Nationwide Housing Continues to Improve; Appraisal Compliance Input

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I can't figure out if this is a story about the rebounding real estate market, or about the gap between the "haves and the have-nots" widening - or both. Bloomberg's Oshrat Carmiel writes how "Miami Luxury Condos Revived With Buyer Cash Deposits." Regarding one 132 unit luxury project where prices range from $4.5 million to $32.5 million, "While the oceanfront tower's foundation is still being poured, 113 of its 132 units have sold. All buyers placed deposits of 30 percent in cash...We wanted to reconfigure and go after a buyer that is not as financially sensitive."  Builders are funding projects with cash commitments from buyers of as much as 60 percent of the purchase price. 

One reason existing home sales are so anemic is because few homeowners can afford to sell. There are roughly 75 million owner-occupied households, of which 10 million are underwater and 10 million have insufficient equity in their homes to afford a down payment on a new home. So 27% of all owner-occupied homes are effectively off limits under standard loan programs. As such, the 5 million expected home sales this year, 10% of the available stock, is good, per economist Dr. Elliot Eisenberg. That being said, a Zillow survey finds nearly 4 million homeowners saw their home prices rise enough to push them back above water (owe less than their house is worth). So-called negative equity is now below 20% nationwide according to Zillow. 

Digging into that a little, if inflation is the cruelest tax of all, negative home equity has to be the most repressive. According to the fourth quarter Zillow Negative Equity Report, the national negative equity rate dipped below 20 percent to 19.4 percent for the first time in years; negative equity reached its national apex in the first quarter of 2012 with 31.4% of all home owners underwater. As home values have risen, negative equity has diminished, which is certainly good for the homeowner, as well as the nation. However, not is all perfect as more than 9.8 million homeowners with a mortgage still remain underwater. Zillow is a driver of interesting housing numbers; none more interesting than their effective negative equity rate (homeowners not technically underwater, but having an LTV > 80%)....this number, unfortunately, is a persistent 37.6%. 

There is a lot of press about Freddie and Fannie - what about jumbo originations? Non-agency residential mortgage lending rose 21% y/y in 2013 to $272 billion and home-equity lending increased 33% to $59 billion, while GSE originations fell 18% as refinancing slowed, according to Inside Mortgage Finance. Total non-agency lending accounted for 18% of total mortgage originations in 2013. As a reminder, the MBA expects about $1.1 trillion in mortgage loan originations in 2014, down 37% year over year. Given that so much of this non-agency production (read: jumbo, and now non-QM) stays on the books of portfolio lenders, there sure are a lot of venture capital and money managers chasing a small percentage of the origination market.  

There was a note regarding appraisal issues: "I work for a large lender, and wanted to see if you could shed some light on the New Appraisal Compliance and Waiver Guidelines. We are being told by legal that when a buyer cannot use 100% of the contracted Seller Help stated in the sales contract, we will have to go back to the appraiser and have the appraiser update the appraisal and if we do not have either a verbal or written Appraisal Waive in the file we will have to wait three days before we can close. Have you heard of something such as this? This seems to be either my employer interpreting the new guideline incorrectly or another ridiculous new guideline from Dodd-Frank. On the other side of this guideline, according to my employer, is if the seller help has to go higher we will have to get the realtors to complete an addendum to make that happen. This is something that has always been there AND we require the appraiser to again change the appraisal AND wait the three days after the customer has received a copy of the new appraisal showing the changes. I have heard rumors that this guideline is not to go into place until 2015, or that my employer has interpreted the new guideline incorrectly." 

I am no expert in appraisal issues, so I sent this along to Brian Coester who returned with, "The reason for this is the tendency to use the concessions to inflate the price of homes and the recent changes from a 'market' based adjustment to concessions to a dollar for dollar amount which is a little more accurate. They are trying to prevent realtors and appraisers from 'inching up' the value of homes in the market are by including concessions in the appraised value or using some type of other then the dollar vs dollar for this. The reason for the appraisal update is because they are required to have that exactly right before the appraiser can be signed off on. The appraiser wouldn't know of the changes in the amounts that the seller is paying. This is annoying but it's technically the right thing to do." 

In a non-descript strip mall somewhere in America, there are three store fronts: an AutoZone parts place, a Subway sandwich shop, and a Check 'n Go payday lender. Since it was after lunch, and my Prius never breaks down, I opened door #3. While it is hard for me to imagine a mortgage originator currently being OUT of compliance with Dodd-Frank (and the CFPB) it's even harder for me to imagine places like these, in their current business model, ever being IN compliance. In a speech given recently by CFPB Director Cordray, addressing state's Attorney Generals, Mr. Cordray said that issues relating to payday and title loans and other small-dollar lending products will be "very much on the [CFPB's] plate" in 2014. Director Cordray is also reported to have said that scrutiny of such products "could easily be expanded to things like pawn brokering and overdrafts." 

Government definitely influences housing & lending, and vice versa. On the Eastern Seaboard Marc Savitt is running for office, and now out in California Dr. Lesli Gooch is running for Congress to succeed Congressman Gary Miller. "Lesli has been an intricate part of Congressman Miller's success in promoting housing and the mortgage industry. When elected, Lesli will be the voice for the homeowner; fighting to preserve and expand homeownership, while working with the housing industry to increase opportunity." "Lesli has spent the past 15 years on Capitol Hill fighting for San Bernardino County families," said Congressman Miller. 

Freddie Mac has updated its reserve requirements to base calculations on the subject property's full monthly payment amount rather than only principal, interest, taxes, and insurance.  Borrowers no longer need to have an additional six months of reserves when converting a -4 unit primary residence to an investment property and using the resultant rental income, e.g. income from units they have not previously occupied, to qualify.  Additionally, FHLMC mas removed the requirement that the appraisal be dated 60 days or fewer prior to the note date when used to document the value of a primary residence pending sale or being converted to a second home/investment property with the intention of establishing the minimum required reserves.  This goes into effect for all loans with settlement dates on or after June 1^st.  

We actually saw a bit of a rally/improvement Wednesday in the bond market. Attribute it to whatever you'd like (flight to quality due to the Ukraine/Russia issue is as good a reason as any), the 10-yr price rose by almost .375 and closed at 2.73%, and agency MBS prices improved about .250. The Fed continues to be the big buyer, and the New York Federal Reserve Board announced that over the mid-March to mid-April period it expected to purchase $16 billion in MBS from paydowns received in its Agency MBS and debenture portfolios in February. Thomson Reuters points out, "Combined with outright purchases, buying is projected to average $2.3 billion per day over the last half of March compared to $2.1 billion in the first half of this month. Assuming the Fed announces another $5 billion taper in MBS at its upcoming meeting, buying is anticipated to decline to just over $2 billion per day over the first two weeks of April." 

But a new day has begun. We've had Retail Sales for February. (Expected at +.2%, it was +.3%, same ex-auto). We've also had Initial Jobless Claims (expected +7k to 330k, it was 315k down 9k from a revised 324k), and Import Prices were +.9% - double expectations. At 11AM MST we'll have a $13 billion 30-year bond auction. For numbers, the 10-yr. closed Wednesday at 2.73% and this morning we were at 2.73% before the numbers; soon after we're at 2.74% and agency MBS prices are worse a tad.

 

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