Negative equity gap nears $4 trillion

The U.S. housing market contains a nearly $4 trillion-dollar
negative equity hole, according to Williams Emmons, an economist
with the Federal Reserve Bank of St. Louis.  Emmons made that
statement while speaking at Housing Wire's 2012 REthink
Symposium.  The Fed Bank economist said it would take $3.7
trillion, much more than the $25 billion mortgage servicing
settlement and other federal housing initiatives, to get
homeowners with mortgage debt back to preferred loan-to-value
ratio levels.

Emmons' data estimates the average LTV for those with mortgage
debt is currently 94.3%.  That compares to preferred LTV levels
among mortgage debt holders of 58.4%, which was the average
struck among mortgaged homeowners in the period stretching from
1970 to 2005. Emmons told the crowd there is no easy way to fill
that gap, and the deep hole is hardly discussed among the media
and policymakers.  "We are sort of stuck in this," he told the
crowd. "It's a sweat box we're in, and we can't get out. We are
not talking about this very much … it's just too ugly."  He
added, "It is like the debt that is outstanding is crushing the
equity that is there."

Emmons said the only viable option to narrow the gap is letting
home prices fall until they eventually reach levels that entice
buyers, bringing private capital back in. A home-price boom or a
government bailout would help, of course, but both those
scenarios are unlikely.  At this point, home price appreciation
would need to rise 62% to narrow the gap to the ideal LTV level,
Emmons said. Significant government intervention also is unlikely
given the fact it would take a $3.7 trillion bailout, or 24% of
GDP, to narrow the gap, according to Emmons' data.  He says that
amount makes other federal initiatives launched to band-aid the
housing market so far look like "peanuts" in comparison.  With
that in mind, the only alternative is that we have "millions of
weak homeowners exit, replaced by new private owners with equity
to recapitalize the housing sector."  Emmons said that option
will still be painful since he believes another reduction in home
prices is needed to attract new buyers.  "The asset class is not
priced attractively yet," Emmons said. "You need to get the value
down to where it looks like a screaming buy."  Emmons in his
report said with the assumption that another 20% decline in
national home prices is required to bring in new buyers, the
amount of mortgage debt that must be eliminated then is $4.97
trillion, or 50% of current face value.

Housing Market Double Dip

House prices dropped to levels below the 2009 housing bust bottom in the first quarter confirming fears of a housing market double dip, dropping 4.2 percent from the previous three months, according to an industry report released Tuesday.

Prices have not been this low in the S&P Case-Shiller national home price index since the middle of 2002.

It was the third straight quarterly drop for the index, which was down 5.1% from a year earlier. National prices are now down 32.7% from their peak set five years ago.The S&P and Case-Shiller national home price index covers 80% of the housing market.

“This month’s report is marked by the confirmation of a housing market double dip in home prices across much of the nation,” said David Blitzer, spokesman for Standard and Poor’s.

Housing Market Double Dip-Brief Recovery

The housing market went through a brief recovery period starting in mid-2009. Home prices recovered nearly 5% of their earlier losses. After home-buyer tax credits, which were in effect during the rebound, expired last April, the slump resumed leading to the recently released reports of a housing market double dip.

“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit,” said Blitzer. “Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession.”

A separate S&P/Case-Shiller index covering twenty major urban areas also fell in March, this being a straight eight monthly decline.

This is the second month of the post-recession housing market double dip for the twenty city index. Home prices reached their highest levels in July 2006,but then started a declined that lasted till June of 2010, adjusted for seasonal differences, have plunged every month since.

There has been no shortage of encouraging numbers in recent housing data. New home sales rose 14.8% in April. Existing home sales were up 7.6%. And pending home sales? They were up 6%. Meanwhile housing starts gained 5.8%. And that’s enough of the good news.

The tax credit has expired, so we’re back to reality. And the reality is that the government can’t use tax credits to buy prosperity in the housing market. Not when a record number of foreclosures are waiting around the corner. The little glimmer of hope we saw is about to be overtaken by the grim fact that the housing market is too fundamentally weak to stand on its own.

And homebuilders see the writing on the wall. Yes, housing starts were up 5.8%. But at the same time, housing permits fell 11.5%. And yes, pending home sales rose 6%… but mortgage applications fell 4.1% last week alone. And the unintended consequence of the tax credit: it brought more home sellers to the market… the inventory of unsold homes rose 11.4% in April. Springtime is officially over in the housing market.

And looking ahead, foreclosures will climb. The National Association of Realtors estimates a record 1.1 million foreclosures this year.

Now we have to give credit where credit is due. The tax credit brought an estimated 1 million buyers to the housing market…which no doubt stemmed a lot of foreclosures. So the future could have looked a lot cloudier.

But at the end of the day, sentiment about the housing market is bleak. Strategic defaults continue to climb. Homeowners have reached a point of indifference…that is even worse than anxiety. And there is such a backlog of properties in default that those homeowners will sit expense free in their homes for easily a year before foreclosure proceedings are completed.

Now, don’t be surprised if we see sustained strength in some of the housing data for the next couple of months. It’s no reason for confidence, though. The government’s tax credit required a contract by April 30, and a closing by June 30. Because existing home sales are counted at the time of closing, this data will have a steady run through the June reading. But after that, expect a precipitous drop.

The bottom line: the tax credit may have only succeeded in affecting “the timing, not the total, of home purchases”, according to Barron’s.

And in the midst of all this misfortune, some are still surprisingly upbeat. Toll Brothers (the largest luxury home builder in the country) increased their land holdings for the first time in four years, according to Bloomberg. And Chairman Robert Toll is optimistic, “The past few months’ activity has been driven by an increase in confidence among our buyers”. That may be the case, but, none the less, the company is not immune to the perils of the housing market. They are sitting on $3 billion in inventory, and that inventory will pose a challenge, particularly since volume this year is expected to be just 30% of that of 2005, according to Morningstar analyst Eric Landry.

But it’s not just Toll Brothers. Now is not the time to buy into any housing stocks. As the lingering effects of the stimulus fades, and the glut of foreclosures rises to the surface, we will find another housing low soon enough. Just wait.

Disclosure: No positions

Article written by Brian Rezny

How is the Housing Market Doing

Bipolar is what comes to mind when diagnosing the post-homebuyer tax credit market. There are two separate forces pulling it in opposite directions, and experts aren’t yet sure which path the market will take.

On one hand, sales and prices are rising, indicating recovery. On the other hand, so are interest rates and repossessions, which most certainly do not. And then there are the millions of foreclosures that need to be sold but haven’t yet been listed — so-called shadow inventory — that could derail a real recovery if they hit the market in floods.

The prognosis? Negative short term but turning positive by the end of 2010.

“In the short run, I see a mini-collapse,” said Richard DeKaser, an independent housing market analyst and founder of Woodley Park Research who correctly predicted a downturn back in 2005 when he was chief economist for National City Corp.

One of market’s biggest hurdles is getting beyond the lapse of the $8,000 homebuyer tax credit. Thanks to the incentive, buyers scrambled to beat the April 30 deadline, pushing new home sales up nearly 30% in March.

But that just borrowed buyers from later months. And now we face the hangover effect.

“In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Industry insiders believe the hangover is worthwhile, however, because the credit helped stabilize housing when it most needed help. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years.

Still, there are some strong negatives dragging on the market.

1. Interest rates have been intermittently creeping up. Although nobody expects 6% until at least 2011, the days of 4.5% mortgages are behind us.

2. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.

3. More than a quarter of borrowers are “underwater,” meaning they owe more than their homes are worth.

4. “Strategic defaults” — where underwater homeowners walkway even when they can still afford to pay — accounted for 31% of all foreclosures in March, according to a recent study.

But there is one factor that has experts really scared: homes that are ready to be sold but haven’t been put on the market. Right now, there could be more than 4.5 million homes in “shadow inventory,” according to a recent report by Barclays Capital.

This so-called shadow inventory is a recent phenomenon. In the past, inventory was either tight or it wasn’t. But now, with home prices so low and so many foreclosures on the market, both homeowners and banks have been waiting to put properties on the market.

“These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there’s a hint of good news,” said Leslie Appleton-Young, chief economist for the California Association of Realtors.

But as more sellers put their homes up for sale, supplies increase, which will depress prices again. Rinse and repeat ad infinitum.

That vicious cycle could cause prices to bounce up and down for years. “I see a saw tooth bottom,” Humphries said. “Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. … Without price appreciation, it leaves more homeowners in negative equity. That’s toxic. Any setback, like a job loss, they go into foreclosure.” 

Here’s a novel idea, let’s help the employed, good credit home owners who are making their payments and want to stay in their homes. Let’s help these borrowers save money on their mortgages.

Imagine putting $300 dollars a month into the hands of a person who can actually meet all of their obligations, that $300 would become real disposable spending money. Wouldn’t that help the economy?

We are dumping millions of dollars to support people who are in trouble on their mortgages, in many cases these are people who over stretched, underemployed and really can’t be helped because they never qualified for their mortgage obligations in the first place.

But what about the others…

There are at least three categories of responsible homeowners who deserve some support and cannot get it.  Who are they?
 
1. Five years ago these borrowers bought their first home, they put 20% down,  they had and continue to have excellent credit, income and employment history.  Five years ago the Fannie Mae underwriting engine called DU for desktop underwriter or the Freddie Mac underwriting engine, LP or Loan Prospector approved these borrowers, they had at the time a back end ratio of 65% of their total income.  That was fine, the credit risk was evaluated and the borrowers were approved.
 
Today those borrowers still have perfect credit, have a perfect mortgage payment history, are still employed but now they cannot benefit from today’s low interest rate environment because even with the monthly savings that a refinance will bring them their back end ratio drops from 65% to 59% and that loan is declined. Today the maximum back end ratio allowed is 50%.

With a perfect payment history, do we really believe that these borrowers will stop making their payments when those payments drop by almost $300 a month?
 
2. Borrowers bought a condominium in a 3 unit property with 20% down.  At the time all three units were owner occupied.  Borrowers have again a perfect payment history and good employment and credit.  The other two unit owners in the building tried to sell their condos, when they couldn’t because of the today’s depressed real estate market they choose to rent instead.  Now the remaining owner occupant cannot refinance because the condominium does not meet the new more restrictive guidelines.  2/3 units must be owner occupied.  The remaining owner cannot sell easily either because a buyer will also have issues getting financed because of the condo regulations.

It is also true that a few years ago that same buyer could have purchased in a property with 2/3 units investor owned and gotten the loan approved with a “limited project review” finding, but today they cannot refinance the identical transaction because the condo is no longer acceptable by Fannie Mae or Freddie Mac.

On another, more ridiculous note, we are seeing refinance loans declined because the condo project does not have the utilities that are ‘separately metered’.  Are you kidding me?  This loan was fine when it closed and now because the 3 unit association has one central heating system the loan does not qualify for a refinance?

I appreciate that in the “go go” years of mortgage finance the underwriters may not have read every word on the condo docs, or the appraisal and that some of the loans approved at that time did not meet guidelines but to punish quality borrowers today because of lax underwriting standards in past seems short sighted and unfair.

We will pay $3000 to a homeowner in a short sale to assist with moving costs but we cannot find a way to help a high credit quality borrower save some money on their mortgage because the rules have changed and the building does not qualify.

 
3. Then there are the borrowers whose appraisals don’t come in.  Yes there is the Fannie Mae ‘Refi Plus’ program and the Freddie Mac ‘Home Possible’ program to assist these borrowers but not every one gets approved for reasons we cannot discern. 

What about the borrowers who have a first and second mortgages, there is absolutely nothing we can do for them in this environment if they appraisal comes in too low to roll the second mortgage into the first mortgage.  Second mortgage servicers are still not subordinating their mortgages essentially handcuffing the borrower from any ability to refinance to take advantage of the current market.

Can we make it mandatory that second lien holders subordinate purchase money second mortgages if the credit profile meets certain criteria?  Again, I would suggest that a second mortgage is more secure if the borrower is saving $300 a month on their first mortgage.

There is an easy solution to put more money into our economy, and to secure and stabilize homeownership for those who have proven that they can be successful homeowners: Create a true streamline refinance program. 

If the borrower has a perfect mortgage payment history, remains employed, and meet some general credit score requirement – simply refinance their mortgage no matter what the property value, loan to value or condominium make up.  The servicers have these mortgages already, Fannie Mae and Freddie Mac have these mortgages on their books, and do these mortgage holdings become more risky if we drop the payments for the borrowers?

The large mortgage servicers cannot possibly meet the needs or return the calls of each borrower seeking relief.  The most qualified of those have been left out of the dance and we are doing that part of the population a huge disservice.  We are rewarding consumers who cannot meet their obligations and are over extended and we are completely ignoring the responsible consumers who should be shown some love and appreciation.  Remember these are also the consumers who are paying the bulk of income taxes in this country.

Fannie Mae and Freddie Mac need to create a streamline program, one with very easy processing guidelines, and these refinances should go back to their original servicers so that they do not loose the servicing revenue from their portfolios.  The servicers could pay a flat per loan fee to correspondent lenders or brokers to originate the loans. Streamline the closing requirements to keep the closing costs low, make this a true streamline process so that the originating company can process and close these loans quickly and help millions of American homeowners who have been left out of the conversation but deserve more than anyone to get some reward for their good credit and fiscal management.

Article by: Amy Tierce