Mortgage News

There was more good news from the National Association of Realtors® (NAR) on Wednesday as they reported that the sales of existing homes rose in January, marking three months out of the last four where sales improved.  Inventories of homes for sale were also improved and NAR disputed the need for a program to rent foreclosed properties

Total sales of existing homes including single family houses, condominiums, and cooperative apartments, increased 4.3 percent to an annual, seasonally adjusted rate of 4.57 million units during the month compared to a downward revised rate of 4.38 million in December and are 0.7 percent above what NAR described as a "spike" in the rate in January 2011.  December 2011 sales were originally estimated at a rate of 4.61 million.

The median price of all property types was $154,700 in January, an annual decrease of 2.0 percent.  Foreclosed properties accounted for 22 percent of all sales and short sales for 13 percent.  The total distressed sales were down 3 percentage points from the 35 percent reported in December and 5 percentage points lower than those sales one year earlier.  

Sales of existing single-family homes rose 3.8 percent to 4.05 million from 3.90 million in December and are 2.3 percent higher than the 3.96 million pace in January 2010.  The median price of a single-family home was $154,400 in January, down 2.6 percent from a year earlier.

Click Here to View the Existing Homes Sales Chart

Condominium and co-op sales jumped 8.3 percent to 520,000 from 480,000 in December but remained10.3 percent below the 580,000-unit level in January 2011.The median existing condo price was $156,600, up 2.0 percent from the year before.

Total housing inventory at the end of January fell 0.4 percent to 2.31 million existing homes available for sale, which represents a 6.1-month supply at the current sales pace, down from a 6.4-month supply in December.  Total unsold listed inventory has trended down from a record 4.04 million in July 2007, and is 20.6 percent below a year ago. 

Lawrence Yun, NAR chief economist, said strong gains in contract activity in recent months show buyers are responding to very favorable market conditions.  "The uptrend in home sales is in line with all of the underlying fundamentals - pent-up household formation, record-low mortgage interest rates, bargain home prices, sustained job creation and rising rents."

 "The broad inventory condition can be described as moving into a rough balance, not favoring buyers or sellers," he said.  "Foreclosure sales are moving swiftly with ready home buyers and investors competing in nearly all markets.  A government proposal to turn bank-owned properties into rentals on a large scale does not appear to be needed at this time."

All-cash sales were unchanged at 31 percent in January; they were 32 percent in January 2011.  Investors, who account for the bulk of cash transactions, purchased 23 percent of all homes in January compared to 21 percent in December but unchanged from a year earlier.  First-time buyers accounted for 33 percent of sales in January compared to 31 percent in December and 29 percent in January 2011.

Forty-seven percent of NAR members report that contracts settled on time in January; 21 percent had delays and 33 percent experienced contract failures.  Contract cancellations are unchanged from December but were only 9 percent in January 2011; they are caused largely by declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price.

Sales were up in every region but prices were down.  In the Northeast existing home sales were up 3.4 percent month-over-month and 7.1 percent year-over-year to an annual rate of 600,000 but the median price of $225,700 was 4.2 percent lower than a year earlier.

Sales in the Midwest were at a pace of 980,000, 1.0 percent higher than December and 3.2 percent higher than one year earlier but the median price declined 3.9 percent to $122,000.

In the South, sales rose 3.5 percent from December to 1.76 million in January but are unchanged from a year ago while the median price declined a slight 0.3 percent to $134,800 on an annual basis.

Existing-home sales took a healthy 8.8 percent month-over-month jump in the West to a 1.23 million annual pace but are 3.1 percent below a spike in January 2011.  The median price in the West was $187,100, down 1.8 percent from a year ago.

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For the second time in just under a month the Mortgage Electronic Registration System (MERS) has won a significant court victory.  The company which serves as registration agent for major mortgage lenders is currently involved in multiple lawsuits throughout the country.   It prevailed in one of these suits, a case filed the U.S. Court for the Western District of Kentucky on Tuesday when Christian County Clerk, by and through its County Clerk, Michael Kem; et al. v MERS; et al. was dismissed with prejudice.

The county clerks had sued MERS and a group of MERS members under provisions of the Kentucky laws regarding the recording of deeds. The Plaintiffs asserted, on behalf of all of the state's County Clerks that MERS had violated the statutes in order to avoid recording mortgages and paying the associated fees. 

The Court found that the Clerks lacked standing to bring the suit.  The judge held that the persons intended to be protected by Kentucky's land record system were "existing lienholders seeking to give notice of their secured status, prospective purchasers and creditors seeking information about prior liens, and owners of property seeking release of liens once debts are paid off."

The Court also said that there was nothing in the statute that would indicate it was designed to be enforced by a county clerk, saying that had "the General Assembly wanted to allow country clerks to file lawsuits regarding recording fees, it certainly knew how to do so."

On January 24 the U.S. Court of Appeals for the 11^th Judicial Circuit handed down a more far-reaching decision upholding MERS rights to foreclose on a property as a nominee and to foreclose on a mortgage that had been physically separated from the note. 

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Both before and after they were placed into conservatorship the two government sponsored enterprises Fannie Mae and Freddie Mac (the Enterprises) spent large amounts of money to defend themselves and former senior executives in class action lawsuits and other legal matters.  For example, in cases arising out of alleged accounting malpractices in the 2004 to 2006 period, Fannie Mae has advanced $99.4 million for the legal defense of three of its former senior executives.  Furthermore, $37 million of those funds have been advanced since the conservatorship began and hence were taxpayer funds and Freddie Mac has paid $10.2 million in legal defense costs for former senior executives since it was placed in conservatorship.  In both post-conservator instances the Federal Housing Finance Administration (FHFA), the Enterprises' conservator, has approved the expenditures.

The legal fees are mandated by indemnification agreements which were part of the former executives' employment compensation packages.  Under these agreements the Enterprises are obligated to pay all liabilities and expenses of their officers and directors including legal expenses that are incurred during their employment provided the officers were acting within the scope of their authority.  As this can only be determined after the proceedings have ended the legal fees are only advances and are subject to requests for repayment.  In the case of such large advances, however, it improbable that repayment could or would be made.

FHFA has defended its approval of advances on several grounds. 

• Paying defense costs reduces the likelihood of a successful claim against the Enterprises that would have to be borne by taxpayers. 
• The protection provided by the indemnification agreements and FHFA's adherence to them is a valuable tool for recruiting new personnel and keeping existing staff.   
• These indemnification agreements have been written so as to contractually obligate the Enterprises and, in the case of the three Fannie Mae officers who settled the cases that led to the lawsuits, they did so without admissions of guilt or findings of liability so are entitled to receive the advances of legal fees until a finding that their conduct disqualifies them.

The FHFA Office of Inspector General (OIG) recently evaluated FHFA's oversight of these payments.  FHFA, the OIG said, confronts a challenging balance of interests.  It wants to avoid potential losses by defending ongoing lawsuits against the Enterprises while at the same time controlling costs.  OIG said that while the agency available tools are limited, it can and should do more to limit and control legal expenses.

FHFA was authorized to reject or repudiate contracts within a reasonable period, but made the determination at the inception of the conservatorship not to do so and has not revisited the decision.   With the passage of time this option may no longer be available and might subject the agency to additional costs if former officers brought suit challenging such repudiation.

FHFA may possess the ability to limit future indemnification agreements by capping total or specific payments at pre-determined amounts, using preferred providers who agree to limit costs, pre-approving payments, electing to settle FHFA enforcement proceedings only if the officer or director admits to liability, and modifying future indemnification agreements to permit denying indemnification in situations that fall short of final court adjudications.

Obviously none of these proscriptive solutions affect on-going litigation.  However, on June 20, 2011, FHFA issued a final rule that provides that claims by shareholders will receive the lowest priority in a receivership behind administrative expenses of the receiver or an immediately preceding conservator, other general or senior liability of the regulated entity, and obligations subordinated to those of general creditors.  It also provides that FHFA will not pay securities litigation claims against a regulated entity during conservatorship unless the FHFA Director determines it to be in the best interest of the conservatorship. 

FHFA unsuccessfully invoked this regulation in a pending class action suit against Fannie Mae in the District of Colombia and the decision is being litigated.  If the regulation survives, it would mean that should the plaintiffs obtain judgment, in any reorganization including receivership that judgment would be subordinated to all other claims by other creditors.  This is especially significant as it is unlikely that the Enterprises will ever earn enough to repay current debts including the $183 billion owed to the Treasury, let alone future obligations. 

"Accordingly, if the Enterprises are unable to make any payments with respect to legacy securities claims, there would appear to be little value in having them continue to participate in ongoing litigation."

As was stated above, however, this cannot be a definitive answer until the legal challenges involving the regulation are settled and the regulation itself does not necessarily absolve the Enterprises of the obligation to provide indemnification. 

The Enterprises have adopted various cost containment measures relative to the current litigation and OIG said that these have resulted in cost savings but FHFA has not independently evaluated them.  FHFA-OIG believes that, given the significant amounts of taxpayer money involved and the issue's high visibility, FHFA must continue to scrutinize intensively the Enterprises' advances in order to limit costs.

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Mortgage applications decreased during the week ended February 17 according to the Weekly Mortgage Applications Survey released this morning by the Mortgage Bankers Association (MBA),   The Market Composite Index measuring the volume of applications decreased 4.5 percent on a seasonally adjusted basis and 3.6 percent unadjusted from the week ended February 10.

The Refinancing Index declined 4.8 percent while the volume of applications for home purchases decreased 2.9 percent on a seasonal adjusted basis.  The unadjusted Purchase Index was 1.4 percent lower than the week before and down 9.2 percent from the same week in 2011.  Applications for refinancing composed 80.1 percent of all applications compared to 81.1 percent the previous week.

The four week moving average of the seasonally adjusted Market Composite Index slipped by 0.30 percent, and the moving average for the seasonally adjusted Purchase Index was down 3.1 percent.  The moving average of the Refinance Index rose 0.33 percent. 

 

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

 

The average contract interest rate for conforming (balances under $417,500) 30-year fixed-rate mortgages (FRM) increased one basis point to 4.09 percent with points increasing from 0.51 to 0.53 point.  The effective rate also increased from the previous week.  Rates for jumbo 30-year mortgages with balances over $417,500 averaged 4.32 percent with 0.42 point compared to 4.30 percent with 0.44 point a week before. The effective rate decreased.  FHA-backed 30-year FRM rates were unchanged at 3.87 percent with points dropping from 0.78 to 0.41.  The effective rate decreased.

Average rates for 15-year FRM increased to 3.38 percent with 0.37 point from 3.33 percent with 0.40 point and the effective rate also increased.

Rates for hybrid 5/1 adjustable rate mortgages (ARMs) increased one basis point to 2.94 percent and points increased to 0.44 from 0.42.  The effective rate also increased.  Applications for ARMs as a share of all mortgage applications declined slightly from 5.4 percent to 5.3 percent.

The preceding rate information is for 80 percent loan-to-value mortgages and points quoted include the origination fee.

During the month of January 57.2 percent of applications for refinancing were for 30-year FRM mortgages, 24.4 percent were for 15 year FRM and 5.5 percent were seeking ARMS.  The percentage of applications in all three categories increased from December figures.  Applications for mortgages with amortization schedules other than 30-year or 15-year terms constituted 12.9 percent of refinance applications, lower than in December.

MBA's weekly survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990.  Respondents include mortgage bankers, commercial banks and thrifts.  Base period and value for all indexes is March 16, 1990=100.

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The Federal Housing Finance Agency (FHFA) said Tuesday that, with its conservatorship of Fannie Mae and Freddie Mac (the Enterprises) now in operation for more than three years "and no near-term resolution in sight," it was time to assess its goals and directions.  In a letter submitted to the chairs and ranking members of the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, Acting FHFA Director Edward J. DeMarco set out a Strategic Plan for Fannie Mae and Freddie Mac Conservatorships with three goals:

1. Build a new infrastructure for the secondary mortgage market;
2. Gradually contract the Enterprises' dominant presence in the marketplace while simplifying and shrinking their operations;
3. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

DeMarco said in moving forward FHFA has to consider that:

• The Enterprises' losses are of such magnitude that they will not be able to repay taxpayers in any foreseeable scenario;
• The operational infrastructures of each are working but require substantial investment to support future business which presents an issue of whether to rebuild or start anew;
• Minimizing taxpayer losses, ensuring market liquidity and stability requires preserving the Enterprises as working entities but this requires some things such as retaining private sector pay comparability that have generated concern because of taxpayer involvement;
• Although the housing finance system cannot be called healthy it is stable and functioning, albeit with substantial government support;
• Congress and the Administration have not reached consensus on how to resolve the conservators and define a path forward.

The absence of any existing meaningful secondary mortgage market mechanisms beyond the Enterprises and Ginnie Mae is a dilemma for policymakers who want to replace them and was a key motivation for conservatorship in the first place.  The elements for rebuilding the system are already known and work can begin without knowing whether there will be a government guarantee other than through FHA.  A secondary market structure without the Enterprises would likely include:

• A framework to connect capital markets to investors to homeowners - i.e. a securitization platform that bundles mortgages and provides support to process and track payments from borrowers through to investors.
• A standardized pooling and servicing agreement that corrects the many shortcomings in the agreements used in the private-label mortgage-backed securities (MBS) market pre-housing crisis.
• Transparent servicing requirements that set forth servicers responsibilities to investors and borrowers.
• A servicing compensation structure that promotes competition rather than concentration of servicing, takes into account servicers' costs and requirements, and considers the appropriate interaction between origination and servicing revenue;
• Detailed, timely and reliable loan-level data for investors that is maintained through the life of the MBS.
• A sound, efficient system for document custody and electronic registration that respects local property laws and enhances the liquidity of mortgages.
• An open architecture for all these elements to facilitate entry to and exit from the marketplace and an ability to adapt to emerging technologies and legal requirements over time.

Since entering conservatorship the Enterprises have guaranteed roughly 75 percent of the mortgages originated in the U.S. with FHA guaranteeing most of the rest.  Shifting mortgage credit risk away from the Enterprises to private investors could be accomplished in several ways.  The following are either under consideration or actively being implemented.

• Increase guarantee fee pricing. In September, 2011 FHFA announced its intention to continue a path of gradual prices increases based on risk and the cost of capital. In December Congress directed it to increase guarantee fees by at least 10 basis points as part of the revenue raising aspects of the Temporary Payroll Tax Cut Continuation Act and Congress also encouraged FHFA to require guarantee fee changes that reduce cross-subsidization of relatively risky loans and eliminate differences in fees across lenders not clearly based on cost or risk.
• Various approaches, including senior-subordinated security structures that could result in private investors bearing some or all of the credit risk.
• Expand reliance on mortgage insurance through deeper mortgage insurance coverage on individual loans or through pool-level insurance policies that would insure a portion of the credit risk currently retained by the Enterprises.

The Enterprises do not dominate the multi-family credit guarantee business and approach it very differently from their single-family business.  For a significant portion, Fannie Mae shares risk with loan originations and for a significant and growing part Freddie Mac shares credit risk with investors through securities.  Given these conditions, generating potential value for taxpayers and contracting the multifamily market footprint should be approached differently and each Enterprise will undertake a market analysis of its operations.

Capital market activities have long been considered the Enterprises' source of greatest profits, controversy, and risk.  These have been used to fund the retained portfolios and is a complex business activity requiring specialized and expert risk managers.  This business line is already on a gradual wind-down path with the Treasuring requiring a 10 percent reduction in the retained portfolio each year.  New mortgages are primarily delinquent ones removed from MBS and other legacy assets have little liquidity.  Over time the retained portfolios are becoming smaller but also less liquid. 

Maximizing taxpayer value on these assets is a key consideration and there is argument for holding some for a longer period.  This in turn requires management, either by retaining in-house expertise or by contracting to a third party.  The first is less disruptive but requires human capital risk which increases with the proposed legislation on Enterprise compensation.  The second would hasten the shrinkage in Enterprise personnel but would be more costly and would pose new control and oversight issues for FHFA.

The third strategic goal is maintaining foreclosure prevention efforts and credit availability.  The Enterprises must continue and enhance:

• Successful implementation of the Home Affordable Refinance Program (HARP) along with the program changes announced last October.
• Continued implementation of the Servicing Alignment Initiative including its approach to loss mitigation through loan modifications and early outreach to distressed borrowers;
• Renewed focus on short sales, deeds-in-lieu, and deeds-for-lease options;
• Further development and implementation of the REO disposition initiatives announced by FHFA last year including efforts to convert properties into rental units.

The Enterprises almost need to resolve other long-standing concerns in the marketplace that may be suppressing a more robust recovery and limited credit.  One major issue is concerns over representations and warrantees.  These policies must be made more transparent and conditions for their implementation defined.

In accomplishing the three goals, there must be consideration of human capital as well.  The boards and executives responsible for the business decisions that led to conservatorship are long gone and shareholders of the Enterprises have effectively lost their investments. The public interest is best served by ensuring that the Enterprises have the best possible leaders to carry out the work and a search is underway for new CEOs for each company and other executives willing to take on the necessary challenges in the face of ongoing criticism of the companies and uncertain legislative environment.  FHFA and the Enterprise boards have taken seriously the Congressional criticism of compensation structure and are working to create new ones that will be all salary with the largest portion deferred and at-risk.

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In its Monthly Mortgage Monitor Report Lender Processing Services (LPS) will report that the national delinquency rate, loans that are 30 days or more late, but not in foreclosure, decreased 2.2 percent in January to 7.97 percent.  This is a drop of 10.5 percent from the rate in January 2011.  The total number of loans in the 30+ day delinquent category nationwide is 3,998,000.  Of those loans a total of 1,772,000 are seriously delinquent, that is 90+ days overdue but not yet in foreclosure.

The foreclosure inventory, loans that are in the process of foreclosure continues, to rise and is 1.1 percent higher than in December at 4.15 percent.  This is 1 basis point below where it was one year earlier.  Loans in foreclosure now number 2,084,000.

The total of mortgage loans that are at least one payment overdue stands at 6,082,000; 15.2 percent of the total LPS data base of 40 million loans.

The states with the highest rate of non-current loans are Florida, Mississippi, Nevada, New Jersey, and Illinois.  

The Monthly Mortgage Monitor Report will be published in its entirety on March 6.

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After four straight months of increases The S&P/Experian Consumer Credit Default Indices fell in January as did the four loans types that make up the composite.  The Default Index dropped from 2.24 percent in December to 2.16 percent in January.  In January 2011 the index was at 2.90 percent. 

Much of the decrease among the component indices was from the first mortgage component which dropped from 2.19 percent in December to 2.08 percent in January and was down significantly from the 2.86 percent level of one year earlier.  The default rate for second mortgages decreased from 1.33 percent to 1.30 percent and bank cards from 4.60 percent to 4.57 percent; those rates were 1.51 percent and 6.13 percent respectively in January, 2011.  Auto loans were unchanged at 1.27 percent but down from 1.58 percent one year earlier.

David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P indicates said "As we begin the New Year, consumer default rates may be resuming the two-year downward trend that was interrupted in the middle of last year.  Last month we reported that the second half of 2011 saw a modest increase in consumer defaults led by four consecutive monthly increases in first mortgage defaults.  While one month of data is not a new trend, January's report shows broad based declines in default rates, which is a bit of a relief."

The Default Indices cover five cities, three of which had lower rates in January.  Los Angeles fell from 2.54 percent to 2.36 percent, Chicago dropped from 2.84 percent to 2.76 percent, and Dallas from 1.56 percent from 1.53 percent.  The rate in Miami rose for the third consecutive month and is now at 4.80 compared to 4.73 percent in December and New York increased ten basis points to 2.23 percent.

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While housing is more affordable than ever for most U.S. families, the lack of financing available to them continues to constrain prospective homebuyers according to the most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) released on Thursday.   The Index indicates that 75.9 percent of all new and existing homes sold in the fourth quarter were within the financial reach of families earning the national median income of $64,200.  This is the highest number for the affordability index in its 20 year history.

HOI measures the percentage of homes sold in a given area that could be purchased by households earning that area's median income at current mortgage interest rates and assuming a 20 percent down payment. 

"While today's report indicates that homeownership is within reach of more households than it has been for more than two decades, overly restrictive lending conditions confronting home buyers and builders remain significant obstacles to many potential homes sales, even with interest rates at historically low levels," said Barry Rutenberg, chairman of NAHB.

The metropolitan area encompassing Youngstown Ohio and Boardman, Pennsylvania was the most affordable major housing market in the country with 95.1 percent of all homes sold during the quarter affordable under the NAHB definition.  The area's median income is $54,900.  Other major MSAs ranking at the top in affordability are Lakeland-Winter Haven, Florida; Modesto, California; Harrisburg-Carlisle, Pennsylvania; and Toledo, Ohio.

The most affordable small housing market was Kokomo, Indiana where 99.2 percent of homes were affordable to families earning the median income of $59,100. Other smaller housing markets at the top of the index included Fairbanks, Alaska; Cumberland, Maryland; Lima, Ohio; and Rockford, Illinois.

Only 29.0 percent of homes in the New York-White Plain area were affordable to those with the area's median income of $67,400.  This was the 15^th consecutive quarter that this MSA ranked last in affordability.  Other major metro area at the bottom of the affordability index included Honolulu and three California MSAs, San Francisco-San Mateo-Redwood City; Santa Ana-Anaheim-Irvine; and Los Angeles-Long Beach-Glendale.

The least affordable small market was Ocean City, New Jersey where, with a median income of $70,100 only 47.5 percent of homes were deemed affordable.  It was followed by Laredo, Texas, San Luis Obispo-Paso Robles, and Santa Cruz-Watsonville, California; and Brownsville-Harlingen, Texas.

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A lawsuit filed against CITIMORTGAGE, INC, a subsidiary of CITIBANK, N.A. was filed in the U.S. District Court for Manhattan on Wednesday and simultaneously settled for $158.3 million.  The suit, brought by the U.S. Attorney that District on behalf of the Department of Housing and Urban Development (HUD), charged the company, a participant in the Direct Endorsement Lender program administered by the FHA, had engaged in risky lending which had caused HUD, FHA's parent, to incur losses on certain loans that the bank should never have originated. 

In the settlement CITIMORTGAGE "admits, acknowledges, and accepts responsibility" for certain conduct alleged in the Complaint including failing to comply with all HUD-FHA requirements with respect to certain loans and submitting certifications to the agency that these loans were eligible for FHA mortgage insurance "when in fact they were not."

One example from the Complaint alleges that the defendant's business units routinely interfered with and exerted pressure on its quality control personnel to improperly reduce the quantity and severity of defects it reported.  Among other things, the business units were instructed to apply "brute force" to pressure quality control personal to reduce or downgrade their findings of defects and to challenge all adverse findings by QC in an effort to drive down defect rates.  This failure to maintain a compliant QC program allowed widespread underwriting deficiencies to continue unabated.

The Complaint alleges that, since 2004 more than 30 percent of loans originated or underwritten by CITIMORTGAGES have gone into default, soaring to more than 47 percent for loans originated in 2006 and 2007.  This resulted in HUD having to pay millions of dollars in FHA insurance claims.

Manhattan U.S. Attorney Preet Bharara stated:  "For far too long, lenders treated HUD's insurance of their mortgages like they were playing with house money.  In fact, they were playing with other people's money and other people's homes.  CITIMORTGAGE is the latest in a series of cases this office has filed against lenders who flouted HUD requirements for making government-backed loans.   We are pleased that, with today's settlement, CITIMORTGAGE has accepted responsibility for its conduct and agreed to pay damages in an amount that will significantly compensate HUD in this case for losses to the FHA insurance fund." 

In filing its Complaint, the Government joined a private whistleblower lawsuit that had been filed against CITIMORTGAGE under the False Claims Act in August of last year.  The $158.3 million CITIMORTGAGE has agree to pay to settle this suit is in addition to the amounts its parent company has agreed to make in connection with the $25 billion mortgage servicing settlement announced earlier this month

The settlement was approved by U.S. District Court Judge Victor Marrero.

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At a press conference accompanying release of the results from its Fourth Quarter 2011 National Delinquency Study (NDS), the Mortgage Banker Association's (MBA) Chief Economist and Senior Vice President for Research and Education Jay Brinkmann said he is frequently asked how long it might be before delinquencies and foreclosures return to "normal."  He said he typically answers that "we are about halfway there." 

Delinquencies during "normal" times averaged around 5 percent but spiked to 10.1 during the recession.  Now the rate is at 7.6, half-way there.  Foreclosure starts generally run around 0.40 percent but hit 1.41 percent in 2009 and are now just below 1percent; almost halfway there.  Foreclosures however are not halfway there.  They were running around 1 percent pre-recession and rose to over 4.5 percent at the peak.  They are now only slightly below 4.5 percent.

The real question, he said, was where we will end up; what will be the new normal?  The new parameters for lending are promising with lower housing prices, and tighter lending standards but the economy may be growing more slowly so a 5 percent delinquency rate might not be the new normal.

Brinkmann pointed to improvements in most of the measures of foreclosure activity.  The only increase in the third quarter was in early delinquencies, i.e. 30 to 60 days, which were up 3 percent from the third quarter to the fourth, probably due to seasonal issues such as the holidays and the beginning of the heating season. 

The rate of 60+ day delinquencies was down 5 percent from Quarter 3 and 10 percent from Q4, 2010 and loans in the 90+ bucket decreased by 39 percent from the previous quarter and 54 percent year-over-year.  Foreclosure starts were down 9 percent and 28 percent over the two earlier periods and the foreclosure inventory declined by 5 percent and 26 percent.

The improvement in delinquencies cuts across all types of loans except those backed by FHA and is particularly evident among those loan products which have been most problematic.  Subprime ARMs now have a delinquency rate of 22.4, an improvement of 267 percent since the third quarter and subprime fixed-rate loans are down 157 percent to 19.67 percent.  Prime ARMs improved by 151 percent to 9.22 percent and Prime fixed-rate loans were at 4.12 percent, down 20 percent from the previous quarter.  FHA loans had an increase in delinquencies of 27 percent, mostly early stage delinquencies and Brinkmann expanded on this later in the press conference.

In most recessions foreclosure statistics mimic unemployment figures, however in the current downturn the problems in housing began before unemployment started to rise, peaked at about the same time, and now appears to be clearing more quickly.  Foreclosures are not echoing this trend either.

Mike Fratantoni, MBA's Vice President for Research and Economics said that the aggregate statistics on foreclosures are covering two very different stories.  Nationwide, slightly more than 40 percent of all mortgage loans serviced are in states primarily using judicial foreclosure processes.  Even in the best of times those 22 or 23 states are disproportionately represented by the number of loans in foreclosure - in early 2008 that share was 47.9 percent and today it is 62.5 percent.

However, the rate at which foreclosures are initiated in judicial states deviates hardly at all from states in non-judicial states; it is the timelines to complete those foreclosures that are causing rising foreclosure inventories in judicial states.  The difference in the backlog of foreclosure inventory between the two types of states is significant and is growing worse.

As stated earlier, FHA has not evidenced the improvements noted in other loan types.  Brinkmann said the sheer numbers of FHA loans have skyrocketed during the recession.  Where it typically backed about 3 percent of the nation's loans it is now backing 34 percent.  Thus the largest percentage of FHA's book of business is of a vintage where historically loans have the greatest risk of default - at 3-3-1/2 years after origination. 

In response to a reporter's question about how the increased delinquencies might affect FHA going forward Brinkmann said that the real question is whether the actual level encountered by an organization is higher than it planned for and while he does not know what FHA had projected, he had heard from knowledgeable persons that even this higher delinquency rate is lower than actuarial expectations.   

Asked about strategic defaults, Brinkmann said where large numbers of borrowers are underwater, every divorce and every job loss can mean a foreclosure and estimates of strategic defaults among these are probably overstated.

The recent settlement with five major banks and there servicers probably won't have much of an impact on the foreclosure inventory Brinkmann said.  While it may speed up some that are underway because the uncertainty is removed, new processes imposed by the settlement may in initially cause slowdowns elsewhere.

MBA is seeing some indication that HARP 1.0 and to a lesser extent HARP 2.0 which is just getting off the ground may be impacting loan originations.  Perhaps 10 to 20 percent of recent refinancing originations may be from those programs.  There is no way of knowing whether this is having an impact on delinquencies as individual loans have little effect in a database of 43 million loans.  Brinkmann said, however, that the incentives offered by HARP are the right ones.

The NDS has been produced by MBA for 160 consecutive quarters and currently covers 42.9 million loans representing 88 percent of all senior one-to-four family mortgages.  The current survey saw an increase of 634,000 loans from the third quarter but 767,000 fewer loans than one year ago.  Data was reported by 120 lenders including mortgage bankers, commercial banks, and thrifts.

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Statistics on building permits and housing starts increased slightly in January according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development and there was a substantial increase in the number of new homes that reached completion during the month.

Building permits for privately owned housing units were at a seasonally adjusted annual rate of 676,000 in January, 0.7 percent higher than the downwardly revised December figure of 671,000 and 19.0 percent higher than one year earlier when 568,000 permits were issued.  The number of permits issued in December was originally estimated at 679,000.

Permits were issued for the construction of single family houses at the rate of 445,000, 0.9 percent above the revised December rate of 441,000 (originally estimated at 444,000) and a 6.2 percent increase from the same period in 2011.  Permits were issued for units in multi-family buildings at an annual rate of 208,000, a 61.2 percent increase from a year earlier.

Permits were up by 10.1 percent in the South and 4.2 percent in the Northeast and were down 18.2 percent in the West and 3.7 percent in the Midwest.

Building Permits

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Construction was begun on privately owned housing units in January at a seasonally adjusted annual rate of 699,000, an increase of 1.5 percent above the upwardly revised December estimate (from 657,000) of 689,000 and 9.9 percent higher than the rate of 636,000 in January 2011.

Single family housing starts were down 1.0 percent to 508,000 from a revised December estimate or 513,000 and 16.2 percent higher than in January 2011.  Multi-family starts increased 14.4 percent from 153,000 in December to 175,000 in January.

Starts were up on a month-over-month basis in three regions, the Northeast (7.9 percent), the South (18.3 percent) and the West (11.9 percent) but fell 48.7 percent in the Midwest.

Housing Starts

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Houses reached completion at an annual pace of 530,000 in January, a 12.0 percent drop from December's estimate of 602,000 but 4.1 percent above the January 2010 rate of 509,000.  The pace of single-family completions was 389,000, down 14 percent from December, and multi-family completions were unchanged from a month earlier at 136,000.  Completions increased 7.5 percent in the Northeast to 36,000 but were down in the other three regions.  The Midwest declined 21.4 percent to 81,000, the South by 6.8 percent to 276,000 and the West by 29.3 percent to 87,000.

At the end of January there were 76,600 outstanding permits nationwide compared to 78,100 in December.  These are permits that have been issued but for which construction had not begun.  More than half of these backlogged permits (42,900) are in the South.

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RealtyTrac reported this morning that foreclosure activity rose 3 percent in January as several states posted spikes in one or more steps in the process.  Foreclosure filings were reported on a total of 210,941 U.S. properties or one in every 624 housing units during the month, however, even with the month-over-month increase in filings overall activity was 19 percent below that in January 2010. 

RealtyTrac, an Irvine California company, compiles a U.S. Foreclosure Market Report^TM each month by tracking documents filed in the three stages of foreclosure:

1.  Notice of Default (NOD) and Lis Pendens (LIS). This is the first legal notification from a lender that the borrower on a mortgage loan has defaulted under the terms of their mortgage and the lender intends to foreclose unless the loan is brought current.

2.  Auction - Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS): if the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.

3.  Real Estate Owned or REO properties : "REO" stands for "real estate owned" and typically refers to the inventory of real estate that banks and mortgage companies have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.

Filings in two of the three categories above rose during the month and the third, default notices were unchanged from the previous month with 58,362 filings.  This was 22 percent less than one year earlier.  Foreclosure auctions were scheduled on 86,037 properties in January, an increase of 1 percent from December but down 20 percent from a year earlier. The numbers of properties taken into bank inventory by lenders (REO) jumped 8 percent to 66,542 properties but this was still 15 percent fewer than in January 2011.

Brandon Moore, CEO of RealtyTrac said of the numbers, "Although overall foreclosure activity was down from a year ago for the 16^th straight month in January, we continue to see signs on a local and regional level that the frozen-up foreclosure process is beginning to thaw."  He noted the increase of activity on an annual basis in several states which he said followed a pattern that started in late 2011. 

"We expect the pattern of increasing foreclosures to continue in the coming months," Moore said, "especially given the finalized mortgage and foreclosure settlement reached in early February between 49 state attorneys general and five of the nation's largest lenders. The settlement sets forth clear guidelines for lenders and servicers to follow when foreclosing, which should allow them to push through some of the delayed foreclosures from last year. Other roadblocks to foreclosure are still in place at the state level, however, including legislation altering the foreclosure process and lawsuits against lenders. We expect to see somewhat uneven trends in local and regional foreclosure numbers going forward as lenders work through these additional legislative and legal roadblocks." 

Several states saw an increase or more than 20 percent in default notices compared to one year earlier, with huge increases in Maryland (100 percent) and Pennsylvania (112 percent). Other states with big increases were Florida (36 percent), Massachusetts (27 percent), and Connecticut (23 percent). 

States with big increases in scheduled auctions included Illinois and Indiana which were both up 141 percent on an annual basis, South Carolina (79 percent), Massachusetts (57 percent) and Minnesota (24 percent).  REO activity jumped in Massachusetts, up 75 percent, New Hampshire (62 percent), Indiana (60 percent), and Illinois (52 percent). 

It is difficult to draw conclusions about the state level figures however, because in some cases the base was relatively small.   Massachusetts, for example, saw big increases in all three categories of filings but even after the increases foreclosure activity overall was one filing per 1,191 households, about half the national rate.  The big jumps in default notices in Pennsylvania and Maryland were against even smaller existing numbers.  In the case of Illinois, Florida, and a few others of the states above the increases came in states where rates were already devastating, in Illinois, for example, the rate is one filing per 369 households and in Florida one in 363.

The three states that have topped the list of filings for years continue to have problems but are finally improving.   Nevada's filings fell by 52 percent from figures a year earlier and are now at a 52 month low with one in 198 properties affected.  California's activity was also at a multi-year low, down 23 percent from a year earlier.  Still, one in every 265 housing units was subject to a filing during the month.  In Arizona the annual rate was down 44 percent however the state saw an uptick of 14 percent from December.  The rate is Arizona is one in 325 properties.

Even better news; the decreases in all three states were driven by drops in the numbers of default notices - the first step in the foreclosure process.  In Nevada these filings have averaged fewer than 1,200 per month since October compared to more than 4,000 per month in the first nine months of the year and in California default notices were at the rate of 18,000 in December and January compared to an average over 28,000 in the three previous months.  Arizona also saw a big drop in foreclosure starts which averaged 4,300 during the last two months after averaging more than 7,500 in the previous 12 months.

Other states still suffering high foreclosure rates are Georgia (one in 328) and Michigan (one in 354).

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The results from the monthly National Association of Home Builders NAHB)/Wells Fargo Housing Market Index (HMI) rose in February for the fifth consecutive month, hitting the highest level for the index in more than four years.  The HMI, which gauges home builder confidence, rose from 25 in January to 29 this month.

Each month NAHB conducts a survey of its members in which it asks them their perceptions of the market for new homes.  They are asked to describe both current sales and their expectations for sales over the next six months as "good," "fair," or "poor."  They are also asked to rate the traffic of prospective buyers as"high to very high," "average," or "low to very low."  Answers to the questions are used to construct a composite index - the HPI - and three component indices.  A number above 50 on any index indicates that more builders view conditions as good rather than poor.  

Each of the three components improved for the fifth consecutive month as well.  The index measuring traffic of prospective buyers rose from 21 to 22; the component measuring expectations for the next six months increased from 29 to 34, and builders' perceptions of current sales rose from 25 to 40.

NAHB Chief Economist David Crowe noted that five months is the longest period of sustained improvement for the HMI since 2007 and called it encouraging.  "However, it is important to remember that the HMI is still very low, and several factors continue to constrain the market," he said.   Foreclosures are still competing with new home sales, and many builders are seeing appraisals come in at less than the cost of construction. Additionally, prospective home buyers are finding it difficult to qualify for a mortgage."

NAHB Builder Confidence vs. Building Permits

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Homeowners who think they may have been financially injured due to the actions of mortgage servicers during a foreclosure have additional time to request a review of their cases.  The deadline for the Independent Foreclosure Review authorized by the Office of the Comptroller of the Currency and the Federal Reserve originally schedule for April 30 has been extended to July 31. 

To be eligible for a review a borrower had a mortgage on the primary residence serviced by a participating company which was in active foreclosure between January 1, 2009 and December 31, 2010.  There are no costs associated with the review.

More information and a list of participating servicers can be found at: www.federalreserve.gov/consumerinfo/independent-foreclosure-review.htm or www.occ.gov/independentforeclosurereview.

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As we see each week in the Mortgage Bankers Association's application survey, few borrowers chose adjustable rate mortgages when buying or financing a home.  This is borne out by Freddie Mac's Quarterly Product Transition Report which found that 95 percent of borrowers who were refinancing during the fourth quarter of 2011 chose a fixed rate loan as their new mortgage.

Virtually none of the borrowers who refinanced a traditional one-year adjustable rate mortgage (ARM) chose to replace it with another one, although slightly over a third traded for a hybrid ARM which have a fixed rate for a period of three, five, seven, or 10 years and then usually convert to a loan that adjusts every year.  Forty-two percent of borrowers with a hybrid ARM refinanced into another hybrid of some type.  About 3 percent of FRM borrowers refinanced into hybrids.

More borrowers chose shorter term loans in Quarter Four.  Forty-three percent of borrowers who refinanced a 30-year FRM chose a 15 or 20 year variety, the highest percentage on record, and 77 percent with a 20-year traded it in for a 15 year.  Only about 19 percent of fixed-rate borrowers picked longer-term loans when refinancing...

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