The Mortgage Corner

Ah, that is the $64,000 question we have been asking since 2008, when housing imploded. Where are conditions improving, if anywhere? The Fed announced it would continue to hold down interest rates, and loan modifications are helping to cut into the foreclosure inventory, which has declined slightly from its highs.

The S&PCase-Shiller same-home price index, the best measure of price changes, rose in 19 of its 20 metropolitan areas in May, with San Francisco,San Diego, Minneapolis, and Los Angeles most improved. Prices in its 10-city index rose 5.4 percent, and 4.6 percent in its 20-city index. But in spite of 3 consecutive monthly increases, S&P said prices were still moving sideways—which probably means they expect prices to decline in June and July after expiration of the tax credit deadline.

clip_image002

Prices have stabilized, in other words, but consumers are not yet convinced that the jobs picture will improve. So consumers continue to pay down mostly mortgage debt, says a New York Fed quarterly report on household debt and credit.

“Aggregate consumer debt continued to decline in the second quarter, continuing its trend of the previous six quarters,” said the report. “As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of 6.7 percent from its peak level at the close of 2008Q3. Excluding mortgage and HELOC balances, consumer indebtedness fell 1.5 percent in the quarter and, after having fallen for six consecutive quarters, stands 8.4 percent below its 2008Q4 peak."

clip_image004

This has not helped new and existing-home sales, also recovering from expiration of the first-time homebuyer’s tax credit. Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995, but actual totals are still lower than one year ago.

clip_image006

To put that number in perspective, according to the NAR, existing-home inventories increased to 3.98 million units in July from 3.89 million in June, piling up because of the lower sales rate. But the all time record high was 4.58 million homes for sale in July 2008, so inventories have actually declined 1.9 percent year-over-year. Inventory is therefore very much dependent on the sales’ rate.

clip_image008

So there are some signs of improvement. The latest Federal Reserve survey of Senior Loan Officers also indicated an easing of credit requirements for both residential and commercial loans over the past quarter, the first easing since 2008.

And delinquency rates are declining, according to the Q2 Mortgage Banker’s Association report. The seasonally adjusted delinquency rate stood at 5.98 percent for prime fixed loans (which make up some 60 plus of outstanding loans), 13.75 percent for prime ARM loans, 25.19 percent for subprime fixed loans, 29.50 percent for subprime ARM loans, 13.29 percent for FHA loans, and 7.79 percent for VA loans.

clip_image010

What is obvious is that the percentage of 90 day-late payments and foreclosures is increasing as a share of total delinquencies as lenders speed up the process of modifications and foreclosures to get delinquent loans off their books. The percentage of loans on which foreclosure actions were started during the second quarter was 1.11 percent, down 12 basis points (0.12 percent) from last quarter and down 25 basis points from one year ago.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.  The percentage of loans in the foreclosure process at the end of the second quarter was 4.57 percent, a decrease of six basis points from the first quarter of 2010, but an increase of 27 basis points from one year ago.

“Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired, said NAR economist Lawrence Yun. “Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” Yun said.

Since sales’ statistics are notoriously imprecise (with ± 15 percent error), we can say that real estate sales have been treading water after an initial sales spurt in 2009, though existing-home prices actually increased 0.7 percent in July, indicating that expiration of the tax credits caused most of the sales’ decline in the lower-end of the market.

The bottom line is that banks seem to be finally committed to cleaning the bad loans off their books. This will probably keep prices from rising in the short term. But it will also enable them to reduce their loan loss reserves and so ease credit conditions for home buyers further, thus reducing inventories and boosting sales further.

Harlan Green © 2010