The Mortgage Corner

We are now beginning to see what is holding back the residential real estate market. The lack of jobs is one cause, of course. But two other factors—the reluctance of lenders and their loan servicers to modify loans, faulty—even fraudulent—foreclosure practices, and too restrictive mortgage credit may be even bigger factors.

Both new-home construction and existing-home sales have been languishing at the bottom of the market since January 2009 with a brief surge during the homebuyer tax incentives of 2010. The beginning of this year’s selling season is giving it some lift, with March housing starts and existing-home sales up.

The National Association of Realtors reports March was a "decent" month for existing home sales with a 3.7 percent gain to a slightly higher-than-expected annual rate of 5.1 million. Prices firmed slightly, up 2.2 percent for the median reading to $159,600. Yet year-on-year, contraction of 5.9 percent is a little deeper than 5.2 percent in the prior month. Slightly more homes were on the market, 3.549 million, but the solid rise in sales brought down the supply reading slightly to a still very heavy 8.4 months.

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The report warns that credit standards are still too tight, reflected in a record all-cash sales rate of 35 percent in the month. Distressed sales made up 40 percent of all sales for the highest rate in nearly two years. The housing market may be lifting slightly but is still near the bottom, as we said.

A look at the distressed markets will tell us why in this Calculated Risk graph. A total of some 2 million housing units are delinquent. Although 30-day lates are slowly declining, the pending Foreclosed (FC), and REO (bank-owned) inventory of about 1 million units hasn’t declined since July 2009.

And the new measures promulgated by the Federal Reserve may take time to implement. For instance, one measure is requiring banks and mortgage servicers to have one point of contact for borrowers either in trouble or wanting to modify their mortgages. Another is not allowing banks to proceed with a foreclosure if it is simultaneously working on a loan modification.

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Qualifying for mortgages has become harder, with credit scores below 680 for even Fannie Mae/Freddie Mac conforming loans no longer qualifying. That means those millions who might have lost their homes could be out of the home buying market for years. That is, they may have solved their financial problems, but it takes many years to get a credit score back above the 680 level.

The Case-Shiller Home Price Index is of no help, as home prices are still declining in most of its 20 metro markets. Its survey tells us that housing prices may have another 10 percent decline, based on historical price-to-rent ratios.

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Here are the Federal Reserve “consent decrees” with the 10 largest commercial banks that include Bank of America, JP Morgan Chase and Citibank:

  • strengthen coordination of communications with borrowers by providing borrowers the name of the person at the servicer who is their primary point of contact;
  • ensure that foreclosures are not pursued once a mortgage has been approved for modification, unless repayments under the modified loan are not made;
  • establish robust controls and oversight over the activities of third-party vendors that provide to the servicers various residential mortgage loan servicing, loss mitigation, or foreclosure-related support, including local counsel in foreclosure or bankruptcy proceedings;
  • provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process; and
  • strengthen programs to ensure compliance with state and federal laws regarding servicing, generally, and foreclosures, in particular.

The Federal Reserve will closely monitor progress at the firms in addressing these matters and will take additional enforcement actions as needed.

Harlan Green © 2011