Mortgage Market Weekly: 

(October 1, 2009)   Edition 116

In This Week’s “Good News”:

Number’s Show Home Prices Improving Across U.S.

According to the S & P (Standard & Poor’s) Case/Shiller Home Price Index, average home prices improved by 1.6% in July of this year, which shows an annual decline in the 20 major city composite at -13.3% currently.  This represents a significant improvement from -15.4% in June and is substantially better than the -19.0% decline in home values recorded in January of this year.

Overall, home prices continued to stabilize in 18 of the 20 metropolitan areas surveyed in July, according to the industry survey numbers released early this week.

Thirteen of the 20 metro areas have seen prices increase for three or more consecutive months, indicating that the deflationary spiral in the housing market may be coming to an end.

In a statement regarding these numbers by Jennifer Lee of BPO Capital Markets she states: “No matter how you measure it, house prices looked to have bottomed, which is the much-needed ingredient required to bake this housing market recovery”.

 “The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets” according to David Blitzer, chairman of the S&P’s Index Committee.

Each of the 20 metro areas showed an improvement in the annual rates of decline. And when compared to June, only two cities ― Seattle, WA and Las Vegas, NV ― continued to see prices fall. Las Vegas represents the unusually hard hit since its home prices peaked in August of 2006, home prices there have deflated 54.8%, including a 1.15% drop in July.

The following chart shows home price changes felt by the 20 major metropolitan areas that make up the composite index by city:

Metropolitan Area	July 2009	July/June Change (%)	June/May Change (%)	1 Year Change (%)
Atlanta	110.06	2.3%	1.5%	-11.8%
Boston	154.53	1.2%	2.6%	-4.9%
Charlotte	121.23	0.6%	0.6%	-9.0%
Chicago	128.32	2.7%	1.1%	-14.2%
Cleveland	107.93	1.5%	4.2%	-1.3%
Dallas	121.17	1.2%	2.7%	-1.6%
Denver	128.79	1.5%	2.5%	-2.9%
Detroit	70.25	1.1%	-.08%	-24.6%
Las Vegas	106.08	-1.1%	-2.0%	-31.4%
Los Angeles	163.86	1.8%	1.1$	-14.9%
Miami	147.27	1.3%	0.5%	-21.1%
Minneapolis	118.68	4.6%	3.2%	-17.3%
New York	173.66	0.8%	0.7%	-10.3%
Phoenix	106.66	1.8%	1.1%	-28.5%
Portland	150.06	1.1%	1.0%	-13.9%
San Diego	150.99	2.5%	1.6%	-12.3%
San Francisco	126.66	3.3%	3.8%	-17.9%
Seattle	149.44	-.01	0.4%	-15.3%
Tampa	142.84	1.4%	0.4%	-18.4%
Washington	176.32	1.8%	2.2%	-9.8%

On average, home prices in the 20-city composite have fallen 32.6% since peaking in Q2 2006. 

However, looking ahead, Mr. Blitzer appeared to be generally optimistic that prices have bottomed out, although there are still some concerns that the new floor could be broken once the government unwinds various incentive programs being offered by the Treasury and the Federal Reserve.

In This Week’s “Take It How You Will” News:

Boost In Affordable Housing Mortgage Programs Expected

In news just released, the Obama administration is preparing to announce that it will provide $35 billion to help state and local housing finance agencies, many of which were hit hard by the economic crisis and forced to curtail or suspend tax-exempt bond programs that had previously allowed them to provide affordable mortgages. There is a caveat however; the window for $20 billion of the assistance money available may close by the end of the year.

Under this new program, the Treasury Department would create a market for “tax-exempt” multifamily and single-family HFA (Housing Finance Authority) bonds by purchasing up to $20 billion of them through government-sponsored enterprises (yes, you guessed it) Fannie Mae and Freddie Mac.

The administration would also provide the additional $15 billion of liquidity to help various HFA’s to remarket their variable-rate debt obligations.

However, the Treasury Department's lawyers have been insisting that any HFA bonds the Treasury purchases through the GSEs (Fannie/Freddie) be issued no later than December 31, 2009, which represents the last date for the department's authority to buy securities from the GSEs under the Housing and Economic Recovery Act of 2008.

It does not take a ‘rocket scientist’ to figure out that if the Treasury Department sticks to the rule, the HFAs would have less than three months to issue the bonds, which may be very difficult.

Congress tried to provide relief for the HFA’s under HERA (Housing and Economic Recovery Act) by giving them the authority to issue an additional $11 billion of new housing bonds through 2010 to finance affordable single- and multifamily mortgages. It also provided alternative minimum tax relief for housing bonds and granted states a 10% increase in housing credit authority in 2008 and 2009 to produce affordable rental housing.

Armed with these new resources, HFA’s were poised in 2008 to produce 100,000 affordable homes in addition to another 250,000 homes produced as a result of annual housing bond and credit allocations, according to the National Council of State Housing Finance Agencies.

However, the act wildly underestimated the full extent of the economic crisis. With the decline in investor income, financial institution deleveraging, and growing uncertainty about the economy, in particular real estate, investor demand for housing bonds and credits diminished significantly.

I will point out here that Fannie Mae and Freddie Mac, historically large purchasers of housing bonds and credits, have been out of both markets since 2006. 

On top of this, other traditional bond purchasers, such as banks, mutual funds and insurance companies, have limited their purchases or dropped out of the housing bond market altogether.

As a result, not surprisingly, state and local HFA’s have been unable to sell long-term housing bonds at interest rates low enough to allow them to lend the bond proceeds affordably, despite a growing demand for mortgages in the current market-place.

As of Sept. 25 of this year, authorities have sold only 91 single family housing bond issues with a total par amount of only $4 billion, compared to 232 issues totaling roughly $10 billion last year and 355 issues at $16.1 billion in 2007, according to Thomson Reuters.

The HFA’s sold only 42 issues totaling almost $1.7 billion of multifamily housing bonds as of Sept. 25 of this year, compared to 98 issues totaling almost $2.6 billion during the same period of 2008 and 106 issues totaling over $2 billion in 2007, the company said.

It will be interesting to see if this potential new infusion of government funds will be able to help the still hobbling real estate market place.

Are Loan Modifications and Loan Work-outs Helping?

As you know an increasing number of loan servicers and mortgage bankers are releasing numbers that seem to be demonstrating that they are finally getting on board with the Obama Administration’s plan to help Americans hold on to their homes.  In fact, efforts to keep more Americans in their homes increased nearly 22 percent during the second quarter.  The problem, delinquencies increased and re-default rates continue to run extremely high, according to the OCC and OTS Mortgage Metrics Report.

According to numbers just release, loan servicers and mortgage bankers implemented 440.000 new “home retention actions” during the quarter, which is up about 75 percent since the first quarter of 2008, which is excellent news.  However, serious delinquencies increased to 5.3 percent of all loans in the portfolio.

Overall, option-arm mortgages performed even worse, with 15.2 percent of the more than 900,000 in the portfolio seriously delinquent and 10 percent in the process of foreclosure.

Nearly three percent of all serviced mortgages were somewhere in the process of foreclosure, though newly initiated foreclosures slipped ever so slightly from the previous quarter.

Meanwhile, re-default rates on modified loans showed few signs of improvement, with more than half 30 days or more delinquent after just six months and nearly a third delinquent after nine months.

The numbers have actually gotten worse with the more recent loan modifications, which can likely be attributed to continued home price depreciation leading to more homeowners simply walking away from their homes.

There is a ‘ray of hope’ however, 78 percent of new loan modifications resulted in lower monthly principal and interest payments, up from about 54 percent a quarter earlier.

Another 4.3 percent left payments unchanged and 17.4 percent actually increased monthly payments.

Re-default rates clearly demonstrate that loan modifications that result in monthly payment reductions of 20 percent or more perform markedly better than those that are increased or left unchanged.

Statistically the numbers regarding re-default break out like this: after 12 months, modified loans with a 20 percent or more payment reduction had a re-default rate (60+ days delinquent) of 34.1 percent, compared to 63.4 percent for an unchanged payment and 64.7 percent for an increased payment.

The numbers contained in this article cover (roughly) 34 million loans totaling about $6 trillion in principal balances and representing about 64 percent of all first lien mortgages in the United States.

In This Week’s Market News:

This week started out with across the board gains to all U.S. markets, however this was short-lived as Consumer Confidence numbers dropped more than most economists had predicted.  The Conference Board Consumer Confidence Index®, which had improved in August, dipped in September. The Index now stands at 53.1 (1985=100), down from 54.5 in August. The Present Situation Index decreased to 22.7 from 25.4. The Expectations Index declined to 73.3 from 73.8 last month.

Since these numbers came out Tuesday, the markets have done an about-face, and have given back all gains made early in the week.

Again mid week investors are tending toward ‘flight to safety’ aiding in higher yields for U.S. treasury’s and bonds – thus mortgage interest rates are beginning to trend to the better.

Markets ended today like this: DOW down @ 9509.28 (-203.00), NASDAQ down @ 2057.48 (-64.94) and the S&P down @ 1029.84 (-27.24). 

Next week’s Calendar of Economic announcements:

Week of October 5 - October 9

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Date	ET	Release	For
Oct 05	10:00	ISM Services	Sep
Oct 07	10:30