Who Wins and Who Loses in the $26 Billion Deal

The $26 billion dollar settlement announced earlier this month the Department of Justice and and Attorneys General from every state with the exception of Oklahoma is being hailed a significant victory for consumers and a step forward for the housing market.

Major Lenders Involved in the Settlement

There are five major banks involved in the settlement: Wells Fargo Mortgage, Bank of America, JP Morgan Chase, Ally Financial and Citigroup. These five are responsible for the entire $26 billion, though an as-yet-unnamed additional nine other, smaller, lenders can contribute around another $7 billion to the settlement if they choose.

How Much the Banks Are Really Shelling Out

The reality of the settlement is that the five lenders are directly responsible for paying $5 billion in cash to be allocated to the Feds and the 49 participating states. Another $500 million to $1 billion will be paid by Bank Of America Mortgage to settle claims against its subsidiary, Countrywide — $500 million payable immediately and another $500 million to be paid over three years if certain loan forgiveness targets are not met.

Who’s Paying the Balance

Of the remaining $20 billion, $3 billion will be provided by the banks in the form of mortgage refinance loans for current borrowers. The largest portion of the settlement, $17 billion, will be funded by reducing the returns to investors who bought mortgage backed securities from the banks.

Who Stands to Benefit

Some existing homeowners, assuming their loans are not GSE or FHA-backed, with troubled mortgages might see their balance reduced by up to $20,000 — those principal reductions are expected to take $17 to $20 billion of the settlement. Another $3 to $5 billion is expected to be distributed as checks to around 750,000 former homeowners whose homes were foreclosed on between 2008 and 2011. Remaining funds will be directed toward refinance support and foreclosure preventions programs.

Breaking it Down

The $5 billion for customers who lost their homes due to improper foreclosure works out to about $2,000 per homeowner.  The banks, although they seem to have gotten away with a minimum penalty, did not win much if any legal protection as a result of the settlement — states and homeowners can still can after them individually, as can the Federal Government. With the current estimate of negative equity in the housing market hovering around $700 billion, $26 billion seems like barely a drop in the bucket.

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How US Mortgage Rates Are Impacted by the Eurozone Economy

Although Greece seems far away — and far from involved in the mortgage and housing market challenges faced in the U.S., the fact is that our economies are linked.

Simply put, Greece is bankrupt, which means it can’t pay its debts, including those made by foreign governments and banks.

Although the direct exposure of U.S. banks to bad debt in Greece is not huge, when you combine Greece with four other European countries facing the same challenges (Portugal, Italy, Ireland and Spain — together with Greece, they are referred to as the PIIGS), you have a much more daunting problem.

Banks with defaulting loans face a decreased liquidity challenge — as protecting and preserving existing capital becomes more of a priority. Last week saw several of the Big Five banks calling a halt to three and four-year fixed rate specials due to “global economic concerns.” On the verge of recovering from the last bout of bad loans (our own mortgage crisis), a looming debt crisis — even if it occurs thousands of miles away — is not what our economy needs.

In the coming weeks and months, the Euro Zone’s response to the crisis in Greece, and in the other PIIGS, will trickle down with some force on our economy, impacting loans and mortgages and the housing market recovery.

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Home sales rise as home prices continue to fall

Unemployment rate falls to 8.3%

The unemployment rate in January of this year fell to to its lowest point in nearly three years, since February 2009.  This, along with the number of people jobless (12.8 million) — also the lowest in nearly three years — are good indicators that the economic recovery is impacting the job market. (via The New York Times)

Monthly job creation rate better than it’s been in 5 years

Averaging 163,000 jobs a month, the U.S. job creation rate is the best it’s been since before the recession began — the best 12 month report since 2007. (via WSJ Blogs:Real Time Economics)

Home ownership levels still low, as are home prices

Home ownership continues to drop, reaching 66 percent in the fourth quarter of 2011, according to the U.S. Census Bureau. The peak of home ownership in the country was in the fourth quarter of 2004, when home ownership reached 69.2 percent. Standard & Poor’s/Case-Shiller index shows that average U.S. home prices are at mid-2003 levels. Many experts feel that prices will stabilize sometime in 2013. (via USA Today)

Home sales are on the rise

For the third month in a row last December, however, home sales rose. David Blitzer of S&P noted that home prices would be the last thing to improve, after home sales increase and inventory decreases. As the economy recovers and home buyers begin to have increased access to credit, depressed home prices will continue to encourage home sales, eventually kick-starting the housing market recovery. (via USA Today)

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Mortgage rates rise 0.7 points

Last week, mortgage rates rose an average 0.7 points, according to Freddie Mac. Realtor Magazine reports a “series of recent positive reports showing the housing market on the mend” may have affected mortgage rates, halting the downward trend.

Increase in home sales highest in over a year and a half

Existing home sales for December of last year increased 5 percent from the month prior — the biggest month-to-month increase since May, 2010. It is also a 3.6 percent increase year over year from December 2010, when 4.45 million units were sold.

Recovery on the way?

NAR’s chief economist, Lawrence Yun, thinks these may be early signs of a sustained recovery — “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.” (via RealtorMag)

NAR President Moe Veissi believes that with steady improvement in the job market, the housing market will also improve, as more home buyers try to make the most of market conditions — low prices and low rates — in 2012.

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An interesting infographic says “yes”

The site One Block Off the Grid (1bog.org), a free group discount site focused on solar energy solutions for home owners, recently published the following infographic showing some statistics about why some houses sell faster than others.

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Freddie Mac and Fannie Mae announce mortgage forbearance extension

In another move geared to moving the housing market recovery along, the two major mortgage players, Freddie Mac and Fannie Mae, last week announced expanded relief programs for homeowners struggling with their loans due to joblessness. The thought that relieving some of the stress from the combination of joblessness and mortgage obligations will make it easier for distressed and out-of-work homeowners to focus on finding a new job and getting back on track with their home loan.

Freddie Mac and Fannie Mae Forbearance for Jobless now 12 Months

Freddie Mac and Fannie Mae now allow mortgage companies to grant unemployed borrowers payment suspension or reduction for up to 12 months. Previously, the maximum length for mortgage forbearance on Freddie Mac guaranteed loans was six months, with written approval from Freddie Mac.

FHA Forbearance was extended to 12 months last July

The Federal Housing Authority (FHA) made a similar move six months ago, in July 2011, when it mandated that mortgage companies offer 12 months of forbearance to qualified unemployed borrowers — up from a prior maximum of four months.

Nearly 60% of Outstanding Mortgages Backed by Fannie, Freddie and the FHA

The announcement from Freddie and Fannie impacts far more homeowners than did the FHA’s announcement last July — Freddie and Fannie together guarantee nearly half of all U.S. home loans, while the FHA backs less than 10 percent.

For more, read these articles:

• Unemployed Mortgage Holders Get Extension on Payments (The New York Times)
• Mortgage Aid for Unemployed Expanded (Wall Street Journal Developments)
• Fannie Mae unveils new forbearance program for unemployed and Freddie extends mortgage forbearance for unemployed (Housing Wire)

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Federal Reserve speaks up on the housing market

Consumer Confidence + Tight Credit + Too Much Empty Property = Slow Recovery

Last week the Fed sent a housing “white paper” to Congress discussing the importance of housing to the economic recovery. On Friday, Federal Reserve Governer Elizabeth Duke observed that “housing demand and homebuilding continue to be restrained by weak income and sentiment, tight lending standards, and a large overhang of vacant properties.”

Unemployment Improvement in Fits and Starts

Duke said she sees unemployment trending down and for inflation to settle to levels that are consistent with the Fed’s mandate. Unemployment does seem to be dropping: December’s jobless rate of 8.5 percent was the lowest it’s been in almost two years.

Housing Recovery is Critical to Economic Recovery

Duke also noted that, typically, the housing sector plays an important role in propelling economic recoveries — and that so far, the housing sector has not only contributed to the recovery, but the combination of substantially decreased home values and the hit on consumer confidence has not only slowed consumer spending, it has pushed a substantial number of homeowners underwater on their mortgages.

More Aggressive Government Support May Be the Answer

Both the white paper sent to Congress and Duke’s comments on Friday included suggestions that more aggressive policies and action from the government may be required to boost the housing market and spur economic recovery. According to Duke,

“policymakers should at least consider policies that take into account the role the GSEs [government-sponsored enterprises] could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the GSEs. In the end, breaking the current logjam created by large numbers of loans severely past due or in foreclosure and high levels of distressed sales should help reduce losses to the GSEs by breaking the downward cycle in prices. And, I think it is plausible that a faster recovery in the housing markets could speed, rather than slow, the end of GSE conservatorship,”

For more of Duke’s comments at the Virginia Bankers Association/Virginia Chamber of Commerce 2012 Financial Forecast, and perspective on the Fed’s position on the housing market and recovery:

• Economic Developments, Risks to the Outlook, and Housing Market Policies (Elizabeth Duke’s speech)
• Fed governor suggests tight underwriting is stalling recovery (Housing Wire)
• Fed’s Duke Sees ‘Choppy” U.S. Job Market Amid Gradual Recovery (Bloomberg Businessweek)
• Fed Up With the State of Housing (Wall Street Journal|Heard On The Street)

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The housing market in 2011 was a year that saw changing trends and breaking records.

Mortgage Rates

15- and 30-year fixed mortgages hit record lows during 2011. via money.CNN.com

Freddie Mac’s Primary Mortgage Market Survey showed the interest rate for a 30-year fixed-rate loan averaging 3.91% last week, the lowest in the 40 years of the survey’s history. The average interest rate for a 15-year fixed-rate mortgage was 3.21% — also a record low.

Mortgage rates are expected to remain low well into 2012.

Greg McBride, a senior financial analyst at Bankrate.com, commented that “for well-qualified buyers interest rates should be no impediment to home buying in 2012.”

Foreclosures & Loans

There were 14% fewer foreclosure notices served in November year-over-year. via Business Week

The  rate of foreclosure filings slowed considerably in 2011, as banks and servicers responded to the documentation and processing challenges from 2010.

The foreclosure liquidation rate is anticipated to rise next year. via Zillow.com

With the settlement between the states’ attorneys general coalition and the major lenders and servicers coming to a head, Zillow sees an increase “either in conjunction with a settlement… or, alternatively, in the aftermath of the settlement effort falling apart.”

Home Values

The slide in home values since 2008 slowed in 2011. via International Business Times

Zillow projects that home values will fall 35% less this year than in 2010; and the Case-Shiller Home Prices indices show that the rate of decline slowed from the second quarter of this year to the third quarter (from 5.8% to 3.9%).

Home values will likely fall a bit more to finally bottom out in 2012.

Jonathon Miller, president and CEP of Miller Samuel, predicts that the decline will be considerably less than this year.

Home Sales & Starts

In 2011, new single-family home sales are on pace to hit a record low of 301,000. via Business Week

On the flip side, however, existing home sales rose to 4.42 million this fall, the highest in 10 months.

Total home starts (houses and apartments) jumped 9.3% month-over-month. via Internation Business Times

This rise from October to November represents the fastest pace in more than 18 months. Although single-family home construction remains stalled, Fitch Ratings projects a 6.7% gain in residential housing starts next year.

Confidence

The Housing Market Index rose to 21 from last month’s 19. via Mortgage News Daily

The National Association of Home Builders (NAHB) surveys its members monthly to compile the index. Although not huge, 20 is the highest the index has been since May 2010.

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Zillow Real Estate’s latest market report says maybe

On a year-over-year basis, the Zillow® Home Value index declined 5.1 percent. Zillow reports that “the rate of monthly depreciation has stabilized around -0.2 to -0.3 percent over the last few months.”

Of the 156 metropolitan statistical areas covered by Zillow, while 95 showed monthly depreciation in home values, 39 areas actually saw an increase in monthly home value this past October. Twenty-two (22) areas remained flat.

The nine markets that saw the largest year-over-year home value increases from October 2010 to October 2011?

• Tulsa, OK— one-year price gain of 6.2%
• Oklahoma City, OK — one year price gain of 3.1%
• Lincoln, NE — one year price gain of 2.7%
• Madison, WI — one year price gain of 1.3%
• Honolulu, HI — one year price gain of 1.3%
• Fort Collins, CO — one year price gain of 1.3%
• Fort Myers, FL — one year price gain of 0.4%
• Pittsburgh, PA — one year price gain of 0.4%
• Boulder, CO — one year price gain of 0.2%

Another sign of stabilization is the decline in the foreclosure liquidation rate — at 8.1 out of every 10,000 homes being liquidated as of October, 2011 — down from the all-time high of 10.7 out of every 10,000 homes in October, 2010. That’s a drop of nearly 25 percent.

For more details on the Zillow Home Value Index and the latest Zillow Real Estate Market Report, check out these articles:

• U.S. Home Values Continued Fall in October; Rate of Decline Stabilizes (MarketWatch)
• Real Estate Markets: Top 9 Gainers in 2011 (Huffington Post)
• A Bit of Good Real Estate News? (Realty Times)

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Analysts disagree over definition and future of the market

Last week, while some real estate analysts offered a somewhat rosy outlook regarding “stabilizing home prices for non-distressed property,” several industry experts from news sources argued that you cannot simply split the market in two pieces — distressed and non-distressed to paint the picture you want.

So what’s the bottom line? Is the market flat, dropping or rising?

Month over month, CoreLogic report that home prices overall fell 3.9 percent in October, and the S&P/Case-Shiller home price index was down 3.9 percent in September (which represents a three month running average of both distressed and non-distressed sales).

Removing the distressed sales(foreclosures and short sales) from CoreLogic’s analysis, however, home prices fell just 0.5 percent in October.

The Wall Street Journal noted that for the first nine months of 2011, non-distressed property prices were relatively stable, with only a two to three percent decline year over year. A real estate analyst from Barclays, a proponent of looking at the two market segments separately, feels that if the pricing trend continues (distressed pricing dropping while non-distressed pricing stabilizes), it could have the effect of “stabilizing something else: home-buyer confidence.” Only time will tell.

For more details, see:

• This blog post on HSH: Home prices may be more stable than we think
• CNBC Real Estate Reporter Diana Olick’s article, Are There Really Two Housing Markets?
•  WSJ mortgage and housing writer, Nick Timiraos’ post: Why Home Prices Are (and Aren’t) Stabilizing

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