The foundation of any housing market is the first-time homebuyer. By definition, people buying their first home don’t have equity (free money) from a previous sale to extend their borrowing power. Without the activity of first-time homebuyers, those who own homes at the entry level (previous first-time homebuyers) can’t sell and buy a move-up property. The first level move-ups ignite a chain reaction throughout the move-up market stimulating sales across all price points. If the first-time homebuyer cohort is not active, the entire housing market seizes up, and sales volumes are low.
Recently, reports in the mainstream media are touting the increase in sales activity. While it’s true that sales volumes are off the anemic lows of the 2008-2011 era, sales are still well below the norm. From 2000 to 2006, sales in Orange County were never below 42,000 sales per year, and the average was about 45,000 per year. Based on the relative number of houses in the county, the ratio of sales to total number of homes was relatively steady. Over the last five years, sales in Orange County have hovered at around 30,000 per year. That’s about 30% less than normal, and about 10% below the average all the way back to 1988 when there were fewer existing homes.
The dramatic decline in sales is apparent in the origination figures:
The low origination volume is a problem across the board. First-time homebuyers are absent due to high debt levels with student loans and credit cards, and move-up markets are hampered by the fact that more than a quarter of borrowers are underwater. The housing market will not recover until first-time homebuyers come back in large numbers at price points high enough to lift existing loanowners above water. The federal reserve and the banks are doing their part. The federal reserve has lowered interest rates to record low levels to allow buyers to bid up prices, and the banks stopped foreclosures to restrict MLS inventory to force the few active buyers to pay more thus raising neighborhood comps. Now all they need is an improving economy and a flood of first-time homebuyers to get the housing market moving again. Unfortunately, first-time homebuyers are facing headwinds of their own.
More first-time home buyers have tough time entering the market
High unemployment for young people, strict lending standards and massive student debt loads are among the factors hurting entry-level buyers.
By Kenneth R. HarneyFebruary 22, 2013, 9:40 p.m.WASHINGTON — Although the housing market is rebounding in many local markets, one important segment is not: First-time buyers are missing in action and represent a smaller proportion of overall sales activity than their historical norm.
Whereas first-timers typically account for roughly 40% of sales, lately they’ve been involved in about 30% to 35%, depending on the source of the data. Lawrence Yun, chief economist for the National Assn. of Realtors, estimates that there were 2.2 million fewer first-time buyers in the United States between 2008 and 2012 — a deficit of about 450,000 a year.
If it weren’t for the activity of investors, including large hedge funds, there would be no market recovery. They are stepping into the shoes of first-time homebuyers and picking up some of the slack. However, this is not without long-term consequences. The move-up market will suffer for another decade because the equity that ordinarily would have accrued to the first-time homebuyers — equity necessary to complete a move-up sale — is instead being diverted to small investors and hedge funds.
The housing market may sustain recent gains if the banks can keep inventory off the market indefinitely; however, a true sustainable housing market recovery will not happen until first-time homebuyers return in large numbers, and about 5 to 7 years later, those buyers will start making move-up sales which will make that segment of the market recover too. 
We’ll know when the real market recover happens when we see the chart of originations (pictured above) break out of its range and start to climb back up to the level of the 00s. So far, it’s been three full years stuck at mid 90s levels, and it’s showing no real sign of improvement, mostly due to the problems facing first-time homebuyers discussed today.
Recent surveys of Realtor members by Yun’s research team have found that first-time purchases slipped to just 30% during each of the last three months. Mortgage investment giant Freddie Mac reports that first-time buyers represented just 35.9% of loan acquisitions by the firm in 2011. Last year, the Federal Reserve found that whereas between 1999 and 2001 about 17% of 29- to 34-year-olds took out a mortgage to buy a first home, the figure plunged to just 9% during 2009-11.
Notice that they picked a stable period prior to the housing bubble as a point of comparison. The decline in first-time homebuyer participation among the 29-34 year age group is remarkable. The only reasonable explanations for this is an explosion in student loan debt and a weak job market that disproportionately impacted younger workers.
All of this represents a potentially significant issue for homeowners and sellers in the overall market. Without entry-level buyers, the housing system doesn’t work well. If there’s no one to buy moderately priced starter homes, the owners of those houses can’t sell and move up.
So what’s the problem? Where are these first-timers who should be jumping in while mortgage interest rates are near all-time lows and prices in some markets are still at 2004-05 levels? Recent economic jolts — the recession and relatively high unemployment rates for younger workers — are crucial factors. Disproportionate numbers of twenty- and thirtysomethings have moved back in with their parents or are renting with others rather than buying a house.
The big question facing homebuilders is whether or not this change is a generational change in attitude or a temporary reaction to the tough economy. If the younger generation permanently chooses the freedom of renting over the debt slavery of home ownership, the multifamily sector will do well, but the demand for new homes will sputter. At this point there is no way to know.
Tougher underwriting and qualification requirements by the banks are also important contributors. …
On top of these burdens, though, is still another financial albatross: massive student debt levels and their toxic interaction with lenders’ stringent rules on debt-to-income ratios.
Student loan debt loads have exploded in the last decade and now exceed $1 trillion, according to financial industry estimates. A Pew Research study last fall found that the average student debt balance is $26,682, and that more than 1 in 10 graduates are carrying close to $62,000 in unpaid student loans. Both numbers are up sharply from just five years earlier.
Lenders and realty agents who work with first-time buyers say the student debts that many bring to the table are often deal killers because they can’t qualify under current debt-to-income limits.
The huge debt levels are preventing first-time buyers with very large student loan burdens from qualifying because their back-end ratios are too high. They can’t afford the mortgage. The implication in the above statements is that debt-to-income ratio requirements should be loosened. That’s not the answer. The reason we have the so-called stringent debt-to-income limits is because when borrowers were allowed to borrow more, they defaulted. Only Ponzis can survive at higher debt-to-income ratios for a while because they are running personal Ponzi schemes.
But really, it’s worse than just too much debt. A huge number of student loan borrowers simply aren’t paying back the loans. Those who are delinquent on their student loans don’t have the credit scores to qualify regardless of their debt-to-income ratios.
Rising Student-Loan Delinquencies Hurt Young Homebuyers
By Janet Lorin – Feb 28, 2013 8:00 AM PT
More people borrowing for education are failing to pay off their loans.
Almost a third of student-loan borrowers in repayment were delinquent at the end of last year, up from about a quarter in 2008 and 20 percent in 2004, according to a report on household debt and credit today by the Federal Reserve Bank of New York.
A third? I had no idea the problem was that bad.
The amount of educational debt, which includes federally backed and private loans taken out by students and parents, has almost tripled in the past eight years to $966 billion, the bank said. With costs to attend college continuing to outpace the inflation rate, more borrowers are struggling to pay. That makes it harder for people — especially those between 25 and 30 — to secure other types of credit, including home mortgages. …
The excessive student loan debt explains much of the decline in homebuying. Even those with jobs can’t afford a mortgage payment.
As more people attend college, the average educational loan balance, as well as the numbers of borrowers and delinquencies are increasing. The number of student-loan borrowers was almost 39 million in 2012, up 70 percent from about 23 million in 2004. The average balance in 2012 per borrower was $24,700 compared with $15,308 eight years earlier.
Total student-loan debt in the fourth quarter was $966 billion, up $10 billion from the previous quarter, according to the New York Fed. The federal Consumer Financial Protection Bureau put the number at $1 trillion last year.
Those are astonishing numbers. Lenders inflated a massive student loan bubble because they knew they would get paid back. Either the borrower would pay them or the government would, and with nearly a third not paying, you and I are.
Ryann Roberts, 22, is one of those borrowers and has seen friends struggle with their debt as a large share of monthly expenses.
She is deferring on more than $37,000 in loans for an undergraduate degree in health policy at Carnegie Mellon University in Pittsburgh and for the first year of a two-year master’s in public health at George Washington University. She has kept her graduate costs low by working full-time as an administrator at the university’s medical school, which waives some tuition for employees.
“I’m worried about graduating and making enough money to pay the loan back and stay afloat,” Roberts said.
She should be worried. She has far too much debt compared to the salary of the career in front of her.
Student loan debt is an area where some government paternalism is in order. Government-backed student loans are an investment in human capital that has historically shown a good return to the taxpayer through higher wages and tax revenues. However, if we are going to have government backing, we need government oversight to protect the taxpayer. One of these protections should be a cost-income analysis that limits the debt students can take on to get certain degrees. As it stands now, if we’re in for a penny, we’re in for a pound. Once a borrower starts school, we are obligated to giving them the chance to finish and get the degree so they can repay the debt even if the job at graduation is low paying. We are subsidizing people like the woman above who are taking on huge debt loads for degrees with little income potential. This doesn’t help the borrower or the taxpayer.
Something needs to be done to curb the wild growth in student loan debt. These huge debt loads are increasing becoming a drag on the economy. Recent graduates with such large debt loads aren’t buying houses, cars or consumer goods because so much of their income is going toward student loan debt. Until this situation changes, the first-time homebuyer cohort will be weak, and the ripple effect will dampen sales throughout the housing market for years to come.
Four and a half years on the bank’s books
Today’s featured property was owned by Ponzis during the bubble who squeezed the appreciation juice from the property and discarded the rind. They were an early implosion defaulting almost immediately after the Ponzi money was shut off. In fact, by now they would probably be eligible to get another loan, assuming they changed their ways and saved enough for a down payment.
The more interesting story about this property is who long it stayed on the lender’s books. The first trustee sale was recorded on 10/30/2008, nearly four and half years ago. Perhaps the former loan owners fought the process because the foreclosure was recorded again on 12/23/2009 and again on 3/31/2011 and again on 8/10/2012. Why would the same loans have to go through four different foreclosures? And these were recorded sales, not default notices followed by a rescission notice from a loan modification. If this was caused by the borrowers gaming the system, they managed to squat for well over five years because they stopped making payments back in early 2007 after extracting over $300,000 in mortgage equity withdrawal in about three years.
Lots of free money and free housing. They will want another one soon.
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Proprietary OC Housing News home purchase analysis
25531 BUDAPEST Ave Mission Viejo, CA 92691
$489,900 …….. Asking Price
$515,000 ………. Purchase Price
10/30/2008 ………. Purchase Date
($25,100) ………. Gross Gain (Loss)
($39,192) ………… Commissions and Costs at 8%
============================================
($64,292) ………. Net Gain (Loss)
============================================
-4.9% ………. Gross Percent Change
-12.5% ………. Net Percent Change
-1.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$489,900 …….. Asking Price
$17,147 ………… 3.5% Down FHA Financing
3.56% …………. Mortgage Interest Rate
30 ……………… Number of Years
$472,754 …….. Mortgage
$124,554 ………. Income Requirement
$2,139 ………… Monthly Mortgage Payment
$425 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$122 ………… Homeowners Insurance at 0.3%
$532 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,218 ………. Monthly Cash Outlays
($413) ………. Tax Savings
($736) ………. Equity Hidden in Payment
$20 ………….. Lost Income to Down Payment
$142 ………….. Maintenance and Replacement Reserves
============================================
$2,231 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,399 ………… Furnishing and Move In at 1% + $1,500
$6,399 ………… Closing Costs at 1% + $1,500
$4,728 ………… Interest Points
$17,147 ………… Down Payment
============================================
$34,672 ………. Total Cash Costs
$34,100 ………. Emergency Cash Reserves
============================================
$68,772 ………. Total Savings Needed
The property above is available for sale on the MLS.
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47 Responses to “A lack of first-time homebuyers is a drag on the housing market”
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Once the stimulating effect of low rates is over and QE is no longer effective in keeping rates low, realtors will have a lot more to whine about than just a lack of first time buyers.
Right now the concern is lack of supply. The weakened demand from the lack of first-time buyers is a less acute problem than the lack of supply. At some point interest rates will go up and eat into the demand further. Then the market will lack both supply and demand. The result will be fewer transactions and less income for realtors.
I think investors are targeting the same properties that FTHB’s are, starter homes that tend to cashflow the best, and the FTHB’s are simply getting squeezed out. The demand from FTHB’s is there, but all cash investors tend to beat 3.5% down payments all day long.
That underscores the problem with supply. If banks were foreclosing on more homes, properties would be more abundant, and prices would be lower so both investors and first-time homebuyers could find a deal.
Four and a half years!!!!!
“If it weren’t for the activity of investors, including large hedge funds, there would be no market recovery. ”
I just wonder when these two groups also stop purchasing homes? They will also hit a financial crossroad where they will no longer purchase additional real estate.
These hedge funds will go elsewhere when rates move north. right now they are being forced into unknown territory, and risk, of SFRs by centrally planned Zero Interest Rate Policy ZIRP.
If we think bush/greenspan’s 1% rates did damage in housing and banking, just wait til we see the fallout from obama/bernanke’s 0%. Systemic.
Firm Says National Home Price Gains Are Unsustainable
While some read recent home price gains as a sign of an improving market, Radar Logic warns the recent gains are “unsustainable” and may actually be dampening market recovery.
Radar Logic attributes recent house price gains to anomalous factors it considers temporary, including low interest rates and elevated investor demand. “None of these drivers are likely to last, particularly as housing prices increase,” RadarLogic stated in its December RPX Monthly Housing Market Report.
The firm calculated an 11.8 percent price increase year-over-year in December, according to its RPX Composite of 25 metropolitan areas.
Radar Logic anticipates prices will decline again as rising prices begin to repel investors while simultaneously leading to bursts in supply as homeowners and financial institutions feel encouraged to list properties for sale.
Already, home builders have begun to add to supply with a 23.6 percent rise in single-family housing starts year-over-year in January, according to data from the Census Bureau.
However, according to Radar Logic, when prices decline again, the market “will once again attract speculative demand and chill starts and sales.”
Radar Logic anticipates prices will “follow such a saw-tooth pattern for a number of years.”
A true recovery in home prices is contingent on rising employment and a return of consumer confidence, “neither of which are much evident at the moment,” according to Radar Logic.
Reading the thoughts of forecasters who are completely wrong is educational. These guys completely miss the impact of the concentration of shadow inventory at the high end. They view the short-term gains as sustainable and ignore the huge discounts high-end distressed properties receive when processed.
Report: Why High-Priced Homes Are Leaders in the Recovery
Historically, higher-priced homes are a leading indicator of the real estate market and tend to lead the market during times of recovery, according to the Home Value Forecast (HVF) report jointly released by Pro Teck Valuation Services and Collateral Analytics.
The companies assessed price changes in the Bay Area and around Los Angeles and found the high-end markets showed stronger price growth compared to lower-priced areas.
According to report, the markets for higher-priced homes tend to be in desirable locations where supply is very limited. The buyer profile is also different in these markets.
“Buyers in these markets tend to be better capitalized, using more equity and lower loan-to-value mortgages. These markets have been less affected by tight underwriting, which has plagued the middle and lower price ranges where loan-to-value averages are generally much higher,” the report explained.
Low Inventory Frustrates Buyers
Prospective homebuyers are starting to feel stung as the market slips away from them, according to responses in Redfin’s latest Real-Time Home-Buyer Tracker.
The survey shows a shortage of inventory and rising prices—both of which naturally benefit sellers—are creating frustration for buyers trying to get in on the ground floor of the housing recovery. According to Redfin’s findings, 79 percent of buyers who responded to the survey now believe home prices will increase in their neighborhood over the next year, up from 71 percent in Q4 2012. The share of buyers who believe prices will rise “a lot” more than doubled, increasing to 22 percent from 10 percent previously.
Forty percent of buyers said the trend of rising prices is a concern for them, up from 33 percent last quarter.
At the same time, 66 percent of buyers listed low inventory as a major concern in 2013’s first quarter, up from 59 percent in the fourth quarter. When asked what has surprised them most about their local real estate market, 38 percent of respondents mentioned a lack of inventory.
Given the situation, it seems buyers are now understanding how much of an advantage sellers currently have. Only 40 percent of buyers believe now is a good time to buy in their neighborhood, down quarter-over-quarter from 48 percent. Meanwhile, 48 percent say it is a good time to sell, up from 27 percent before.
These concerns are driving buyers to change their purchase plans, said Redfin blogger Tim Ellis.
“In response to the one-two punch of rising prices and tight inventory, more buyers are expanding their home search to new areas they haven’t considered before,” Ellis wrote on the company’s blog. “More buyers are increasing their budgets, as well. Thirty-four percent of respondents said they were ‘ready to pay more,’ up from 26 percent last quarter.”
The listings in my neighborhood have jumped in the last couple of weeks with “make me move” asking prices.
It’s worth a shot for them. The low interest rates make even WTF prices financeable. They don’t have anything to lose, and they just might hit the lottery.
“Make Me Move” pricing, good one!
That phrase is from Zillow, I think? Some site allows you to list a crazy price for your house to see if someone will bite, and the listing is “Make Me Move.” Can’t claim credit…
The current low supply situation has caught so many first time buyers by surprise. So many have been told that “this market isn’t going anywhere for a long time”.
After the OC market bottomed in ’09 I had been telling others to start acquiring real estate, especially because I saw that even back then, monthly payments were in line with rents for starter homes. Often times I was accused of being a shill on the Lansner blog. Now we’ve left the flat bottoming years and things are heading back up again. (The bottom wasn’t as flat as it should have been thanks to the homebuyer tax credit in 2010, creating a temporary blip.)
So many people were lulled into a sense of complacency by the market crash and missed the greatest opportunity of our lifetimes to purchase a home. I was somebody that advised against waiting until prices began rising before making a purchase, a position I was constantly criticized for. My reasoning was simple. If you wait until prices start going up, then you’ve already missed the bottom.
Now that pack of angry jackals that used to frequent the Lansner blog has lost out. Sure, they can still buy SOMETHING, but it won’t be the kind of deal they could have had. It will also be exponentially more time consuming, frustrating, and stressful to buy in the next few years then at any time in recent history. I think this market is even worse than ’04-’05.
Dude…. awesome post!
As a result, I’m calling the top is in for this QE (artificial stimulus) cycle.
PS: Enjoy! http://www.oftwominds.com/photos09/housing-gold1.png
Wow… that’s a gutsy call given how many have tried and failed. Even Bill Gross famously botched that one.
Regarding the old crew at the Lansner blog, there’s still one poster that shows his face… Pat Veling. He was always a bit douchy, but with the current market turnaround his hubris is out of control.
I was telling people not to buy in the 2009 and 2010 tax credit blip because I believed that rally wasn’t real. Plus, the analysis I was doing showed that prices were still above historic norms for rent and income. However, in 2011, my published reports were very bullish because falling prices and falling interest rates made houses very affordable. Some people did buy based on those reports, but many were hesitant, me included.
I don’t think there’s any way anyone could have known the banks could engineer such a dramatic decline in inventory. The market shouldn’t have bottomed last year as the banks shouldn’t have stopped processing foreclosures. This recovery is by no means certain, but while prices are still affordable relative to rents, my reports remain bullish.
This time around, I don’t see people getting priced out like the last bubble. There will be much more price appreciation friction when affordability levels are reached because the affordability loan products are now banned. The window of opportunity is still open, but banks are working to close it fast.
You’re still a shill.
This is no recovery. This is subsidy.
For now, they can print enough money to make house prices levitate. But don’t pat yourself on the back, that which is unsustainable ends.
Prices will continue to fall in real terms.
Spot-on x 4
A shill is a self-interested promoter that doesn’t disclose their interests. By definition, I’m not a shill because I’m not promoting anything, and because I’ve always disclosed my interests to anybody that bothers to ask.
Historically, RE has shown resilience to rising interest rates, whereas gold has gotten absolutely destroyed. I understand that you believe this time is different, but I don’t.
Señor MellowR….. it all has to do with the cost basis + valuation absorption capability.
1) pertaining to debt-based instruments, lower rates = higher cost basis; higher rates = lower cost basis.
2) RE has shown resilience to rising rates in the past simply because valuations/purchases were based-on much higher rates, so the cost basis was much lower. Thus, valuation was able to absorb higher rates.
Today, homes are being valued/purchased at ultra-low rates so the cost basis is ultra-high in comparison. Thus, valuation is not able to absorb higher rates.
Savvy?
So…. you see, this time really is different.
There is an ocean of FTHB’s out there. What’s missing is second time, move up buyers willing to vacate their FTH purchase properties.
My theories why there aren’t more move ups?
A) “Why should I move? My work environment isn’t so hot right now and who knows when the next raise might come in?”
2) “Why should I move? I’ve got a smoking 3.0% 15 year fixed rate that I can afford comfortably now”.
III) “Why should I move? Have you seen the WTF prices sellers want, Mello Roos, and HOA dues today? Pass.”
I’m sure there are 10,000 other reasons why the market is distressed, but lack of FTHB’s isn’t one of them.
Soylent Green Is People.
I address this in a post tomorrow, but I think the main reason you don’t have any inventory from potential move ups is because most of them are underwater. You can’t move up without equity, and 25% to 40% wouldn’t get a check at a closing table after paying off the mortgage, the realtor, and closing costs. With no equity, they are effectively first-time homebuyers. The lack of equity explains most of the lack of supply.
As does the Buy and Bail restriction on any new financed purchases.
Yes, it eliminates the short cut as it should. People can still “bail and buy.” It just takes two years between the strategic default and the next purchase.
Is Italy is headed to default? Just wondering since have $16.5 trillion in debt and what will be the impact on real estate.
If it shakes up the bond market, it could cause rates to rise temporarily. I doubt this has any permanent impact on housing.
I think an abrupt euro exit is more likely. Italy runs a primary budget surplus, so they have no need to borrow more money from the Germans, at least right away. So if they jump out of the euro, they can let their currency depreciate drastically, which it would, and their own internal interest rates rise, which they would, and inflate away their debt, while simultaneous attracting capital from the rest of Europe (and even America) starving for a yield, as well as business longing for a low price of labor. (Indeed, if the Italians simultaneously pruned away their business regulation, they could conceivably spur their economy fast enough that they would not actually have to take an axe to their social spending, and could grow their way out of trouble. Well…at least for a little while. Italian fertility is so low that demography is going to kill them a la Japan sooner or later anyway.)
This is why the rest of Europe really wants a Europhile to lead Italy, and why the recent election worries the **** out of them.
I didn’t realize Italy actually had a budget surplus. If their spending isn’t out of control, getting out of the Euro is probably the best thing for them.
They don’t have an actual surplus, they have a “primary” surplus, meaning their budget excluding interest costs is in surplus. But that means, for example, if they took the drastic step of simply defaulting, the government could go on functioning, since it takes in more tax money than in spends on services.
Greece is different: they must borrow money to meet service spending, as well as interest, so if they defaulted they couldn’t borrow money and everything would go up in smoke.
Should a service be responsible like a bank? Does Ocwen originate loans?
Ocwen will fight CFPB plan for homeowner relief fund
By Kerri Ann Panchuk March 4, 2013 • 10:46am
Federal financial regulators are starting to put the squeeze on massive loan servicer Ocwen ($38.96 -1.1%), reportedly by recommending the servicer contribute to a consumer relief fund that would give cash to foreclosed borrowers.
But the servicer, which says a refusal to do so could result in a $135 million penalty, doesn’t believe such a move is needed and advised in an SEC filing that “we indicated our willingness to adopt the servicing standards set out in the national mortgage settlement with certain caveats.”
Furthermore, Ocwen said unequivocally it’s against having to contribute to a relief fund.
The relief fund contribution was recommended by the Consumer Financial Protection Bureau, state Attorneys General and the Multi-State Mortgage Committee of the Conference of State Bank Supervisors (MMC), the servicer said in its 10-K filing.
Ocwen said in the same filing that it’s committed to offering consumer assistance such as loan modifications and foreclosure avoidance, but added that the firm will fight contributions to a consumer fund even if it results in litigation.
“We do not believe such a contribution from us is warranted under the circumstances and have so notified the requesting parties,” Ocwen wrote in its 10-K filing. “It is reasonably possible that legal proceedings could ensue with regard to this matter and, if so, we will defend vigorously. At this time, the amounts, if any, that ultimately could be incurred with regard to this matter are not reasonably estimable.”
Ocwen more than doubled its 2012 profit as revenue soared 70% above 2011 levels.
The company’s expansive revenue growth came after Ocwen spent the year, gobbling up mortgage servicing rights.
With just the closing of the firm’s two major acquisitions – a deal to acquire Homeward Residential and the purchase of servicing rights from Residential Capital — Ocwen increased its servicing portfolio by 270%, excluding master servicing, the firm said in its fourth-quarter earnings report.
Yet, any servicing issues acquired in recent deals also could be subject to some regulatory scrutiny, Ocwen suggested in its own SEC filing.
“One or more of the foregoing regulatory actions or similar actions in the future against Ocwen, OLS, Litton or Homeward could cause us to incur fines, penalties, settlement costs, damages, legal fees or other charges in material amounts, or undertake remedial actions pursuant to administrative orders or court-issued injunctions,” Ocwen wrote.
One of the issues Ocwen mentioned is the fact that before it acquired Homeward Residential, the U.S. Justice Department of the Eastern District of Texas issued civil investigative demands to look into “whether HRI violated the False Claims Act in connection with its participation in the Home Affordable Mortgage Program,” Ocwen wrote.
The firm added, “We were advised by HRI that documents and information have been provided pursuant to these CIDs. The investigation remains open, and we intend to cooperate in the event there are further informational requests.”
Analysts with Compass Point Research & Trading Group responded to the Ocwen disclosures saying, they expect a cash payment or some other type of monetary relief with so many distressed borrowers in Ocwen’s servicing portfolios.
Still, Compass Point sees Ocwen and other servicers as still getting “high marks from the GSEs, rating agencies and other regulatory agencies concerning their servicing practices,” Compass Point suggested.
But the research firm added, “we do expect further regulatory scrutiny and the possibility of monetary penalties for Ocwen, NationStar [stock NSM[ [/stock], Walter ($46.15 -0.27%) and PHH ($21.72 0.03%). Considering Ocwen has the largest subprime, non-agency servicing portfolio of the non-bank servicers, we believe their monetary penalty could be the largest of the group (if the others were to be invited).”
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FTHB here, back from a weekend of open houses. Frustrating is too light a word.
We need some damn inventory.
Two of the three houses had offers so far above asking that the realtors went out of their way to note they were contingent upon appraisal.
As someone who has tracked prices 4 years and counting, it’s downright maddening to see asking prices 50k (~10%) over this fall’s comps getting bid up FURTHER.
I’m just waiting to next year. Maybe with the tighter loans qualifications and hopefully a good down payment requirement, it will change the market mix.
We’re renting month to month, so we’re ok being patient.
But it’s tough just waiting when prices are doing this:
http://www.deptofnumbers.com/asking-prices/california/orange-county/
+37% in a year?!
+22% in a month?!
Let’s see, this puts us on track for bubble pricing by about mid-summer. Sure, it’s only asking prices but it’s pulling the sold price up with it and we know that number is sticky as hell.
No Worries, I always have to remember the interest rates. One day the Fed won’t be able to purchase MBS…but when?
Bond Bears Collide With Swaps Showing Low Rates
By Liz Capo McCormick – Mar 4, 2013 5:10 AM PT
Just the hint the Federal Reserve would end debt purchases that have supported bond prices sent Treasury yields soaring last month to the highest since April, a reaction that is unwarranted if money markets are a guide.
Even as yields rose, overnight index swaps that traders use to speculate on the path of the Fed’s target interest rate for overnight loans between banks signaled that the zero to 0.25 percent range won’t increase for more than two years. In a bullish sign for bonds, Bank of America Merrill Lynch’s MOVE Index, which tracks the outlook for swings in U.S. government debt rates, shows investors don’t anticipate an increase in price swings.
While investors dumped bonds as minutes of recent Fed meetings showed central bankers raised doubts about whether they need to keep buying $85 billion of debt securities a month to support the economy, the bigger influence on Treasuries is what policy makers say about the path of rates, JPMorgan Chase & Co. data show. Bonds rallied the most last week since August as Fed Chairman Ben S. Bernanke told Congress that it would take a “substantial improvement” in employment to end the purchases.
“The Fed has been very articulate about the direction of short-term rates,” said Krishna Memani, the chief investment officer of fixed-income in New York at OppenheimerFunds Inc., which oversees $80.7 billion. “It is entirely data-driven and nobody expects that data to improve” enough to satisfy the Fed “anytime soon,” he said in a Feb. 27 telephone interview.
Bond Rebound
Yields on 10-year notes fell 12 basis points, or 0.12 percentage point, to 1.84 percent last week, the biggest decline since the period ended Aug. 31, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due in February 2023 rose 1 3/32, or $10.94 per $1,000 face amount, to 101 13/32. Memani said he see yields ranging from 1.8 percent to 2.25 percent this year. The yield was unchanged at 8:07 a.m. in New York.
Last week’s rally came after yields increased to about an eight-month high of 1.97 percent on Jan. 4, the day after minutes of the December 11-12 Federal Open Market Committee meeting showed policy makers questioned whether the more than $2.3 trillion of monetary easing since 2008 risked unleashing inflation and fueling an asset-price bubble.
Yields continued to rise, reaching a high of 2.05 percent on Feb. 20 after minutes from January’s FOMC meeting showed policy makers discussed slowing or ending purchases of mortgage and Treasury debt.
It is frustrating, and unfortunately, I don’t see any signs the situation will change. Underwater owners won’t bother to list until they are above water, and banks aren’t foreclosing on the delinquent mortgage squatters, so the only people with the incentive or the ability to sell are sellers with equity, and apparently, there aren’t very many of those.
I think you also have to consider that people who own homes aren’t all financial fools, particularly those who did not go all Ponzi in the last bubble. Consider that they might have the same attitude towards real estate as hedge funds and other investors looking for an inflation-resistant home for their capital. That is, the same reasons that compel investors to want to sink their money into real estate instead of, say, muni bonds, Treasuries or GE stock, compel people who own homes to stay put and shove any extra cash into paying down the mortgage still further.
Really, with crazy money printing at the national level, anyone who owns a decent home has almost no better place to put his money than reducing his mortgage debt. These days that’s returning no less than 3-6%, depending on how old your mortgage is, even without any rise in prices. If you factor in, say, half of recent capital appreciation, figuring there will be a modest correction, you are getting a 7-10% return on your investment paying down your mortgage these days. No other investment of even remotely comparable risk or availability to the retail investor comes close to that.
This is one of the weird unexpected side-effects of The Bernank’s master plan. Sure, fears of inflation would make people with savings desperate to buy a hard asset — stimulating demand. I’d say he’s stimulated demand to the point where demand is frothing at the mouth, rabid. But apparently they forgot that anyone who has a hard asset would be driven by the very same inflation fears to hold onto it, so he’s also freaked out supply, and supply is hiding in the closet, not remotely interested in talking to demand. Bummer. Another fine result of Central Planning by the Bright Boys with degrees from Harvard.
“Really, with crazy money printing at the national level, anyone who owns a decent home has almost no better place to put his money than reducing his mortgage debt.”
This statement really makes no sense. If you expect inflation to be high then the last thing you want to do is pay off the mortgage. High inflation hurts lenders and rewards borrowers. The prudent borrower would sit back and let Bernanke pay the mortgage off for him.
Agree w mellow ruse. but carl pham was likely noting the lax monetary policy as well as centrally planned ZIRP, which gives people few options for decent return.
better to trade cash for gold, make the 30yr payment, sit back and watch them print this thing into a full blown currency crisis.
It makes sense in the here and now, with no other investment of similarly low risk returning anything like the rate on even a recent mortgage.
Whether it makes sense in the future is, indeed, another story. If savage inflation breaks out, then, yes, one would be advised to pay no more than you must on the mortgage and put any extra cash you have into some other inflation-hedge — Canadian equities, more property, new cars, gold maybe.
But that just means the guy continuing to pay his mortgage even if he’s a little underwater has a twofer going on: on the one hand, he’s earning himself a 4% return on his money. (I’m setting aside here the possibility of his simply reneging on the debt, which is why I said “slightly” underwater, where that may not make sense.) And on the other hand, if brutal inflation does come to pass — he’s in the position, i.e. owning a house, of, as you say, sitting back and letting Bernanke pay his mortgage and using his cash for something else.
I’m not saying the math works out well to buy a house, particularly at an inflated value. But if you’ve already got one, I think there’s a good conservative argument to be made for not selling it — which is what we’re trying to explain, why no one is selling houses.
Has anybody hear of the Canadian 5 year adjustable mortgage? It adjusts every 5 years?
People want their federal guarantee I think it should be very expensive.
Real Estate Will Reform of Fannie and Freddie Kill the 30-Year Mortgage?
By Christopher MatthewsMarch 04, 2013
The sequester is all anybody wants to talk about. I get it: It’s the hip new crisis sweeping Washington. But remember Fannie Mae and Freddie Mac? You know, the once quasi-independent housing giants whose takeover by the federal government has cost taxpayers upwards of $190 billion thus far? Well, Fannie and Freddie are still owned by the federal government and, on top of that, are the only thing holding the U.S.’ badly battered housing-finance system together, as the Feds back 9 out of 10 mortgages issued today.
But Congress and the President have been so bogged down in their never-ending budget battles that we’ve heard little from Washington on this subject in recent months. Until last week, that is, when the Bipartisan Policy Center — a think tank formed by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole, and George Mitchell — tried to bring this very important issue back to the fore by releasing a 131-page report on the future of housing policy in America.
Their solution is to wind down Fannie Mae and Freddie Mac by slowly selling off their assets to the private sector as the economy improves. In their place, the government would create a public guarantor of mortgages, sort of like what Ginnie Mae does for FHA and VA loans now. This guarantor would not purchase mortgage-backed securities as Fannie Mae and Freddie Mac do now; rather it would simply insure mortgages in case of default, and charge a fee to do so. The BPC framework would also require issuers of mortgage-backed securities to purchase private insurance, so that the government guarantor would only have to step in in the case of a total real estate market meltdown, similar to the one we experienced in 2008.
This system is more stable than the one in place prior to the crisis because the government guarantees would be explicit, and be accounted for in the budget. Furthermore, any losses the government would have to take would be paid for in advance by guarantee fees paid by the issuing bank.
But this raises the question: Why does the government play a role in the housing market at all? After all, one of the causes of the mortgage market meltdown was quasi-governmental Fannie and Freddie taking on too much risk. And many Republicans, like House Financial Services Committee Chair Jeb Hensarling, want to completely privatize the housing finance system. Wouldn’t that make the most sense if the goal is to protect taxpayers from having to bailout out the mortgage industry again?
Not if we want to maintain the 30-year, fixed-rate mortgage that most American homeowners have come to know and rely on. According to the report, without some form of government backstop, those types of mortgages would be exceedingly rare. As was seen during the savings and loan crisis of the 1980s, long-term, fixed-rate mortgages are risky investments for mortgage lenders to keep on their books. A bank that makes such a loan has not only to deal with the risk that a borrower may not re-pay in full, but also the risk that interest rate fluctuations impose on the investment. When interest rates rise, a bank can’t pass that cost on to borrowers because the rate is fixed. On top of that, lenders have to deal with prepayment risk, the risk that a borrower will pay back the mortgage before its due, reducing the total return of the investment.
The BPC’s position is no government role, no long-term fixed rate mortgages. So what’s the alternative? Though it may come as a surprise to many Americans, the 30-year fixed-rate mortgage is actually very uncommon outside the U.S. For all the reasons listed above, banks just don’t like to make such long commitments without being able to adjust the interest rates they charge customers, or prohibiting prepayment. In Canada for instance, the most common mortgage is a five-year fixed rate loan. These mortgages are amortized over a twenty-five year period, but the interest rate must be adjusted every five years, and there is no cap on how much interest can be charged.
This sort of system probably seems strange to most Americans, who have grown used to knowing exactly what their housing payments will be over the long term. There surely is value in having this sort of certainty, but banks don’t give it away for free. Lenders charge a premium to cover the risk they are incurring by giving such stable terms. And while it may seem to Americans that the Canadian system is too unpredictable, Canadians themselves seem to get along just fine with it, as they have home ownership rates similar to ours.
So while you may recoil at the idea of having the government involved in the mortgage market, it appears government intervention is necessary unless we’re willing to introduce significant changes to the way the average American will finance the purchase of a home. And given how averse to change many voters in this country are, one can expect significant support for continued federal participation in housing finance for years to come.
San Diego County CU offers a similar loan program with a 5% maximum increase. https://www.sdccu.com/pages/rates/HomeLoanRates.pdf
“However, if we are going to have government backing, we need government oversight to protect the taxpayer.”
IrvineRenter, the gov is backing these loans with OPM – Other Peoples Money. They don’t give a shit how large of a disaster this becomes. They’ll feign ignorance when it bursts and print the difference, saying, “Let them eat paper”
Gov backing is folly, but supporting gov backing and then expecting proper gov oversight is extreme folly.
That’s exactly the plan. Have govt. backing with very little oversight. When enough liabilities are transferred to the govt., let the house of card collapse on the taxpayers’ dime. The power that be will have cash from the profits to buy at the collapsed prices and almost no liabilities because the govt back all the bad loans.
History repeats itself. Only the names and dates have changed.
Even if taxpayers refused to pay for it, they’d just print the difference and make them pay via inflation.
After enough beatings via inflation, even the biggest patsies will be trading their cash for goods or gold.
The powers that be control or own the resources. They don’t care about inflation as long as there’s limited wage inflation. Inflation of goods while wages are kept in-check is the best state for them as long as there’s no revolution to overthrow them.