Thursday, January 17, 2013

Friday: Consumer Sentiment, State Employment

by Bill McBride on 1/17/2013 09:18:00 PM

First from Merrill Lynch on more mortgage credit: "Housing heats up"

[W]e believe recent developments on mortgage policy and mortgage servicing could lead to loosening of credit, providing further upside momentum for prices. We highlight three important steps forward the mortgage market has made.

One major development was the announcement of the final definition of a Qualified Mortgage (QM) by the Consumer Finance Protection Bureau (CFPB). The rule focuses on a borrower’s ability to repay, setting a 43% back-end debt-toincome ratio (DTI) as a clear upper boundary. By adhering to this guideline and avoiding risky loan features (such as IO, neg am, balloons, etc.) for prime quality borrowers, lenders can claim a “safe harbor” from future litigation from borrowers. ...
...
[R]elease of the QM definition is an important step forward that should enable lenders to increase their willingness to make residential mortgage loans.

Additionally, ten mortgage servicing companies ... reached an agreement in principle with regulators ... As a result of this agreement, the participating servicers would cease the Independent Foreclosure Review, which involved case-by-case reviews, and replace it with a broader framework allowing eligible borrowers to receive compensation significantly more quickly. We believe the end of this Review process should free up and create aggregate servicing capacity that could be used for other activities such as moving distressed loans through the pipeline more quickly and processing refinancing applications, suggesting higher voluntary and possibly involuntary prepayments in the future.

Furthermore, Fannie Mae announced a comprehensive resolution with Bank of America ... The resolution included Fannie Mae’s approval of Bank of America’s request to transfer the servicing rights of approximately 941,000 loans to specialty servicers. Bank of America also announced that it signed definitive agreements with two different counterparties to sell the servicing rights on certain residential mortgage loans serviced for Fannie Mae, Freddie Mac, Ginnie Mae, and private label securitizations, with an aggregate unpaid principal balance of approximately $306 billion. Our view is that these transfers effectively act as an injection of servicing capacity into the industry, which should allow for more refinancing activity, more loss mitigation activity and, ultimately, loosening of mortgage credit.
More credit availability is one reason Merrill Lynch increased their house price forecast for 2013 to 4.7% (up from 3.0%).

Friday economic releases:
• At 9:55 AM ET, Reuter's/University of Michigan's Consumer sentiment index (preliminary for January). The consensus is for a reading of 75.0, up from 72.9.

• At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for November 2012

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