"Buyer traffic is strong, supply of homes for sale is low,
and yet home prices continue to defy the usual formula,
falling again in March. Prices usually rise as supply
shrinks, but demand is still too low to make those
historical 'norms' compute, not to mention that the type of
supply available is largely distressed. Foreclosures and
short sales accounted for 47.7% of sales, in a three month
running average measured by Campbell/Inside Mortgage
Finance. That's the 25th month in a row that distressed
sales have topped 40% of the market. 'With nearly half of
the market being distressed, we're a long way from a return
to a normal market,' said Thomas Popik, research director at
Campbell Surveys. 'Agents responding to our survey say that
homeowners with well-maintained properties in good locations
are very reluctant to list at today's prices. That's why
inventory is low--and also why forced REO and short sales
are such a big proportion of the remaining market.' Home
prices for non-distressed properties fell 5.7% in March
year-over-year, according to the survey. Prices for
'damaged' REO (bank-owned properties) fell 5.7% and for
move-in ready REO fell 2.5% during the same period. The real
sticker shock is in short sales. Prices of those homes fell
14.3% from March of 2011.
Short sales have been ramping up of late, as banks attempt
to comply with the so-called 'robo-signing' mortgage
settlement. Those are part of the losses the banks are
required to take in the $25 billion deal. Over the past six
months, short sales have moved from 17.8% of all sales to
19.9%, according to the Campbell/IMF survey. They now
represent the number one segment for distressed properties.
That share is likely to grow, as the conservator of Fannie
Mae and Freddie Mac, the Federal Housing Finance Agency
(FHFA), last week announced it was directing the two
mortgage giants to 'develop enhanced and aligned strategies
for facilitating short sales, deeds-in-lieu and
deeds-for-lease in order to help more homeowners avoid
foreclosure.' It includes a requirement that mortgage
servicers review and respond to short sale requests within
thirty days. Lengthy timelines have long been the biggest
complaint in the short sale sector.
Fannie Mae and Freddie Mac hold hundreds of thousands of
distressed loans, and accelerating the process will surely
move the numbers up quickly, although the rules don't go
into effect until June 1. The FHFA is requiring the two make
final decisions on these sales within 60 days. Previously,
short sales could take up to a year and even beyond, with
buyers often dropping out in frustration. 'This could put
short-term downward pressure on home prices, as short sales
by their nature occur more quickly than foreclosures,'
writes Jaret Seiberg, analyst at Guggenheim Partners. 'That
could raise questions about the status of the housing
recovery, which could be negative for those with housing
exposure. That would include homebuilders, mortgage lenders
and mortgage insurers.' On the plus side, short sales tend
to sell at higher prices than foreclosures. It appears,
however, that regardless of the FHFA edict, banks are
already ramping up the short sales. Some began doing so in
the aftermath of the robo-signing scandal, as foreclosures
stalled. Even now, foreclosures falling as short sales rise.
The good news is that sales of distressed properties are
rising, but the headlines will likely focus more on the
falling prices, than the much-needed clearing of these
homes."
No QE expectations
Wall Street is not expecting additional quantitative easing
(QE) from the Federal Reserve at its meeting this week but
increasingly believes in the Fed’s promise to keep
interest rates low until late 2014, according to the latest
CNBC Fed Survey. Just a third of the 53 economists, fund
managers, and strategists who responded to the CNBC survey
see additional QE from the Fed in the next 12 months,
unchanged from the March survey. And just a quarter expect
Operation Twist to be extended beyond its expiration in
June. The survey found that 49% now believe the Fed will
keep interest rates “exceptionally low” through late
2014, up from just 40% in March. The same percentage,
however, disagree, showing that while there has been
improvement, Fed Chairman Ben Bernanke has not yet made
believers of all investors. James Paulsen of Wells Capital
Management called on the Fed “to move beyond its crisis
mindset and appropriately normalize policy to reflect the
maturation of the US economic cycle from crisis to recovery.
Failure to do so soon risks creating another crisis — an
inflation crisis!" In fact, 42% of respondents agreed with
the statement that the Fed’s forecast that it will keep
interest rates low through 2014 is a mistake that could
undermine the Fed’s credibility; 38% said it’s a good
decision that has helped drive down interest rates.
Home prices drop
Home prices dropped in February in most major US cities for
a sixth straight month, a sign that modest sales gains
haven't been enough to boost prices. The Standard &
Poor's/Case-Shiller home-price index shows that prices
dropped in February from January in 16 of the 20 cities it
tracks. The steepest declines were in Atlanta, Chicago and
Cleveland. Prices rose in Phoenix, San Diego and Miami. They
were unchanged in Dallas. The declines partly reflect
typical offseason sales. The month-to-month prices aren't
adjusted for seasonal factors. Still, prices fell in 15 of
the 20 cities in February compared with the same month in
2011. That indicates that the housing market remains far
from healthy despite the best winter for sales in five
years.
Bloom - economy stuck in "Death Valley"
Having raised hopes of a self-sustaining recovery, the US
economy has disappointed and finds itself stuck in “Death
Valley”, says David Bloom, the global head of the FX
strategy team at HSBC. He believes the data is neither weak
enough to guarantee a third round of quantitative easing nor
strong enough to convince the market the Federal Reserve is
about to end its extraordinary measures. “At this stage
the economy worsened markedly, eventually leading the Fed to
its commitment to keep rates low for an extended time
period. The point is that we are now neither at the stage
where the economy has deteriorated markedly, nor are we
seeing the economy improve to the extent where the Fed is
certain not to add stimulus” said Bloom in a research
note. With the market looking for clues on what the Fed
will do next when Ben Bernanke holds a press conference on
Wednesday, Bloom believes euro/dollar is stuck in a tight
range as a game of chicken and egg is played out in the euro
zone. “We have the uncertainty of the French and Greek
elections and the recent blow-out in Spanish bond yields.
Meanwhile, the ECB (European Central Bank) is sending out
signals that it is reluctant to engage in another LTRO
(long-term refinancing operation). Once again a game of
chicken is being played out in the euro zone,” said Bloom.
So until we get confirmation of which direction the US
economy is heading into or evidence that investors are
negative on the euro area as a whole and not just Spain,
Bloom believes the euro will remain on the sidelines despite
volatility elsewhere.
WSJ - ready for another Dodd-Frank spat?
Get ready for another spat over Dodd-Frank mortgage lending
rules. It’s been more than a year since regulators
unveiled the first set of proposed (and yet-to-be completed)
mortgage rules resulting from the 2010 financial overhaul
law. Now a new consumer regulator is hashing out a separate
rule that will define what kind of loans mortgage lenders
will be able to make. At issue is a part of the Dodd-Frank
law, known as the “qualified mortgage” rule. It is
designed to protect consumers from the kind of risky lending
practices that shook the financial system in 2008.
The Consumer Financial Protection Bureau (CFPB), also
created by the Dodd-Frank law, has the difficult task of
completing these rules, which were initially proposed by the
Federal Reserve last year. The idea is to provide an
incentive for the industry to make safer loans, and ensure
that they lenders consider a borrower’s ability to repay
the loan. Loans made under the qualified-mortgage standard
will receive a degree of protection from lawsuits, though
the level of that shield is a matter of intense debate. In
a speech last week, Raj Date, the consumer bureau’s deputy
director, gave some broad outlines of the consumer
bureau’s thinking: "We want to ensure that consumers are
not sold mortgages they do not understand and cannot afford.
We want to minimize compliance burden where possible, in
part through the careful definition of those lower-risk
“qualified mortgages.” We want to ensure that, as the
market stabilizes over time, every segment of prudent loans
has the benefit of sufficient investor appetite and a
competitive market."
It’s a daunting challenge, given that the mortgage-lending
market has contracted since the housing market went bust.
Mortgage lenders have tightened their standards
dramatically, eliminating most of the problem loans that
helped cause the housing market’s woes. Many argue that
tight lending is hampering the economic recovery, so a
misstep by the CFPB could harm the housing market further.
The Dodd-Frank law mandates that the mortgage rule exclude
certain exotic varieties of loans that fed the housing boom
— such as “option” adjustable-rate mortgages, which
only require low minimum payments and allow the principal
balance to increase, and “interest-only” loans, which
don’t require principal payments for several years.
Other pieces are much less clear. One key issue that’s
been debated in policy circles is how much limits the
mortgage rule should place on the amount of debt that
consumers can take on. One joint proposal between an
industry group and three consumer organizations attempts to
solve this problem. It says that qualified mortgages should
automatically include any loans made to borrowers who are
spending no more than 43% of their pretax income on all
debt, including home loans, credit card debt and car loans.
Loans could be allowed up to a 50% debt-to-income ratio if
the borrower’s housing costs only comprise 31% of income,
or if the borrower demonstrates stable income or cash
reserves.
Still, it remains to be seen whether the consumer bureau
will accept this approach. And many in the lending and real
estate industry say they are worried that the regulator will
enact requirements that could crimp lending. One big
concern, particularly for small lenders, is that the rule
will lack the industry’s top priority — a shield against
lawsuits for loans that meet guidelines set out by the
consumer bureau. Without those legal protections “lending
is going to become more conservative,” said Bill Cosgrove,
chief executive of Union National Mortgage Co. in
Strongsville, Ohio. “That is a problem. It’s a problem
for the housing recovery.” Richard Cordray, the consumer
bureau’s director, told lawmakers last month that the
legal protections sought by the industry wouldn’t
necessarily choke off lawsuits, although reducing litigation
is one of the bureau’s goals. “We don’t want this to
be punted into the courts,” Mr. Cordray said. Consumer
groups say they aren’t trying to spark a barrage of
lawsuits against the mortgage industry. Instead, they argue
that the threat of litigation will give lenders an incentive
to comply with the new lending rules.
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