Mortgage Mayhem

October 12, 2010 by Shirleen Von Hoffmann Leave a reply »

Courtesy of HanleyWood Marketing  Written by Jonathan Deinhart and Ken Lee

Bank of America halting foreclosures in all 50 states is the latest shoe to drop in a growing debacle which calls in to question whether large financial institutions have adequately documented all the vital details surrounding repossessed properties. The already-fragile housing market certainly didn’t need any more problems, and the full ramifications of this situation are not clear. What is clear, however, is that many areas still have a substantial backlog of foreclosed properties that will at some point be unloaded onto the marketplace. Since these distressed properties tend to be priced well under the going market rate for regular resales and new homes, understanding the scope of that pipeline is key in determining how deep of a hole a particular market is in.

Our data feature this week, courtesy of Housing IntelligencePro, looks at which markets have the most months supply of homes that have been foreclosed, but not yet resold to the market. These six markets are the only ones out of the Top 100 which have a months supply of greater than 10 when it comes to the REO Pipeline. The REO Pipeline is determined by looking at all the foreclosures in these markets since 2005, and subtracting the REO sales that have put those homes back into the market. What is left is our hang-over of REO supply, and based upon the last 12 months of closing activity we can determine how long it would take to get through those remaining foreclosed homes at the current average monthly closing rate. Because of that, a high months of supply can be indicative of a large pipeline, or a low closing rate, or both. Luckily for users ofHousing IntelligencePro, the details of this situation are available at the press of a button.

In broader economic news, weaker labor market conditions and new FHA lending guidelines may serve to dampen what small improvements we’ve seen in housing activity recently. The Labor Department reported this morning that the U.S. economy continued to shed payrolls in September while losing slightly more jobs than most economists had expected. The private sector continued to add payrolls, which is a positive sign, but it was not enough to offset job losses in the government sector. Although 95,000 payrolls were lost in September, the unemployment rate remained unchanged at 9.6%.

New guidelines for FHA mortgages that went into effect starting Oct. 4 will likely put further pressure on housing activity going forward by reducing the pool of potential buyers. The newer guidelines will make obtaining a FHA mortgage more difficult to qualify for while increasing its borrowing costs. Since the financial meltdown started, private banks have been significantly more stringent with their lending standards which have increased the amount of FHA mortgage activity because of its lower credit score and down payment requirements. In 2009, the FHA accounted for roughly 30% of all home purchase loans. That increase in activity has pressured the organization’s capital reserve ratio down to just 0.53% which is substantially lower than the 2.0% required by law. In efforts to improve loan quality and boost financial stability, the FHA set guidelines for higher credit scores and raised down payment requirements and private mortgage insurance premiums for their loans.

Buyers with under a credit score under 500 will no longer qualify for a FHA-insured loan while those with credit scores between 500-580 will be required to put down 10% compared to the 3.5% down payment previously required. Mortgage insurance fees will increase to 0.95% compared to 0.50% before and can go up to as high as 1.5%. According to the Mortgage Bankers Association, purchase loan application activity picked up for the second straight week due to a jump in FHA applications.

Because of the new measures that were set to take place starting Oct. 4, applicants rushed to get their paperwork in before that date which resulted in a 17.2% increase in FHA applications last week. Purchase loan applications in the coming weeks will likely correct from this artificial increase in activity.

The Economy

The U.S. economy shed 95,000 non-farm payrolls in September on a seasonally-adjusted basis. The results were slightly worse than most economists had expected. This marks the fourth consecutive month that the economy has lost jobs. The government sector accounted for the majority of the weakness. The private sector continued to add payrolls at a steady pace which is a positive sign. Currently, non-seasonally adjusted total non-farm employment shows a figure of 130,564,000, which is a 0.25% increase from September 2009. Despite further job losses, the unemployment rate in the U.S. remained unchanged from the previous at 9.6% in September. First-time unemployment claims declined again this past week. Initial jobless claims dropped by 11,000 to 445,000 in the week ended October 2nd. This is the second straight week that initial jobless claims have fallen and the lowest they have been since early July. However, jobless claims remain at historically high levels and have not fallen to levels that will help chip away at the 9.6% national unemployment rate. In August, personal incomes in the United States increased to $12,571.0 billion compared to a revised figure of $12,511.7 billion in July. Personal incomes are up 3.3% from $12,173.8 billion in August of last year. Personal incomes recorded its strongest annual increase in August since September 2008. Personal incomes have now recorded nine straight months of gains. The personal consumption expenditures (PCE) price index, which is a leading gauge for inflation, increased 0.2% from the previous month. The PCE price index excluding food and energy increased 0.1% from the previous month.

Housing Market

The National Association of Realtors’ Pending Home Sales Index increased for the second straight month in August. The index increased 4.3% to a reading of 82.3 from a downwardly revised July figure of 78.9. However, the index is still down significantly from its same year-ago levels when it stood at a reading of 103.0.

New all-time record low mortgage rates in the past few weeks have helped fuel buyer activity. National average mortgage rates declined from the previous week to 4.27% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on October 7th. This is the second straight week that mortgage rates have declined while reaching a new all-time record low. In the week ending October 1st, the MBA’s seasonally-adjusted purchase index jumped 9.3% from the previous week but was still down 35.09% compared to the same time last year. This is the second straight week that the purchase index has increased and the highest it has been since early May. Despite record-low mortgage rates, the purchase index remains near its lowest levels in nearly 14 years.

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