According to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending March 29, 2019, mortgage applications increased 18.6 percent from one week earlier.
The Market Composite Index, a measure of mortgage loan application volume, increased 18.6 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 18 percent compared with the previous week.
The Refinance Index increased 39 percent from the previous week, and was at its highest level since January 2016. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. The unadjusted Purchase Index increased 4 percent compared with the previous week and was 10 percent higher than the same week one year ago.
“There was a tremendous surge in overall applications activity, as mortgage rates fell for the fourth week in a row – with rates for some loan types reaching their lowest levels since January 2018. Refinance borrowers with larger loan balances continue to benefit, as we saw another sizeable increase in the average refinance loan size to $438,900 – a new survey record,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “We had expected factors such as the ongoing strong job market and favorable demographics to help lift purchase activity this year, and the further decline in rates is providing another tailwind. Purchase applications were almost 10 percent higher than a year ago.”
Added Kan, “The average loan size for purchase loans declined slightly, as applications for smaller purchase loan sizes exceeded that of higher loan sizes – a positive sign that first-time buyers were increasingly active in the market.”
The refinance share of mortgage activity increased to 47.4 percent of total applications from 40.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 9.5 percent of total applications.
The FHA share of total applications decreased to 8.8 percent from 9.3 percent the week prior. The VA share of total applications remained unchanged from 10.4 percent the week prior. The USDA share of total applications remained unchanged from 0.6 percent the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) decreased to 4.36 percent from 4.45 percent, with points increasing to 0.44 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $484,350) decreased to 4.21 percent from 4.35 percent, with points decreasing to 0.25 from 0.27 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.41 percent from 4.48 percent, with points remaining unchanged at 0.48 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.78 percent from 3.87 percent, with points decreasing to 0.40 from 0.47 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 5/1 ARMs remained unchanged at 3.77 percent, with points increasing to 0.38 from 0.30 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The Managing Director of Federal Mortgage Bank of Nigeria (FMBN), Architect Ahmed Dangiwa, says the bank has invested N5.03 billion in 1,225 housing units in Kaduna.
Speaking during the banks’ day at the ongoing 40th Kaduna International Trade Fair, the MD said the houses were developed in six housing estates project sited in Kaduna city, Kafanchan and Zaria.
He added that the bank has equally disbursed over N578 million as home renovation loans to 652 beneficiaries in the state and earmarked N572 million for disbursement to NHF contributors in the state in the current year.
He noted that 10,133 retirees have been refunded the cumulative sum of N965 million saying, “Aside from direct fund investment, the bank is a significant contributor to socio-economic development of the Kaduna state.
“Not only have we contributed to the housing stock, home ownership rate and improving living conditions through our home improvement micro housing loans, we can boast of having generated over 200,00 direct jobs at an average of 17 jobs per housing unit delivered in the state.
“Towards improving the national housing scheme service delivery, the bank recently launched its ICT platforms for contributions to access records of NHF contributors and ensure they receive SMS alerts of monthly deductions,” he said.
He advised contributors to use any of the ICT channels to access the bank’s NHF services and assured of the bank’s commitment to sustaining its partnership with Kaduna state with regards to housing delivery.
He urged that such economic events must be fully supported by business entities and corporate bodies to enhance and strengthen economic recovery being witnessed currently.
He observed that trade fair create wonderful opportunities for innovative sharing of business ideas, products, good and services and also create a conducive atmosphere for positive and profitable business-to-business interactions and partnerships.
The mortgage industry aims at technology to streamline processes and tackle workflow inefficiencies, financial burdens and better borrower experiences.
Housing activity is down, costs to close are up, and lenders being forced to get creative hope digital advancements help combat these tough conditions, while also simplifying the process for consumers.
But going digital is no easy feat. Technology investments push up closing costs, at least in the short term, and lenders targeting quicker closing times can only shave off so many days in such a fragmented industry. Evolving cyber security risks also need to be addressed.
Nonetheless, lenders are certainly making progress with tech and embracing things like artificial intelligence, with 2019 set to be an important year for innovation in the mortgage world, according to FormFree CEO and Founder Brent Chandler.
From rising closing costs to implementation strategies, here’s a look at five themes shaping the direction of digital mortgages in 2019, according to topics discussed at the Mortgage Bankers Association Technology Conference on March 24-27 in Dallas.
Money well spent?
Mortgage lenders utilize technology to make the process better for borrowers, but they’re also trying to drill down costs in a climate where housing activity lags on higher home prices and previous growth in rates.
But digital advancements are doing the opposite for closing costs. While this could be a result of upfront tech investments and implementation, it’s taking a toll on an already financially constrained industry.
The average total expenses to close a mortgage spiked, going to $8,405 in 2018 from $5,958 in 2013. Digitizing the process may not be the sole reason, but it’s a contributor, and is certainly putting the pressure on lenders to get creative to keep costs low.
Ingredients for success
Lenders are moving past optical character recognition and embracing artificial intelligence to streamline processes, but they’re not getting the whole picture.
At a time when institutions are extracting rich, comprehensive data, they’re then just converting that data to a PDF and shipping it off; efforts are being made to digitize the process, but the initiatives are not carried across the lifecycle of the loan.
Part of the problem is companies aren’t tackling issues piece-by-piece, and instead rely on one model to solve multiple issues. While one tool may be responsible for extracting data, another is likely required to facilitate it through an additional piece of the mortgage value chain.
The following formula can help institutions reach a successful technology implementation: identify a problem, determine whether they have the necessary data to settle the issue and then decide which machine learning model to use, according to David Frost, director of commercial mortgage servicing technology at Wells Fargo.
Holding back progress
In its pursuit of a better customer experience, the mortgage industry targets a quicker process, but its fragmented nature limits its efforts.
The average loan closing time fluctuated between 2012 to 2018, reaching a low within the range of 40.3 days in 2014 and a high of 48.2 days in 2012, according to Ellie Mae.
Though days to close did drop over the past couple of years, lenders are working to reduce it further, but they aren’t really addressing how compartmentalized the industry is.
“Everywhere you look its fragmentation upon fragmentation,” Aaron King, Snapdocs CEO, said in an interview. “Lenders have multiple technology components to stitch together, all these settlement agents, all these investors, all these underwriters. If you look at webcam notarization, if you look at e-notes, if you look at the adoption of all these really good technologies, none of them are getting traction because nobody is solving this network challenge.”
With technology quickened closing times are inevitable, though the amount of days that can be shaved off is up for debate.
The great debate
The conversation around mortgage technology is as much about the “what” as it is the “how.”
In taking tech steps forward, mortgage lenders evaluate whether building or buying a product is best for their business.
Purchasing a product is typically the quicker and most cost-effective option in the short run, as a tool is already in place for institutions to evaluate, and it’ll be more readily available for integration. But companies developing their own technology, though a hefty and potentially expensive task, have the advantage of customization, and may wind up spending less money down the line.
Companies tapping a vendor for tech should ensure a product will properly integrate, and those opting to develop their own must have adequate resources, manpower and a solid understanding of regulatory standards.
But whether built or bought, staying mindful of business objectives sits at the core of tech implementation, requiring heavy attention from business leaders and stakeholders over a tech department.
Privacy at a price
Mortgage lenders racing to adopt technology and streamline processes are also forced to battle increased data-privacy regulation and evolving cybersecurity risks extending beyond their own operations.
From securing their own data, to that of vendor partners, and even protecting borrowers from wire fraud, lenders are gearing up to battle a sea of potential risks, and all at a price.
If borrowers lose their down payment money to a scam artist who intercepts loan information and sends false wiring information for a down payment, they can no longer purchase that house and the lender loses a loan.
Wire fraud alone generated more than $1.4 billion in losses from over 300,000 cases in 2017, according to the FBI’s Internet Crime Complaint Center. The dollar volume and incidence of wire fraud has generally trended upward since 2013.
Source: By Elina Tarkazikis, National Mortgage News
There are two essential parts to achieving affordable housing: building decent, low-cost homes, and developing a housing finance market that enables low-income earners to buy those homes. For, without finance, almost no home price is low enough to be affordable on an average salary.
For this reason, the mortgage market has been growing. Housing loans have risen more than ten-fold since 2006, from 1,278 loans valued at Sh19m 12 years ago to 24,458 loans valued at Sh203.3bn by 2015, according to the Central Bank of Kenya (CBK).
But the market still remains tiny when compared with other nations. In Tanzania and Uganda, the mortgage loan value is under 2.5 per cent GDP while in Kenya stands at 3.15 per cent of GDP by 2015. In South Africa, it contributed some 32 per cent of GDP.
Yet in countries where mortgages drive a large flow of home buying, home owners prime the pumps of the economy with additional spending power in an inflow that makes for faster economic growth.
However, our own mortgage market is held back by multiple constraints, including bureaucracy. Normally, the purchase of a property takes around three months to complete. For instance, mortgage finance in Kenya typically takes six months to arrange, mired in nine separate, manual, administrative processes.
These span land rent and rates clearance certificates, transfer filing and consent, the search, the valuation and its endorsement, and the stamp duty and lodging of documents. This process, which the government is now working to simplify, adds cumbersome work, as well as risk, thus increasing the cost of mortgages.
Most primary mortgage lenders in the region thus set higher mortgage rates and focus on high net worth individuals and high earners who can afford higher rates. They also run shorter repayment periods, ranging from as low as three years to an average of eight years.
But repaying at such high rates, so rapidly, puts borrowers under considerable pressure and leads to defaults, which today stand at some 12 per cent of Kenyan mortgages. It is additionally a model that offers very few opportunities for low and middle-income Kenyans to own homes.
We, thus, need a radical overhaul of mortgage financing if we are to achieve widespread home ownership, which is where mortgage refinancing comes in.
Providing a source of secure, long-term funding for mortgages has a direct impact on the affordability of home loans for home buyers and is a vital pillar to achieving a developed mortgage system. Such funding was critical, for instance, in Malaysia and Singapore, where about 80 per cent of houses are now mortgage-owned.
For this reason, the Kenyan National Treasury is contributing to the Affordable Housing Pillar of the BIG 4 Agenda by supporting the creation of a lending facility (the Kenya Mortgage Refinance Company) to provide longer-term funds for banks and SACCOs for residential mortgages in Kenya.
The Kenya Mortgage Refinance Company (KMRC) will provide secure funding to mortgage lenders so that they can offer more mortgages at lower prices. With such long-term funding, primary mortgage lenders will also be able to lengthen repayment periods to 15 to 25 years, and offer a fixed interest rate, making mortgages both safe and affordable for low income earners.
The new financing will mainly be available for lower cost housing, valued at less than Sh4m in Nairobi metropolitan area (Nairobi, Machakos, Kiambu and Kajiado) and Sh3m elsewhere. Likewise, to qualify for the housing loan, Kenyans must be earning less than Sh150,000 a month.
Refinancing the financial institutions will also enable them to expand their lending scope to finance developers as well, a strategy that can also be borrowed by other East African countries in meeting their affordable housing agendas.
The Government Affordable Housing project seeks to develop 500,000 houses in five years, which presents the largest real estate opportunity for a long time. But with the country having only managed to produce about 50,000 units over the last two to three years, achieving the targeted 100,000 houses a year will require considerable investment in construction.
The financing structures necessary to achieve this will be outlined in forums at the April 10th -11th East African Property Investment Summit, which aims to support the Government Affordable Housing Project. But as government and industry leaders convene to discuss the delivery of the targeted affordable housing, mortgage refinancing will be taking center stage as a crucial enabler.
Source: Johnstone Oltetia is the Interim CEO of Kenya Mortgage Refinance Company (KMRC)
Two weeks ago, the Federal Housing Administration took steps to mitigate risks to its single-family portfolio, announcing updates to its TOTAL Mortgage Scorecard that will flag some loans for manual underwriting.
The move upset a number of lenders who feared that some of their borrowers would be shut out of FHA financing and that borrowers who began the process but no longer qualified under new guidelines would be angry.
Turns out, their fears have some merit.
An FHA official told The Wall Street Journal that approximately 40,000 to 50,000 loans a year will likely be affected, which amounts to about 4-5% to all the mortgages the FHA insures on an annual basis.
“We have continued to endorse loans with more and more credit risk,” said FHA’s Chief Risk Officer Keith Becker. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”
The WSJ points out that the move is a complete reversal of the agency’s 2016 decision to loosen underwriting standards, nixing an old rule that required manual underwriting for loans with credit scores below 620 and a debt-to-income ratio above 43%.
Requiring manual underwriting for riskier loans is intended to curb these risks, and there’s a good chance a number of borrowers will no longer qualify.
According to Becker, it’s likely that many of the loans flagged for manual underwriting won’t end up passing muster.
The Director, Other Financial Institutions Supervision Department, Central Bank of Nigeria, Mrs Tokunbo Martins has said the mortgage registry system would boost the level of internally generated revenues of states across Nigeria and make Asset Mortgage more transparent.
Mrs Tokunbo stated this in an interview with Abuja Housing show newsmen at the FSS2020 Mortgage Sector Forum 2019 held in Abuja on Wednesday.
Discussions at the forum centered on “using electronic mortgage asset registry system to develop the mortgage sector in Nigeria.”
While stating the challenges militating against the Mortgage sector in Nigeria, the Director explained that the proposed mortgage asset registry system would deepen the level of transparency in the management of mortgage assets across the country.
She identified low access to long term financing as one of the major challenges facing the sector, noting that the forum critically deliberated on the challenge and devised several measures for tackling it.
One of such measures, she said, was the development of a new Application and a USSD code that would make the National Housing Fund (NHF) more accessible and Transparent.
Mrs Tokunbo added that a Mortgage Interest draw back fund would be available to borrowers and developers who meet the prescribed conditions.
She expressed optimism towards the outcome of the forum and enjoined all sectors to boost their work load so that more progress could be attain.
Also present, the Director, Financial System Strategy (FSS2020), M.D Suleyman said more collaborations with stakeholders would ensure the actualization of the sector’s set objectives.
He added that mortgage cost was a challenge that has to be addressed.
Fannie Mae (FNMA/OTCQB), the largest provider of liquidity to the U.S. housing market, today announced that it has appointed Hugh R. Frater as Chief Executive Officer effective March 26. As CEO, Frater will set the overall enterprise vision and strategic direction of the company. In addition to his role as CEO, Frater remains on the Board of Directors. Frater previously served as Interim CEO.
“Following a six month nationwide search of qualified candidates, I am pleased to announce Hugh R. Frater as Fannie Mae CEO. Hugh’s deep understanding of the housing and the financial services industries, broad experience, and strong leadership skills make him an ideal choice to lead Fannie Mae,” said Jonathan Plutzik, Chair of Fannie Mae’s Board of Directors.
“Hugh’s contributions as Interim CEO over the last several months demonstrate his commitment to strengthening the company and delivering value to our customers and partners.
This appointment also provides continuity in Fannie Mae’s leadership team as we fulfill our mission to provide liquidity and support to the mortgage market.”
“I am honored with this opportunity to lead Fannie Mae and to play a part in the company’s important contributions to the housing finance system,” said Frater. “The Fannie Mae of today is customer focused, innovative, and committed to leading a housing finance system that is safe, sound, and sustainable for taxpayers and creditworthy borrowers of all income levels.
I look forward to continuing to work with this outstanding leadership team to deliver on Fannie Mae’s strategic priorities and transform the mortgage experience for our customers and partners.”
Frater served as Fannie Mae’s Interim CEO since October 16, 2018 and on Fannie Mae’s Board since 2016. He has held a number of executive and management roles throughout his career. Frater currently serves as Non-Executive Chairman of the Board of VEREIT, Inc.
He previously led Berkadia Commercial Mortgage LLC, a national commercial real estate company providing comprehensive capital solutions and investment sales advisory and research services for multifamily and commercial properties.
He served as Chairman of Berkadia from April 2014 to December 2015 and he served as Chief Executive Officer of Berkadia from 2010 to April 2014. Earlier in his career, Frater was an Executive Vice President at PNC Financial Services, where he led the real estate division, and was a Founding Partner and Managing Director of BlackRock, Inc.
The Chairman of a leading property development and management company, Urban Shelter Limited, Malam Ibrahim Aliyu, has said the potential for housing in Nigeria will not be realized until the current mortgage rate is brought down below 10 per cent.
Malam Aliyu stated this during a courtesy visit on the company in Abuja recently by officials of Media Trust Limited, publishers of Daily Trust and other titles, led by its Chief Executive Officer, Malam Mannir Dan-Ali.
The Urban Shelter Limited chairman said if government borrowed less, interest rate in the country is lower and the cost to borrow to finance housing (mortgage rate) is also much lower – between 9-10 per cent – the potential for housing in the country could be realized.
“Our mortgage rate must be around or about 9 per cent and this can only come about when inflation is lower and inflation can be lower only if government is not borrowing at the kind of rate we have seen in the last 15 years,” Malam Aliyu said.
He said the development of housing was a critical factor in the development of any economy and that Nigeria has substantially lagged behind in that area primarily because the issues around finance have not been tackled.
“There’s no way you can get extensive housing finance if you do not have a good mortgage system. You cannot have a good mortgage system if you cannot borrow at an interest rate that is less than two digits: nine per cent or less.
“The main reason why such mortgage funding is not available is because government is borrowing extensively at rates of 12 per cent and up to 15 per cent. There is a need to moderate this. It will help to moderate inflation and bring the mortgage rate down which can proliferate housing development,” he added.
While commending President Muhammadu Buhari for signing the new Executive Order 007 that permits private companies to fund major road construction projects and in turn get tax credit, Aliyu urged government to further expand infrastructure financing opportunities.
“I think Mr. president is in a wonderful position to recognize that infrastructure is important. The government cannot do it alone. Government has started to recognize this. They should go further. The Executive Order 007 is an important development. The only limitation is that they have taken only one means of financing infrastructure,” he noted.
Rates for home loans fell, with no bottom in sight as investors increasingly brace for slowing economic growth.
The 30-year fixed-rate mortgage averaged 4.28% in the March 21 week, mortgage guarantor Freddie Mac said Thursday. That was down 3 basis points during the week and a 13-month low for the popular product, which has managed a weekly gain only twice during 2019.
The 15-year adjustable-rate mortgage averaged 3.71%, down from 3.76%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.84%, unchanged during the week.
Fixed-rate mortgages follow the benchmark U.S. 10-year Treasury note TMUBMUSD10Y, -0.15% , although they move with a bit of a lag. Investors have been piling into bonds over the past week, betting on a more dovish stance from the Federal Reserve.
That turned out to be the right call. After the release of the central bank’s statements, bond prices jumped, pushing yields down sharply. Freddie’s weekly mortgage survey captures activity through Tuesday, so the big bond market moves of this week will likely be reflected in mortgage rates next week.
This may be the sweet spot for borrowers. Lower rates are obviously a boon for the housing market, which has struggled in the face of a supply crunch, rising prices, and outsize demand. But the economy hasn’t slowed enough that people are losing their jobs. Americas are still showing signs that they want to try to become homeowners. Mortgage applications rose 1.6% over the past week as rates drifted down, the Mortgage Bankers Association said Wednesday.
But few of the other obstacles have been resolved. The average mortgage application size hit a fresh high for the third week in a row as the supply of entry-level homes dwindled, the MBA said. The upcoming spring selling season will be watched very closely for clues about how the market is doing.
The 2004-07 bubble era in U.S. housing markets was a time of utter madness. Much has been written about it, but almost nothing has been said about the craziest aspect of it — the cash-out re-financing lunacy.
Let’s take a good look at it and explore why the scope of this insanity was so massive that it could — once again — start to take down numerous major housing markets within the next year.
Although traditional refinancing had been done by homeowners to lock in lower interest rates for their mortgage, what became known as a cash-out refinancing was different.
With home prices soaring nationwide during the housing bubble, homeowners an opportunity to pull some of that growing equity out of their house. The main vehicle was a refinance of the homeowner’s first mortgage. The owner cashed out the growing equity in the house by refinancing the first mortgage with a larger first. The difference between the two amounts went directly into the pocket of that homeowner. Just like printing money!
How much extra cash are we talking about? Freddie Mac publishes a quarterly cash-out refinance report. Between 2004 and 2007, homeowners were able to cash-out a total of $964 billion. They were free to spend it on anything, and they did. Freddie Mac’s figures include only refinancing of prime first-lien conventional mortgages. They do not include refinancing of second liens nor refinancing of subprime loans.
The second method was for the owner to refinance a second lien called a home equity line of credit (HELOC). The HELOC was similar to a business line of credit where the homeowner could draw on the available credit up to the limit provided by the lender. The beauty of this HELOC was that almost all of them required only interest payments for 10 years. Who could resist? Few did.
Cashing out the refinanced HELOC was similar to the cash-out first lien. A borrower was offered a line of credit larger than the current HELOC. The difference was extra money upon which the homeowner could draw.
During the peak bubble years of 2004-06, roughly 20 million first liens were refinanced across the country. According to the Freddie Mac report, more than 85% of all refinances were cash-outs in 2006.
Los Angeles: the epicenter of the madness
Since California was the center of the housing bubble in the U.S., it also became the epicenter for the cash-out refinancing lunacy. Between 2000 and 2007, home prices across California almost tripled. Homeowners used this to turn their rising home value into real spending money.
Roughly five times as many refinance loans were originated in California compared to mortgages for purchasing a home. Millions of Californians refinanced their first mortgage once, twice, even three times during the bubble years. They also refinanced with a cash-out HELOC while their home soared in value. Homeowners partied as if it would never end.
If California was the epicenter for the cash-out refinancing madness, metropolitan Los Angeles was undoubtedly the epicenter of the California craziness. Here is why.
The Los Angeles metro is comprised of Los Angeles and Orange counties, with a population of about 13 million during the bubble years. For four years, utter lunacy prevailed.
According to Mortgagedataweb.com, 2.72 million conventional mortgages were refinanced between 2004 and 2007 in the Los Angeles metro alone. How much money was involved? A total of $627 billion in refinanced mortgages was originated. That’s right – $627 billion for one metro.
While these L.A. numbers are mind-boggling, the average refinanced loan was just $232,000. That puzzled me for some time. This was California during the craziest real estate bubble in U.S. history. Eventually I realized that most of these were refinanced HELOCs and not first mortgages.
Since the median California home sale price at the peak was close to $500,000, how many refinanced first liens in Los Angeles metro were jumbo mortgages? These were mortgages that exceeded the limits for a loan to be guaranteed by Fannie Mae or Freddie Mac. Mortgagedataweb.com gives us the answer. In 2005 and 2006 alone, 231,000 jumbo mortgages were refinanced in the Los Angeles metro. With an average size of slightly over $600,000, the total came to an astronomical $140 billion — among a population of around 13 million.
The housing collapse in L.A. and its turnaround
By 2008, the housing market collapse in Los Angeles was in full swing. That year, 37,670 homes in Los Angeles County were foreclosed by mortgage servicers according to data provider Property Radar. Although foreclosures nationwide did not peak until 2010, the peak for Los Angeles was in 2008.
Prices were cratering throughout California in 2009. More than 500,000 delinquent homeowners received a default notice that year. According to the California Association of Realtors, nearly half of all sales were either repossessed properties or short sales. DataQuick reported that in February 2009, 58% of all home sales in California were repossessed properties.
As home prices showed no sign of leveling off in 2009 or early 2010, lenders and their servicers panicked. They decided that the bleeding might be stopped if they drastically reduced the number of repossessed properties placed on the active housing market. RealtyTrac had begun reporting as early as April 2009 that most foreclosed properties were being held off the market. They estimated that roughly 80,000 foreclosed properties in California had been deliberately kept off the market.
What began in California spread nationwide. This table shows what servicers in major metros were doing with their foreclosed homes according to data provided by RealtyTrac.
By mid-2010, Los Angeles County mortgage servicers had just under 30,000 properties in their foreclosure inventory. A mere 1,214 were actively for sale.
Did this desperate strategy prevent home prices from falling further? Not at first. There were simply too many delinquent properties that had not yet been foreclosed. As late as December 2010, 34% of all homes sold in Los Angeles metro and the other four surrounding counties were repossessions. Two months later, 40% of all sales in the state were foreclosed properties. More drastic action was clearly necessary.
The solution was to sharply restrict the number of delinquent properties actually foreclosed. Early in 2012, the number of homes repossessed by the servicers began to plunge.
Take a look at this table showing the sharp drop.
Because of this massive cutback in repossessions, home prices in Los Angeles County finally began to level off and then turn up. ATTOM DATA reported that sellers in the second quarter of 2012 actually showed a profit from their original purchase price.
Servicers realized that reducing foreclosures to a trickle had worked. By February 2013, repossessions plunged in LA County to a mere 310. For all of 2013, only 3,340 houses were foreclosed. What servicers were doing went unreported by the media.
Cash-out refinancing exacerbated the L.A. collapse
There is an excellent source that explores why Los Angeles was so devastated by the housing crash. Steven Lauffer was a professional staffer at the Federal Reserve Board. In 2013, he published a paper entitled “Equity Extraction and Mortgage Default.” Lauffer carefully laid out the case that mortgage defaults in Los Angeles County were caused by cash-out refinancing much more than by anything else.
Using CoreLogic’s search tools and database, Lauffer was able to search more than 1.2 million homes between 2000 and 2009 in Los Angeles County. Through this, he could identify every open mortgage against all these properties during the study period. He selected 100,000 homes purchased between 2002 and 2004 before the bubble reached its peak. From this, he randomly chose 20,000 properties to make his study more manageable.
What Lauffer found was truly shocking. Half of these homeowners had taken out a second mortgage at the time of purchase. After buying the property, these owners took out an average of 2.5 new mortgages through 2009. Of these new mortgages, 45% were cash-out refinances and an additional 10% were HELOCs.
When home prices stopped rising in 2006 and then began to decline, homeowners started defaulting in droves. Of those who bought a house in 2003, 10% had defaulted by 2009. Those who purchased in the peak bubble year of 2006 saw their equity evaporate almost overnight. By the end of 2009, 40% of this cohort had defaulted on their mortgage.
Here is the real shocker: Lauffer found that of those homeowners who defaulted by 2009, 40% of them had purchased their home in 2003 or earlier. Although their houses had increased in value considerably until the bubble popped in late 2006, more than 40% of their outstanding mortgage debt in 2009 was the result of cash-out refinancing – what Lauffer called “equity extraction.” For 90% of the defaulters, he found that their original mortgage debt at the time of purchase was less than the value of their home when they defaulted. It was this cash-out refinancing more than losing a job or anything else that led these homeowners to default.
Why difficult times are still ahead of us
In a recent column, I discussed why the massive delinquency of bubble-era non-agency mortgages is a disaster waiting to happen. Comments by quite a few readers showed me they had a hard time understanding how fewer than 4 million mortgages could take down major housing markets.
That is a fair objection. You need to understand that the problem is much greater than just the non-agency mortgages. During the bubble years, a total of 28 million first and second liens were refinanced. Recall that roughly 80% of these were cash-out refinances.
Although the cash-out refinancing lunacy was most excessive in the Los Angeles metro, it took place throughout the nation, especially in the major metros. When home prices began declining in late 2006 and early 2007, the vast majority of these homeowners had a total mortgage debt which was much greater than when they bought their home.
This massive problem of underwater homeowners could not be resolved only by shutting off the spigot of foreclosures. That is why a total of 25 million permanent mortgage modifications and other so-called “workout plans” were put in place from 2008 until June 2018 according to data provider Hope Now.
Modifying mortgages as an alternative to foreclosure just kicked the can down the road. It succeeded in bringing these delinquent homeowners into current status. Yet millions of them are re-defaulting on these modified mortgages. The number of re-defaults is increasing relentlessly around the U.S. Worse yet, many re-defaulters are on their second- or third mortgage modification.
Which investors might be vulnerable? Owners of some mortgage REITs, owners of nearly any mortgage-backed securities (RMBS) originated by Ginnie Mae (FHA-insured mortgages), and more than a few hedge funds.
It is quite likely that there is no feasible solution to this massive problem of mortgage modification re-defaults. As home sales weaken now around the country and sale prices level off, you’ll do well to prepare by assuming the worst.