Research Firm Says Housing Currently Undervalued by 14% to 17%
The sharp fall in residential property prices in the third quarter means that housing in the United States has become even more undervalued, according to the analysts at Capital Economics.
Based on the latest S&P Case-Shiller index, Capital Economics has concluded that house prices are now 17 percent undervalued relative to disposable income per capita. Housing has never before looked as undervalued, the firm pointed out in a research note released to DSNews.com.
Looking at the data included in the index compiled by the Federal Housing Finance Agency (FHFA), residential home prices are 14 percent undervalued, which is also a record, according to Capital Economics.
The housing affordability index from the National Association of Realtors (NAR) remains close to its record high. Capital Economics explained that NAR’s affordability assessment indicates that a median income household with a 20 percent down payment can now more easily afford the monthly mortgage payments on a median-priced home than at any time in the last 30 years.
Rock-bottom interest rates have also helped to bring owning a home within the means of more Americans. Mortgage rates have begun to head upward from half-
century lows in recent weeks, but Capital Economics says the increase has done little to reduce overall affordability.
The firm’s analysts explained that the recent rebound in 10-year Treasury yields has pushed 30-year fixed mortgage rates up from the record low of 4.25 percent seen in October to 4.50 percent. They say the bigger picture, though, is that mortgage borrowing has remained incredibly cheap. According to Capital Economics, anything below 5 percent is a bargain compared with the average mortgage rate over the last 20 years of just above 7 percent.
Such a high level of affordability, however, has done little to drive consumer demand. Capital Economics says the problem is that high unemployment, tight credit conditions, and widespread negative equity are preventing households from taking advantage of cheap financing and favorable valuations.
After rising in each of the previous two months, both existing and new home sales fell back in October, by 2.2 percent and 8.1 percent month-over-month, respectively, according to recent industry stats. Capital Economics notes that total home sales in October were just 14 percent above July’s trough and 17 percent below the 5.7 million annual pace that historical sales rates suggest is normal.
The company’s analysts believe that part of the decline in home sales probably reflects the freezing of foreclosure activity by several major servicers towards the start of October.
Some deals on properties repossessed by lenders likely fell through as banks pulled their inventory from the market. But Capital Economics points out that this dynamic should not have affected new home sales, which implies that the industry’s foreclosure affidavit problems may have hit the confidence of all buyers.
“The housing market recovery appears to have stalled before it even really began,” according to the analysts at Capital Economics.
By: Carrie Bay
Fannie and Freddie Restart Frozen REO Sales
By: Carrie Bay
Both Fannie Mae and Freddie Mac have instructed their selling agents to move forward with transactions involving foreclosed properties in cases where sales were suspended due to potential problems with the legal paperwork.
The GSEs were forced to temporarily halt the sale of certain properties two months ago when news surfaced that some of the nation’s largest servicers – including Bank of America, JPMorgan Chase, and GMAC Mortgage – had been employing robo-signers who failed to comply with clearly defined state laws when handling foreclosure documentation.
Fannie and Freddie also employed the services of the so-called foreclosure mill law firm of David J. Stern in Florida, which is currently under intense investigation for forging foreclosure documentation. Both companies terminated their business dealings with the Stern firm in early November.
The flawed casework from servicers and legal firms has raised questions about the validity of some foreclosure actions and the legitimacy of title ownership in the sale of repossessed homes.
Now that most of the servicers at the center of the paperwork mess have completed a large chunk of their case reviews and found no evidence of improper foreclosures, Fannie and Freddie are moving to proceed with foreclosures and REO sales as customary.
In a memo last week, Fannie Mae told its REO selling agents to “proceed with scheduling and holding the closings” and to direct matters to the appropriate staff “if a title issue arises with respect to the potential defect of an affidavit used in the underlying foreclosure.”
Freddie Mac said in its own memo that agents should “resume all normal sales activity.” The GSE reaffirmed that it will “resume marketing, sales, and disposing of assets previously placed ‘on hold.’”
As of September 30, Fannie Mae’s inventory of single-family REO properties stood at 166,787. Freddie Mac’s REO inventory totaled 74,897 homes at the end of September. Together, the two GSEs hold about a quarter of all bank-owned residential properties in the United States.
LPS: More Than 7M Mortgages Are Delinquent or in Foreclosure
By: Carrie Bay
There are 7,043,000 mortgages in the United States that are at least 30 days past due or in the process of foreclosure, according to Lender Processing Services (LPS).
The company provided the media with a sneak peek at its October month-end mortgage performance data this week. The numbers show the nation’s delinquency rate was virtually unchanged from the previous month’s reading, but foreclosures are on the rise.
Of the more than 7 million home loans in the country going unpaid, 2,090,000 have been referred to an attorney for foreclosure, LPS says. Another 4,953,000 are 30 or more days delinquent but not yet in foreclosure, with 2,238,000 of these at least 90 days overdue.
Based on LPS’ calculations, the nation’s total mortgage delinquency rate – which includes loans at least a month past due but not yet pushed to foreclosure – stood at 9.29 percent as of the end of October.
That figure is up a nominal 0.1 percent compared to the previous month and down 8.4 percent from October 2009.
LPS calculates the foreclosure inventory rate based on loans that have been referred to a foreclosure attorney but have not yet reached the final stage of foreclosure sale. That rate was 3.92 percent at the end of October.
The foreclosure pre-sale inventory rate rose 2.1 percent from September and is up 5.2 percent year-over-year in LPS’ study.
The company’s data show the states with the highest percentage of non-current loans (defined as the total number of foreclosures and delinquencies as a percent of all active loans in that state) include: Florida, Nevada, Mississippi, Georgia, Louisiana, and New Jersey.
The lowest percentage of non-current loans can be found in: Montana, Wyoming, Arkansas, South Dakota, and North Dakota.
LPS’ analysis is based on details pulled from its loan-level database of nearly 40 million mortgages. The company plans to provide a more in-depth review of this data in its October Mortgage Monitor report, scheduled for release November 22.
Mortgage Delinquencies Drop in Third Quarter: MBA
By: Carrie Bay
The nation’s mortgage delinquency rate declined in the third quarter, the Mortgage Bankers Association (MBA) said Thursday, as the job market showed signs of what the trade group’s economic team called “marginal improvements.”
But lenders are still dealing with a massive backlog of defaults, and they stepped up initiations of foreclosure proceedings during the July to September period. Even with an increase in foreclosure starts, MBA says the ratio of home loans in the foreclosure process declined, signaling servicers are pushing unpaid mortgages through the pipeline at a faster pace – some might argue too fast with all the controversy surrounding robo-signing and deficient documentation.
According to MBA’s latest figures, the delinquency rate for mortgage loans on one-to-four unit residential properties dropped 72 basis points from the second quarter to 9.13 percent of all loans outstanding in the third. The rate is down 51 basis points from one year earlier. (The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.)
The percentage of loans on which foreclosure actions were started during the third quarter was 1.34 percent, up from 1.11 percent the previous quarter. Foreclosure start rates increased across all loan types, with prime fixed loans setting a new record high in MBA’s quarterly survey.
According to Michael Fratantoni, MBA’s VP of research and economics, the increase in foreclosure starts is just a “natural progression of defaulted loans moving through the process.”
Total loans in the process of foreclosure equaled 4.39 percent of the nation’s outstanding mortgages at the end of the third quarter, according to MBA’s analysis. That’s down from 4.57 percent in the second quarter and 4.47 percent during the third quarter of 2009.
As more loans exit the foreclosure process, REO inventories are growing. Fratantoni says he expects existing home sales in 2011 to be 4.8 million – roughly the same as in 2010. While that’s not a fast enough pace to bring down the overhang supply, he expects to see home prices stabilize over the next year.
Fratantoni also noted that the industry’s problems with flawed legal paperwork that prompted a number of major servicers to suspend foreclosures temporarily aren’t reflected in the Q3 numbers, but he expects the foreclosure inventory rate to be impacted in Q4 and the first half of 2011.
Based on MBA’s analysis, a total of 13.78 percent of the nation’s mortgages are not current (the combined share of loans at least one payment past due or in foreclosure). That’s down 19 basis points from 13.97 percent last quarter.
MBA says there are about 50 million outstanding first-lien home loans in the United States. That means about 6.9 million are currently past due or in foreclosure. The trade association’s estimates are closely in line with figures released earlier this week by Lender Processing Services (LPS), which put the non-current count at 7 million.
“One of the most important trends in terms of differences across products is the change in the composition of the market,” Fratantoni said, “with a rapidly shrinking pool of subprime and prime ARM [adjustable-rate mortgage] loans, and a significant increase in the number and proportion of FHA [Federal Housing Administration] loans.”
According to MBA’s market data prime fixed and FHA loans currently make up almost 78 percent of loans outstanding and accounted for more than half of the foreclosures started in the third quarter. A year ago, prime fixed and FHA loans made up 39 percent of foreclosure starts.
Compared to its peak around 3 years ago, the number of subprime ARM loans outstanding has decreased by about 50 percent, while prime ARM loans outstanding has declined by about 36 percent. Over the last 3 years, the number of FHA loans outstanding has doubled.
MBA’s report shows that across all loan types, the states with the highest overall delinquency rates were Mississippi (14.13 percent), Nevada (12.88 percent), and Georgia (12.46 percent).
Based on foreclosure inventory, the states with the highest rates were Florida (13.68 percent), Nevada (9.72 percent), and New Jersey (6.73 percent).
Based on foreclosure starts, the three states with the highest rates were Nevada (3.17 percent), Arizona (2.44 percent), and Florida (2.32 percent).
Fratantoni says California is seeing improvement in its delinquency and foreclosure inventory numbers, and that is helping to bring the national numbers down.
5 MORE Foreclosure Myths – BUSTED!
Four years into the housing crisis, myths about foreclosure still litter the minds of even the smartest of real estate consumers. When it comes to matters as high stakes as your home, confusion can cost you thousands – or even your home. Whether you’re a buyer looking at foreclosures, a homeowner struggling to keep your home or a seller concerned making sure your home can compete with the foreclosed homes on your block, these foreclosure myths are prime for the busting, with no further ado.
Myth #1: Foreclosure happens fast. With unemployment and underemployment still affecting nearly 1 in every 4 Americans, no one is immune from fears that a pink slip might quickly turn into a foreclosure notice. According to NeighborWorks America, nearly 60 percent of families seeking foreclosure counseling cited a lost job or cut wages as the reason they were facing foreclosure.
While the Obama Administration’s Home Affordable Programs haven’t been nearly as effective as predicted in actually preventing foreclosures, they have had the effect of extending the foreclosure process for many families. Even though the legal process of foreclosure can happen in as few as 6 months in most states, it is currently taking much longer for the average foreclosure to get to completion. Recently, JP Morgan Chase revealed that their average borrower who loses a home to foreclosure has not made any payments in 14 months nationwide; 22 months in FLorida and 26 months in New York.
To be sure, some see this as a good, others view it as unnecessarily dragging out the overall market’s recovery. Many insiders will point out that these delays in foreclosure may be calculated to save the banks the costs of owning and maintaining foreclosed homes, not to help homeowners. In any event, the fact that foreclosure does not happen nearly as fast, in many cases, as expected does give families who are temporarily down on their luck some extra time to try to get back on their feet and save their homes.
Myth #2: Buyers can’t get clear title or title insurance on foreclosed homes. When the foreclosure robo-signing scandal first hit, there was widespread concern that buyers would not be able to get clear title on foreclosed homes, because the former foreclosed owners might be able to come get their homes back when the improprieties in the bank’s foreclosure documentation processes came fully to light. At the same time, several of the country’s largest title insurance companies publicly balked at issuing policies on bank-owned homes until the issue was resolved. At this point, the banks claim they have revamped their processes, and all banks have stated that they have found not a single borrower whose home was repossessed without them having missed the requisite number of mortgage payments. Nevertheless, a number of governmental investigations are still in progress.
The fact is, buyers of bank-owned properties in nearly every jurisdiction are protected from later title attacks by foreclosed homeowners by the bona fide purchaser rule, under which courts would prefer to simply award cash damages to be paid by the culpable bank to a wrongfully foreclosed-on homeowner, rather than reversing the sale or ownership to the new, innocent buyer. Additionally, the title insurers have now changed their tune and restarted issuing insurance policies on bank-owned homes which protect buyers’ interests, after working with the banks for them to take responsibility in the event a former homeowner prevails in a wrongful foreclosure suit.
While there are still many intricacies of title to be resolved for foreclosure buyers who purchase homes at trustee sales and auctions, or for cash buyers who often went without title insurance in the past, on the average, Trulia-listed, bank-owned property purchased with an average mortgage and title insurance, the chances a buyer’s title will later be successfully challenged by the foreclosed homeowner on the basis of robo-signing? Exceedingly slim.
Myth #3: Buyers should wait for the shadow inventory to be released. Many a buyer, discouraged with the homes they see on the the form in their price range, has decided to sit still and wait for the banks to release for sale what is called their “shadow inventory” – rumored to be anywhere from 4 to nearly 6 million homes that have already been foreclosed, but not listed for sale, or will be foreclosed in the near future. The fact is, to the extent that the banks have acknowledged the existence of a pool of homes they own but are not selling, they have expressed that their reasoning for holding the homes off the market is to avoid flooding the market and driving home values down any further. For that reason, buyers should not expect to see a massive influx of these shadow homes onto the market anytime soon – if ever.
The banks’ current modus operandi is that as they sell a home, the replace it with another home in that market – if they sell 50 homes in a town that month, they’ll put another 50 on the next. So, don’t hold your breath waiting for a fabulous new flood of homes. Instead, set up a Trulia alert to notify you when homes that fit your search criteria come on the market, and be ready to call your agent and go visit any and every one that looks like it might be a good fit.
Myth #4: If you’re looking for a deal, you’re looking for a foreclosure. Despite what they may say, no buyer’s heart’s fondest desire is to buy a foreclosure. But almost every buyer dreams of buying a great home – and getting a great deal on it. Many people think that to get a great value on their home on today’s market, it means they must buy a foreclosure. As a result, the value and other advantages of buying an individually-owned home on today’s market are frequently overlooked. Individual sellers with homes on the market right now are generally quite motivated, and understand that their homes are competing with discounted short sales and foreclosed homes. Many of these sellers are slashing prices in an effort to get them sold – the most recent Trulia Price Reduction Report revealed that 27 percent of homes on the market across the country have had at least one price reduction. Now that’s what I call a sale!
Further, individual owners are often much more negotiable on a wide range of contract terms than a bank which owns a foreclosed home. You can work with non-bank owners on things like repairs, closing dates, choice of escrow provider, closing costs and even included personal property much more flexibly than you can when the bank is on the other side of the bargaining table. On top of that, many individually-owned homes are in pristine, move-in condition; that is much rarer with foreclosures. So, don’t underestimate the value of the deal you might be able to get on a non-foreclosed home. Just get clear on what you can afford and look at all the homes that are available in that price range, without discriminating against non-foreclosures.
Myth #5: Having a foreclosure on your credit history means it’ll take years and years before you can buy again. One of the most Frequently Asked Questions in the Trulia Voices Community by homeowners who are facing or have just lost a home through foreclosure is how long it will take before they’ll be able to buy again. Until recently, the standard wisdom was that 5 years, minimum, would have to have elapsed between the foreclosure and the new home purchase. Now, though, borrowers can obtain an FHA loan with the low, 3.5 minimum down payment requirement as soon as 3 years following a foreclosure. To do so, though, all your other ducks must be in a row.
Post-foreclosure buyers need a credit score of 620-640 to qualify for an FHA loan; higher for a non-FHA loan – given that the foreclosure itself usually dings anywhere from 100-150 points off the credit score (not necessarily counting a full year or more of pre-foreclosure missed payments), former homeowners who want to buy again need to ensure they have no other late payments or credit dings after they lose thier home. You must have clean credit with no derogatory marks like late credit card payments following the foreclosure, and you may also be required to document 12 to 24 months straight of on-time rent payments after the foreclosure.
Further, the bank may impose a lower debt-to-income ratio on post-foreclosure borrowers than on borrowers who have not had a foreclosure, in an effort to keep your mortgage payments low, keep you from overextending yourself and boost the chances you’ll be a successful homeowner over the long-term this time around. The bank will also need to see 2 years of continuous employment history in the same field, and documentation that you meet other loan qualification requirements.
By Tara-Nicholle Nelson
