Why the Record Low Interest Rates?

The Mortgage Corner

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The 30-year fixed rate conforming mortgage rate fell to a 1-year low, according to Freddie Mac, the GSE still in government conservatorship, and major purchaser of conforming conventional mortgages. The 30-year fixed-rate averaged 4.35 percent in the February 21 week, mortgage giant Freddie Mac said last Thursday. That was down from 4.37 percent in the prior week and the lowest since early February 2018.

In fact, the 10-year Treasury yield on which mortgage rates depend has not been this low since the 1950s, when money was plentiful and U.S. economic growth was phenomenal, reaching 6 and 7 percent GDP growth rates after WWII.

What will this do for the housing market, which has shown signs of life after last year’s marked slowdown? It will depend on interest rates remaining at this record level over the longer term, which shouldn’t be happening at this late stage of the current recovery. I discussed its effect on the rise in construction and new-home sales last week.

"After two lackluster months, new home sales surged...in January to the fastest pace in our survey, dating back to 2013," said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. "Despite the jitters potential homebuyers felt in December from the volatility in the financial markets, the healthy job market and wage growth, moderating price gains and lower mortgage rates all helped home sales recover. Additionally, builders seem to be seeing improvement in their labor shortages, as recently released government survey data showed increases in construction hiring and openings in December."

Not enough attention is being paid to why interest rates are at this level again at a time of full employment and last year’s growth spurt, which should put a strain on the available money supply, but hasn’t done so. It could be a sign of slowing growth.

There is almost no sign of incipient inflation, in other words, which has caused the Fed to back off on further rate increases. Or put another way, there is a disinflationary environment affecting many of the worlds’ developed economies today that have zero or negative sovereign debt yields. This has brought back memories of the Great Depression when so-called aggregate demand—the demand by consumers, government and foreigners for U.S. products—fell into negative territory, memories that caused recent Fed Chairman ‘helicopter’ Ben Bernanke to shower the U.S. economy with cash by buying up U.S. securities in various QE programs to mitigate the effects of the Great Recession.

This had the desired effect of keeping interest rates at post-WWII lows, aiding in the recovery from the Great Recession and housing bust. But why has it also kept inflation at multi-decade lows? Many conservative economists and deficit hawks predicted runaway inflation at the time.

Japan experienced outright deflation during several lost decades under similar circumstances—of falling wages, as well as prices. This meant that Japanese consumers’ purchasing ability also shrank drastically, which caused economic growth to decline into several recessions in recent decades.

Tradingeconomics.com

Then, as now, the real culprit must be the lack of household income growth, which has remained static since the 1970s, after inflation. It should be a truism that if consumers’ incomes don’t rise faster than inflation, then there isn’t sufficient demand to boost inflation, which in small doses actually aids economic growth.

That brings up the other major cause—a worldwide savings glut that isn’t being invested productively. What would be the best use for some of those savings? Repair and replace the $2.25 trillion in ageing U.S. infrastructure that hasn’t really been upgraded in 75 years, according to the American Society of Civil Engineers. It would boost incomes as well as the productivity of future generations.

What is its worst use? The Trump tax cuts, which haven’t increased either capital expenditures or wages, but went instead into the pockets of stockholders and corporate CEOs, where it does nothing except add to the savings glut, and overpriced stock values.

Nobelist Paul Krugman in a recent NYTimes Op-ed has perhaps best said why there has been no infrastructure spending over the past two years with Republicans controlling government. “The truth is that modern conservatives hate the idea of any kind of new public spending, even if it would make Americans better off — or perhaps it would be more accurate to say especially if it would make Americans better off, because a successful spending program might help legitimize a positive role for government in general. And while Trump may not fully share his party’s small-government ideology, all his limited energy is going into finding ways to punish people, not help them.”

So we see that the real reason for record low interest rates and inflation is the outright refusal of conservatives, in particular—both here and in the Eurozone—to make the investments that would bring more prosperity to those working households that need it the most.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Shortage Continues

The Mortgage Corner

It was very good news that new-home sales rose nearly 3 percent in May to a 610,000 annualized rate. The report, always volatile, included a big upward revision to April which however, at 593,000, is still the year's low. But that isn’t close to the 1 million plus new homes built annually during the housing bubble.

Existing home sales also proved better than expected, up more than 1 percent to a 5.620 million rate. Low unemployment and low mortgage rates are major positives for housing. But that only exacerbates the shortage of homes on the market.

Graph: Econoday

And that doesn’t even take into account the 1 million prospective homebuyers who could buy a home, if Fannie and Freddie would ease their qualification standards to that which prevailed throughout the last 2 decades. But because the U.S. Treasury won’t release its stranglehold on supervision of the GSE’s, for fear that taxpayers might again be at risk if another housing bubble materializes, there is little prospect of this aid coming to first-time and entry-level buyers, in particular, that must then rely on the more expensive FHA alternative.

This is while the housing shortage continues, even though prices are up a median $252,800 for resales and $345,800 for new homes, a 6 percent rise, whereas household incomes are rising just 2.4 percent annually. The FHFA house price index is another of the week's highlights, up sharply in April to a year-on-year rate of 6.8 percent.

This should boost housing construction, but housing starts are also lagging. And we are hardly in bubble territory. Bubbles occur when there is too much of something—whether housing, or credit—so that the resulting oversupply causes prices to plummet at they did during the Great Recession.

Graph: Calculated Risk

Calculated Risk shows the “Distressing Gap” that occurred with the housing crash, when oversupply of distressed housing caused new-home construction to plummet. It hasn’t yet recovered, but “in general the ratio has been trending down since the housing bust, and this ratio will probably continue to trend down over the next several years,” says Calculated Risk’s Bill McBride.

The National Association of Home Builders reported builder confidence in the market for newly-built single-family homes weakened slightly in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

New-home inventories remain too low to satisfy surging demand that comes from low interest rates and full employment. Full employment is a two-edged sword, however, as it also means labor shortages and unfilled jobs. Where are those workers, when just 2 million are currently employed in construction, and there were as many as 6 million employed during the housing bubble? It could be the recession hangover, such as memories from the housing crash that has discouraged many from re-entering the workforce. Hence the 4 percent drop in labor participation rate since the end of the Great Recession.

“As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector,” said NAHB Chief Economist Robert Dietz.

Builders can’t keep up with the housing demand, in other words—especially now that the Millennials, those between the ages of 18 to 36, are coming into adulthood and outnumber all other population groups. A good percentage will want to own a home someday as their primary asset.

he younger baby boom generation dominated in 2010.  By 2016 the millennials have taken over.  “The six largest groups, by age, are in their 20s - and eight of the top ten are in their 20s,” reports Bill McBride and the U.S. Census Bureau. 

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher New Home Sales, Mortgage Lending

We wrote last week about unusually restrictive mortgage standards for conforming stalwarts Fannie Mae and Freddie Mac that are still wards of the US Treasury. Now we’ve learned that they are still doing almost record loan volumes. This is while new-home sales continue to soar in 2017, with continued prospects for growth if builders can find more construction workers—with as many as 50 percent undocumented that may be deported under President Trump’s new deportation orders.

And the National Association of Homebuilders reports they are lacking 200,000 construction workers, which building firms say would enable them to build more affordable housing. But despite the worker shortage, sales of newly built, single-family homes rose 3.7 percent in January to a seasonally adjusted annual rate of 555,000 units, per newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

"This increase in new home sales is in line with our forecast for a steady, gradual recovery of the housing market," said Granger MacDonald, chairman of the National Association of Home Builders (NAHB). "However, the pace of growth may be hampered by supply-side headwinds, such as shortages of lots and labor."

The combined volume of single-family loans purchased by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac totaled $909.2 billion, up nearly 24 percent from the 2015 mark of $733 billion, an analysis of GSE’s annual reports shows, per mortgage magazine Scotsman Guide.

Graph: Scotsman Guide

The GSE combined loan counts for 2016 totaled 4.2 million, up more than 13 percent from the 3.7 million loans originated in 2015. Fannie and Freddie are the most important sources of liquidity in the single-family mortgage market. The GSEs purchase and securitize more than half of all residential loans in the U.S., making their activity an indicator of mortgage origination trends.

In other words, Fannie and Freddie are the most important sources of liquidity in the single-family mortgage market. Fannie Mae saw the more significant gains over 2015. Fannie’s 2016 loan volume of $512.6 billion was 34 percent higher than in 2014, and its loan count rose by nearly 18 percent, to 2.5 million loans. Notably, Fannie experienced an 84 percent year-over-year surge in refinance activity in the fourth quarter, to 459,000 refis, up from 249,000 in 2015.

This is largely due to the historically low interest rates, even though entry-level homebuyers are still having a difficult time finding affordable homes. And "We can expect further growth in new home sales throughout the year, spurred on by employment gains and a rise in household formations," said NAHB Chief Economist Robert Dietz. "As the supply of existing homes remains tight, more consumers will turn to new construction."

The inventory of new home sales for sale was 265,000 in January, which is a 5.7-month supply at the current sales pace. The median sales price of new houses sold was $312,900.

Most analysts believe that refinance activity will drop off sharply in 2017 as interest rates rise, a factor that will lower the GSE counts as well as loan counts for other loan programs. The Mortgage Bankers Association predicted that overall single-family originations will fall to $1.56 trillion in 2017, down from $1.89 trillion in 2016. Aside from Fannie and Freddie loans, this forecast includes the government-loan programs, such as VA and FHA, reports Scotsman Guide.  

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Home Sales Reach 10-year High

Financial FAQs

Existing-home sales ran at a seasonally adjusted annual pace of 5.69 million, the National Association of Realtors said Wednesday. That was 3.3 percent above an upwardly-revised 5.51 million in December and 3.8 percent higher than a year ago.

Total existing-home sales , which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, expanded 3.3 percent to a seasonally adjusted annual rate of 5.69 million in January from an upwardly revised 5.51 million in December 2016. January's sales pace is 3.8 percent higher than a year ago (5.48 million) and surpasses November 2016 (5.60 million) as the strongest since February 2007 (5.79 million), which marked the end of the housing bubble.

 Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says January's sales gain signals resilience among consumers even in a rising interest rate environment. "Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home," he said. "Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions."

But in fact interest rates have risen substantially only for the less than perfect credit holders, as my recent column has highlighted—those with credit scores below 700 with less than 20 percent down payment, and debt-to-income ratios below 30 percent.

The median existing-home price for all housing types in January was $228,900, up 7.1 percent from January 2016 ($213,700). This is yuge. January's price increase was the fastest since last January (8.1 percent) and marks the 59^th consecutive month of year-over-year gains.

Total housing inventory at the end of January rose 2.4 percent to 1.69 million existing homes available for sale, but is still 7.1 percent lower than a year ago (1.82 million) and has fallen year-over-year for 20 straight months. Unsold inventory is at a 3.6-month supply at the current sales pace (unchanged from December 2016).

It is a record low housing inventory of homes for sale, and means that housing construction hasn’t been able to keep up with the demand for housing, another reason prices are rising so fast and first-time homebuyers are having such a hard time finding affordable housing.

Then we have overly restrictive mortgage qualification standards, mainly because Fannie Mae and Freddie Mac, the main guarantors of conforming mortgages are still ‘owned’ by the US Treasury, which has imposed draconian fees on prospective borrowers with less than perfect credit scores.

NAR President William E. Brown talks about this problem that could possibly drag down inventory for would-be buyers even further in coming months. "Supply and demand imbalances continue to be burdensome in many markets, and now Fannie Mae is supporting a Wall Street firm's investment in single-family rentals," he said. "This will only further hamper tight supply and put major investors in direct competition with traditional buyers. Instead, the GSEs should lower overly burdensome fees (link is external) and help qualified borrowers become homeowners."

"Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower- and mid-market price range," added Yun. "NAR and realtor.com®'s new ongoing research — the Realtors® Affordability Distribution Curve and Score — revealed that the combination of higher rates and prices led to households in over half of all states last month being able to afford less of all active inventory on the market based on their income." 

First-time buyers were 33 percent of sales in January, which is up from 32 percent both in December and a year ago. NAR's 2016 Profile of Home Buyers and Sellers — released in late 2016 — revealed that the annual share of first-time buyers was 35 percent.

Much will depend on whether Janet Yellen’s Fed can continue to keep interest rates at their historic lows. Conforming 30-year fixed rates are still obtainable at interest rates as low as 3.50 percent for those with credit scores above 740—those almost perfect credit score holders. It will be more difficult for the rest, unless the US Treasury eases its death grip on Fannie and Freddie, which would allow many more—as many as 1.1 million more to qualify for an affordable home, according to the Urban Institute.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Such Restrictive Mortgage Lending?

The Mortgage Corner

Earlier this month, researchers at the Urban Institute’s Housing Finance Policy Center published some of their research on lending standards. Drawing on data from the Home Mortgage Disclosure Act, they found that lower-credit applicants accounted for only 33 percent of all applicants in 2015. That compares to 62 percent in 2006, at the height of the bubble, and 50 percent in 2000, when market conditions were generally considered balanced.

Graph: Urban Institute

What determines a “lower-credit applicant’, according to the Urban Institute? A FICO score below 700, a loan-to-value ratio less than 78 percent, and debt to income ratio less than 30 percent. That means prospective homeowners and borrowers are either easily discouraged, or other factors that tighter credit criteria are at play, since 700 is still a good credit score and even a 10 percent down payment with 45 to 50 percent debt to income ratios usually mean a credit-worthy borrower in today’s housing markets.

Of course it makes sense that borrowers with “less than perfect credit” would have a more difficult time qualifying for a mortgage. But why 7 years into this recovery would so many lower credit applicants still have problems qualifying?

There are a number of factors, including higher home prices, of course. And incomes are not rising as they should even with this low inflation environment, while mortgage rates remain historically low—still below 4 percent for conforming 30-year fixed rates—an incredible boon for prospective homebuyers given the low inflation environment..

In fact, it’s not so much that lending standards are stricter. Rather, thanks to the government ownership of conventional mortgage giants Fannie Mae and Freddie Mac, mortgages have become more expensive because of so-called fee addon’s with “less than perfect” credit scores below 700, which Fannie Mae and Freddie Mac have tacked on more recently.

Why discourage what are very credit-worthy borrowers in normal times? Costs go up exponentially with credit scores below 720 for Fannie Mae and Freddie Mac guaranteed mortgages—as much as 2.5 points, which translates to an equivalent 0.625 percent rate increase.

It seems that the US Treasury has been trying to discourage all but the most credit-worthy borrowers, all in the name of down-sizing the GSEs. In fact the Obama Treasury Department has made no secret of wanting to close down Fannie and Freddie, which is why it has been taking all of its profits since a 2012 modification to Treasury’s conservation agreement, rather than allowing them to build up their capital base.

Graph: Calculated Risk

Yet delinquency rates are almost back to historical levels. Fannie Mae reported that the Single-Family Serious Delinquency rate barely increased to 1.23 percent in November, up from 1.21 percent in October. Big Deal! The serious delinquency rate is down from 1.58 percent in November 2015. But that is close to the long term delinquency rate that is just under 1 percent. The definition of serious delinquency is mortgage loans that are "three monthly payments or more past due or in foreclosure".  

The Urban Institute’s Laurie Goodman, co-director of the Housing Finance Policy Center, sees the decline in lower-credit applicants as clearly problematic, and symptomatic of an overly-tight mortgage market, although it’s not clear whether would-be applicants are holding back because they are aware they may not qualify, or for some other reason, such as not having enough money for a down payment or losing interest in homeownership.

Earlier Urban analysis suggested that tight lending meant that 1.1 million mortgages that would have been made in 2001 were “killed” – never written – in 2015. The real answer to this problem of what is really a defacto denial of credit to lower income homebuyers is to pry Fannie Mae and Freddie Mac from the greedy grasp of Treasury and return them to the private marketplace.

There are many forms that could take, but it means Congress and the Trump Administration has to show some initiative.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Conforming Mortgage Limits Rise for 2017

Financial FAQs

The Federal Housing Finance Authority, or FHFA, just announced it is increasing the limit for conforming mortgages from $417,000 to $424,100 in most regions of the United States starting Jan. 1, 2017—the first such increase since 2006.

The approximately 1.7 percent bump in the baseline conforming loan limit follows the FHFA’s announcement that  the average U.S. home price has returned to its pre-decline peak, which it hit in the third quarter of 2007. The FHFA bases the loan cap on its quarterly Housing Price Index, which gauges average single-family home prices. The index rose 1.5 percent during the third quarter of 2016 and is up 6.1 percent over the past year, enough to push it above its previous high point.

Graph: Econoday

The FHFA is the supervising entity of conforming loans guaranteed by Fannie Mae and Freddie Mac.
FHFA house price index eased slightly in September and was up 0.6 percent after increasing 0.7 percent in August. On the year, the FHFA index surged to plus 6.1 percent, down from August's gain of 6.4 percent. In the third quarter, house prices were up 1.5 percent and were 6.1 percent higher than the third quarter in 2015. 

Eight of nine census divisions posted monthly gains in September ranging from plus 1.3 percent in the in the Pacific with the Northeast declining 0.2 percent. On the year, the Pacific region was up 8.1 percent with New England in the rear at 2.9 percent.

Conforming loan limits are significant because they apply to home loans that meet the underwriting guidelines of Fannie Mae or Freddie Mac, the government-sponsored entities that acquire mortgages from lenders and ensure a steady flow of money to the mortgage market.
Interest rates for nonconforming, or jumbo mortgages, are generally higher than rates for loans that fall under the cap, and these types of mortgages can be more difficult to obtain.

“Today’s conforming loan limit increase is a much-needed recognition of rising home prices in high-cost markets, and a help to first-time and lower-income borrowers looking to utilize an FHA mortgage,” said NAR President William E. Brown. “Credit remains tight, but this decision will help more qualified buyers address the hurdles and high costs standing between them and the dream of homeownership.”

Conforming loan limits are higher than the baseline cap in parts of the country where home prices are especially high, but cannot be more than 150 percent of the baseline limit—$636,150 for 2017—for the contiguous U.S. Exceptions are established for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where loan limits in specific locations may exceed that amount.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Isn't It Easier to Qualify For A Mortgage?

The Mortgage Corner

It’s not getting any easier to obtain a mortgage. This is in spite of record low mortgage rates, as low as 3.0 percent for 30-year conforming fixed rates; as well as the appearance of so-called Alt-A, non-QM mortgages with 3 to 7 year, interest only, fixed rates that require 12 months personal bank statements to verify income.

According to a report from the Urban Institute that tracks mortgage availability among other housing issues, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2 percent of the loans defaulted after 10 years.

By comparison, 12 to 13 percent of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data. And that was mostly due to the Great Recession and loss of some 8 million jobs.

Graph: Calculated Risk/Black Knight

The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69 percent of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1 percent of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700

Requiring higher credit scores is just one way lenders have made it more difficult to qualify. Fannie and Freddie also pile on points for scores above 680, which was a normal mid-score before the housing bubble, and in effect boosts the interest rate. For instance, just a 1 pt. cost add on for a score below 700 is the equivalent of a one-quarter percent raise in the rate.

Other problems are due to the reforms mandated by Dodd-Frank designed to protect consumers from predatory lenders, while a good idea, have made it much more difficult for lenders and slowed down the qualification time. This includes additional delays in closings for the slightest change in rates or points enacted due to the new TRID requirements (short for TILA/RESPA Integrated Disclosure) enacted last fall.

This has made lenders much more selective in granting mortgages. We are probably back to 1980s qualification standards when many fewer loans were granted—mostly by S&Ls that disappeared after the late 1980s banking scandals.

We are in a much better position today, 7 years after the Great Recession, in other words. The inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015, according to Black Knight. At a total of 3.2 million, or 6.5 percent of all homeowners with a mortgage, this represents significant improvement from the peak in 2010, but is still well above “normal” levels.

Graph: Black Knight

 Both the S&P Case-Shiller Home Price Index and Corelogic stats show home prices rising as much as 10 and 11 percent in Portland and Seattle, respectively, in its latest 3-month averaged, same home survey, and 5-6 percent nationally on average.  This will continue to bring back housing values and lower negative equity in homes.

So there’s no reason to continue to be as cautious as mortgage lenders are today.  There is of course the political brouhaha over whether Fannie and Freddie should become private corporations again, and so separated from US Treasury control.  With their future unclear, these entities that guarantee more than 60 percent of all mortgages make lenders doubly cautious about qualifying younger, entry-level borrowers, in particular.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fannie Mae, GSEs, Even More Important

The Mortgage Corner

With news that Fannie Mae, one of the GSEs now managed by the Federal Housing Finance Authority (and US Treasury) just showed a $1.1B profit in Q1, but must pass all of it profits to Treasury since 2012, the question of how to resolve the status of major mortgage guarantors Fannie Mae and Freddie Mac becomes even more critical.

Why? They will have no capital left after 2017, and ““Operating with essentially zero capital is not sustainable,” said Fannie CEO Tim Mayopoulos on the Thursday morning earnings call, just after his company reported a $1.14 billion profit in the first three months of the year, the 17th consecutive quarter of profitability.

Yet banks and other non-GSE lenders aren’t stepping up to the plate to replace Fannie and Freddie. And they still guarantee more the 60 percent of all conventional mortgages. Private capital is “unwilling to step in” to replace the government-sponsored enterprises as mortgage finance leaders in the secondary market, said Mayopoulos to HousingWire’s Jacob Gaffney.

This is hurting the housing market, needless to say, as the GSEs keep tightening qualification standards in an attempt to satisfy Treasury that it is shrinking its loan portfolio. The average Fannie borrower’s FICO score was 746 in the first quarter. By way of comparison, the median credit score across the entire mortgage market in 2001, before the bubble era, was 701.

And that is even high, as scores of 620 to 680 were more prevalent in past decades because it was hard for homeowners to avoid at least one mortgage late payment in a year, what with so many payments made via snail mail. In fact, both FHA and VA, the other two Government Supervised Entities, allow credit scores as low as 520.

Graph: Calculated Risk

Fannie’s serious delinquency rate also shows cleaner credit quality. It fell for the 24th quarter in a row in the beginning of the year, to 1.44 percent. According to the company’s financial statement, that number would be even lower if foreclosures didn’t take so long in many states.

And Freddie Mac reported the Single-Family serious delinquency rate decreased in March to 1.20 percent from 1.26 percent in February. Freddie's rate is down from 1.73 percent in March 2015. This is the lowest rate since August 2008.

All this is making it more difficult for younger, first-time homebuyers with generally lower incomes, savings and credit scores. The NAR’s March existing-home sales survey reported the share of first-time buyers was 30 percent in March, unchanged both from February and a year ago. First-time buyers in all of 2015 also represented an average of 30 percent.

"With rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now," said the NAR’s chief economist Lawrence Yun. "Unfortunately, the same underlying deterrents impacting their ability to buy haven't subsided so far in 2016. Affordability and the low availability of starter homes is still a major barrier for them in most markets."

So there is no reason that credit requirements should be tightening at a time when more first-time homebuyers are entering the housing market. And there is plenty of evidence that the younger generations want and need housing.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Record Mortgage Originations in 2015, In Spite of FHFA, Treasury

The Mortgage Corner

In addition to very large Consumer credit borrowing that rose $17.2 billion in February (but excludes mortgage lending), the number of new first mortgages increased to a post-recession high in 2015, according to new data from credit rating company Equifax. In fact, it is approaching pre-recession levels thanks to the Fed’s low interest rate policy, which should also help the housing shortage by stimulating more new-home construction.

This is in spite of the Obama Administration’s efforts to downsize Fannie Mae and Freddie Mac, the conforming mortgage GSEs that continue to guarantee the bulk of affordable mortgage loans.
According to the company’s latest National Consumer Credit Trends Report, the total number of new first mortgages originated in 2015 rose to 7.71 million, an increase of 31.6 percent from 2014. Meanwhile, the total balance of new first mortgages was $1.82 trillion, a year-over-year spike of 42.9 percent.

Equifax also found that first mortgage lending to subprime borrowers grew in 2015, with 366,900 loans made – an increase of 25.2 percent over 2014 – and a total subprime balance of $59.7 billion, a 41.3 percent increase.

Graph: Econoday

 

Why is it taking this long for the housing market to recover? The so-called qualification criteria of conforming loans have become ever stricter since the housing bubble. It is even more difficult to qualify for a subprime mortgage, or the origination totals would be even higher. There has to be some measure of the ability to repay as part of the mortgage application process these days. For subprime mortgages it can be the 12-month total of deposits from non-business bank accounts—no more No Income, No Asset mortgages, in other words. And it has to be a 5 or 7-year fixed rate ARM that converts to an adjustable rate for the rest of the 30 years, rather than the plain vanilla 30-year fixed rate.

“We saw a nice jump in mortgage lending in 2015 that was driven by both rising home-purchase activity and solid refinancing volumes,” said Amy Crews Cutts, Equifax senior vice president and chief economist. “While low interest rates are helping, continued gains in employment and consumer confidence are key. What we are not seeing is any meaningful loosening of underwriting, at least with respect to credit scores. The median credit score on new first mortgages in the fourth quarter of 2015 was 750 and 90 percent of first mortgage borrowers had a score in excess of 646; these values are essentially unchanged for the past three years.”

There is a reason for the higher credit scores. Both Fannie and Freddie add large ‘penalties’ for credit scores lower than 720. This discourages many borrowers, as the US Treasury and the Federal Housing Finance Authority, their nominal conservators, don’t seem to want the GSEs to expand their credit guarantees.

Why? It’s a long story, but the Treasury (the real puppeteer pulling their strings) has said several times they want to dissolve the GSEs, and have Congress replace them with something more streamlined, but without an implicit government guarantee. The catch is it will raise interest rates, since the latest Treasury proposals require originating lenders to put some skin into the game (such as retaining liability even when sold to investors), which defeats the purpose of making home ownership more available.

This overturns the reasons Fannie Mae, created as part of Roosevelt’s New Deal, and Freddie Mac, created post-WWII, were formed. They were never the cause of the housing bubble, nor contributed to its failure. That was due to the likes of such non-banks as Lehman Brothers and Bear Stearns lending money they themselves had borrowed. Why on earth does the Obama Administration oppose the GSEs, as long as there are eligible home buyers?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Fannie-Freddie Debacle Continues

           We are already seeing the results of Obama Administration attempts to kill Fannie Mae and Freddie Mac, the Government Sponsored Entities that guarantee more than 60 percent of all mortgages originated in the U.S. housing market these days. The Mortgage Bankers Association in particular is beginning to worry that taxpayers will have to pick up the tab in the event of another housing bust, since Fannie and Freddie aren't being allowed to maintain a capital cushion.

Obama's Treasury Department has refused to allow Fannie and Freddie to maintain a capital base as their profits decline. Instead, all their profits flow into Treasury coffers due to a 2012 amendment to the government's conservatorship agreement.

“Once their capital goes to zero, there will be no cushion between the GSEs [government-sponsored enterprises] and the need for additional draws on the remaining Treasury commitment, roughly $250 billion,” said Michael Fratantoni, the MBA’s chief economist and senior vice president of research and industry technology, in an article for The Hill.

The government took over Fannie and Freddie in 2008 to keep them from collapsing under the weight of bad mortgage debt. The two entities have drawn a total of $187.5 billion from the Treasury Department and have repaid $241 billion in dividends, though those payments don’t even count toward their debt, because of Treasury’s decision to commandeer all their profits.

The nominal head of Fannie and Freddie is Mel Watts, head of the Federal Housing and Finance Agency that also controls both FHA and VA mortgage agencies.  And he is saying it is up to Congress to fix the problem.  But Congress has done nothing, as the tug of war continues over whether the GSEs should be public supported or privately funded organizations.

“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind,” he said in a Feb. 18 speech. 

In fact, the U.S. Treasury is really behind the 2012 amended conservatorship agreement that requires each firm’s capital to be reduced from $1.2 billion this year to $600 million next year and then to $0 in 2018, 10 years after the financial crisis. So taxpayers will still be on the hook, unless Congress can make up its mind.  But that isn’t happening, and probably won’t happen until after the Presidential election.

             Fannie and Freddie hold a combined $5 trillion in mortgage guarantees on their books but face shrinking earnings and a zero-capital predicament — a situation David Stevens, head of the Mortgage Bankers Association (MBA), called “unheard of.”  Stevens called the situation “a terrible predicament” because Fannie and Freddie “are completely critical to our housing system,” in The Hill article.

            Stevens said he expects that one of the GSEs will need to take a draw from the Treasury Department’s credit line sometime this year — possibly as early as the first quarter, a move likely to reverberate on Capitol Hill. 

            But that may not have to the case, according to documents filed in lawsuits against FHFA and the Treasury Department by holders of Fannie and Freddie stock that have been rendered valueless by the amended conservatorship. For starters, plaintiffs say, Treasury justified the conservatorship of the GSEs via accounting gimmicks since they faced no liquidity issue at the time of the crisis and recession. They note that Fannie Mae’s Cash Net Income, adjusted for non-cash items, was positive throughout entire crisis and recession.

            Fannie Mae disclosed they held $36.3 billion cash in the bank on September 30, 2008 with a maximum exposure of roughly $6 billion per quarter. That was enough liquidity to survive over 18 months, assuming it didn’t bring in another dime.

Graph: Huffington Post

But due to that last minute (2012) 'tweak' to the original conservatorship order by FHFA, all profits went into the Treasury General Fund, which raised suspicions that Treasury was behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders. How is that fair when the GSEs weren't responsible for the bubble, or subprime loans, or the Great Recession?

We know this because some $16 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

Why has the White House resisted calls to unseal their documents in pending lawsuits by preferred stockholders attempting to recoup losses due to the conservatorship? Antonio Weiss,, a Treasury counselor, gave their only response to Bloomberg News.

“Some have suggested the federal government could stop supporting Fannie and Freddie in the near term by allowing the companies to retain their earnings. This overlooks the high level of capital required to adequately cover the risk of the $5 trillion in assets on the GSEs' books. A recent analysis from Moody’s and the Urban Institute made clear that it could take decades for Fannie and Freddie to build safe and sound levels of capital and that recap and release would ultimately drive up the cost of mortgages.”

So this is the Treasury and White House response--inaction. Let's keep the taxpayer on the hook for all losses in the event of another downturn, rather than allowing the GSE's to begin to build their capital base again.

It may therefore be up to the courts to decide who is at fault in the continuing debacle--at a time of record low interest rates and a housing market just beginning to recover.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will Fannie and Freddie’s Investors Finally Succeed?

Financial FAQs

It is welcome news for Fannie Mae and Freddie Mac investors that Judge Margaret Sweeney in the Federal Claims Court in Washington Tuesday granted a motion that will force the U.S. Treasury to release all discovery document materials in its possession that pertain to the decision to take Fannie Mae and Freddie Mac into conservatorship.

Why? Because the White House, US Treasury, and Federal Housing Finance Authority have been stonewalling discovery requests by investors who want to know exactly why the GSEs were put into conservatorship in the first place.

This is important for several reasons—not least is the reputed $36 billion in preferred Fannie stock alone that was ‘taken’ by the government when it claimed Fannie and Freddie were in danger of collapse, and so had to be recapitalized with government support to the tune of $186 billion.

But that has been paid back in spades, and the GSEs are not being allowed to recapitalize. This is when commercial banks that were granted some $350 billion in TARP funds by the same Republican Treasury Secretary under GW Bush (Henry Paulson, former Chairman of Goldman Sachs) were allowed to be recapitalized. So Wall Street benefited, but not Main Street homeowners that for the most part still depend on Fannie and Freddie to guarantee most home loans.

Instead, due to a last minute (2012) ‘tweak’ to the original conservatorship order, all profits go into the Treasury’s General Fund, which has raised suspicions that Treasury is behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders, at least. How is that fair when the GSEs weren’t responsible for the bubble, or subprime loans, or the Great Recession, at all?

We know this because some $14 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

The request, made by Fairholme Funds, is a big win for them in the battle to review federally sealed documents in its case against the United States government. Fairholme is one of several former investors in the government-sponsored enterprises who say their ownership stake was illegally taken from them by the federal government during conservatorship. They are fighting in court to get that stake returned.

The more than ten thousand discovery documents will be available to the United States District Court of Appeals in Washington D.C. and the United States District Court.

There is plenty of evidence that Fannie and Freddie were still solvent at the time. Even Treasury Secretary Henry Paulson reassured Congress of their solvency, while Bear Stearns was going under in 2007.

"Fannie Mae and Freddie Mac play an important role in our housing markets today and need to continue to play an important role in the future," Secretary Treasury Henry Paulson told the House Financial Services Committee at a hearing on financial regulation. "Their regulator has made clear that they are adequately capitalized."

And mortgage delinquency rates are almost back to historical levels. For instance, June’s existing-home sales report showed just 8 percent of sales were comprised of forecloses homes, lowest since 2007 and the housing bust.

 

Graph: Seeking Alpha

The profits have been enormous for US Treasury. “Taxpayers have been paid back and the companies are now left with little capital due to the net worth sweep,” says Seeking Alpha in its latest article on the issue. “Based on Judge Lamberth's ruling (of last year dismissing Fairholmes suit), the government could be sued for a taking if the companies are liquidated. Reform must include adequate compensation to shareholders, as well as a method to bring capital back onto the balance sheet. After 2010, solvency was never a problem.”

And now we have Judge Sweeney ruling in favor of discovery that will enable investors to untangle the ‘rest of the story’.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fannie and Freddie Didn’t Do It!

Financial FAQs

As if further confirmation was needed that Fannie Mae and Freddie Mac were not even a minor cause of the housing bubble and consequent bust, the latest judgment against Nomura Securities for selling fraudulent mortgages to Fannie and Freddie should be icing on the cake; settlements that now total more than $14 billion in fines for almost all the major banks and lending institutions.

The charge is old. Critics, (mainly those caught selling fraudulent loans to Fannie and Freddie) have long maintained that the GSE’s encouraged too many people to buy homes by offering all manner of payment assistance, and even guaranteeing subprime mortgages from the likes of Countrywide Financial (that was subsequently bought by Bank of America).

A U.S. judge on Monday ruled that two more large financial entities, including Nomura Holdings Inc., made false statements in selling mortgage-backed securities to Fannie Mae and Freddie Mac ahead of the 2008 financial crisis.

U.S. District Judge Denise Cote in Manhattan ruled for the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, in a ruling that could allow the U.S. regulator to recover around $450 million.

This is one more example of how almost all of the major financial institutions jumped on the bandwagon that encouraged the housing bubble—lending money to both qualified and unqualified borrowers and then misrepresenting their quality to the main guarantors of US housing finance.

Cote, who presided over a non-jury trial, said the FHFA was entitled to judgment against Nomura and the Royal Bank of Scotland Plc, which underwrote some of the $2 billion in mortgage-backed securities, in light of misstatements they made in offering documents.

Such originators were the real problem. Nomura Securities is just one of a growing list of mortgage lenders that have had to settle fraud charges that the loans submitted to Fannie and Freddie weren’t the quality loans they had certified—16 at last count totaling more than $14 billion in fines, as we said. Their loans had not in fact conformed or even followed Fannie and Freddie’s qualification standards, including verification of income and even whether they held real jobs, when they sought their guarantee insurance.

The result was the demonization of the GSEs as undercapitalized and incapable of fulfilling their mandate to make housing more affordable to Main Street Americans. I have been writing about the resistance of US Treasury—and maybe White House—to any recapitalization of Fannie and Freddie’s corporations to cushion them from another such housing downturn, corporations that were set up in the 1930s and 40s respectively to encourage home owning.

And in successfully fulfilling their mandate, they were a major factor in creating middle class Americans’ wealth, much of which was destroyed during the Great Recession. FDR’s Home Loan Corporation came to the rescue during the Great Depression, and we should be doing the same for housing in order to aid our recovery from the Great Recession.

Then why does Treasury, and even the White House oppose recapitalizing them, in spite of their now record-breaking profits? Because Treasury seems to believe there is a better alternative. However, that is yet to be seen and the GSEs are guaranteeing more than 60 percent of originations these days, while making the Treasury literally $$billions.

The Federal Housing and Finance Authority has just issued an update on their plans to ‘reform’ the GSEs. It is a proposal to form a Common Securitizing Platform (CSP) to replace competing Fannie Mae and Freddie Mac platforms that securitize its mortgage pools.

“The objectives in developing a Single Security are to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans and to maintain the liquidity of this market over time,” says the FHFA. “Achievement of those objectives would enhance the liquidity of the TBA market and further FHFA’s statutory obligation to ensure the liquidity of the nation’s housing finance markets.”

The question then is what comes next? The Treasury says their overall objective of not recapitalizing Fannie and Freddie is to induce private originators to guarantee a larger majority of mortgages. So will Banks and other private loan originators then step up to the plate and issue pools that can be either purchased or guaranteed by the CSP, which up to now they have been reluctant to do, without the GSEs’ guarantee?

And if the Treasury dissolves the GSEs, as it says it ultimately intends in order to put, “private capital at risk ahead of taxpayers,” can private issuers of said mortgage-backed-securities be the guarantors, without substantially raising their fees and profit margins, which will raise interest rates, as well? There was a reason Fannie and Freddie conforming mortgage rates were so affordable. They had lower capitalization requirements, in part because of the superior quality of their mortgage underwriting standards, and consequent low delinquency rates.

Graph: Calculated Risk

Then who will enforce the very successful underwriting standards now required by Fannie and Freddie that has brought down the default rates close to historical standards? It is the real issue that was exposed in the lawsuits. Who will police the banks and private mortgage originators that the record shows will evade those standards when it suits them?

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Doesn’t Government Want Fannie, Freddie to Succeed?

The Mortgage Corner

At a time when the housing market is just beginning to recover, the US Treasury wants to close down Fannie Mae and Freddie Mac, the two GSEntities under government conservatorship.

Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman, speaking at Monday’s National Council of State Housing Agencies Legislative Conference, said, "I know that many of you want to know where we are on housing finance reform. On this subject, let me be clear: the Administration stands by our belief that the only way to responsibly end the conservatorship of Fannie Mae and Freddie Mac is through legislation that puts in place a sustainable housing finance system that has private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns."

But Timothy Howard, chief economist and a senior Fannie Mae executive for 23 years, says “Fannie Mae never experienced a threat to its solvency because of difficulty rolling over its maturing debt, nor did it need to sell assets at depressed prices to survive.  The company never experienced a market crisis.  At the time it was put into conservatorship, Fannie Mae’s capital significantly exceeded its regulatory minimum.” 

So dissolving Fannie and Freddie makes no sense for several reasons. There is no financing model that has yet been created to replace both their securitization structure that in effect guarantees almost all conforming and Hi-Balance conforming loans, which account for more than 60 percent of loan originations today.

And, they are generating immense profits for the US Government that has commandeered all of their profits since a 2012 amendment to the 2008 conservatorship agreement. “As of last December, the Treasury had received a total of $225.4 billion from the companies,” says NYTimes Gretchen Morgensen in a recent column. “An additional $153.3 billion in receipts from Fannie and Freddie could be generated through fiscal year 2025, according to estimates in the 2016 budget offered by the president.”

So why does the government want to close them down when their sometimes too strict underwriting standards have brought loan default rates back to historical levels, and Fannie Mae has repaid more than the $186 billion lent to them?

The quick answer is that our government fears they may have to bail out the GSEs again, putting taxpayers at risk, with their current structure as stock holding corporations, but with an implicit government guarantee that they can’t fail.

Treasury officials (and the banking lobby) maintain it gives them an unfair interest rate advantage that has enabled them to keep lower capital reserves, and thus a lower expense overhead, therefore impeding the development of so-called “private-label” mortgages generated by commercial lenders, but not guaranteed by the GSEs.

Morgensen highlighted the ongoing debate on whether Fannie and Freddie should be re-privatized in describing a lawsuit by a major stockholder of the GSEs whose stock is in effect worthless, unless the government allows them to rebuild their equity.

“The problem with the apparent involvement by Treasury and White House officials in the decision to commandeer Fannie’s and Freddie’s earnings is that by congressional statute, the F.H.F.A. is supposed to be an independent agency, tasked by law to protect the safety and soundness of the companies. Letting the companies’ profits flow to the Treasury had the opposite effect. Allowing them to rebuild their capital with profits after they repaid the taxpayer seems more like it.”

So the only danger to taxpayers seems to be that created by the U.S. Treasury and FHFA, in not allowing them to rebuild capital as a cushion against a future housing downturn. Even if there was another housing crisis, Fannie and Freddie today would not be allowed back into the subprime market that guaranteed loans from such as Countrywide Financial that was in turn bailed out by Bank of America.

“Intervention in support of banks was done in response to sudden and uncontrollable liquidity crises that required immediate government assistance to keep the companies from failing, and involved actions and tools intended to achieve that result (not always successfully),” says Howard.  “The act of placing Fannie Mae and Freddie Mac into conservatorship was not a response to any imminent threat of failure but rather a policy decision initiated at a time of Treasury’s choosing, and involved actions and tools intended to make and keep the companies insolvent.”

Former Fannie Mae exec Timothy Howard also thinks Fannie and Freddie can still function as viable institutions. “There is no credible basis for the oft-repeated contention that they are a “failed business model,” he said.  “Even after Fannie Mae and Freddie Mac made unwise decisions to lower their underwriting standards to try to compete with private-label securitization, their loans acquired between 2005 and 2008 still performed four times as well as loans from that period financed through private-label securities, and more than twice as well as loans made and retained by commercial banks during that time.”

“The argument for bringing Fannie Mae and Freddie Mac out of conservatorship and using an amended version them as the basis of the future mortgage finance system is extremely straightforward: their credit guaranty mechanism is low-cost, efficient and effective, and has a proven track record of success.”

Need we have any other reason to break the gridlock that has kept the GSEs in conservatorship, now that the housing market is recovering? Their model works, and without them the housing market would be in far worse shape.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Mortgage Refinancings Surging in 2015

The Mortgage Corner

The still record-low interest rates are making a difference. Refinancings jumped 66 percent in January’s first two weeks, according to the MBA. And borrowers who refinanced during the fourth quarter of 2014 were able to reduce their interest rate, on average, by about 1.3 percentage points – a savings of about 23 percent, according to a recent Freddie Macs report. On a $200,000 loan that translates into saving of about $2,500 interest during the next 12 months.

Graph: Calculated Risk

Why? Conforming 30-yr fixed rates now are as low as 3.375 percent, and high-balance fixed rate conforming amounts can be found at 3.50 percent for 1 origination point.

"Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined over the course of 2014,” says Len Kiefer, Freddie Mac deputy chief economist. “However, because mortgage rates fell in the fourth quarter of last year, we actually saw the share of refinance originations tick up a bit despite volumes being down, a similar trend we expect to see for the first quarter of 2015 as mortgage rates have moved even lower.”

One popular program that in many cases doesn’t even require an appraisal for loan amounts up to 125 percent of value is the HARP II programs for conforming loans originated before June, 2009. Borrowers can reduce their interest rate to today’s market rates. But normal conforming qualification debt ratios and decent credit are required for HARP refinancings.

Home owners who refinanced through the government’s HARP program during the fourth quarter of 2014 saw an average reduction in their interest rate of 1.6 percentage points, according to Freddie Mac, amounting to an average savings of $3,300 in interest during the first 12 months – or about $275 in savings every month.

About 71 percent of those who refinanced their first-lien mortgage maintained about the same loan amount or lowered their principal balance by paying additional money at closing, according to the report.

But 34 percent of refinancers were able to shorten their loan terms, according to the report. This is when the conforming 15-yr fixed rate today is 2.50 percent. Overall, borrowers who refinanced in 2014 saved about $5 billion in interest over the next 12 months.

This has to spur home construction as well, since it enables the reduction of so much debt.

Graph: Calculated Risk

And sure enough, the U.S. Census Bureau of the Department of Commerce said that construction spending during October 2014 was estimated at a seasonally adjusted annual rate of $971.0 billion, 1.1 percent above the revised September estimate of $960.3 billion.

The latest NAR survey also showed more optimism for 2015 housing sales. An improving job market, low mortgage rates, and recent moves by the government to loosen up mortgage credit is fueling increased optimism among REALTORS®. In particular, real estate professionals are growing more confident about the housing market’s outlook for the next six months, according to the December 2014 REALTORS® Confidence Index, a survey of more than 4,000 Realtors.

So stay tuned, as winter wanes and interest rates stay low. Of course it will be up to the Federal Reserve as well, to maintain low interest rates for the rest of 2015.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen