FBR: Specialty Servicers Should Expect Large Transfers in 2013

Tailwinds should continue for specialty servicers in 2013, according to a report from FBR.

As large, traditional servicers become unwilling to service certain asset that require more attention, FBR says it believes about $600 billion to $700 billion in “high-touch, credit sensitive assets” will eventually make their way into specialty servicing and sub-servicing sector.

FBR explained Fannie Mae and Freddie Mac will act as vehicles behind the transfer of assets to specialty servicers as the GSEs “look to minimize losses from troubled mortgages.”

The report also stated, “increased regulatory oversight on the servicing process” will drive transfers.

The investment bank cited a report from the Federal Housing Finance Agency revealing Fannie Mae has about $300 billion in high-touch, credit-sensitive servicing that needs to be moved. Furthermore, FBR stated it believes Freddie Mac has about $200 billion and the Federal Housing Administration has $150 billion of “agency paper.”

“This implies a total available UPB pool between $600 billion and $700 billion, which should be more than enough to support growth for the company’s servicing business in the near term,” the FBR report stated.

To date, FBR also says investors should expect some of the largest servicing transfers in the industry, and noted Nationstar Mortgage Holdings, Inc. and WalterInvestment Management Corp. should benefit from the significant asset transition process.


KBW Expects ‘Modest Changes’ in Mortgage Market in New Year

Keefe, Bruyette & Woods (KBW), a boutique investment bank and broker-dealer, recently released its predictions for the mortgage market for the year 2013, entitledWatching Grass Grow: Mortgage Reform in 2013. As the title implies, KBW does not expect major changes in the New Year.

However the investment bank does expect some “modest changes in the mortgage landscape driven by the Federal Housing Finance Agency (FHFA).”

For example, KBW has noted whisperings throughout the media that the White House may replace FHFA Acting Director Edward DeMarco. One of the White House’s complaints against DeMarco for some time has been his resistance to principal reductions.

However, KBW said this issue overall “is not very meaningful for Agency MBS investors since it would only be on delinquent loans that would already have been purchased out of Agency MBS pools.”

Another change KBW foresees in the FHFA is rising guarantee fees (g-fees). FHFA has already raised g-fees by 20 basis points, and KBW says it is likely FHFA will continue to raise g-fees “to the level where it reflects the subsidy being provided.”

FHFA may also look into risk sharing, increasing private mortgage insurance coverage and raising servicing fees, according to KBW.

In other GSE-related activity, KBW expects the Home Affordable Refinance Program (HARP) to help bolster mortgage industry gain-on-sale margins. “We believe that the HARP deadline could also be extended past the end of 2013,” KBW stated in its report.

Lawmakers continue to deliberate many regulatory concerns, but KBW believes the Consumer Financial Protection Bureau (CFPB) will bring clarity to one major issue in the New Year – the qualified mortgage.

While KBW expects “modest” change in the FHFA, it also expects “only minor changes” to the Federal Housing Administration (FHA), even despite the fact that FHA’s capital ratio continues to decrease.

According to FHA’s annual audit report, the agency’s capital requirement is now -1.44 percent, far below its requirement of 2 percent.

However, the FHA “plays too important a role in the purchase mortgage market” for its role to be “meaningfully reduced.”


A Tricky Transition from Housing Stability to Strength in 2013

Daren Blomquist is RealtyTrac’s VP. He also acts as managing editor of the company’s monthly newsletter, theForeclosure News Report.

Some level of certainty and stability returned to the U.S. housing market in 2012, providing a solid foundation for the market to build on in 2013.

But there are still significant risks that threaten this hard-won stability and could trip up some local markets trying to make the tricky transition from stability to strength.

U.S. Foreclosures Continue Slow Descent

At a national level and in states with relatively efficient foreclosure processes, foreclosure activity will not pose a significant threat to housing market stability. U.S. foreclosure activity will continue its slow descent off the peak of 2.9 million properties with foreclosure filings in 2010 and back toward a more normal level of around 500,000 properties with foreclosure filings a year – although don’t expect to see a completely normal foreclosure year until 2015.

Foreclosure Flare-Ups

Rising foreclosure activity in certain markets at the beginning and end of the year could threaten the stability in those markets. RealtyTrac expects 2013 to be bookended by two discrete increases in foreclosure activity: a jump in bank repossessions (REOs) near the beginning of the year and a jump in foreclosure starts near the end of the year.

The jump in REO activity will be centered mostly in judicial states with lengthy foreclosure timelines where lenders are still playing foreclosure catch-up with homeowners who stopped making mortgage paymentsyears ago. These states include Florida, Illinois, Ohio, New York and New Jersey. The jump in foreclosure starts near the end of the year will be centered in the non-judicial states of California, Oregon, Nevada and Georgia, where a recent spate of state legislation and court rulings has changed the ground rules of the foreclosure game. By the end of 2013 lenders will have adjusted to these new ground rules and will start playing catch-up with foreclosure starts.

Price Appreciation Pretenders

Home prices will break through a false bottom in some local markets where deferred foreclosures are listed and sold in greater numbers. But markets without much foreclosure backlog to speak of will see home price appreciation take hold for the long term. The good news: the latter will likely outnumber the former by a fairly wide margin.

Foreclosure Timelines Decrease

As banks work through the foreclosure backlog during the first half of the year – particularly in the judicial foreclosure states – the average time to foreclose will finally turn a corner and start decreasing nationwide. As of the third quarter of 2012, the average time to complete a foreclosure from the first public notice was 382 days nationwide, the highest since RealtyTrac began tracking this metric in the first quarter of 2007. But the timelines have already started to slowly decrease in states like Florida and New Jersey. The shorter timelines will provide a healthy dose of additional certainty and stability for the housing market.

Short Sale Staying Power

Short sales are proving to be the most efficient way to accomplish a smooth transition from a distressed market to a healthy market. This relatively smooth transition should be preserved in 2013 as elevated levels of short sales help the market continue to recalibrate and absorb the still-rampant negative equity hanging over the housing market – in the form of 12 million homeowners who are underwater.

One wildcard here is the possible expiration of the Mortgage Forgiveness Debt Relief Act, which could cause many of those underwater homeowners to either stick it out or walk away and allow their homes to be foreclosed – which then could boost the foreclosure numbers higher for the year.

Five Star Economist: Housing in 2013 Depends on Many Moving Parts

No matter how foggy the haze is, economists typically dust off their crystal balls in December. However economic forecasts too often involve driving by looking in a rear-view mirror.

Anticipating what might happen in the housing markets, with so many moving parts involved, can be the trickiest of all forecasts.

Because housing is a unique expenditure—combining elements of investment and a service—it depends on a variety of elements: employment, income, interest rates, the regulatory environment, and even the weather. Equally important are demographics and, as with any purchase or investment decision, the cost of alternatives (in this case rental housing). The housing market is complicated further by second homes and investor properties, separate from the investment component of the purchase of a primary residence.

The biggest question mark over the housing picture, though, is the fiscal cliff and the on-again, off-again negotiations to avoid a national financial calamity.

There is more to the fiscal cliff deadline than just the expiration or continuation of the Bush-era tax rates and the automatic spending cuts Congress agreed to during the debate on increasing the debt ceiling. Indeed, there are two distinct housing related issues: a provision which makes mortgage insurance payments tax deductible and a tax provision which shields forgiven mortgage debt, both of which are set to expire at the end of 2012. The latter kicks in when a bank modifies a mortgage to reduce the principal; when a borrower sells her home in a short sale and the purchase price is less than the outstanding balance on the mortgage; or when a bank waives the portion of the mortgage balance it couldn’t recoup in a foreclosure.

If either provision is allowed to expire, the consequences for the housing market could be serious, overshadowing any other forecasts.

Then, there are the “solutions” to the fiscal cliff as they affect taxes, one of which is to eliminate or drastically reduce the mortgage interest tax deduction, which has the potential to undercut home values with a ripple effect for the rest of the economy. Reduced home values will hit older homeowners who have looked to the investment component of their housing as a comfortable best egg for retirement.

Lower values and prices could create some churn in the housing market and benefit buyers, but without “willing” sellers, those buyers will be left holding onto their cash. The lower values will also increase foreclosures as more homeowners find themselves underwater (and perhaps without the tax protection for a short sale).

Foreclosures and short sales have helped lagging home sales. About 15 percent of existing home sales each month this year have been foreclosed homes and another 11 percent short sales.

That said, the trend in home sales has been positive: Existing-home sales averaged 4.65 million per month in the first 11 months of 2012 compared with an average of just under 4.3 million in 2011 and a shade less than 4.2 million per month in 2010. That trend marked a turnaround, as 2010 sales were weaker than 2009, which were in turn weaker than 2008. The last time existing-home sales showed back-to-back year-over-year gains was 2004-5, so home sales have the momentum to continue to improve in 2013.

The pattern is not quite the same for new home sales which are on a trajectory to improve in 2012 from 2011—the first year-over-year increase since 2005. To the extent reduced values for existing homes are affected by tax law changes creating a new class of reluctant sellers, homebuilders could benefit as would-be homeowners turn to new, rather than “used” homes.

There is, however, a price advantage to buying an existing home: The median price of an existing home in 2012 averaged about $175,000, while the median price of a new home averaged just under $239,000. Prices for both would likely drop if the mortgage interest deduction disappears or is reduced, but any cuts to the price of a new home would be strain on builders, so the likelihood new homes sales in 2013 will grow over 2012 remains uncertain.

The most positive sign for housing to continue to ramp up in 2013 is the improvement in the labor market, though even those gains require an asterisk.

The unemployment rate has been below a still-high 8.0 percent for three straight months and is a full point better than it was in November 2011, but the number of people counted as unemployed has remained stubbornly high.

Unemployment averaged over 12.5 million per month in 2012 compared with a monthly average of 8.9 million in 2008, the first full year of the recession. The average shot up to 14.3 million per month in 2009, the year the recession officially ended (according to the Business Cycle Dating Committee of the National Bureau of Economic Research). That the unemployment rate has gone down is a function of arithmetic: The labor force has also come down.

Nonetheless, jobs have been returning. Non-far m payrolls averaged 134 million per month during 2012, up from just over 131.5 million per month in 2011 and just under 130 million per month in 2010. In the year before the recession began, the monthly average was 137.6 million. As Wall Street investors would say, the “trend is your friend,” and it is positive.

That makes it a bit easier for lenders to approve mortgage applications, even in a new post Dodd-Frank world designating some mortgages as “qualified.” Recent reports suggest banks are relaxing—or at least no longer tightening—lending standards for residential mortgages. Whether that movement reflects easing or merely the fact that standards could not be tightened any further is up for debate. (Imagine a leaking faucet which you tighten and tighten until the leak stops. That you have stopped tightening it is not the same as loosening.)

Perhaps the only constant in the mortgage picture would be interest rates. The Federal Reserve has maintained a low-rate policy it began in December 2008, resulting in record-low rates for mortgage loans. Although the Fed said at its last Federal Open Market Committee meeting it would begin to increase rates if certain benchmarks are reached—an unemployment rate under 6.5 percent and inflation remains in check—its own forecasts show those milestones won’t be hit until at least 2015, meaning low rates will remain in place next year.

Taken together, the housing outlook for 2013 suggests a continued, painfully slow improvement, but we’re still a long way from heady pre-recession days.

Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 am and again at 9:40 eastern time.


TransUnion Projects Drop in Delinquencies, but Rate Remains High

TransUnion forecasts a decline in mortgage delinquency rates for 2013, but the rate is expected to stay above 5 percent.

The credit bureau expects the mortgage delinquency rate—ratio of borrowers 60 or more days past due—to drop to 5.06 percent by the end of 2013 from an estimated 5.32 percent at the end of this year.

“As house prices and unemployment slowly improve, TransUnion’s forecast indicates that the national mortgage delinquency rate will gradually drop throughout 2013,” said Tim Martin, group VP of U.S. housing in TransUnion’s financial services business unit.

At its peak, the mortgage delinquency rate reached 6.89 percent in the fourth quarter of 2009 after increasing for 12 straight quarters from 1.94 percent in the fourth quarter of 2006.

As of the third quarter of this year, the national mortgage delinquency rate was 5.41 percent, representing a 21 percent decrease from the 2009 peak.

If the rate does drop to 5.06 in 2013 as TransUnionpredicts, the decrease would only be a 27 decline from the peak and still remain above normal levels, which the bureau says ranges from 1.5 to 2 percent.

“While we are encouraged by the direction of the forecast, we would have hoped for a projection that called for a more substantive drop in delinquencies. If the pace of improvement does not pick up, it will take a very long time to get back to ‘normal’ delinquency rates,” Martin added.

Performance among individual states will vary, but most states should see a decline in delinquencies. TransUnion forecasts mortgage delinquencies will drop in 34 states and the District of Columbia, with 13 states seeing increases.

TransUnion expects the most substantial declines in delinquencies to occur in Nevada (-18.62 percent), Minnesota (-13.58 percent), California (-12.14 percent) and Arizona (-11.61 percent).

States that have struggled to rebound after the mortgage crises are also projected to see declines in delinquencies. The mortgage delinquency rate in Georgia is expected to fall by 9.19 percent, followed by Florida (-8.39 percent), New York (-7.67 percent), and New Jersey (-4.95 percent).

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Foreclosure Crisis Takes Toll on Renters

Industry data suggests by the end of 2010, more than 5 million homes had been foreclosed as a result of the recent housing crisis, and some anticipate another 8 million to 10 million more foreclosures will make their way through the pipeline over the next few years.

However, as the National Law Center on Homelessness and Poverty points out, this is only part of the picture. About 20 percent of all foreclosed properties have been rental properties, according to a recent NLCHP report.

In fact, about 40 percent of all families evicted in foreclosure are renters not owners, according to NLCHP.

“Renters are innocent bystanders caught in the crossfire of the foreclosure crisis, becoming vulnerable to homelessness through no fault of their own,” NLCHP stated in its report, Eviction (Without) Notice: Renters and the Foreclosure Crisis.

In 2009, the federal government enacted the Protecting Tenants at Foreclosure Act (PTFA), which is set to expire at the end of 2014.

Under PTFA, tenants are allowed to continue living in their rental properties throughout the duration of their lease, even if their rental property is foreclosed. If a tenant has a short-term lease or no lease, the new property owner must give a 90-day notice to all tenants before eviction.

NLCHP, however, found evidence that “violations of thePTFA are widespread across the country,” and tenants are often uniformed about the law protecting them.

Often, new property owners fail to communicate with tenants or provide “illegal, misleading, or inaccurate written notices,” according to an NLCHP survey.

At times new property owners fail to maintain the property for tenants, and NLCHP also found instances of “harassment from real estate agents, law firms, or bank representatives.”

As a result of its findings, NLCHP recommends congress appoint one federal agency to enforce PTFA. The group also advises bank regulators to monitor compliance with the law to ensure tenants are protected.

NLCHP also encourages states to enact increased protections for renters when their landlord faces foreclosure.

Furthermore, as NLCHP expects the foreclosure crisis to continue for the next several years, the group advises congress to make PTFA a permanent law, rather than a temporary one.

Report: LIBOR Scandal May Have Cost GSEs More Than $3B

Fannie Mae and Freddie Mac may have lost billions of dollars as a result of borrowing rate manipulation, according to a report from the Office of the Inspector General of the Federal Housing Finance Agency (FHFA-OIG).

The banking world was rocked in late June as it was revealed that traders at Barclays spent years rigging the London Interbank Offered Rate (Libor), a global interest rate at which banks lend money to each other. Investigations have been underway since that time to uncover the roles any other banks might have played in the scandal—so far, only Barclays and UBS AG have reached settlements to resolve investigations of their practices.

As those probes continue, the Wall Street Journal is now reporting Fannie Mae and Freddie Mac may have sustained more than $3 billion in losses from the rate-rigging.

The WSJ uncovered an internal memorandum from FHFAinspector general Steve Linick to acting director Edward DeMarco examining the extent of the financial damage the GSEs likely took during the height of the financial crash as a result of rate manipulation.

The team that prepared the report—which was apparently given to Linick October 26 and forwarded to DeMarco November 2—came up with their loss figures based on an analysis of historical Libor data and the GSEs’ balance sheets.

In the report, FHFA-OIG calls for the enterprises to conduct their own analyses of the potential losses they faced from Libor rigging and to consider options for legal action.

“In the context of active federal and state investigations into possible LIBOR manipulation, as well as the results of our own preliminary analysis of publicly available information, we believe that further investigation of the potential harm to Fannie Mae and Freddie Mac—and therefore to Treasury and, ultimately, the American taxpayer—of any LIBOR manipulation is firmly warranted,” the report reads.

In a response letter dated November 15, deputy director for enterprise regulation Jon Greenlee notes the enterprises have both engaged an outside law firm to help conduct such assessments.

FHFA issued a statement after the publishing of the WSJarticle, saying the agency “has not substantiated any particular LIBOR-related losses for Fannie Mae and Freddie Mac” and “has not made any determination regarding legal action” as of yet.