Ask the Economist: The Contracting Housing Market

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Nela Richardson, Chieif Economist for Refin, joined Redfin from Bloomberg LP, where she was a Senior Economist with Bloomberg Government. She has also held research economist positions at the Commodity Futures Trading Commission, Harvard University’s Joint Center for Housing Studies and Freddie Mac. Nela leads the Redfin research team and is a frequent guest expert on housing and economic issues for local and national media

Richardson recent spoke with DS News about her views on the current housing market as well as innovation in the mortgage industry.

You spoke recently of the housing market contracting inside of bubbling. What do you think the future of the market will look like with this contraction?

I think there is going to be less turnover. One of the strengths of the U.S. Labor Market is that it has been supported by a very active, very mobile workforce. Part of that is because historically it has been very easy for people to buy and sell their homes and move to where the jobs are. I think along with other thinkers that it looks to be that this is not going to keep going at the same amount we have seen in the future. This means that turnover will be less. Because inventory is so low, people are a little timid about selling their house and a little afraid of not finding a new home is a new location. There is also the issue of the prices being too high in the location where the home is. Overall, this low turnover in the long run might impact the labor market simply because people can’t move because of various housing restraints to where the jobs are.

 

What does the housing market look like in regard to sales, and you spoke of less investors in the market so what impact does that have to the market as a whole?

Year-to-date sales are up and in fact we will have the best year in housing since the bust. But recently we have seen some slowness in the market. The last month we saw a drop year over year so what we think is happening in the second part of the year is that low inventory is actually putting a lid on sales. We could have much stronger sales than we do right now if there was more inventory because buyer demand is high.
For the buyer, having less investors is a good thing because it means less competition. In a market that has such low inventory, it is good to have less competition. At the low end though, for the affordable homes you do see more investors and that is a challenge to first time buyers. This is because whenever there is an affordable home that comes into the market, the agents say that you see first time buyers, high end buyers and investors because that property has such potential as a rental property. First time buyers are not only competing with themselves for affordable housing but they are also competing with investors who want to turn the properties into rentals and high end buyers who want a second home to turn into a vacation home or Airbnb.

 

What are some of the mistakes you are seeing post-crisis in the market and in the mortgage industry?

One, we need more lending to new construction, not less. We’ve seen recent data show that things are pulling back from multifamily, and that is back news because that trickles down to all segments of the housing market. When there is less in the market whether that is rental or for sale that makes it harder for buyers and renter to find homes in their price range. We need more new construction and lending. Second, we are not overbuilding but we are also not meeting the demand for starter homes. First time buyers, millennials are not finding a lot in their price range whether it’s condos or single family homes because they’re not building there and homeowners aren’t listing at that price range. Third, the for-sale market has never been faster. Technology has really added homebuyers. And yet in the mortgage market we are seeing exactly the opposite. The mortgage market has not kept up with the pace of housing and that is a big mistake. During the crisis, the mortgage market could have outrun the fundamentals of housing but now it is lagging.

 

Why do you think the mortgage industry might be reluctant to innovation?

Regulations, Risk, and Repercussions, the three R’s. In a low rate environment like we have now this is the time where you should see innovation in the mortgage market but I think the industry hasn’t figured out how to have financial innovations and in a safe way. A lot of the mortgage market is unwilling to take the risk because of regulations and the cost of making a mistake. The justice department won several lawsuits from banks and I think banks are really worried about the repercussions of making a mistake, running out of bounds of regulation, not having clear lines of what is tolerable and what is not in terms of risk and for that reason they’re afraid to take a bet on the American consumer and the future homebuyer of whether they’re first time or millennial. The banks right now I think like to stay on the safe end of the pool and so we are not seeing a lot of innovations right now. We are not even seeing a lot of loosening right now. There was a little bit last year but banks are pretty much holding steady on their underwriting standards. Some people would argue that this is great and we should have tight underwriting and it should be hard to get a mortgage because we should make homeownership aspirational enough that people make sound decisions. While I don’t disagree with that, I still think that it is too hard to get a mortgage for most middle class families.

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Urban Institute: Improving GSEs’ Risk Sharing Effort

The credit risk transfer (CRT) process has come a long way since the GSEs began their de-risking effort more than three years ago, according to a recent brief produced by the Urban Institute. They state that in the early CRT deals, the GSEs transferred only synthetic mezzanine risk to a relatively small group of investors in capital market transactions, but now the GSEs are transferring first loss and mezzanine risk to a broader range of investors. Urban Institutes states that the GSEs and the Federal Housing Finance Agency, have accomplished a lot in a short period of time.

The authors of the brief note, though, that in order to fulfill its significant potential, CRT still has a way to go. They share that their primary criticism of the framework is that it focuses almost exclusively on how various risk sharing structures might effectively reduce the current risk to the GSEs. Additionally, they state that they feel the FHFA focuses too little on how such structures might contribute to a housing finance system that is more stable and robust over time, and not at all on how these structures might impact consumers or the broader financial system. They then offer their thoughts on what they feel is the best path forward within a broader framework.

The brief says that to date, credit risk transfers have been dominated by back-end transactions to transfer mezzanine risk to capital markets. The authors report that as of the end of 2015, the GSEs have transferred at least some of the risk on $693.2 billion of unpaid principal balance through Fannie Mae’s Connecticut Avenue Securities as well as Freddie Mac’s Structured Agency Credit Risk transactions. They compare this with only $131.1 billion through their back-end insurance and re-insurance transactions, and $12.7 billion through front-end risk sharing.

Urban Institute goes on to recommend expanding the CRT effort to include greater focus on a wider range of structures and sources of private capital to provide the broader experience and price discovery needed to understand what mix of structures and sources of capital will best serve the housing finance system, not just today but through the business cycle and over the long term. The authors state that these include lender recourse transactions across lenders of all sizes, deep cover mortgage insurance, back-end capital market transactions by loan-to-value ratios and credit score ranges, and catastrophic risk transfers.

Urban Institute states that this expanded vision for CRT will extend the experimental phase of the exercise, but they note that now is the time to help answer the critical questions about who should take risk ahead of the taxpayer and how, so that when legislators return to the question of long-term reform they are informed with what Urban Institute feels is needed to lead them down the right path.

They also state that although they believe their recommendations are consistent with the FHFA’s existing authority, if the FHFA believes that any are not, then they suggest that FHFA work with Congress. The brief states that given the broad bipartisan support for its objectives, Urban Institute feels it is likely to find a receptive audience.

First Post-Crisis Fitch-Rated RMBS Class Has Been Paid

Paying Money One BHThe first post-crisis, Fitch-rated RMBS class backed in part by non-performing loans has been paid in full, according to a recent report from Fitch Ratings.

The report states that the Class A-1 from Mortgage Fund IVc Trust 2015-RN1 received the remainder of its unpaid principal balance with the August 2016 distribution. Fitch Ratings states that the transaction closed in October 2015, with a $35 million class A-1 rated ‘Asf’ by Fitch. At issuance, Fitch Ratings shares that approximately one-third of the mortgage loan pool was 90 or more days delinquent or in foreclosure, with an additional 14 percent of the mortgage loan pool 30-60 days delinquent. The report says that it was the first post-crisis RMBS transaction rated by Fitch that contained a significant percentage of non-performing loans.

Additionally, the report notes that the percentage of the pool that is 90 or more days delinquent, including foreclosure and REO, has declined since issuance from roughly one-third to one-quarter of the remaining pool. They also share that loss severities on liquidated loans to date have averaged approximately 37 percent. This outperformed Fitch Ratings’ base-case lifetime severity assumption at issuance of 55 percent.

Fitch Ratings also reports that the transaction has a sequential principal payment waterfall, in which class A-1 received all scheduled and unscheduled principal payments before class A-2 received any principal payments. In addition, in the year since it was issued, Fitch Ratings says that class A-1 received monthly principal payments averaging roughly $3.4 million. They also note that the mortgage pool has incurred roughly $20.8 million of realized losses since issuance, comprising $14.4 million of loss from liquidations and $6.4 million of loss from deferred principal modifications.

Finally, Fitch Ratings says that Class A-1 was well protected against realized pool losses to date. In addition to the $205 million of credit enhancement provided by the unrated class A-2, they stats that classes A-1 and A-2 also had roughly $111 million of overcollateralization at issuance to absorb collateral losses. Additionally, the initial credit enhancement was significantly above the amount needed to support the initial credit rating of ‘Asf.’

Mortgage Complaints Sit Lower on CFPB Complaint List

Complaint BHAs the Consumer Financial Protection Bureau (CFPB) approaches one million complaints handled in its five-year history, mortgages have taken a back seat behind debt collection as the most complained-about financial product, according to theBureau’s latest monthly complaint snapshot released Tuesday.

As of August 1, 2016, the CFPB has handled approximately 954,000 complaints on various financial products. For the longest time, mortgages were the most complained-about product, but they were recently surpassed by debt collection complaints. The CFPB began accepting complaints about mortgages on December 1, 2011, and has since handled nearly a quarter of a million (239,703) complaints. The Bureau began accepting complaints about debt collection a year and a half later, on July 10, 2013, but has accepted more complaints in that category (254,773) than mortgages or any other category in just three years.

Mortgages were the third-most complained about financial product in July 2016, according to the report. First was debt collection (6,546) and second was credit reporting (5,382). In July, the Bureau took in 3,910 complaints about mortgages. These three categories combined for about two-thirds of the complaints the Bureau received in July.

The monthly complaint snapshot highlighted bank account or service complaints, on which the Bureau has received approximately 94,200 complaints in the last five years.

“Complaints about the use of consumer and credit reporting data for account screening are increasingly common,” the report stated. “Consumers frequently mention learning of a furnisher’s past negative reporting to both specialty checking account reporting and national credit reporting companies when they attempt to open a new bank account.  Consumers also express concern over the difficulty that they have addressing potential errors on their reports.”

The three main credit reporting agencies, Equifax, Experian, and TransUnion, were the top three complained-about companies in July, with complaint totals of 1,430; 1,247; and 1,077. The company that has received the most complaints over five years is Bank of America with 57,199.

Fannie Mae’s Serious Delinquency Rate Declines

Fannie Mae BHHaving fallen below its 2016 cap of $339.3 billion in March, Fannie Mae’s gross mortgage portfolio contracted further in both April, May June and now July, shrinking at an annual rate of 24.7 percent and serious delinquency decreased 2 basis points, according to Fannie Mae’s July 2016 Monthly Volume Summary.

Fannie Mae’s serious delinquency rate, or the share of loans backed by Fannie Mae that were seriously delinquent, declined by two basis points from June to July down to 1.30 percent. Fannie Mae completed 6,958 loan modifications in July, down from 7,629 in June.

The 24.7 percent rate of contraction in July was almost five times the rate of shrinkage in June and 5.1 percent. With July’s contraction, the aggregate unpaid principal balance (UPB) of Fannie Mae’s gross mortgage portfolio was $308.88 billion at the end of the month—down by about $6.6 billion from June, according to Fannie Mae. The portfolio has declined at an annual rate of 17.3 percent over the first seven months of 2016.

Fannie Mae’s total book of business, which includes the gross mortgage portfolio plus total Fannie Mae mortgage-backed securities and other guarantees minus Fannie Mae MBS in the portfolio, increased at a compound annualized rate of 0.2 percent in July up to a value of about $3.103 trillion, according to Fannie Mae.

In January 2016, Fannie Mae’s gross mortgage portfolio experienced a rare expansion, increasing at an annual rate of 5 percent. With July’s contraction, the portfolio has now contracted in all but four months since June 2010. The four months in which the portfolio expanded were January 2016, March 2015, January 2015, and December 2012. At the beginning of that stretch in June 2010, the amount of unpaid principal balance (UPB) of the loans in the portfolio was $818 billion

Distressed Sales Drop Down in May

Distressed sales, which include REO and short sales, accounted for 8.4 percent of total home sales nationally in May 2016, according to a recent report from CoreLogic. This was a decrease of 2.1 percentage points from May 2015 as well as a decrease of 1 percentage point from April 2016.

The report states that within the distressed category, REO sales accounted for 5.4 percent of total home sales in May 2016 and short sales accounted for 3 percent. CoreLogic also shows that the REO sales share was 1.7 percentage points below that of May 2015. It is also the lowest for the month of May since 2007. Additionally, the short sales share fell below 4 percent in mid-2014 and has remained in the 3-4 percent range since then.

CoreLogic says that at its peak in January 2009, distressed sales totaled 32.4 percent of all sales with REO sales representing 27.9 percent of that share. They state that while distressed sales play an important role in clearing the housing market of foreclosed properties, they sell at a discount to non-distressed sales, and when the share of distressed sales is high, it can pull down the prices of non-distressed sales. Additionally, the report notes that there will always be some level of distress in the housing market, and by comparison, the pre-crisis share of distressed sales was traditionally about 2 percent. CoreLogic believes that if the current year-over-year decrease in the distressed sales share continues, it will reach a “normal” mark of 2 percent by mid-2019.

In a further breakdown of the data, CoreLogic reports that all but eight states recorded lower distressed sales shares in May 2016 compared with a year earlier. Specifically, they say that Maryland had the largest share of distressed sales of any state at 19.4 percent in May 2016, and this was followed by Connecticut at 18.5 percent, Michigan at 17.8 percent, Illinois a 16 percent, and finally Florida at 15.8 percent.

In contrast, CoreLogic reports that North Dakota had the smallest distressed sales share at 2.5 percent. They also report that oil states continued to see year-over-year declines in their distressed sales shares in May 2016. Specifically, Texas saw a 1.3 percentage point decrease, and Oklahoma and North Dakota both saw a 0.1 percentage point decrease. In addition, Florida had a 5.5 percentage point drop in its distressed sales share from a year earlier. This was the largest decline of any state.

California had the largest improvement of any state from its peak distressed sales share. It fell 60.4 percentage points from its January 2009 peak of 67.5 percent. CoreLogic reports that while some states stand out as having high distressed sales shares, only North Dakota and the District of Columbia are close to their pre-crisis levels Both are within one percentage point of those pre-crisis levels.

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The Week Ahead: All Eyes Watching the Jobs Report

The industry will be watching closely for what will be the last employment situation from the Bureau of Labor and Statistics before the next Federal Open Market Committee meeting on September 20-21. Job gains in June and July were solid after May’s disappointment; even with the May report calculated in, job gains still averaged 190,000 over the three-month period from May to July.

“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in a speech in Jackson Hole on Friday. “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

Economists and analysts widely praised July’s Employment Situation not just for the headline number, but also for the majority of the data contained within.

“It’s rare to have a jobs report with a strong headline, yet so few blemishes in the details, and we got one today,” Fannie Mae Chief Economist Doug Duncan said. “With upward revisions to prior months’ job gains, annual wage growth tying a seven-year best, an improved participation rate, and a longer workweek, the report gives support to those on the Fed hoping to increase rates this year, especially if the numbers are supported in future releases. The report should help soothe concerns over the health of businesses, which have seen sustained declines in capital expenditures.”

Which Way Will Pending Home Sales Go?

Inventory and affordability constraints, along with uneven regional numbers, hampered what was supposed to have been a boost to mortgage activity in June, leaving pending home sales slightly up but essentially flat for the month in the last pending home sales report released in late July.

The industry will find out how pending home sales fared in July when that month’s report is published on the morning of Wednesday, August 31.

June’s Pending Home Sales Index from the National Association of Realtors (NAR) reported that, based on contract signings, pending home sales inched up 0.2 percent to 111 in June. This also is 1 percent higher than June 2015, but is noticeably down from this year’s peak level in April, 115. June, however, was the second-highest reading in a year.

This week’s schedule

Tuesday, August 30
S&P CoreLogic Case Shiller Home Price Index for June 2016, 9 a.m EST
Consumer Confidence for August 2016, the Conference Board, 10 a.m. EST

Wednesday, August 31
Pending Home Sales Index for July 2016, National Association of Realtors, 10 a.m. EST

Friday, September 2
Employment Situation for August 2016, Bureau of Labor Statistics, 8:30 a.m. EST