by Calculated Risk on 12/14/2011 07:07:00 PM

I missed this last week from Adam Belz at the Des Moines Register: Iowa AG says mortgage settlement should be done by Christmas (ht Kevin)

Iowa Attorney General Tom Miller said Thursday a settlement between almost all state attorneys general and the five largest mortgage servicers should be finalized before Christmas, with or without California.

The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities.

In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions, and cash payments to some homeowners who’ve alrady gone through foreclosure.

And from Bloomberg today: Ex-Cuomo Aide Said to Be Among 4 Foreclosure-Monitor Candidates

Steven M. Cohen, who was the governor’s secretary, is one potential foreclosure monitor, according to the person, who declined to be identified because the negotiations are secret. That person said North Carolina Commissioner of Banks Joseph A. Smith Jr. is also a candidate, as did a second person who asked not to be identified.

Selection of a monitor is one of the final issues to be worked out between the banks and state and federal officials, said the people. Selection of the monitor is a key issue for the regulators because success of the agreement will largely depend on his or her work, one of the people said.

Other candidates are Nicolas P. Retsinas, a former assistant secretary of the U.S. Department of Housing and Urban Development, and ex-Federal Deposit Insurance Corp. Chairman Sheila Bair, one of the people said.

The discussion of possible principal reductions is too optimistic. They are discussing something like a $25 billion settlement (including California) and only a portion would be for principal reductions. Currently, according to CoreLogic, homeowners with negative equity (including 2nd liens) are an aggregate $699 billion underwater. Even if the entire settlement went to principal reductions, the average underwater homeowner would only see a few percent of their negative equity eliminated.

The major impact from this settlement on the housing market would be to reduce the number of seriously delinquent loans - either by modifications (including principal reductions) or through foreclosures. Currently, according the LPS, there are 1.76 million loans 90+ days delinquent (not in foreclosure) and another 2.21 million loans in the foreclosure process. I'd expect those numbers to decline fairly rapidly next year following a settlement.

by Calculated Risk on 12/14/2011 05:00:00 PM

Some headlines ...

From the WaPo: Greece is slipping on reforms, IMF warns

From the WaPo: UK’s unemployment increases to highest level in 17 years as austerity measures bite

From the Financial Times: Dive in deposits at foreign-owned banks in US

From the WSJ: Strains Remain in Interbank Market Despite Cheap Dollars

From CNBC: Fitch Downgrades Five Major European Commercial Banks and Banking Groups

It might be time for another summit.

by Calculated Risk on 12/14/2011 01:40:00 PM

The Federal Reserve released the Q3 2011 Household Debt Service and Financial Obligations Ratios yesterday. (ht Bob_in_MA) I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.
...
The homeowner mortgage FOR includes payments on mortgage debt, homeowners' insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases

This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:

The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only a rough approximation of the current debt service ratio faced by households. Nonetheless, this rough approximation may be useful if, by using the same method and data series over time, it generates a time series that captures the important changes in household debt service payments.

Click on graph for larger image.

The graph shows the DSR for both renters and homeowners (red), and the homeowner financial obligations ratio for mortgages and consumer debt.

The overall Debt Service Ratio has declined back to 1994 levels - thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt is also at 1994 levels.

However the homeowner's financial obligation ratio for mortgages (blue) is still high and will probably continue to decline. This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to 2003 levels.

by Calculated Risk on 12/14/2011 11:48:00 AM

Over the last few days, there has been some more discussion on the current number of excess vacant housing units in the United States.

There are always a large number of vacant housing units - this includes second homes, housing units for rent, homes sold but not yet occupied, and several other categories. The key is the "excess". Once the excess is absorbed in a local area, then new construction will pickup (we are already seeing an increase in apartment construction in many areas).

Here is the recent discussion, first from an article by Catherine Rampell over the weekend in the NY Times:

Household formation has slowed dramatically since the recession, as cash-strapped families double up and unemployed recent college graduates are unable to leave behind their parents’ couches. To judge just from demographic statistics, more than a million households that should have been formed in the last few years weren’t, according to Mark Zandi of Moody’s Analytics.

The tally of missing households is approximately equal to the country’s current surplus of vacant homes.

Dean Baker responded: Mark Zandi and the NYT Hugely Underestimate the Number of Vacant Homes

The NYT cited Mark Zandi as saying the number of vacant homes is roughly 1 million, which he puts as equal to the gap in household formation that resulted from the recession. According to the Commerce Department, if the vacancy rate was back at its pre-bubble level, there would be 3 million fewer vacant units.

Unfortunately Dr. Baker is using the Census Bureau's Housing Vacancies and Homeownership (CPS/HVS) survey, and there are serious questions about this survey. See Be careful with the Housing Vacancies and Homeownership report and Lawler to Census on Housing Data: "Splainin" Needed Not Just on Vacancy Rate. The HVS is based on a fairly small sample, and does not track the decennial Census data. Dr. Baker's estimate of 3 million excess vacant housing units is probably far too high.

Using the Census 2010 national data, Tom Lawler estimated "a number in the 1.6 to 1.7 million range seems about right.” (as of April 1, 2010) and "probably in the 1.2 to 1.4 million range on May 1, 2011."

Using the Census 2010 state data, I estimated that the number of excess vacant housing units was above 1.8 million on April 1, 2010 (the date of the Census). See: The Excess Vacant Housing Supply. The number of excess units is lower today - even with sluggish household formation - because the builders are completing a record low number of housing units this year.

Lawler's most recent estimate was as of May 1, 2011. We can walk that forward to today. The decline in the excess vacant housing units is equal to new households formed, minus completions, minus scrappage (demolitions). Completions are still at record lows, and the excess vacant housing supply has probably declined conservatively by another 200 to 300 thousand units over the last seven months - so the excess vacant housing supply is probably close to 1 million or so as the NY Times reported.

by Calculated Risk on 12/14/2011 08:38:00 AM

From the MBA: Refinance Applications Increase as Rates Drop to 2011 Lows

The Refinance Index increased 9.3 percent from the previous week to its highest level since November 4, 2011. The seasonally adjusted Purchase Index decreased 8.2 percent from one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.12 percent, the lowest rate this year, from 4.18 percent, with points decreasing to 0.45 from 0.48 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. ...

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500)decreased to 4.47 percent, the lowest rate this year, from 4.52 percent, with points decreasing to 0.45 from 0.47 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. ...

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image.

The purchase index decreased last week, but the 4-week average increased slightly. This index has mostly been sideways for the last 2 years - and at about the same level as in 1997.

The MBA index was one of the indicators that NAR was overestimating existing home sales for the last several years.

All current Existing Home Graphs