Mortgage news

News, trends and analysis of the mortgage and credit market

Wednesday, May 30, 2007

Mortgage reset

Teaser ARMS

Through 2012, millions of homeowners will find their ARM rates reset for the first time.

Adjustable-rate mortgages exploded in popularity from 2003 through 2006. A slow-motion explosion of another kind will occur through 2012. Millions of homeowners will find their ARM rates reset for the first time.

Millions of homeowners will find their ARM rates reset for the first time. Rates will detonate, and monthly payments will blow sky-high.

Many homeowners didn't understand the complex mortgages they got. They are vulnerable to nasty surprises when their mortgage rates reach their first adjustment.

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About one in five mortgage applicants nowadays gets an adjustable-rate mortgage, or ARM. The hardest-to-understand element of an ARM is the index.
When you get an ARM, two main factors determine the rate you pay: the index and the margin.

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The index is a rate set by market forces and published by a neutral third party. The margin is an agreed-upon number of percentage points that is added to the index to determine your rate.

A thorough mortgage shopper will run across a bunch of acronyms to denote various ARM indexes, such as COFI, LIBOR, MAT and CMT.

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Each index responds at its own peculiar pace to the economy's ups and downs.

Indexes can be divided into two broad categories: those based upon rate averages and those based upon more volatile spot rates. There is some overlap between the two categories.

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ARMs indexed to average rates tend to move more slowly, in rather gradual steps, whether the markets are rising or falling. ARMs based on spot rates go up and down abruptly.

ARMs based on averages tend to have higher margins than ARMs based on spot rates.

Someone who gets an ARM indexed to rate averages gets one benefit and one drawback.

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The benefit is that, in a changing rate environment, an average index will move more slowly, so the payment changes more slowly.

The drawback is that the margin typically is higher, and so the rate you pay is higher.

One way to compare ARMs with different index options is to look at their fluctuations in a graph. That will help you understand how rapidly and how much the rates change.

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Thursday, May 24, 2007

Purchases of new homes surged in April

Purchases of new homes rising

But mortgage rates climb

Purchases of new homes in the U.S. unexpectedly surged in April by the most in 14 years as buyers took advantage of the biggest decline in median prices since 1970.

Most economists continue to look for slow, but positive, economic growth over the next few quarters, with real GDP growth moving back up toward trend by late this year or early in 2008.

Rates Climb. The average 30-year fixed mortgage rate rose from 6.21% to 6.37% for the seven-day period ended May 24, according to Freddie Mac's Primary Mortgage Market Survey.

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Wednesday, May 23, 2007

Housing market trend analysis

Long-term outlook seems attractive

It may seem counterintuitive to talk about strength in the housing market, but by most measures, the long-term outlook is good, even though near term adjustments are beginning to restore the balance between supply and demand.

Home building and prices outran long-term demand in recent years. After this current adjustment period passes, the housing and mortgage markets should resume their growth in keeping with long-term trends.

And in many ways, we are fortunate that the rest of the economy, driven by corporate profits, consumer spending and stable interest rates, is fueling growth during this period.

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The net result of this is that GDP growth excluding housing has been running at 2.1 percent over the past four quarters, while housing has reduced this by about 1 percent. Like most economists, I believe that this underlying economic strength will keep us from slipping into a recession.

We are in a housing downturn. House prices were flat to down throughout most of the U.S. for the twelve months ending in March, with particular weakness in the most recent quarter. Most of this weakness is on the coasts and in the East North Central states being offset by strength in the Southeast and oil-producing states.

Price declines came after a period of unprecedented appreciation between 2003 and 2005, when the average home in the U.S. gained approximately 27 percent in value.

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These facts, together with continued low unemployment, suggest that this is not the beginning of a collapsing housing market, or the leading edge of a broad economic downturn but rather a working off of some of the excesses from recent years.

Inventories of existing homes increased significantly in 2006.
While the current months-of-supply is high by recent experience, it remains well below the levels seen in prior downturns.

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As would be expected, many of these problems are focused in the condo market, where vacancies are roughly four times that in the single family detached market, and in previously-hot areas like San Diego, Boston and Miami.

Increased supply in markets such as these will clearly cause a continuing drag on prices in periods to come. But again, this isn't surprising given the level of price appreciation we experienced in the past few years, and the fact that home prices so significantly outpaced wage growth.

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While this trend benefited many homeowners, in recent years, accelerating prices reduced affordability – making it more difficult for first time homebuyers.

Job loss or unemployment has been the primary reason for delinquencies that have led to the subprime crisis. Over the next decade, demographers expect there to be some 15 million new households in the United States.

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Approximately 10 million of them will be minorities, and recent immigrants will likely account for 5 million. Many of these will be first time homeowners. GSEs should help provide financing for these families as this will help our long-term growth.

In sum, a growing economy, low unemployment, and favorable demographic trends all point to attractive long-term growth rates in mortgage debt outstanding.

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Friday, May 18, 2007

Home prices in decline

Home prices continue to fall.

We need patience to see a slow, gradual recovery that should start
in the second half of this year.

Home prices continued to fall in the first three months of this year compared to the same time last year, and the number of houses resold declined even more sharply, according to the National Association of Realtors.

Realtors' economists predict that the market will turn around in the second half of the year. Existing-home market is stabilizing in a broad cyclical trough and moving in the right direction, with a modest gain from the fourth quarter. We need more patience now to see a slow, gradual recovery, which should start in the second half of this year.

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Houses and condominium units were resold at a seasonally adjusted annual rate of 6.41 million units in the first three months of this year. That's down 6.6 percent from the sales rate in the first quarter of 2006, and down slightly from the 6.48 million units that were resold in all of 2006.

Evidently, homeowners have been reluctant to deal, as prices fell more slowly than the number of units sold. In the first quarter of this year, half the houses were sold for more than $212,300, or 1.8 percent below the median price of $216,100 in the first quarter of 2006.

The decline is sharper when you look at the median price for all of 2006: $221,900. The median price in the first quarter of this year was 4.3 percent below that.

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Median prices have fallen three quarters in a row, and they fall faster each quarter, like a bullet dropped from the top of the Empire State Building. The median price in the first quarter this year was 3.1 percent below the median price in the final three months of 2006.

The National Association of Realtors explains that "there is a downward skew" in the price data "because sales have shifted away from many high-cost areas." In the year ending in March, sales were down more than 25 percent in higher-priced Nevada, Hawaii and Florida, as sales were up in lower-price areas such as Wyoming, Arkansas and Iowa. In Kentucky, prices have been relatively flat.

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Even though prices fell faster in the first quarter than they did in the previous two quarters, the NAR says it is encouraged by a flattening in home prices. It appears that the worst of the price correction is to come. More stable home prices and declining mortgage interest rates are increasing buying power, which should encourage potential buyers who've been on the sidelines.

The most expensive housing in the first quarter was in the Silicon Valley in Northern California, with a median price of $788,000. Prices there were up about 4 percent from the previous quarter and from the first quarter of 2006.

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The second most expensive area was up the peninsula in San Francisco and Oakland, with a median price of $748,100. The most expensive metro area outside California was the Golden State's playground, Honolulu, where the median price was $620,000.

The least expensive metro area was Elmira, New York, where half the houses sold for less than $75,300. It was followed by Decatur, Illinois, with a median price of $76,200, and the Youngstown area, Ohio, at $78,300.

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As far as price gains go, the biggest year-over-year increase was in the Cumberland metro area, Maryland, where the median price was $100,000, or 17 percent higher than the $85,400 median price in the first quarter of 2006. Beaumont-Port Arthur, Texas, came next, with the median price rising 16.5 percent in a year, and Gulfport-Biloxi, Mississippi, where the median price advanced 15.7 percent.

The biggest price decline was in the aforementioned Elmira, New York, down 14.9 percent compared to a year before. Year-over-year median prices fell 12 percent in the Sarasota-Bradenton metro area, Florida, and 10.9 percent in New Orleans.

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Thursday, May 17, 2007

Fair lending practices: Govenment will take action

Fair lending practices

Government will take action

Federal Reserve Chairman Ben Bernanke said Thursday that he did not believe the growing number of mortgage defaults would seriously harm the economy. He also promised that the Fed would do everything possible to crack down on abuses that have put millions of homeowners in jeopardy of defaulting on their mortgages.

A new subprime product totally different from anything seen before will be created within six months, according to a panelist at the SourceMedia Nonprime Lending Symposium in Las Vegas.

Countrywide Financial Corp., Calabasas, Calif., has announced the sale of $4 billion of convertible bonds through a private placement and said it will use some of the proceeds to buy back up to 23 million shares of its common stock.

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Mortgage companies news

Mixed data in the mortgage sector

Wholesale subprime giant Option One Mortgage Corp. plans to close 12 mortgage processing offices and trim 600 workers by early September.

New York Mortgage Trust Inc., a New York-based real estate investment trust, has reported a consolidated net loss of $4.7 million ($0.26 per share) for the first quarter, including a $3.8 million loss from its discontinued mortgage lending operations.

Wells Fargo housing market index dropped three points to 30 in May.

The meltdown within the subprime mortgage industry pushes mortgage lenders to tighten lending standards.It’s tougher for subprime borrowers to get a mortgage. Tighter mortgage standards could prolong housing slump.

Wall Street: Report of a decline in housing makes stocks retreat. But signs of stabilizing inflation are raising the prospect of lower interest rates.

The Department of Housing and Urban Development wants to ban all downpayment "gift" assistance provided to homebuyers by sellers.

As home foreclosures mount, mortgage companies are knocking on doors, sending letters and making phone calls with a simple message for struggling homeowners: They'd rather modify your loan than foreclose.

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Saturday, May 12, 2007

Housing wealth and macro-economy

Housing wealth impacts significantly the macro-economy

Low level of long-term interest rates is an incentive for cash-out refinancings
and, therefore, for consumer spending.

The housing market impacts the macro economy through many channels, most directly through construction jobs and homebuilding activity, and spending on furniture and appliances by families moving into new or existing homes. No channel has been more important of late than housing wealth.

According to many prominent economists, the extraction of home equity wealth in recent years has propped up consumer spending. A sudden swoon in housing prices, they warn, could shut off this spigot, prompting a sharp cutback in spending and elevating recession risks.

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Growth of house prices has indisputably stalled, and even reversed in some parts of the country. Price appreciation on a year-ago change basis slowed from rates exceeding 13 percent in 2005, to 6 percent by the fourth quarter of 2006.

More recent monthly data show prices flat or falling in many major cities. Such weakness has fueled fears that an abrupt halt to growth of housing wealth may limit households' ability to withdraw home equity. Such a decline in cash-out refinancings could, in turn, undermine consumer spending.

Reports on mortgage applications and cash-out refinancings provide important and perhaps surprising news. The refinance share of mortgage applications averaged 46 percent in the first quarter of 2007, unchanged from the prior period. Moreover, homeowners continued to extract home equity in the first quarter at close to the pace of late last year, despite diminished price appreciation.

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In particular, 82 percent of loans refinanced during the first quarter resulted in a new loan balance at least 5 percent greater than the unpaid balance of the original loan, with an estimated $70.5 billion cashed out, only slightly below the $77.0 billion cashed out in the fourth quarter of 2006.

There are several reasons why cash-outs have defied reports of their demise. Most importantly, the current rate of housing price appreciation is not what determines if a cash-out is feasible, but rather the cumulative gain since the existing loan was originated.

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Homeowners have benefited from robust price gains during 2004 and 2005. As a result, the median appreciation on refinanced properties was 24 percent, providing ample margin for taking out cash without running down home equity. The low level of long-term interest rates provides another incentive for cash-out refinancings.

Rates on 30-year fixed-rate mortgages averaged 6.2 percent in the first quarter, allowing many homeowners to use the proceeds to pay off higher-cost credit card debts or home equity lines. With mortgage rates stable in our economic forecast, we anticipate that refinancing activity will wane only gradually.

There are still legitimate concerns that a high level of cash-outs may deplete homeowners' equity in their properties. However, homeowners' equity had grown to nearly $11 trillion at the end of 2006, an increase of 30 percent over the past three years, even after cash-out activity.

The housing market recovery still faces significant risks, to be sure, in particular the danger that problems in the subprime space spill over to mortgage markets in general, inflicting damage on the macro economy.

Continued smooth performance of the mortgage markets will be a critical factor supporting the housing recovery in the months ahead.

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Friday, May 11, 2007

Foreclosure crisis

Dealing with the foreclosure crisis

Senate introduces legislation

On Thursday Senator Charles Schumer (D-NY), chairman of the Senate's Housing Subcommittee introduced legislation to deal with a potential foreclosure crisis arising out of the subprime lending mess.

In the legislation Schumer and co-sponsors Sherrod Brown (D-OH) and Bob Casey (D-PA) proposed that $300 million in federal funds and, Schumer said, "hopefully even more private money," would be channeled to community non-profit groups via the Department of Housing and Urban Development to boost refinancing programs to help homeowners prevent foreclosures.

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These funds, Schumer said, placed in the hands of community groups that specialize in foreclosure prevention "will not only help hundreds of thousands of families save their homes, but it will save billions in spillover foreclosure costs. This seems like a cost-effective investment to me, and one that will help restore confidence in our shaky housing market."

Schumer said that acting to prevent what he expected to be large numbers of foreclosures over the next two years is not only important from the perspective of protecting homeowners and communities, "but it also makes good economic sense. Foreclosures can cost up to $80,000 for all stakeholders-homeowners, neighbors, cities and local governments, lenders, and loan servicers.

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The rising wave of subprime foreclosures has caused existing programs to become overwhelmed by requests for assistance, and they are struggling to give homeowners in trouble the assistance they require in order to successfully workout a suitable payment plan with the lenders."

Also on Thursday the Federal Reserve Board announced that it will hold a public hearing on June 14 to gather information on how it might use its authority to curb abusive lending practices in the home mortgage market.

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The three senators said that, to encourage the private sector including those banks and mortgage lenders that have the most to lose from foreclosures, they had just sent letters to individual financial institutions, the American Bankers Association and other groups encouraging them to partner with the federal government to create a similar home retention fund by matching federal funds at a minimum of $2 to $1.

A second part of the proposed legislation is designed to "seal the cracks in our regulatory system to prevent future widespread lending abuses." The bill seeks to regulate mortgage brokers and lenders under the Truth in Lending Act. Among the proposals is a standard for originators to assess a borrower's ability to repay a mortgage and holds lenders responsible for brokers and appraisers.

"The goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation," said Federal Reserve Board Governor Randall S. Kroszner, who will chair the hearing. "We want to encourage, not limit, mortgage lending by responsible lenders, so it is crucial that any actions the Board might take are well calibrated and do not have unintended consequences."

And finally, on Wednesday General Motors Acceptance Corporation (GMAC) posted a first-quarter loss as the company took charges at its housing finance unit. GMAC, a former wholly owned subsidiary of General Motors (which still holds a 49 percent stake) took a net loss of $305 million.

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GMAC's mortgage unit ResCap had a quarterly loss of $910 million which effectively swamped net proceeds from the company's insurance and auto financing divisions which totaled $605 million. One year earlier GMAC posted a profit of $495 million.

GMAC has sold off some of its subprime mortgages at a loss, marked down its remaining portfolio and is curtailing new loans to non-prime customers, reducing its subprime lending to 1/3 the volume of one year ago and increasing its reserves to accommodate higher delinquencies.

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