Mortgage Industry Trend Update - March 2011

March 2011

Investors and cash-only buyers seeking bargains in the nation's extensive inventory of distressed properties helped increase sales of existing homes in January to an eight-month high. Prices continue to fall, however. Case-Shiller data released in late February showed a 3.9% drop in home prices during the fourth quarter-and a 4.1% annual decline. San Diego and Washington, D.C., were the only major metropolitan areas to see a year-over-year price improvement. Thanks to new construction codes in several key states, starts rose 14.6% in January. An 80% jump in multifamily construction starts offset a 1% drop in single-family starts. The number of foreclosures increased by 12% in January, although there was a 23% increase in states with non-judicial foreclosure processes, and a 7% decrease in states with judicial processes. The average interest rate on a 30-year fixed-rated mortgage topped 5% for the first time since early 2010, and the Obama Administration announced plans to eliminate Fannie Mae and Freddie Mac.

Cash Purchases of Distressed Properties Boosted January Sales of Existing Homes
Sales of previously owned homes rose to their highest level in eight months in January, according to the National Association of Realtors (NAR). Sales were up 2.7% from December, to a seasonally adjusted 5.36 million units in January. That represents a 5.3% increase from one year earlier. The NAR also reported that the number of all-cash sales increased-to 32%, from 29% in December and 26% in January 2010. That suggests investors are focusing on foreclosures and other bargains, the industry group said. Investors were responsible for 23% of purchases in January, up from 20% in December and 17% in January 2010. New-home sales fell 12.6% in January, according to the Commerce Department.  

Prices Down Almost Everywhere in Q4
Data through December 2010, released in late February by Standard & Poor's for its S&P/Case-Shiller Home Price indices, show that home prices declined by 3.9% during the fourth quarter of 2010. Prices were down 4.1% versus the fourth quarter of 2009, which is the lowest annual growth rate since the third quarter of 2009, when prices were falling at an 8.6% annual rate. Nearly all (18 of 20) metropolitan areas covered by Case-Shiller data were down compared with December 2009, leaving San Diego and Washington, D.C., as the only two cities where home prices are increasing on a year-over-year basis.

Housing Starts Up, Due to Construction of Multifamily Units
Housing starts jumped 14.6% in January, despite the miserable weather. An 80% jump in multifamily starts accounted for the increase, as legal distortions trumped weather problems. Several states (including notably California) changed building codes January 1, causing a surge in permit issuance in December, which translated to starts in January. Single-family starts fell 1.0% to 413,000. Starts were down in the West but up in the other three regions. Permit issuance fell back down after the December spike, but the level (562,000) remains up from November, although down 10.7% from last January. Starts are down 2.6% from last January, but only because the 81.9% jump in multifamily starts largely offset the 19.2% drop in single-family starts. Housing data are always very volatile in the winter months because of weather, even without regulatory issues.  

Foreclosures Up in January
The number of U.S. home foreclosures rose 12% in January, but researchers noted significant differences among states depending on what type of foreclosure process they use, according to a Reuters report citing RealtyTrac data. While bank seizures climbed 23% in states with non-judicial foreclosure processes, they decreased 7% in states with judicial processes, suggesting that legal scrutiny of lender practices has slowed actions against delinquent homeowners in states with court oversight. Despite the monthly increase in January, foreclosures were still down 11% from one year earlier. And while the number of foreclosure filings rose 1% in January, it was down 17% from the previous year. The report also noted that five states-California, Florida, Michigan, Arizona and Illinois-accounted for more than half of the January foreclosure filings. California alone accounted for more than 25%. For the forty-ninth month in a row, Nevada earned the dubious distinction of having the highest foreclosure rate in January: One of every 93 homes there received a foreclosure filing. That's more than five times the national average. Overall, the number of foreclosures may rise again before it falls. According to Reuters, the number of "underwater" single-family homes rose to 27% in the fourth quarter, from 23% in the third quarter.  

Delinquencies Declined
The number of households that are behind on their mortgage payments dropped during the fourth quarter to the lowest level in two years. The Mortgage Bankers Association reported that 8.2% of loans were in the hands of a borrower who missed a payment between October and December. That translates to 4.3 million households. At the end of 2010, 4.6% of all mortgages were in foreclosure. The hardest-hit state was Florida, with 14% of all loans in foreclosure and another 10% with missed payments.  

30-Year Rates Above 5% Again
The troubled housing market faced yet another challenge in February, as the average interest rate on a 30-year mortgage exceeded 5% for the first time since last spring. Rising rates could convince potential buyers-many of whom are still concerned that prices will keep dropping-to stay on the sidelines even longer. The average rate on 30-year fixed-rate mortgages subsequently dropped below 5% again, settling at 4.95% in the week ended February 24, according to Freddie Mac, down from 5% a week earlier.  

Obama Administration Calls for End to Fannie Mae, Freddie Mac
The Obama administration's plans for reshaping the government's role in housing finance include the eventual dissolution of Fannie Mae and Freddie Mac. According to The Wall Street Journal, a government report released in February includes three options for replacing the institutions, all of which would make mortgages more expensive and potentially make home ownership an unaffordable goal for more families. The first option would largely privatize the mortgage market by having lenders originate and securitize mortgages without any government backing. The second option would also create a largely private marketplace, but with provisions for government support during times of financial crisis. The third option would create new privately owned companies to buy mortgages from banks and sell them as securities. No course of action has been charted yet, however, and the process of eliminating Fannie Mae and Freddie Mac could take up to seven years. In the meantime, the Obama Administration will push for higher minimum down payments-of at least 10%-for loans eligible to be purchased by the agencies.  

Banks Seek Higher Down Payments
Private lenders aren't waiting for new federal rules requiring buyers to put more money down. According to The Wall Street Journal, banks are already raising down payment requirements to offset the risks they face from falling home prices. The median down payment on properties purchased with conventional mortgages in nine major U.S. cities has doubled in three years, and is now 22%. Many lenders believe large down payments discourage delinquencies.