Downward pressure on prices

Short sales and huge inventories of bank-owned real estate properties continue to put downward pressure on home prices, according to data released today by California-based analytics company CoreLogic. Fifty-seven of the 100 largest statistical areas based on population posted year-over-year declines in March.  Nationally, CoreLogic’s March Home Price Index report shows prices fell 33.7% in March 2012, from their peak in April 2006.  Home prices, including distressed sales, edged downward year-over-year, falling 0.6% from March 2011 to March 2012. Excluding distressed sales, home prices rose slightly, climbing 0.9% year-over-year. In spite of the yearly decline, home prices rose month-over-month. Including short sales and real estate held by banks, prices increased 0.6% month-over-month — the first monthly rise since July 2011. Proving just how much of a drag short sales and REOs are on home values, prices have appreciated monthly for three consecutive months when distressed sales are excluded from the stats.  Even with all the bad news, the relatively flat monthly and yearly changes seem to indicate prices are beginning to steady, and some states even saw significant price appreciation. Wyoming, West Virginia, Arizona, North Dakota and Florida all saw yearly gains of 4% or more. Wyoming topped the list with an increase of 5.9% year-over-year.

Jobless claims slightly down

Slightly fewer Americans filed for new unemployment benefits last week, a reassuring sign about the labor market in the closely watched economic reading.  The Labor Department reported yesterday that 367,000 filed new jobless claims in the week ended May 5, down from 368,000 the week before. The previous week reading was revised up by 3,000.  Economists surveyed by Briefing.com had forecast 365,000 would file for help.  There have been growing worries about a weakening of the recovery in the jobs market, especially after a disappointing April jobs report that showed employers adding far fewer jobs than expected.  Jobless claims, which had been falling steadily earlier this spring, also had climbed again in recent weeks before a drop two weeks ago.

Free mortgage review, few apply

It’s been more than six months since government regulators and banks first extended an offer to 4.3 million homeowners facing foreclosure: to review, at no cost, the foreclosure process to check for any possible errors or misrepresentations.  Homeowners stand to collect compensation of as much as $100,000 if errors are found. But thus far, only a tiny percentage of those eligible have signed up.  The push for a review process was set in motion by the “robo-signing” scandal. In 2010, several banks admitted mishandling some foreclosure documents. Some borrowers may have wrongfully lost their homes as a result, and the scandal exposed systemic problems in the foreclosure process.  In the wake of the scandal, federal bank regulators required 14 mortgage companies to establish the Independent Foreclosure Review process.

The review costs homeowners nothing, but at last count, only 165,000 people — fewer than 4% of those eligible — have applied.  The original April 30 deadline has since been extended to July 31.  Last month, Housing and Urban Development Secretary Shaun Donovan tried enlisting a group of housing counselors to get more homeowners to sign up for the review.  “I am concerned that not enough folks have signed up, and that we’re going to waste that opportunity,” Donovan said.  Donovan says the process presents the first real opportunity for most troubled homeowners to get an independent read on whether their case was — or is — being handled appropriately.

Chinese banks coming to a location near you

The Federal Reserve gave three state-owned Chinese banks its stamp of approval Thursday to expand their presence in the United States.  The central bank accepted an application from Industrial and Commerce Bank of China Ltd., along with China Investment Corporation and Central Huijin Investment, to become bank holding companies by purchasing up to an 80% stake in New York-based Bank of East Asia USA.  The approval marks the first time the Fed has allowed any large Chinese bank to purchase a US bank, and it could boost merger and acquisition activity “as Chinese banks may look to acquire regional banks in order to establish a US footprint,” said Guggenheim senior policy analyst Jaret Seiberg, in a research note.  Meanwhile, the Fed also granted the Bank of China permission to open its fourth US branch in Chicago. The Beijing-based bank already has two branches in New York and one in Los Angeles.

NAR – sales up, inventory down

Median existing single-family home prices are firming in many metropolitan areas, while improving sales and declining inventory are creating more balanced conditions, according to the latest quarterly report by the National Association of Realtors (NAR).  The median existing single-family home price rose in 74 out of 146 metropolitan statistical areas (MSAs) based on closings in the first quarter from the same quarter in 2011, while 72 areas had price declines.  In the fourth quarter of 2011 only 29 areas were showing gains from a year earlier.  A new breakout of income requirements on a metro basis shows most buyers have the necessary income to buy a home in their area, assuming a favorable credit rating.

At the end of the first quarter there were 2.37 million existing homes available for sale, which is 21.8% below the close of the first quarter of 2011 when there were 3.03 million homes on the market.  There has been a sustained downtrend since inventories set a record of 4.04 million in the summer of 2007.  The national median existing single-family home price was $158,100 in the first quarter, which is 0.4% below $158,700 in the first quarter of 2011.  The median is where half sold for more and half sold for less.  Distressed homes - foreclosures and short sales which sold at deep discounts – accounted for 32% of first quarter sales; they were 38% a year ago.  Total existing-home sales, including single-family and condo, increased 4.7% to a seasonally adjusted annual rate of 4.57 million in the first quarter from a downwardly revised 4.37 million in the fourth quarter, and were 5.3% above the 4.34 million level during the first quarter of 2011 when sales spiked. 

The national median family income was $61,000 in the first quarter.  However, to purchase a home at the national median price, a buyer making a 5% down payment would only need a $34,700 income.  With a 10% down payment the required income would be $32,900, while with 20% down, the income drops to $29,300.  First-time buyers purchased 33% of homes in the first quarter, unchanged from the fourth quarter; they were 32% in the first quarter of 2011.  The share of all-cash home purchases in the first quarter was 32%, up from 29% in the fourth quarter; they were 33% in the first quarter of 2011.  Investors, drawn by bargain prices and who make up the bulk of cash purchasers, accounted for 22% of all transactions in the first quarter, up from 19% in the fourth quarter; they were 21% a year ago.  In the condo sector, metro area condominium and cooperative prices – covering changes in 52 metro areas – showed the national median existing-condo price was $157,200 in the first quarter, which is up 3.4% from the first quarter of 2011.  Eighteen metros showed increases in their median condo price from a year ago and 34 areas had declines.

Regionally, existing-home sales in the Northeast jumped 8.6% in the first quarter and are 6.6% above the first quarter of 2011.  The median existing single-family home price in the Northeast declined 3.2% to $226,300 in the first quarter from a year ago.  In the Midwest, existing-home sales rose 5.5% in the first quarter and are 11.7% higher than a year ago.  The median existing single-family home price in the Midwest increased 0.8% to $125,300 in the first quarter from the same quarter in 2011.  Existing-home sales in the South increased 2.1% in the first quarter and are 4.1% above the first quarter in 2011.  The median existing single-family home price in the South rose 1.2% to $143,600 in the first quarter from a year earlier.  Existing-home sales in the West rose 5.9% in the first quarter and are 1.4% higher than a year ago.  The median existing single-family home price in the West slipped 0.9% to $196,200 in the first quarter from the first quarter of 2011.

Modified loans defaulting

The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later.  The FHA’s role in lending to first-time buyers with poor credit and limited cash expanded after the 2008 collapse of the mortgage market put it at the center of government efforts to revive housing. The FHA allows down payments as low as 3.5 percent for borrowers with a credit score of 580, below the 640 defined as subprime by the Federal Reserve.  n increase in FHA foreclosures may lead to further demands for stricter standards that could shut buyers out of the real estate market as it shows signs of stabilizing after a six-year slump. Mark Calabria, director of financial regulation studies at the Cato Institute in Washington, in a February report called for Congress to tighten the agency’s lending qualifications to protect taxpayers, who insure the loans. First-time homebuyers accounted for 33 percent of real estate sales in March, according to the National Association of Realtors.

Borrowers with mortgages for homes bought in 2010, the FHA’s peak lending year, now owe almost 7 percent more than their homes are worth if they used the minimum down payment, according to S&P/Case-Shiller home price index data. That year, the agency insured 1.1 million loans to purchase single-family homes, more than four times the total of 261,165 in 2007.  Lenders initiated foreclosures on 36,400 FHA-backed mortgages, twice the number in April 2011, according to Lender Processing Services. The increase for Fannie Mae and Freddie Mac loans was 13 percent, the Jacksonville, Florida-based mortgage- data company said.  A Treasury Department study of modified government- guaranteed mortgages in the fourth quarter found that 49 percent were delinquent again after 12 months. The Treasury report analyzed a group of loans that was 80 percent FHA, 15 percent Veterans Administration mortgages and 5 percent Department of Agriculture rural home loans. The rate for Fannie Mae and Freddie Mac was 27 percent.  The share of government-guaranteed loans being paid on time dropped to 84.2 percent in the fourth quarter from 85.2 percent in the prior three months, the Treasury’s Office of the Comptroller of the Currency said in its March 28 report. It was the third consecutive quarterly decline.  The U.S. housing market is showing signs of having hit a bottom after prices fell 35 percent since peaking in 2006. Values in 20 U.S. cities fell 3.5 percent in February, the smallest 12-month drop since February 2011, the S&P/Case-Shiller index showed last month. New homes sold at an annual pace of 328,000 in March, up 7.5 percent from a year earlier, the Commerce Department said.

Identity theft and tax fraud

After checking employment records, the Treasury Inspector General for Tax Administration (TIGTA) said it found more returns may have been sent to tax filers using stolen identities than the IRS initially estimated.  If the IRS does not do more to catch improper refunds, up to $26 billion could be refunded to identity thieves in the next five years, J. Russell George, head of TIGTA, told a congressional hearing on Tuesday. He said IRS may have issued $5.2 billion more in refunds through ID tax fraud than the agency had earlier estimated.  The IRS did not dispute the watchdog’s figures, but said estimates for ID theft tax fraud would be lower if updated to include new IRS practices, said Steven Miller, IRS deputy commissioner for services and enforcement.

MBA – mortgage applications up

Mortgage applications increased 1.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 4, 2012.  The Market Composite Index, a measure of mortgage loan application volume, increased 1.7 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 2.0 percent compared with the previous week.  Increases to the seasonally adjusted Market Composite and Purchase indices were driven by increases in their Conventional components.  Application activity within the Government market decreased for both of these measures from last week.  Likewise, the Refinance Index increased 1.3 percent from the previous week, driven by a 1.8 percent increase to the Conventional Refinance Index, while the Government Refinance Index decreased 2.3 percent.  The seasonally adjusted Purchase Index increased 3.4 percent from one week earlier, spurred by a 5.4 percent increase in the seasonally adjusted Conventional Purchase Index. The unadjusted Purchase Index increased 3.8 percent compared with the previous week and was 0.4 percent lower than the same week one year ago.

The four week moving average for the seasonally adjusted Market Index is up 1.13 percent.  The four week moving average is down 0.82 percent for the seasonally adjusted Purchase Index, while this average is up 1.81 percent for the Refinance Index.  The refinance share of mortgage activity decreased to 72.1 percent of total applications from 72.6 percent the previous week.  This is the lowest refinance share since April 6, 2012.  The government purchase share decreased over the week from 37.0 percent to 35.8 percent of all purchase applications.  This is the lowest government purchase share since March 27, 2009.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.01 percent from 4.05 percent, with points decreasing to 0.41 from  0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  This is the lowest 30-year fixed interest rate recorded in the history of the survey.   The effective rate decreased from last week.

Oil down

Oil fell for a sixth day in New York, the longest run of declines in almost two years, after crude stockpiles advanced in the U.S., the world’s largest consumer of the commodity.  Futures slid as much as 0.8 percent after dropping 8.6 percent in the past five days. U.S. inventories increased 7.8 million barrels last week to 378 million, the highest level since August 1990, the American Petroleum Institute said yesterday. A government report today may show supplies rose 2 million barrels, according to a Bloomberg News survey. Oil is poised to rebound as global refiners increase purchases, Societe Generale SA predicts.  “U.S. inventory levels are preventing oil having the traditional dead cat bounce after such a steep fall,” said Christopher Bellew, a senior broker at Jefferies Bache Ltd. in London, who predicts prices will rebound this month. “The lows we’ve seen this week will probably hold, and crude will likely rise as buying by funds and weakness in the dollar assist with a recovery.”  Crude for June delivery fell as much as 76 cents to $96.25 a barrel in electronic trading on the New York Mercantile Exchange and was at $96.53 at 8:58 a.m. London time. It slipped 1 percent yesterday to $97.01, the lowest close since Feb. 6. Front-month prices are down 2.2 percent this year. The six-day decline is the longest since July 2010.  Brent for June settlement was at $112.50 a barrel, down 0.2 percent, on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to West Texas Intermediate was at $15.83, little changed from $15.72 yesterday.  The Organization of Petroleum Exporting Countries said its basket of crudes was at $109.58 a barrel yesterday, the first time the grades have fallen below $110 since Jan. 3.

WSJ – Freddie drops fee

In the latest bid to help homeowners hit by the housing crash, Freddie Mac, the U.S.-supported mortgage giant, is set to drop a fee associated with refinancing deeply underwater loans.  The firm plans to eliminate a fee of 0.5 percentage point, called a “cash adjustor,” on loans refinanced under the Home Affordable Refinance Program with balances greater than 125% of the property’s value, said Paul Mullings, a senior vice president at Freddie Mac. He spoke at a Mortgage Bankers Association conference on Monday.  Dropping the fee represents the latest sign that the government-sponsored enterprises and their regulator are determined to extend the reach of the refi program. Changes last year eliminated the loan-to-value cap and relieved banks of some liabilities that could arise with homeowners willing to default.  Freddie Mac had earlier this year dropped the cash adjustor on HARP refinancings for mortgages with loan-to-value ratios ranging from 105% through 125%, and encouraged the lenders to pass the savings to consumers. (The fee was created to help offset some of the increased risk seen in such refis.)

Where manufacturing is gaining

After hemorrhaging jobs during the recession , manufacturing has been one of the few bright spots, restoring 489,000 jobs since the beginning of 2010.  But there have been some significant geographic distinctions in that recovery, as well as some toppled assumptions, one of which is that factory jobs have steadily shifted from the Midwest to the South.  A new report from the Brookings Metropolitan Policy Program shows that since the beginning of 2010, manufacturing employment has increased by 5.2 percent in the Midwest, while it has gone up by only 2.2 percent in the South.  Southern regions remain relatively strong in manufacturing, with eight metropolitan areas on that list. But the usual narrative of an inexorably declining Rust Belt seems not quite accurate – or at least for now.

“It’s possible that this bounce-back is just a bounce-back and won’t last,” said Howard Wial, an economist and fellow at the Brookings Institution who was one of the authors of the report. “But there is an opportunity for it to be more.”  The study also examined the clustering of manufacturing companies in particular regions. Very high-tech manufacturing companies are concentrated in the Northwest and West, for example, while chemical companies are found mostly in the South.  The authors indicated that most state and local governments do little to foster a thriving manufacturing industry when they offer tax breaks and other incentives to companies or pass right-to-work laws that tend to suppress wages. Instead, they say, governments should focus on research and development and work-force training aimed at specific manufacturing sectors.  Mr. Wial said that there was some evidence that manufacturing could make more of a comeback in the United States because labor costs are rising in developing countries and “many large companies are starting to reconsider the costs and benefits of offshoring.”

CoreLogic – Market Pulse

CoreLogic today released its May CoreLogic MarketPulse report. The monthly economic publication provides insight into the current and future health of the U.S. economic climate with particular focus on housing and mortgage metrics. CoreLogic Chief Economist Mark Fleming and Senior Economist Sam Khater authored the articles and commentary.  Key findings in the May MarketPulse Report include:

-  The national housing market is transitioning to more stability in sales and home prices, with reasonable inventory levels and a declining share of REO sales.

-  Short sales, modifications, and other foreclosure alternatives are playing a larger role than in years past, and the flow of new foreclosures is declining with an improving economy.

-  Mortgage performance is experiencing a slow and steady improvement as the 90+ day serious delinquency rate in March fell to 7.0 percent, the lowest rate since July 2009. “This decline in serious delinquency represents a significant reduction of approximately three quarters of a million borrowers,” said Fleming in the report.

-  Overall home sales activity continues to improve, with total sales eclipsing 410,000, up more than 20 percent from a year ago and the highest March sales rate since 2007.

-  While the national market continues to improve, it masks regional variation where some local markets are improving much more rapidly than others. The most improved markets from a year ago are Phoenix, Boise and Salt Lake City.

-  Home prices are at, or very close to, the bottom as the Memorial Day weekend approaches.

CoreLogic – less than 1% decrease in housing prices

CoreLogic today released its March Home Price Index (HPI) report which shows that nationally home prices, including distressed sales, declined on a year-over-year basis by 0.6% in March 2012 compared to March 2011. On a month-over-month basis, home prices, including distressed sales, increased by 0.6% in March 2012 compared to February 2012, the first month-over-month increase since July 2011.  Excluding distressed sales, month-over-month prices increased for the third month in a row. The CoreLogic HPI also shows that year-over-year prices, excluding distressed sales, rose by 0.9% in March 2012 compared to March 2011. Distressed sales include short sales and real estate owned (REO) transactions.  “This spring the housing market is responding to an improving balance between real estate supply and demand which is causing stabilization in house prices,” said Mark Fleming, chief economist for CoreLogic. “Although this has been the case in each of the last two years, the difference this year is that stabilization is occurring without the support of tax credits and in spite of a declining share of REO sales.”  “While housing prices remain flat nationally, in many markets tighter inventories are beginning to lift home prices,” said Anand Nallathambi, president and chief executive officer of CoreLogic. “This is true in Phoenix, New York and Washington, for example, which all reflect higher home price values than a year ago. A continuation of this trend will be good for our industry across US markets.”

Highlights as of March 2012

-  Including distressed sales, the five states with the highest appreciation were:  Wyoming (+5.9%), West Virginia (+5.3%), Arizona (+5.1%), North Dakota (+4.7%) and Florida (+4.5%).

-  Including distressed sales, the five states with the greatest depreciation were: Delaware (-10.6%), Illinois (-8.3%), Alabama (-8.0%), Georgia (-7.3%) and Nevada (-5.8%).

-  Excluding distressed sales, the five states with the highest appreciation were: Idaho (+5.4%), North Dakota (+5.1%), South Carolina (+4.7%), Montana (+3.5%) and Kansas (+3.4%).

-  Excluding distressed sales, the five states with the greatest depreciation were: Delaware (-7.6%), Alabama (-4.1%), Nevada (-3.9%), Vermont (-3.9%) and Rhode Island (-2.9%).

-  Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to March 2012) was -33.7%. Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -24.5%.

-  The five states with the largest peak-to-current declines including distressed transactions are Nevada (-59.9%), Arizona (-48.6%), Florida (-48.1%), Michigan (-45.1%) and California (-42.7%).

-  Of the top 100 Core Based Statistical Areas (CBSAs) measured by population, 57 are showing year-over-year declines in March, eight fewer than in February.

Business confidence lackluster

While the National Federation of Independent Business’ Small Business Optimism Index rose two points in April to 94.5, the index is back to the same level it had been in February 2011.  “It’s positive from last month,” said NFIB chief economist William Dunkelberg. “But we’re in the same place as a year ago, so a whole year has gone by and we don’t go anywhere.”  In areas like capital outlays, indications are that while things are slowly improving, it’s “nothing to write home about,” said Dunkelberg. The Index now stands at 54%, far above the 44% in August 2010, but below the average rate of 60%.  “In the smallest businesses, we’re seeing improvement,” said Dunkelberg, “but it’s going on under the government’s radar. It will take a while before it registers” in the national picture, he said, pointing to the job creation number in particular. “Hopefully this time they will not deteriorate again.” and that’s pretty much the hope for all 10 categories in the index, many of which have, over the course of the past few years, seen ups and downs.  “We keep getting these head fakes, like last year, and we’re wondering if [the index] will do it again,” said Dunkelberg, referring to March 2011, when the survey took a dip, and then continued a downward trend throughout the spring and summer, only starting to rise again last October. “Last year, it kept getting worse; this time March took a dive, then came back.”

Regulations stifle mortgage market

Rulemakings will dominate the mortgage industry this year as the sector continues its “slow, bumpy road to recovery,” keynote speakers said as the Mortgage Bankers Association’s (MBA) secondary conference got into full swing Monday in New York City.  The rulemaking surrounding the Qualified Mortgage — or QM, repurchase requests, national servicing settlements and government-sponsored enterprise reform will dominate the year, said David Stevens, president and CEO of the MBA. But despite the attention to those four key areas, the MBA is tracking some 100 rulemakings in the Dodd-Frank Act.  Monday’s opening session was part feel-good, part dire warning as speakers struck a balance between the good and the bad in the current marketplace.  An opening video, for example, provided the feel-good atmosphere. It showed an MBA member’s recollections of his immigrant father buying a tract home in the New York burrough of Queens after World World II.

Mitch Kider, with Washington, D.C.-based law firm Weiner Brodsky Sidman Kider PC, recounted the reverence his father felt for the bank that provided the Federal Housing Administration loan that made it all possible.  “The people that work in this industry are working there because their heads and their hearts are in the right place,” he said. “As mortgage bankers, you are doing wonderful things for society.”  Stevens brought things back to earth by voicing borrower trepidation to buy homes, lender concern over burdensome regulations and investor mistrust of the process.  Borrowers, especially those on the margins, could be negatively impacted if the qualified mortgage rule — what he called “the holy grail of who gets access to a mortgage” — is too narrowly defined.  The need for more clarity in the system, for borrowers, lenders, mortgage servicers and investors, was a recurring theme from opening speakers.  On GSE reform, Stevens urged the industry do what it can without Congress, where he predicted a continued logjam.  “We need to take control of our own destiny,” he said.

Lewis Ranieri, chairman and founding partner of Ranieri Parnters, widely considered a pioneer of modern mortgage finance, said the industry must be aware of those would not be content to fix the capital market but who believe the capital markets “are not simply broken … but are profoundly the wrong thing to do.”  If it doesn’t stay aware, the industry may end of with a fundamental rewrite of the way it does business, where everything resides on the balance sheet, he said.  Two mortgage businesses came to him recently about a possible sale due to the tough regulatory environment, Ranieri said.  “I truly believe the future of our industry is decided in the next eight months,” he said. “There is a regulatory movement that isn’t just trying to fix, it’s trying to change.”  Richard Dorfman, managing director of the Securities Industry and Financial Market Association, or SIFMA, said it falls on the industry to define the issues in ways that resonate with consumers.  Instead of complaining that Dodd-Frank is a burden to the banks, regulations should be defined in ways that show how they limit mortgage access to potential homebuyers, for example, he said.  “Consumers must be served, and they can and will be served by this industry,” he said. “There is no doubt in my mind.”

Krugman’s ideas “reckless” and “silly”

The president of the Federal Reserve Bank of Dallas, Richard Fisher, rejected the idea that higher inflation would spur the economy on Monday.  Saying the last thing businesses needed in this economy was uncertainty, Fisher sided with Federal Reserve Chairman Ben Bernanke in his public feud with Paul Krugman, the leftwing economist and New York Times columnist.  Called “The Battle of the Beards” by The Washington Post, the back-and-forth between the two economists began when Krugman called on the Fed to raise inflation targets, a move Bernanke called “reckless.”  “I would say that Ben Bernanke’s guilty of understatement. It would be more than reckless. It’s a silly thing to recommend,” Fisher said.  “I understand the argumentation from Krugman’s standpoint, from his perspective. He’s just trying to broaden the window to try to make things normal if we were to go below the 2% rate. That’s our long-term target. I believe we’re going to stick with it. I personally feel that this is something that is ultra-critical for our credibility.”

Olick – $150,000 off?

“A select group of struggling mortgage borrowers are about to get an offer that sounds too good to be true. Executives at Bank of America say they will begin mailing 200,000 letters offering certain customers mortgage principal reduction.  ‘If people get these things and toss them, they won’t be eligible,’ says Ron Sturzenegger, the Bank of America executive charged with providing solutions to borrowers in need of mortgage assistance.  But the offer is real, and eligible borrowers could get as much as $150,000 knocked off the balance of their mortgages. It is all part of the $25 billion settlement reached this year between federal and state agencies and the nation’s five largest mortgage servicers over fraudulent foreclosure document processing (so-called ‘robo-signing’).  Bank of America, in a deal with state attorneys general and the US Department of Justice, committed $11 billion to mortgage principal reduction, but executives say they will go beyond that if enough borrowers respond to their offer. Five thousand borrowers have already received a collective $700 million in principal reduction through a pilot program for those already in a modification negotiation. The 200,000 borrowers being targeted now may have already exhausted modification options or may have yet to contact the lender.

Executives say borrowers receiving the letters are eligible, but they still have to prove they qualify. In order to be eligible, a borrower must be 60 days late on the mortgage payment as of Jan. 31, 2012. The borrower has to owe more on the mortgage than the home is currently worth, commonly known as being ‘underwater’ on the mortgage, and the borrower’s loan must either be owned by Bank of America or serviced by Bank of America for an investor who is allowing the modifications.  In order to qualify for the modification, the borrower must answer the letter with full documentation of income, showing that under the terms of the modification they can still make the monthly payment. A borrower with no income would therefore not qualify. A borrower’s current monthly payment must be  more than 25% of gross income, and the borrower must show they are unable to afford that.  ‘If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification,’ says Sturzenegger.  If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25% of the borrower’s gross income. That could mean principal forgiveness well over $100,000, as there is no limit to the amount of the mortgage. If enough borrowers respond, it could cost Bank of America far more than it committed to in the settlement.  ‘Yes, we have the capability to go well beyond the $11 billion,’ adds Sturzenegger.

If the borrower qualifies, Bank of America will bring the monthly mortgage payment down to 25% of the borrower’s gross income. That could mean principal forgiveness well over $100,000, as there is no limit to the amount of the mortgage. If enough borrowers respond, it could cost Bank of America far more than it committed to in the settlement.  ‘Yes, we have the capability to go well beyond the $11 billion,’ adds Sturzenegger.  Bank executives say that before choosing which borrowers will get the offer, they performed a net present value test on each loan, making sure that the principal reduction modification would net Bank of America or the investor who owns the loan more than foreclosing on the home. ‘It has to be fair to the investor as well,’ says Sturzenegger.  Not all of the 200,000 borrowers who receive the letters are expected to respond. Executives say there is a level of fatigue among delinquent borrowers who have already received several notices or who may have gone through a failed modification process already. Some borrowers simply don’t want to stay in their homes, while others may think the offer is a scam.  ‘They have been contacted by a lot of other people, and this offer may appear too good to be true,’ says Sturzenegger.

That’s why Bank of America is sending the letters by certified mail and trying to make the language as simple as possible. A sample letter obtained by CNBC shows a bring red box in the top corner labeled, ‘IMPORTANT’ and simple language stating, ‘Qualifying customers may reduce their monthly payment by an average of 35%.’  Some 6,500 letters should be arriving in mailboxes across the country this week, with a wave of new letters going out every week until the end of the summer, when all 200,000 should have been mailed. Bank of America is staggering the mailings in order to handle the expected response. The bank has staffed up to handle the task, with 50,000 employees manning servicing desks, but the process will clearly take a lot of time. That’s why Bank of America has suspended any foreclosure actions against these 200,000 borrowers until the process is complete. There are currently 5.59 million US loans that are either delinquent or in the foreclosure process, according to Lender Processing Services. Bank of America services one million of those loans, but many of them are owned by Fannie Mae and Freddie Mac. Their regulator, Edward DeMarco of the Federal Housing Finance Agency, has yet to agree to principal reduction in loan modifications, despite harsh criticism from some lawmakers on Capitol Hill and increasing pressure from the White House.”

Consumer credit on the rise

US consumer credit shot up during March at the fastest rate since late 2001 as credit-card use, and student and car loans ballooned, data from the Federal Reserve showed yesterday.  Total consumer credit grew by $21.36 billion — more than twice the $9.8 billion rise that Wall Street economists surveyed by Reuters had forecast. That followed a revised $9.27 billion increase in outstanding credit February.  It was the largest surge in consumer credit for any month since November 2001, when it climbed by $28 billion, according to the Fed’s statistics.  The increase in March was concentrated in nonrevolving credit, which includes student and car loans. It climbed by $16.17 billion following a revised $11.62-billion gain in February.  Concern about student-loan levels has increased in an environment where newly graduating students face difficulty finding a job and keeping up on payments.  Congress is currently considering how to prevent a low interest rate for student loans from doubling on July 1 and is expected to find a way to do so, if only to avoid irritating young voters ahead of November’s presidential elections.  But so-called revolving, or credit-card debt, also gained strongly in March. It rose $5.18 billion in a sharp reversal from February when this category of credit use contracted by $2.35 billion.

NAHB – 100 markets on the improving list

The list of housing markets showing measurable and sustained improvement held virtually unchanged in May at 100, down from 101 in April, according to the National Association of Home Builders (NAHB)/First American Improving Markets Index (IMI), released yesterday. The number of states represented on the list also held firm from the previous month, at 35 (including the District of Columbia).  The index identifies metropolitan areas that have shown improvement from their respective troughs in housing permits, employment and house prices for at least six consecutive months. While 83 metros held onto their previous places on the IMI and 17 new ones were added to the list in May, 18 metros dropped from the list, for a net loss of one. Metros newly added to the list in May include such geographically diverse places as Phoenix, Ariz.; Bowling Green, Ky.; Bend, Ore.; and Lubbock, Texas.  “The fact that there are 100 markets in 34 states and the District of Columbia represented on the improving list illustrates that all housing markets are local, and that the national headlines often don’t apply to what’s happening in a specific metropolitan area,” said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “In places where employment is firming up along with demand for new homes, the main factors weighing down the housing market continue to be access to credit (for both builders and buyers) and the difficulty of obtaining accurate appraisals on new construction.”

“The overall number of markets on the IMI continued to plateau this month, with more than a quarter of all US metros still showing signs of improvement,” said NAHB Chief Economist David Crowe. “Many of these are relatively small markets in terms of their population and building volume, which is why their improvement is barely registering on the national scale as of yet. Moreover, we are seeing some shifting of markets on and off the list primarily due to small seasonal house price changes in areas that have had flat, stable prices rather than a boom-and-bust cycle.”  “The fact that the number of improving metros continued to hold its own with 100 entries in May shows that there are many places across the country where confidence and consumers are returning to the housing market,” observed Kurt Pfotenhauer, vice chairman of First American Title Insurance Company.  The IMI is designed to track housing markets throughout the country that are showing signs of improving economic health. The index measures three sets of independent monthly data to get a mark on the top improving Metropolitan Statistical Areas. The three indicators that are analyzed are employment growth from the Bureau of Labor Statistics, house price appreciation from Freddie Mac, and single-family housing permit growth from the US Census Bureau. NAHB uses the latest available data from these sources to generate a list of improving markets. A metropolitan area must see improvement in all three areas for at least six months following their respective troughs before being included on the improving markets list.

Short sales surged in second quarter: RealtyTrac

Second-quarter pre-foreclosure sales jumped 19% from the previous quarter, suggesting more banks and distressed borrowers are searching for efficient ways to offload properties that are near foreclosure, RealtyTrac said. Third parties acquired 102,407 pre-foreclosures in the second quarter, while 162,680 bank-owned homes were sold in the same period. Pre-foreclosure sales are generally short sales and properties sold within the foreclosure process. As for who is nabbing up distressed and bank-owned properties, RealtyTrac said third parties acquired 265,087 homes classified as in foreclosure or bank-owned in the second quarter. That is up 6% from the revised first quarter figure and down 11% from the second quarter of last year. The average sales price for foreclosures or bank-owned properties hit $164,217 in 2Q, down less than one percent from 1Q and 5% from the second quarter of 2010.  The sales price for distressed real estate was 32% below the average sales price of homes not in foreclosure. States with the largest quarterly increase in pre-foreclosure home sales included Nevada, which experienced a 43% increase; Washington (39%), California (38%); and Texas (34%). The states with the highest number of foreclosure sales included Nevada, Arizona and California.

Budget Deficit Estimate Cut to $1.28 Trillion: CBO

The federal budget deficit will hit $1.28 trillion this year, down slightly from the previous two years, with even bigger savings to come over the next decade, according to congressional projections released Wednesday.  The nonpartisan Congressional Budget Office says budget deficits will be reduced by a total $3.3 trillion over the next decade, largely because of the deficit reduction package passed by Congress earlier this month. Nevertheless, the federal budget will continue to be awash in red ink for years to come. Even with the savings, budget deficits will total nearly $3.5 trillion over the next decade—more if Bush-era tax cuts scheduled to expire at the end of 2012 are extended.  There is more bad news in the report: CBO projects only modest economic growth over the next few years, with the unemployment rate falling only slightly by the end of 2012. The agency projects an unemployment rate of 8.5 percent for the last four months of 2012. The presidential election is in November of that year. 

“The United States is facing profound budgetary and economic challenges,” the new CBO report says. “With modest economic growth anticipated for the next few years, CBO expects employment to expand slowly.” Failure to pass a package would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.  The new CBO report projects that the legislation will reduce deficits by a total of $2.1 trillion over the next decade. The agency also projects savings of $600 billion over the next decade from lower interest rates.

Diana Olick: Higher-End Housing Hits a Wall

Most of America won’t shed a tear for those who own higher-priced homes, especially given that the median home price in the nation has now fallen to just $174,000, but investors and homeowners alike should take note: Higher priced homes are taking a hit and the outlook for them is worse than the overall market.  That will have ramifications for recovery.  Despite the fact that just eight percent of US loans are currently jumbo, according to Inside Mortgage Finance, and that share will rise to just 10-12 percent when the conforming loan limit is lowered October 1st, high-end housing is already being hit harder than the overall market, which isn’t exactly doing so well itself. For one, weekly mortgage applications to purchase a home have been falling steadily, down 5.7 percent last week. But jumbo loan purchase applications fell 15 percent.

While sales of homes below $250,000 rose nearly 25 percent in July year over year according to the National Association of Realtors (June 2010 was the end of the home buyer tax credit, so July 2010 was artificially low, still….) sales of homes over $500,000 were basically flat.  Demand on the low end of the housing market is boosted by investors largely buying distressed properties; they either fix up and flip the homes or rent them out, waiting for the market to recover. Higher end homes have far fewer investors and may be more sensitive to a volatile stock market, as potential buyers are more likely to be invested there. Suffice it to say, we need all segments of the housing market pushing forward in order to get the full market back to health.

Markets not impacted by rise in jobless claims

Initial jobless claims rose last week, increasing by 5,000 filings for a total of 417,000 claims on a seasonally adjusted basis. That is up from the previous week’s revised figure of 403,500 claims. The Labor Department noted the numbers for the week ending Aug. 20 were impacted by 8,500 claims stemming from a labor dispute between the Communications Workers of America and Verizon Communications. Meanwhile, the advance seasonally adjusted insured unemployment rate hit 2.9% for the week ending Aug. 13, a slight decrease from the previous week’s revised rate of 3% Despite recent volatility in the stock market, analysts with Econoday said Thursday the markets “are showing little reaction to the report, which outside of the Verizon strike, points to mildly improving conditions in the labor market.”

Pre-Foreclosure Short Sales Jump 19% in Second Quarter

Short sales shot up 19 percent between the first and second quarters, with 102,407 transactions completed during the April-to-June period, according to RealtyTrac. Over the same timeframe, a total of 162,680 bank-owned REO homes sold to third parties, virtually unchanged from the first quarter. RealtyTrac’s study also found that the time to complete a short sale is down, while the time it takes to sell an REO has increased. Pre-foreclosure short sales took an average of 245 days to sell after receiving the initial foreclosure notice during the second quarter, RealtyTrac says. That’s down from an average of 256 days in the first quarter and follows three straight quarters in which the sales cycle has increased.  Nationally, REOs had an average sales price of $145,211, a discount of nearly 40 percent below the average sales price of non-distressed homes. The REO discount was 36 percent in the previous quarter and 34 percent in the second quarter of 2010.  Together, REOs and short sales accounted for 31 percent of all U.S. residential sales in the second quarter, RealtyTrac reports. That’s down from nearly 36 percent of all sales in the first quarter but up from 24 percent of all sales in the second quarter of 2010.