Residential Mortgage Standards Hold; Non-Traditional Mortgage Use Increases

August 16, 2005 | 2:03 pm | |

There has been a lot written about how lending standards have eased which has help promote the rise in housing prices with non-traditional loans. The Federal Reserve released a report that said US banks eased terms for commercial and industrial loans while residential loans remain unchanged. [Note: Subscription] 20% of domestic banks saw increased demand for mortgages.

The good news is that restrained lending requirements, especial on investor properties, will help keep price growth in check. However, The Fed report seems to contradict the recently released report by the Mortgage Bankers Association [Note: Subscription] which said that lending standards continued to slide.

The Fed Report also said that use of non-traditional mortgages continues to rise.
[Matrix] piggyback loans

Nontraditional mortgage products include adjustable rate mortgages with multiple payment options and interest-only mortgages.

Interestingly, the lenders reported that less than 15% of the mortgages were non-traditional, which is less than the impression given in the media right now. Still, its of concern because highly leverage buyers are less able to weather a market downturn if one were to occur.


Mortgage Fraud: Changing Names on the Appraisal [part 1 of a series]

August 15, 2005 | 4:25 pm | |

Today our appraisal firm received a frantic call from a mortgage broker we occasionally do business with. We have had a number of problems in the past from this firm with being pressured for values so we don’t encourage the relationship. In order to curb the pressure, we require payment in advance for all work from this firm and firms like them.

The call goes like this [names withheld to protect the guilty?]:

Mortgage Broker: The appraiser and supervisory appraiser that signed your report are not approved by the out of state bank we are submitting the report to. The report looks terrific but we need the names changed.

Appraiser: What do you mean? Are other appraisers in our company approved?

Mortgage Broker: Yes, we need you to change the names on the report so we can get this loan done. We send you a lot of business and this is not a big issue.

Appraiser: Sorry, we can’t do that. Do you realize what you are asking?

Mortgage Broker: Yes, and its not a big deal.

Appraiser: No, thats not possible.

Mortgage Broker: Exasperated sigh, [Click]

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FBI sees double the Suspicious Activity Reports

August 15, 2005 | 3:49 pm | |


The Federal Bureau of Investigation received more than double the number of mortgage-related “suspicious activity reports” from 2003 to 2004.

Common mortgage fraud schemes include:

  • Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold.
  • Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Mortgage fraud indicators include:

  • Inflated Appraisals – Exclusive use of one appraiser
  • Increased Commissions/Bonuses – Bonuses paid (outside or at settlement) for fee-based services and/ or higher than customary fees

Mortgage fraud is growing and moving from cities to more rural areas and appraisals using fraudelent information is an important component.

If you look at what causes fraud, it’s a case of economics,” said Bill Matthews, vice president of Reston, Va.-based Mortgage Asset Research Institute, “If you have a frothy market it causes fraud to go undetected.”

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Its Still the Wild West; Kansas on the Cheap

August 15, 2005 | 3:36 pm |

NAR: Housing Affordability Index Down in Second Quarter, Still Favorable

Affordability was largely favorable in the second quarter but higher home prices and mortgage rates more than offset the increase in family income. The West Region shows both higher prices and more highly leveraged transactions. Kansas had the highest affordability for home ownership.

NOTE: This table shows the approximate home price a family earning the specified income could afford making a 20 percent downpayment, with no more that 25 percent of gross income for principal and interest payments. Variables include the type of loan and interest rate.

While the national median sales price of a US home was reported to be $218,900 in June 2005, there was great disparity in the 4 regions covered: Northeast, Midwest, South and West.

  • Northeast $247,500 (21.8%)
  • Midwest $174,500 (16.2%
  • South $190,900 (20.6%)
  • West $322,200 (30.9%)

The West saw an 85% higher median sales price in June than the Midwest did. Not only does the West region have the highest housing prices, but has the highest payment level as a percentage of income, roughly 50% more than the other regions.

A urban development think tank ranked housing affordability by state using median sales price and median household income for 1970 and 2000. They contend that denser urban areas that control growth generally have higher prices.

Kansas was the most affordable place to own a home in the US. Hawaii was the least affordable, nearly 2.7 times that of Kansas.


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Piggyback Loans Pose Higher Risks to Certain Markets

August 14, 2005 | 4:41 pm |

A study by PMI Mortgage Insurance Co. found that piggyback loans may pose risk to the mortgage system; especially vunerable are high priced housing markets. The borrower can use a second mortgage to “finance” a portion of the down payment. This creative financing technique has allowed more purchasers to be more highly leveraged. The study suggests that higher priced housing markets, where the gap between affordability and price is wider, are seeing more of this type of financing and are therefore subject to greater risk in a housing downturn.

USA Today put together the results of the PMI study in the following table.

housingrisktable8-2005

The PMI Risk Index predicts the risk of home-price declines over the next two years using local economic forecasts.

Piggyback loans — so called because a second mortgage is piggybacked on to a first to compensate for a smaller down payment — have become common in recent years as housing prices have appreciated. Approximately 42 percent of home purchase mortgage loan dollars involved piggyback loans during the first half of 2004, up from 20 percent in 2001.

Here is the PMI Report [Note: PDF]

Local media coverage based on risk:


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Supersized Housing With More Amenties

August 14, 2005 | 4:39 pm | |

According to the US Census, the average size of a house in the US is 2,349 square feet, up almost 300 square feet from 1990. We are seeing larger homes coming into neighborhoods called Faux Chateaus [Note: Subscription] or McMansions [Note: Paid Subscription].

Its not just the size thats increasing in new construction, more amenities are being added.

This trend tends to overshadow pricing in the housing market. Larger housing skews the overall market statistics, both median sales price and average sales price, so the rise in prices would be overstated.


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A Bear in a China Shop?

August 13, 2005 | 12:38 am |

Apparently, the Chinese government (The National Development and Reform Commission)was concerned about housing prices back in 2004 which rose 7.7% nationwide last year. In addition, values increased 25% over the period 1998 to 2003 with a 16% market share of investment properties.

The article also said that “The commission Tuesday also said the government’s housing supply is not as balanced because common commercial apartments are not available in large enough numbers, while there is an oversupply of luxury apartments and high-end villas.”

Is it just me, or does this sound familiar? But wait a minute…this is China…”oversupply of luxury apartments and high-end villas?”

Fast forward to the current real estate market in China…

Housing prices in 20 cities fall in July but the average nationwide increase in 70 cities increased 6.4% annually. China, like us has localized markets with different housing trends. 20 out of 70 cities saw falling prices, yet the overall average saw an increase.

Shanghai has observed soaring housing prices in recent years. Its commercial housing prices topped 5,118 yuan (US$617) per square metre last year, about 24.2 per cent or 1,000 yuan, up from the previous year.

Does that sound familiar?

Note: By my conversion calculations, Shanghai averages $6,641 per square foot! Please help me out on this…did I do the conversion correctly? Thats 30% higher than the highest sales in Manhattan on a per square foot (Rupert Murdoch’s $44M penthouse purchase was just north of $5,000 per square foot).


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Yield Curve Enters Kitchen Table Talk

August 12, 2005 | 11:57 pm |

According to Investopedia.com a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”



Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

John Herrmann, chief economist at Cantor Viewpoint, a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is somewhat contrarian. Most economists expect rates to rise as the economy strengthens. But Mr. Herrmann told MSN that mortgage rates could be headed lower – perhaps to 5.25% by the end of the year and eventually “grinding down to 5%” next year.

A deceleration of economic growth, competitive pressure in the mortgage industry, and a trend toward tying 30-year mortgage rates and hybrid loan rates closer to the five-year Treasury rate than the 10-year are all contributing factors, he said.

His reasoning? Without housing, economic growth is way below potential.

More on yield curves to come…


Phew! No Housing Bubble In Canada.

August 12, 2005 | 11:56 pm |

Canadian housing prices are on the rise, but the underlying conditions do not suggest the threat of a bubble similar to that of the late 1980s, according to the Bank of Montreal.

I would hope Bank of Montreal (BOM) learned their lesson from the late 1980’s when they were active construction lenders in the New York market with what appeared to be loose underwriting standards.

BOM says the same things that economists are generally saying in the US: a modest rise in mortgage rates will temper demand but there are concerns about affordability.

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Predatory Lending Results From Overzealous Efforts To Increase Homeownership

August 11, 2005 | 9:40 am | |


Predatory lending has run largely unchecked. Here’s one of the best articles I have seen written on the topic….Wolves in Small Print

excerpt…

Buyers aren’t the only ones screaming. Nationally and in Fort Worth, some of those working in the real estate and mortgage business are also coming forward to charge that the real estate lending business is fraught with fraud. Those professionals say that appraisals are being inflated to buoy up higher housing prices, bigger loans, and higher fees for the industry. First-time home buyers without down payments and with poor credit histories are being pushed through the mill, critics say, and come out the other side with loans they have little chance of repaying. That in turn is pushing foreclosure rates to alarmingly high levels.

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Making Sense of High Housing Prices

August 10, 2005 | 11:11 pm |

Here is an article written by an independent thinktank on public policy initiatives called oddly enough, The Independent Institute

“Making Sense of High Housing Prices” discusses the fact that once governments started adopting land use and urban growth controls, prices began to climb.

Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

In fact, Glaser & Co. did a study on Manhattan housing that asked the question “Why is Manhattan so expensive? (it also refers to a Miller Samuel / NYU research paper).


Besides Newspapers, Housing Bubbles Sell T-Shirts

August 10, 2005 | 10:54 pm |

Not everyone is taking a bath…

mrhousingbubble


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