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

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

The National Mortgage Settlement

The Mortgage Corner

The $25B National Mortgage Settlement has finally been signed off by a federal judge, and 5 of the largest banks will begin the process of providing relief to the estimated 9 million present or former homeowners who are either now underwater with their mortgages, or who have already lost their home due to foreclosure.

Who May be Eligible for Assistance

Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief. Borrowers from states who did not sign the settlement will not be eligible for any of the relief directly to homeowners. Borrowers from Oklahoma will not be eligible for any of the relief directly to homeowners because Oklahoma elected not to join the settlement.

The settlement provides assistance for:

• Homeowners needing loan modifications now, including first and second lien principal reduction.  The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.

State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.

• Borrowers who are current, but underwater.  Borrowers will be able to refinance at today’s historically low interest rates.  Servicers will have to provide up to $3 billion in refinancing relief nationwide.
• Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process.  $1.5 billion will be distributed nationwide to some 750,000 borrowers.

TIMELINE

• Over the next 30 to 60 days, settlement negotiators will be selecting an administrator to handle the logistics of the settlement and monitor compliance.
• Over the next six to nine months, the settlement administrator, attorneys general and the mortgage servicers will work to identify homeowners eligible for the immediate cash payments, principal reductions and refinancing. Those eligible will receive letters.
• This settlement will be executed over the next three years.

WHERE YOU CAN GO FOR HELP

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)

Loans owned by Fannie Mae or Freddie Mac are not impacted by this settlement.  You may visit the following websites to learn if your loan is owned by either Fannie Mae or Freddie Mac:

• http://www.fanniemae.com/loanlookup
• http://www.freddiemac.com/mymortgage

These sites will also include links to information about mortgage and foreclosure programs you may be eligible to access.  You may also call 1-888-995-HOPE (4673)

Harlan Green © 2012