Recent Economic Slowdowns are Eroding Consumer Confidence

The widely reported recent slowdowns in the U.S. economy—only 151,000 jobs added for January and 1.0 percent GDP growth in the fourth quarter, for example—were reflected in the Conference Board’s Consumer Confidence Index for February, which tumbled from 97.8 in January down to 92.2 (1985=100) in February.

Consumers were pessimistic all around in the survey, as the Present Situation Index dropped from 116.6 down to 112.1 from January to February, and the Expectations Index declined from 85.3 to 78.9 during the same period. Over-the-month, fewer consumer said they believe that business conditions are good, while more said they believe that business conditions are bad; more consumers thought jobs were hard to get while fewer consumers said they believe that jobs are plentiful.

Also from January to February, fewer consumers said they believe that business conditions would improve in the next six months, while more consumers said they though business conditions would get worse. The share of consumers who anticipate more available jobs and anticipate an increase in their income in the next six months declined over-the-month, while the share who anticipate fewer available jobs and a reduction in their income increased.

 

“Consumer confidence decreased in February, after posting a modest gain in January,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions weakened, primarily due to a less favorable assessment of business conditions. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects. Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term.”

The findings of the Conference Board survey are in line with other recent economic forecasts. According to Fannie Mae’seconomic outlook released in mid-February, deteriorating financial conditions and increasing global concerns appear to be hindering economic growth despite a forecasted pickup in consumer spending, a relatively healthy labor market, and residential investment and government spending that is strengthening. As a result of the economic slowdowns, Fannie Mae lowered its forecast for the number of rate hikes that will occur in 2016 from three down to two.

“Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term.”

Lynn Franco, the Conference Board

“We believe that the tightening labor market will further boost wages and help increase consumer spending,” Fannie Mae chief economist Doug Duncan said. “Recent survey data reaffirm a relatively healthy jobs market with increased job openings, hires, and quits, as well as decreased layoffs and decent gains in average hourly earnings.”

Also according to the Fannie Mae report, home price appreciation is expected to outpace income growth, but the good news for the housing market is that the home price appreciation will continue to lift underwater borrowers into positive equity.

“We expect our 2016 theme ‘housing affordability constrains as expansion matures’ to hold true as home price gains are likely to outpace household income growth as the year continues,” Duncan said. “However, the expected increase in home prices should help lift underwater mortgages and create a healthier housing market. Meanwhile, increased household formation, low mortgage rates, and easing credit standards and more access to credit for residential mortgages are positive factors for a continued housing expansion. We expect constraints on single-family homebuilding to ease and builders should be able to increase production at a faster pace this year, while the gain in multifamily construction is expected to be more modest than last year.”

The Conference Board reported that the share of respondents planning to buy a lived-in home in the next six months declined over-the-month from 3.7 percent in January to 2.5 percent in February, while the share planning to buy a new home in the next six months also dropped over-the-month from 1.2 percent to 1.1. percent. Despite the monthly declines, however, the trends shown recently in those two categories are climbing from their trough, and February’s level of consumer confidence is relatively high by historical standards, according to the National Association of Home Builders.

The Bureau of Labor Statistics (BLS) will release the February Employment Summary on Friday, March 4. The next Federal Open Market Committee (FOMC) meeting will conclude on March 16.

Existing-Home Sales Recovering From Temporary TRID Setback

Supply and demand troubles have been constant burdens on the housing market in the last few months, and Ten-X.com (formerly Auction.com) predicts that existing-home sales for February will be affected by the lack of options in the market.

Ten-X’s Residential Real Estate Nowcast for February 2016 shows that existing-home sales for February 2016 are expected to fall  between 5.23 and 5.58 million annual sales, with a targeted number of 5.4 million. This number is up 10.4 percent year-over-year, but down 1.3 percent month-over-month.

The January existing-home sales report from the National Association of Realtors (NAR) indicates that sales are well on the path to recovery from TRID delays that have hampered sales since November.  The report found that existing-home sales increased 0.4 percent to a seasonally adjusted annual rate of 5.47 million in January from a downwardly revised 5.45 million in December. Existing sales are now 11.0 percent higher than a year ago, the highest annual rate in six months and the largest year-over-year gain since 16.3 percent July 2013.

“Following the temporary market setbacks brought on by the implementation of the CFPB’s ‘Know Before You Owe’ rules, the latest sales figures indicate that housing is starting off the year on solid ground,” said Ten-X Chief Economist Peter Muoio. “Several positive underlying fundamentals–particularly a stronger labor market and improved household spending power due to reduced energy expenses–should lead to a rise in home sales despite growing global economic concerns and relatively weak GDP growth.”

“Following the temporary market setbacks brought on by the implementation of the CFPB’s ‘Know Before You Owe’ rules, the latest sales figures indicate that housing is starting off the year on solid ground.”

Peter Muoio, Ten-X Chief Economist

According to the NAR, the median existing-home price in January was $213,800, up 8.2 percent from last January’s median price of $197,600. Housing inventory rose 3.4 percent to 1.82 million existing homes available for sale, but is still 2.2 percent lower than a year ago when inventory totaled 1.86 million. Inventory levels remain low at a 4.0-month supply, up slightly from 3.9 months in December 2015.

Ten-X forecasted that sales prices for existing homes will fall between $209,607 and $231,671 in the month of February with a targeted price of $220,639. This will mark a 9.3 percent year-over-year increase.

“Constrained inventory will continue to limit the recovery of the housing market, and it doesn’t seem likely that we’re going to see a surge in the number of homes for sale as the spring home buying season approaches,” said Ten-X EVP Rick Sharga. “As demand appears to be growing–especially in certain geographies–prices are likely to rise, impacting affordability, and leaving homeownership just out of reach for many would-be buyers.”

In a Financial Institution Letter issued on Wednesday, the Federal Deposit Insurance Corporation (FDIC) clarified its supervisory expectations in existing guidance for the risk-management practices when banks make the decision to discontinue foreclosure proceedings, which are commonly known as abandoned foreclosures.

The FDIC noted in the letter that when banks stop the foreclosure process after it has already been started, the borrower may have already abandoned or stopped maintaining the property—which can often lead to accumulation of trash, blight, and crime, and have an adverse effect on the surrounding community.

“The FDIC continues to encourage institutions to avoid unnecessary foreclosures by working constructively with borrowers and considering prudent workout arrangements that increase the potential for financially stressed borrowers to keep their properties,” the letter said. “When workout arrangements are unsuccessful or not economically feasible, existing supervisory guidance reminds institutions of the need to establish policies and procedures for acquiring other real estate that mitigate the impact the foreclosure process has on the value of surrounding properties.”

When making the decision to discontinue the foreclosure process, institutions should have appropriate policies and procedures in place, according to the FDIC’s letter on Wednesday. Institutions should:

  • Obtain and use the most current market value information on the property and use current valuation and other relevant information when making the decision to initiate, pursue, or abandon the foreclosure process
  • Implement criteria for determining when their lien(s) should be released due to the financial considerations they may face due to stopping the foreclosure process. In some cases, the institution may face litigation.
  • Notify appropriate state or local government authorities such as tax authorities, courts, or code enforcement departments of their decision to abandon the foreclosure process, and they must comply with all applicable state and local laws.
  • Notify the borrower(s) that they will no longer be pursuing foreclosure, whether or not the mortgage holder has released the lien, the borrower has the right to occupy the property until a sale or title transfer occurs, and that the borrower is responsible for the remaining balance on the mortgage loan and for maintaining the property.
  • Use reasonable means to contact the borrower in order to provide the notice described above, particularly in cases where the borrower vacated the property because the foreclosure process was initiated.

Lawmakers to HUD and FHFA: Get with the Program

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A group of 45 members of the U.S. House of Representatives led by Rep. Mike Capuano (D-Massachusetts) has written a letter to HUDSecretary Julián Castro and FHFA Director Mel Watt asking the regulators to make changes to improve their respective agencies’ non-performing loan (NPL) sales programs.

These programs have come under criticism in the last year from lawmakers and other various groups because of the large volumes of loans that are being sold to private equity firms and investors. Capuano and Sen. Elizabeth Warren (D-Massachusetts) led a protest to this effect in September in Washington, D.C. and met with housing regulators (including Watt) to discuss possible improvements to agency NPL sales practices.

The group of lawmakers expressed concern in their letter that the agencies’ tendency with NPL sales was to sell thousands of deeply delinquent mortgage loans to the highest bidder “without sufficient attention to potential outcomes for homeowners, communities, and the affordable housing missions,” of both HUD and the FHFA.

“We are concerned that this approach represents a huge missed opportunity to prioritize neighborhood stabilization, help alleviate the affordable housing crisis in communities across the country, and to work with organizations that have a track record of preserving homeownership,” the Representatives wrote.

In the letter, the lawmakers made four recommendations for improving agency NPL sales programs:

  • Disqualify participation from “bad actors,” or those who “pay lip service to legitimate loan modification requirements while engaging in unfair and abusive practices towards borrowers.” The lawmakers said these entities “should not be able to use government programs to profit from the continuing legacy of the financial and foreclosure crisis.”
  • Make the programs “as transparent as possible,” requesting that the agencies “clearly spell out the criteria you use to determine which properties go into which pools and why.” The lawmakers claim it is impossible to determine how the pools are constructed, how properties are assigned to different pools, and how vacant properties are treated versus occupied properties.
  • Recognize the added value provided by purchasers who commit up front to foreclosure prevention efforts and property disposition strategies that prioritize affordable housing. The lawmakers stated that “the work these entities do to rehabilitate these properties and achieve favorable outcomes for neighborhoods should not be discounted as immaterial to the price that your agencies will accept.”
  • Bring state and local governments, including state and local housing finance agencies, into the process. The lawmakers said they were concerned that state and local governments “have not to date been consulted in any meaningful way as to how these programs should be structured, what impact bulk sales could have in their jurisdictions, what role states and localities can play in these programs, or at minimum, if there has ever been a process established for notifying states and localities of upcoming sales of properties in their jurisdictions.”

Both Fannie Mae and Freddie Mac feature smaller, geographically-concentrated pools of loans in their NPL auctions that are targeted for participation by non-profits. Fannie Mae has sold two such pools of loans to non-profit New Jersey Community Capital. In their letter, the lawmakers called this a “step in the right direction.”

This letter was not the only one recently written by lawmakers to Castro about agency NPL sales practices. In early February, U.S. Sen. Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, and U.S. Rep. Elijah Cummings (D-Maryland), Ranking Member of the House Committee on Oversight and Government Reform, wrote a letter to Castro asking the Secretary for more information on foreclosure prevention options available to the borrowers on loans sold through HUD’s Distressed Asset Stabilization Program (DASP).

Also in early February, elected officials and community leaders in cities all over the country rallied to protest the sales of deeply delinquent mortgage loans by Fannie MaeFreddie Mac, and HUD to Wall Street investors and speculators. Baltimore, Philadelphia, New York, East Orange, New Jersey, and San Francisco were some of the cities that participated.

“We are concerned that this approach represents a huge missed opportunity to prioritize neighborhood stabilization, help alleviate the affordable housing crisis in communities across the country, and to work with organizations that have a track record of preserving homeownership.”

Both HUD and FHFA, which is the conservator for Fannie Mae and Freddie Mac, announced enhanced rules for the sale of non-performing loans in 2015. HUD now requires the buyer of the loans to delay foreclosure for at least a year and to evaluate the borrower for loss mitigation possibilities. FHFA announced in March 2015 a set of more stringent guidelines for NPL buyers which call for bidders to identify servicing partners at the time of qualification and complete a questionnaire to demonstrate a record of successful loan resolution through foreclosure alternatives. As part of the new requirements, servicers who purchase non-performing Agency loans must apply a “waterfall of resolution tactics” before resorting to foreclosure.

“The guidelines require NPL purchasers to evaluate all borrowers for loan modifications and to pursue foreclosure only as a last resort,” an FHFA spokesperson told DS News in September. “Fannie Mae and Freddie Mac have been very transparent about their NPL sales programs and have hosted training sessions encouraging non-profits and minority- and women-owned businesses to participate as NPL buyers. This is evident by Fannie Mae’s recent sale of NPLs to New Jersey Community Capital.”

Edward Golding, Principal Deputy Assistant Secretary of the Federal Housing Administration, said of the meeting with Warren, Capuano, and advocacy groups in September, “We discussed how HUD and FHA might make better use of one of its tools, the Distressed Asset Stabilization Program (DASP), to further the Department’s goal of stabilizing communities  and assisting them as they, and their public-minded partners, work to address severely distressed mortgages that are on the verge of foreclosure. FHA recently made significant changes to this program, including expanding our outreach to participating nonprofit organizations and requiring a 12-month delay in finalizing any foreclosure action to allow struggling families a greater opportunity to remain in their homes or find another sustainable housing solution.”