Marc (Moshe) Preger Mortgage Solutions

Marc's Mortgage Matter's

QE2 is Over, Reverse Mortgages, and Hong Kong!

June 26th, 2011 10:05 AM

Somehow a 22-year old buying a 57,000 square foot mansion is wrong. Maybe not - I just wish I'd returned her numerous phone calls to me over the last few years... IsThereRoomForMe?

Wells Fargo Home Mortgage announced today that it will discontinue origination of Home Equity Conversion Mortgages (HECM), commonly known as reverse mortgages. The HECM is a U.S. Department of Housing and Urban Development reverse mortgage program that was designed for senior citizens in 1987. Wells Fargo Home Mortgage began originating reverse mortgages in 1990. As of 2010, the funded volume of reverse mortgage business was approximately 2.2% of retail mortgage volume.

The company stated that the decision was made based on today’s unpredictable home values along with the restrictions associated with reverse mortgages that make it difficult to determine seniors’ abilities to meet the obligations of homeownership and their reverse mortgage, e.g., payment of property taxes and homeowners’ insurance. The government’s HECM or reverse mortgage program was designed in a different economic time. No Kidding!

Deposits are the mother’s milk of banking, so it’s always interesting to look past asset size and look at deposits. Here are deposit totals for a few names you’ll know.

$1.01 trillion	Bank of America (1)
$930 billion	Chase (2)
$848 billion	Wells (3)
$844 billion	Citigroup (4)
$204 billion	U.S. Bank (5)
$ 60 billion	KeyCorp (20)
$ 50 billion	Charles Schwab Bank (22)
$ 15 billion	Associated Bank (51)
$ 8 billion	Flagstar Bank (84)
$ 7 billion	Sterling Financial (98)
$ 5 billion	Texas Capital (121)

Housing Market Forecasting: Don't Even Bother

The only thing we know about the future of the housing market right now is that we don't know anything

590 psychic fail kjarrett flickr.jpg

Are home prices at the bottom, near the bottom, or far from the bottom? Will sales pick up later this year, next year, or in a decade? When will defaults slow to a trickle? The answers to these questions depend on who you ask. The truth is that nobody really knows. In fact, no one has a clue.

This point became quite clear on Thursday at a housing conference where Robert Shiller, Yale economist and co-creator of the much-cited S&P/Case-Shiller Home Price Index, spoke about the uncertainty plaguing the market. Diana Olick at CNBC reports him saying:

Statisticians deal with things that repeat themselves. This housing boom and bust is so historic and unprecedented, you can't forecast the future because you have no comparison.

Of course, that didn't stop Shiller from making broad statements about things that wouldn't surprise him. Reuters reports him also saying:

"My gut feeling is we might see a continuation of the decline" in home prices, Shiller said earlier Thursday at a Standard & Poor's housing summit.

He added that a 10 percent to 25 percent slump in real home prices "wouldn't surprise me at all," though he cautioned that was not a forecast.

And:

As for when home prices might bottom, Shiller told Insider that was unclear and it was possible prices could slide for 20 years.

"We've seen five years of decline already since the peak in 2006 and I don't see evidence that we're coming out of it," he said.

But not everyone agrees. Separately, an article by Suzanne Kapner from the Financial Times reports on an analysis by Altos Research that asserts optimism is returning to the U.S. housing market:

List prices rose in 24 of 26 cities tracked by Altos Research in May, with San Francisco, Washington and San Jose, California, showing the biggest gains.

Separately, CoreLogic's latest report on home prices agrees that "signs of market stability" are coming as summer approaches. It says that the home price declines are slowing.

Who's right? It's impossible to know. As Shiller says, we're in unchartered territory. The U.S. has never experienced a housing bubble as large or widespread as the one that burst in 2007. Prices could return to their usual trend line, or they could overshoot, dipping even lower. The excess inventory could result in years of price stagnation. Prolonged high unemployment could make matters worse. Meanwhile, Congress' housing finance policy reform debate paired with last year's financial regulation bill makes the market even less stable, as the rules of the game are changing.

To refashion a classic Plato quotation (attributed to Socrates), you could say that the only thing we know about the future of the housing market right now is that we don't know anything. Though, that is something. As long as the future of home prices, home sales, and foreclosures remains hopelessly uncertain, many consumers will be wary about buying a home. At some point, home prices will have fallen far enough that the fear of the unknown will be overshadowed by the perceived bargains out there. At that time, we'll begin to see home sales slowly tick up until home prices are rising consistently and confidence is restored. But we don't know when that will be. And until then, all forecasters can really do is guess. Personally, I believe we have a rosier picture here in the immeadiate Tri-State area, thank goodness!

Last week, the University of Hong Kong released their Hong Kong Residential Real Estate Series (HKU-REIS) indicating that, in April, the price of residential properties increased 1.52% since March climbing 25.55% above the level seen in April 2010.

The “Hong Kong Island” index, “Kowloon” and “New Territories” sub-components also showed notable monthly and annual increases with the "Hong Kong Island" series indicated that prices have now far outpaced the prior 1997 peak.

The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.

Nearly 80 percent of Libyans have known no other leader than Moammar Kaddafi. His 42 years in office would be the same as if Richard Nixon were still in the White House.

What do these countries have in common? Botswana , Kosovo , Gambia , Trinidad and Tobago , Bahrain , Cyprus , Qatar , Luxembourg , Belize , Estonia , Iceland and The Bahamas . The answer is that Wal-Mart has more employees than each of these countries has in their entire populations.

The nation’s two biggest providers of reverse mortgages are no longer offering the loans, as the economics of the business have come under pressure.

Wells Fargo said its inability to assess borrowers' financial health was the biggest factor in leaving the business. Anyone over 62 with enough home equity can take out a reverse mortgage.

Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America, the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance.

But the loans have increasingly become a riskier proposition. Banks are not allowed to assess borrowers’ ability to keep up with all their payments, and more borrowers do not have the wherewithal to stay current on their homeowners’ insurance and property taxes, both of which have risen in many parts of the country. At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Yet home prices continue to slide.

“We are on new ground here,” said Franklin Codel, head of national consumer lending at Wells Fargo. “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.” He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.

As a result, banks are seeing a rise in what are known as technical defaults, when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.

Bank of America, meanwhile, said that declining home values made fewer people eligible for reverse mortgages. So it decided to redeploy at least half of those working on the mortgages to its loan modification division, which has been criticized for failing to help enough homeowners on the brink of foreclosure. (Shocking, that after years of selling bogus loan products, remember Countrywide?, like Option Arms and plugging NO DOC loans to my 9 year old sister - they finally are pulling personal to help with the loan modifications that millions needed help with in past 24 months plus..to avoid foreclosure and sleepness nights.....utter chutzpah!)

For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.

“We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

Reverse mortgage borrowers are required to pay premiums for mortgage insurance, which protects the lender if the homes are ultimately sold for less than the mortgage value, since the government is required to pay the difference to the lender. The premium rates were increased last October to account for declining home values (though one sizable upfront mortgage premium was eliminated to make the loans more attractive to certain borrowers).

But lenders are responsible for making tax and insurance payments on behalf of delinquent borrowers until they submit an insurance claim to HUD, at which point the agency would be responsible since it provided the insurance against default.

In January, HUD sent a letter to lenders and reverse mortgage counselors that provided guidance on how to report delinquent loans to the agency, and what steps the lenders could take to get borrowers back on track, like establishing a realistic repayment plan that could be completed in two years or less, or getting a HUD-approved mortgage counselor involved to help come up with a solution. If one cannot be reached, the lenders must begin foreclosure proceedings.

Both Wells Fargo and Bank of America have said they have not foreclosed on any borrowers to date.

With the news that Wells is exiting reverse mortgage lending in all channels came a reader commenting, "People say this is a recession, not a depression. They are correct, but I think they don't see one of the big reasons why. There are four safety nets our society has now, that were not in existence in the early thirties: Social Security, Medicare, Medicaid, and Reverse Mortgages. Bank of America has exited the sector primarily due to the fact that a relatively small reverse mortgage department was a distraction to the main effort to show how well they are doing at fixing their issues when the Dodd Frank regs go into effect 7/21. These regs will further penalize the large banks that continue to have legacy loans issues, and Bank of America has Countrywide's. In Wells' case, I believe that Wells does not feel it is in their best interests to continue to produce new reverse mortgages because HUD has eliminated the discretionary power to delay a foreclosure if the bank chooses to do so. As with BofA, the bottom line for Wells is that the reverse mortgage business represented a very small portion of their mortgage business. That business is now a huge regulatory headache and now is going to present a potential risk that Wells is not willing to live with. If you take away any one of the four programs noted above, and you will have seniors digging through the dumpsters. In 'The Grapes of Wrath,' Granny was in the Ford heading west, and not for the fun of it."

"Wells' reasoning for getting out of reverse is a bit of 'inside baseball' if you know what I mean. Lenders do not want to foreclose on reverse mortgage borrowers who do not pay their taxes and insurance. The PR would not be pretty - 'Wells forecloses on little old lady who has a reverse mortgage.' What has been happening is that Wells and other reverse servicers were paying the taxes and insurance for the 5% or so of reverse borrowers who were delinquent. HUD has been insisting that lenders foreclose - it is a system practically designed to fail and to cause more problems for the servicers. I think Wells got tired of waiting for HUD to create a solution. (There's something novel - waiting a long time for HUD to act.) Anyway, what this means for MetLife and others in that sector is an opportunity. I think that Wells' move will get HUD off the dime."

Click to enlarge!

The Federal Reserve Open Market Committee closed a two-day meeting on Wednesday, releasing updates to their economic projections for the future. While acknowledging an economy recovering "somewhat more slowly than the Committee had expected", the Fed believes that at least some of the issues keeping the economy from moving forward are likely to prove transitory, and that signs of improvement will start to show later this year. Should the recent decline in oil and especially gasoline prices stick around for a while, this would eventually start to keep billions of dollars out of the gas tank and back in productive use across the economy, moving growth higher.

The program of purchasing $600B of Treasury obligations (QE2) will come to an end at month's end with no extension or replacement. Fed Chairman Bernanke noted that he believed the program was important in that it helped stave off the potential for deflation and may have influenced borrowing costs lower for any number of audiences. Mortgage interest rates may have received some minor ancillary benefits in that regard.

Mortgage rates have recently moved down to 2011 lows, and a little flare of refinancing activity has been going on as a result. Perhaps these low rates this will spark some home sales, which could use any lift they can get at this point. With little in the way of economic stimulus available, and the benefit of low interest rates limited to those who need to (and can qualify) to borrow money, we seem likely to have protracted and sub-par recovery.

Next week, the Fed's extraordinary program of purchasing $600 billion in Treasury debt (QE2) comes to a close. More discussions and plans for the Fed to wind down their massive holdings of mortgages and treasuries will come in time, but for the moment big shifts in one direction or another by the Fed are most unlikely. Also, after a rough-and-tumble couple of weeks in the stock markets, investors do seem to be peeking their heads out from under the covers; any significant improvement in the major stock indexes would come at the expense of Treasuries, driving interest rates a little higher then they have been of late.

The Fed does "expect the pace of the recovery to pick up over the coming quarters", but Mr. Bernanke took pains to note that the interest rates the Fed controls would remain extraordinarily low for an "extended period of time." When pressed about how long an extended period might be, he offered that this time frame generally encompasses two to three Federal Reserve meetings, but depends upon the outlook and incoming data. For the moment, we should expect no change to policy until November or even December at the earliest, and only then if things have improved a good bit.

Of course, the Fed will be watching carefully to see if there is any faltering from an already slow economic pace, and would never rule out additional stimulus if the need should arise. It was noted in the release that "The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability."

While better times may be in front of us as we move past a soft patch in the recovery, we still have to plow though a fair pile of data covering this weak period. This will serve to temper any growing enthusiasm for at least the moment, and next week's reports will continue to be fairly glum. As such, we expect little change to mortgage rates as we start the first full week of Summer.

The Recession is really hitting everybody!
Yesterday I got a pre-declined credit card in the mail.
A stripper was killed when her audience showered her with rolls of pennies while she danced.
I saw a polygamist with only one wife.
If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
Angelina Jolie adopted a child from America.
A truckload of Americans were caught sneaking into Mexico.
The Treasure Island casino in Las Vegas is now managed by Somali pirates.
Congress says they are looking into this Bernard Madoff scandal. So the guy who made $50 billion disappear is being investigated by the people who made $1.5 trillion disappear!

Posted by Marc (Moshe) Preger on June 26th, 2011 10:05 AMPost a Comment (0)