Banking


30-Year Mortgage Rates Drop to 4.51%

Mortgage rates fell this week from last, amid a weakening job report and an increase in the unemployment rate, Freddie Mac stated in its weekly mortgage market survey.

Here’s a closer look at mortgage rates for the week:

30-year fixed-rate mortgage: averaged 4.51 percent, downfrom last week when it averaged 4.60 percent. Last year at this time, the 30-year rate averaged 4.57 percent.

15-year fixed-rate mortgage: averaged 3.65 percent, downfrom last week when it averaged 3.75 percent.A year ago at this time, the 15-year rate averaged 4.06 percent.

5-year adjustable-rate mortgage: averaged 3.29 percent this week, down from last week when it averaged 3.30 percent. A year ago, the 5-year ARM averaged 3.85 percent.

1-year ARM: averaged 2.95 percent this week, downfrom last week when it averaged 3.01 percent. At this time last year, the 1-year ARM averaged 3.74 percent.

Source: “Mortgage Rates Fall After Weak Job Report,” Freddie Mac (July 14, 2011

Strategic default smarts

By Tara Tran • Jul 7th, 2011 • Category: Feature Articles, Journal Articles, July 2011 Journal

 

This article reviews a newly-developed Fair Issac Company (FICO) analytics model which predicts a borrower’s likelihood to exercise a strategic default and revisits the financial advantages of a strategic default for a negative equity homeowner.

 

FICO findings

Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005. [For more information on the strategic default trend, see the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]

FICO researchers found borrowers who walked away from their mortgages had common traits including:

  • higher FICO scores;
  • better credit management (understood financial statements);
  • less retail balance (did not need credit to buy);
  • shorter length of residence on the property and thus greater likelihood of a negative equity; and
  • more open credit in the past six months with which to purchase items. [For more information on FICO’s findings on strategic defaulters, see the FICO article Predicting Strategic Default.]

 

The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record. [For more information about the fallacy of FICO’s argument, see the June 2010 first tuesday article, The FICO score delusion.]

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages. [For more information on the relationship between higher credit scores and strategic defaults, see the October 2009 first tuesday article, Financially savvy homeowners turn to mortgage defaulting as a strategy.]

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied. [For more information on when to strategically default, see the May 2011 first tuesday article, Short sale or foreclosure? The naked truth for underwater homeowners.]

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

– ftCopyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

Latest Bill Calls for Fannie, Freddie Merger

A bill is expected to be introduced today in the House of Representatives that calls for a merger between government-sponsored enterprises Fannie Mae and Freddie Mac, The Wall Street Journal reports.

Rep. Gary Miller, R-Calif., who is introducing the bill and who is also a real estate developer and former home builder, proposes that the newly merged firm also be restructured in how it operates. It would purchase mortgages and sell them to investors as securities that are backed by the government.

Unlike other bills that have called for winding down of the GSEs and privatizing them, Miller’s bill would not seek private owners for the new entity. However, the new firm would be privately capitalized.

Banks would pay a ‘guarantee’ fee on loans that would fund the firm’s operations and maintain adequate capital. Investors would pay an additional fee to finance an insurance fund that would cover catastrophic losses,” The Wall Street Journal explains.

The new firm would be regulated by the Federal Housing Finance Agency. The FHFA would ensure the firm’s market share never exceeds 50 percent of the mortgage market.

Lawmakers continue to wrestle over the fate of the GSEs, which have cost taxpayers $138 billion since the government took them over in 2008. Earlier this year, the White House called for winding them down. A series of bills currently in Congress are attempting to shrink Fannie and Freddie’s role and privatize them.

Miller’s bill is expected to garner bipartisan support.

Source: “Bill Calls for Fannie, Freddie Merger,” The Wall Street Journal (July 5, 2011

Study: Real Estate Is at a ‘Historic Turning Point’

Nearly two-thirds of economists and real estate experts recently polled say the U.S. housing market is at a historic turning point. More than half say they expect national home prices to reach bottom this year and remain stable with a modest 2 percent average annual growth through 2015, according to MacroMarkets LLC’s June Home Price Expectations Survey.

MacroMarkets polled more than 100 housing experts, including Lawrence Yun, chief economist of the National Association of REALTORS®; Frank Nothaft, Freddie Mac’s chief economist; and others.

Most of the experts polled said they believe the bottom for housing prices occurred in the first quarter of 2011 or will arrive sometime before the end of the year.

While predictions varied somewhat, on average, panelists predict a 3.52 percent decrease in home prices in the fourth-quarter of 2011 compared to the same period in 2010. They predict then small increases every year through the fourth-quarter of 2015, when prices are expected to rise 3.47 percent on an annual basis.

Greece and the euro

Was it worth it?

Jul 4th 2011, 14:10 by R.A. | WASHINGTON

STEVE WALDMAN asks the burning question:

Suppose that Greece had never adopted the Euro and the terms of its external borrowing had remained subject to “market discipline”, as it had been in the 1990s. Would Greece today be better off or worse off, in real terms, looking forward?

The question is impossible to answer, obviously, but it’s worth thinking about all the same. As Mr Waldman indicates, Greece was able to borrow on unrealistically good terms for most of the last decade; somewhat surprisingly, national interest rates converged in the wake of the adoption of the euro. This contributed to Greece’s accumulation of debt, and only when market forces began to reassert themselves and peripheral yields diverged from core yields did it become clear that Greece’s debt burden was unsustainable.

Of course, market discipline isn’t the only discipline around. Entrance into the euro zone was contingent on Greece’s accomplishing certain reforms and achieving a required level of macroeconomic prudence. Greece clearly fell short of the standards of good behaviour other euro-zone members had in mind, but economic research indicates that even when fiscal rules don’t strictly bind they can nonetheless have a positive effect. The process of entering the euro zone didn’t turn Greece into Germany, but it may have left Greece in better institutional shape than it otherwise might have been.

As a euro-zone member, Greece gave up monetary independence. As it turned out, the super-responsible ECB spent the 2000s making a monetary policy that fit the laggardly German economy, and which was actually too loose for Greece’s economic situation (according to a simple Taylor rule). On the other hand, from 1999 to 2010, Greek inflation topped 4% only twice. Between 1980 and 1998, by contrast, Greek inflation was never below 4%. Indeed, for all but 4 of those years, inflation was in double digits. Would Greece have contained its inflation problem outside the euro zone? And if it hadn’t, what impact might that have had on growth?

The current austerity plans being foisted on Greece are too severe, but they nonetheless include many needed reforms. Greece will probably make it through this episode with a smaller and more manageable state, a broader and more reliable tax base, and a less encumbered private sector. Without heavy outside pressure, the Greek government might never have undertaken these measures.

I don’t claim that this all amounts to a clear positive answer to Mr Waldman’s question. Greece’s outlook may well be worse than it otherwise would have been. But for all the current pain, it’s not obvious that the euro zone hasn’t been a net plus for Greece. Consider this chart:

This image compares the path of real per capita output for Greece with that for Britain and Denmark—two countries in the European Union but not the euro zone. These levels are normalised; in absolute terms, Denmark and Britain are a bit richer than Greece. But Greece clearly enjoyed catch-up growth during its euro stint. And while some of that growth has been given back during the brutal recession years, it remains (and is projected by the IMF to remain) closer to British and Danish income levels than when it joined the single currency. Might it have caught up anyway? Certainly. This is simply to show that the decision to join wasn’t obviously a big mistake.

What is certain, however, is that Greece’s outlook should be better and would be better within a better euro zone. But you don’t build good supranational institutions overnight. Today, Americans are celebrating a federation that, after 235 years, only mostly works and then only some of the time. Whether Greeks should be heartened or discouraged by the American experience is another very good question.

Do you agree with the motion?

Representing the sides
Ha-Joon  Chang
Defending the motion
 
Ha-Joon Chang
Faculty of Economics, University of Cambridge
Jagdish Bhagwati claims that it is growth that is driving the expansion of manufacturing. But where does this higher income come from? It has ultimately to come from productivity growth, which is faster in manufacturing, so a weaker manufacturing base means slower growth.

READ MORE
Jagdish Bhagwati
Against the motion
 
Jagdish Bhagwati
Professor of Economics and Law, Columbia University
Ha-Joon Chang seems to be unaware of the conceptual problems that make comparisons, across countries and indeed over time, of manufacturing and services difficult. As I noted almost two decades ago, services often are a result of what I called a “splintering process”.

READ MORE

A Dodd-Frank report card

By Kelli Galippo • Jun 28th, 2011 • Category: real estate newsflash

The one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is swiftly approaching, and government officials, lawyers and media outlets are all anxiously tracking the progress of regulations being formulated to implement the required changes.

So far, 28 deadlines for the drafting of new regulations have been missed. Of the 385 new rules to be written, only 24 have been completed.

It has become undeniable that many on Wall Street (and in Congress) are using highly-paid, aggressive lobbyists to resist the changes demanded by Dodd-Frank. As a result of the delays, most of the new safeguards may not become effective until after the next election — giving newly-elected officials (supported by lenders) an opportunity to stop them altogether.

Regulators overseeing the transition process of the overhaul are struggling to discern whether the requests to slow the process down are genuinely in the interest of the consumer or just excuses for delay conjured up by those with only an interest in their own pocketbooks.

first tuesday take: Dodd-Frank is going to take longer to implement than expected. We anticipated lenders (and choice members of Congress) would do whatever they could to slow or kill the process. For them, lending is all about how much money can be taken from the consumer. Lenders are part of the rentier society that makes money simply by having money, versus the American homeowners who must contribute their skills to society and “rent” the money they need from the rentiers.

Among the many changes, (Dodd-Frank) strictly defines a qualified residential mortgage (QRM) as a Real Estate Settlement Procedures Act (RESPA)-controlled loan (for personal purposes, not business-related) which is not a Section 32, high-cost RESPA loan typical of equity loans and private money non-business loans. Tighter parameters will be placed on a borrower’s ability to obtain a mortgage not in the QRM category. [For more information regarding the Dodd-Frank changes, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement; for more information about the QRM, see the May 2011 first tuesday article, How much medicine can the sick housing market stomach?]

These tighter lending standards and increased consumer protection measures mean less business for lenders who made a killing during the Millennium Boom originating subprime loans and adjustable rate mortgages (ARMs).

Furthermore, the legislation prevents mortgage loan brokers (MLBs) from being compensated through yield spread premiums, or undisclosed kickbacks in an effort to remove MLB incentives for originating mortgages homebuyers can’t afford to repay. This is a good thing, which many MLBs remaining in the business acknowledge. Those who participated in the carnage have mostly lost their licenses or let them expire. [For more information regarding kickbacks, see the October 2010 first tuesday article, How to make money as an endorsed, registered, law-abiding RESPA mortgage loan broker.]

It is crucial for regulators to remember the purpose of these changes is to protect the mortgage borrowers. Further delay of the changes leaves homeowners and homebuyers vulnerable to the game played and (thus far) always won by lenders.

Re: “Financial overhaul is mired in detail and dissent” from the NY Times

« Previous PageNext Page »