t reduce principal.

In addition, Fleming stresses that because borrowers need to be current on existing loans, HARP 2.0 will not reduce the level of the shadow inventory, which, by definition, is composed of seriously delinquent loans and REO held off the market.

Fleming says there is little direct and immediate benefit to the impacted housing markets in the near term or to the borrowers who are already delinquent. Instead, he says, benefits of HARP2.0 will be longer term in the form of reduced, new distressed assets.

“There are no silver bullets that will solve the issues facing the housing and mortgage markets, only solutions that play their small part,” Fleming said. “In the end, the best solution will be a stronger economy and the passing of time.”