Refinance Free Credit

Most of us know that foreclosures can be a problem for homeowners and their neighborhoods, but a new report released Wednesday details the pain now being felt by renters, as rents continue to increase and many find themselves caught in a foreclosure they had nothing to do with.

“Today, investor-owned one- to four-family rental properties account for nearly 20 percent of all foreclosures,” said Nicolas P. Retsinas, director of the Harvard University’s Joint Center for Housing Studies, which produced the report. “Moreover, because many of the high-risk home purchase and home refinance loans now in default are concentrated in low-income and minority communities, the fallout from foreclosures is hitting the same neighborhoods where many of the nation’s most economically vulnerable renters live.”

That renters are caught in foreclosure likely won’t surprise anyone; but the Harvard study does uncover some other interesting trends that might be less intuitive, at first glance.

The number of renter households jumped by nearly one million last year, or more than four times the pace of renter growth over the 2003 to 2006 period, according to the Joint Center report. Despite the growing signs of economic weakness, monthly rents last year reached a record high of $775, as well. The result is a rental population that’s growing dramatically and quickly, but finding fewer and fewer opportunities to rent what they can afford, Retsinas said.

Part of the problem is that investors are demanding higher rents for single-family and condo properties they own, needed to cover their outstanding mortgage obligations; these rents don’t track with property value and are often higher than what the typical renter can — and perhaps should — look to afford.

The report also observes that rising foreclosures and the resulting turmoil in credit markets raises the costs of financing rental housing construction and preservation. Last year, completions of multifamily units for rent fell to 169,000 units –- just two thirds of the 2002 figure and only one-third of the 1986 record high.

The report argues that the “blighting influence of vacant and foreclosed properties” will accelerate the abandonment of low-cost rental properties in distressed neighborhoods, further limiting the supply of affordable housing.

“For the past decade, broader access to homeownership has been the centerpiece of federal, state, and local housing programs,” said William Apgar, a senior scholar at the Joint Center. “The rapid rise in mortgage delinquencies and home foreclosures unfortunately exposes the tragic flaw in this imbalanced approach.”

“A balanced national housing policy should focus renewed energy on preserving the stock of subsidized rental housing,” he said.

For more information, visit http://www.jchs.harvard.edu.

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The Federal Reserve voted Wednesday, as expected, to cut the federal funds target rate 25 basis points to 2 percent; the cut was largely within investor expectations, leading Wall Street higher as the Dow Jones Industrial Average added slightly to earlier gains in Wednesday’s trading session.

The latest cut comes as rising concerns about inflation have many expecting a pause to future rate cuts; the Fed has cut rates seven times since last summer, by a total of three percentage points.

Also as expected, the Fed signaled that concern about inflation may lead it to pause on further rate cuts going ahead, saying that “uncertainty about the inflation outlook remains high.”

Critics have recently contended that the Fed’s rate cuts did little to abate the mortgage and financial turmoil that has best global markets since last August, pointing instead to the Fed’s historic use of the discount window and liquidity programs as the real reason markets have calmed; some have also suggested that the Fed’s aggressive monetary policy stance has further weakened the U.S. dollar and helped create a global run-up in commodity prices that has led to rioting and food shortages in other countries, including Egypt.

Balancing inflationary concerns with lagging economic activity has become the largest challenge for Ben Bernanke’s Fed as the credit crisis has rolled on, and pushed the U.S. into what many believe is already a nationwide recession.

The Fed said that “economic activity remains weak,” and that the housing contraction was “deepening” and likely to “weigh on economic growth over the next few quarters.”

The Fed’s decision didn’t come unanimously, with Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, voting for no change to the target rate. Plosser, in particular, has vocally argued against seeing rate cuts as a panacea for current economic ills.

The full statement from the Federal Open Market Committee is available here.

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It appears that former retail real estate agents aren’t the only ones flocking to the booming REO business these days. Online real estate brokerage Redfin.com said Wednesday that it launched a new version of its Web service that combines bank-owned foreclosure and for-sale-by-owner listings, along with more traditional broker-listed properties from various local Multiple Listing Services (MLS) in the markets the company serves.

In a press statement, Redfin said it is “the only major site to offer actionable foreclosure data free of charge.”

The move marks dot-com real estate maverick’s move into highly competitive territory for foreclosure marketplace listings — a market that includes RealtyTrac and Foreclosure.com, among others — and signals a growing realization on the transactional side of the real estate business that foreclosures are likely to represent a large part of the real estate market for some time to come.

“Other sites show foreclosures but then ask the user to pay to see their addresses; often these listings are marketed as foreclosures when in fact they are in pre-foreclosure, where the owner has received a notice of default but is still able to avert foreclosure,” the company said.

Redfin said it lists REO properties, including making their full address and bank contact details freely available; the company does not, however, show foreclosure properties scheduled to be sold at auction, often called pre-foreclosures.

Many foreclosed properties can be bought directly from the bank prior to their being listed by a broker in the MLS, but buyers can only see them on most websites if and when the bank hires a broker. Redfin said user can now see the foreclosed properties on its Web site as soon as the bank takes possession, usually after an auction fails to attract a buyer willing to pay the amount owed on the mortgage.

For more information, visit http://www.redfin.com.

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Severely delinquent mortgage accounts jumped 15 percent in February versus one year earlier, according to data released Wednesday by an Experian subsidiary — news that likely won’t surprise anyone actually in the industry. Experian said it defined “severely delinquent mortgage accounts” as charge-offs, short sales, foreclosures, repossession, collections, voluntary surrenders and bankruptcies — which, frankly, means it isn’t entirely clear exactly what is captured in the data and what isn’t.

“Changes in the housing market have affected many homeowners across the nation, with consumers in some states showing a significant increase in severely delinquent mortgage accounts,” said Ty Taylor, group president of Experian Interactive. “Delinquent accounts can have a negative impact on a consumer’s credit score which could lead to higher interest rates when trying to refinance a current home loan, obtain a new loan or other lines of credit.”

The national average credit score for those with a severely delinquent mortgage account was 599 in February 2008, compared to 605 in February 2007, Experian said. Conversely, the average credit score in February 2008 for those with a mortgage account with no delinquencies was 750.

Severely delinquent borrowers weren’t just subprime, according to the credit bureau — they also owned owed an average mortgage balance of $131,699 in February, compared to $124,465 one year earlier.

And is anyone surprised where the delinquencies are? California (12.4 percent of mortgage accounts are severely delinquent), Florida (8 percent of mortgage accounts are severely delinquent) and Texas (6.3 percent of mortgage accounts are severely delinquent). For Texas, the percentage of delinquent mortgages actually decreased year-over-year, dropping from 7.2 percent one year earlier.

The Experian study comes on the heels of a separate report from competing bureau TransUnion, released Tuesday, which forecast a jump of 34 percent in mortgage delinquencies during 2008. Experian did not provide a similar forecast in its report.

For more information, visit http://www.experian.com.

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The latest round of RMBS downgrades continued in full swing late Tuesday, as Standard & Poor’s Ratings Services said it had cut ratings on 2,138 classes of Alt-A RMBS form the 2006 vintage. The move came as the rating agency updated its loss assumptions on Alt-A loans, affecting more than $41 billion in issuance volume, or 6.1 percent of the par amount for the 2006 vintage.

The agency also placed 487 AAA-rated Alt-A tranches on review for a future downgrade, it said.

“Due to current market conditions, we are assuming that it will take approximately 15 months to
liquidate loans in foreclosure and approximately eight months to liquidate loans categorized as real estate owned,” S&P said in a press statement explaining the downgrades. The agency also said it assumed loss severity of 34 to 35 percent, depending on whether the transactions in question are backed by option ARM collateral; sources suggested to HW that the severity estimates may actually prove to be far too conservative.

For example, Clayton Holdings, Inc. (CLAY: 5.81, +0.35%) reported in late March that average loss severity observed on Alt-A first liens was nearly 37 percent (and increasing).

S&P said it is projecting lifetime losses ranging from a low of 4 percent of original balance for fixed and long-reset collateral to a high of 7.5 percent of original balance for Option ARM transactions.

The majority of Tuesday’s rating cuts, on a dollar volume basis, were centered in AAA and AA-rated tranches — 8.09 percent and 5.86 percent of affected tranches, respectively, according to S&P. The rating agency did not disclose to the media specific deals cut or how far some of the former AAA-rated tranches were downgraded.

The cuts at S&P come on the heels of aggressive Alt-A downgrades at rival rating agency Moody’s Investors Service last week, as reported by Housing Wire. Moody’s began cutting Aaa-rated tranches and also issued a warning on hundreds more top-rated classes within Alt-A on April 24.

For more information, visit http://www.standardandpoors.com.

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While the bad economic news is still out there, at least one REIT is betting that the mortgage crisis yet has an untapped silver lining — and went public Tuesday to prove it. Believing that agency-backed mortgage securities will be a safe bet going forward, Hatteras Financial Corp. (HTS: 25.20, -0.40%) saw its initial public offering backed by investors, with shares gaining as much as 4 percent above the initial offer price of $24/share.

In this sort of economic climate, that the company went public and saw shares boosted at all should be seen as a vote of confidence, sources told HW. Shares were down slightly in morning trading on the New York Stock Exchange.

Via the Associated Press:

“You have to admire their willingness to step into a market where it wasn’t clear that we’re at a bottom,” Holmes said. He said that one advantage to these companies is that they have clean books of business.

Other analysts are more cautious. “I still feel that this sector is and will have some growing pains.” said Scott Sweet, managing director of research firm IPO Boutique. “I’ve seen this many, many times over the years when people prematurely believe the worst is over, when in fact it is not so,” Sweet added.

“We were cautious about Hatteras,” said Renaissance Capital Chairman Kathleen Shelton Smith. “We think that it’s a highly leveraged strategy and those are still risky strategies.”

The agency mortgage REIT is pursuing a strategy of investing only in hybrid adjustable-rate single-family residential mortgage pass-through securities and collateralized mortgage obligations guaranteed by a U.S. government agency or a U.S. government-sponsored entity.

Like many mortgage REITs pursuing similar strategies — and the number is growing — Hatteras is highly leveraged. At the end of March, its leverage ratio was a reported 8.3 percent. That is, it held about $2.74 billion in repurchase agreements at the end of the year, while it had about $329 million in equity on its balance sheet.

It’s unclear if the funds from the IPO will significantly shift leverage at Hatteras, although the company did say in its prospectus that it would use the funds to grow its portfolio of roughly $3.04 billion in agency MBS.

Hatteras won’t be the last agency mREIT to jump into the IPO mix, either; American Capital Strategies, Ltd. (ACAS: 32.21, -0.53%), a $19 billion private equity fund, filed an updated prospectus with the SEC earlier on Monday for American Capital Agency Corp., its own agency mortgage REIT that will pursue a strategy similar to that of Hatteras.

American Capital said it expects to price its IPO at $20/share; the REIT will be the first foray into RMBS investments for the nation’s largest publicly-traded alternative asset manager.

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Mortgage applications reached their lowest level yet this year, as borrowers stayed away from the both purchases and refinancing activity amid relatively steady mortgage rates. According to a widely-watched survey released Wednesday morning by the Mortgage Bankers Association, the group’s Market Composite Index fell 11.1 percent to 567.0 for the week ended April 25. Total applications were 14.2 percent below last year’s levels, the MBA said.

The application index is calibrated to March 16, 1990; a reading of 567.0 means that application activity was roughly 5.7 times greater than when the index was first established.

Refinancing activity continued its recent freefall, dropping another 16.7 percent last week, the MBA said; refis fell 20.2 percent one week earlier — meaning the refinancing activity has fallen nearly 34 percent in the past two weeks alone.

Purchase activity, often seen by economists as an important directional indicator for housing, also fell last week. The MBA reported that its index of purchase applications fell 4.8 percent, marking the third straight week of declines for purchase applications. FHA purchases also fell for the second consecutive week, dropping 3.7 percent after a torrid run-up in application volume in the back half of the first quarter of 2008.

Reflecting the dearth of refinancing activity, refinance share of total applications decreased to 45.7 percent of total applications from 49.2 percent the previous week, the MBA said. ARM share continued its steady decline as well, decreasing to 5.9 from 6.6 percent of total applications from the previous week.

For more information, visit http://www.mortgagebankers.org.

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None other than Barclays Capital warned Tuesday that roughly half of all subprime and Alt-A borrowers in the U.S. could soon owe more than their house is worth, or have extremely minimal equity left — a problem that is imperiling more homeowners in the States than mortgage rate resets, which have received far greater press coverage.

Continued price declines are likely to put as much as $800 billion worth of debt at risk, Bloomberg reported:

Subprime loans from 2006 and 2007 that exceed the value of the homes jumped 5 percentage points to 19.8 percent in the fourth quarter, and may reach 26 percent by midyear if prices drop at the same pace, Barclays analysts wrote in a report yesterday. Alt-A loans, a grade better than subprime, would grow to 23 percent from 16.3 percent

… Among two-year-old Alt-A mortgages that are underwater, 33 percent are at least 60 days late, the analysts wrote. That compares with 7 percent delinquency on similar loans in which homeowners have equity of at least 20 percent. For corresponding subprime loans, the delinquency rate is 58 percent for underwater debt and 29 percent where equity exceeds 20 percent.

Sources suggested to HW that the Barclay’s study is the first to attempt to quantify the so-called “walking away” problem that has many lenders and analysts concerned. In particular, New York-based analysts Ajay Rajadhyaksha and Derek Chen at Barclays wrote that the problem is already larger than statistics might otherwise suggest:

Many of the loans are in areas where prices are falling faster than the U.S. average, so the size of the shift is underappreciated, New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote …

“Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data,” they wrote.

In particular, by “aggregate home price data,” the analysts were referring to OHFEO’s conforming home price index — the index shows both more moderate gains and losses relative to other indices, such as the S&P/Case-Shiller HPI, which is weighted more heavily towards non-conforming loan products and is less geographically dispersed..

Standard & Poor’s said earlier on Tuesday that the Case-Shiller numbers indicated in a record state of price decline in key metro areas during February.

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Mortgage delinquencies will get worse before they get better, with more than 4 percent of mortgages 60+ days in arrears by the end of this year, according to analysis by TransUnion’s financial services group. Less than 3 percent of mortgages were 60+ days delinquent to start 2008.

TransUnion’s quarterly analysis found that average mortgage debt per mortgage borrower nationally fell 3.9 percent during the fourth quarter of 2007; only two states showed any increases in average mortgage debt from the previous quarter — Hawaii (0.31 percent) and Alaska (0.22 percent), with West Virginia showing the smallest percent decline (-0.11 percent).

“The market continues to see the effect of the mortgage crisis in the steeply increasing mortgage delinquency rates among borrowers across the country,” said Keith Carson, a senior consultant in TransUnion’s financial services group.

The top three areas showing the greatest growth in delinquency from previous quarters were Florida (34 percent), California (33 percent) and Arizona (32 percent), according to TransUnion. It’s worth noting — especially amongst the constant drumming of bad housing news — that states such as Alaska and Montana actually experienced a drop in their delinquency rates over the previous quarter (-21 percent and -5.6 percent, respectively).

Nevada, however, is anticipated to be the area of the country that will experience the highest average delinquency rate in 2008, at 9.34 percent of mortgage holders; North Dakota is forecast to register nationa’s lowest level of delinquency, TransUnion said.

While borrower delinquencies are expected to pile up further throughout 2008, TransUnion noted that it expects the rise in mortgage delinquency rates to taper off in 2009, as economic conditions improve and home prices begin to stabilize.

For more information, visit http://www.transunion.com.

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If anyone needed proof that default servicing is now headed towards the spotlight, look no further than yesterday’s announcement by the Senate Judiciary Committee that it will hold a session focusing on recent high-profile bankruptcy management missteps. The Judiciary Committee’s Subcommitree on Administrative Oversight and the Courts will hold a hearing titled “Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?”

The hearing, scheduled for May 6, was called by chairman Charles Schumer (D-NY) — who has said that he wants legislation enacted to protect borrowers from servicer missteps in and after bankrupcty proceedings.

Schumer has invited Countrywide Financial Corp. (CFC: 5.85, +0.34%) Angelo Mozilo to testify, the New York Times reported Tuesday. Also invited were representatives from McCalla, Raymer, Padrick, Cobb, Nichols & Clark in Atlanta, a creditor’s rights law firm and one of the largest such firms in the default servicing industry. Both the law firm and Countrywide have been at the center of a highly-publicized series of case involving the United States Trustee, in which the Trustee has alleged “abuses of the bankruptcy process” by Countrywide and its associated counsel in Georgia, Florida and Ohio.

A similar case, a putative class action suit filed in February by a group of borrowers in Texas, was thrown out by a judge in a federal bankruptcy court in Houston this past March.

While it’s unknown whether Mozilo or McCalla Raymer will be attending the hearing, the New York Times reported that three others will be testifying: Robin Atchley, the borrower at the center of the Countrywide bankruptcy brouhaha in Atlanta, as well as Clifford J. White III, director of the executive office for the United States Trustee, and Katherine M. Porter, an associate professor of law at Iowa University. Porter published a study in 2006 that found half of foreclosures contained “questionable fees.”

The New York Times covers more details:

“What the hearing is going to show is what an ongoing, awful enterprise some of these companies ran, not just taking advantage of the terms of the mortgage, but when they control the mortgage how they continue to squeeze and squeeze and squeeze,” Mr. Schumer, Democrat of New York, said.

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