Mortgage applications decrease in latest MBA weekly survey

Mortgage applications decreased 6.7% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 25, 2015.  The Market Composite Index, a measure of mortgage loan application volume, decreased 6.7% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 7% compared with the previous week. The Refinance Index decreased 8% from the previous week. The seasonally adjusted Purchase Index decreased 6% from one week earlier. The unadjusted Purchase Index decreased 6% compared with the previous week and was 20% higher than the same week one year ago.  The refinance share of mortgage activity decreased to 58.0% of total applications from 58.4% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 6.9% of total applications.  The FHA share of total applications increased to 13.8% from 12.9% the week prior. The VA share of total applications increased to 10.3% from 10.0% the week prior. The USDA share of total applications remained unchanged from 0.7% the week prior.

Senate OKs bill to fund government through December 11

The Senate voted overwhelmingly Wednesday to extend government funding through Dec. 11.  The bill passed 78-20 and now goes to the House, which must act before midnight to head off a shutdown, and House Republican leaders say they plan to pass the bill in time.  Meantime, top-level negotiations between GOP leaders in Congress and the White House to resolve critical end-of-year budget issues — including a longer-term government funding bill, an increase in the debt ceiling, new funds for highway construction, and renewal of expiring tax provisions — are expected to begin soon.

WSJ – new mortgage rules may spark delays, frustration

Mortgage lenders and real-estate agents are bracing for the Oct. 3 implementation of a five-year-old law that has forced them to overhaul the way they process sales.  The changes, prompted by the 2010 Dodd-Frank financial law, are meant to help consumers better understand the terms of their mortgages before they sign the dotted line.  But some in the real-estate industry worry that the rest of the year could be marked by delayed closings, frustrated borrowers and confused real-estate professionals as they adjust to the new rules.  At heart, the changes simplify forms long required by the federal government that disclose loan terms, such as a mortgage’s interest rate and prepayment penalties. The rules also require that consumers see the final terms at least three business days before closing, a change meant to ensure they have time to understand what they’re agreeing to.  The reform is meant to prevent what occurred during the housing boom, when some borrowers agreed to loan terms they later found they didn’t understand, such as low initial interest rates known as teasers, loan balances that could increase over time and balloon payments due after a certain number of years.

Few lenders now make loans with the most exotic loan terms, but the Consumer Financial Protection Bureau, which is enforcing the changes, says the new forms will ensure borrowers have a chance to understand what they’re getting into before they sign.  Lenders have spent billions of dollars in technology-system changes and training to get ready for the changeover, said David Stevens, president of the Mortgage Bankers Association, a lender trade group.  “It is without question the single largest implementation challenge that the broad industry has faced since Dodd-Frank,” said Mr. Stevens. “It’s massive. It involves every real-estate agent, settlement-service provider, every consumer, mortgage originator, everyone.”  Quicken Loans Inc., the third-largest US mortgage lender by volume according to Inside Mortgage Finance, has had about 350 employees working for 17 months to change over to the new federally mandated processes and forms, said Chief Executive Bill Emerson.  Clearly if we weren’t doing that, we’d have folks deployed on other projects, maybe things that would be innovative. But there’s no choice. You have to do it,” said Mr. Emerson, who said Quicken is prepared for the change.

Despite having a long time to prepare, some in the real-estate industry are worried that technology snafus could crop up in the days after implementation. The National Association of Realtors is advising real-estate agents to extend contracts by around 15 days in anticipation of delays in some home closings.  Some changes to the closing terms—such as if a home buyer wanted to change from a fixed-rate mortgage to one with an adjustable rate—cause the three-day period to reset.  Since home transactions often are made together, as home buyers sell their old homes, a delay in one home closing can cause a ripple effect.  The National Association of Realtors has hosted dozens of webinars, conference calls and training sessions with real-estate agents to get them ready for the changes, said NAR President Chris Polychron. “Are there going to be some blips? Yeah. Are there going to be some delays? Absolutely,” Mr. Polychron said.  Bert Bevis, a real-estate agent in Tallahassee, Fla., said he has taken a few classes to prepare for the changes but is still worried some agents or vendors he works with might not be prepared. He said borrowers, accustomed to being able to make last-minute changes to a transaction, might get frustrated at closing delays.  “If they dillydally, they’re going to get their closing delayed. That’s the missing link. Nobody’s educating the consumer yet,” Mr. Bevis said.

Job creation gets big boost from big business: ADP

Private companies topped expectations for job creation in September, adding 200,000 new positions thanks in part to a boost from large companies.  Small firms with fewer than 50 employees have been the primary engine of job creation during the post-recession recovery, but that turned last month, according to a report Wednesday from ADP and Moody’s Analytics.  Companies with more than 500 workers added 106,000 new positions for the month, with medium-sized businesses adding 56,000 and small firms contributing just 37,000.  Manufacturing lost 15,000 positions for the month, while trade, transportation and utilities led the way with 39,000 new jobs.  As has been the case throughout the recovery, services were by far the leading job producer with 188,000, while goods producers added 12,000.  Elsewhere in sectors, construction added 35,000, professional and business services grew by 29,000 and financial activities were responsible for 15,000 of the new positions.  The ADP/Moody’s report comes two days before the government releases its nonfarm payrolls, which is expected to show 206,000 total new jobs with the unemployment rate holding steady at 5.1%.  Economists occasionally will modify their estimates for the payrolls report based on the ADP count, though there often are wide disparities between the two counts.

CoreLogic – cash sales accounted for 31% of all home sales in June 2015

Cash sales made up 31.3% of total home sales in June 2015, down from 33.9% in June 2014. The year-over-year share has fallen each month since January 2013. Month over month, the cash sales share fell by 0.7 percentage points in June 2015 compared with May 2015. Due to seasonality in the housing market, cash sales share comparisons should be made on a year-over-year basis.  The cash sales share peaked in January 2011 when cash transactions made up 46.5% of total home sales nationally. Prior to the housing crisis, the cash sales share of total home sales averaged approximately 25%. If the cash sales share continues to fall at the same rate it did in June 2015, the share should hit 25% by mid-2017.

Real estate-owned (REO) sales had the largest cash sales share in June 2015 at 57% and was the only sales category to see a year-over-year increase in the cash sales share. Resales had the next highest cash sales share at 30.8%, followed by short sales (28.7%) and newly constructed homes (15.6%). While the percentage of REO sales that were all-cash transactions remained high, REO transactions made up only 6% of all sales in June 2015. In January 2011 when the cash sales share was at its peak, REO sales made up 23.8% of total home sales. Resales typically make up the majority of home sales (about 83% in June 2015), and therefore have the biggest impact on the total cash sales share.  New York had the largest share of any state at 47%, followed by Florida (45.8%), Alabama (44.8%), New Jersey (40.7%) and Oklahoma (39.6%). Of the nation’s largest 100 Core Based Statistical Areas (CBSAs)2 measured by population, West Palm Beach-Boca Raton-Delray Beach, Fla. had the highest cash sales share at 55.5%, followed by Philadelphia, Pa. (55.1%), North Port-Sarasota-Bradenton, Fla. (54.5%), Miami-Miami Beach-Kendall, Fla. (53.5%) and Detroit-Dearborn-Livonia, Mich.(52.9%). Washington-Arlington-Alexandria, D.C.-Va.-Md. had the lowest cash sales share at 13.4%.

Chicago PMI at 48.7 in Sept vs 53.0 reading expected

The Chicago Purchasing Managers Index showed surprising weakness in September, with the gauge dropping below 50.  Chicago PMI, a reading on manufacturing activity, fell to 48.7, compared with expectations of 53.0 and down sharply from 54.4 reported a month earlier.  A reading below 50.0 indicates a contraction in the sector.

RealtyTrac – mortgages: what if there’s a lender shortage?

The usual assumption when getting a mortgage is that there are a ton of lenders out there fighting for your business, so it makes sense to shop around for rates and terms. That’s surely true today but what about tomorrow? What happens if lending becomes an exotic craft in a market with lots of borrowers and far fewer lenders?  Looking at today’s financial landscape worries about a lender shortage may seem unlikely, but today’s financial landscape is changing. A lot of traditional residential mortgage lenders are already gone and many that remain are cutting back, concerned in some cases that new financial rules are so unclear — and the penalties so great — that maybe residential mortgage lending is the wrong business.  Part of the problem is heft. The new TILA-RESPA Integrated Disclosure rule (TRID) that goes into effect October 3rd runs 1,888 pages. While the rules have been available to lenders since 2013, everyone wonders if there’s a clause which will be misread or just plain missed, a serious concern because according to ComplianceEase “knowing violations” can result in fines of as much as $1 million — per day.  When lenders look at risk and reward they have to consider the benefits of being in the mortgage business versus the possible downside. According to the Mortgage Bankers Association, the typical loan produced a profit of $1,522 in the second quarter. A single one-day “knowing violation” can potentially eat the profits from more than 650 loans.

The Mortgage Bankers Association says that the number of mortgage-originating institutions dropped from 8,886 in 2006 to 7,062 in 2014. What took their place?  In some cases there are fewer banks because of closings and mergers but at the same time there has also been a shift from traditional lenders to new players.  According to the CFPB between 2010 and 2014 “the market share of large banks and their affiliated mortgage companies declined from 53.8% to 38.3%.” During the same period, the market share of credit unions increased from 3.7% to 6.4%, independent mortgage companies saw their activity grow from 34.7% to 47.2%, while small banks held steady at 8%.  Figures from RealtyTrac illustrate the new marketplace realities: While Wells Fargo remains the nation’s largest mortgage originator, nonbanks such as Quicken Loans and Caliber Home Loans, a company owned by the Lone Star private equity fund, are among the top four so far this year along with JP Morgan Chase. Caliber, in particular, is an interesting story because it’s now the nation’s fourth-largest loan originator, a sign of remarkable growth given that it did not even show up on prior top-ten lists.  The growth of nonbanks has been attributed to lower marketing costs (no branches) and savvy Internet marketing. The catch is that traditional banks have the capacity to do the very same things by simply creating nonbank subsidiaries. Money is certainly not a problem — in the second quarter FDIC-insured lenders had profits of $43 billion — and surely traditional bankers can find some smart web designers and savvy online marketers.  Instead, the reason for so much nonbank growth may well be due to a plain decision by established lenders to simply leave some areas of the mortgage business, cherry pick borrowers, make loans to only the best-qualified applicants, and reduce potential liabilities.

Lenders are moving to restrict the loans they offer as a way to reduce liability. This can be done by increasing loan requirements, a process called “layering.”  Layering is a generally-accepted financial concept with one exception: While lenders are entirely free to require whatever they want in the way of credit scores, down payments and many other terms of credit for conventional, VA, portfolio and non-QM loans, the idea of laying is disputed in the case of FHA financing. Unlike other loans, FHA financing gives lenders a 100-percent guarantee against loss thus — the argument goes — there is no need to layer for properly underwritten loans.  That said, it’s widely reported that FHA lenders are now layering, fearing that borrowers with low credit scores — say below 640 — represent too much risk under the TRID rules, regardless of federal guarantees. Effectively, lenders who layer FHA loans are abandoning part of the market in the search for less risky and more profitable mortgage offerings.  An alternative way to reduce perceived FHA risk is to simply originate fewer government-insured loans.  “In the second quarter,” reports National Mortgage News, “JPMorgan Chase originated just 340 FHA loans, compared with 19,111 FHA loans in the second quarter of 2013. Meanwhile, the bank’s overall home lending business is booming. JPMorgan originated $29.3 billion of home loans in the second quarter, up 74% from a year earlier.”

Marketing Service Agreements (MSAs) are best thought of as strategic alliances between lenders and builders, lenders and brokers, closing companies and lenders, etc. One example of such an arrangement concerns a builder who offers a discount — but only if you use the builder’s preferred lender.  This summer Wells Fargo announced that it would “withdraw from mortgage marketing services and desk rental agreements with real estate firms, builders and certain other referral sources. The decision was made as a result of increasing uncertainty surrounding regulatory oversight of these types of arrangements and as part of Wells Fargo’s ongoing efforts to simplify the process that customers experience as they weigh all of their choices when shopping for a mortgage.”  On the same day, Prospect Mortgage said it too was leaving the MSA business.  “Recent interpretations of Real Estate Settlement Procedures Act (RESPA) requirements introduce substantial uncertainty as to the rules and requirements applicable to MSAs,” said the company. “Prospect has taken every precaution to ensure that it is complying with the rules and guidance under applicable law. However, in light of these recent rulings, Prospect believes that MSAs are no longer a viable marketing tool for the industry.”

What set off such reactions? A good guess is that the lending industry took notice of what happened to Lighthouse Title, a Michigan title insurance agency, fined $200,000 in 2014 by the Consumer Financial Protection Bureau.  The CFPB alleged that “Lighthouse Title entered into marketing services agreements (MSAs) with various companies, including, for example, real estate brokers, with the understanding that the companies would refer mortgage closings and title insurance business to Lighthouse. The agreements made it appear as if the payments would be based on marketing services the companies were supposed to provide to Lighthouse. However, Lighthouse actually set the fees it would pay under the MSAs, in part, by considering the number of referrals it received or expected to receive from each company. The CFPB’s investigation found that the companies on average referred significantly more business to Lighthouse when they had MSAs than when they did not.”  “Today’s action sends a clear and simple message, that quid pro quo agreements for real estate referrals are illegal,” said CFPB Director Richard Cordray. “The Consumer Bureau will continue to take action to ensure that the mortgage market is a level playing field where everyone plays by the rules.”  Lenders, no doubt, are looking at MSA arrangements in a new light as a result of the Lighthouse settlement and Cordray’s comments.

For borrowers the issue is not that in the future there won’t be competing lenders, instead there will simply be lots of new names among the competitors. No less important, because of new technologies and smaller lender expenses it may be that future mortgages will be available at less cost.  Will the influx of new loan sources make the mortgage system more risky? If the question had been asked a decade ago the question might have been worthy of debate, but in the era of Dodd-Frank, TRID and big liabilities for even small lender mistakes the answer is fairly obvious: Lenders are being cautious and avoiding risk.  In comparison, RealtyTrac reports that borrowers who get financing this year from Quicken Loans routinely put down 10% and 9% with Caliber. Traditional lenders are getting more up-front in 2015 including Wells Fargo Bank and Bank of America (15% down, on average) as well as JP Morgan Chase (17%). These figures suggest that nonbanks are capturing market share — at least in part — by attracting borrowers with less down while not concentrating on FHA, VA and similar loan products with minimal down payment requirements.  Looking ahead the mortgage marketplace will be very different from what we saw a decade ago. Given the new regulatory environment, changing technologies and lower costs it’s a difference borrowers are likely to appreciate and a growing number of traditional lenders are sure to watch — from the sidelines.

Zillow – July Case-Shiller: as expected, US home value growth ticks up Slightly

Today, the S&P/Case-Shiller Home Price Indices showed that the July 10- and 20-City Composites rose 4.5% and 5%, respectively, on a year-over-year basis. Year-over-year growth in the 10-city index was flat from June, while annual growth in the 20-city index was up slightly from June’s 4.9% pace. The US National Index rose 4.7% year-over-year, up from 4.5% in June. Today’s data were in line with Zillow’s forecasts, released last month.  On a seasonally adjusted (SA) monthly basis, the 10- and 20-City Composites were both down 0.2%. The National Index was up 0.4% month-over-month (SA). The table below shows how Zillow’s forecast compared with the actual numbers. “To many observers, the housing market is sending mixed messages right now,” said Zillow Chief Economist Dr. Svenja Gudell. “Median home values overall continue to grow at a modest clip, but many individual homes have actually lost value in the past year. Sales of existing homes took a step back recently, despite new home sales being the highest since early 2008. For-sale housing is still very affordable in many cities across the country, however on the ground conditions are often difficult, especially for first-time homebuyers. These conflicting trends may be confusing and even frustrating for some, but right now they shouldn’t be too much cause for concern. The market is continuing to heal and find its footing in a new environment, one where highly local factors – including local job opportunities, household formation and income growth – matter more in local markets than national trends.”

NAR – pending home sales retreat again in August

Pending home sales retreated in August but remained at a healthy level of activity and have now risen year–over–year for 12 consecutive months, according to the National Association of Realtors (NAR). A modest increase in the West was offset by declines in all other regions. The Pending Home Sales Index, a forward–looking indicator based on contract signings, decreased 1.4% to 109.4 in August from 110.9 in July but is still 6.1% above August 2014 (103.1). The national median existing–home price is expected to increase 5.8% in 2015 to $220,300. NAR forecasts total existing–home sales this year to increase 7.0% to around 5.28 million, about 25% below the prior peak set in 2005 (7.08 million). The PHSI in the Northeast fell 5.6% to 93.3 in August, but is still 8.9% above a year ago. In the Midwest the index inched down 0.4% to 107.4 in August, and is now 6.5% above August 2014. Pending home sales in the South declined 2.2% to an index of 121.5 in August but are still 4.1% above last August. The index in the West rose 1.8% in August to 104.9, and is now 7.6% above a year ago.

Consumer spending rises in August

US consumer spending grew briskly in August and a key measure of inflation firmed a bit, signs of strength in America’s domestic economy that could lead the Federal Reserve to tighten interest rates despite weakness abroad.

The Commerce Department said on Monday consumer spending increased 0.4% after an upwardly revised 0.4% rise in July. The data suggests the strong consumer spending that bolstered the economy in the second quarter carried over into the third. Consumer spending, which accounts for more than two-thirds of US economic activity, was previously reported to have gained 0.3% in July. Economists polled by Reuters had forecast consumer spending rising 0.3% last month. Last month, spending on long-lasting goods such as automobiles increased 0.9%. Outlays on services like utilities rose 0.5%. When adjusted for inflation, consumer spending rose 0.4%. Personal income increased 0.3% in August. Overall inflation remained muted, reflecting low oil prices. Inflation, which has persistently run below the Fed’s 2% target in annual terms, rose just 0.3% in August from the same month a year earlier. However, prices were up 1.3% when excluding food and energy, a key metric used by the Fed to gauge the trend rate of inflation. This so-called core PCE price index has been holding around 1.3% through 2015.

Gold falls as US rate outlook weighs

Gold fell for a second session on Monday, as the dollar stood close to a five-week high ahead of a key US jobs report later in the week, which could boost bets the Federal Reserve will hike interest rates this year. Platinum fell nearly 3% to a fresh 6-1/2 year low of $617.25 an ounce on Monday. It posted its biggest weekly drop since July last week on fears that the Volkswagen emissions scandal could dent demand for diesel cars, where it is used in catalysts. “Platinum must continue to fall in the short term because of the lack of clarity in the Volkswagen scandal…it is a very complicated situation involving carmakers, regulators and governments,” Societe Generale analyst Robin Bhar said. Spot gold fell 1.2% to $1,133.36 an ounce by 1034 GMT, extending Friday’s declines made after Fed chair Janet Yellen said she expected to begin raising rates later in 2015. Non-interest-paying gold has lost about 3% this year on fears that demand could take a hit in a higher interest rates’ environment. “Interest around $1,141 should continue to support gold over the short-term, while $1,155 will provide resistance,” MKS Group said in a note. Earlier in the month, the Fed delayed a long-anticipated rise in US rates, citing concerns over the global economy and improving investor sentiment towards gold. Holdings in SPDR Gold Trust, the world’s top gold-backed exchange-traded fund, rose for a fourth straight session on Friday. Hedge funds and money managers raised their bullish bets in COMEX gold futures and in the week to Sept. 22, US Commodity Futures Trading Commission data showed on Friday. Palladium fell 2.2% to $648.47 an ounce, following a near 10-percent jump last week, its biggest weekly gain since December 2011. Silver fell 2.3% to $14.74 an ounce.

CoreLogic – 4 top markets overvalued, double the number as of Q1 2015

Home prices have continued to rise throughout the country, though for most markets, at a slower pace. Most markets are still at normal price levels or undervalued, according to the CoreLogic Market Condition Indicators. However, the number of overvalued markets among the nation’s top 100 cities is up to 14 as of Q2 2015, double the number from Q1 2015, with Texas leading the charge— five of its six top markets are overvalued. Home prices in five Texas markets are well above their historical peak levels partly due to strong job growth and to the absence of the severe boom-bust housing cycle that was seen elsewhere. Between 2006 and 2014, the oil and gas boom had fueled job and population growth in some markets, pushing home prices well above their sustainable levels in these markets. Since last year, geopolitical events have shifted in favor of excess oil supply, possibly exerting further downward pressure on oil prices in the next few years and impacting some of these Texas markets. The areas that have become overvalued since Q1 2015 are: Cape Coral, Fla., two Tennessee markets: Knoxville and Nashville–Davidson–Murfreesboro–Franklin, Philadelphia, Silver Spring–Frederick–Rockville metro in Maryland and Denver–Aurora–Lakewood in Colorado. As home prices have risen significantly since 2013 in these markets, homes have become less affordable, and therefore, more susceptible to decline in the event of rising mortgage rates, an economic downturn or a building boom.

Although the number of overvalued markets doubled, and despite significant home price growth since 2012, most markets are still well within sustainable levels, with many still recovering from the market collapse. At the national level, the housing market is expected to remain within normal levels of the long-term sustainable level through 2017, with most of the top 100 markets normally valued. Figure 1 shows the population-weighted average of the gaps between home prices and their long-run sustainable levels in the largest 100 markets. During the housing bubble from 2005-2007, home prices were significantly more than 10% above the long-run sustainable levels. During the market collapse, home prices quickly fell more than 10% below sustainable levels during late 2010 and early 2013 as a substantial number of distressed sales depressed prices. Subsequently, as home prices have continued to rise, the gap has narrowed to 3.6% below the long-run sustainable level in June 2015. By the end of 2017, the gap between the CoreLogic Home Price Index (HPI) and the sustainable level is forecasted to be 1.5%, meaning that, on average, homes will be fairly valued through the end of 2017.

Black Knight – Home Price Index report

The Data and Analytics division of Black Knight Financial Services, Inc. released its latest Home Price Index (HPI) report, based on July 2015 residential real estate transactions. The Black Knight HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 US ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.

  • At $253K, US HPI now just 5.5% off June 2006 peak of $268K, and up nearly 27% from the market’s bottom
  • Home prices in New York led all states with 1.4% growth from June
  • Indiana, New York, Tennessee and Texas hit new peaks again in July
  • New York state metro areas accounted for seven of the month’s top 10 movers
  • 12 of the nation’s 40 largest metro areas hit new home price peaks in July