Feb212013
Mortgage lending standards continued to tighten in 2013
Realtors, builders, mortgage brokers, basically anyone with a financial interest in a real estate transaction is complaining that lending standards are too tight. From the beginning of these complaints four years ago, it’s all been complete bullshit. Lending standards were completely abandoned during the housing bubble as all the parties allowed greed to overcome their better judgement. Any return to sane standards was going to require tightening — a lot of it.
The market first reacted to a huge wave of defaults by tightening standards suddenly and violently in a massive credit crunch in August of 2007. This effectively dried up funding for the most toxic loan products and caused loan balances to plummet. The lower loan balances translated to lower home prices.
Credit standards needed to tighten for one simple reason: lenders were giving loans to people who weren’t paying them back. Until lenders successfully screened out deadbeats, credit was doomed to tighten further. The credit crunch was just the first step. Once the spell was broken and lenders recovered their senses, credit was tightened incrementally over time to prevent further delinquencies and associated losses.
To suggest that credit standards are tight today is to feign ignorance to the history of lending standards. Sure, compared to the housing bubble’s complete lack of standards, today’s underwriting guidelines are tight, but compared to any other time in mortgage lending history, today’s standards are still loose. Prior to the housing bubble, borrowers had to come up with a 20% down payment unless they were using an FHA loan — which had tighter standards then as well (FHA standards were eased to qualify more buyers when it became the substitute for subprime when the housing bubble imploded). High down payment standards, rigorous income verification, and high FICO score hurdles were standard fare before the 00s. The so-called tight standards of today are not tight at all by historic norms.
So despite the chorus of transaction-dependent whiners constantly complaining in the media about tight standards, mortgage qualification standards continue to tighten, and they will continue to do so until people stop defaulting at rates higher than historic norms. We’ve taken a meaningful step toward reestablishing normalcy with the implementation of the qualified mortgage rules. I believe the new mortgage regulations will prevent future housing bubbles. We will see more tightening when the standards for the qualified residential mortgage are announced soon. In the meantime, analysts are looking at the potential impact of these new standards, and those hoping for a loosening of standards do not like what they see.
Report: Rules Could Exclude Nearly Half of Recent Mortgages
February 12, 2013, 3:50 PM — By Nick Timiraos
It’s no secret that banks have tightened up mortgage-lending rules over the past four years after lax standards inflated the housing bubble during the middle of the last decade.
But data from research firm CoreLogic show that just 52% of all mortgages made in 2010 would have met the definition for the safest loans under the “qualified mortgage” rule recently set out by the Consumer Financial Protection Bureau. Loans that meet the “QM” standards for a safe harbor will satisfy new legal liabilities banks face to ensure that borrowers have the ability to repay their mortgage.
I suspect the 48% that wouldn’t have met the standards were FHA or GSE loans which are given an exemption.
Ostensibly, the federal government wants to reduce the footprint of the FHA and the GSEs on the mortgage market. The new safe harbor rules permitting exceptions for FHA and GSE loans will ensure these entities will continue to dominate mortgage lending for quite some time.
Certain loan products, including those that have initial “interest-only” periods that allow borrowers to defer principal payments, don’t meet the QM standard. Borrowers’ total debt payments can’t exceed 43% of their pretax income, a restriction that knocks out 24% of all originations from 2010.
We are still going to see future foreclosures from the 2007-2012 era loans that permitted DTIs in excess of 43%. Borrowers simply cannot afford such large debt service burdens. Anyone with a DTI higher than that is foregoing all other forms of savings and investment to service their debt.
Recognizing the potential bite of such a definition on mortgage credit markets, the CFPB created an alternate way for lenders to satisfy the QM test: If a loan is eligible for sale to Fannie Mae Freddie Mac or the Federal Housing Administration, it will be considered a QM. That waiver expires in seven years, or whenever Fannie and Freddie exit their government-run conservatorship, whichever comes first.
Seven years from now when the GSEs and the FHA still dominate the mortgage market, this waiver will get extended.
Jumbo mortgages that are too large for government backing aren’t eligible for that second option, and CoreLogic finds that nearly one-third of jumbo mortgages issued in 2010 wouldn’t have been deemed QM. A separate report published last week by Deutsche Bank estimates that 75% of jumbo loans issued before 2010 were not QM, and that 13% of the jumbo loans issued since 2010 would not be QM.
The jumbo loan market is still headed for trouble. These new restrictions will further restrict credit and thin out the buyer pool. We have way, way to many homes valued at jumbo loan prices, far more than we have qualified buyers. I believe the $900,000+ market will languish for a decade or more — once lenders start processing their huge backlog of jumbo loan delinquencies (see: Delinquent jumbo loans in Coastal California pollute bank balance sheets)
Regulators have yet to issue a separate definition for the “qualified residential mortgage,” which will be exempt from requirements that banks hold more capital for mortgages that are pooled and sold off to investors as securities. If that “QRM” definition includes an additional requirement for a 10% down payment, then nearly 60% of loans made in 2010 wouldn’t satisfy both the QM and QRM definition, according to CoreLogic.
And what if the qualified residential mortgage mandates a more reasonable 20% down payment?
It’s a rhetorical question. I think we all know it will further weaken the market and cause the so-called recovery to fade away.
el O says: February 15, 2013 at 9:54 am
shorting LEN 40.91
———————————————-
cha-ching
http://chart.finance.yahoo.com/z?s=LEN&t=5d&q=l&l=on&z=l&a=v&p=s&lang=en-US®ion=US
Sort of looks like the gold chart for the past few days.
Nice trade. The housing starts drop is causing the sector to correct. This is likely a good long-term buying opportunity.
There’s a guy in our office who likes to trade. It’s funny how he’s so vocal about his wins, but we never hear about any of the losses. I guess his trading always nets profits?
Well, when I post a particular trade here, it’s basically submitted in real-time, so day, time and price of the trade are stamped. And… you can be assured my good friend MellowRuse will be on-scene to make note of the losses. If any
Where is MellowRuse?
Rising prices and rising interest rates are hurting demand.
Mortgage applications continue to sink
Mortgage applications continued to sink, dropping 1.7% from last week according to data from the Mortgage Bankers Association.
The refinance share of mortgage activity decreased to 77% of total applications, the lowest level since May 2012, from 78% the previous week. The adjustable-rate mortgage share of activity increased to 4% of total applications.
Following the rise from previous weeks, the average interest rate for a 30-year fixed-rate mortgage with a conforming loan balance rose to 3.78%, the highest rate since August 2012.
This is up from 3.75% from a week earlier.
Additionally, the 30-year FRM with a jumbo loan balance dropped from 3.98% to 3.94%, while the 30-year FRM backed by the FHA increased to 3.54% from 3.53% the week before.
The 15-year, FRM increased from 3.01% to 3.03%, which is the highest rate since September 2012.
The average 5/1 ARM remained unchanged from the decline last week and stayed at 2.66%.
Mortgage Servicers Whine About New Regulations
The regulatory tidal wave has come upon the industry, declared David Stevens, president of the Mortgage Bankers Association (MBA), in a written speech Wednesday.
“Over 3500 pages of regulations have been released in just the first few weeks of 2013 and many more will be released by mid-year. These changes will impact business operations and the future of mortgage access for years to come,” said Stevens in his remarks for the MBA’s National Mortgage Servicing Conference & Expo.
In light of the rules, Stevens advised “listening to the CFPB staff explain the rules,” while also “letting them know, respectfully, what works, what doesn’t and what we need to work on together.”
Stevens also stressed the need for the industry to come together to make their voices heard by policymakers, explaining that until officials understand the industry and understand what servicers do, only then, Stevens said, “will they have the knowledge to propose useful, productive changes.”
Stevens also took time to spotlight the role of servicers during the housing crisis, noting millions of struggling borrower were assisted.
“In a very short amount of time, servicing went from a low cost, low touch, efficient business to a high cost, high touch, and tough environment. You were on the front lines taking, absorbing and implementing a slew of new programs and new government guidelines, with new ‘experts’ and auditors looking over your shoulder, telling you what to do and how to do it, causing major disruptions to servicing,” he said.
Interest rates may rise sooner than most think.
Fed minutes send warning on durability of bond buying
(Reuters) – A number of Federal Reserve officials think the central bank might have to slow or stop buying bonds before seeing the pickup in hiring the program is designed to deliver, according to minutes of the central bank’s policy meeting last month.
The Fed opted in January to keep buying bonds at an $85 billion monthly pace until the labor market outlook improved substantially, but the minutes on Wednesday showed anxiety over the strategy’s risks – news that sent stocks sharply lower.
The S&P 500 .SPX suffered its steepest daily percentage decline since mid-November as investors mulled divisions between Fed doves, who want do as much as possible to spur growth, versus colleagues who see merit in a more cautious approach.
“A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred,” the minutes said.
Most of the major news this week is about mortgages.
It’s sort of double hit in some cases. The FHA is buyer is facing higher mortgage insurance premiums and in some cases a larger down payment requirement in a couple of months. Now, mortgage rates could be in the uptick
But do you think it’s a head fake? If the fed stops the QE purchasing then mortgage rates will rise and banks will be hit with more losses are prices drop.
Bernanke is out of bullets so retirees are going to get crushed by higher interest rates…2001 was the tech bubble bust, 2008 was the housing bubble bust, this time it will be education, healthcare, & government spending bubble bust…Bernanke doesn’t want to fuel it forever…
The asset values of retirees holdings will be hurt by rising interest rates, but at least then they will be able to earn some interest on their CDs.
A must read…
The Fed’s D-Rate: 4.5% At Dec 31, 2013… And Dropping Fast
Recently, we have noticed that the mainstream media has, with its usual 2 year delay, picked up on just this topic of the implicit and explicit risk borne by Bernanke’s grand (and final) monetary experiment. And slowly but surely they are coming to the inevitable conclusion (which our readers knew two years ago), that the Fed has no way out
Further asset purchases would compromise the Fed’s longer run profitability in two ways.
First, because the securities have been purchased during a period of economic distress the yields on these securities are unusually low. The purchase of these securities has been financed by reserve creation. The cost of reserve creation is the interest rate paid on reserves (IOER) currently only 25 bps.
Of course, the interest rates on IOER, RRPs, and Term Deposits all represent variable interest rates, while the yields on SOMA are effectively all fixed rates. Thus, there is an asset/liability mismatch, which could compromise the Fed’s Net Interest Income (NIM) should short term interest rates rise. The Fed’s exit from the extraordinarily low funds rate regime will not be compromise by the prospect of reduced or negative NIM. Instead, the remittances to the Treasury would be reduced or suspended.
How high do these short-term interest rates have to go before the NIM become negative?
In 2012 the Fed generated $80.5 bln in interest income on an average $2.606 bln in SOMA holdings, or about 3.1%. The SOMA was funded by paying only 0.25% on average reserve balances of $1.527 trillion or about $3.8 bln. In other words NIM was about $77 bln.
Had the IOER been consistent with what FOMC participants regard as normal in the longer-run, say 4-1/4%, NIM in 2012 would have been only about $15 bln, with a slightly restrictive posture, say 5-1/4% NIM would be close to zero, and with at 5-1/2% NIM would have been negative.
Now if we do the same arithmetic with a SOMA that is increased by $1 trillion due to the asset purchase programs, even keeping the effective yield at 3.1%, we see that NIM turns negative at a lower funds rate. Gross interest income from SOMA would increase to around $115 bln. At the same time if the IOER was set at 4-1/4%, NIM would fall from $15 bln to only $4 bln. At a 4-1/2% NIM becomes negative.
If the fed’s net interest margin goes negative, won’t they simply print more money to cover the shortfall? The federal reserve is the only entity besides government that could conceivably fund such a Ponzi scheme because they control the printing press. Perhaps seeing the margin go negative will hasten inflation as the fed has to print more and more money to cover it’s losses.
Indeed, they could print more money to cover. But, will they? By doing so, they’ll destroy further the only thing that gives them their power. The majority certainly believes they will print. But, the ‘majority’ typically is proven wrong simply because once known, they’re the fuel that sparks the counter-move.
Once the powers that be have unloaded (transfer liability) for enough toxic loans to others and unload the overpriced stocks back to the small individual investors and penisons, the reset button with increase interest rates will occur. The housing prices and stock will drop and the powers that be will be a a position to buy and repeat the process. The banksters don’t need to take it all in one cycle, only a few percent on each transaction.
Wow, I doing a related post this weekend. It’s 2015 and federal reserve owns 25% of the outstanding mortgage debt, now what? If QE stays on the same pace for three years. The only path is slow sale of assets, at a very steep discount.
From The Economist (last week of January)
The Fed’s profits
The other side of QE
What happens when the Fed starts losing money
EVER since the Federal Reserve first started buying up financial assets back in 2008, some have fretted about taxpayer exposure. The private debt purchased by the Fed to prop up the financial system might sour. The government bonds it has bought with newly created money, a strategy dubbed “quantitative easing” (QE), could fall in value if interest rates rose.
The reality has been happier. The Fed’s assets have ballooned to nearly $3 trillion, mostly in Treasuries and mortgage-backed securities (MBS). It paid $89 billion in profit to the Treasury for 2012, the largest in a string of record-breaking remittances (see chart). Before the crisis, the Fed’s profits were typically only a third of that.
In this section
The Fed makes its money much as most banks do: from the spread between the return on its assets and the interest paid on its liabilities. The Fed’s liabilities are principally made up of currency in circulation, which pays no interest, and reserves, the cash that commercial banks keep on deposit at the Fed. Since 2008 these reserves have exploded to $1.6 trillion, on which the central bank pays only 0.25% interest. The difference between that modest cost and the average return of about 3.5% on its bond holdings explains the whopping “seigniorage”, as the profit the Fed earns from printing money is called.
Some Fed officials worry about what comes next. When the Fed raised rates in the past, it meant little for profits because reserves were trivial and earned no interest. Since 2008 the Fed has paid interest on reserves in order to maintain control of interest rates. So when the Fed eventually tightens monetary policy, it will have to pay out more interest. To absorb reserves it may have to sell some bonds for less than what it paid, incurring capital losses. In theory, it could end up losing money, a risk that grows the more bonds it buys.
In a recent paper five Fed economists calculated that if the Fed buys $1 trillion of bonds this year and starts tightening in 2014, then the Fed’s profit will turn to loss by 2017. Cumulative losses could eventually reach $40 billion, from higher interest expenses and realised losses on MBS sales (the economists assume the Fed will hold its Treasuries to maturity). If interest rates rise more sharply than expected, losses could peak at $125 billion, and the Fed would pay no profit for six years.
For the government as a whole, these losses are less than meets the eye. The interest paid on reserves by the Fed partly substitutes for interest the Treasury would be paying the public if its bonds were not held by the central bank. But it may still worry some Fed officials, given the attacks it regularly endures from Republicans in Congress. “Being seen to have lost taxpayer money could only intensify pressures on the Fed, to the point where at least some of the central bank’s independence could be put at risk,” says Roberto Perli, a former Fed economist now with ISI Group, a broker. He thinks some officials could be worried enough to oppose continuing QE once it reaches $1 trillion at the end of this year, even if the economy is not yet up to snuff.
Whether such concerns would really blow the Fed off the course dictated by economic circumstances is debatable, however. The Fed would not actually need a taxpayer infusion. One of the perks of central banking is that it can print the money needed to pay interest. If that generates a loss, it creates an offsetting “deferred asset” on its balance-sheet, representing future profits it won’t have to send to the Treasury. The forgone profit would pale in comparison with total interest saved, higher tax revenue due to stronger growth and roughly $500 billion of profit that QE had previously made possible. More importantly, the losses would occur only once the economy was healthy enough to require higher interest rates, which, after all, would be proof that QE had worked.
‘The Economist’ ??
**The publication belongs to The Economist Group, half of which is owned by Pearson PLC via Financial Times. A group of independent shareholders, including many members of the staff and the Rothschild banking family of England,[6] owns the rest. A board of trustees formally appoints the editor, who cannot be removed without its permission.
You’re scaring me. You’re attacking the messenger – a common tactic of extremists on the Right and Left – rather than addressing the point.
Oh c’mon counselor, all I did was post public info regarding who is behind the publication… which btw, completely addressed the point. Just say’n
Fair enough…
U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk
By Yalman Onaran – Feb 19, 2013 4:01 PM PT
That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are — or about the size of the U.S. economy — according to data compiled by Bloomberg.
“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”
U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.
Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.
World’s Largest
JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.
U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.
Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds.
Derivatives are financial contracts whose value depends on stocks, bonds, currencies or other securities. Because two parties agree to swap cash or collateral at the end of a pre- determined period, that value also depends on the existence of the counterparty when it’s time to pay.
Netting Derivatives
Netting allows banks and trading partners to add up the positions they have with each other and show what would be owed if all contracts had to be settled suddenly. These master agreements are only relevant during bankruptcy and underestimate risk, according to Anat Admati, a finance professor at Stanford University. When a bank’s solvency is in doubt, derivatives partners demand to be paid immediately, causing a run.
“These liabilities do matter in times of distress,” said Admati, whose book “The Bankers’ New Clothes” was published this month. “By netting, you are hiding fragilities.”
The U.S. Financial Accounting Standards Board and the International Accounting Standards Board pledged a decade ago to converge the two bookkeeping systems. After six years of meetings, they remain divided. Proposed rules for how much money banks need to set aside for loan losses may make European and U.S. lenders even less comparable.
I hope they require them to conform to international standards. First, it will expose the risk and force them to reserve for it which should help stabilize the system. Second, it would expose just how large these banks really are, and perhaps it will lead to more pressure to break up the too-big-to-fail banks.
[…] Seriously Delinquent U.S. Mortgages Fall to Four-Year Low – By John Gittelsohn – Bloomberg ————Mortgage lending standards continue to tighten – OC Housing News […]