Home Sales Going Up, but Prices Should Continue to Drop
By Brian Collins
Recent reports that home sales may have bottomed out appear to have stirred some optimism that the worst of the housing crisis could be over.
Unfortunately, house prices and loan performance are lagging indicators in a recovery — and this downturn has seen the biggest price drops and the worst loan performance since the Great Depression.
Historical patterns show that house prices will fall and defaults and foreclosures will continue to rise until there is an improvement in the job market. If the employment numbers start to increase in mid-2010, as many expect, the turnaround in prices and delinquency rates may not come until the first quarter of 2011.
Nevertheless, sales are expected to trend upward and that is an important development, according to David Berson, chief economist for the PMI Group Inc. in Walnut Creek, Calif. "It is the precursor to everything else improving. Sales had to go up first and that is happening now," Mr. Berson said.
The National Association of Realtors reported a 2.9% increase in existing home sales in April and the trade group is forecasting a major jump in sales during the last three quarters of this year. NAR economists expect home sales will rise to a 5.5 million seasonally adjusted annual rate in the fourth quarter, up 19% from the first quarter, as the $8,000 tax credit for first-time homebuyers boosts sales.
Federal Reserve Board chairman Ben Bernanke even told Congress that he is seeing "some signs of bottoming" in the housing market. And he expects overall economic activity to "bottom out, and then turn up later this year."
Despite the improvement in sales, the PMI chief economist says house prices will continue to fall this year. "It will go down 9% to 10% this year and it will be roughly flat next year," Mr. Berson said. "There are just too many homes for sale," he said, and too many vacant homes.
The PMI Group uses First American Loan Performance data in forecasting house prices, which shows prices have declined by 22% since the peak in the third quarter of 2006. From the first quarter of 2008 through the first quarter of 2009 prices have fallen 11.7%.
Meanwhile, the Census Bureau reported that only 345,000 full-time employees lost their jobs in May, compared 700,000 during the winter months. But the unemployment rate jumped to 9.4% from 8.9% in April.
"It is a good sign and it bolsters the argument that the housing market should bottom in terms of sales and perhaps in (housing) starts" possibly in June or July, according to Scott Anderson, senior economist at Wells Fargo & Co.However, the yield on the 10-year Treasury note has risen sharply in the past few weeks and the
Federal Reserve is struggling to keep mortgage rates low. The average rate on 30-year fixed-rate mortgages hit 5.59% during the week of June 12, according to Freddie Mac. This has already impacted refis. The Mortgage Bankers Association refinancing application index has plummeted to 2,600 from 6,800 on April 3.
"Just as we are hitting bottom in the housing market there is a lot of uncertainty about how strong the recovery will be," the Wells Fargo economist said. "The risk factor is mortgage rates," Mr. Anderson said, which could keep home sales stuck at "moribund levels."
His forecast calls for house prices to drop 5%-10% from April 1 through February 2010. He expects the unemployment rate will peak around 9.7% in the fourth quarter of 2009 or the first quarter of 2010 and remain at that level for most of the year. Defaults and foreclosures won't "top out until some time in 2010," Mr. Anderson said.
Meanwhile, declining house prices undermine homeowners' equity and make it difficult to modify mortgages, especially if the owner losses their job.
A Mortgage Bankers Association delinquency report shows there were 600,000 foreclosure starts in the first quarter. And foreclosure starts on prime loans jumped ahead of subprime loans for the first time this decade.
Defaults on prime loans are the "hardest to fix" because they mostly reflects the loss of a job or other life event, according to MBA chief economist Jay Brinkmann. "Since the mortgage performance lags improvement in the job market, that would put us to the end of 2010 or possibly the first quarter of 2011 before we see a nationwide improvement in the performance of mortgages," Mr. Brinkmann said.
He made his comments in releasing MBA's delinquency report, which shows the serious delinquency rate on all single-family loans (90 days or more past due or in foreclosure) hit an all-time high of 7.38% in the first quarter.
Showing posts with label default. Show all posts
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Friday, July 3, 2009
Monday, April 20, 2009
President Barack Obama's ambitious plan to rescue the housing market
At the heart of the President Barack Obama's ambitious plan to rescue the housing market is the conviction that restructuring distressed mortgages will keep struggling borrowers in their homes and help insert a floor beneath plummeting property values. With $75 billion dedicated to reworking troubled loans, that's a big bet—especially considering that a top banking regulator said last December that almost 53 percent of loans modified in the first quarter of 2008 went bad again within six months. But supporters argue that mortgage modifications need to be properly engineered to work—and many early ones weren't. To that end, the Obama administration on Wednesday unveiled fresh details on its plan to restructure at-risk loans and help as many as four million home owners avoid foreclosure. Here are seven things you need to know about Obama's loan modification program.
1. Payments, not prices: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans)," Buffett wrote. "Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay."
2. Thirty-one percent: To that end, the administration's plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower's gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower's monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that's not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that's still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. "For underwater loans, if you don't write down the balance to be less than the value of the house, people still have an incentive to default," Green says. "Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me."
3. Cash incentives: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.
4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower's credit report. In addition, the program is designed to target homeowners who are undergoing "serious hardships"—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. "If we would have had such stringent verification over the last four or five years, we probably wouldn't be in as bad a position as we are in," says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. "It's going to be a very time-consuming process," he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration's plan is out, lenders are free to begin modifying loans.
5. Net present value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn't. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan.
6. Second liensThe Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear.
7. Will it work? Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration's efforts to focus the initiative on primary residences, Moody notes that "it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan]," Moody says. Now that it's clear the Obama plan leaves speculators out, "we could actually see a spike in foreclosures or at least mortgage defaults among this group."
1. Payments, not prices: The plan centers on the belief that struggling borrowers will stay in their homes—even as values decline sharply—as long as they can make their monthly payments. Although not everyone agrees with this, billionaire investor Warren Buffett endorsed the philosophy in his most recent letter to shareholders. "Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans)," Buffett wrote. "Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay."
2. Thirty-one percent: To that end, the administration's plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower's gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower's monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that's not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that's still not enough, the servicer would forebear loan principal at no interest. The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, the director of the Lusk Center for Real Estate at USC, considers a shortcoming. "For underwater loans, if you don't write down the balance to be less than the value of the house, people still have an incentive to default," Green says. "Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me."
3. Cash incentives: To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.
4. Financial hardship: The Obama administration is pitching its plan as an effort to help responsible homeowners ensnared in the historic housing slump and painful recession—not speculators. As such, only owner-occupied, primary residences with outstanding principal balances of up to $729,750 are eligible. Occupancy status will be verified through documents, such as the borrower's credit report. In addition, the program is designed to target homeowners who are undergoing "serious hardships"—such as a loss of income—which have put them at risk of default. To participate, borrowers will have to sign an affidavit of financial hardship and verify their income with documents. "If we would have had such stringent verification over the last four or five years, we probably wouldn't be in as bad a position as we are in," says Richard Moody, the chief economist at Mission Residential. But while Moody has no objection to such verification, obtaining documents from so many homeowners could be an onerous effort. "It's going to be a very time-consuming process," he says. Only loans originated on or before Jan. 1, 2009, are eligible, and modified payments will remain in place for five years. Now that the administration's plan is out, lenders are free to begin modifying loans.
5. Net present value: To determine if a particular mortgage will be modified, the servicer will perform a so-called net present value test. The test compares the expected cash flow that the loan would generate if it is modified with the expected cash flow it would generate if it isn't. If the modified loan is expected to produce more cash flow for the mortgage holder, the servicer is to restructure the loan.
6. Second liensThe Obama plan also addresses the issue of second liens—such as home equity loans or home equity lines of credit—by offering incentives to extinguish them. But key details on this component of the plan remained unclear.
7. Will it work? Moody argues that while the plan may reduce foreclosures for primary residences, it could lead to a spike in defaults for another group of homeowners. Although he supports the administration's efforts to focus the initiative on primary residences, Moody notes that "it could be the case that a lot of [real estate speculators] have been just hanging on waiting to see exactly what the details are of this [plan]," Moody says. Now that it's clear the Obama plan leaves speculators out, "we could actually see a spike in foreclosures or at least mortgage defaults among this group."
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