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.”