Banks’ Buybacks of Loans up 373%

According to National Mortgage News banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. JPMorgan Chase and Bank of America led the field followed by Citibank, National City, Wells Fargo and SunTrust.

What does this mean for you?  Further tightening of underwriting standards and larger down payment requirements are coming.  The next wave of changes hits in mid-December.

Average 30-Year Freddie Mac Rate Matches Record Low

The average Freddie Mac rate for a 30-year fixed-rate mortgage has matched a record low last seen earlier this year.   Borrower’s who qualify can get 30-year, fixed rate conforming loans with note rates in the mid 4’s.

New Home Sales Bump Up- Big Deal

New home sales rebounded 6.2% in October after a slight 2.4% dip in the previous month, while the inventory of newly constructed homes plunged to a 38-year low. The U.S. Census Bureau found that the new home inventory fell to a 6.2-month supply during the month, down from a 12-month supply in January.  Still, according to the chart below from realestatedecline.com new home sales are seriously below annual averages for the last ten years.

According to National Mortgage News, real estate analyst Mike Larson of Weiss Research says this is a sign builders need to start swinging their hammers.  Mike Larson is wrong unless you believe more bankrupt builders and banks in trouble are a good thing.  Until this economy creates jobs and the current and hidden inventory of existing homes held by banks are moved off their balance sheets, builders need to be hyper-cautious.  Actually, builders don’t need to be hyper cautious because banks are not lending.

How does a builder create a small fortune in housing in this market?  Start with a large one……

 According to the Assoiciated Press there are two versions of an extension of the First-Time Homebuyer’s Tax Credit being circulating in the Senate. Both versions are targeted to be put in place by an amendment to the larger bill extending unemployment benefits. One version extends the credit through the end of March, 2010, allows move-up homebuyers to also get a credit and contracts written by the end of March have 90 days to close. It seems somebody in the senate actually understands the current state of affairs in the housing industry. The other version apparently keeps the current credit in place but drops the maximum credit by $2,000 each quarter with full expiration at the end of 2010. According to AP, both versions face a key vote next Tuesday. Google “first time homebuyer’s tax credit” and the search should bring up the most recent stories.

Big Bank gets big bucks.  Big Auto gets big bucks.  Big Insurance gets big bucks. What about Jane & John Homeowner?  You know, clients like yours’ and mine, quietly paying their mortgage every month on a home worth far less than they paid a year or two or three ago.  Often, their mortgage is greater than the home’s present value.  There are likely millions of homeowners who fall into this category.  They are struggling like the rest of us.  Who is looking out for them?  From what I can see, no one is.

Why not an Underwater Homeowner’s Tax Deduction?  Why not allow the homeowner to take a tax loss on their home based on an independent appraisal?  I think it is an idea worth exploring.  In a nutshell the program could work like this:

• The homeowner gets an independent appraisal (HVCC perhaps)
• The present appraised value is deducted from the original sales price
• The loss is taken all at once or over a 2-3 year period, taxpayer’s choice
• The new basis for the home is the new appraised value
• Future gains are based on the new basis

I propose this Tax Deduction be applied only to the taxpayer’s primary residence but would love to hear other idea’s.

Think about it, potentially millions of homeowner’s could get immediate tax relief which will directly benefit their household economy.  The tax effect is targeted directly where it is long overdue, for Jane and John Homeowner.  Do you know an elected representative who is willing to create and sponsor this legislation?

For the record, I was having a conversation with Debbie Taylor , a loan officer in Puyallup, Washington and she came up with this great idea.  She said it was ok with her if I wrote about it.  It is too good of an idea to keep below the surface.

We have experienced a whole season of ultra-low mortgage rates.  Borrower’s who qualify, who own or are purchasing a property that qualifies have been able to cement sub-5% interest rates for up to 30-years. 

Why are rates so low?  First, we are in a recession.  Real unemployment is over 16%.  Regrettably, there is nothing on the horizon to dispel consumer jitters about their jobs or the future so the typical paths to recovery, housing and consumer spending offer no relief.

Second; inflation is not a fear, deflation is the fear, most notably in the housing market.  These two factors alone are enough to foster a low mortgage rate environment as long as energy prices remain in check.

There is a third factor at play.  The Federal Reserve and the Treasury have been plowing through the issues of mortgage backed securities.  According to the Mortgage Bankers Association, the Federal Reserve purchased almost 80% of available product in August.  The Treasury stepped in for another 9%.   You don’t need a Nobel Peace Prize in economics to imagine where rates would  be if the combined total of the two were less than 50% of the available product.  According to Jay Brinkman, Chief Economist for the MBA the government might be overpaying for mortgage backed securities (the higher the price, the lower the rate) and they are keeping the usual investors on the sidelines.

When will this end?  The conventional wisdom is the Federal Reserve plans to wean themselves off buying mortgage backed securities this Spring.  If the above analysis is right, expect rates to rise this Spring, just in time to throw cold water on the buying season.  And if the economy shows any signs of recovery or if energy prices rise (i.e. inflation) expect rates to leap high enough to punch housing in the stomach, getting us shovel-ready for stagflation.

My advice, buy now, pray later.

Note: today was a typical day for the bottom seekers.  Rates blipped up a tad and many have regrets.  “You should have locked yesterday.”

Pre Amble

Today, new disclosure requirements are in effect.  These requirements are being issued by the Federal Reserve, under Reg Z as mandated by the MDIA (July, 2008) as an amendment to the Truth in Lending Act.

The application of the Act leaves some guidelines unchanged, creates addition disclosure and timeline requirements and mandates new language be added to our disclosures.

If you want to read every word of the Rules and Regulations, they are published in the Federal Register, Vol.74. No. 95, dated Tuesday, May 19, 2009. It is specifically published under the Federal Reserve System, 12 CFR, Regulation Z, Docket No.-R-1340, Truth in Lending. 

Transactions Affected – All mortgage transactions on 1-4 family dwellings regardless of occupancy with one exception.  A specific exception is any mortgage transaction for a rental property that is not owner-occupied (the owner does not expect to live more than 14 days during the coming year).

Early Disclosures

A Good Faith Estimate and TIL (early disclosures) must be delivered or mailed no later than three business days after receipt of an application.  No advance deposit can be collected from the consumer prior to delivery of the early disclosures for any expense other than for the actual cost of a credit report(s).  Delivery has been defined as “three business days after mailing (or any other delivery method) unless delivered in a face-to-face interview.  If the creditor has proof of receipt (i.e. email acknowledgement of receipt, courier receipt) then the date of receipt of acknowledgement can be deemed the date the three day waiting period begins.  The same credit card can be used for the appraisal with a specific request to and acknowledgement from the consumer after the waiting period has passed.  In practice, most appraisal orders will be delayed until the seventh day after initial disclosures are mailed or on the fourth day from the date of an email or courier receipt of disclosures is dated.

Re-Disclosure

For any transaction that qualifies for Early Disclosure, re-disclosure is mandated any time the initial terms disclosed are changed to the point where the APR calculation is changed (higher or lower) more than .125% for a fixed rate transaction and .150% for any other transaction.

Any loan subject to redisclosure cannot be consummated prior to three business days from the date the creditor delivers the re-disclosures.  Refer to the Early Disclosure paragraph for clarification of delivery. 

Seven Day Rule

No loan can close sooner than seven days from early disclosure.  The determination for seven business days is defined as when the early disclosures are either delivered or placed in the mail. The final rule also stipulates the transaction can close on the seventh business day. 

Note 1:  In theory, based on the new guidelines a purchase or refinance transaction could close on the seventh business day after the receipt of an application, presuming there is no trigger for re-disclosure. 

Definition of a Business Day

For purposes of all disclosure requirements a business day is defined by this new regulation as all calendar days except Sundays and legal federal holidays.  Whether an office is open or closed does not affect the definition of a business day. 

Consumer’s Waiver of Waiting Period Before Consummation

The new regulation allows for the waiver of the waiting period prior to consummation of the transaction to expedite consummation based on a “bona fide personal financial emergency.”  On brokered transactions the wholesale lender will make the final determination as to whether a waiver is warranted based on a “bona fide personal financial emergency.”  As a matter of policy, it is doubtful any lender will allow a waiver for any reason. 

New Disclosure Language

There is a new requirement that the early disclosures contain a clear and conspicuous notice containing the following statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” 

 Epilogue

This  description of the MDIA is based on an actual reading of the act.  You can expect varied approaches to compliance based on the lender selected.  The month of August will be a “shake out” month as the ramifications and unintended consequences of the new regulation are realized with implementation. 

Choose your loan originator wisely.  You will need a diligent, seasoned, ethical professional with experience sheparding transactions through the maze of existing regulations to manage the new changes.

Hope and change, baby.  Hope and change.

In May I wrote about TALP (Tax Advance Loan Program) the brainchild of Washington Realtors. WR took a good idea (the $8,000 tax credit) and made it better by creating a program to get the money at the closing table, when in it really needed, not weeks or months later. They worked diligently with the Washington State Housing Finance Commission (WSHFC), the State Treasurer and others to bring the program to life. However, the plan had an Achilles heel.

You see, the TALP program required the tax credit be sent directly to the bank, not the tax-paying borrower. This requirement meant a change in IRS policy and procedure. In a few words, no way, no how would the IRS go along with the plan. End of story?

Not quite. WR should still lobby hard to get the WSHFS to allow tax-payers with a pre-determined credit score to utilize the program, trusting no right-minded citizen would jeopardize a hard-earned quality credit score by diverting the refund to anywhere other than to pay back the loan. With WR backing their plan with their own money, it just seems right to modify TALP to let this happen.

What do you think?

It stands for Tax Advance Loan Program and it is the pet name given to Washington State’s “public-private” down payment program by Bill Riley, Pierce County Realtor and President-Elect of Washington Realtors. Riley and others had a big problem with the $8,000 tax credit for first time home buyers. According to research conducted by his group, about half of all first-time buyers can’t save enough for a down payment and closing costs before November 30th in spite of having the credit profile and income to afford a home. They would be effectively locked out of this buyer friendly market without a better idea in place.

Under Riley’s leadership Washington Realtors created a better idea. The outcome, working with the legislature and more importantly state Treasurer James McIntire, $25mm is standing by for the TALP, available in $8,000 increments. This money is not a new tax nor will it add to the state’s overburdened budget. Washington Realtors put their own money behind the success of the program, pledging $400,000 as loss mitigation. Anyone who has not owned a home three years prior to closing qualifies as a first-time homebuyer. The buyer must take a five-hour class from the Washington State Housing Finance Commission, available online. They must also have their 2008 tax return amended by a qualified tax professional. According to Riley, the money is interest free the first 10 weeks but there is a processing fee.

There is one more piece of the puzzle that must fall into place. The lynchpin of this plan is convincing the Obama administration to allow the state to tap into the tax payer’s amended 2008 tax return and be directly assigned all or a portion of the tax credit refund. Under current IRS rules, according to McIntire, tax refund checks are sent only to the taxpayer’s address. In letters to Treasury Secretary Timothy Geithner and IRS commissioner Douglas Shulman, McIntire argued that credit monetization programs run by states are crucial to the success of the federal effort. To ensure prompt repayment of bridge loans, the state wants refunds mailed to the housing finance commission to facilitate immediate repayment of each loan upon receipt. With direct repayment from the IRS, the state can return the money to the pool and lend it again. Used once the $25 mm could create up to 3,000 home sales.

With over 190 days left until November 30th the money has the potential to turn up to three times. Riley said that State Senator Steve Hobbs and US Senators Murray and Cantwell are working through their own channels to get this change in IRS policy implemented quickly.

When I spoke with Riley on May 1st he said mortgage brokers have full access to this program as long as they work on a wholesale basis with Bank of America (Countrywide) wholesale. B of A is offering the first mortgage and is the conduit to advance the TALP funds from the state.

Riley wanted to make it clear the staff of Washington Realtors worked tirelessly on the project and the lobbyist for the Washington Association of Mortgage Professionals, Steve Buckner was instrumental in getting the word to the right legislators and officials in state government.

When I learn more, I will post again so stay tuned.  This same story is unfolding in at least ten other states so this should be interesting.

That is right; I have studied the maps, looked at the stars, consulted the hair ball, worn out my boots and talked to those who should know.  The news is encouraging. Foot traffic is up at open houses.  Sellers with listings are serious about selling their homes.  Rates are down, very down.  The State of Washington is close to a measure that will allow qualified first time homebuyer’s to utilize their full tax credit this year, before they file their 2009 return.  Everything is in alignment.  This is the perfect scenario for our recovery to officially begin.  All we need is good weather.

The Farmers’ Almanac provides support for my bold prediction.  You see, according to the Farmers’ Almanac we are going to have great weather on the weekends of May 8th and May 16th.  Puget Sounders will spend at least part of the May 8th weekend finishing work in their yards.  When the next weekend of good weather rolls around (May 16th) mom will have cabin fever and will want to get out.  Most will stay close to home because the Memorial Day weekend follows.  What better way to spend a lovely weekend with the yard work done than visiting the local offerings of homes for sale?  It is free, always interesting and of course you have the chance to engage with any number of local, committed real estate professionals.

I say transactions will be started after the weekend of May 16th.  That week will be full of counter offers and final agreements.  On May 26th, everyone in our market will agree, the real estate market has turned the corner.  

Count on it.  The Farmers’ Almanac told me so.

 The Seattle King County Association of Realtors brought in Dr. Lawrence Yun, Chief Economist for the National Association of Realtors for their annual Broker Summit last Friday. He prefaced his presentation with the long run postulate, “everything is going to be just fine in the long run “(OU Delt house, ’71) He reiterated how we got where we are (credit bubble = housing bubble), presented an overview of the housing stimulus package (let’s hope it works as it is a one shot deal) and gave us his analysis of the short term outlook for our region.

The data he used for his short term outlook surprised me because he made a direct comparison of Seattle and Orange County, California. He noted that historically as California goes, so goes the West Coast. He cited that California has a net loss of population (citizens and legal residents) while our region continues to grow (with many new residents from California). He also cited that California was losing jobs and the Seattle area was relatively stable.

He displayed a graph that showed that the rise in home values in Orange County was far steeper than our region and hence, the downward correction was far more drastic. He went on to say that the sale of existing homes in Orange County is up 100% from the same period one year ago and that the trend is likely to continue.

He then cited three things in our region that added together spell a recovery in home sales. Median income in our region has been relatively steady, median home prices have fallen and that combination coupled with the affordability (a calculation using median income, median home prices and current interest rates) should spell a housing recovery. In fact, the affordability index in the entire country has never been this favorable according to Dr. Yun.

In spite of this the sale of existing homes fell dramatically from January to February of this year. It is obvious that current demand is driven by buyers looking for bargains. Lower mortgage rates in December drove new sales and closings in January. January’s very modest rise in rates caused buyers to step back, waiting for the return of rates in the 4’s.

So there is the pickle. Unless rates fall back to December levels or buyers figure out that rates today are as low as they will be for a long time, buyers will stay on the sidelines.

The quote below is from Jim Randel, a real estate expert and author on many topics real estate and money related.  He presents a chart created by Robert Schiller in 2005.  The chart is interesting and my interprepation of the chart follows (I responded to Jim via email).  It is food for thought in this mad, mad, mad real estate world.

“Since I hold myself out as a real-estate expert, the question that people are always asking me is “how much lower?”    In other words, how much lower will housing prices go before they hit bottom?
 
Here is what this chart tells us:  that from 1890 through 1950, excepting the World War I and II periods, housing prices stayed within a fairly narrow range (adjusted for inflation).  As you can see, in the year 2000 housing values were only about 10% above Shiller’s benchmark (1890 values).  But then look at what happened in 2000!!
 
In just five years or so, prices doubled – fueled as we all know by a nasty cocktail of greed, bad lending, hyper-low interest rates, and an unquestioning belief in the premise that housing prices always go up. 
 
So where are housing prices headed??  Well the dotted line on this chart shows you one interpretation of how much further prices have to fall:  another 30% or so before they reach year 2000 levels and a point of seeming equilibrium (based on a 110-year history).
 
Don’t ruin your day by looking at the graph’s location in the “Great Depression” period (1920 – 1940).  I would argue that stretch is an aberration.  From 1950 – 2000, housing prices were pretty stable.
 
By the way, here is how Shiller describes what happened between 2000 – 2006 … sound familiar??”

“Irrational exuberance is the psychological basis of a speculative bubble … a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others successes and partly through a gambler’s excitement.”     
Well, of course, I don’t know, but the chart below, produced by economist Robert Shiller and excerpted from his book, Irrational Exuberance (Doubleday, 2d Edition, 2005) shows you what many economists think.

Jim, 

Craig Goebbel from Real Estate Radio, here.  I don’t want to argue with your interpretation about another 30% drop in home values but I have a different perspective from the very same chart.  Note that since 1950 there is a floor of support above $105,000.  Why?  I would argue it is a result of more efficient markets, the consistent availability of 30-year fixed rate mortgages and a growing population.  The other factor is the increased cost to build new homes due to the myriad of fees associated with a new home and developing its building site.

So, my interpretation is we are at the bottom overall, with some pain still on its way for some regions around the country. 

I am not an economist but if you want four opinions on the economy, ask three economists.

Craig E. Goebbel

craig@craiggoebbel.com

206-601-9824 – Mobile

253-906-5626 – Mobile

Jim is a good guy to follow and you can find him at www.jimrandel.com.