August 16, 2015

The Fourth Straight Year Of Housing Market Happiness

A weekend topic on lending. “RealtyTrac released its Q2 2015 U.S. Residential Loan Origination Report, which shows that 1,950,267 loans were originated on single family homes and condos in the second quarter, up 22 percent from the previous quarter and up 23 percent from a year ago to the highest level since the third quarter of 2013. ‘The rise in loan originations particularly the sharp rise in FHA purchase originations indicates the FHA premium reduction at the end of January really is having a big impact, pushing people off the fence to purchase,’ said Daren Blomquist, VP at RealtyTrac. ‘The average loan amount for FHA purchase loans increased from $187,718 in the first quarter of 2011 to $197,315 in the second quarter of 2015 (a 16 quarter high), as the lower FHA premium gave those buyers more buying power.’”

“There were a total of 326,143 Federal Housing Administration (FHA) loan originations – typically low down payment loans utilized by first time homebuyers in the second quarter. FHA loan originations increased 50 percent from the previous quarter and were up 46 percent from a year ago. There were a total of 118,807 Veterans Administration (VA) loans originated in the second quarter, representing 6.1 percent of all loan originations. VA loan originations in the second quarter were up 12 percent from the previous quarter and up 39 percent from a year ago.”

“There were a total of 118,807 Home Equity Lines of Credit (HELOC) originated in the second quarter, representing 14.4 percent of all loan originations. HELOC purchase originations were up 21 percent from the previous quarter and up 78 percent from a year ago while HELOC refinance originations were up 20 percent from the previous quarter and up 20 percent from a year ago.”

The Friday Flyer in California. “More of the Same. If you remember last month (and who doesn’t), the region celebrated a month of sales and price appreciation not seen for nearly a decade. Indeed the whole country seemed to experience the same boosted level of housing market happiness in June, leaving housing prognosticators salivating over the prospect that the housing market has finally hit it’s stride. That may be. After all we’re coming up on the fourth straight year of year-over-year price appreciation and that’s good news.”

“Of course, having recently heard radio commercials advising homeowners to borrow against their ‘future equity,’ I do appreciate the necessity of keeping some degree of oversight on the banking industry. But the banking industry can always hire pricier attorneys and they’re usually still at least a step ahead of the government boys.”

The Santa Cruz Sentinel in California. “Buying a home is a longtime commitment, it takes a lot of money both up front as well as monthly and owning a home requires maintenance and financial responsibility. While it is considered a long term investment, it is certainly not liquid. That is, when it comes time to sell it, it is not so easy to cash in on your investment like, say, stocks would be. On the other hand, if you don’t own a home, you are making the mortgage payments for your landlord; you could be forced to move out at the whim of the landlord and you are more than likely to experience rent increases.”

“Even in the wake of the mortgage crisis that we all experienced some years ago, the mortgage industry has stepped up to make buying a home as easy as financially possible. The mortgage industry allows borrowers to buy a home with just 3 percent down and to spend up to 45 percent to 50 percent of their monthly income on their principal, interest, taxes, insurance or PITI.”

“Perhaps this fear of buying lies in the fact that paying 45 to 50 percent of your monthly gross income cuts into the family budget too much. The other consideration is how much will your home increase in value through the years. A $500,000 home that is purchased with $50,000 down and appreciates 5 percent per year will grow in value $25,000 per year which is not bad for the $50,000 investment.”

“Buying a home is clearly not right for everyone. In fact only 60 to 65 percent of Americans own their own home and nationwide, according to Wikipedia, of these homes, owners have about 50 percent equity. In other words, the average mortgage held by these homeowners is about 50 percent of the value of the home, which probably sounds pretty good to the first-time homebuyers who must borrow more than 80 percent of the value of their homes.”

Mortgage Professional America. “Future growth and profitability in the real estate industry are looking good according to a survey by the National Association of Realtors. Its annual report shows that 95 per cent of real estate firms expect profits to increase or remain the same in the next year. Concerns about the ability of homebuyers to make a purchase include 54 per cent who fear that millennials will be unable to afford to buy in the next two years due to stagnant wage growth, slow jobs market and debt-to-income ratios.”

“Mortgage credit was easier to obtain in July according to the Mortgage Bankers’ Association. Its index based on analysis of Ellie Mae data showed a 2.9 per cent rise in the month with conventional mortgages loosening restrictions the most followed by jumbo, government and conforming. ‘Credit availability increased in July, mainly driven by higher-balance loan programs,’ said Mike Fratantoni, MBA’s Chief Economist. ‘Many investors are fine tuning their cash-out refinance requirements to meet increasing borrower demand for home equity financing. Some investors increased the availability of low down payment loans.’”

The American Banker. “Studies showing the economic and societal benefits of homeownership have not changed in the years since they left office. Yet throughout the presidency of Barack Obama, the homeownership rate has fallen steadily and now stands at its lowest point since 1967. More troubling still, a recent report from the Urban Institute predicts that this trend will continue for another 15 years and that the decline will be experienced disproportionately by African American families. As more and more Americans write rent checks instead of gradually paying off their mortgages, the wealth gap will continue to widen.”

“How did the hard-fought gains in homeownership slip away? Ironically, much of the blame can be laid on many of the policies meant to protect borrowers in the aftermath of the housing crisis. These policies were intended to prevent Americans from getting loans they can’t afford to repay and to rein in lenders who were too aggressive in extending credit. But policymakers failed to anticipate harmful consequences of these regulations.”

“The changes implemented under the Dodd-Frank Act include the creation of the Consumer Financial Protection Bureau and the introduction of “qualified mortgages” and complicated formulas that lenders must use to determine borrowers’ ability to repay. The Department of Housing and Urban Development’s inspector general has teamed up with the Justice Department to use a 150-year-old statute called the False Claims Act, never before applied to mortgage lenders, to extract billions of dollars in settlements from those who make loans insured by the Federal Housing Administration. Many large lenders have backed away from FHA-insured loans, which are targeted at first-time homeowners and lower-income borrowers. FHA lending on single family homes has plummeted since 2009.”

“The result is a ‘zero-defect’ lending environment, wherein lenders agonize over each loan and appear willing to make only the safest loans to borrowers who have pristine credit histories. In our zeal to protect consumers, we have deprived many of them of one of their best chances to climb the economic ladder.”

“But there are alternatives. Recent events suggest that private capital stands ready to take on credit risk in the mortgage markets. For instance, new entrants into the mortgage insurance industry have been able to raise significant amounts of capital. In addition, according to the U.S. Mortgage Insurers Association, established players in the private mortgage insurance industry have raised about $9 billion in new capital since 2007.”

“Just as telling is the robust demand for credit risk recently packaged and sold by the government-sponsored enterprises. For the past several years, Fannie and Freddie have been required by the Federal Housing Finance Agency to sell to private capital sources significant slices of the credit risk associated with their mortgage portfolios. Each has now created new forms of securities that tie the bond’s return to the actual credit losses incurred on specific pools of underlying residential mortgages. Recent offerings of these securities have been oversubscribed, and, as a result, the prices bid on the securities have risen.”

“What is the conclusion to be drawn from all of these transactions? Private capital hasn’t given up on the mortgage markets. It just needs to find ways to earn reasonable returns for assuming the risks. The next administration should make a fresh assessment of the utility of the new regulatory framework. The data suggest that those who have fallen behind on their mortgages may have realized some advantage from new CFPB rules that prolong the foreclosure process and provide layers of protection to delinquent borrowers. However, new borrowers are paying higher rates for a more limited range of mortgages after undergoing a dramatically longer and more difficult lending process. The net result: fewer homeowners.”

“Most importantly, candidates in the next presidential race should support building a system that will give any family that has a reasonable chance of sustaining homeownership a chance to pursue that course. By definition, such a system will result in some defaults. But if the losses are predominantly sustained by private capital and if the lender is able to price the loan according to the risk it assumes, more loans will be made. The net result will be a rise in homeownership levels. The nation will be the better for it.”

Bits Bucket for August 16, 2015

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