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

Why the Growth Slowdown—It’s Housing, Stupid

Popular Economics Weekly

Dean Baker, a noted economist with the Center for Economic Policy and Research (NEPR), has probably given the best and most understandable reason for the Great Recession and ultra-slow recovery—it’s the lousy housing market. The economy is growing at slightly over 2 percent, when we would expect 3 percent growth 5 years after the end of the Great Recession.

“The basic story of the Great Recession is about as simple as they come,” says Baker. “The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That's all simple and easy.”

So the weak housing market, even with the Fed doing all it can do to keep interest rates at rock bottom, hasn’t boosted US growth sufficiently to approach full employment. Why? The housing market would be recovering sooner if government was allowed to do more, because of austerity policies prevalent both here and in Europe. And the results are easy to see in this Paul Krugman graph.

Graph: Paul Krugman

Those countries with the lowest growth rates have the most stringent austerity measures—i.e., most drastic budget cuts and highest interest rates when government should be keeping interest rates as low as possible. And they are the United Kingdom, Spain, Portugal and Greece, of course. But the US isn’t far behind, in line with France that is having its own budget problems.

What should be done? We know the government has to help, either with mortgage relief (buy up the bad mortgages and hold them until the market improves), or buying the underwater housing as was done during the Great Depression, and selling them back when conditions improved.

The Home Owners’ Loan Corporation was set up in 1933 under the New Deal. It made more than one million loans to homeowners, sometimes bought the underwater homes, and otherwise supported homeowners who were behind on their payments. Sound familiar?

Graph: FHFA

The HARP and HAMP loan programs were current attempts to do the same and they have refinanced 3 million of the 16 million homes guaranteed by Fannie Mae and Freddie, according to The Housing Wire and FHFA, the Federal Housing Finance Authority that supervises Fannie and Freddie.

“…what did economists think would fill a trillion dollar gap in annual spending?” laments Baker. “Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility.”

So 8 million more homes are eligible, according to the FHFA, and the White House has done little to promote HARP 3.0, a newer version that would loosen qualification standards to increase eligibility for those behind on their payments, which would allow more homes to be refinanced. It doesn’t look like another New Deal for housing is in the offing.

Harlan Green © 2014

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

California Foreclosures Plunging, Sales Rising

The Mortgage Corner

The number of California homeowners entering the foreclosure process plunged to the lowest level in more than seven years last quarter, reports DataQuick. The unusually sharp drop in the number of mortgage default notices filed by lenders stems mainly from rising home values, a strengthening economy and government efforts to reduce foreclosures, says DQ.

No wonder, as the median price paid for a California home last quarter was $297,000, up 22.7 percent from a year ago, according to DataQuick. During first-quarter 2013 lenders recorded 18,567 Notices of Default (NODs) on California houses and condos. That was down 51.4 percent from 38,212 during the prior three months, and down 67.0 percent from 56,258 in first-quarter 2012.

Graph: Econoday

Most of the loans going into default are still from the 2005-2007 period, per DQ. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than three years, indicating that weak underwriting standards peaked then. The most active creditors in the formal foreclosure process last quarter were Wells Fargo (5,546), JP Morgan Chase (3,863) and Bank of America (2,565).

And Calculated Risk’s Bill McBride has become very sanguine about real estate’s role in boosting economic growth. He maintains that new home sales will pick up due to unfilled demand, due to the big jump in household formation—to 1.3 million new households last year and the prediction this level will be maintained over the next decade. He sees the so-called existing-to-new home sales ratio trending back down to its historical average of 6 to 1 from its current heightened ratio, in this very interesting graph. It was the “flood’ of depressed sales from foreclosures that depressed new home sales because of the plunge in housing prices brought on by the foreclosures.

Graph: Econoday

According to the Census Bureau, there were 104 thousand new homes sold in Q1 2013, up about 19.5 percent from the 87 thousand sold in Q1 2012. That is a solid increase in sales, and this was the highest sales for Q1 since 2008, per Calculated Risk.

“Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions” said McBride. “This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.”

Harlan Green © 2013

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

Housing Construction, Retail Sales Surge

The Mortgage Corner

Another sign that the economy is finally recovering—new housing starts surged 15 percent, to their highest levels since 2008 and the beginning of the Great Recession. This is boosting construction employment in particular, but also finance, insurance and other related sectors. Construction employment is up 7 percent just this year, for instance.

And privately-owned housing building permits in September were at a seasonally adjusted annual rate of 894,000. This is 11.6 percent above the revised August rate of 801,000 and a huge 45.1 percent above the September 2011 estimate of 616,000. This is an even better indicator that new housing inventories, which have fallen to a 4-month low, will recover.

As Calculated Risk reported, Three-fourths of the way through 2012, single family starts are on pace for about 520 thousand this year, and total starts are on pace for about 750 thousand. That is actually an increase of about 20 percent from 2011, and confirms rising builder optimism in the NAHB sentiment survey.

Graph: Calculated Risk

And The Federal Housing Finance Agency (FHFA) just released its August Refinance Report, which shows that Fannie Mae and Freddie Mac loans refinanced through the Home Affordable Refinance Program (HARP) accounted for nearly one-quarter of all refinances in August.

Nearly 99,000 homeowners refinanced their mortgage in August through the HARP program with more than 618,000 loans refinanced since the beginning of this year. This continues the strong pace of HARP refinancing with the program on target to reach a million borrowers in 2012.

In August, borrowers with loan-to-value (LTV) ratios greater than 105 percent continued to account for more than half the volume of HARP loans as HARP enhancements were fully implemented in the second quarter of 2012.
In August, nearly 18 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages, which help build equity faster.

But the best sign that consumers are feeling more confident was the surge in retail sales, up a huge 1.1 percent.

Graph: Inside Debt

Retail sales rose in September as Americans stepped up purchases of everything from cars to electronics, a sign that consumer spending is driving faster economic growth. Reuters’ Inside Debt reports consumer spending remains the U.S. economy's biggest engine, and expectations for third-quarter economic growth improved after the Commerce Department reported a 1.1 percent increase in retail sales.

Lastly, three and a half years after peaking, the number of California homes entering the foreclosure process fell last quarter to the lowest level since the early stages of the housing bust. Mortgage default filings hit their lowest point since first-quarter 2007, due in large part to a stronger economy and housing market and more short sales, a real estate information service reported.

All of these factors—especially consumer spending--are the reasons economists are upgrading their estimates of GDP growth for the rest of the year. 

Harlan Green © 2012

Fewer Foreclosures Boost Housing Prices

The Mortgage Corner

Calculated Risk just reported that Lender Processing Services (LPS) released their Mortgage Monitor report for July with some good news. According to LPS, 7.03 percent of mortgages were delinquent in July, down from 7.14 percent in June, and down from 7.80 percent in July 2011.

Graph: Calculated Risk

LPS reports that 4.08 percent of mortgages were in the foreclosure process, down slightly from 4.09 percent in June, and down slightly from 4.11 percent in July 2011.
This gives a total of 11.12 percent delinquent or in foreclosure. It breaks down as:
• 1,960,000 loans less than 90 days delinquent.
• 1,560,000 loans 90+ days delinquent.
• 2,042,000 loans in foreclosure process.

“Nationally, 18 percent of borrowers who are current on their loan payments are ‘underwater’ (owing more on the mortgage than the home’s current market value),” continued Calculated Risk from a Herb Blecher report, “ranging from a low of 0.4 percent in Wyoming to nearly 55 percent in Nevada. As negative equity increases, we see corresponding increases in the number of new problem loans. In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines – should they occur – could jeopardize recent improvements.”

Graph: Calculated Risk

But we are seeing that real estate prices are beginning to climb in those same states that gained, then lost the most equity during the bubble and consequent bust. “Home prices gained in the second quarter,” says David M. Blitzer, Chairman of Standard and Poor’s Dow Jones Indices. “In this month’s report all three composites and all 20 cities improved both in June and through the entire second quarter of 2012. All 20 cities and both monthly Composites rose for the second consecutive month. It would have been a third consecutive month had we not seen home prices fall in Detroit back in April."

Graph: Calculated Risk

And Housing Wire reports that “a sustained uptick in home prices in more metros caused the number of improving housing markets across the nation to rise to 99 in September from 80 the previous month, according to the National Association of Home Builders and First American Home Price Index.

This is while there are already principal reductions happening for the non-Fannie and Freddie home loans. Billions worth of subprime mortgages once handled by Saxon Mortgage Services received more principal write downs since Ocwen Financial Corp. took over the portfolio.

Ocwen, now the largest subprime servicer in the U.S., completed its October 2011 acquisition of Saxon from Morgan Stanley in April 2012.More than $22 billion in mortgages transferred through the deal.

Just 11 percent of all modifications done on these loans included a principal reduction as of May. But in the three months since, Ocwen wrote down principal on 56 percent of modifications on Saxon loans, according to Laurie Goodman, chief analyst at Amherst Securities.

So now we are waiting for implementation of the recent National Mortgage Settlement Act that Wells Fargo, Citibank, Bank of America, Ally, and JPMorgan Chase agreed to. Among other things, it appropriates $25 billion to both settle borrowers’ claims of fraudulent foreclosure practices, but also help homeowners needing loan modifications now, including first and second lien principal reduction that aren’t Fannie Mae or Freddie Mac insured.  (Those mortgages are covered by the HARP loan modification program).  The servicers are required to work off up to $17 billion in principal reduction loan modifications and other forms of loss mitigation nationwide. Eligible borrowers will by contacted by the Servicers and will receive letters offering principal reductions or other modifications starting in June 2012.  This modification process will continue for approximately 3 years.

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers. Keeping in mind the timeline above, you may contact the banks directly if you need additional information:

• Ally/GMAC: 800-766-4622
• Bank of America: 877-488-7814 (Available M-F  7am - 9pm CT and Saturdays  8am CT - 5pm CT
• Citi: 866-272-4749
• JPMorgan Chase: 866-372-6901
• Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)

Harlan Green © 2012

HARP 2.0 Leads Mortgage Refinance Higher

The Mortgage Corner

There is growing optimism that the real estate bust is finally at an end. The cause is a combination of record low interest rates leading to more refinance activity and increasing confidence of consumers in the economic recovery. For the first five months of 2012, more than 78,000 homeowners who owe more than 105 percent of their property’s value have refinanced using the government’s Home Affordable Refinance Program, or HARP. That was up from about 60,000 in all of 2011, the Federal Housing Finance Agency said in a recent report.

Much of it is due to HARP 2.0 that removed loan to value caps on mortgage amounts higher than the property value. The removal of the 125 percent LTV cap and certain risk-based fees for refinancing enabled more underwater borrowers to access refinancing through HARP 2.0. HARP volume represented 20 percent of total refinance volume in May, the highest percentage reported since the inception of HARP. One in five refinanced loans in May was originated through HARP, according to the FHFA.

Borrowers with LTV greater than 105 percent accounted for 32 percent -- or almost one third -- of HARP volume, up from 15 percent in 2011. In addition, an increasing number of underwater borrowers chose shorter-term 15- and 20-year mortgages, which build equity faster than traditional 30-year mortgages.

Graph: Calculated Risk

Interest rates in California have dropped as low as 3.375 percent for conforming 30-year fixed to $417,000 and 3.625 percent for jumbo conforming fixed rates to $625,500 for owner-occupied single units with zero points origination fees.

This is why the MBA’s Refinance Index increased 22 percent from the previous week and is at the highest level since mid-June. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier, though builder optimism jumped another 6 points to 35, the highest level since March 2007, according to the National Association of Home Builders.

“Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” noted NAHB Chief Economist David Crowe. “This is particularly encouraging at a time when other parts of the economy have begun to show softness, and is all the more reason that the challenges constraining housing’s recovery – namely overly tight lending conditions, poor appraisals and the flow of distressed properties onto the market – need to be resolved.”

Calculated Risk reports that “Refinance application volume increased last week to near peak levels for the year as mortgage rates dropped to a new low, driven down by growing concerns about the health of the US economy,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Applications for HARP refinance loans accounted for 24 percent of refinance activity last week, in line with the HARP share for the past few weeks.”

Consumers seem to be doing fine, as I said last week, in spite of their worries about jobs, the economy and budget deficits (their own more than governments’). Consumer credit jumped $17.1 billion in May for the largest increase since the $19.1 billion boost seen in November 2011. Gains for the latest month were seen in both revolving and nonrevolving credit.

And the U.S. Census Bureau reports that Privately-owned housing starts continued their monthly increase in June, at a seasonally adjusted annual rate of 760,000, the highest rate since October 2008. This is 6.9 percent above the revised May estimate of 711,000 and is 23.6 percent above the June 2011 rate of 615,000. Single-family housing starts in June were at a rate of 539,000; this is 4.7 percent above the revised May figure of 515,000. The June rate for units in buildings with five units or more was 213,000.

Graph: Calculated Risk

Why have interest rates continued downward to the lowest levels since World War II? We can thank the nervousness of foreign investors worrying about recessions in Europe and China that are parking their money in U.S. Treasury Bonds. The 10-year benchmark bond yield has dropped to 1.5 percent, which sets the level for mortgage rates. So where else are investors looking to make money? In real estate, it seems.

Harlan Green © 2012

Housing Recovery Has Begun

The Mortgage Corner

This may be the brashest of predictions. Can residential real estate prices actually be recovering? Yes, as housing inventories decline. The National Association of Realtors just reported on the national level, inventory of for-sale single family homes, condominiums, townhouses and co-ops declined by -20.7 percent in May 2012 compared to a year ago, and declined in all but two of the 146 markets covered by REALTOR.com.

This is while the median age of the inventory fell -9.78 percent on a year-over-year basis last month, and the median national list price increased 3.17 percent last month compared to May 2011.

Graph: Calculated Risk

“Signs of recovery are evident in a growing number of markets that were once the epicenter of the housing crisis, and older industrialized areas in the Northeast and the Midwest are showing emerging signs of weaknesses,” said NAR’s press release. “For example, the recovery process that began in Florida approximately one year ago has since spread to Phoenix and most recently California. At the same time, markets such as Reading, PA, Allentown, PA and Milwaukee, WI continue to lag behind the rest of the market.”

Another sign of the housing recovery is that Mortgage applications increased 18.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA).  This is part because of the new Fannie Mae/Freddie Mac HARP 2.0 loan modification program, which Fannie Mae predicts could affect as many as 9 million mortgage holders.

Graph: Calculated Risk

“Mortgage application volume increased sharply last week. The increase was accentuated due to the comparison to the week including Memorial Day, but the level of refinance and total market activity is the highest since the spring of 2009,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “Refinance volume increased as borrowers were able to lock in at mortgage rates below 4 percent, and purchase application volume was its highest level in over six months. HARP volume has been steady in recent weeks at about 28 percent of refinance applications.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.88 percent from 3.87 percent, with points decreasing to 0.43 from 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. But rates are actually lower in states like California, where the 30-yr fixed conforming rate has fallen to 3.50 percent, with zero points origination fee.

According to the MBA, HARP activity is increasing at the same rate as overall refinance activity, which means long waiting periods for refinances in particular. Some lenders are saying it takes up to 16 days for underwriting approval.

The so-called echo boomer generation, children of baby boomers are beginning to provide some of the increased purchase activity. There are approximately 62 million echo boomers in the U.S. Also called "millennials," echo boomers are currently ages 17-31. According to the 2011 National Association of Realtors Profile of Home Buyers and Sellers, younger home buyers - those ages 18-34 - represent 31 percent of all recent home purchases.

In other words, it looks like 2012 is the year real estate will begin to recover. With 4.5 million jobs created or retained since 2009, the demand for jobs growing, according to the Bureau of Labor Statistics JOLTS report (with 3.5 million job openings), and affordability never higher, housing might be finally leading us out of the Great Recession.

Harlan Green © 2012

Home Prices Finally Rising!

The Mortgage Corner

Even the S&P Case-Shiller Home Price Index, a 3-month average of all existing-home prices that lags all other indexes—such as FHFA and CoreLogic—says home prices are finally showing signs of life. Why? Inventories are declining as investors in particular are picking up the best bargains. Also, prices have fallen faster than incomes, so that housing is cheaper than ever.

Graph: Calculated Risk

Case-Shiller home prices were up 0.1 percent in March for the adjusted composite 20 index and up 0.2 percent in February. This is the first back-to-back monthly gain since the spring of 2010, said Econoday. The year-on-year rate of minus 2.6 percent is the best reading since December 2010. Phoenix is really on the rebound with Miami, Tampa, Minneapolis and Dallas all showing a run of stand-out strength. Phoenix had the largest increase, showing that cities with the biggest price busts continue their boom and bust ways.

Graph: Calculated Risk

The median price of existing homes shot up 10 percent in April as well, as housing inventories have declined to 6.6 months. And that is at the current slow sales pace. Should it pick up this year, inventories could decline to their historical low of 4 percent giving a further boost to prices.

Graph: Calculated Risk

This is because total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April.

And we are seeing larger price rises in the FHFA price index of homes with Fannie Mae/Freddie Mac owned mortgages. Home prices climbed 1.8 percent on a seasonally adjusted basis in March, said the Federal Housing Finance Agency. Year-on-year, prices rose 2 percent. For the first quarter as a whole, prices rose 0.6 percent from fourth-quarter levels. "Increased affordability and a somewhat smaller inventory of homes for sale are positively impacting house prices," said Andrew Leventis, FHFA principal economist. The FHFA is a purchase-only index based on transactions bought or guaranteed by Fannie Mae or Freddie Mac, as we said.

Lastly, default rates continue their decline, meaning fewer REO (bank-owned) properties are coming on the market. As far as delinquencies, MBA Chief Economist Jay Brinkmann says we are "halfway back" to normal of around 5 percent historically, though this does not include loans in foreclosure, which are still near record highs. We anticipate further declines in both default and foreclosure rates, as HARP 2.0 Fannie/Freddie loan modification activity that ignores negative equity is going through the roof. Some lenders are reporting up to 18 days to initial underwriting of submissions, because of the huge backlog.

The Mortgage Banker Association's National Delinquency Survey (NDS) covers about "42.9 million first-lien mortgages on one- to four-unit residential properties" and is "estimated to cover around 88 percent of the outstanding first-lien mortgages in the market," said the press release. This gives about 5.8 million loans delinquent or in the foreclosure process.

So increased affordability, combined with declining inventories seems to be finally spurring homebuyers to come out of their rentals (or parents’ households) to make that that most important of investments—a home of their own.

Harlan Green © 2012

HARP 2.0 Loan Modifications Begin This Week

The Mortgage Corner

The revamped HARP 2.0 loan modification program for Fannie Mae and Freddie Mac loans kicks off this week, which allows unlimited loan-to-values for existing 30 or 15-year fixed rate mortgages owned by Fannie and Freddie, and maximum 105 percent ltvs for adjustable rate mortgages. It should stimulate as many as 9 million refinances of conforming loans, reports Fannie Mae in it press release.

And, nationwide housing starts edged down 1.1 percent to a seasonally adjusted annual rate of 698,000 units in February. This was the second-best pace of new construction since October of 2008 following an upwardly revised 706,000-unit pace in January.

Graph: Inside Debt

"Builders are reporting increased buyer interest and are expecting demand for new homes to improve in the coming months, but continue to exercise caution regarding new projects until that interest translates into more signed sales contracts," noted Barry Rutenberg, chairman of the National Association of Home Builders (NAHB). "This process is certainly being slowed by today's overly tight lending conditions, the difficulty of obtaining accurate appraisals on new construction and competition from distressed properties that can make it tough for prospective new-home buyers to sell an existing home."

Here are the HARP 2.0 basics:

• Unlimited LTV, CLTV, and HCLTV
• No minimum credit score
• All occupancy is acceptable (OO, 2nd HM, NOO, 1-4 Units)
• Income documentation might be required, depending on u/w approval
• Rate/Term only
• Max 2X60 mortgage late payments in 2 years
• Borrower must benefit with either lower payment/rate, more stable payment (longer ARM fixed rate period, or from 30 to 15 or 25 fixed rate)
• Must be originated prior to June, 2009

Prospective borrowers can look up the Fannie Mae and Freddie Mac websites to ascertain if their mortgages are eligible for the program.

\http://www.fanniemae.com/loanlookup/

https://ww3.freddiemac.com/corporate/

Harlan Green © 2012

Employment Report Means Holiday Cheers!

Popular Economics Weekly

Not only were the employment numbers for the past 3 months much higher than originally estimated, but job openings are growing. All we need now is for consumers’ credit conditions to ease to bring back their confidence.

Much of the pessimism and predictions of a second recession were based on faulty data, and that has caused lenders to pull back. For instance, instead of 0 job growth in August that scared the markets, more than 104,000 jobs were created after ‘revisions’ to the seasonal adjustments that we have discussed in past columns. In fact, payroll jobs in October posted a gain of 80,000 after rising a revised 158,000 in September (originally 103,000).  So revisions for August and September were up net 102,000.

In fact, consumers are spending for the holidays as if the Great Recession is finally over, in spite of still uncertain income and credit conditions. The caveat: It took 23 months for consumption per person to return to its pre-recession level in earlier recessions. At 42 months, personal consumption has not yet returned to 2007 pre-recession levels, though some of that consumption was fueled by the housing bubble and may not be desirable, says Kevin Lansing of the San Francisco Federal Reserve.

Graph: Calculated Risk

Firstly, the number of job openings in September was 3.4 million, up from 3.1 million in August. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in September was 1.2 million higher than in July 2009 (the most recent trough for the series). The number of job openings has increased 38 percent since the end of the recession in June 2009, which tells us growth is picking up. We should therefore see 3 percent plus GDP growth for the rest of this year, at least, contrary to the Federal Reserve’s downwardly revised forecasts.

The consensus expected unemployment to be stuck at 9.1 percent instead of dropping to 9 percent in the Labor Department’s October household report, which tracks self-employeds as well.  The unemployment rate declined largely on a sizeable 277,000 boost in household employment which has posted significant increases for three months in a row.  The increases in August and September were 331,000 and 398,000, respectively.

And there is additional favorable news in the household survey.  Part-time employment for economic reasons is down and the duration of unemployment declined in October.  In nonagricultural industries, the number of those employed part time instead of full time for economic reasons dropped 328,000, says Econoday.

By downgrading its growth estimates, the Fed is leaving the door open for additional ease with the emphasis on significant downside risks remaining. For real GDP, the central tendency forecast for 2011 is now a 1.6 to 1.7 percent versus the prior range of 2.7 to 2.9 percent.  The large downgrade likely is due to a large downside miss to second quarter growth.  (But we believe growth will also be upgraded in coming months.) For 2012, forecast growth is 2.5 to 2.9 percent versus June’s 3.3 to 3.7 percent.   For 2013, forecast growth is 3.0 to 3.5 percent versus June’s 3.5 to 4.2 percent.   The Fed doesn’t see sustained growth until 2014—a range of 3.0 percent to 3.9 percent.

And early data for October on actual purchases by consumers indicate that this sector is doing better than suggested by surveys on the consumer mood, as we said.  Thanks to the one area where credit is easing, unit new motor vehicle sales rose 1.2 percent in October after surging 8.0 percent the month before. October’s sales pace was 13.3 million units annualized, compared to 13.1 million in September.

The bottom line is that credit is still being tightened in most areas, according to the Federal Reserve’s October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices. Fewer domestic banks eased standards and terms on commercial and industrial (C&I) loans over the third quarter compared with recent quarters, particularly on loans to large and middle-market firms, said the survey. And all of the domestic and foreign respondents that reported having tightened standards or terms on C&I loans cited a less favorable or more uncertain economic outlook as a reason for the tightening.

And so consumers will have to be patient, if they want to see credit standards easing for such as home loans. We hope the HARP II loan modification program that allows lowered payments and shortened payoff terms Fannie Mae and Freddie Mac-owned mortgages, though no principal reduction, will spur refinances and thus many to move out of their homes to find new jobs to be helpful.

The bottom line is that consumers are borrowing again, but for longer term purchases and still reducing their credit card debt, in part because banks are still restricting credit card use. Consumer credit expanded $7.4 billion in September benefiting once again from strength in nonrevolving credit, said the Federal Reserve’s latest Consumer Credit report. So-called installment loans outstanding, reflecting strong vehicle sales, rose $8.0 billion in the month to $1.66 trillion. This offsets another contraction in revolving credit, down $0.6 billion to $789.6 billion outstanding.

Harlan Green © 2011

Who Will Benefit From HARP II Modifications?

The Mortgage Corner

Who will benefit from HARP II, the latest attempt at loan modification? President Obama announced in Las Vegas that Fannie Mae and Freddie Mac would loosen their loan modification rules, which could enable up to one million homeowners with Fannie or Freddie-owned loans to reduce their interest rate and/or “accelerate the reduction of principal”.

Since it’s estimated there are up to 11 million homeowners that are ‘underwater’ (have negative equity in their homes), who will this really help? Firstly, it will spur more refinance activity, which means many homeowners might finally be able to sell their homes and move to better job locations. Part of the reason for the 3.1 million job openings according the Labor Department’s JOLTS report is that employers can’t match their skill requirements to the local applicant pool.

Secondly, it will help the banks that are holding the underwater mortgages by giving more certainty to valuations in their mortgage portfolio. And lastly, it should lower default and foreclose rates, which have been a major reason for RE values continuing to fall.

Graphs: Calculated Risk Blog

The delinquency rate has been declining from its peak of almost 12 percent in 2009 to 8.13 percent in August 2011, but foreclosures are stuck in the low 4 percent range, whereas historical delinquency and default rates were in the 4 and 1 percent range, respectively. Fannie and Freddie’s default and foreclosure rates, on the other hand, have remained within historical levels because of their stricter qualification requirements that have always required income and asset verification.

Calculated Risk’s take is, “What this program does do is remove many of the stumbling blocks to refinancing Fannie and Freddie loans (eliminate reps and warrants, reduce or eliminate fees, automatic 2nd subordination, minimal qualifying). These were all deal killers for HARP, and hopefully these changes will smooth the refinance road.”

Then questions remain on what to do with all the non-agency, or private label securities (PLS). They are where almost all of the subprime mortgages originated by the likes of Countrywide, Bank of American and Wells Fargo remain, and where most of the foreclosures occur.

One solution being worked out by the State Attorneys General, as reported by Jon Prior’s Housing Wire, is a reduction in the principal of the existing mortgage. “As part of the negotiations, the AGs are working to force servicers to refinance current borrowers into lower-rate mortgages,” said Prior. “A source said last week principal reductions were also very much a part of the talks, which some states began to split from, including foreclosure heavy California and New York…”The settlement negotiation is also going to be focused on significantly accelerating the reduction of principal," Department of Housing and Urban Development Secretary Shaun Donovan said Monday.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

How does one find out who qualifies for the HARP II loan modification? The first step is to find out if the borrower has a Fannie or Freddie-owned mortgage. Homeowners can use mortgage “look-up tools” to determine if Fannie or Freddie owns their loan.

• Freddie Mac loan look-up
• Fannie Mae loan look-up

Homeowners can also contact their current lender or loan servicer, to find out if the loan is backed by Fannie or Freddie. It’s a key requirement for HARP 2.0 and will likely remain in place throughout 2012, says the Home Buying Institute.

“Put those three programs together: HARP refinance for GSE loans, a HARP like refinance program as part of the mortgage settlement for many non-GSE loans, and an REO dispositions program that keeps many occupants in place as renters and I think that will help,” said Calculated Risk.

Harlan Green © 2011

Third Quarter Growth Will Be Better

Popular Economics Weekly

We now know the reasons for this summer’s growth pause, but growth is picking up for the rest of the year. The Japanese earthquake and Tsunami disrupted a fragile recovery at the same time as Europeans found out they had a fragile banking system. And several stimulus programs had expired—such as the housing tax credits while much of the ARRA $800 billion had been spent. Top that off with congressional gridlock, the U.S. credit downgrade, with consumers and businesses still paying down their debt, and we can see why many pundits were calling for a second recession.

But that ain’t happening, folks, as I’ve said. In part, because of so much cash being held by corporations with record profits, and banks in excess reserves. Economic growth for the second quarter ended up stronger than previously estimated but remained anemic, as I’ve said.

And we will see better third quarter economic growth—in the 2 to 3 percent range—as the steady increase in consumer spending (read retail sales) means more businesses will be hiring, while manufacturing is holding up. One reason is industrial production. Manufacturing data point to a stronger third quarter—and no recession. Manufacturing—especially autos—continues to lead industrial production.

Manufacturing has even outpaced growth for the overall economy over the past year. On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August.  Through the second quarter, real GDP growth was 1.6 percent on a year-ago basis.  Basically, manufacturing is leading the recovery and at the national level is running stronger than implied by manufacturing surveys.

Obama’s new push on allowing more homeowners to refinance—up to 1 million by some estimates—can also breathe new life into the housing market.  Expansion of his Home Affordable Refinance Program (HARP) will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments, said President Obama at his Las Vegas unveiling. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

It seems that businesses have chosen to get the most out of their current workforce rather than hire new workers. It shows in the flagging productivity numbers and rising unit labor costs (ULC) seen in Econoday’s graph, which means their existing employees cannot produce much more per worker.

This means businesses aren’t hiring more workers because they don’t yet see increasing demand for their products. But the recent pickup in exports, capital goods orders and retail sales are telling us that the Third Quarter will look better. We are still in a deflationary cycle, as Krugman, et. al., have been saying ad nauseum. It is called a liquidity trap when businesses and consumers hold onto their savings rather than spend or invest out of the fear that conditions can worsen again. What will loosen their wallets is some confidence in the future.

Harlan Green © 2011