Smart Real Estate News & Commentary by Chris McLaughlin June 22, 2011
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NAR – existing home sales decline
According to the National Association of Realtors (NAR), Existing-home sales, (completed transactions that include single-family, townhomes, condominiums and co-ops), fell 3.8% to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3% below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit. There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Lawrence Yun, NAR chief economist, explained. The national median existing-home price for all housing types was $166,500 in May, down 4.6% from May 2010. Distressed homes3 – typically sold at a discount of about 20% – accounted for 31% of sales in May, down from 37% in April; they were 31% in May 2010. NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. “We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum down payment requirements to 20%,” he said. “We don’t need to throw the baby out with the bath water – increasing down payment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”
Bernanke not likely to make big changes
Federal Reserve Chairman Ben Bernanke is unlikely to announce a major change in monetary policy at his second-ever news conference later today, but investors will hang on his every word for clues on whether the Fed will scale back its presence in financial markets, analysts said. The central bank will release quarterly economic forecasts and analysts expect them to be revised lower to reflect the recent weakness, but they said Bernanke will be quick to say he sees an acceleration in the recovery. “I’m sure he’ll predict one,” John Wraith, fixed income strategist at Bank of America Merrill Lynch (BAML), said. “I’m sure he won’t announce any reversal of the stimulus.” The Federal Open Market Committee is likely to take the formal decision to end the second round of quantitative easing – a program under which it pumps liquidity in markets by buying assets – at the end of June but to leave the reinvestment policy in place, according to analysts from Barclays Capital. Mark Olson, former Fed governor, said he would be surprised if the FOMC did not vote unanimously to stay the course and that he does not expect big changes in the Fed’s statement.
The Fed’s statement is due at 12:30 pm New York time and Bernanke’s news conference is expected to start at 2:15 pm. The statement is likely to say that headline inflation was pushed higher by a rise in commodity prices but that these have fallen back somewhat and inflation expectations remain stable, Barclays Capital analysts wrote.
MBA – mortgage applications drop
After experiencing a 13% surge in mortgage applications, the mortgage market lost steam last week with applications dropping 5.9% for the week ending June 17. While homeowners rushed to refinance earlier in the month, that trend reversed itself, with the refinance index and purchase index falling 7.2% and 2.8%, respectively, the Mortgage Bankers Association said Wednesday. In addition, the four-week moving averages for the market index and the refinance index are up 0.4% and 0.8%, respectively, while the seasonally adjusted purchase index is down 0.7%. Refinancing activity cooled as the refinance share of mortgage activity fell to 69.2% of total applications from 70% the previous week. In addition, the adjustable-rate mortgage share of activity fell to 5.9% from 6.1% the prior week. Meanwhile, the average interest rate on the 30-year, fixed-rate mortgage grew to 4.57%, up from 4.51% a week earlier. The 15-year fixed-rate mortgage also rose to 3.70%, up from 3.67% a week earlier.
Mortgage lender CEO sentenced
Paul Allen, 55, the former CEO of Taylor, Bean & Whitaker, or TBW, pleaded guilty in April to one count of making false statements and one count of conspiring to commit bank and wire fraud. He was sentenced to more than three years in prison. The Justice Department said the fraud scheme contributed to the failure of TBW, which was one of the largest privately held U.S. mortgage lending companies, as well as the bankruptcy of Alabama-based Colonial Bank, which was one of the 50 largest U.S. banks. Former TBW Chairman Lee Farkas, who was convicted on April 19 on 14 counts of fraud for his role in masterminding the scheme, is scheduled to be sentenced on June 27. The Securities and Exchange Commission (SEC) also has a civil action pending against Farkas in the Eastern District of Virginia. Allen’s co-conspirator Sean Ragland, a 37-year-old former senior financial analyst at TBW, was also sentenced today by Judge Leonie Brinkema to three months in prison. Four other senior officials with TBW and Colonial Bank have also been sentenced to time in prison ranging from three months to eight years for their role in the fraud.
Assistant Attorney General Lanny Breuer said Allen “concealed TBW’s staggering deficits through false financial reports, which ultimately caused investors to lose more than $1.5 billion.” He said the sentencing sent a “strong message that corporate fraud by senior executives will not be tolerated,” but also showed that plea deals like Allen’s — under which he provided “substantial assistance” to government investigators — would be taken into account at sentencing. According to court documents and information presented at trial, Allen and Ragland distributed materially false documents to investors in Ocala Funding, a TBW multi-billion dollar lending facility, from early 2005 through August 2009. As a result, investors in Ocala Funding lost more than $1.5 billion, while Colonial Bank lost $900 million.
Olick – on the distressed property sales drop
“The share of distressed sales in May, that is foreclosed properties and short sales (when the property is sold for less than the value of the loan), fell to 31% of all sales from 37% in April. Investors, who purchase a large share of these distressed properties, also represented a smaller share in May. So what’s going on? We know there is still a huge supply of bank owned (REO) properties, and we also know that banks are pushing short sales on many more properties than ever before. But they are also pushing REO sales, thanks to new sales incentives from lenders and the GSE’s (Government-Sponsored Enterprises). ‘Realtors and mortgage loan officers nationwide are driving mid-to-high end organic, short and distressed sales on the fear that buyers will be unable to qualify for loans once the QRM (Qualified Residential Mortgage) rules are in place requiring 20% down,’ says mortgage market analyst Mark Hanson, describing new rules being considered for risk retention by banks (part of the banking overhaul legislation passed last summer).
Some bloggers though, writing in to me after the existing home sales report, claimed that Fannie and Freddie are holding on to REOs, trying to game home prices. Fannie strongly disputes that. ‘Fannie Mae doesn’t have a shadow inventory of REO properties that are available to be sold. As soon as we acquire a property, we quickly identify a market competitive price, determine whether to make any necessary repairs and list the property. In the first three months of 2011, we sold a record number of REO properties, selling more properties than we acquired,’ said Amy Bonitatibus, Fannie Mae spokeswoman. ‘We watch taxpayer dollars like it’s our own money. We have an immense responsibility to get the most possible value from each REO property we sell. We are committed to stabilizing neighborhoods and preserving communities across the country,’ she added.
In fact, Fannie Mae recently launched another program of financial incentives to Realtors to sell REO properties. A note from analysts at Goldman Sachs, titled Foreclosure Sales: Federally Backed Lenders Shifting to Net Sellers, states: ‘Although these entities could hold property off the market to reduce the negative effects of distressed properties on house prices, they do not appear to be doing so…in Q1 the GSEs and FHA became net suppliers of foreclosed properties to the market for the first time since 2009. Moreover, if the temporary slowdown in REO sales over the last two quarters ends, the federal entities seem likely to add roughly 30% to the sales of fore loses property over the next year as compared with the previous four quarters.’
Bottom line, in order for this housing market to recover, the distressed properties need to go, whether by short sales or REO sales. The distress is driving the fear, which in turn keeps buyers on the sidelines. We need investors, and we need first time buyers, and I will say it until I’m blue in the face: These buyers need better access to credit.”
Oil down
Oil prices fell below $94 a barrel today after a crude supply report reflected mixed signs about U.S. demand and the dollar strengthened against other currencies. By early afternoon in Europe, benchmark oil for August delivery was down 82 cents to $93.35 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 54 cents to settle at $94.17 on Tuesday. In London, Brent crude for August delivery was down 41 cents to $110.54 a barrel on the ICE Futures exchange. The American Petroleum Institute (APA) said late Tuesday that crude inventories fell 81,000 barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted a drop of 2.0 million barrels. Inventories of gasoline dropped 1.5 million barrels last week, surprising analysts who had forecast an increase of 1 million barrels. Distillates fell 541,000 barrels, the API said.
May delinquencies down
U.S. mortgage delinquencies are faring much better compared to one year ago, according to Lender Processing Services’ “First Look” report released yesterday. The report provides month-end mortgage performance statistics from LPS’ loan-level database of nearly 40 million mortgages. The Jacksonville, Fla.-based firm will release more detailed reporting in its upcoming “Mortgage Monitor” report, which comes out at the end of this month. According to the report, 7.96% of U.S. home loans were 30 days past due but not in foreclosure in May, down a staggering 18.3% compared to the same month in 2010. This figure is down a slight 0.1% from April. LPS estimates there are 4.2 million mortgages in delinquency status, with 1.9 million seriously delinquent, meaning 90-plus days past payment. Foreclosure pre-sale inventory, on the other hand, continued to stay above last year’s averages. Inventory was up 4.11% last month compared to the year ago period, totaling 2.2 million homes.
Florida posted the highest percentage of noncurrent loans statewide in May, followed by Nevada, Mississippi, New Jersey and Illinois. The states with the least percentage were, in descending order, Montana, Wyoming, Alaska, South Dakota and North Dakota. In other recent news, LPS recently lowered its second quarter earnings estimate by 31% based on the sluggish mortgage market.
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
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According to a survey conducted by Realtor.com, home buyers in the U.S. are hesitant to jump into the housing market, given the current economic downturn. Nearly 53% of the survey participants said they have postponed their home plan on account of their negative outlook. Uncertainty on the job front was the main factor for not buying a house for nearly a third of the survey participants. Nearly 16% said they worry about selling their current home, while 8% said they fear home prices will keep falling. Home buyers recognize that the housing market currently offers great deals; however, financial worries far outweigh attractiveness of the deals available. Nearly 20% said they were interested in foreclosed homes with an attractive price, while nearly 15% said they want to receive incentives such as the $8,000 tax credit for first-time buyers. Errol Samuelson, president of Realtor.com, said buyers feel that purchasing a foreclosed home is more “complex” than other transactions. Among the survey participants, only 28% said President Barack Obama’s plan to tackle the foreclosure crisis is working, compared with 41% who said it isn’t and 27% who didn’t know.
New York City prosecutors have charged 25 people, including lawyers, bankers, mortgage brokers and appraisers, and a mortgage company, with committing mortgage fraud. Robert Morgenthau, Manhattan District Attorney, said AFG Financial Group Inc. (AFG) and its accomplices inflated property values, created phony loan packages, forged W-2 forms, and bank documents to get loans from banks for unsuspecting buyers. Buyers did not know that the transactions were a sham. AFG, through its attorneys, would ask that the mortgage money be deposited in escrow accounts. Instead of paying the seller, AFG would take the money for itself. “These attorneys often did not meet or communicate with their so-called clients until the day of the closings … and were paid off by AFG for their efforts,” Morgenthau said. Buyers were left with bad credit while the lender foreclosed the seller’s property and took ownership. Banks which were cheated include New Century Mortgage Corp., which lost $32.2 million; Countrywide Home Loans, which lost $7.9 million; and Washington Mutual, which lost $8.6 million. “This is one of the reasons for the mortgage crisis,” said Morgenthau. Among those charged, 12 have pleaded guilty. All those convicted face up to 25 years in prison.
Joshua Shanker, an analyst at Citigroup, says American International Group (AIG) will have no value left after repaying bailout funds. “Our valuation includes a 70% chance that the equity at AIG is zero,” said Shanker. AIG has received over $182 billion as bailout funds from the government so far. Edward Liddy, the outgoing chief executive officer of AIG, said last month at the firm’s annual meeting that the company has an “excellent chance” of repaying the government. Liddy had earlier informed the Congress that the company can pay back bailout funds within 5 years. AIG said last week that its recent losses in derivates could have a “material adverse effect” on its results. “The company has not been forthcoming about the sequence of events that would result in a loss,” Shanker said. “Even a proportionally small loss could be significant.” The outgoing CEO has been under pressure to sell some of AIG’s assets to repay government funds. “The CEO’s motivation and ability to lead may be compromised by his preparations to transition the company’s top seat to another,” Shanker said.
The U.S. government believes that the Swiss bank UBS has about $15 billion in secret accounts meant to evade taxes in the U.S. UBS says it cannot reveal the identity of its account holders on account of Swiss banking laws. Switzerland has made it clear that it would prevent UBS from revealing the identity of account holders. “Switzerland will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS,” the Swiss government said in a response to U.S. authorities. Analysts believe that this issue souring diplomatic relations between the U.S. and Switzerland. Alan Gold, a district judge in the U.S., has asked the U.S. Justice Department if the government will shut UBS in the United States if the bank does not provide information on its account holders. The Justice Department will have to be careful in answering the judge’s question. “They’re going to have to be very delicate and thoughtful in terms of how they respond to this,” said Peter Hardy, a partner at the Post & Schell, a law firm.
