FHFA Announces Final Rule for Fannie Mae, Freddie Mac Affordable Housing Goals

pen-and-paper1The Federal Housing Finance Agency (FHFA) has announced the adoption of a final rule establishing the housing goals for Fannie Maeand Freddie Mac for both single-family and multifamily housing for the years 2015 through 2017.

The proposed housing goals rule for the GSEs was first issued in August 2014. More than 144 comments were made on the proposed rule, all of which were considered by the FHFA in the development of the final rule. According to the FHFA, the final rule sets identical benchmarks in all categories for both Fannie Mae and Freddie Mac.

“The single-family goals advance the Enterprises’ statutory missions to provide access to credit for creditworthy borrowers and provide liquidity to the U.S. housing market while operating in a safe and sound manner,” FHFA Director Melvin L. Watt said. “The multifamily goals will create rental opportunities for those who need affordable housing. Together, these goals establish a solid foundation for affordable and sustainable homeownership and rental opportunities in this country.”

Mel Watt

The final rule establishes the following single-family housing goals for Fannie Mae and Freddie Mac for each of the three years from 2015 to 2017:

  • A low-income home purchase goal of 24 percent, which is a slight increase from the proposed benchmark for each year of 23 percent, which was also 2014’s benchmark goal;
  • A very-low income home purchase subgoal of 6 percent, which is down 7 percent from the subgoal in the proposed rule and down 1 percentage point from 2014’s benchmark goal;
  • A low-income areas home purchase subgoal of 14 percent, the same as what was in the proposed rule and 3 percentage points higher than 2014’s benchmark goal;
  • A low-income refinance goal of 21 percent, down 27 percent from what was in the proposed rule and 1 percentage point higher than 2014’s benchmark goal.

“The single-family goals advance the Enterprises’ statutory missions to provide access to credit for creditworthy borrowers and provide liquidity to the U.S. housing market while operating in a safe and sound manner.”

The final rule establishes goals for the first time for rental units affordable to low-income families in multi-family properties with five to 50 units. According to the final rule, both GSEs’ multifamily low-income goal for each year from 2015 to 2017 is 300,000 units, an increase from the proposed number of 250,000 units for each year for Fannie Mae and the proposed number of 210,000 for 2015, 220,000 for 2016, and 230,ooo for 2017 for Freddie Mac.

FHFA Housing GoalsFHFA is required to establish housing goals annually for mortgages purchased by the GSEs under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which was amended by the Housing and Economic Recovery of 2008.

The final rule will become effective 30 days after it is published in the Federal Register, according to FHFA.

Delinquency Rate Continues Rapid Decline Driven by Higher Quality Originations

delinquent-noticeThe delinquency rate on mortgages, or the percentage of mortgages on which borrowers are 60 or more days overdue with their payments, declined by 20 percent year-over-year in Q2 down to 2.72 percent, according to TransUnion‘s Industry Insight Report for Q2 released Monday.

The delinquency rate is less than half of what it was three years ago, when it was reported at 5.39 percent for Q2 2012, according to TransUnion.

“This is the lowest mortgage delinquency level we’ve seen in several years – down from a peak of nearly 7 percent in early 2010,” said Joe Mellman, VP and head of TransUnion’s mortgage group. “This is largely due to foreclosures and other seriously delinquent accounts continuing to work their way through the foreclosure process, as well as a reflection of the high credit quality of recent originations.”

The age group that saw the largest decline in delinquent mortgages was the 30 and under group, or the “millennials,” who experienced a drop from 2.32 percent in Q2 2014 down to 1.7 percent in Q2 2015, TransUnion reported.

All 10 of the largest metro areas and 48 states reported double-digit year-over-year declines in the percentage of seriously delinquent mortgages in Q2, according to TransUnion. The metro areas that experienced the largest declines were Miami (40 percent, down to 5.31 percent) and Los Angeles (29.1 percent, down to 2.07 percent).

The average mortgage balance increased slightly both over the quarter and over the year. For Q2 2015, the average mortgage balance was $188,237, which was up from $186,999 in Q2 2014 and from $187,175 in Q1 2015, according to TransUnion.

All mortgage originations, measured by loan count, jumped up to 1.48 million in Q2, which was an increase of 2.4 percent from the previous quarter and of 40 percent from the same quarter a year earlier. A big reason for the substantial year-over-year growth was increases in the Prime Plus and Super Prime originations, which climbed to 42.8 percent and 56 percent, respectively. The number of jumbo loan counts rose from 46,000 in Q1 2014 up to 63,000 in Q1 2015.

“We believe a major reason for the increase in mortgage originations was due to falling mortgage interest rates,” Mellman said. “The growth in jumbo loans for the Prime Plus and Super Prime risk tiers was another key driver. Despite this increase, it should be noted that there were 1.1 million fewer mortgage originations this past quarter compared to the pre-recession high in the third quarter of 2007.”

Drop in REO Sales is Driving Continued Decline in Cash Sales Share

cashThe share of total residential home sales in May 2015 that was made up of all cash sales was 31.9 percent, down from 35.1 percent in May 2014, according to CoreLogic‘s Cash Sales Data for May 2015 released on Tuesday.

The cash sales share has declined year-over-year every month since January 2013; May’s share marked 29 consecutive months of declines for cash sales as a percentage of total home sales. According to CoreLogic Chief Economist Frank Nothaft, a drop in REO sales has been the main force behind the continuing decline in cash sales share.

Though REO sales comprised more than half of all cash sales in May 2015, REO sales accounted for only about 6.4 percent of all home sales. By comparison, in January 2011 when all cash sales made up 46.5 percent of all home sales, REO sales accounted for about 23.8 percent of all home sales, according to CoreLogic. Resales typically account for the majority of home sales, as they did in May (82 percent).

“The primary reason for the decline in cash sales share has been the drop in REO sales,” Nothaft said. “Since 2009, more than one-half of REO have been bought by all-cash buyers.  The REO share of all home sales peaked at 24 percent in January 2011, and has fallen to 6 percent of sales in May 2015.  The drop in REO sales explains must of the 15-percentage point decline in the all-cash share between January 2011 and May 2015.”

May 2015’s cash sales share of nearly 32 percent was down by 31 percent from the peak of 46.5 percent recorded in January 2011. CoreLogic estimates that if the cash sales share continues to decline at the same rate as it did in May 2015, the cash sales share should fall back down to its pre-crisis level of 25 percent by the middle of 2017.

REO sales still had the largest cash share in May 2015, as they have had historically, with 56.1 percent. It was the only category which experienced a year-over-year cash sales share increase in May, according to CoreLogic. Resales had the next highest cash sales share with 31.5 percent. Short sales comprised 30.1 percent of all cash sales in May, and newly constructed homes accounted for 14.7 percent of all cash sales for the month.

The states with the highest cash sales share in May 2015 were Florida (47.8 percent), New York (45.8 percent), New Jersey (45.8 percent), Alabama (44.2 percent), and Michigan (38.4 percent), according to CoreLogic. Out of the nation’s top 100 core-based statistical areas (CBSAs) measured by population, four of the five with the highest cash sales share were located in Florida: West Palm Beach-Boca Raton-Delray Beach had the highest cash sales share with 58.1 percent. North Port-Sarasota-Bradenton was second with 55.9 percent, followed by Cape Coral-Fort Myers at 55 percent, Detroit-Dearborn-Livonia, Michigan with 54.6 percent, and Miami-Miami Beach-Kendall with 54.6 percent. The CBSA with the lowest cash sales share was Syracuse, New York, with 11.6 percent.

St. Louis Fed Casts Doubt on the Effectiveness of QE and Zero Interest Rate Policy

federal-reserveIn a recently released white paper analyzing actions taken by theFederal Reserve in the immediate aftermath of the 2008 financial crisis, St. Louis Fed VP Stephen D. Williamson questions a few of the central bank’s policies and the effect they have had on the economy.

In a section of the white paper titled “Unconventional Monetary Policy After the Great Recession,” Williamson covers three areas which he says comprised a program of “unconventional policy” by the Fed starting in 2009: The zero interest-rate policy (ZIRP); quantitative easing, or large-scale asset purchases; and forward guidance.

Even though the Fed’s ZIRP is nothing new, since the interest rate on reserves during the Great Depression was zero, Williamson points out that it is unprecedented in post-1951 United States. He contends that the ZIRP period constitutes a “liquidity trap” in which reserves and Treasury bills are “essentially equal assets.” Williamson said that the zero interest rates enacted by the Fed in 2008 and are still in place have not had their intended effect on inflation. Instead, he said, “the relevant long-run determinant of inflation, in a nominal-interest-rate-targeting monetary regime, is the level of the nominal interest rate. Indeed, mainstream monetary theory and the experience of Japan for the last 20 years tells us that extended periods of ZIRP lead to low inflation, or even deflation.”

It is possible, Williamson said, for the Fed to become permanently trapped in ZIRP because of the Taylor rule that dictates how much the Fed should raise rates in response to other economic conditions.

“If the playbook for the Fed’s forward guidance in the post-Great Recession period was supposed to have come from received macroeconomic theory, then it seems clear that the FOMC was not following instructions correctly.”

“With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate,” Williamson wrote. “But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely.”

QE, which consisted of purchases of long-maturity Treasury securities and mortgage-backed securities, has served to increase the Fed’s balance sheet by more than four-fold since before the crisis and substantially increase the average maturity of the Fed’s assets, according to Williamson. But while the Fed’s rationale for QE was articulated by then-chairman Ben Bernanke in 2012, Williamson said that the theory behind QE is “not well-developed.”

“Further there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity,” Williamson wrote. “Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2 percent inflation target.”

Janet Yellen, Chair of the Board of Governors Federal Reserve System

Forward guidance was an attempt on the part of the Fed to provide more explicit information on policy statements instead of letting the central bank’s actions speak for themselves, according to Williamson. Like the ZIRP, however, Williamson says the Fed’s forward guidance may have had the opposite effect of what was intended.

“If the playbook for the Fed’s forward guidance in the post-Great Recession period was supposed to have come from received macroeconomic theory, then it seems clear that the FOMC was not following instructions correctly,” Williamson wrote. “‘Extended period’ is far too vague to have any meaning for market participants; monetary policy rules should be specified as contingent plans rather actions to take place at calendar dates; ‘thresholds’ are meaningless if nothing happens in response to crossing a threshold. Thus, the Fed’s forward guidance experiments after the Great Recession would seem to have done more to sow confusion than to clarify the Fed’s policy rule.

Foreclosure Inventory Rate Drops to Below Pre-Recession Levels

With nearly a 30 percent year-over-year decline in June, the nation’s foreclosure inventory rate—the share of residential homes with a mortgage in some state of foreclosure—is at 1.2 percent, the lowest level since 2007, according to CoreLogic‘s June 2015 National Foreclosure Report released Tuesday.

The foreclosure inventory rate has now declined year-over-year for 44 consecutive months, including June. The 1.2 percent foreclosure inventory rate represented about 472,000 homes, down from 664,000 in June 2014.

Although the national foreclosure inventory rate is back to pre-recession levels, the rate remains high in select areas hit hardest by the crisis, such as Florida and New Jersey.

“The foreclosure rate for the U.S. has dropped to its lowest level since 2007, supported by a continuing decline in loans made before 2009, gains in employment, and higher housing prices,” said Frank Nothaft, chief economist for CoreLogic. “The decline has not been uniform geographically, as the foreclosure rate varies across metropolitan areas. In the Denver and San Francisco areas, the foreclosure rate has fallen to 0.3 percent, whereas in the Tampa market the rate is 3.5 percent and in Nassau and Suffolk counties it is an elevated 4.8 percent.”

The serious delinquency rate—the share of residential mortgages that are more than 90 days overdue, including those that are in foreclosure or REO—also took a substantial drop in June 2015 down to 3.5 percent, about 1.3 million homes, the lowest number since January 2008.

“Serious delinquency is at the lowest level in seven and a half years reflecting the benefits of slow but steady improvements in the economy and rising home prices,” said Anand Nallathambi, president and CEO of CoreLogic. “We are also seeing the positive impact of more stringent underwriting criteria for loans originated since 2009 which has helped to lower the national seriously delinquent rate.”

Completed foreclosures, which are an indication of the actual number of homes lost to foreclosure, dropped by nearly 15 percent year-over-year in June from 50,000 to 43,000. The number of completed foreclosures nationwide in June 2015 represented a 63.3 percent decline from their peak of 117,000 reached in September 2010, according to CoreLogic.

Despite the year-over-year decline and the large dropoff from their peak total nearly five years ago, completed foreclosure bumped up by 41,000 in May to 43,000 in June, which is more than double the monthly pre-recession total. From 2000 to 2006, completed foreclosures averaged about 21,000 monthly. A total of about 5.8 million homes have been lost to foreclosure since the beginning of the financial crisis in September 2008. About 7.8 million homes have been lost to foreclosure since home prices peaked in the second quarter of 2004, according to Corelogic.

Monitor Finds Ocwen’s IRG Issues Have Been ‘Sufficiently Addressed’

Joseph A. Smith, Jr., monitor of the National Mortgage Settlement (NMS), concluded his investigation of Ocwen Financial‘s Internal Review Group (IRG) with the determination that issues surrounding the Atlanta-based servicer’s IRG have been “sufficiently addressed,” according to an announcement from Smith’s office.

Smith announced Tuesday he had filed his final report with the U.S. District Court for the District of Columbia on the investigation of Ocwen’s IRG and of Ocwen’s compliance with the NMS for the first and second quarters of 2014.

Smith’s report includes independent retesting of at-risk metrics and the corrective action plans (CAPs) Ocwen has implemented to address deficiencies. Consumer relief crediting for both Ocwen andSunTrust are included in Smith’s report.

Smith, who is overseeing Ocwen’s compliance with the terms of the NMS, said his team launched an investigation in May 2014 after hearing from an employee about “serious deficiencies in Ocwen’s internal review group process” and issues relating to erroneously dated foreclosure notices to about 7,000 borrowers, which Ocwen blamed on computer errors. The erroneously dated notices resulted in Ocwen reaching a $150 million settlement with the New York Department of Financial Services in December 2014.

“I now have a measure of assurance that issues with Ocwen’s IRG’s independence, competency and capacity have been sufficiently addressed,” Smith said. “Before reaching that conclusion, I ordered independent retesting of at-risk metrics, reviewed changes made to the personnel and governance of the IRG, and reviewed and approved corrective action plans to address failed metrics and a global corrective action plan that intends to fix letter-dating issues. I will continue to closely monitor Ocwen’s compliance with the Settlement agreement and plan to report on Ocwen’s compliance for the third and fourth quarter of 2014 in the coming weeks.”

Independent firm McGladrey LLP reviewed metrics deemed to be at-risk for Q1 and Q2 2014 under Smith’s direction. McGladrey’s findings were “substantially consistent” with those of Ocwen’s IRG. Two failed metrics were discovered for Q1 2014, one found McGladrey and one discovered by Ocwen’s IRG. Ocwen submitted a CAP, which has been approved by Smith, for both failed metrics. Ocwen has also submitted a Global CAP to remedy the issue of the erroneously dated foreclosure notices under Smith’s direction and approval. According to Smith, Ocwen will implement the Global CAP and testing will resume in Q3 2015.

“We are pleased that after more than one year of intense scrutiny and investigation by the Monitor, our original testing was substantially validated,” said Ocwen spokesman John Lovallo. “The Monitor appears to have regained confidence in our Internal Review Group and our overall compliance with the National Mortgage Settlement.”

Consumer Relief Credit

Smith confirmed that Ocwen has provided more than $881 million in consumer relief to 8,861 borrowers through first-lien mortgage modifications as of December 31, 2014, in his first report on Ocwen’s $2 billion consumer relief obligation under the NMS.

“After my thorough reviews, I can confirm Ocwen’s progress of over $800 million toward its consumer relief obligation,” Smith said. “I will continue to report to the public on Ocwen’s consumer relief activities and my reviews as information is available.”

Lovallo issued a statement that Ocwen was “very pleased” with Smith’s first update on Ocwen’s progress toward its consumer relief obligation under the NMS.

“With over two years left to meet our obligations, we have completed 44 percent of the required consumer relief, and we believe we have satisfied most if not all of the remaining principal reduction requirements,” Lovallo said. “We will submit those principal reductions credits to OMSO (Office of Mortgage Settlement Oversight) in the near future. These principal reduction modifications, as well as all our loss mitigation options we offer to our borrowers, are designed to be net present value positive when compared with a foreclosure. In the end, our principal reduction modifications benefit both investors in the loans, and help keep families in their homes.”

SunTrust Bank

Smith also reported that he has credited SunTrust Bank with distributing $7.8 million in consumer relief toward its obligation of $500 million to be provided by September 30, 2017. The initial filing is based on 100 loans submitted by the Atlanta-based through December 31, 2014. This is Smith’s second report on SunTrust’s consumer relief progress.

“SunTrust submitted to me an initial sample of 100 loans to ensure that its testing protocols had been properly designed and implemented,” Smith said. “Based on this early review of relief distributed through year-end last year, I am encouraged by SunTrust’s progress. I will continue to closely review and oversee its consumer relief distribution until the $500 million requirement has been met, and I will make information public as soon as it is available.”

The NMS was originally finalized in April 2012 between 49 states and the District of Columbia, the federal government, and five banks and/or mortgage servicers —Bank of America, Citi, JPMorgan Chase, Parties to GMAC Residential Capital (which was taken over by Ally Financial), and Wells Fargo—to settle claims of misconduct on the part of the servicers involving residential mortgage foreclosures and loan servicing.

The settlement created new servicing standards and providing relief to distressed homeowners as well as funding for state and federal governments. As part of the agreement, the five servicers were required to provide $20 billion in consumer relief and $5 billion in other payments. The settlement is considered landmark because it established the first-ever nationwide reforms to mortgage servicing that include better communication between servicers and borrowers as well as a single point of contact and appropriate standards servicers for executing documents in foreclosure cases.

Ocwen falls under Smith’s supervision due to Ocwen’s acquisition of mortgage servicing rights from a unit of Ally Financial, which took over GMAC Residential Capital (ResCap), one of the original banks included in the settlement. ResCap filed for Chapter 11 bankruptcy in 2013. Ocwen entered into a new consent judgment with the CFPB and 49 states in 2014 that required Ocwen to provide $2.1 billion in consumer relief and comply with standards set forth by the NMS for its entire loan portfolio.

GSEs Have Totaled Nearly 3 Million Home Retention Actions During Conservatorship

Fannie-Freddie-logosFannie Mae and Freddie Mac combined to complete nearly 18,000 home retention actions for distressed homeowners in May 2015, bringing the total since the conservatorship began up to nearly 3 million, according to the FHFA‘s May 2015 Foreclosure Prevention Report released Tuesday.

The two GSEs completed 17,930 home retention actions in May for families facing foreclosure. Those actions included both Home Affordable Modification Program (HAMP) and proprietary loan modifications (14,069), repayment plans (3,040), forbearance plans (721), and charge-offs-in-lieu (100). May’s totals brought the number of home retention actions up to 2,899,632 – only 100,368 short of 3 million – since the fourth quarter of 2008, which was the first full quarter after the FHFA’s conservatorship of the GSEs began.

Fannie Mae and Freddie Mac completed 2,882 non-home retention solutions in May, including short sales (2,088) and deeds-in-lieu of foreclosure (794), bringing to the total of non-retention solutions since the first full quarter of the conservatorship to 620,869. Combined with the nearly 2.9 million home retention actions completed since the conservatorship began, the GSEs have completed more than 3.5 million foreclosure prevention actions.

More than half of the total foreclosure prevention actions completed by the FHFA in nearly seven years (1.82 million) have come in the form of permanent loan modifications, according to FHFA. The share of mods with principal forbearance held steady from April to May at 19 percent, while the share of mods with extend-term declined to 47 percent largely due to improved prices and a declining HAMP-eligible population.

From April 2009, when HAMP began, through the end of May 2015, a total of 1.081 million trial modifications were started. Through the end of May, 5,694 of those trials remained active. Nearly 60 percent of the trial mods (644,917) transitioned into permanent modifications. As of the end of May, 63 percent of the permanent mods (409,119) remain active; about 199,000 of the permanent mods defaulted, while 36,335 were paid off.

Foreclosure starts on GSE-backed mortgage loans ticked up 5 percent from April to May, from 19,500 to 20,561. The share of seriously delinquent loans (90 days or more overdue or in foreclosure) declined from 1.70 percent in April down to 1.65 in May while the share of loans 30-59 delinquent rose up from 1.31 percent (365,000 loans) to 1.47 percent (408,000 loans). The share of loans 60-plus days delinquent or more declined slightly from 2.05 percent (569,000 loans) down to 2.02 percent (561,646). Third-party and foreclosure sales dropped by 8 percent month-over-month in May down to 9,929, according to FHFA.