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Stormy Report on the FHA

November 19th, 2012 by Bill Collins Leave a reply »

Financial Conditions at FHA Worse Than Forecast

On Friday November 16th, HUD released its annual report to Congress on the financial condition of the FHA.  The report indicated that the FHA has current reserves of $30.4 billion but projects losses of $46.7 billion on loans it has guaranteed resulting in a projected deficit of $16.3 billion.  In a news release Friday, the FHA highlighted the fact that the problems largely related to loan originations from 2007 to 2009 and cited reforms taken since then.  The FHA news release noted that:

“This does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury. The need to draw on Treasury funds is determined not by the economic assumptions of this actuarial review but those used in the President’s FY 2014 budget proposal to be released in February, with a final determination on a potential draw made in September. Also, the actuary’s estimate of the Fund’s economic value excludes $11 billion in expected capital accumulation through the end of FY 2013. Finally, HUD’s report includes additional actions designed to contribute billions of dollars in added value to the MMI Fund over the next several years”.

Three factors were cited by the FHA as leading to the downward change in position in comparison with last year and with projections.  The first factor was erroneous assumptions made as to appreciation in housing prices which lagged behind forecasts. Secondly, the decline in interest rates (while considered favorable to the economy) result in many creditworthy FHA borrowers refinancing at lower interest rates leaving those unable to do so projected to default at higher percentages.  Thirdly, refinements in methodology to predict losses from reverse mortgages and defaulted loans have resulted in more pessimistic projections.

Anticipating a political squabble over the audit, HUD Secretary Shaun Donovan attempted to remind critics that:
“FHA has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement, and consumer protections.  During this critical period in our nation’s economic history, FHA has provided access to homeownership for millions of American families while helping bring the housing market back from the brink of collapse to a point where the outlook is positive and recovery is underway.”

The release also quoted FHA Acting Commissioner Carol Galante as saying that:
“While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously. We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

A link to the entire 64 page FHA report to Congress is found here:
HUD Annual Report to Congress (Opens a .PDF File)

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Recovering From Sandy

As the waters recede, damage estimates run upward of $50 billion with several years required to repair and rebuild.  Debates have begun over enacting stricter building codes in flood zones as well as whether to allow rebuilding in many areas.  Appraisers are already facing challenging assignments related to these questions along with evolving buyer preferences as to proximity to the oceanfront and living within waterfront communities.

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Recent Real Estate Reports

Yesterday, the National Association of Realtors (NAR) reported that sales of existing homes increased 2.1% in October from the previous month and were up 10.9% over October of 2011.  Sales increased in all regions of the country both month to month and year to year except for a small decline (1.7%) from last month in the Northeast. The median sale price nationally rose 11.1% from the same month last year to $178,600 with the mix of sales contributing to this gain: just 24% of all sales were distressed transactions (12% short sales and 12% foreclosures) compared with 28% in October of 2011.  NAR calculates that last month short sales sold for an average discount of 20% and foreclosure sales 12%.  First time buyers accounted for 31% of all sales last month in comparison with 34% last October.

The National Association of Home Builders also reported yesterday that builder confidence in the market for new single family dwellings increased markedly to its highest point since May of 2006. 

On November 13th, Realty Trac reported in their U.S. Foreclosure Market Report for October that foreclosure activity increased 3% from the previous month but was down 19% from October of 2011.  Daren Blomquist, Vice President of Realty Trac, is quoted as saying that: “We continued to see vastly different foreclosure trends across the country in October, depending primarily on how each state’s foreclosing infrastructure was able to handle the high volume of delinquent loans during the worst of the foreclosure crisis in 2010”.

Realty Trac noted that the three states with the biggest increase in foreclosure activity last month were the same states impacted by Sandy: New Jersey (+140%), New York (+123%) and Connecticut (+41%).  Fannie Mae and Freddie Mac are reportedly in the process of putting moratoriums into effect which would delay actions by mortgage servicers against homeowners in these three states. 

A link to the Realty Trac news release is found here:
Foreclosure Activity Increased 3 Percent in October

Two days later, the Mortgage Bankers Association (MBA) reported that mortgage delinquency and foreclosure rates declined at the end of the third quarter from the previous quarter and the same quarter last year.  Nationally, 4.07% of loans were in the foreclosure process at the end of the quarter along with an additional 7.03% classified as seriously delinquent.

The report highlighted the gap between the “judicial” states and “non-judicial” states which is wider than at any point since the MBA began tracking this in 2006:  foreclosure rates were at 6.6% in the former and 2.4% in the latter.

On that same day, Federal Reserve Chairman Ben Bernanke issued words of caution regarding the housing market emphasizing the problems of overly tight credit, delinquent loans and underwater homeowners.

Anticipating a housing “fiscal cliff”, the National Association of Realtors (NAR) issued a “call to action” to its membership on November 5th urging extension of tax relief on mortgage forgiveness.  Since 2007, the Mortgage Forgiveness Debt Relief Act has provided exemptions to homeowners from the payment of taxes related to money forgiven by a lender as a result of short sales, loan modifications or foreclosures.  The NAR noted in an email to its membership that: "Over a quarter of all transactions still involve distressed properties. That is why you must take action now.  Homeowners shouldn’t be forced to pay a tax on money they’ve already lost with cash they never received."

The NAR and homebuilder associations have also raised concern about proposals which might eliminate or limit the mortgage interest deduction with Jerry Howard, CEO of the National Association of Home Builders describing the proposal as “chilling the market”.

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Rates & Dates

Mortgage interest rates moved downward in the weekly reports issued by both Freddie Mac and the Mortgage Bankers Association (MBA).

On November 15th, Freddie Mac reported that 30-year fixed-rate mortgages declined from the previous week’s rate of 3.40% to 3.34%, a new record low. They also noted that last year at this time the 30-year rate was 4.00%. 

The MBA in its most recent Weekly Mortgage Applications Survey released November 14th, for the week ending November 9th, reported that 30-year rates with conforming loan balances ($417,500 or less) decreased to 3.52% from the previous week’s rate of 3.61%.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) also decreased from 3.88% to 3.83% as did the average rate for FHA backed mortgages which declined from 3.37% to 3.34%. 

In their press release of November 14th, the MBA reported an increase of 12.6% in mortgage applications.  Refinance applications represented 81% of all applications, up from 80% the previous week. 

Additional information from Freddie Mac can be found by going to: Primary Mortgage Market Survey PMMS – Freddie Mac

Additional information from the Mortgage Bankers Association can be found by going to their site at: Research and Forecasts – Mortgage Bankers Association

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Bill Collins, Appraiser Help Inc.

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