Economist: Leverage Plays Major Role in Driving Foreclosures

With the nation’s homeownership rates similar to those of 50 years ago, the foreclosure rate is significantly higher compared to the early 1960s. The main reason for the increase in foreclosure risk while the homeownership rate remains little changed is leverage, according to CoreLogic chief economist Sam Khater.

The economist noted that leverage remains unaddressed by those responsible for initiating housing policy, and he recommended in his study that they may want to consider the ability to manage leverage in order to obtain financial stability in the residential housing market.

“Leverage is known to play an important role in loan default, but while theoretical research on leverage exists; to our knowledge there has been virtually no long-term data driven empirical analysis on the impact of leverage on residential foreclosure,” Khater wrote on CoreLogic’s blog. “We assembled data from various sources to fill that void and examine the role leverage plays in mortgage foreclosures over the last five decades. This is an especially timely topic given that policy makers have recently attempted to thaw the tight lending environment by reducing the price and expanding the quantity of low down payment real estate credit.”

Khater said the CoreLogic research on the relationship of leverage to residential foreclosures revealed four main findings: 1) Foreclosure risk is two to three times higher than it was 50 years ago despite homeownership rates being close to their 1960s levels; 2) leverage has been a primary driver of foreclosures during the last 50 years, and that the strong role of leverage has rendered savings and income changes insignificant drivers of default; 3) high inflation rates in the 1970s and 1980s propelled nominal home prices, resulting in reduced aggregate LTV and lowering default risk – thus stabilizing foreclosures during those decades; and 4) government regulations aimed at making the mortgage market safer for consumers center on an income-based ATR rule that manage the risk of delinquency, but are not so much focused on foreclosure risk.

“Therefore, leverage as the most important driver of foreclosure performance over the last five decades remains unaddressed for the market,” Khater wrote. “In the future, policy makers may need to consider exploring their ability to manage the leverage cycle to promote residential financial stability.”

Homeownership stood at just 40 percent in the 1930s, but jumped to 62 percent by 1960 with the help of expanded credit access with the creation of the Federal Housing Administration and Fannie Mae. Homeownership has largely stabilized between 62 percent and 65 percent since then, peaking at 69 percent in 2004; it was reported at 64 percent for Q4 2014, according to CoreLogic. The conventional foreclosure rate was 0.6 percent in the early 1960s, while it was 1.4 percent for FHA loans; by 2014, the conventional foreclosure rate had more than doubled up to 1.5 percent and the foreclosure rate on FHA loans had swelled to 2.6 percent.

Khater said the higher foreclosure rates are not necessarily due to the recession and subsequent foreclosure peak experienced in 2010, citing the fact that the higher foreclosure risk for both conventional and FHA mortgage loans was still three times higher than in during the 1960s in 2004, four years prior to the recession.

A model comparing the different drivers of foreclosure rates (savings, unemployment, inflation, aggregate current LTV, real median household income) revealed only two primary factors and one secondary factor that noticeably influenced foreclosure rate: LTV ratio and unemployment rate were the most important, with LTV ratio “by far being the most important variable,” Khater said.

The findings in the model were consistent with the “dual trigger theory of foreclosures” that states that combination of a lack of equity (with a high LTV ratio) and economic shocks, such as unemployment or job loss, tip a home into foreclosure.

The model’s findings were also consistent with emerging theories that point to leverage as a major driver of default and foreclosures. Increased mortgage rates in the early 1950s combined with lower down payments drove homeownership rates higher but also drove foreclosure rates higher. Leverage stabilized from the mid-early 1960s to the mid-1980s, causing foreclosure rates to stabilize. In the early 1990s, leverage increased when housing policy began to focus on increasing homeownership via lower down payment; in the early 2000s, cash out refinances and home equity lending caused leverage to rise even faster. Foreclosures soared due to a spike in both leverage and unemployment rate when home prices crashed; in the last four years, the process has reversed and leverage has declined, according to Khater.

“CoreLogic findings illustrate how important leverage has been both historically and in today’s recovery. While leverage is the dominant driver of foreclosure trends, the unemployment rate captures the impact of short-term economic cyclical fluctuations,” Khater wrote. “A less important but still influential factor has been periods of accelerating inflation, which ease the burden of the monthly mortgage payment and masked the rise in leverage via higher nominal home prices. Interestingly, the savings rate and household income were not at all important, which was a surprise given that traditional underwriting focuses on affordability.”

Lawmakers Discuss Use of RMBS Settlement Funds at House Judiciary Committee Hearing

Speaking at Thursday’s House Judiciary Committeehearing entitled “Oversight of the Justice Department’s Mortgage Lending Settlements,” some lawmakers criticized the federal government for using little or none of the $36 billion in recent mortgage backed-securities settlements with big banks to help foreclosure victims.

Republicans had called the hearing to address concerns that the funds from the RMBS settlements were not going toward consumer relief, as was intended, but instead going to third-party organizations.

Addressing the House Judiciary Committee on Thursday, U.S. Representative Tom Marino (R-Pennsylvania) cited an article published by the Delaware Online News Journal in late January which stated that out of about 32,000 homeowners foreclosed on in Delaware, only a little more than 1,000 of them have received any money from the settlements. According to the News Journal, when they did receive money, it was often for less than $1,500, and therefore not enough to make a difference – and the remaining foreclosure victims have received no money.

Since the financial crisis began in September 2008, approximately 5.5 million residential homes nationwide have been lost to foreclosure, according to CoreLogic. Since homeownership peaked in 2004, about 7 million homes have been lost to foreclosure, CoreLogic said.

“It is a cruel irony that those who lost the most to the foreclosure crisis seem to be helped the least from the Department of Justice’s settlement,” Marino said.

JPMorgan Chase settled with the Justice Department for a then-record $13 billion in November 2013, followed by a $7 billion settlement between Citigroup and the DOJ in July 2014. In August 2014, Bank of America and the DOJ entered into a $16.65 billion settlement, breaking the record set by JPMorgan Chase nine months earlier. Those three settlements, all to settle claims of packaging and selling faulty residential mortgage-backed securities in the run-up to the financial crisis, totaled more than $36 billion.

Representatives Bob Goodlatte (R-Virginia), the chairman of the House Judiciary Committee, and Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, wrote a letter to U.S. Attorney General Eric Holder in late November questioning why money from these settlements was being donated to what they called “left-wing activist groups” such as NeighborWorks America and La Raza.

“Directing a defendant to pay money directly to a third-party interest group is simply an end-run around the law,” he told the Committee. “All told, the Department of Justice has directed as much as half a billion dollars to activist groups entirely outside the Congressional budget and oversight process. . . For DOJ to funnel money to third-parties through settlements this way may violate the law and is undoubtedly bad policy.”

Marino stated that he did not care if an organization receiving the money was “right wing” or “left wing” – he said he believed the money should not be given to a partisan organization.

Geoffrey Graber, Deputy Associate Attorney General and Director of the Residential Mortgage-Backed Securities Working Group of the Financial Fraud Enforcement Task Force with the U.S. Department of Justice, testified at Thursday’s hearing to answer the lawmakers’ claims that the money from the settlements was not being spent as it should be.

“In all of these settlements, the banks are required to report their consumer relief efforts to independent monitors, who are paid by the banks. The independent monitors are charged with verifying that the banks meet their consumer relief obligations. The monitors also publicly report their findings,” Graber said in his testimony. “It is important to bear in mind, however, that the Department does not have control over how the banks choose to complete their consumer relief obligations within the parameters set forth in the settlement agreements. It is up to the banks to choose exactly how they fulfill their obligations.”

Analyst Says Nation’s 5.6 Percent Unemployment Rate is Misleading

While the Obama Administration is touting monthly job gains consistently averaging more than 200,000 and a labor market that they say is at its healthiest level since the turn of the century, at least one analyst says that the recently reported national unemployment rate of 5.6 percent may not be telling the complete story.

Jim Clifton, chairman and CEO of polling firm Gallup, claims in a story on the Gallup website blog entitled “The Big Lie: 5.6 Percent Unemployment” that this figure is misleading, and he spells out why he believes that way.

The nation’s unemployment rate has particular meaning for the housing industry because economists and analysts have repeatedly stated that housing recovery depends on economic recovery, and vice versa – and that housing recovery depends in particular on a healthy combination of consistent job gains and wage growth. In fact, many analysts have predicted that millennials (age 25 to 34) will drive housing recovery in the next year, thus making employment among that demographic imperative.

“Right now, we’re hearing much celebrating from the media, the White House and Wall Street about how unemployment is ‘down’ to 5.6 percent,” Clifton wrote, referring to the rate the Bureau of Labor Statistics reported for December that actually ticked up to 5.7 percent in January. “The cheerleading for this number is deafening. The media loves a comeback story, the White House wants to score political points and Wall Street would like you to stay in the market.”

Clifton asserts that the 5.6 percent unemployment rate is not a true representation of the percentage of unemployed workers nationwide because it doesn’t include people who have given up looking for a job – or in his words, “While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news – currently 5.6 percent.”

About 30 million Americans are either out of work or severely underemployed, according to Clifton. When the number of Americans in “good jobs” is calculated – or in other words, the number of Americans who have a job with an organization that puts them to work for 30 or more hours a week and provides them with a regular paycheck – that number is a staggeringly low 44 percent, Clifton said.

Another reason why the 5.6 percent unemployment figure is misleading, according to Clifton, is that it does not include those who work part-time and want to work full-time.

“There’s no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie,” Clifton wrote. “And it’s a lie that has consequences, because the great American dream is to have a good job, and in recent years, America has failed to deliver that dream more than it has at any time in recent memory. A good job is an individual’s primary identity, their very self-worth, their dignity – it establishes the relationship they have with their friends, community and country. When we fail to deliver a good job that fits a citizen’s talents, training and experience, we are failing the great American dream.”

In January, when the BLS announced the 5.6 percent unemployment rate for December, Fannie Mae chief economist Doug Duncan noted that the labor force participation was at 62.7 percent – its lowest level since 1977.

“So far, the diminishing slack in the labor market has not yet translated into stronger wage gains, which sends a disappointing signal to the housing market,” Duncan said. “We fear that housing may, again, lag the progress of the overall economy this year. . . While we expect economic growth to strengthen to an above-par pace this year, our view for the housing market remains cautious, as we believe that meaningful income growth needs to occur to spur household formation, which has been frustratingly anemic in the current economic expansion.”

FDIC’s ‘America Saves Week’ Could Help Many Consumers Achieve Homeownership

With a little help from the Federal Deposit Insurance Corporation (FDIC), American consumers can overcome the single biggest obstacle to homeownership – saving for a down payment – and increase their savings to a level that will allow them to finally own a home.

The FDIC has designated the week of February 23 through 28 as America Saves Week, dedicated to helping Americans invest in their financial future. The FDIC and is providing resources throughout the week to help consumers reach their goals.

“Saving money on a regular basis in a federally insured financial institution is a proven way to safely and steadily reach your financial goals,” FDIC Chairman Martin J. Gruenberg said. “Whether you are opening your first savings account or have had one for a while, during America Saves Week I encourage you to establish a regular contribution to an insured account. You might be surprised how the habit of regular savings—even in small amounts—can help you make progress to a stronger financial future.”

The recent lowering of the FHA mortgage insurance premiums down to 0.85 percent and the FHA lowering the down payment for qualifying homeowners down to 3 percent could make homeownership a reality for many Americans who previously could not afford a 20 percent down payment or perhaps they got into a home but could not sustain the monthly mortgage payments. FDIC will help out during America Saves Week by encouraging Americans to make a strong commitment to savings and then provide consumers with tools, ideas, and other resources such as educational resources that will help consumers evaluate their options and move them toward their savings goals.

One of the ideas FDIC is pushing in particular is saving through automated means (i.e. through regularly scheduled deposits into a savings account).

The timing for America Saves Week could not have been better for aspiring homeowners who are about to receive an income tax refund. Freddie Mac reported on its blog last week that eight out of 10 Americans who file will receive a tax refund, and the average refund will be $3,539, which would make up a sizeable portion of the down payment with the lowered requirements. It could also be put toward closing costs, which average about $2,500, according to Freddie Mac.

“Depending on their credit history and other factors, many borrowers can expect to make a down payment of about 5 to 10 percent,” Freddie Mac wrote in the blog. “And new 3 percent down financing options for qualified borrowers could mean a down payment as little as $6,000 for a $200,000 home.”

New York AG Proposes New Expanded Bill to Reduce Zombie Properties

New York Attorney General Eric Schneiderman announced on Monday that he plans to introduce an expanded version of the bill he proposed last year reduce the number of zombie properties in the state.

The goal of Schneiderman’s new proposed Abandoned Property Neighborhood Relief Act is to cut down on the increasing number of residential properties that fall into disrepair when they are abandoned by owners during the foreclosure process and subsequently not maintained by mortgagees. Such properties are often referred to as “zombie properties.”

Speaking at the New York State Association of Towns’ 2015 Training School and Annual Meeting on Monday, where he announced his intention to introduce the expanded legislation, Schneiderman said the number of zombie properties in New York increased by almost 50 percent in 2014 compared to 2013, which amounted to about 16,700 zombie properties. Scheneiderman quoted data that in the 10 counties in New York with the most zombie properites, approximately 42 percent of properties in foreclosure are abandoned before the lengthy process is finished. When the bank fails to maintain these properties, they fall into disrepair, which in turn lowers property values of surrounding houses and invites vandalism and violent crime.

“Leaving zombie properties to rot is unfair to municipalities and unfair to neighbors, who pay their taxes and maintain their homes,” Schneiderman said. “In the next two weeks, my office will resubmit to the Legislature our bill that would require banks to take responsibility for maintaining properties much earlier in the foreclosure process, take that burden off of towns and cities, and allow local governments to more easily identify the mortgagees of these properties to make sure they maintain them. And as my office enforces the requirement that banks take responsibility for these properties, any fines we levy will go into a fund to help towns and cities hire more code enforcement officers.”

The proposed Abandoned Property Neighborhood Relief Act addresses the problem of homeowners who may be unaware of their legal rights abandoning their homes once they receive a foreclosure notice. The new bill requires mortgagees to provide homeowners with early notice that they are legally entitled to remain in their homes until a court orders them to leave. Also as part of the new bill, mortgagees are required to identify, secure, and maintain vacant properties soon after they are abandoned rather than at the end of the foreclosure process. The bill requires mortgagees and their loan servicing agents to periodically inspect properties with delinquent mortgages to ensure that they are occupied. The bill also makes it unlawful for a mortgagee or anyone acting on the mortgagee’s behalf to enter an occupied property and intimidate, harass, or coerce a lawful occupant into vacating the property.

“Many vacant and abandoned properties are a significant source of blight, magnets for criminal activity, negatively impact property values and detract from residents overall quality of life,” Binghamton Mayor Richard C. David said. “This issue impacts cities across the nation and the Attorney General’s proposal to hold mortgage lenders more accountable and provide a strategy to keep these properties from deteriorating will ultimately protect homeowners and improve the integrity of our neighborhoods.”

The Abandoned Property Neighborhood Relief Act is part of Schneiderman’s broader strategy to help New York homeowners and communities recover from the foreclosure crisis, according to Schneiderman’s announcement. His other actions toward obtaining this strategy include securing $2 billion in a National Mortgage Settlement to help financially struggling families and dedicating $100 million of that money to the Homeowner Protection Program (HOPP), which provides housing counseling and free foreclosure prevention legal services to struggling homeowners in New York. According to Schneiderman’s office, HOPP has helped 39,000 families in the state as of December 2014.

LoanLogics Introduces Time-Saving Signature Audit Tool

Pennsylvania-based loan risk management firm LoanLogics has announced the introduction of a new signature examination tool that will make it easier to audit signatures contained in loan documents.

The new technology, called SignaFacts, is part of LoanLogics’ LoanHD platform and is the industry’s first fully automated signature clipping tool. SignaFacts evaluates the signatures on many types of documents, including the good faith estimate, truth in lending disclosure, mortgage note, deed of trust, and HUD endorsement.

“Because of this enhancement, the actual signatures can be audited, and when there are dissimilar signatures, it will be readily apparent. Until now, underwriters and auditors did not have a reliable method to quickly and easily inspect signatures side-by-side, which presented quality control issues for mortgage lenders,” said Craig Riddell, SVP and Chief Business Officer for LoanLogics. “This innovation in a pre-close audit helps identify potentially fraudulent signatures before the loan is closed, and in the process, protects borrowers and lenders. Additionally, we have spent considerable time with industry leading Correspondent lenders who are confident that SignaFacts will be a very valuable feature in further reducing the costs of their pre-funding audits.”

SignaFacts provides visual validation of execution and allows for the easy comparison of signatures, ensuring that lenders will no longer have to sort through hundreds of pages of loan file documents to audit those signatures. Saving time and resources in the audit process has become even more critical as new regulations and heightened scrutiny have caused an increase in the number of documents necessary to complete a loan, stretching staffs thinner.

“File size and resource issues have made it more challenging than ever to detect signature fraud, while regulatory penalties and reputational damage make it a necessity,” Riddell said. “Lenders can now take steps to protect themselves using an interactive tool to confirm execution and view a side-by-side comparison of signatures. That’s what SignaFacts provides to clients—helping them guard against being the unwitting victim of fraud and quickly identify patterns and root causes of signature anomalies.”

Mortgage Risk on the Rise

A key measure of lending behaviors shows the number of risky mortgages rose in September as housing agencies fail to compensate for high debt-to-income (DTI) ratios.

The American Enterprise Institute’s (AEI) National Mortgage Risk Index, released Monday by the group’s International Center on Housing Risk, rose to 11.43 percent in September, little changed from the revised average of the previous three months and nearly 1 percentage point higher than a year ago.

The risk index measures stressed default rates on home purchase loans, including mortgages purchased by Fannie Mae and Freddie Mac and those insured by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). Including an additional 232,000 loans added in September, the index covers approximately four and a half million mortgages.

In keeping with recent trends, the index measuring risk for FHA loans was the highest, sitting at 23.99 percent—nearly quadruple the 6 percent threshold AEI considers to be stable. Over the last year, that index has climbed 2.1 percentage points.

Meanwhile, the newly added VA index had a risk rating of 11.24 percent, slightly below the composite index. Based on key risk factors, including credit scores, total DTI, and loan-to-value ratio, AEI says VA loan characteristics make those mortgages about 20 percent less risky than FHA loans. Controlling for borrower and loan characteristics, the VA’s default rate on 2007 loans averaged only about 60 percent of the FHA rate.

“If the FHA were to emulate the VA’s risk management practices, the composite would drop to about 9 percent,” the group said.

The stressed default rate for loans purchased by Fannie and Freddie remained just on the stable side at 6 percent.

Out of the number of risk factors at play in September’s index, AEI says the standout continues to be the high volume of loans with excessive DTI ratios. Over the past three months, the association estimates 22.3 percent of loans had DTI ratios above 43 percent, the cutoff established under the Consumer Financial Protection Bureau’s qualified mortgage (QM) definition. Mortgages qualified for purchase by the GSEs or for insurance by FHA are temporarily exempt from that provision.

“FHA is not compensating for riskiness of high DTI loans; Fannie and Freddie are compensating only to a limited extent,” AEI said.