Archive for May, 2011

FDIC sues CoreLogic and LPS

Acting as the receiver of the late Washington Mutual Bank (which was seized by the federal government in 2008), the FDIC is suing two companies — CoreLogic and Lender Processing Services’ subsidiary LSI Appraisal — for allegedly overvaluing homes it appraised to the point of “gross negligence.” In fact, the FDIC says that about 75 percent of the appraisals it examined were inflated.

Lucky for CoreLogic and LPS, the FDIC is only suing over a relative handful of loans and their appraisals: 194 done by CoreLogic and 220 by LPS, for a total of $129 million in damages from the former and $154 million from the latter. Those are only the loans that were on WaMu’s books. Many more loans were packaged and sold as securities, so the FDIC

Unlucky for CoreLogic and LPS, if the FDIC proves its case, the owners of those other loans are likely to load  their legal guns. And if a large percentage of those other loans show the kind of issues the FDIC claims, one estimate puts the two companies on the hook for between $82 and $331 billion.

Of course, those numbers are based on the idea that the FDIC is 100% correct in its assertions, and that there aren’t a long list of mitigating circumstances. In other words, it’s an unlikely worst-case scenario for CoreLogic and LPS.

On the other hand, the FDIC isn’t just saying the appraisals were wrong — that’s tough to prove. It’s claiming “multiple egregious violations of USPAP and applicable industry standards.” And standards like that may be easier to prove. May be.

Whatever comes of it, it seems clear that the federal government is — in some way, shape, or form — willing to target at least some of the companies that either caused our current crisis or made it worse. As always, stay tuned.

 

Tuesday morning quick smile

From xkcd:

homeownership

April saw a rise in median home prices

Virginia’s median home sales price increased for the third month in a row in April 2011 to $230,000.  These three monthly increases were after nearly half a year of declining median home sales prices.  This increase in median home sales price is despite a decline in the number of home sales in April from 7,005 in March 2011 to only 6,400 in April 2011.

Many other real estate market indicators in Virginia are quite positive as of April 2011:

  • Average Days on Market declines for the second straight month
  • Unemployment Rate declines for the third straight month
  • Average 30-Year Mortgage Interest Rates decline for the second straight month

Click here to download the full monthly market report.

Leonardo Pareja with Keller Williams in Arlington makes REALTOR® magazine’s 30 Under 30 list. He was Keller Williams’ top producer for group sales volume in 2010 and now teaches agents around the country how to run large REO operations.

Congratulations, Leonardo!

I mentioned in an earlier post that it matters almost nothing whether someone puts down 5% or 20% on a mortgage — down payment doesn’t affect performance. A coupla folks were tempted to call shenanigans and wanted to know the source.

I had heard this at NAR’s mid-year conference from an NAR speaker, but that’s really not good enough. So here’s the detail. It comes from a piece on REALTOR magazine’s Speaking of Real Estate blog by Robert Freedman, and the data come from the Community Mortgage Banking Project:

In an analysis of the performance of loans made between 2002 and 2008, loans on which the down payment is increased from 5 percent to 10 percent showed improvement of between 0.1 percent and 0.5 percent. No, those aren’t typos. The gains are that small.

There was a little bit better improvement when down payments were increased from 5 percent to 20 percent. Performance improved between 0.3 percent and 1.6 percent.

That 1.6% was in 2007. In every other year from 2002 through 2008, the reduction in default rate from a 5% down payment to a 20% down payment was between 0.3% (2003) and 0.8% (2005-2006). Requiring a 20% down payment instead of 5% will reduce defaults by less than one percent.

What, you want me to draw you a picture?

And vice-versa

How about the other way around, since we’re looking at real numbers? If someone defaults on their mortgage, how bad a credit risk does that make him?

The answer comes from TransUnion, via a HousingWire story, “Mortgage defaults do not predict poor credit behavior“:

Consumers who default on other bills and lines of credit, such as credit cards and auto loans, are more likely to miss payments in the future. The results are meant to be used by lenders to help determine which kind of lender is better apt to handle more credit.

The report found borrowers who had mortgage-only defaults on their records performed far better when they took out new loans when compared to borrowers who defaulted on multiple lines of credit.

So there you have it, federal regulators. Requiring a 20% down payment for qualified residential mortgages will clobber the mortgage and housing markets, and all for naught.

In a conversation I had with Blake “VAR legal counsel” Hegeman the other day, he explained that he and his wife weren’t buying new stuff — they were saving their money. “What kind of American are you?” I asked. We don’t save; the average American has eight credit cards (!) and is about $8,000 in debt. (And here I felt silly when I had a Visa and and an Amex.)

It gets worse.

One of the (many) things wrong with the idea of requiring 20% down for a government-backed mortgage is the simple fact that too many people simply couldn’t come up with the cash ($50,000 for a $250,000 home!). In fact, according to today’s Atlantic Wire, half of Americans couldn’t come up with $2,000 if they needed to.

[R]esearchers from the George Washington School of Business, Princeton University, and Harvard Business School asked survey participants whether they would be able to come up with $2,000 for an “unexpected expense in the next month.” 22.2 percent predicted they would be “probably unable” and 27.9 percent said they’d certainly be unable to foot the unplanned bill.

So how many do you think could come up with 25 or 30 times that amount for a down payment?

Ripples continue: REOs hurting sales

Quick read from the Times today: “As Lenders Hold Homes in Foreclosure, Sales Are Hurt.” The gist: Banks and other lenders own more than 872,000 homes in the country, thanks to all those foreclosures. More are in the pipeline. That pushes down prices, and therefore property values. More people are underwater, which means more foreclosures… you get the idea.

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year.

 

 

Commercial lending comes under scrutiny

Here’s an interesting set of instructions: Lenders, we really want you to lend to commercial borrowers. Oh, but don’t forget the rules about having too much commercial exposure.

That’s pretty much what federal regulators told community banks, according to this Housing Wire story. Here’s a sample:

The standards were designed to address a growing problem — namely the fact that CRE loans are a main culprit today in bringing banking institutions down.

Commercial real estate accounted for 77% of the nonperforming loans at the most recently failed banks, analytics firm Trepp said earlier this year.

Regulators closed six banks on April 15, accounting for a total of $4.8 billion in assets. So far in 2011, there have been 34 closings, according to Trepp.

But, some banks are now accusing examiners of being too harsh in their treatment of CRE loans, making banks less willing to write business at a time when the CRE segment is in need of more activity.

 

NAR issues Call for Action: Don’t let 20% down be the standard

We’re gonna keep pounding this QRM thing because it’s critical for your business.

QRM: Qualfiied Residential Mortgage. A mortgage that meets certain requirements, and thus one that Fannie and Freddie will be willing to buy from lenders. But what will make a loan “qualify”? Federal regulators are considering making a 20% down payment part of the qualifications.

Sure, banks could loan to someone who puts less than 20% down — but only if they’re not planning to sell the loan to F&F (which own something like 90% of the secondary mortgage market). So whatever the QRM standard is going to be, you know it’s going to be the de facto mortgage standard.

Can you imagine if a 20% down payment was the only way to get a low-interest mortgage? How well do you think that would work? Hint: In the last 12 months, 60% of home buyers have put down less than that. And you know how hard it’s been to get a mortgage, so these are the folks with the great credit ratings — and they’re not shelling out $40,000 or $50,000 as a down payment.

Thus, the Call for Action: Don’t let federal regulators set the QRM bar so high. It’s one thing to ensure that reasonable standards are being met, but it’s another thing to price out 60% of the market.

Give a two-and-a-half minute listen to NAR President Ron Phipps explaining what we have to do. Then go to NAR’s Realtor® Action Center where it only takes a couple of clicks to tell your congressmen to rein in the regulators before they go too far.

Without your voice, you could end up telling your clients, “Come back when you’ve got 40 grand in cash. Then we can go house shopping.”

 

 

When they can’t buy, you can’t earn

NAR has a rather stark — and clear — image reminding all of us how tough it is on home buyers these days, from tighter credit standards to the possible lack of flood insurance.

When a person makes the decision to buy and steps into the arena that is our housing market, it’s not a pretty sight awaiting him. Credit is tight, flexibility for lenders is limited, flood insurance may not be available, FHA fees are increasing.

In short, it’s tough for them so it’s tough for you — there’s a lot of pressure from a lot of places.

Click for a large, suitable-for-printing version. Put it on your wall to remind yourself to keep some pressure on Congress, too.

NAR-1113_Growing Burden on Housing_r3