Bull Market in Bonds Nearing an End?

After the false starts of 2010 and 2011, the U.S. economy may finally be on the path toward a strong recovery, Lawrence Summers, former Treasury secretary and currently Charles W. Eliot University Professor at Harvard, wrote in an opinion piece in the Financial Times on Monday.

In the springs of 2010 and 2011, many observers who thought they detected evidence that the economy had decisively turned around were disappointed a few months later, Summers wrote.

"Several considerations suggest that this time may be different," he said.

Among them, he listed employment growth that has been running "well ahead" of population growth for some time, a higher U.S. stock market, and the fact that expected market volatility is "lower than at any time since 2007."

He also cited pent-up demand from consumers who have long put off purchases of new cars and other durable goods, and signs that the housing market is beginning to stabilize.

"For years now, the rate of new families setting up households has been well below normal as more and more young people have moved in with their parents," Summers wrote. "At some point they will set out on their own, creating a virtuous circle of a stronger housing markets, more 'family formation' that boosts demand, further improvement in housing conditions and so on."

Of jobs, loans, and timing

Homeowners considering finding a new job and refinancing a house may be wondering which task to take on first. According to mortgage experts, homeowners should complete their refinancing before making any major career changes, especially if they are planning to start their own business or become an independent contractor, in which case, income may fluctuate.

Making sense of the story

• During the refinancing process, homeowners may find that actively looking to leave their current job may impact how the bank views giving them a mortgage. The search will raise a question mark about their future employment and their ability to pay the mortgage.

• In addition to checking employment at the start of the application process, many lenders will verify such information as late as the last 72 hours before mortgage closing. If they learn a borrower is starting a new job in the very near future, the mortgage can be delayed or even derailed. And borrowers who withhold such information could be committing income fraud. Other lenders, however, say they make loans based on a moment-in-time snapshot of a borrower’s finances.

• An advantage to refinancing first is that the borrowers are freeing up additional cash flow by reducing their monthly payment.

• All that said, however, there are advantages to refinancing later, especially for those who might have to relocate when they change jobs.

• A person may get a new job with more income, which may help him or her qualify for a larger mortgage, or even better terms.

Permanent modifications on Fannie, Freddie loans increase in Q4:

Fannie Mae and Freddie Mac completed more than 2.1 million foreclosure prevention actions since the start of conservatorship including 1.1 million permanent loan modifications. These actions, designed to help borrowers stay in their homes, are detailed in the Federal Housing Finance Agency’s fourth quarter 2011 Foreclosure Prevention and Refinance Report. The report also shows that after nine months, fewer than 20 percent of Enterprise loans modified in the four quarters ended March 31, 2011, had missed two or more payments, an improvement over prior years.
With this report, FHFA releases new state data sets and launches an interactive Fannie Mae and Freddie Mac State Borrower Assistance Map, showing the number of loans owned or guaranteed by Fannie Mae and Freddie Mac, delinquencies, foreclosure prevention activities, Real Estate-Owned (REO) properties, and refinances in each state. In addition, the report now includes a graphic showing Delinquent Loans by State and Profiles of Key States, with detailed information about states with the biggest five-year decline in house prices and the highest number and rate of seriously delinquent loans.
Also in the report:

• Half of all borrowers who received loan modifications in the fourth quarter had their monthly payments reduced by over 30 percent, and one-third included principal forbearance.

• Serious delinquency rates for Fannie Mae and Freddie Mac loans remain below industry levels and continue to decline.

• California had the largest number of completed foreclosure prevention actions since the beginning of conservatorship in 2008.

February Existing-Home Sales Slip But Up Strongly From a Year Ago:

Daily Real Estate News | Wednesday, March 21, 2012   

February existing-home sales declined from an upwardly revised January pace but are well above a year ago, while the median price posted a slight gain, according to the National Association of REALTORS®. Sales were up in the Midwest and South, offset by declines in the Northeast and West.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums, and co-ops, slipped 0.9 percent to a seasonally adjusted annual rate of 4.59 million in February from an upwardly revised 4.63 million in January, but are 8.8 percent higher than the 4.22 million-unit level in February 2011.

Lawrence Yun, NAR chief economist, said underlying factors are much better compared to one year ago. “The market is trending up unevenly, with record high consumer buying power and sustained job gains giving buyers the confidence they need to get into the market,” he said. “Although relatively unusual, there will be rising demand for both rental space and homeownership this year. The great suppression in household formation during the past four years was unsustainable, and a pent-up demand could burst forth from the improving economy.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was a record low 3.89 percent in February, down from 3.92 percent in January; the rate was 4.95 percent in February 2011; recordkeeping began in 1971.

NAR President Moe Veissi, broker-owner of Veissi & Associates Inc. in Miami, said market conditions are improving. “Supply and demand have become more balanced in more markets, but with tight supply in the lower price ranges – particularly in the West,” he said. “When markets are balanced, we normally see prices rise one to two percentage points above the rate of inflation, but foreclosures and short sales are holding back median prices.”

The national median existing-home price for all housing types was $156,600 in February, up 0.3 percent from February 2011. Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 34 percent of February sales (20 percent were foreclosures and 14 percent were short sales), down from 35 percent in January and 39 percent in February 2011.

“The bottom line is investors and first-time buyers are competing for bargain-priced properties in much of the country, with home prices showing signs of stabilizing in many areas,” Veissi said. “People realize that homeownership is an investment in their future. Given an apparent over-correction in most areas, over the long term home prices have nowhere to go but up.”

Total housing inventory at the end of February rose 4.3 percent to 2.43 million existing homes available for sale, which represents a 6.4-month supply at the current sales pace, up from a 6.0-month supply in January.
Even so, unsold listed inventory has trended down from a record 4.04 million in July 2007, and is 19.3 percent below a year ago.

“Falling visible and shadow inventory, combined with a dearth of new-home and apartment construction during the past three years, assure that rents will continue to rise, with likely home price increases in 2012,” Yun said.

Fifty-one percent of NAR members report that contracts settled on time in February, 18 percent had delays, and 31 percent experienced contract failures; the cancellation rate was 33 percent in January and 9 percent in February 2011. Contract failures are commonly caused by declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price.

“Many buyers are staying in the market after experiencing a contract failure and making an offer on another property, showing their determination to take advantage of the favorable conditions, but the cancellations are contributing to an uneven sales pattern,” Yun said.

All-cash sales rose to 33 percent of transactions in February from 31 percent in January; they were 33 percent in February 2011. Investors account for the bulk of cash transactions.

Investors purchased 23 percent of homes in February, unchanged from January; they were 20 percent in February 2011. First-time buyers accounted for 32 percent of transactions in February, down from 33 percent in January and 34 percent in February 2011.

Single-family home sales declined 1.0 percent to a seasonally adjusted annual rate of 4.06 million in February from 4.10 million in January, but are 9.4 percent higher than the 3.71 million-unit level a year ago. The median existing single-family home price was $157,100 in February, which is 0.1 percent above February 2011.

Existing condominium and co-op sales were unchanged at a seasonally adjusted annual rate of 530,000 in February and are 3.9 percent above the 510,000-unit pace in February 2011. The median existing condo price was $153,000 in February, up 1.6 percent from a year ago.

Regionally, existing-home sales in the Northeast fell 3.3 percent to an annual level of 580,000 in February but are 5.5 percent above a year ago. The median price in the Northeast was $225,800, down 1.9 percent from February 2011.

Existing-home sales in the Midwest rose 1.0 percent in February to a pace of 1.02 million and are 13.3 percent higher than February 2011. The median price in the Midwest was $120,500, which is 0.5 percent below a year ago.

In the South, existing-home sales increased 0.6 percent to an annual level of 1.77 million in February and are 9.3 percent higher than a year ago. The median price in the South was $138,100, up 1.8 percent from February 2011.

Existing-home sales in the West declined 3.2 percent to an annual pace of 1.22 million in February but are 6.1 percent above February 2011. The median price in the West was $195,300, up 3.1 percent from a year ago.

Bull Market in Bonds Nearing an End?

Mortgage rates have seen historic lows due to a long-running bull market in bonds. Specifically, mortgage backed securities. Demand has far exceeded supply which has driven down mortgage rates. As demand starts to pull back, mortgage rates will begin to move upward.

Say goodbye to the longest bull market for bonds in history. The market is at a turning point, say portfolio managers—some of whom are running the nation’s largest bond funds. The reason: growing worries about inflation . While it is not a problem right now, there are several strong economic factors that typically lead to higher prices down the road.

Rates are already starting to rise, even without the Fed. This week, Treasuries and Mortgage Backed Securities saw a sharp sell-off, bringing yields—which move opposite to prices—to their highest level since October.

Rising yields, when coupled with inflation, are a double-whammy to the value of bonds.

With job growth comes purchasing power and pricing pressure on businesses and consumers. Yigal Jhirad, portfolio manager for Cohen & Steers, thinks this pressure is already underway.

While significant inflation and higher mortgage rates are still far down the road, it is clear that they are on the horizon. This is actually a good thing for housing. The housing market has always performed better in the "sweet spot" of mortgage rates which is in that 5.50% to 7.00% range.

FHA mortgages are poised to get more expensive:

The Federal Housing Administration (FHA) plans to impose significant restrictions on the amount of money that sellers can contribute at closing in the near future. The FHA also will be raising its mortgage insurance premiums during the coming weeks, increasing charges for new purchases across the board.

Making sense of the story

• One reason for the increase in fees is that over the last six years, the number of FHA loans used by buyers has increased significantly. The housing program is financing 40 percent or more of all new-home purchases in some areas and is a crucial resource for first-time buyers and moderate-income families. This is especially because of the low 3.5 percent down payment required for most FHA loans.

• During this span of rapid growth, the FHA’s insurance fund capital reserves have steadily deteriorated – far below congressionally mandated levels. And delinquencies have been increasing. As a result, the FHA is under the gun to get its own house in order, cut insurance claims, and rebuild its reserves.

• Under the changes, the FHA will lower its seller concession cap to 3 percent of the home price or $6,000, whichever is greater. Currently, the FHA allows up to 6 percent of the price of the house to go toward buyers’ closing costs.

• Beyond that change, the FHA also plans significant increases in insurance premiums – upfront premiums will rise to 1.75 percent from 1 percent, effective April 1, and annual premiums will increase by 0.1 percent on all loans under $625,000 and 0.35 percent on mortgage amounts above that, effective June 1.

A hidden fee is set to rise:

The guarantee fee – a hidden fee inside the interest rate quoted on a home mortgage – has been mandated by Congress to increase this spring, and other increases are likely later to take place later this year and next.

Making sense of the story

• The guarantee fee has been charged by government sponsored entities like Fannie Mae and Freddie Mac for more than three decades. The fee does not show up in borrowers’ mortgage documents or good-faith estimates, and it is little known outside the industry. According to a Fannie Mae spokesman, the fee “gets incorporated into the underlying rate the borrower pays.”

• An interest rate is usually made of up three parts: The largest goes to the bank or the investors who buy the loan; the smaller portion is for the mortgage servicer that collects monthly payments; and then there’s the guarantee fee. Fannie and Freddie charge guarantee fees as a form of insurance against default for the loans they acquire and resell to investors.

• The guarantee fee will rise 10 basis points on April 1; the increase was included in the two-month extension of the payroll tax reduction last December. A basis point is equal to one one-hundredth of 1 percent, or 0.01 percent.

• One way to avoid the guarantee fee is to use a lender that does not sell off its loans – for instance, a community bank or a credit union.

• In addition to offsetting risks, the fees provide a primary source of revenue for Fannie Mae and Freddie Mac. Both organizations started raising fee rates in 2008 during the housing crisis, as foreclosure costs rose.

Employment Picture Continues to Improve:

The U.S. economy scored its third straight month of more than 200,000 jobs created with 227,000 in February as measured by the Non Farm Payroll data. It is widely believed by economists that the economy needs to add at least 150,000 jobs each month in order to continue our growth out of the last recession.

The Unemployment Rate was unchanged at 8.3% from the prior month, however that rate is based upon a phone survey and economists put much greater value and weight on the Non Farm Payroll data which is based upon real data and statistics.

This three month positive trend in job creation is very important for housing as this trend comes at the perfect time before the busy home buying season. Obviously, consumers that feel better about their job security or have recently returned to work will help to bolster demand for housing.

FHA announces price cuts to FHA’s Streamline Refinance Program:

The FHA is reducing fees on its Streamline Refinance Program to assist qualified homeowners with refinancing their existing FHA mortgage. Beginning June 11, 2012, FHA will lower its Upfront Mortgage Insurance Premium (UFMIP) to .01 percent and reduce its annual premium to .55 percent for certain FHA borrowers.
To qualify, borrowers must be current on their existing FHA-insured mortgages, which were endorsed on or before May 31, 2009.

Currently, 3.4 million households with loans endorsed on or before May 31, 2009, pay more than a five percent annual interest rate on their FHA-insured mortgages. By refinancing through this streamlined process, it’s estimated that the average qualified FHA-insured borrower will save approximately $3,000 a year or $250 per month. FHA’s new discounted prices assume no greater risk to its Mutual Mortgage Insurance (MMI) Fund and will allow many of these borrowers to refinance into a lower cost FHA-insured mortgage without requiring additional underwriting. FHA-insured homeowners should contact their existing lender to determine their eligibility.

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Consumers’ attitudes stabilize in February

Americans' concerns about key economic and housing issues are beginning to subside, according to results from Fannie Mae's February 2012 National Housing Survey. Consumers' attitudes have stabilized across most indicators – including personal finances, housing, and employment – demonstrating their sense that downside risks have abated somewhat compared with late summer and fall of 2011.

Highlights of the survey include:

• The rise in confidence in the economy’s direction continued in February, with 35 percent responding that they think the economy is on the right track, a 5 percentage point increase from January. The percentage of respondents who say the economy is on the wrong track dropped to 57 percent, a decline of 6 percentage points.

• On average, Americans expect home prices to increase by 0.8 percent over the next 12 months (down slightly since last month).

• Twenty-eight percent of respondents expect home prices to increase over the next 12 months (consistent with last month), while 15 percent say they expect home prices to decline (down 1 percentage point since last month). Fifty-three percent say prices will stay the same.

• The percentage of respondents who say it is a good time to sell rose by 3 percentage points to 13 percent, the highest level in more than a year, while the percentage of respondents who say it is a good time to buy dropped 1 percentage point to 70 percent this month.

• Sixty-five percent of respondents say they would buy their next home if they were going to move, up 1 percentage point since last month, while 29 percent say they would rent, down 1 percentage point versus last month.

Obama Slashes Refi Costs on FHA Mortgages

Daily Real Estate News | Wednesday, March 07, 2012   

Home owners who have mortgages backed by the government may be able to refinance their mortgages at a lower interest rate as well as not have to bear the high refinance fees to do so, President Obama announced at a news conference Tuesday.

The Federal Housing Administration will cut its upfront fees for refinancing loans. The plan is expected to reduce mortgage payments for the average FHA borrower by about $1,000 a year for up to 3 million borrowers, the administration announced.

Eligible borrowers must have FHA loans that were issued before June 1, 2009.

"It's like another tax cut in people's pockets," President Obama said at the news conference.

Lowering refinancing fees "should be broadly positive for housing and the economy by reducing foreclosures and freeing up income for consumers to spend on other goods and services," analyst Jaret Seiberg with the Washington Research Group told CNNMoney about the administration’s move.

Also on Tuesday, President Obama announced aid to service members who are found to have been wrongfully foreclosed upon. He said that lenders and mortgage servicers will be required to review the case of all service members who were foreclosed upon since 2006. Any service member found to have been wrongfully foreclosed upon will be compensated -- repaid the lost equity in the home plus interest, as well as a flat fee of $116,785.

Consumer confidence increases in February

The Conference Board Consumer Confidence Index increased in February. The Index now stands at 70.8 (1985=100), up from 61.5 in January. The Present Situation Index increased to 45 from 38.8. The Expectations Index rose to 88 from 76.7 in January.

Consumers’ assessment of current conditions was more favorable in February. Those claiming business conditions are “good” increased slightly to 13.3 percent from 13.2 percent, while those claiming business conditions are “bad” decreased to 31.2 percent from 38.3 percent. Consumers’ appraisal of the labor market was also less pessimistic. Those stating jobs are “plentiful” increased to 6.6 percent from 6.2 percent, while those saying jobs are “hard to get” decreased to 38.7 percent from 43.3 percent.

Consumers were more optimistic about the short-term outlook than they were last month. The proportion of consumers expecting business conditions to improve over the next six months increased to 18.7 percent from 16.7 percent, while those anticipating business conditions will worsen decreased to 11.8 percent from 14.6 percent. Consumers’ outlook for the labor market was also more upbeat. Those anticipating more jobs in the months ahead increased to 18.7 percent from 16.4 percent, while those anticipating fewer jobs declined to 16.9 percent from 19.1 percent. The proportion of consumers expecting an increase in their incomes improved to 15.4 percent from 13.8 percent

The New York Times
Points lose favor
With interest rates at or near record lows, many borrowers are seeing little reason to pay points when buying or refinancing a home.  Some are even opting for what’s known as “negative points,” agreeing to a slightly higher rate to help pay closing costs.

Making sense of the story

Paying points enables a borrower to “buy down” the interest rate on a mortgage in exchange for an upfront fee.  The trend away from points partly reflects borrower sentiment that rates are already low enough, according to industry experts.

A point equals 1 percent of the loan amount, so paying one point on a $250,000 refinancing costs an extra $2,500 at closing, in addition to other mortgage fees, taxes, and escrow amounts.  Paying a point usually reduces the interest rate by 0.25 points over its term, so for instance, instead of 4 percent, the rate is 3.75 percent.

The average number of points paid in 2011, according to a Freddie Mac survey, was 0.7 percentage points, less than half the levels people paid in the 1990s.  The average has been 0.7 percent for three years, after it hit a low of 0.4 percent in 2007; in 1995 it averaged 1.8 percent, according to Freddie Mac data.

The primary advantages of paying points are a lower rate and monthly payment.  To decide if paying points is worthwhile, borrowers should consider two key decisions: How long they plan to live in the home, and how much they can afford in close costs.

Many mortgage professionals suggest following this rule: If the borrower plans to live in the home for at least five years, paying points will help the homeowner to reap savings. 

Some borrowers are even going for negative points, which is also called a lender rebate or points in reverse.  In exchange for accepting a higher interest rate, the lender agrees to give the borrower a credit, which is usually used for closing costs.