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A Bipartisan Policy Center report released Feb. 25 primarily focused on reducing the government’s role in the nation’s housing finance system, but it also proposed changes to current appraisal policy.
Appraisal-specific recommendations contained within the 136-page report, titled “Housing America’s Future: New Directions for National Policy,” focused on banning the use of distressed home sales as comparables by appraisers, a practice the BPC said was helping to depress local home values and impacting buyers’ ability to secure financing.
The report suggested that Fannie Mae, Freddie Mac and the Federal Housing Administration should refuse to accept distressed sales as valid comps, which would force a reassessment of non-distressed properties.
The report stated that “distressed property sales continue to be recorded and used as comps in appraisals of non-distressed (retail) properties, a practice that depresses local home values and impacts would-be homebuyers’ ability to secure financing. In some markets, demand for multiple reappraisals, sometimes just days before closing, also introduces substantial uncertainty into the home-buying process and can derail sales and disrupt the plans of homebuyers and sellers.”
The BCP’s recommendations for a reduced government role in housing included phasing out the government-sponsored enterprises and replacing them with a public guarantor that would oversee a new mortgage market. Banks and other private firms would originate loans and issue mortgage-backed securities through the new market.
Such a proposal would require private insurance companies to guarantee the mortgages and cover losses in the event of default. The public guarantor only would come into play in the event that private insurers were wiped out. A fee paid on each issue of mortgage-backed securities would fund that public guarantor’s federal insurance pool.
The public guarantor also would determine what mortgage products would be eligible for government backing. BPC suggested limiting mortgage loans eligible for backing to $275,000 rather than the current national limit of $417,000.
The BPC proposal also supported the idea that the government should continue to play a role in housing by allowing borrowers access to low-cost, 30-year fixed-rate loans. The proposal acknowledged that the government would still step in in the event of a bust, but not to the degree of the 2008 crisis. The BPC called it a “guarantee of last resort.”
The BPC said its report could serve as an outline for the U.S. Department of the Treasury to create its own proposal for a housing market overhaul.
The BPC Housing Commission is led by former U.S. Sens. George Mitchell, a Democrat, and Mel Martinez and Kit Bond, both Republicans, as well as former U.S. Housing and Urban Development Secretary Henry Cisneros.
Read the Bipartisan Policy Center report.
Rep. Maxine Waters, D-Calif., the ranking member of the House Financial Services Committee, sent a letter Feb. 19 to Federal Reserve Chairman Ben Bernanke and Comptroller of the Currency Thomas Curry asking why an independent foreclosure review program was terminated following a multi-billion-dollar settlement with banks over questionable foreclosure practices, The Hill reported.
Sen. Elizabeth Warren, D-Mass., and Rep Elijah Cummings, D-Md., a ranking member of the House Government Reform and Oversight Committee, also have expressed concerns about the program’s termination and have written letters to regulators asking about the settlement, The Hill reported.
The Federal Reserve and the Office of the Comptroller announced the settlement Jan. 7.
The independent foreclosure review process began April 2011 and was designed to review the alleged questionable foreclosure practices of 14 banks, including Aurora, Bank of America, Citibank, HSBC, Goldman Sachs, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo.
The settlement required the banks to provide cash payments and loan modification assistance to borrowers with homes in foreclosure in 2009 and 2010.
Officials said the program was closed following the single settlement because the loan-by-loan reviews were taking too long and that homeowners were not getting reimbursed for banks’ mistakes.
Curry told reporters in January that “It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers,” The Hill reported.
Waters was not convinced and has asked for more information about the settlement and requested that the panel Chairman, Jeb Hensarling, R-Texas, hold a hearing on the settlement.
Misrepresentation of loans pooled into mortgage-backed securities was widespread during the housing crisis and not just limited to a few banks, according to a white paper from the Columbia Business School and the University of Chicago, The Wall Street Journal reported Feb. 20.
The paper, authored by Columbia’s Tomasz Piskorski and James Witkin and Chicago’s Amit Seru, examined the two most common types of loan misrepresentations.
The first type was loans for properties represented as owner-occupied when they were not. Of the loan samples reviewed by the authors, more than 6 percent of mortgages reported to be for owner-occupants actually were given to borrowers whose primary residence was elsewhere. The Journal reported that those loans had a default rate 60 percent higher than those for owner-occupied properties.
The second misrepresentation involved properties where the loan was represented as being the only mortgage on the residence when, in fact, the residence carried a second mortgage. The authors discovered that 7 to 13.6 percent of loans claiming no junior liens actually carried them. Those loans had default rates 70 percent higher than average loan default rates.
The paper concluded that private-label securities not backed by the government-sponsored enterprises were the worst performing loans at the time of the housing crisis and that investors were not made sufficiently aware of the true nature of the loans in which they were investing. As a result, they “had to bear a higher risk than they might have perceived based on the contractual disclosure,” the Journal reported.
Multiple banks already have agreed to numerous legal settlements over loan misrepresentations, and this latest paper confirms that misrepresentation of loan quality was widespread, the Journal reported. “This was not limited to one or two bad apples,” the authors stated.
In the paper, the authors also noted that the Dodd-Frank Act may not sufficiently address the potential for future loan misrepresentation and called for even great disclosures.
Read the paper on mortgage fraud.
The Federal Open Market Committee will continue quantitative easing through monthly bond purchases at least until the Federal Reserve sees sufficient recovery in the housing and job markets, according to FOMC meeting minutes, HousingWire reported Feb. 20.
The announcement means that the Fed would maintain its practice of buying agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a rate of $45 billion per month.
However, some FOMC members said that the Fed should be prepared to vary the pace of purchases based on economic conditions because they fear a large portfolio of long-term assets could expose the regulatory agency to major capital losses in the future, HousingWire reported.
Other members argued that a reduction or a too-early end to bond purchases could damage economic recovery. Some said that the Fed should be prepared to hold securities longer than originally anticipated by the committee’s exit principles as a replacement for future asset purchases.
Overall, the FOMC agreed to a flexible and accommodative stance based on market conditions, HousingWire reported.
The U.S. Department of the Treasury approved an Oregon pilot program to aid underwater borrowers in Multnomah County (which includes Portland) to refinance their mortgages, HousingWire reported Feb. 19. The program is funded through the Treasury’s Hardest Hit Fund.
The program comes from Sen. Jeff Merkley, D-Oregon, who created the proposal, “The 4% Mortgage: Rebuilding American Homeownership,” to enable underwater homeowners who are current on their mortgage an opportunity to refinance to a lower interest rate.
Oregon will pilot the initiative using $10 million of the $220 million from the Hardest Hit Fund, members at the Oregon Housing and Community Services told HousingWire.
Even though OHCS anticipates that the pilot program only will refinance about 50 homes in Multnomah County, which is the state’s hardest hit county, the program ideally can serve as a template for national programs designed to help homeowners.
Other states supposedly are still in the development phase of their Hardest Hit plans, but Oregon is the first to have launched a program, HousingWire reported.
“The Hardest Hit fund allows states hardest hit by the housing crisis to implement innovative ideas to help struggling families avoid foreclosure,” Treasury said, HousingWire reported. “Through the program, states can directly address the distinct needs of the homeowners struggling in their state.”
The Merkley plan would be along the same lines as the Home Affordable Refinance Program, where 1.8 million borrowers have mortgages secured by both Fannie Mae and Freddie Mac.
“HARP is designed to help homeowners refinance their first mortgages, if their mortgage is government-guaranteed, which by itself excludes half of all American homeowners. HARP also suffers from the complexities involved in first and second mortgages,” Merkley said, HousingWire reported.
“In addition, HARP’s rules give the current mortgage servicer a distinct advantage in issuing the refinanced mortgage.”
Mortgage servicing firm Lender Processing Services settled with the U.S. Department of Justice over alleged fraudulent mortgage practices in order to avoid federal criminal prosecution, Mortgage Daily reported Feb. 18.
The settlement signed Feb. 15 will cost LPS $35 million, although that amount is far less than a similar settlement it reached with 46 state attorneys general and the District of Columbia in January for $127 million.
LPS’ former foreclosure processing unit, DocX LLC, was accused of engaging in a six-year scheme to prepare and file more than a million fraudulently signed and notarized mortgage-related documents, Mortgage Daily reported.
Lorraine Brown, chief executive officer of DocX, pleaded guilty to charges in U.S. District Court in Florida in November. She and her subordinates allegedly allowed unauthorized personnel to sign and notarize documents from 2003-09.
“LPS has taken a number of remedial actions to address the misconduct at DocX,” the Justice Department noted. Those actions included winding down all of the unit’s operations and re-executing and re-filing mortgage documents deemed faulty, Mortgage Daily reported.
In 2012, LPS reported that it accumulated $223.1 million in legal and regulatory expenses, which covers settlements with state attorneys general over foreclosure and robo-signing issues and additional legal matters.
Stabilization of the housing market has helped narrow the price gap between a home’s foreclosed value and its original market value, real estate analytics firm FNC Inc. revealed in its Foreclosure Market Report released Feb. 18.
Data from the fourth quarter of 2012 showed that the average foreclosure discount, which is a comparison between a foreclosed home’s market value and its final sales price, had dropped to 12.2 percent. At the peak of the mortgage crisis, the discount had been as much as 25 percent.
The report noted that many metro areas are beginning to see rising home prices and foreclosure prices are starting to bottom out.
“The fact that we are seeing a combination of rising home prices and a bottoming out of foreclosure prices is a very good sign the housing recovery is taking hold,” Dr. Yangling Mayer, FNC senior research economist, said. “This is the very first time in the long housing recession that the two are happening at the same time.”
Single-family foreclosures made up 18.1 percent of home sales in the fourth quarter, down from 26.5 percent in the first quarter of 2012.
The median non-distressed home sales price was $183,500 during the fourth quarter while the median foreclosure sale price was $93,000. Homes at the lower end of the market still have far greater foreclosure discounts than average at roughly 18.4 percent.
Michigan is the only state where foreclosures dominated home sales, with 56 percent of sales in the fourth quarter classified as foreclosures.
The Midwest in general is still seeing a significant number of foreclosures; Chicago, Cleveland, Detroit and St. Louis still have the largest concentration of foreclosure sales.
Hard-hit regions outside the Midwest include Florida, which classified 20.5 percent of all home sales as foreclosures, as well as California (19.8 percent of sales classified as foreclosures); Arizona (14 percent); and Nevada (13 percent).
Read the Foreclosure Market Report.
Nearly 13.8 million homeowners in the U.S. were in negative equity at the end of 2012 — down from 15.7 million in the fourth quarter of 2011, real estate website Zillow reported Feb. 21 in its Fourth Quarter Negative Equity Report.
The report looked at current outstanding loan amounts across the nation for individual owner-occupied homes and compared them to those homes' current estimated values.
During the fourth quarter, 27.5 percent of all homeowners with a mortgage were underwater, compared with 31.1 percent one year ago. Zillow reported that nearly 2 million homeowners were freed from negative equity over the course of the year.
A jump in home values coupled with continued high foreclosure rates were responsible for the drop in negative equity. Zillow reported that national home values rose 5.9 percent year-over-year in 2012 to a median value of $157,400.
“As home values continue to rise and more homeowners are pulled out of negative equity in 2013, the positive effects on the housing market will be numerous,” Dr. Stan Humphries, Zillow chief economist, said in a news release. “Freed from negative equity, homeowners will have more flexibility, and some will likely choose to list their home for sale, helping to ease inventory constraints and moderating sometimes dramatic, demand-driven price increases in some markets.”
Among the nation's 30 largest metro areas, those with the highest number of homeowners freed from negative equity last year were Phoenix (135,099 homeowners freed in 2012); Los Angeles (72,936 homeowners freed); Miami-Fort Lauderdale (70,484 homeowners freed); Dallas-Fort Worth (59,461 homeowners freed); and Riverside, Calif. (58,417 homeowners freed).
Zillow predicted that the negative equity rate among all homeowners with a mortgage would fall to around 25.5 percent by the fourth quarter of 2013, freeing an additional 999,000 homeowners from being underwater on their homes.
Read Zillow’s Fourth Quarter Negative Equity Report.
The number of seriously delinquent residential mortgages (at least 90 days past due) fell in January to 1.58 percent after three consecutive months of increased delinquency, according to S&P/Experian Consumer Credit Default Indices released Feb. 19, Mortgage Daily reported.
The rate was down from December when 90-day delinquency was 1.68 percent, and also down from a year prior, when the rate was 2.08 percent, Mortgage Daily reported. Until the January data was reported, first-mortgage delinquency had increased every month since September.
The data revealed that second-mortgage delinquency held steady at 0.69 percent from December to January; but the rate had improved significantly from a year earlier when serious delinquency was 1.30 percent.
Fixed mortgage rates increased slightly this week but continued to hover near record lows, Freddie Mac reported Feb. 21 in its weekly Primary Mortgage Market Survey.The 30-year fixed-rate mortgage increased to 3.56 percent, up 0.03 percent from last week (down from 3.95 percent a year ago). The 15-year fixed-rate remained unchanged at 2.77 percent again this week (down from 3.19 percent a year ago).
The one-year adjustable-rate mortgage rose 0.04 percentage points to 2.65 percent (down from 2.73 percent a year ago). The five-year Treasury-indexed adjustable-rate held steady at 2.64 percent (down from 2.80 percent a year ago).
“Mortgage rates have been relatively stable, hovering near record lows, for the past four weeks which is helping to spur new home construction,” Frank Nothaft, Freddie Mac vice president and chief economist, said in a news release. “For instance, new construction on single-family houses rose to an annualized rate of 613,000 in January, the most since July 2008. In addition, single-family building permits were up to the highest issuance level since June 2008.”
View Freddie Mac’s weekly Primary Mortgage Market Survey.