13 September 2013

Tight Credit Woes

Story first appeared in USATODAY.

Adele and Josue Montoya missed the housing bubble and bust.

Still, the first-time home shoppers are in a situation not unlike that faced by millions of Americans in the years preceding the start of the housing collapse in 2006.

Then, as now, home prices were rising rapidly in the Sacramento area where they live. Investors chasing fat profits on rising prices were a big part of the U.S. housing market, just as they are now. Buyers, such as the Montoyas, thought prices would go up further.

One thing is very different: It's far harder to get a home loan.

To pre-qualify for a home loan, the Montoyas had to submit reams of documents to show that they could actually afford it. That often didn't happen in the loose-lending days leading up to the housing bust, which helped drive Lehman Bros. into bankruptcy five years ago.

What's more, new lending rules have been put in place to guard against the worst lending abuses that fueled the housing bubble, the mortgage industry says. But critics say the rules aren't shaping up to be tough enough.

"We've created this false sense that we've made mortgages low risk," says Edward Pinto, resident fellow at the American Enterprise Institute. "But as time goes on and the push for looser lending occurs ... the same thing could happen again."

In the housing bubble from 2000 to 2006, U.S. home prices rose by an inflation-adjusted 76%, based on Case-Shiller data. The bubble was fed by low interest rates, easy credit, scant regulation, toxic mortgages and, some economists argue, a false belief that home prices couldn't fall.

Trillions of dollars in risky mortgages became embedded in the U.S. financial system as the loans were packaged, turned into securities and sold to investors. Lehman bet on rising property prices, too.

The change in lending standards since the bust is hard to miss.

In 2006, 16% of new home loans were subprime, meaning they went to borrowers with credit scores below 620. Last year, just 0.2% of new home loans were subprime, according to mortgage tracker Lender Processing Services.

By 2006, loans issued with little or no documentation of borrowers' finances made up more than one in four mortgages, says the Center for Responsible Lending. As the recession hit, and home prices tanked, many of those borrowers found they couldn't afford their home loans anymore. All told, an estimated 7 million homes have been lost to foreclosure or short sale in the housing bust, says market researcher RealtyTrac.

The change isn't a bad thing, says Adele Montoya, 38. She works as an office supervisor. Her husband works as a produce supervisor in a grocery chain. The couple wants to know they can afford whatever loan they get.

"I don't want any surprises down the road," she says.

Signs of easing

Lending standards "remain tight" but have eased slightly in recent quarters, says Jonathan Corr, CEO of mortgage tracker Ellie Mae.

In August, the average FICO score for a closed home loan was 734, down from 748 for all of last year, show data to be released next week by Ellie Mae. The top FICO score is 850. The average down payment was 18%, vs. 21% last year.

Corr says lenders appear to be easing standards, given rising home prices and higher interest rates, which cut into refinance volumes, leaving lenders to look for more business from home purchases.

Rising home prices also reduce the risk of loan defaults. After falling more than 30% from their 2006 peak, U.S. home prices were up 12.1% in June over 12 months, Case-Shiller says. They're still about 23% off their 2006 peak.

As the bust recedes, look for further easing in mortgage lending as the housing industry tries to drum up business, says Anthony Sanders, real estate finance professor at George Mason University.

"There's a lot of money in weak credit standards," he says.

Reducing lending risks

There are some new safeguards, however.

"We are in an entirely different universe than the unregulated period" before the bubble, says David Stevens, CEO of the Mortgage Bankers Association.

One big change is that, starting in January, lenders must make home loans that meet new federal qualified mortgage standards or face greater liability from borrower lawsuits, should the loans go sour.

Some of the risky loans that fed the housing bubble are outside the new standards. Those include interest-only loans and loans that push borrowers' debt above 43% of their income.

Lenders could still make those loans. But borrowers could sue to recoup losses or stop foreclosures if they went into default.

The standards put a "set of documented rules" around what lenders are doing today, Corr says.

If loans are resold to investors, thereby shifting risk, other rules will come into play.Those are still being developed by six federal agencies, including the Federal Reserve and the Securities and Exchange Commission.

The current proposal is for those loans to meet the same standards dictated by the qualified mortgage rule.

In 2011, regulators had proposed a 20% down payment for loans sold to investors, or lenders would have to retain 5% of the risk.

Last month, the 20% down payment condition was dropped amid opposition from the real estate industry and consumer groups. They argued it would hurt the housing market, including first-time buyers.

The typical American family would have to direct every penny of savings for 16 years to a housing down payment if 20% was required, said the Coalition for Sensible Housing Policy, which includes real estate, banking and consumer groups. They also argue that low-down-payment loans work as long as lenders make sure consumers can afford their loans.

Sanders says higher down payments guard against mortgage defaults. Even before the new rule gets out the door, "it's being weakened," he says.

Echos of past bubbles

Loose lending standards weren't the only factor driving the bubble.

An even bigger factor may have been the widespread expectation that home prices would only go up, says Harvard economics professor Edward Glaeser.

The same optimism has long fueled real estate bubbles in America, including the frontier land boom of the 1790s, the Alabama land boom in 1820, the skyscraper craze of the 1920s and the Southern California housing boom in the 1990s, he says.

"It's the same American instinct to gamble on land," Glaeser says, noting that even George Washington was a big land speculator.

What's more, the U.S. tax code still encourages home ownership through the mortgage interest deduction, Glaeser notes.The government also now backs more home loans than ever, about 85% of new loans through Freddie Mac, Fannie Mae and the Federal Housing Administration. While reducing the government's role in the home loan business is being discussed, reforms are likely years away.

The biggest impediment to another housing bubble might be that "a whole generation of buyers have seen that housing can go down," says Discover Home Loans economist Cameron Findlay.

The U.S. homeownership rate has fallen from a record high of 69.2% in 2004 to 65% and could drop to 63.5%, he says.

Even the Montoyas have decided to hold off on buying in the frenzied Sacramento market, where prices were up almost 27% in July year-over-year. They expect new home construction to add to the supply of homes for sale, increasing their chances.

"We're just going to wait," Adele Montoya says.

09 September 2013

Mortgage Lender Layoffs

Story first appeared in the Detroit Free Press.

After four years of rapid growth and expansion, mortgage lender Michigan Mutual laid off nearly a fifth of its workforce last week as the mortgage industry as a whole adjusts to rising interest rates and a slowdown in the once-booming refinancing business.
The majority of the 68 layoffs on Aug. 26 were at Michigan Mutual’s Southfield office and mostly involved loan underwriting and loan-processing positions, said Hale Walker, co-founder of the Port Huron-based firm. It now employs 355 workers, down from a peak of 465.
“It was heart-wrenching to have to lay off people,” he said. “This is the first time that we’ve had to do this in 20 years.”
Walker blamed the need for layoffs on several factors that industry experts say also are affecting the nationwide mortgage market, particularly rising interest rates.
Big national lenders such as Bank of America, Wells Fargo, Citicorp and Troy-based Flagstar Bank have all announced layoffs in recent weeks, citing the affect of higher rates on the refinance business.
Some of these same institutions did significant hiring in the past two years to help process the heavy inflow of applications from borrowers wishing to refinance their home mortgages at historically-low rates.
But because interest rates began to climb this spring, there has been less interest in refinancing and less work for the staff to do.
Flagstar Bank made an undisclosed number of recent layoffs due to the fall in refinance activity, President and CEO Alessandro DiNello said Wednesday.
“In a mortgage business that’s so cyclical and so dependent on rates, when production declines, you’re going to have a declining workforce as well,” DiNello said, adding that Flagstar Bank continues to hire in its home purchase mortgage lending business.
The average rate on a fixed 30-year mortgage was 4.5% last week, up from 3.4% in early May and 3.6% a year ago, according to a market survey by government-backed Freddie Mac.
Data compiled by Inside Mortgage Finance Publications show how refinance activity has been slipping. In the first quarter, refinance activity represented 76% of all mortgage originations. That fell to 67% in the second quarter and is projected to hit about 60% by the end of the current third quarter.
“Rates kept falling and falling and people were refinancing two or three times, and that trend is over,” said Paul Muolo, managing editor at Inside Mortgage Finance Publications.
To offset the lost refinancing business, many lenders are pushing to gain a bigger piece of the pie in the purchase mortgage business.
“They’re all going to try to move into this business of making mortgages for people to buy homes, but there’s only so much room on the life raft and you’re going to see more of this,” Muolo said, referring to the recent layoffs.
DiNello said that due to market conditions, Flagstar’s total mortgage origination volume for the year is on pace to be about $10 billion lower than last year’s $53 billion.
Yet his firm, one of the nation’s largest wholesale mortgage lenders, is hoping to see continued growth in its retail lending operations for people buying new homes.
“The refinance business is going to continue to decline, and then what us mortgage lenders hope is that the economy picks up at enough of a pace to make up for a good portion of that lost refinance business,” DiNello said.
“Now realistically, I don’t think the economy is going to grow fast enough to make up entirely for that lost refinance business, so what all of us are going to try to do is gain market share.”
For Michigan Mutual, another factor in last week’s layoffs was the April 1 increase in mortgage insurance premiums on new Federal Housing Administration loans. FHA loans are “a very big product for us, so the volume of that business has gone down,” said Hale Walker, who co-founded the firm in 1992 with his brother, Mark Walker.
Michigan Mutual, which changed its name from First Preferred Mortgage on Jan. 1, reported $1.8 billion in business last year, up from $1.1 billion in 2010.
Once other aspects of its lending business pick up, Michigan Mutual hopes it can rehire many of the employees who were let go.

03 September 2013

When owners walk, 'zombie' homes become nuisance

Story originally appeared on USA Today.

A zombie-titled property is in a gray area between the homeowner and the bank that foreclosed on the home.

MELBOURNE, Fla. -- Zombies are everywhere lately, it seems. TV shows, video games, even chasing runners during special 5K races.

You might even have a zombie next door. The first sign of trouble: An unmaintained yard, growing wild amid summer heat and rain.

"Zombie" properties — homes abandoned by the owners, but still not reclaimed by banks — continue to be a problem in Brevard County, Fla., even as the worst of the foreclosure crisis has passed.

In Brevard, there were 6,920 homes somewhere in the process of foreclosure in June, according to RealtyTrac, a California-based real estate information company.

Of those, 1,903 are homes vacated by their owners, the company said.

RealtyTrac compared data of properties in default or scheduled for foreclosure auction with data from the U.S. Postal Service indicating whether a home has been vacated by the homeowner.

Florida had 55,503 owner-vacated properties in June, more than any other state.

"Florida has the twin problems of a high foreclosure rate and a very lengthy foreclosure process," said Daren Blomquist, vice president at RealtyTrac.

"That means it is more susceptible to having these zombie foreclosures, because you have a homeowner who could be in foreclosure for two or three years and decides to walk away from the situation."

Brevard, with 28% of foreclosed homes vacated, was above the national average of 20% and state average of 23%.

The problem is particularly acute in the summer when it quickly becomes obvious which homes are not being maintained.

"The rainy season is always my busy time," said Maddie Curtis, code enforcement officer for Rockledge, Fla. "My case load doubles or triples this time of year."

When the lawn grows too high, along with other signs of neglect, Curtis steps in. But with a zombie, neither party will take responsibility and the city is left to maintain and place liens on the property.

She sends e-mails to banks and homeowners, makes follow-up phone calls, and e-mails pictures of violations while she builds a case file on each property.

"I do a lot of documentation for the foreclosures," Curtis said. "The whole foreclosure-mortgage situation is an absolute mess."

The housing collapse that began several years ago left homeowners owing banks much more than their houses were worth and they just walked away from properties in foreclosure.

The exodus might have slowed, but there were 6,142 foreclosures filed in Brevard County last year and 2,587 through the first six months of this year, according to county records.

Until a bank follows through on a foreclosure and accepts title of a property, an absent and unaware homeowner remains on the title and responsible for the property, even after going through bankruptcy.

Meanwhile, a zombie-titled property can rack up thousands of dollars in liens in the homeowner's name ready to ambush the next potential owner while it threatens the health and safety of a neighborhood.

"It is an ideal breeding ground for snakes, cockroaches, mosquitoes as well as other insects and critters," said Curtis, who became Rockledge's code enforcement officer in 2009. "Generally things that can make someone's life miserable."

A zombie-titled house in north Rockledge has plagued the otherwise well-kept neighborhood for more than a year.

The homeowners, Brenda and Cleo Hillmon, were notified their house was in foreclosure in June 2011, according to Brevard County records. They left the house and filed for bankruptcy.

Since then, Curtis has had to respond to complaints from neighbors about the property for more than a year.

Last year, Curtis sent two code violation notices to the Hillmons,who still live in Brevard County, asking them to mow the lawn or the city would do it and bill them $300.

Cocoa, Fla., attorney Carole Suzanne Bess responded in writing to the city, stating that the Hillmons had filed for bankruptcy and sanctions would be sought against the city if the couple received further notifications, according to the letter on file with the city of Rockledge.

The vacant house had become a haven for an unwelcome element in the neighborhood.

"The neighbors were calling me stating that the house was being used as a crack house," Curtis said. "When the neighbors would call me up, they said whatever you do, don't go talk to them because they are bad, they're bad news."

The large volume of foreclosures in the system has created a backlog that could take a single case 18 months or more to complete, Bess said. She suggests homeowners remain in the house or rent it during the foreclosure process.

"I tell people to stay as long as they can because you are really doing your neighbors a service and helping yourself," Bess said. "If it is occupied, there is less that can go wrong."

Palm Bay has 1,911 properties in active foreclosure and 439 that are owner-vacated, according to RealtyTrac.

Brevard's largest city has a $200,000 annual budget to maintain properties that violate the code and the city has to step in.

The city will send the owner notice that they have 20 days before the city deals with the problem.

"That includes not just mowing but securing if the house's windows are broken," said William Martinez, supervisor of code compliance section for Palm Bay.

Martinez is also familiar with the zombie-title situation that creates orphaned properties.

"We have quite a few of them," Martinez said. "(Banks) are getting the judgment in court, but they are withholding applying for the certificate of title that would give them possession of the property."

Most Brevard municipalities require banks to register vacant properties in foreclosure and provide contact information.

"We require them to register with us and maintain the property," said Dan Porsi, Melbourne, Fla., code enforcement administrator. "Usually, all we have to do is call them and they have somebody out there."

But banks typically hire private companies to take on maintenance duties of these properties. That can take as long as 60 days to happen.

"Meanwhile, we have a house that is not being maintained for a couple of months," Curtis said. "Then it could take another month to get through their maintenance cycle."

Curtis sees 10 or more overgrowth cases each month and the process of finding the guardian for a property starts again.

"The homeowner has no legal rights to the house, but because they are on the title, they have all the liability for what happens to the house," Curtis said. "It's a zombie title."

Vacated homes in foreclosure

Here are the number of properties in the foreclosure process and the homes that owners have vacated:


Foreclosed homes: 844,640

Owner-vacated homes: 167,680

Percentage: 20%


Foreclosed homes: 242,772

Owner-vacated homes: 55,503

Percentage: 23%

Brevard County, Fla.

Foreclosed homes: 6,920

Owner-vacated homes: 1,903

Percentage: 28%

Source: RealtyTrac