Saturday, December 31, 2011

The Economy Stokes Further Optimism

                                           ⇒ Optimism Despite Media Headlines
                                           ⇒ Payroll Tax Cut Compromise -- FHA Costs To Rise
                                           ⇒ FHA Extends Flipping Waiver
                                           ⇒ Freddie Mac 2012 Forecast
                                           ⇒ Business Planning 2012

With the European debt crisis hanging over the markets, our politicians continuing to act like children and now the markets worrying about the regime change in North Korea, there seems to be no end to the scary headlines. Even if the news is not scary, the media is pumping up bad news. For example, last week the National Association of Realtors adjusted home sales down for the past five years because they did not present accurate numbers. The headline? The recession caused worse real estate sales than we thought. The media seems to have lost the fact that existing home sales rose last month. New home sales were also surprisingly stronger, especially in the multi-family sector. Finally, real estate inventory is significantly lower than it was 12 months ago.
           Through all of these negative headlines, the economic news is actually brightening our horizon. We had previously mentioned the precipitous drop in first time unemployment claims which is stoking optimism regarding possible future employment gains. Here is the point. The recovery is moving forward while worries overseas and in Washington are dampening our "public" enthusiasm. For example, the stock market has rallied significantly from the lows of October but despite this rally, interest rates are still at their historic lows and gas prices have not risen in the past several months. If the crisis in Europe were resolved and politicians were being cooperative, rates and gas prices would be going up based upon the positive economic news. We don't really care what the media "headlines" say. We care that these economic reports prod businesses to use some of the cash they aresitting on to pick up the pace of hiring. This is what we need for our current economic situation to continue to get better into the first quarter.
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          Fixed rate loans set record lows again last week. Freddie Mac announced that for the week ending December 22, 30-year fixed rates averaged 3.91%, down from 3.94% the previous week. The average for 15-year loans were stable at 3.21%. Adjustable rates were also down, with the average for one-year adjustables decreasing to 2.77% and five-year adjustables decreasing slightly to 2.85%. A year ago 30-year fixed rates were at 4.81%, almost a full percent higher from this week. Attributed to Frank Nothaft, Vice President and Chief Economist, Freddie Mac, "Rates on 30-year fixed loans have been at or below 4 percent for the last eight weeks and now are almost 0.9 percentage points below where they were at the beginning of the year, which means that today's homebuyers are paying over $1,200 less per year on a $200,000 loan. This greater affordability helped push existing home saleshigher for the second consecutive month in November to an annualized pace of 4.42 million, the most since January. In addition, new construction of one-family homes also showed a back-to-back monthly gain in November to the largest increase since June. Moreover, homebuilder confidence in December rose to its highest reading since May 2010 according to the NAHB/WF Housing Market Index." Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
           Updated December 23, 2011


December 22


6-month Treasury Security



1-year Treasury Security



3-year Treasury Security



5-year Treasury Security



10-year Treasury Security



12-month LIBOR

0.993% (Nov)

12-month MTA

0.196% (Nov)

11th District Cost of Funds

1.218% (Oct)

Prime Rate


Since home sales are picking up, is there any chance that home prices will start to recovery? Jaime from Colorado
           Jaime, I am very optimistic about the pace of home sales picking up next year. The improving economy will have more people shopping. And they will like what they see because I see banks letting go of more of the shadow inventory. If banks are convinced that the homes will sell, the increased REO sales alone will give us a healthy boast in home sales. That is the good news. The bad news is that REO sales actually hurt home prices. Therefore, while it does not mean that home prices will continue to slip, I don't see any upward pressure in home prices until the shadow inventory gets down to a manageable level. Many are predicting that to take years, however, if the economy improves I believe the absorption can take place more quickly than anyone can imagine.
           Right now we have 1.6 million in inventory and more on the way, according to Core Logic. Existing home sales are now in the range of 4.5 million annually and, depending upon who you believe, 1/3 to 1/2 of all sales are REO or short sales. That means we are absorbing almost 2 million problem properties per year. A 20% pick-up in home sales next year would absorb another 500,000. Another way of looking at it, we are now at 5 months time to clear the shadow inventory and were at 7 months a year ago. If we drop to 2-3 months by October 2012 that is pretty close to the "healthy average" of one month. Bottom line, I don't think home prices will go up next year, but if they can hold their own while we absorb 2.5 million REO units AND the economy gets better, slowing down the pipeline, that will set the stage for the next up cycle.

Breaking News:  Consumers soon will be paying more for government-backed home loans now that the House and Senate have reached a deal to extend a payroll tax break for two months.  The bill (H.R. 3630) pays for the payroll measure by hiking guarantee fees on Fannie Mae and Freddie Mac loans by 10 basis points. Lenders will pay the extra points but, more than likely, will past the cost onto borrowers. After a bitter fight over the two-month extension, congressional leaders reached a deal late Thursday. They will return to Washington in January to hammer out a full-year extension. Industry leaders are hoping lawmakers will look elsewhere for revenues to fund the next extension. H.R. 3630 also increases annual premiums on Federal Housing Administration single-family loans by 10 bps.  This corresponding hike is designedto ensure that FHA goes not gain a competitive advantage and increase its market share via the GSEs. Industry leaders were relieved to learn that the higher premiums will be used to bolster the FHA's undercapitalized mortgage insurance fund and will not be diverted to pay for other government programs or tax breaks. In addition, FHA can phase-in the 10 bp annual premium increase over two years. The agency currently charges a 115 bp annual premium. Source: National Mortgage News
           In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity, Acting Federal Housing Administration (FHA) Commissioner Carol J. Galante will extend FHA’s temporary waiver of the anti-flipping regulations. With certain exceptions, FHA regulations prohibit insuring a loan on a home owned by the seller for less than 90 days.  In 2010, FHA temporarily waived this regulation through January 31, 2011, and later extended that waiver through the remainder of 2011. The new extension will permit buyers to continue to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. It will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities. The extension iseffective through December 31, 2012, unless otherwise extended or withdrawn by FHA.  All other terms of the existing Waiver will remain the same.  The Waiver contains strict conditions and guidelines to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers.  The Waiver continues to be limited to sales meeting the following conditions:
            All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
            In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the Waiver will only apply if the lender meets specific conditions and documents the justification for the increase in value.
            The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.  Source: FHA
           Freddie Mac issued Bulletin No. 2011-25. These guideline changes at the Federal Home Loan Mortgage Corp. favorably impact cashout refinances for borrowers who didn't use a home loan to purchase the property. The secondary lender additionally updated its appraisal requirements. Approved Freddie Mac sellers were advised of new cashout guidelines for properties that were recently acquired for cash. The company also revised its underwriting guide for manufactured housing refinances. A cashout will be allowed on some properties that were purchased for cash less than six months. But the underlying purchase transaction and the cashout refinance will be subject to specific requirements. Freddie has clarified when loans to pay off land contracts are considered purchase or refinances. Updates were made to Sections 23.7, Land Contract; Contract for Deed, 24.5, Requirements for "NoCash-Out" Refinance Loans, and H33.3, General Eligibility Requirements. Sellers are now required to utilize Guide Form 1032, One-Unit Residential Appraisal Field Review Report, or Form 1072, Two-to Four-Unit Residential Appraisal Field Review Report, when obtaining an appraisal field review report. On appraisal updates, sellers now need to use Form 442, Appraisal Update and/or Completion Report. When a seller determines that the opinions of market value from multiple reports are equally accurate and well-supported, then the lower value needs to be used in the loan underwriting. Freddie reminded sellers that they need to address rescinded MI coverage immediately and could be required to repurchase loans that lose coverage. Source: MortgageDaily
           The Federal Housing Finance Agency will play a key role in shrinking the backlog of homes now in foreclosure, since Fannie Mae and Freddie Mac own half of all distressed loans, Fitch says in a research note. The glut of real estate-owned property held by banks and the government has hit a "staggering" 2.2 million units, and disposing of them and expediting the foreclosure process over the next two years is crucial to economic recovery. Fitch expects the FHFA to devise a plan to sell REOs at a measured pace, including in bulk to investors who would rent them out until the housing market rebounds. Source: American Banker
           Freddie Mac released its U.S. Economic and Housing Market Outlook with five projections for 2012. Frank Nothaft, Freddie Mac's vice president and chief economist, said there are indications that the economy and housing market are slowly gaining ground. "Sustained and increased job growth beyond the average monthly payroll gains of 130,000 so far this year ending in November are essential," he said in a statement. Nothaft also expects rates to remain low through the middle of 2012, and for rentals to continuing leading housing market improvements. "All told, next year will be another bumpy ride," he said. Five outlook highlights:
            Economic growth will likely strengthen to about 2.5 percent in 2012.
            The U.S. unemployment rate will decline but likely remain above 8 percent.
            Rates will likely remain very low, at least through mid-2012.
            Housing activity will be better in 2012, but not robust.
            Expect less single-family originations but more multifamily lending in 2012.