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Fannie Mae overpaid servicers by about $89 million in 2012 due to errors made by a third-party vendor incorrectly processing servicer reimbursement claims, National Mortgage News reported Sept. 18.
The Office of the Inspector General for the Federal Housing Finance Agency reported the problem, noting that Fannie not only overpaid servicers but also incorrectly denied $27 million in reimbursements last year.
However, the FHFA conducted its own review of the issue and claimed that the errors were “substantially less” than what the IG’s report suggested, although the agency failed to report the amount they said was overpaid, National Mortgage News reported.
The FHFA contracted with third-party vendor, Accenture, to review the reimbursement claims by servicers and then decide whether or not to pay, curtail or deny those claims. The IG’s report indicated that Accenture reviewed about 1.3 million claims last year and approved $2.9 billion worth of reimbursements.
Before 2011, Fannie conducted its own reimbursement reviews; now 80 percent undergo manual review by Accenture.
The IG’s report indicated that errors largely were due to inconsistent application of guidelines, incomplete reviews or large volumes of claims.
“Although these overpayments may not equate directly to financial harm against Fannie Mae, they represent a fundamental problem that undermines the reliability and integrity of Fannie Mae's servicer reimbursement operations,” the IG report concluded, National Mortgage News reported.
The report suggested that Fannie minimize processing errors by creating a red flag system, and it also advised the firm to quantify and aggregate overpayments and to determine the root cause of those overpayments. The IG also said the firm should then publish the results.
The FHFA said it would implement most of the IG’s recommendations but noted that it would not publish the results of a review of overpayments.
Fannie Mae and Freddie Mac have started to electronically validate all loans they purchase in order to better flag defective ones and to better assess risk when banks sell mortgages to the two government-sponsored enterprises, National Mortgage News reported Sept. 18.
Steve Spies, vice president of loan quality and lender assessment at Fannie, said the GSE’s new expectation is “zero defects.”
Previously, the GSEs only reviewed a sample of the loans and only after they defaulted. Now they will review all loans within 120 days of purchase and grade lenders on underwriting, quality control and governance; should banks sell GSEs defective loans, they immediately will be forced to repurchase them.
Fannie and Freddie reported that most underwriting defects are related to lenders failing to obtain copies of all necessary paperwork for supporting loan decisions; with rising interest rates, the GSEs worry that banks have begun loosening standards. "As rates go up, the credit box will try to be expanded, corners will be cut and that's when we will be on the front lines," Chris Mock, Freddie's vice president of quality control, told National Mortgage News.
Fannie and Freddie also have begun reviewing 10 percent of all loans where quality control processes have been outsourced. National Mortgage News reported that Fannie currently has 500 employees working on ensuring lender compliance, and Freddie has 250.
The tougher standards should benefit banks, as well. One component of the new guidelines is that lenders don’t have to repurchase a failed loan as long as it performs for three years, and loans refinanced through the Home Affordable Refinance Program are relieved of repurchase requirements after only a year of consecutive on-time payments.
Becky Walzak, president of Walzak Consulting in Deerfield Beach, Fla., told National Mortgage News that it won’t be easy for banks to keep up with the new standards.
“They want lenders inspecting every single loan and sending it back if it's not right, and that is so extremely expensive, lenders cannot afford to do that,” she told National Mortgage News. “They want more people looking at compliance and loan quality, so now we have this subpopulation of people at these lenders checking the checkers and paying for it. That's why the cost of a loan will go up.”
Fannie and Freddie argue, however, that the new standards are necessary to avoid another housing bust. Since 2008, banks have had to repurchase thousands of defaulted and non-performing loans, and the Federal Housing Finance Agency has launched 18 lawsuits against banks for misrepresenting loan quality.
The National Association of Realtors challenged the Federal Housing Finance Agency’s authority to lower the maximum loan amounts for mortgages that Fannie Mae and Freddie Mac can purchase, The Wall Street Journal reported Sept. 19.
The FHFA announced that it was considering a reduction in the allowable loan limits, which currently are set at $417,000 for most of the country but as high as $625,000 in higher priced markets. While those limits generally are in tune with home prices, the FHFA did not change them when home prices dropped.
In a letter to the FHFA dated Sept. 17, NAR questioned the agency’s legal authority to drop loan limits without Congressional approval, the Journal reported.
NAR contended that decreasing loan limits could dampen the nation’s economic recovery if the private sector failed to fill in the gaps as hoped, particularly since jumbo loans generally require larger down payments and higher credit scores.
NAR further protested the increase in guarantee fees that Fannie and Freddie now charge, arguing that the fees are unnecessary in an improving housing market and only serve to increase borrowing costs without necessarily increasing private sector interest in the mortgage market.
Read NAR’s letter to FHFA.
A federal judge has denied Wells Fargo’s request for an injunction against the rollout of a California city’s controversial eminent domain plan for rescuing underwater borrowers, HousingWire reported Sept. 17.
U.S. District Court Judge Charles Breyer dismissed the case without prejudice because it wasn’t ready for court since it was predicated on events that have not yet occurred.
The city council of Richmond, Calif., voted two weeks ago to purchase underwater mortgages in the city from bondholders using the power of eminent domain and then modify those mortgages to help troubled borrowers.
Plaintiff Wells Fargo filed for a preliminary injunction against the city, indicating that if Richmond exercised eminent domain as planned, the move could cause a massive disruption in the nation’s mortgage finance system. Richmond filed a motion to dismiss Wells Fargo’s claims.
Wells Fargo can refile once Richmond actually moves forward with its eminent domain actions, HousingWire reported.
The mortgage industry has argued that if eminent domain proceeds, it could hurt future lending in the city because banks and investors would be worried about investing in mortgages that might be seized if they don’t perform well.
Richmond is the nation’s first city to proceed with an eminent domain plan for rescuing underwater borrowers.
John Ertman, a partner with Ropes & Gray, told HousingWire that the Sept. 16 court ruling only addressed the matter of timing and that the eminent domain issue will, inevitably, be taken up in court.
“This is an unprecedented application of eminent domain powers that we believe is facially unconstitutional,” he told HousingWire. “If implemented by the city, this eminent domain program will cause economic harm to millions of savers and retirees throughout the United States.”
Around 63,000 homeowners received permanent, affordable loan modifications from mortgage servicers in July, bringing the total number of homeowners helped so far in 2013 to 519,000, MBA NewsLink reported Sept. 20.
The data was provided by HOPE NOW, a voluntary, private-sector alliance of mortgage servicers, investors, mortgage insurers and nonprofit counselors.
HOPE NOW reported that the total number of loan modifications increased to 6.6 million since 2007. That figure includes 5.36 million proprietary loan modifications and 1.236 million Home Affordable Modification Program modifications. The July breakdown was 50,000 proprietary modifications to borrowers and 13,183 HAMP modifications, MBA NewsLink reported.
The data showed an overall reduction in foreclosures through the first seven months of the year; 378,000 foreclosure sales so far in 2013 compared to 458,000 foreclosure sales a year prior. For the month of July, HOPE NOW reported 59,000 foreclosure sales completed — a 14 percent increase from June when 52,000 foreclosure sales were reported. Foreclosure starts increased 5 percent to 102,000 in July compared to 98,000 in June.
According to MBA NewsLink, the report showed that short sales totaled 26,000 in July, which is unchanged from June. Since the nonprofit began tracking short sale data in 2009, 1.32 million short sales have been completed. Delinquencies of 60 days or more edged up 1 percent to 2.24 million in July from 2.21 million in June.
HOPE NOW reported that 99 percent (or 50,000) of the total loan modifications made so far this year included fixed interest rates of five years or more; modifications with reduced principal and interest monthly payments made up 82 percent or 41,000; and modifications with reduced principal and interest payments of more than 10 percent accounted for 81 percent or 40,000.
“Data shows a consistent trend, month over month, pointing toward market stabilization,” Erik Selk, HOPE NOW executive director, told MBA NewsLink. “Loan modifications and short sales continue to outpace foreclosure sales … while progress is being made in the housing market, there is still a need for aggressive outreach and education by mortgage servicers, government agencies, non-profits and local groups to at-risk homeowners.”
Read the full data set for July 2013.
Investors have mostly ignored the large interest rate increase from earlier this year and maintained their pace of purchasing properties in the same locations at virtually the same prices, National Real Estate Investor reported Sept. 18.
The most recent figures from commercial real estate analytics firm CoStar showed a steady volume of investment sales in the months since rates have gone up.
“Investors were expecting that interest rate rise,” Walter Page, director of CoStar’s U.S. research for office, told National Real Estate Investor. “A 1 percent rise to interest rates was fully baked into the numbers.”
However, Page noted that additional interest rate increases could affect purchasing habits. Specifically, one additional percentage point added to the yield on 10-year Treasuries and other investments that compete with commercial real estate for investor attention could add half a percentage point to cap rates.
CoStar’s preliminary numbers revealed that investors still are bidding higher prices for properties in expensive core markets, and that the volume of investment sales has been consistent.
“We’ve seen some record pricing on stuff across the country,” Page told National Real Estate Investor. For example, CoStar’s data showed that for the top 20 percent of office building sales in New York City the median price climbed past $1,200 per square foot; 12 percent more than the prior peak in 2007. Page noted that San Francisco has seen a similar increase.
A total of $20.4 billion in office properties changed hands in the second quarter in the U.S., up from $18.4 billion the previous quarter and $19.3 billion in the second quarter of 2012. Page said that the high volume of sales has continued into the third quarter.
Prices remain strong for many property types, other than garden apartments whose prices have dipped slightly relative to income.
Cap rates for garden apartments are up about 20 to 30 basis points nationwide, according to data from real estate data firm Real Capital Analytics, National Real Estate Investor reported. Average cap rates for garden apartments currently are about 6.5 percent — up from 6.2 percent at the beginning of the year, with most of the increase occurring in the spring.
According to RCA, cap rates for other property types remain low. Apartments are 6.1 percent overall, office properties are down to approximately 6.8 percent from 7.1 percent earlier this year. Retail spaces are at 7 percent, down slightly from 7.1 percent.
Interest rates increased notably during the summer after officials at the Federal Reserve indicated that they might start tapering off their quantitative easing program later this year. The yield on 10-year Treasuries went up from 1.8 percent in May to more than 2.9 percent as of Sept. 18.
Page told National Real Estate Investor that investors had been expecting the interest rate increase, and he first noticed the effect earlier this year in the difference between capitalization rates on the sales of commercial real estate properties and the yield on 10-year Treasury bonds. “The spreads were abnormally large.” The uptick in Treasury bond yields has put the difference between cap rates and Treasury bond yields into a more typical range.
Additionally, an extra point in yields for Treasury bonds has not led to an extra percentage point in interest charged to commercial and multifamily real estate properties. This is partially because most lenders never offered interest rates as low as some might expect based on the low Treasury yields. Rather, the spread widened and lenders kept the overage; banks didn’t follow the Treasury rates all the way down. When Treasury yields went up again, banks didn’t have to add that increase directly to their interest rates.
Data released Sept. 18 by the Federal Financial Institutions Examination Council showed that total loan originations increased 38 percent from 2011 to 2012 — an increase of 2.7 million loans, Mortgage News Daily reported.
During that same period, refinancings increased 54 percent and home purchase lending increased by 13 percent.
The FFIEC collected its data through the Home Mortgage Disclosure Act and included information on 15.3 million applications for home loans made through 7,400 banks, credit unions, mortgage companies and savings associations, Mortgage News Daily reported.
Data also showed that the Federal Housing Administration’s share of first mortgage lending increased from 5 percent in 2006 to a peak of 37 percent in 2009. By 2012, that share had dropped to 27 percent.
Loans guaranteed by the U.S. Department of Veterans Affairs increased from 2 percent in 2006 to 8 percent in 2011, and the number of VA loans went up by 11 percent from 2011 to 2012, though market share stayed the same at about 8 percent.
Mortgage News Daily reported that conventional lending made up 85 percent of all refinancing in 2012, with FHA and VA loans making up 9 and 6 percent, respectively. Conventional loans for refinancings increased 51 percent from 2011 to 2012, while those backed by the FHA increased 78 percent and those backed by VA increased 90 percent.
HMDA-covered institutions include those regulated by the Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Department of Housing and Urban Development.
View the full report.
Mortgage lending likely will experience an upward swing in volume with the Federal Reserve’s Sept. 18 announcement that it will continue quantitative easing in the near-term, HousingWire reported.
In the last few months, mortgage rates have trended upward with concerns that the Fed intended to wind down its monthly $85 billion in bond buying.
Rui Pereira, managing director at Fitch Ratings, told HousingWire that the Fed’s surprise announcement should reverse the upward trend in mortgage rates and “give a short-term boost to mortgage volume as borrowers look to take advantage of the temporary reprieve.”
Pereira told HousingWire that rising mortgage and interest rates and lower stock markets were the reasons the Fed cited for continuing its bond-buying program.
Tim Rood, partner and managing director of The Collingwood Group, told HousingWire, “Lower interest rates undeniably boost buyer interest and affordability. You can rarely pick the bottom of a housing market, but locking in 3-4 percent mortgages for 30 years is a once-in-a-lifetime phenomenon.”
Single-family housing starts and permits for future construction hit a five-year high in August, signaling that the housing market continues to recover despite higher mortgage rates and declines in new multifamily development, Reuters reported Sept. 18.
Single-family housing starts were up 7 percent in August to an annual rate of 628,000 units — the highest increase in six months, according to data released by the U.S. Department of Commerce. Single-family homes account for the largest segment of the market.
“Homebuilding seems to be holding up decently in the higher mortgage rate environment, probably due to the support of strong underlying fundamentals: thin inventories and steady household formation,” Guy Berger, economist at the Royal Bank of Scotland in Stamford, Conn., told Reuters.
New construction for apartments and condominiums, however, declined 11.1 percent in August, which retarded growth in total housing starts to an 891,000-unit pace and fell short of the 917,000-unit rate expected by economists, Reuters reported.
Permits for multifamily homes also fell 15.7 percent in August, pushing down overall permits 3.8 percent to a 918,000-unit pace.
Multifamily property values remain consistent with fundamental economic housing market trends, and the rate of appreciation in the market segment has steadied over the past year, according to Freddie Mac’s U.S. Economic and Housing Market Outlook for September, the GSE reported in a news release Sept. 18.
“The decline in cap rates and growth in rents (adjusted for inflation) are key fundamentals that explain the rise in apartment values over the past decade,” Frank Nothaft, Freddie Mac vice president and chief economist, said in the news release. “Seen through this lens, the rise in property values appears to be consistent with overall economic forces, and the slower appreciation over the past year reflects the bottoming of cap rates.”
Nothaft noted that cap rates are expected to gradually move higher in the coming year as long-term yields move higher. Rents also are likely to outpace overall inflation, leaving apartment values firm and on solid ground.
Additional highlights from Freddie’s U.S. Economic and Housing Market Outlook:
• Multifamily property values increased a cumulative 41 percent between the second quarter of 2000 and the second quarter of 2013, as measured by the National Council of Real Estate Investment Fiduciaries multifamily index and the Freddie Mac House Price Index. • During the past 13 years, property values are only slightly more than overall inflation in the U.S. • Apartment building values are affected by net operating income and cap rates; cap rates have decreased approximately 35 percent over the past decade, which is a major reason why property values have increased. • The spread between cap rates and Treasury yields averaged 3 percent from 1996-2005 and 4 percent during the first half of 2013; this spread reflects relatively cautious valuations by investors, yet remains near all-time highs. • Rental revenue advanced over the past three years, while vacancy rates have come down and apartment markets tightened. Rents have increased about 3 percent in apartment buildings compared with a 1 percent increase in the Consumer Price Index, year over year.
More information about the September 2013 U.S. Economic and Housing Market Outlook is available on the Freddie Mac website.
Rising profits, limited supply growth and improved access to capital indicate that the U.S. lodging industry is ripe for investment, according to Hospitality Investment Survey results released Sept. 19 from PKF Consulting, a firm that specializes in the valuation of hospitality properties.
Conducted in the spring of 2013, the survey tracked changes in investment and financing in the lodging industry over the previous12 months.
The survey revealed that revenue per available room is expected to grow 6 to 7 percent in most major U.S. lodging markets during the next year due to limited supply growth. Net operating income also is expected to improve more than 10 percent through 2015 due to continued revenue growth in the hotel sector.
The survey noted that because interest rates for hotel development and acquisition purposes remain at historically low levels, the dividend yield from a hotel investment looks very attractive given the reduced risk.
Investors and lenders who participated in the survey showed optimism for the future of the hotel industry, and, due to the lack of high-quality assets being marketed for sale, said that they expected the transaction activity of well-branded assets in second-tier and tertiary markets to increase over the next 12 to 18 months.
“It has been a while since we have seen such a convergence of positive operating fundamentals and a favorable, yet practical, financing environment,” Scott Smith, MAI, vice president in the Atlanta office of PKF, said in a news release accompanying the survey results.
Fixed mortgage rates moved lower during the past week, Freddie Mac reported in its weekly Primary Mortgage Market Survey released Sept. 19.
The 30-year fixed-rate dropped 0.07 percent to 4.50 percent (up from 3.49 percent a year ago). The 15-year fixed-rate fell 0.05 points to 3.54 percent (up from 2.77 percent a year ago).
The one-year adjustable-rate mortgage decreased 0.02 percent to 2.65 percent (down from 2.67 percent a year ago). The five-year Treasury-indexed dropped 0.11 percent to 3.11 percent (up from 2.76 percent a year ago).
“Mortgage rates drifted downwards this week amid signs of a weakening economic recovery,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a news release. “Retail sales rose 0.2 percent in August which was nearly half of July's 0.4 percent increase. In addition, industrial production in August grew 0.4 percent, less than the market consensus forecast. And lastly, consumer sentiment fell for the second consecutive month in September to the lowest reading since April.”
View Freddie Mac’s weekly Primary Mortgage Market Survey.