Archive for December, 2013

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Despite recent gains, which some of us believe are more of a mirage than an oasis, the economy still isn’t creating enough good-paying full-time jobs to drive a full recovery in the housing market. This is particularly true among the millennials, who continue to live at home with mom and dad at near record levels.

Unemployment—and under-employment—among the 25- to 35-year-old cohort continue to be stubbornly high, which is having a chilling effect on the number of first-time homebuyers—the group that historically has fueled growth in the housing ecosystem. This has led to slower-than-forecast household formation, and increasingly, when new households are formed, they’re rental households.

Some erstwhile buyers have simply decided not to enter into a long-term financial obligation for the time being. Others either don’t have sufficient funds for a down payment or don’t qualify for today’s relatively strict lending requirements.

Those lending requirements—and a lending environment that I believe is going to get more challenging before it gets easier—are the other major headwinds that could slow down housing. While most forecasts are calling for a slight uptick in purchase loans in 2014, it’s easy to build a scenario that goes terribly wrong.

The Consumer Financial Protection Bureau’s new Qualified Mortgage (QM) and Ability-to-Repay rules will exclude somewhere between 10-20 percent of borrowers who would have qualified for a loan in 2013. Most of the large banks will issue loans that fall squarely within QM guidelines, simply to avoid as much risk as possible. The one exception is likely to be jumbo loans, offered to ultra-qualified, high-net-worth individuals.

Another complication is lower loan limits proposed by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). These lower limits will make it more difficult for borrowers in high-priced housing markets to get loans. Those who do qualify for loans will pay more—the Federal Housing Finance Agency (FHFA) recently announced hikes in the GSEs’ guarantee fees and a new, higher payment schedule for borrowers who fall within certain FICO and down payment measures. The FHA has also increased insurance premiums, particularly on its lowest down payment products.

Some believe that by raising costs and limiting loan amounts, the government will drive private capital back into the market, but that seems unlikely until regulatory and litigation risks have subsided, and until loans can be priced appropriately to risk. At some point in 2014, private capital will probably return, along with a more functional secondary market. Then non-bank lenders can come to market with loans available to less-than-perfectly-qualified borrowers, but at significantly higher interest rates.

Higher interest rates, which are inevitable, will begin to erode affordability levels, even with home prices still well off the peak numbers reached during the housing boom. The primary culprit isn’t high interest rates or rising home prices, but lower median incomes and wage stagnation over the past five years.

So which will it be: Full speed ahead, or trouble around the bend? If nothing else, 2014 promises to be a very interesting year.


Many economists and market observers have suggested the market is poised for continued growth as the recovery enters its third year, and there are positive elements in play that provide some reasons for optimism.

Recent loan vintages continue to perform at levels better than historical norms—the default rates on loans from 2011-2013 are virtually non-existent. This has essentially shut off the pipeline of distressed assets, finally allowing the industry to work through the backlog of seriously delinquent loans and loans already in the foreclosure process.

States with non-judicial foreclosure processes have had remarkable success in clearing out the inventory of distressed properties, which is one of the factors driving the housing rebound in states like California and Arizona.

Not coincidentally, foreclosure activity has been declining as well, and this is likely to continue throughout 2014. Unprecedented levels of short sales have been one of the reasons for the decline in foreclosures—every short sale represents one less REO coming to market. And the billions

of dollars of non-performing loan sales have connected distressed borrowers with special servicers, who have managed to modify tens of thousands of loans, preventing more foreclosures.

Investor activity at the low end of the market has had two significant effects: first, investors have gobbled up virtually all available REO homes, and begun to purchase rental properties via short sales and trustee sales.

Second, they’ve helped accelerate home price appreciation, particularly in many of the markets that were hardest hit during the downturn. This, in turn, has dramatically reduced the number of homeowners in a negative equity position, dropping the number of homes in the so-called “shadow inventory” to much more manageable levels.

As home prices have risen, more non-distressed properties have begun to enter the market, helping to ease the inventory shortage of existing homes, and dropping the extremely high percentage of distressed home sales to more reasonable levels than we’ve seen in the past seven or eight years.

Builders have noticed the drop-off in distressed property sales and limited inventory, and housing starts for single-family homes have risen dramatically in the last months of 2013.

So…home sales are up, prices are up, inventory is improving, foreclosures are dropping, and homebuilding is awakening from its long hibernation. What’s there to be bearish about?

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Rick Sharga is EVP for Look for the second part of his 2014 commentary on Friday.

By Krista Franks Brock

The percentage of homeowners who owe more on their mortgages than their homes are worth has declined to less than 12 percent as of the third quarter of this year, according toLender Processing Services’ Mortgage Monitor report. While the increasing number of homeowners rising above water is good news for the market, LPS detects some tumultuous seas ahead as a cloud of problem home equity loans forms on the horizon.

The negative equity rate at the beginning of the year was 19 percent, according to LPS. The company estimates it dropped to 11.6 percent by the end of October. LPS SVP Herb Blecher explained the company’s methodology for calculating the negative equity rate.

“As reports of estimated U.S. negative equity tend to vary widely, and to clarify our approach, we are applying a highly refined methodology to our calculations, accounting for not only the current combined loan amount of first and second liens using comprehensive loan and property data, but also the impact of distressed sale discounts on loans in serious delinquency and foreclosure,” Blecher said.

Close to half—about 48 percent—of today’s outstanding home equity lines of credit (HELOCs) were originated between 2004 and 2006, and more than 75 percent were originated between 2004 and 2009. According to LPS, “the vast majority” of these loans are set to amortize over the next few years.

Credit scores among borrowers with HELOCs originated since 2004 are declining, based on LPS’ data. For example, the average credit score for a borrower with a HELOC originated in 2007 was 744 at the time of origination. Those same borrowers today have an average credit score of 724.

This poses a threat to lenders who “are often on the hook for almost all of 2nd lien losses,” LPS explained. The average unpaid principal balance on these loans varies from $50,000 for loans originated in 2004 to $70,000 for loans originated in 2006 and 2007, according to LPS’ data.

LPS says “alarm bells shouldn’t be going off just yet,” but the company reasons, “if these trends continue— the next few years could present significant risk for defaults in the home equity market.”

Meanwhile, LPS reported that the national delinquency rate declined 2.8 percent in the third quarter, dropping to 6.28 percent; and as usual, things are a little worse in judicial states than non-judicial states.

Foreclosure starts in judicial states were up 12 percent over the month of October, while foreclosure starts in non-judicial states increased 5 percent.

However, the pipeline ratio in judicial states—while still higher than in non-judicial states—continues to improve. LPS says the pipeline in judicial states is now 47 months, down from a high of 118 months in 2011. The pipeline in non-judicial states is 39 months.

Overall, distressed sales made up 14.2 percent of September home sales in the United States, according to LPS’ report. The company says the last time the distressed sale share was this low was in 2007.

In its report, LPS also noted the sharp decline in the refinance share of the originations market. Refinance mortgages are down from 75 percent at the beginning of the year to about 50 percent in October.


While analysts across the industry are reporting waning price gains as we head toward winter, Clear Capital also points out another interesting – and perhaps counterintuitive – trend occurring in the housing market. Prior to the recovery, high saturations of distressed sales correlated with falling prices, but today’s market reveals a switch such that high levels of distressed sales are taking place alongside higher price gains.

Currently, distressed sales are more prevalent among higher-performing markets, according to Clear Capital’s Home Data Index Market Report released Monday.

The average annual price growth among the 15 top-performing markets is 19.2 percent, and distressed sales make up 24.5 percent of sales in these markets.

In contrast, prices in the lowest-performing markets average 4.9 percent over the year, and distressed sales make up a lower 17.2 percent of sales in these markets, according to Clear Capital.

This is part of what Clear Capital has termed the “First-In-First-Out” recovery, in which hard-hit markets have made the strongest and quickest comebacks in the housing recovery.

“The Phoenix MSA has embodied this behavior as one of the first markets to exhibit a sustained recovery alongside its high levels of distressed sale saturation,” Clear Capital said in its press release Monday.

“After significant gains, the market’s growth is now moderating with quarterly growth of 2.4%, less than half of the current annual rate of growth when annualized,” Clear Capital continued.

In fact, Phoenix, having spent close to a year at the top of Clear Capital’s highest-performing list, has slid off the list completely.

Nationally, price gains are starting to let up as well, according to Clear Capital.

National home prices increased 1.8 percent in the rolling quarter ending in November, almost half of the previous quarter’s 3.3 percent gain.

“Though some market observers may take this as a sign of a deflating bubble, we see this as a natural, and welcomed evolution on the horizon of the new housing landscape,” said Alex Villacorta, VP of research and analytics at Clear Capital.

“Understandably, many current homeowners would like to see hot gains continue for some time to come,” he added. “Market participants, however, are better served by a cooler and more sustainable recovery.”

On an annual basis, prices rose 10.8 percent year-over-year during the rolling quarter ending in November, according to Clear Capital. This is down from an 11 percent gain in the previous quarter.

REOs and short sales made up 21.6 percent of home sales during the three-month period ending in November, which according to Clear Capital is “substantially lower” than the 41 percent high reached in 2011.

On an annual basis, the Northeast and South posted single-digit price gains as opposed to the West and Midwest’s double-digit gains.

Prices in the Northeast increased 6 percent over the year. In the South prices were up 8.7 percent.

In the West and Midwest, prices rose 19.3 percent and 10 percent, respectively.

On a more local level, Clear Capital found eight of the 15 highest performing major metro markets over the quarter were located in California with San Francisco, Riverside, and Sacramento topping the list.

The lowest performing metro, and the only one to post a quarterly decline, was the Houston, Texas, metro, which experienced a 1.4 percent price decline over the quarter.

Birmingham, Alabama, and Honolulu followed with price gains of 0.3 percent and 0.4 percent, respectively.