Morning Mortgage Notes

Daily Commentary on Mortgage News

Mortgage Market - Confusing Economic Signals

In digesting any news or market an analyst most valuable contribution is sorting the signal from the noise. Unfortunately, in the current mortgage and real estate market we have too many noise makers: unpredictable executive and legislative actions, multiple regulatory opinions and guidance, skittish investors, and fearful consumers.

So, with that being said, I won’t try to be the mortgage market analyst. However, I will share some of the things I believe to be signals and I am not sure they point to recovery.

• Mortgage101 highlights an apparent deceleration in housing price declines. Two points of caution with statements like these: “deceleration of declines” does not necessarily indicate trend reversal and a decline is still a decline.

• I agree with Tim Manni, of HSH Associates, in his assessment that housing price stability is the only important indicator of economic recovery. Homes are typically 60-75% of the average homeowners’ net worth. If that is running to zero or negative territory we have a lot of poor people with no discretionary income for consumer and durable goods.

• This is a REAL ugly one: 1 in 4 Homeowners Said to Willingly Default on Mortgage. Having spent some time in the mortgage capital and secondary markets business–this is a violation of a fundamental assumption (a “constant” if you will) that would break every mortgage asset valuation model on Wall Street. Big trouble if this continues to play out!

• One of my favorite sources of real estate data, Altos Research, makes the case that “recovery indicators” may be seasonal not structural in which case we may not be recovering, but headed on the way back down (I tend to buy into this theory).

Here is my two cents on where I think the real signal is…

I think the housing market is still in a decline, one that may continue a downward decline in many local real estate markets for the following reasons:

1. I will start with an assumption: “all real estate markets are local.” Therefore, markets with traditionally conservative mortgage lending laws (Texas) and mild 2000-2004 price appreciation (Ohio) may experience different results. As is already the case.
2. There is a second wave of option and IO ARM mortgages in the queue ready to reset in late 2009-2010. Most of these borrowers are not refinancing or may not even be aware. More toxic assets.
3. Foreclosures and bank sales will continue to replace real estate inventory on par with home sales–keeping housing inventories flat despite rosy reports of increasing home sales.
4. Employment does not have a macroeconomic trend to reverse and absorb the growing unemployed labor force.
5. Government continues to executive order, legislate, and regulate with no material effect.
6. Government will have to pull out as a “market participant” at some point and regardless of how smartly it is done it will be a mess.

All this being said, I am not a pessimist. We’ll figure it out–capitalism always does. I just don’t think we have figured it out yet. And, I am inclined to think that is a good thing for long-term recovery.

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• Good Borrowers Gone Bad: The Latest Wave of Defaults (hsh.com)
• America’s 4 Nastiest Regional Housing Busts (usnews.com)
• Fannie and Freddie may refi deeper-underwater mortgages (seattlepi.com)

Home Affordable, Mortgage Fraud, Bank Balance Sheet

Home Affordable Gets a Solution for Second Mortgages

Okay, first off if you don’t currently read Mike Shedlock (aka Mish’s Global Economic Trend Analysis) immediately do so now (Mish’s RSS) and return. He seems to be one of the few not running a blind-sheep commentary on how the government (all parties included) are running this economic recovery.

Here are his thoughts on the latest “tinkering” with the Home Affordable program–incentives for the writing down of second mortgages to facilitate loan modifications, mortgage refinance, and or other foreclosure prevention.

The bill hugely rewards servicers for every loan they modify. This creates an incentive for servicers such as Countrywide (Bank of America) to modify loans whether or not that is in best interest of the mortgage holders. Worse yet, the Safe Harbor Provision goes one step further and shields servicers if they do commit such fraud.

Reverse Mortgage Volume Up and the Market is Changing Leaders

HUD is reporting that reverse mortgages applications surge–heading for mainstream type numbers, with a big year-over-year increase:

HUD’s FHA outlook report mirrors the optimistic outlook by showing that during FY 2009, 85,548 HECM applications have been taken, up 16.1% compared to last year.

Reporting on a Reverse Market Insights’ report, Reverse Mortgage Daily points out a significant shift in the reverse mortgage market:

JB Nutter has over taken Financial Freedom as the largest wholesale reverse mortgage lender.  The data shows that over the last year, Nutter saw its wholesale business grow 76.8% compared to Financial Freedom seeing it’s volume drop 41.3%.

Mortgage Fraud, an Epidemic?

It seems like there is a sudden outbreak of mortgage fraud:

• SEC charges ex-American Home Mortgage executives (Reuters)
• $70 million ponzi scheme in Maryland (baltimoresun.com)

Epidemic, or simply revelation brought on by volatile mortgage markets. Mortgage markets grow and expand–mortgage fraud grows and expands. Mortgage markets rapidly change directions–mortgage fraud scheme pop-out. No surprise.

Are Banks Getting Healthier?

It would seem that bank balance sheets are improving, but are they?

So you run a bank. And it’s not been the smoothest sailing lately. Sure, record-low interest rates let you make money writing mortgages and refis, which helps your bottom line. And maybe your active-trading division has provided a bump, especially in fixed-income products. But that still doesn’t get your numbers where you want them to be. There are a few little tricks that can get you there, from accounting wizardry to liberties with the Gregorian calendar.

Some clever accounting slight of hand.

Related articles by Zemanta

• New Mortgage Assistance Addressed Second Liens (mortgageloan.com)
• FHFA - “Examining the Making Home Affordable Plan” - Net Present Value Model (appraisalnewsonline.typepad.com)
• Making Home Affordable Program (bloghomedenver.com)
• Fourth Quarter Mortgage Statistics Are In (hsh.com)
• Making Home Affordable Mortgage Refinance & Modification Program (bargaineering.com)

Looking for Mortgage Recovery and Attacking Mortgage Fraud

Looking for Anything that Says Real Estate Recovery

Home price deceleration leads the front-page real estate and mortgage news.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” said David M. Blitzer, chairman of S&P’s index committee. Still, 10 of the 20 metro areas reported record year-over-year declines.

As of February, the 10-city index is down 32% from its mid-2006 peak and the 20-city is down 31%. The two indexes have fallen every month since August 2006, 31 straight.

The indexes showed prices in 10 major metropolitan areas fell 19% in February from a year earlier and 2.1% from January. In 20 major metropolitan areas, home prices also dropped 19% from the prior year and 2.2% from January.

Early trading has the markets surging on indicators that price declines may be slowing and consumer confidence is returning. However, beware of the dead cat bounce again with unemployment still increasing and Monday’s swine flu panic still in the news and the markets. Oh, and by the way, these are still housing price declines and sizable ones at that.

Also, don’t discount the effects of the White House sending in jumbo jets chased by fighter jets into a major city near you.

Net Tangible Benefit, The Rope that Hangs

Representative Barney Frank (D-MA)  is dabbling in mortgage reform again. This is a classic quote about giving mortgage regulators “flexibility:”

“Is it vague? To some extent, but that’s what you do with the law and then they are defined by practice,” he said. “In terms of net tangible benefit I would say to the person doing the loan, ‘Would you tell your mother to do it?’”

I guarantee that someone goes to jail because they don’t have a high enough regard for their mother.

Mortgage Fraud Squad is Getting Real Teeth

Mortgage fraudsters and scam artists are full on in this market. A market flush with desperate victims and tones of over-taxed government mortgage assistance. However, charging through the Senate is the cavalry:

The bill would give the Justice Department $165 million a year for 2010 and 2011 to hire investigators and prosecutors. The bill would also give extra funds to the Securities and Exchange Commission, the U.S. Postal Inspection Service and other agencies to root out fraud.

I guess my question is how much of this money will flow into the States Attorneys Offices, where most mortgage fraud gets investigated and prosecuted?

Bank of America Re-brands the Countrywide Cancer

This one is for the “Why did it take so long file?” Bank of America Home Loans:

Bank of America Corp., the second- largest U.S. home lender after buying the biggest provider of credit before property prices slumped, hopes to bolster its mortgage brand as it drops the Countrywide Financial Corp. name.

The campaign includes a new consumer disclosure intended to let applicants see potential mortgage costs, said Barbara Desoer, the Charlotte, North Carolina-based bank’s mortgage chief. The one-page “Clarity Commitment” form includes worst- case scenarios for adjustable loans, reflecting a survey of 5,000 customers, she said in an April 23 telephone interview.

Related articles by Zemanta

• Bank of America lets go of Countrywide name (money.cnn.com)
• Homeownership Continues Decline (mortgageloan.com)

Shifts in Mortgage Banking? Hyper-Inflation and Federal v. State Banking Powers

Federal Reserve and Hyper-Inflation

Andy Kessler asks a very important question: How do you “Put the Toothpaste Back in the Tube?”

Kessler begins thinking about how the Federal Reserve might go about heading off inflation as the economy begins to recover:

But how? Doing the opposite of what it is doing now. By raising interest rates. By sopping up dollars by not only selling Treasuries, but also selling all those mortgage-backed securities and other toxic stuff bought from Bear Stearns, AIG, Fannie and Freddie, and everyone else. By removing all the backstops it put in for the commercial paper and other markets to keep them functioning. But won’t that have the effect of slowing the economy? Sure will. This is a tightrope act. Getting all that toothpaste back into the tube will require the skills of a surgeon and the moxie of a middle linebacker, and someone deaf, dumb, and blind to congressional meddling. And worse, this is something that has never been done before.

How this actually executes is going to be a critical factor in the future of the mortgage industry and your mortgage business. All assume that it will be nearly impossible to do perfectly. Therefore, using that as a baseline assumption who wins in a mortgage environment with double-digit interest rates?

As the Federal Reserve meets for FOMC this week the question of inflation is beginning to re-enter the discussion.

Federal v. State Banking Powers

Here is another issue that may have strategic impact on the future structure of the mortgage industry: “Can the US Treasury Shield National Banks from New York State Law?”

Four years ago, Eliot Spitzer, then the New York attorney general, asked several national banks to explain why they were disproportionately charging blacks and Hispanics high interest rates.

Instead of an answer, he got a lawsuit. The banks, and the Treasury Department agency that regulates them, persuaded federal courts to bar the state attorney general from enforcing New York antidiscrimination laws.

On Tuesday, the U.S. Supreme Court will hear New York’s appeal. If the state wins, it would mark a break with decades of precedent that mostly favors the powers of the federal government and open a new era for 50 state regulators to play a bigger role.

A shift like this, although unlikely based on past Federal judicial precedence would dramatically shift the structure of banking.

Roubini Looks at Insolvency Regime for Non-Banks and Holding Companies

Major financial institutions, like Bear Stearns and AIG are demostrating their enormous potential impact on the US and even global economies. However, there is little or no coordinated supervision or insolvency path should they begin to fail.

US Treasury Secretary Timothy Geithner begin revealing his plan for a “new era of regulation.” Meanwhile, Roubini takes his shot at crafting a response and framework for what he thinks would be most effective:

Blueprint for a non-bank and holding company insolvency regime (RGE Monitor)

Do we need an insolvency regime for non-bank and holding companies? (RGE Monitor)

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Are We in an Economy Where Low Mortgage Rates Don’t Matter?

24/7 Wall Street presents and interesting angle on the role of mortgage rates in recovering the housing market. Are we in an economy where factors and anxiety around unemployment and investment make it such that mortgage rates are too much at any cost?

While some data shows that housing may be finding a bottom, it is likely that very few people are willing to gamble their own money that the perception is true. If unemployment rises, housing prices could continue to fall. If foreclosures rise, the value of homes could tumble anther 10% or more.  Of course, people thinking about buying a house have to be concerned with their own jobs. Low mortgage rates don’t matter to the unemployed.

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Roubini Still Predicting Rough Road Ahead for Stock Market and Banks

Roubini, professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, tells Bloomberg that banks are not out of the woods yet. The infamous doomsdayer of the impending mortgage crisis in 2004, is cautioning investors and economist on reveilling in the euphoria of optimist stock market rallys.

Roubini cautions economic recovery heralds as he predicts more major bank failures and nationalization ahead.

I am certainly in his camp on this one. We need to remember that the stock market (normally) does trade on a forward horizon. However, they may be outpacing macroeconomic indicators.

For instance, today’s futures are indicating a strong opening on news that the GDP decline of 6.2 percent beat a survey of economist predicting 6.5-6.6 percent decline. This considered positive trading news–on record declines in GDP–danger!

The other important footnote to these GDP numbers is this fact:

The main culprit behind the GDP downgrade was that businesses’ cut inventories more deeply than estimated a month ago. That shaved 0.11 percentage points off fourth-quarter GDP, rather than adding 0.16 percentage points in the previous report.

That is a definite signal for future inflationary concerns–confidence in consumers and markets, with underlying rapid declines in consumer goods. This can potentially create a Carter administration style whipsaw in inflation as too much money starts chasing too few goods.

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GM Banruptcy-Good for the Economy, but Bad for Management?

An interesting opinion piece in the Wall Street Journal, penned by Harvard Law School professor Mark J. Roe, argues that putting GM into Chapter 11 bankruptcy may not be as scary as GM management might want you to think:

General Motors Corp. is back in Washington, this time asking for $12 billion to add to the $18 billion loan the government approved last year. The possibility of bankruptcy for GM is very real — the company posted a loss of $30 billion in fiscal 2008.

GM continues to argue that it couldn’t survive a Chapter 11 proceeding, but the truth is that bankruptcy could boost its ability to survive. As the Obama administration considers its response to GM’s request for more cash, it should be mindful of the advantages of bankruptcy that haven’t been highlighted — certainly not by GM’s management.

As GM management argues its case for more capital, it warns of the dangers of Chapter 11 bankruptcy for not only itself, but also hundreds of vendors and suppliers.

Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders. Send in fresh supplies, and the courts have the bankrupt company pay for them, even while prebankruptcy creditors cool their heels.

Roe argues bankruptcy courts understand that and consider suppliers in restructuring.

There are other reasons why a Chapter 11 resolution may be the best solution for GM. Bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network, and achieve a viable labor agreement.

Roe also argues that Chapter 11 may help GM more efficiently use your taxpayer capital by dramatically creating the needed change, versus incrementally negotiating and rearranging the deck chairs.

However, Roe thinks this is the real hesitation and resistance to bankruptcy:

But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at restructuring troubled companies, and they may well be more effective than GM’s current management. It’s no surprise GM’s management isn’t advertising this fact, but taxpayers and the government should know about it.

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• GM’s mother of all scare tactics (money.cnn.com)
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Mish’s Open Letter to President Obama

Okay, Mish and I are not politically aligned, but I like his approach and I think this Obama budget is going to be a powder keg in both parties. Full of democratic policy initiatives, much like the economic stimulus package, this budget is going to drive Americans and politicians crazy with images of overusing political capital.

In classic Mish fashion he captures the key points:

With all due respect Mr. President, Tim Geithner and Ben Bernanke are offering the same policies as President Bush and Secretary Paulson. Those policies are to bail out banks regardless of cost to taxpayers. Mr. President, it’s hard enough to overlook Geithner’s tax indiscretions. Mr. President, it is harder still. if not impossible, to ignore the fact that neither Geithner nor Bernanke saw this coming. Yet amazingly they are both cock sure of the solution. Even more amazing is the fact that solution changes every day.

More patchwork, fix-it, gadgetry going on. The programs, terminology, and acronyms created during this crisis would over-stuff an Oxford English Dictionary. One of the major challenges I see is that the programs are so numerous, overlapping, and tedious that the likelihood of any effectively being implemented equals close to zero percent (e.g., Hope for Homeownership).

With all due respect Mr. President, your budget proposal is the same big government spending as we saw under President Bush. The only difference is you promised more spending and bigger government, while President Bush promised less government and less spending and failed to deliver on either count.

An ode to the glory days of Reaganomics. Can I have an Amen for fiscal constraint?

With all due respect Mr. President, you and Congress want to force banks to lend when banks (by not lending) are acting responsibly for the first time in a decade. Mr, President can you please tell us who banks are supposed to lend to? Do we need any more Home Depots? Pizza Huts? Strip malls? Nail salons? Auto dealerships? What Mr. President? What? And why should banks be lending when unemployment is rising and lending risks right along with it?

I won’t entirely debate this point, but the capital constraint is reserving against illiquid assets. Ironically where we started this journey. What would have happened if Paulson hadn’t gotten cold feet on TARP?

With all due respect Mr. President, Fannie Mae Reported A Fourth Quarter Loss Of $25.2 Billion. Can you please tell us where you draw the line on taxpayer bailouts of Fannie Mae? Freddie Mac? AIG? Mr. President is there a line anywhere, on anything? If there is, we would appreciate knowing where it is.

With all due respect Mr. President, how can you talk about reducing the budget deficit while proposing the biggest budget in history?

This is my BIG question.

Thanks Mish! I eagerly await the President’s response. Please post

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Are Mortgage Brokers Vanishing?

I caught this quote over on LeadCritic.com (a blog about mortgage lead generation):

we have slowed for 2 reasons - the first is that all the leads we had purchased in the past are finding us again - or we are finding them - so no need for “new” leads, but more importantly is that our funding source (warehouse banks) options have constricted. I would think this is the same for many lenders - even the banks (some - cant speak for all of course) who you would think would not have this limitation are internally slowing down real estate lender to maintain capital ratios required of regulated banks.

A bit of background–the discussion was on the slowing demand for mortgage leads in the market and the commenter was Owen Raun a principle at RMC Vanguard.

Although the comment and the “slowing” referes to the purchase of mortgage leads, I think there is an important thread to be followed about the overall mortgage market.

We have heard about large banks tightening or eliminating correspondent and wholesale (mortgage broker) programs. This capacity, being eliminated from the mortgage market was 80 percent of the loan origiantions. Certainly lending has declined during the mortgage crisis, but if we eliminate a whole class of loan originators who is going to work-out the 3.5-6.5 million foreclosures on the horizon?

The more and longer bank credit constriction continues the harder it is going to be to have the ability to implement any broad loan modification or refinance strategy–regardless of the rates and terms.

What do you think?

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