California Dreamin' + Public Integrity

An estimated 36,215 new and resale houses and condos were sold statewide last month. That was up 23.9 percent from 29,225 in February and up 47.4 percent from 24,565 for March 2008. Sales have increased on a year-over-year basis the last nine months. California sales for the month of March have varied from last year's low to a peak of 68,848 in 2005, the average is 44,813. MDA DataQuick's statistics go back to 1988.
The median price paid for a home last month was $223,000, down 0.4 percent from $224,000 in February, and down 37.7 percent from $358,000 for March a year ago. Around half the drop in median is due to depreciation, the other half due to shifts in the types of homes selling.
Of the existing homes sold last month, 57.4 percent were properties that had been foreclosed on. A year ago it was 35.5 percent.
The typical mortgage payment that home buyers committed themselves to paying last month was $958. That was down from $976 in February, and down from $1,712 for March a year ago. Adjusted for inflation, last month's mortgage payment was the lowest in DataQuick's statistics, which go back to 1988. The payment was 54.4 percent below the spring 1989 peak of the prior real estate cycle. It was 63.1 percent below the current cycle's peak in June 2006.
MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
Indicators of market distress continue to move in different directions. Foreclosure activity is nearing its 2008 peak, while financing with adjustable-rate mortgages is at an all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, and non-owner occupied buying activity is above-average in some markets, MDA DataQuick reported.

In 2004, years before plummeting real estate values turned Fort Myers, Florida, into a top five foreclosure capital, appraiser Mike Tipton faced a dilemma.
Tipton’s employer, eAppraiseIT, sent him to value a two-bedroom home in a new subdivision built by the developer D.R. Horton. Paperwork givBut after inspecting the home and comparing it to five similar houses that had recently sold, Tipton set the value at $237,000, $8,000 less than the estimate. He knew the difference might disappoint DHI Mortgage, the prospective buyer’s lender, which is a subsidiary of developer D.R. Horton. And indeed it did.
The lender, in a process appraisers say was common in the boom days before the housing bubble burst, asked Tipton to redo the appraisal. It sent paperwork through eAppraiseIT asking him to reconsider the value. It gave him different homes to use for comparisonsen by the appraisal
management company to Tipton included a $245,000 estimated value.

“If you read between the lines, they wanted a larger value,” Tipton said. “I told them no, I wasn’t changing my report.”

Tipton, who like many other appraisers is paid by the job, says he was never given another appraisal for a D.R. Horton home. “All I can say is D.R. Horton has remained an active developer in Lee County,” Tipton said. “I didn’t see any further appraisals for DHI Mortgage. So you tell me.”
Carrie Gaska, a spokeswoman for First American eAppraiseIT, declined to comment on why Tipton received no further orders from the company for DHI Mortgage properties.
Tipton is among dozens of appraisers who have told the Center for Public Integrity that for years lenders across the United States have pushed them into inflating the value of homes to justify higher mortgages. Appraisers and lenders alike are demanding better oversight of the industry. In addition, the Center has obtained copies of lenders’ “blacklists” containing the names of thousands of appraisers; some appraisers say lenders used those lists to exclude those who refused to inflate home values.
The Center also found many appraisers who say they bowed to lender pressure to “hit the numbers” in order to remain in business. These appraisers, along with the lenders who pressured them, helped pump air into the housing bubble that led to widespread economic devastation, according to dozens of appraisers, lenders, and others with intimate knowledge of home loan practices.
And there’s evidence that Fannie Mae and Freddie Mac, the two largest purchasers of home loans, bought mortgages without ensuring they were made with accurate appraisals, according to an investigation by New York Attorney General Andrew Cuomo.
No one knows exactly how much of a role inflated appraisals played in the mortgage meltdown. But as an increasing number of homeowners face foreclosure, many remain unaware that the appraisal they paid for during the purchase process may not have reflected the true value of their investment, and may have allowed them to borrow more money than their home was worth.
Depending on the state where the homeowners purchased, the scheme may or may not have been against the law. Pressuring an appraiser to inflate the value of a property is a crime in at least 20 states and the District of Columbia, though it is often a misdemeanor punishable by a fine, a slap on the wrist that appraisers say does little to prevent the exertion of undue pressure.

There is rampant corruption throughout the industry,” said George Dodd, a veteran appraiser in Virginia who has been advocating for more regulation. “The way it stands now, the public doesn’t stand a chance.”
Dodd said, that in addition to the appraisal ordered by the lender, consumers can protect themselves by ordering a second independent appraisal before a purchase. They will, however, still have to pay for the lender’s appraisal.

Fudging the Numbers
Richard Frank, an appraiser in Vero Beach, Florida, started appraising homes in 1998, when values were climbing. From the beginning, Frank said he stepped into a business arrangement in which lenders forced appraisers to abandon their standards if they wanted work.
Frank said lenders commonly gave appraisers an estimated value for a home on each appraisal order. Appraisers, who usually determine values by comparing homes to recent sales of comparable properties, often worked backwards from that estimated price to find recent real estate sales that would “make the value,” he said. Working backwards from the estimate was faster. Everyone made money. And since appraising homes is subjective — both an art and a science — it was easy to fudge numbers.
“The [supposedly comparable] houses might be bigger and better, but who’s going to know?” Franks said. “In an increasing market, your sins are buried.”
If an appraisal came in lower than the purchase price, the loan likely would be denied. Since loan origination staff is typically paid by commission, a failed deal meant no paycheck for them. If that happened too many times, Frank says, lenders stopped sending the appraiser work. “Put out, and you will get more dates. It’s just that simple,” he said.
Richard Bitner, a former subprime lender in Texas who has written an insider account of the mortgage industry collapse, backs up Frank’s story. Bitner says the pressure came more from the cozy relationship between lenders and appraisers than threats.
“The pressure applied didn’t really need to be overt,” Bitner said. “If suddenly [an appraiser] can’t make the values, at the end of the day, it’s pretty easy to go to someone else. You are here to make money.”
Appraisers say lenders did just that, sometimes asking appraisers to promise a value before they officially ordered the report.
Both appraisers and lenders say the two professions have not always been at odds. Appraisers traditionally served as the front-line defense for loan underwriting departments, ensuring that the value of a home was worth the loan amount in case the lender needed to foreclose. In the past, many banks had in-house appraisal departments. And, unlike today, lenders historically kept and serviced the loan for the life of the mortgage. But when lenders began bundling loans and selling them to Wall Street and other investors, lenders carried less risk and industry analysts say they became less concerned about home values. With no “skin in the game,” lenders focused on closing deals. In this climate, many in the industry say the appraisal became a barrier to jump over.
Appraisers say making money was easy, as long as they did not cross lenders. But if they did, appraisers say lenders lashed out, adding their names to the blacklists that lenders originally kept to identify incompetent appraisers. Lenders kept their own lists, but appraisers sometimes found their names on those lists even if they never worked for that lender.
Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it. In December, appraiser Tom Woolford found his name on Amerisave’s list when the list also appeared on a popular online appraisal industry forum. Woolford said he has never done an appraisal for Amerisave, and the address they used for him was at least 10 years old. He doesn’t know how he ended up on the list, but he says it could be a matter of reputation: He says he never gives in to lender pressure.
“I think you will find a lot of the people on these lists do not hit numbers,” Woolford said. “I won’t lie, and I won’t push a number for nobody.”
After conferring with top management officials, Martin Wilhelm, an Amerisave vice president, declined to answer questions about how it compiles its blacklist.
Unheard Warning Bells
Before real estate prices began to plummet in 2006, some sounded the alarm on fraudulent appraisals and lender pressure, but few listened to the warnings, least of all Congress, industry regulators, and the Justice Department.
David Callahan, a founder of the public policy think tank Demos, was one of the first people to study inflated appraisals and lender pressure. In 2005, Callahan wrote a paper describing the financial incentives for lenders and appraisers to pursue inflated appraisals. The goal of lenders, brokers, real estate agents and developers was to ensure that a home loan closed without a problem, Callahan said. All those people exert pressure on appraisers to inflate values.
In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.
“Congress didn’t really care about it,” Callahan said, noting the lack of reaction his report generated in Washington. “There was remarkably little legislative activity looking at the corruption in the real estate market.”
In fact, Congress had struggled with the issue of lender pressure on appraisers since the savings and loan crisis of the 1980s. In recent years, Congressman Paul Kanjorski, a Pennsylvania Democrat, has been the most vocal proponent for stronger regulation, proposing legislation in 2007 that would have set stiffer appraisal independence standards. The legislation, which would have prohibited lender coercion of appraisers and established penalties for it, was folded into the 2007 Mortgage Reform and Anti-Predatory Lending Act. The legislation faced stiff opposition and lobbying by the banking and mortgage industry, which argued it would adversely impact credit availability, and the bill was not taken up in the Senate after passing the House. In March, the legislation was reintroduced in the House as part of the Mortgage Reform and Anti-Predatory Lending Act.
Appraisal industry insiders say part of the difficulty in policing the process stems from regulatory fragmentation. Appraisers fall under the jurisdiction of state regulators, which enforce standards set up by the Appraisal Foundation, a nonprofit industry group authorized by Congress. State licensing is overseen by the Appraisal Subcommittee, an agency created by Congress in 1989.
Hyped appraisals did not escape the attention of federal banking and savings and loan regulators, but reports published since the mortgage industry collapse show that those officials did little to stop the practice. A February audit by the Treasury Inspector General on the implosion of IndyMac, a savings and loan, noted that the Office of Thrift Supervision, IndyMac’s primary regulator, identified problems with appraisals on the company’s loans in 2001, but took no formal action.
In one example from the audit report, an IndyMac file for a $1.5 million loan contained appraisals ranging from $639,000 to $1.5 million. “There was no support to show why the higher value appraisal was the appropriate one to use for approving the loan,” the report says.
In 2006, Ameriquest, then the largest subprime lender in the country, paid $325 million and agreed to reform its business practices to settle a 49-state investigation into its predatory lending practices. Among the allegations, the lawsuit claimed Ameriquest engaged in deceptive or misleading practices to obtain inflated appraisals substantially beyond the market values of homes. The company, which closed in 2007, denied the allegations.
Problems like these only seem to come to light during declining markets and concerns are put on a shelf when buyers return, says Dave Biggers, founder and CEO of the real estate technology company a la mode, inc. In an appreciating market, appraisals five to 10 percent beyond value are not an issue, he said, and home values climb beyond appraisal values soon after the sale.
But when the market peaked in 2005 and then began its sharp decline, inflated appraisals exacerbated the trouble faced by “underwater” homeowners. “We as the taxpayers are getting stuck with the bill,” Biggers said. “What has not been investigated is the systemic issues that take place on the basis of policy by many of these companies.”
“Who Has Juice with Whom”
Since the bubble burst, the FBI has focused most of its real estate efforts on appraisers and other fraudsters who developed intricate schemes to defraud banks. The Justice Department is not going through the wreckage looking at the institutionalized lender pressure on the appraisal process. An FBI official, asking not to be identified because the agency has no official position on the matter, said they view the matter as a regulatory issue to be addressed by Congress not a matter of law enforcement.
FBI Deputy Director John S. Pistole testified in March before the House Committee on Financial Services about the agency’s efforts to combat mortgage fraud, saying the bureau is focusing its limited white collar crime-fighting resources on real estate industry insiders engaged in fraud for profit. Those cases target real estate speculators and mortgage brokers who work with appraisers to sell a house for far more than its true value. So far, however, there have been no prosecutions of lenders who pressured appraisers to inflate values.
Instead, the highest-profile investigation of the appraisal industry has come from New York Attorney General Andrew Cuomo. In 2007, Cuomo filed a lawsuit against First American Corp. and its subsidiary First American eAppraiseIT, charging that eAppraiseIT allowed loan production staff at Washington Mutual to pressure appraisers to inflate home values. The suit is pending.

The suit claims the appraisal management company allowed Washington Mutual’s “loan production staff to hand-pick appraisers who bring in appraisal values high enough to permit WaMu’s loans to close, and improperly permits WaMu to pressure eAppraiseIT appraisers to change values that are too low to permit loans to close.”
In addition, the complaint alleges that executives at eAppraiseIt knew its appraisal arrangement with Washington Mutual broke the law. “I think WaMu’s new initiative is way over the line,” it quotes eAppraiseIT’s executive vice president as writing in spring of 2007 to the company’s president. “It is even possible that the current arrangement crosses the line.”
“Bingo!” replied the company president, according to the complaint. “It boils down to who has juice with whom at the regulatory level.”
In a 2007 press release, First American said the New York lawsuit “has no foundation in fact or law. The Attorney General’s allegations, largely based on a handful of e-mails that have been taken out of context, or mischaracterized, and an incomplete review of the facts, belie our record of compliance with applicable law.”
Cuomo also subpoenaed Fannie Mae and Freddie Mac. The investigation into whether the two largest loan purchasers bought loans that included inflated appraisals was dropped in March 2008 after Fannie and Freddie agreed to strict new rules — penned in part by Cuomo’s office — governing the appraisal practices for the loans they buy. They also agreed to pay $24 million to fund the Independent Valuation Protection Institute, a new organization to help implement and monitor the code.
What led Fannie and Freddie to the agreement was not made public, and Cuomo’s investigators aren’t talking, but his office did point the Center for Public Integrity to letters Cuomo sent in 2007 to the CEOs of both Fannie Mae and Freddie Mac, expanding his investigation to include a subpoena of their records.
In the letters, Cuomo wrote that his office had “uncovered a pattern of collusion between lenders and appraisers that has resulted in widespread inflation of the valuations of homes.” Further, Cuomo wrote that evidence shows mortgages Fannie and Freddie purchased from Washington Mutual “may be premised on fraudulently inflated appraisals” that do not meet regulatory standards. “We are, therefore, expanding our investigation to determine the extent of [Fannie Mae and Freddie Mac’s] knowledge of, and actions regarding, these problems as they relate to past mortgage purchases and securitizations.”
Cuomo’s office declined the Center’s request for details of its investigation’s findings.
The Home Valuation Code of Conduct, an industry standard which came about as a result of Cuomo’s investigation, is slated to go into effect on May 1, makes deep changes to the appraisal industry.
The code, which affects all loans eligible for purchase by Fannie and Freddie, bans lenders and brokers from pressuring appraisers to hype appraisals by threatening to withhold future business as punishment. Lenders must inform appraisers when they are removed from qualified use lists and allow them to appeal. It also bans loan origination staff from ordering appraisals directly — instead, the lender must use other in-house staff or go through a middleman appraisal management company. Even so, the incentive to pressure appraisers still exists, even for supposedly independent appraisal management companies.
Fox and the Hen House
Despite the changes, the new code has been panned by both the appraisal industry and some lenders. The National Association of Mortgage Brokers filed a lawsuit to try to block the rules, arguing that the code puts smaller mortgage brokerages at a disadvantage because they will be forced to rely on lenders to obtain appraisals for their customers, thereby limiting their ability to shop for loans. The association dropped the action earlier this month.
Appraisers who work for themselves or small businesses say the code will end their careers since mortgage brokers and other loan generation staff can no longer contact them directly. Instead, they say the code in effect directs all business to appraisal management companies, the unregulated middlemen that are often subsidiaries of lenders.
Appraisers say the management companies passed on pressure from lenders in the past, including in Cuomo’s case against eAppraiseIt, and see nothing in the new code to stop it from happening.
“It’s a bit of irony that the solution is the same thing that got us here,” said Bill Garber, director of government and external relations at the Appraisal Institute, a trade association representing appraisers.
The Home Valuation Code of Conduct, Garber added, is lip service to cleaning up the industry. Appraisal management companies “are just as capable of pressuring appraisers as anyone else.”
Appraisers also dislike the plan because some appraisal management companies take a hefty administrative fee and pay low rates to appraisers, which experienced appraisers say will force them out of the business and turn the industry over to less experienced appraisers who are more likely to make mistakes.
Pressure will still come from the management companies, said Dodd, the Virginia appraiser. “They could give a damn about the consumer. They don’t care if the consumer pays ten, twenty, or thirty thousand more than it’s worth.”
Cuomo hasn’t answered critics of the new code, and his office did not return calls from the Center for Public Integrity.
Lawyers, Banks, and Money
Since the real estate crash, the appraisal and lending industries have come under closer watch by regulators and Congress. But so far, no one has addressed the effect inflated appraisals have had on struggling homeowners. Buyers who moved in at the height of the boom are particularly vulnerable, and attorneys say their struggle provides fertile ground for civil litigation.
“I definitely believe that lenders have engaged in widespread illegal activities, and they will come under increased scrutiny in the next year or so as people who have been damaged by this realize there are some bad actors out there,” said Steve Berman, an attorney in Seattle.
In October, Berman’s firm, Hagens Berman Sobol Shapiro, filed a class action on behalf of blacklisted appraisers against Countrywide Financial and its subsidiary Landsafe, an appraisal management company. Like Cuomo’s suit, Berman’s case argues that Countrywide forced appraisers to hit the numbers and added them to a blacklist if they refused.
“Countrywide… has engaged in a practice of pressuring and intimidating appraisers into using appraisal techniques that meet Countrywide’s business objectives even if the use of such appraisal techniques is improper and in violation of industry standards,” the complaint alleges.
If the appraisers refused, the complaint says they were placed on a “field review list,” which disqualified them for further work for loans for Countrywide. Because mortgage brokers shop for lenders, if an appraiser was blacklisted by Countrywide, the largest independent mortgage lender, they were in effect blacklisted by much of the industry, Berman’s complaint claims.
According to the complaint, Countrywide’s blacklist contains more than 2,000 appraisers. Berman said his firm is looking at other lenders and their blacklists as it considers further litigation.
The new appraisal code and increased scrutiny of the industry seems to have had some effect. Lender pressure is not as strong, appraisers say, but it still exists. Ray Miller, an appraiser outside Madison, Wisconsin, says the pressure is moving to FHA loans and refinancing as credit for other loans remains dried up.
In January, Miller said he did an appraisal for a lake home where the owner was looking to refinance. The original appraisal, done when the owner bought the home a few years back, listed the value at $554,000, but the comparables used to hit that number were from homes on a more upscale lake, Miller concluded.
Miller’s reappraisal came in at $400,000. “I’m just waiting for the phone call,” he said.
In February, Miller received a call from a different lender. This one wanted him to remove pictures of a cracked sidewalk he included in his appraisal. This would be prohibited under the Home Valuation Code of Conduct. But Miller expects lenders will figure out a way around the rules.
“They don’t want good appraisers,” he said. “They don’t want good numbers, even now.”

Will The Chicken Be Left In The Hen House?

The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.
The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer-dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.
With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch. The unprecedented campaign comes after a worsening recession sent the unemployment rate up to a quarter-century high of 8.1 percent.
“The FOMC may believe the economy is nowhere near a bottom,” William Poole, former president of the St. Louis Fed, said in an interview today with Bloomberg News. “The Fed is engaging in a massive quantitative easing.”
Quantitative easing refers to using injections of funds into the economy as the main policy tool. Poole is now a senior economic adviser to Merk Investments LLC in Palo Alto, California, and a contributor to Bloomberg News.
Yields Plunge
Benchmark 10-year note yields plunged to 2.48 percent at 4:40 p.m. in New York, from 3.01 percent late yesterday, the biggest decline since records dating from 1962. The Standard & Poor’s 500 Stock Index rose 2.1 percent to 794.35 at the close.
“They wanted to shock the market and they succeeded,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. If the Fed’s action “succeeds in driving primary mortgage rates” to about 4.25 percent to 4.5 percent, that would increase “affordability, which will in turn lead to increased housing demand.”
Central banks around the world are grappling with how to formulate policy with target interest rates near zero. The Bank of England is buying government bonds and corporate debt, the Bank of Japan is snapping up government notes and making subordinated loans to banks, and the Swiss National Bank is intervening to weaken the franc.
Chairman Ben S. Bernanke is employing strategies to stamp out the risk of deflation that he first laid out as a Fed governor in 2002, when he listed purchases of longer-dated Treasuries as an option.
Inflation Subdued
While buying government debt has, in some historical episodes, been associated with causing inflation to soar, Fed officials are confident that consumer prices will remain in check given “weak” demand.
The FOMC said today that inflation could “persist for a time” below their preferred level. A government report today showed that consumer prices, excluding food and energy costs, rose 1.8 percent in February from a year before, compared with an average rate of 2.2 percent over the past decade.
Bernanke is trying [?] to prevent the credit contraction from deepening what already may be the worst recession in 60 years. U.S. employers have eliminated 4.4 million jobs since the start of last year. Industrial production fell 1.4 percent in February, the fourth consecutive decline, while factory capacity in use hit 70.9 percent, matching the lowest level on record.
‘Gradual Resumption’
“Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract,” the FOMC said in the statement. “The committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.”
The global economy will contract this year for the first time since World War II, the World Bank predicts, forcing central banks to keep pumping money into their economies when conventional interest rates are at, or close to, zero.
The Fed has cut the benchmark rate from 5.25 percent, beginning in September 2007, as credit froze and the economy buckled. Policy makers are now focused on how to further channel money to the economy. The Fed has already committed to buying $600 billion of mortgage-backed securities and bonds sold by government-sponsored housing agencies.
Geithner Plans
Treasury Secretary Timothy Geithner also may unveil details in coming days on his plans to remove distressed mortgage assets from banks balance sheets. People familiar with the matter said the effort will involve expanding the Fed’s Term Asset-Backed Securities Loan Facility to include lower-rated, illiquid assets in addition to recent, top-rated debt backed by consumer loans.
The Federal Deposit Insurance Corp. may also get a broader role in the Obama administration’s strategy, the people said. The Treasury may make its announcement as soon as this week.
While the Fed’s actions have helped bring down mortgage rates, those costs have remained elevated relative to benchmark Treasuries. Prior to today’s meeting, the difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
Yields on Fannie Mae’s 4.5 percent mortgage securities fell 0.27 percentage points from yesterday to 3.97 percent as of 3:30 p.m. in New York, suggesting new-loan rates may be pushed down about 0.27 percentage point, according to data complied by Bloomberg. Thirty-year fixed-rate mortgages averaged 5.03 percent as of March 12.
Types of Treasuries
The central bank will begin purchases of longer-term Treasuries “late next week” and buy the securities two to three times per week, the New York Fed, which will manage the operation, said in a statement. The transactions will be concentrated in two-year to 10-year debt the statement said; 30- year bonds underperformed 10-year notes as a result.
Through emergency loans and liquidity backstops, U.S. central bankers have expanded Fed credit to the economy by an unprecedented $1 trillion over the past year.
Banks worldwide have posted $1.2 trillion in write downs and credit losses on mortgage loans and other assets. U.S. Treasury officials will put the largest 19 banks through “stress tests” and decide whether they need more capital. The banks can raise equity privately or seek more government funds. Officials are also looking at ways to remove bad assets.
Coca-Cola Co., health insurer WellPoint Inc. and more than 30 other companies are tapping longer-term credit markets and paying down their short-term IOUs, a sign of some investor confidence.

New FICO Credit Score for Mortgage Lenders Debuts

March 11, 2009 (Minneapolis, Minnesota and Atlanta, Georgia) — FICO (NYSE:FIC), the leading provider of analytics and decision management technology, and Equifax (NYSE: EFX), a global leader in information solutions, today introduced BEACON® Mortgage Score, a new FICO® industry score specifically designed to help mortgage lenders make the best possible risk decisions when addressing both current homeowners and those aspiring to own. Equifax plans to make the new score available in April to mortgage lenders and servicers for use in their loan servicing decisions including mortgage loan modifications.

The new score builds upon the predictive power of today’s BEACON® credit risk score which is widely used in the mortgage industry. By focusing specifically on mortgage risk performance, FICO scientists have developed a version of the BEACON score with significantly greater power for assessing mortgage repayment risk. In early validation testing, the performance of BEACON Mortgage Score was compared to that of the general risk BEACON score when predicting mortgage repayment risk specifically. The new score identified up to 25 percent more of the high-risk mortgages and home equity lines-of-credit that later became seriously delinquent. In light of today’s housing crisis, this new score can aid servicers in earlier identification of borrowers at risk, mitigating the high cost of consumers moving to foreclosure.

In business terms, these early results suggest that the use of BEACON Mortgage Score by the industry potentially can save it $1 billion in foreclosure costs and help keep an estimated 115,000 more struggling homeowners in their homes.

“One of the goals of our alliance with Equifax is to bring both companies’ assets and expertise to bear on the uncertainty facing lenders, borrowers and investors,” said Lisa Nelson, vice president of Global Scoring Solutions for FICO. “This new score is one of the first fruits of that alliance, and it couldn’t be more timely or valuable for mortgage lenders, loan servicers and the securitization industry.”

“Everyone in the mortgage industry is working hard to manage risk more effectively, which will help address the rising foreclosure rate while allowing servicers to keep their doors open to qualified new borrowers,” said Dann Adams, president of US Consumer Information Solutions for Equifax. “The BEACON Mortgage Score is an innovative solution with unprecedented visibility that will provide greater predictive strength at a time when the industry needs it most.”

To assist clients, BEACON® Mortgage Score retains the same 300-850® scoring range, minimum scoring criteria, and inquiry treatment as previous versions of the BEACON® score. However, to achieve its significant increase in predictive strength, FICO’s new scoring model assesses several additional data variables derived from Equifax consumer credit files, selected specifically to predict mortgage repayment risk. As a result, the model includes 15 additional score reason codes that help lenders understand and explain the scores


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Sandra F. Braunstein, Director, Division of Consumer and Community Affairs
Mortgage lending reform
Before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, U.S House of Representatives, Washington, D.C.

The Board's Rules under TILA and HOEPA
The Federal Reserve has primary rulewriting responsibility for many consumer protection laws, including the Truth in Lending Act and the Home Ownership and Equity Protection Act, which amended TILA. TILA and HOEPA are implemented by the Board's Regulation Z. Following a series of hearings in 2006 and 2007, the Board last July used its authority under TILA and HOEPA to revise Regulation Z by issuing final rules to establish sweeping new regulatory protections for consumers in the residential mortgage market. Importantly, the Board's new rules apply to all mortgage lenders, not just depository institutions supervised by the federal banking and thrift agencies.

In response to specific problems we saw in the subprime market, some restrictions in the final rules apply only to higher-priced mortgage loans. Other provisions, however, apply to all mortgage loans secured by a consumer's principal dwelling. In addition to rules that protect consumers from unfair or abusive lending and mortgage servicing practices, the Board also adopted rules governing mortgage advertisements to ensure they provide accurate and balanced information and do not contain misleading or deceptive representations. A third component of the final rules ensures that for all types of mortgage loans, consumers receive transaction-specific cost disclosures early enough to use while shopping for credit.

It is important to note that the Board's final rules resulted from an interactive process that involved extensive research and outreach to consumer groups, industry representatives, and other government agencies at the state and federal levels. The Board held a series of public hearings on consumer protection in the mortgage market in four cities across the country during the summer of 2006. In light of the information received at the 2006 hearings and the rise in defaults that began soon after, the Board held an additional hearing in June 2007, to explore how it could use its authority under HOEPA to prevent abusive lending practices without unduly constricting credit. At the 2007 hearing, and in hearing-related public comments, the Board received input from individual consumers, lenders, mortgage brokers, state government officials, and academicians. The Board's rulemaking was also informed by the comments received in connection with the development of interagency supervisory guidance on nontraditional mortgage products issued in September 2006 and interagency guidance on subprime lending that was issued in June 2007.

In response to the proposed rules that were issued under HOEPA in December 2007, the Board received and considered approximately 4,700 comment letters that represented a broad spectrum of views. The Board also used consumer testing by conducting several dozen one-on-one interviews with a diverse group of consumers to test the effectiveness of proposed disclosures related to mortgage broker compensation. The testing results were the basis for making significant changes to the final rule. In sum, listening carefully to the commenters, collecting and analyzing data, and undertaking consumer testing, led to more effective and improved final rules.

Rules for Higher-Priced Loans
The Board's HOEPA rules add four key protections for a newly defined category of "higher-priced mortgage loans." These are defined as consumer-purpose loans secured by a consumer's principal dwelling and having an annual percentage rate (APR) that exceeds the average prime offer rate for comparable transactions published by the Board by at least 1.5 percentage points for first-lien loans, or 3.5 percentage points for subordinate lien loans. For the foreseeable future, the Board will obtain or derive average prime offer rates from Freddie Mac's Primary Mortgage Market Survey, and will publish these rates on at least a weekly basis. Based on the available data, the thresholds adopted by the Board would cover all, or virtually all, of the subprime market and a portion of the alt-A market.

Concerning the four key protections for higher-priced mortgage loans:

First, lenders are prohibited from making any higher-priced mortgage loan without regard to the borrower's ability to repay the obligation from income and assets other than the home. The rule requires the lender to take into account future, predictable changes in payments in determining repayment ability. Lenders comply, in part, by assessing repayment ability using the highest scheduled payment in the first seven years of the loan, rather than the consumer's initial monthly payment. For example, for an adjustable rate mortgage (ARM) with a discounted initial interest rate that is fixed for five years, the lender determines repayment ability using the scheduled payment in the sixth and seventh years, which is based on the fully indexed rate.

Second, lenders are prohibited from making "stated income" loans and are required in each case to verify the income and assets they rely upon to determine borrowers' repayment ability. Lenders must also verify and consider the borrower's other debt obligations, such as by using a credit report. The rule is intended to ensure that creditors do not assess repayment ability using overstated incomes or understated payment obligations. The rule is sufficiently flexible to allow lenders to adapt their underwriting process to accommodate a borrower's particular circumstances, such as when the borrower is self-employed.

Third, the final rules restrict the use of prepayment penalties. Prepayment penalties can prevent borrowers from refinancing their loans to avoid monthly payment increases or if there are other reasons that their loan becomes unaffordable. Under the Board's rule, prepayment penalties are prohibited when the monthly payment can change during the initial four years after consummation. For other higher-priced loans, a prepayment penalty cannot last for more than two years.

Fourth, creditors are required to establish an escrow account for property taxes and homeowner's insurance for all first-lien mortgage loans. This addresses the concern that the lack of escrows in the subprime market increases the risk that consumers' borrowing decisions will be based on misleading low payment quotes that do not reflect the true cost of their homeownership obligations. The rule preserves some consumer choice by permitting creditors to allow consumers to opt-out of the escrow account after 12 months.

Protections for All Loans Secured by Consumers' Principal Dwelling
In addition to the rules for higher-cost loans, the Board adopted other protections that apply to all mortgage loans secured by a consumer's principal dwelling, regardless of cost. The rules prohibit lenders or brokers from coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of the property. The Board also prohibited loan servicers from engaging in certain unfair billing practices. Servicers are prohibited from failing to credit a payment to a consumer's account as of the date received. Second, the rule prohibits the "pyramiding" of late fees by prohibiting servicers from imposing a late fee on a consumer when the consumer's payment was timely and made in full but for any previously assessed late fee. In addition, the rules prohibit loan servicers from failing to provide a loan payoff statement on a timely basis after receiving a request from the consumer or any person acting on the consumer's behalf.

Based on the results of consumer testing, the Board did not adopt a proposed rule that would have prohibited a creditor from paying a mortgage broker more in compensation than the consumer agreed in advance the broker would receive. Under the proposal, brokers would have to disclose to consumers their total compensation, including any portion paid directly by a creditor as a "yield spread premium" before obtaining the consumer's written agreement. Brokers would also have to disclose that a creditor payment to the broker could influence the broker to offer the consumer loan terms that would not be in the consumer's interest or the most favorable terms the consumer could obtain.

The proposed rule was intended to limit the potential for unfairness, deception, and abuse while preserving the ability of consumers to cover their payments to brokers through rate increases. The Board also anticipated that the proposal would increase transparency and increase competition in the market for brokerage services. The withdrawal of this portion of the proposal was based on the results of the Board's one-on-one interviews with several dozen consumers which demonstrated that the proposed agreement and disclosures would confuse consumers and undermine their decisionmaking rather than improve it. The Board is continuing to explore options for addressing potential unfairness associated with originator compensation arrangements such as yield spread premiums.

Advertising Rules
Another goal of the Board's final rules is to ensure that mortgage loan advertisements do not contain misleading or deceptive representations. Thus, the Board's rules require that advertisements for both closed-end loans and home-equity lines of credit (HELOCs) provide accurate and balanced information about rates, monthly payments, and other features in a clear and conspicuous manner. In addition, the Board used its authority under HOEPA to prohibit seven deceptive or misleading advertising practices. For example, an advertisement for a variable rate loan may not use the word "fixed" in referring to the interest rate or payment unless there is an equally prominent statement of the time period for which the rate or payment is fixed. The rules also prohibit misrepresentations about government endorsement of the loan program and misleading claims of "debt elimination."

Requiring Earlier Cost Disclosures
With the increased complexity of today's mortgage products, consumers need to be well-informed shoppers. To assist consumers further, the Board amended Regulation Z to require that lenders provide consumers transaction-specific cost disclosures earlier in the application process, so that they can be used by consumers while shopping for a mortgage loan. Under the revised rules, creditors must provide a good faith estimate of the loan costs, including a payment schedule, within three days after the creditor receives the consumer's application. To ensure that consumers are able to use the information to shop, consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history. The rule applies to any home-secured loan, including home refinance loans and home-equity loans. Currently, early cost estimates are only required for home-purchase loans.

Last July, the Congress enacted the Housing and Economic Recovery Act of 2008, which codified the Board's new requirements for providing earlier TILA disclosures and also added some additional requirements, including a requirement that the estimated cost disclosures be provided at least seven days before the loan closing. This will enable consumers to review the transaction-specific disclosures when they have more time and are not confronted by a large number of other loan documents. In December 2008, the Board issued proposed rules to implement these additional changes and, with the recent close of the comment period, we expect the final rules to be issued in early spring.

The Board's Current Efforts to Improve Mortgage Disclosures
The Board recognizes the need to update TILA's cost disclosures for mortgage loans, to better reflect today's more complex products. Last year, we began using one-on-one interviews with consumers to test the current disclosures and potential revisions. We are well aware that consumers receive an overwhelming amount of information at the time they close a mortgage loan. The Truth in Lending disclosure, however, is a single-page form, and we are hopeful that the new requirements for providing this form earlier in the application process will distinguish the TILA disclosure from the many legal documents presented at loan closing as part of the credit contract or to satisfy state or local laws. However, the effectiveness of a disclosure is best judged through the results of consumer testing and not by the length of the disclosures alone.

Our goal is to improve the content and format of disclosures for both closed-end loans and home equity lines of credit in order to make mortgage disclosures more useful. The challenge is to strike a proper balance between providing information that is accurate and complete but not so complex as to create information overload. Testing model disclosures with real consumers is critical to the success of this effort.

In addition to our consumer testing, we are engaged in extensive outreach to obtain the views and suggestions of consumer advocates, industry representatives, and others. One concern that has been expressed over many years is the fact that consumers must receive separate disclosures under TILA and the Real Estate Settlement Procedures Act (RESPA), which is implemented by the Department of Housing and Urban Development (HUD). This issue is not unfamiliar to us. In 1998, the Board and HUD submitted a joint report to the Congress containing recommendations for legislative reforms, including a requirement that a single model form be developed that creditors could use to comply with both TILA and RESPA. The joint report included a sample model form showing one approach to combining the disclosures.

Several years ago, HUD initiated efforts to revise the RESPA disclosures and the forms creditors use to provide a Good Faith Estimate (GFE) of settlement charges. Creditors must provide the GFE within three days after receiving a mortgage loan application, which is also the timing requirement for providing loan cost disclosures under TILA. HUD's efforts over the past several years have included testing its proposed disclosure forms with consumers and consulting with the Board's staff. We support the goals of HUD's efforts to make RESPA disclosures more accurate and more useful, and we commend HUD for using consumer testing to develop the new RESPA forms. However, we continue to believe that efforts should be made to develop a single form that creditors could use to satisfy the requirements of both TILA and RESPA.

In November 2008, HUD finalized its revised RESPA rules and mandated the use of a new three-page GFE form developed by HUD. As the Board moves forward in revising TILA's mortgage disclosures, we will continue to coordinate with HUD to avoid potential inconsistencies in the two disclosure schemes. We also remain ready to work with HUD in developing a combined disclosure form if HUD is willing to pursue this approach.

Legislative Responses
On November 15, 2007, the House of Representatives passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, which takes a comprehensive approach to addressing mortgage lending problems while appropriately focusing on the practices that took place in the subprime mortgage market. We commend Congress' work on H.R. 3915, which informed the Board's rulemaking and represents a significant contribution to the public debate about these issues. The Board shares Congress' concerns with these practices, many of which are also addressed in the Board's recently adopted rules under HOEPA. As with regulations, it is important that any new laws carefully target abuses without unduly restraining responsible credit. Maintaining this balance is particularly important as many borrowers may need to refinance subprime loans into more affordable loans.

At this time, I will share briefly some observations about the bill. It should be noted that members of the Board's staff have previously discussed technical issues concerning the bill with congressional staff. We would be pleased to continue these discussions going forward if the Congress considers additional amendments to the bill.

As I stated earlier, H.R. 3915 would address many of the same concerns addressed in the Board's HOEPA rules. Although some of the details regarding implementation differ, H.R. 3915 and the Board's HOEPA rules both set minimum underwriting standards that are designed to ensure creditors verify and document borrowers' ability to repay higher-priced loans. H.R. 3915 would also provide consumer remedies for violations of the bill's minimum standards and consumers would be able to seek these remedies against creditors, assignees, and securitizers. As a general matter, the issue of appropriate remedies is one that is best left to the Congress. We note, however, that in order for assignee liability to create more market discipline, the laws must be clear about what acts or practices are prohibited so that assignees can perform due diligence and detect violations before purchasing the loans. Assignees may have difficulty in determining a creditor's compliance with a broad prohibition against making loans that do not provide a "net tangible benefit" unless that term is capable of being clearly defined in law or regulation.

H.R. 3915 also seeks to establish a federal duty of care that would apply to all mortgage originators, although the bill would not create a fiduciary relationship between the originator and the consumer. Loan originators would be required to present a range of loan products for which the consumer is likely to qualify, and which are appropriate for the consumer's current circumstances. The mortgage products presented to a consumer must be consistent with the consumer's ability to pay and provide a net tangible benefit. Because these standards are broad and originators would be liable for violations, we believe that the establishment of clearly defined safe harbors may be appropriate in implementing the law and that the statute should clarify that the rulewriting agency has sufficient flexibility for this purpose.

I would also like to say a few words about the bill's delegation of rulewriting responsibility. Since enactment of the Truth in Lending Act in 1968, the Federal Reserve has been the sole agency responsible for issuing rules to implement that Act. Several provisions of H.R. 3915 would amend TILA and would be implemented by regulations that are promulgated jointly by the federal banking agencies. On the one hand, interagency rulemakings ensure that different perspectives are considered in developing a rule and that all agencies have a say in the outcome. On the other hand, the interagency rulemaking process generally is a less efficient way to develop new regulations. Frequently, it can be challenging to achieve a consensus among the different agencies involved in an interagency rulemaking. As a result, interagency rulemakings can take considerably longer to complete than rulemakings that are assigned to a single agency.

Conclusion
The Federal Reserve is continuing its efforts to enhance consumer protection in the residential mortgage market. As we develop more useful consumer disclosures for both closed-end loans and home-equity lines, we are mindful that improved disclosure may not always be sufficient to address abuses. Accordingly, we will carefully consider whether additional substantive protections are needed to prevent unfair or deceptive practices. We look forward to working with the Congress to enhance consumer protections while promoting sustainable homeownership and

Homeowner Affordability & Stability Plan

– The Obama Administration today announced new U.S. Department of the Treasury guidelines to enable servicers to begin modifications of eligible mortgages under the Administration's Homeowner Affordability and Stability Plan – announced by President Barack Obama just two weeks ago. The release of detailed requirements for the "Making Home Affordable" program facilitates implementation of the critical provisions that will help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure such as lower housing prices, increased crime and higher taxes.
"Two weeks ago, the President laid out a clear path forward to helping up to nine million families restructure or refinance their mortgages to a payment that is affordable now and into the future. Today, we are providing servicers with the details they need to begin helping eligible borrowers," said Treasury Secretary Tim Geithner. "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive. Economic recovery requires action on all three fronts."
"Only two weeks after the President unveiled his plan to help promote homeowner affordability, we are moving forward today with these guidelines to implement that plan," HUD Secretary Shaun Donovan said. "This step forward represents a tremendous coordinated effort between major government and regulatory agencies to help bring relief to America's housing market and homeowners. This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans."
The guidelines will implement financial incentives for mortgage lenders to modify existing first mortgages and set standard industry practice for modifications.
Treasury announced today that the Making Home Affordable program will also include additional incentives for efforts made to extinguish second liens on loans modified under this program. Extinguishing second liens will make mortgages more affordable, improve loan performance, and help prevent foreclosures.
In conjunction with the release of the new guidelines, Treasury, HUD and other members of a broad interagency task force have prepared consumer friendly Q&A and eligibility assessment tools for borrowers available at FinancialStability.gov. To ensure the program can be implemented as quickly as possible, the agencies also have conducted extensive outreach with housing counselors and mortgage servicers, including the development of call center phone scripts, a training plan and detailed guides, to prepare them for incoming inquiries from borrowers in the wake of the guidelines release. An expanded online resource will soon be available for borrowers, and agency representatives will fan out across the country in the coming weeks to conduct outreach at homeownership events in communities hardest hit by the housing crisis.

Homeowner Affordability & Stability Plan

– The Obama Administration today announced new U.S. Department of the Treasury guidelines to enable servicers to begin modifications of eligible mortgages under the Administration's Homeowner Affordability and Stability Plan – announced by President Barack Obama just two weeks ago. The release of detailed requirements for the "Making Home Affordable" program facilitates implementation of the critical provisions that will help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure such as lower housing prices, increased crime and higher taxes.
"Two weeks ago, the President laid out a clear path forward to helping up to nine million families restructure or refinance their mortgages to a payment that is affordable now and into the future. Today, we are providing servicers with the details they need to begin helping eligible borrowers," said Treasury Secretary Tim Geithner. "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive. Economic recovery requires action on all three fronts."
"Only two weeks after the President unveiled his plan to help promote homeowner affordability, we are moving forward today with these guidelines to implement that plan," HUD Secretary Shaun Donovan said. "This step forward represents a tremendous coordinated effort between major government and regulatory agencies to help bring relief to America's housing market and homeowners. This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans."
The guidelines will implement financial incentives for mortgage lenders to modify existing first mortgages and set standard industry practice for modifications.
Treasury announced today that the Making Home Affordable program will also include additional incentives for efforts made to extinguish second liens on loans modified under this program. Extinguishing second liens will make mortgages more affordable, improve loan performance, and help prevent foreclosures.
In conjunction with the release of the new guidelines, Treasury, HUD and other members of a broad interagency task force have prepared consumer friendly Q&A and eligibility assessment tools for borrowers available at FinancialStability.gov. To ensure the program can be implemented as quickly as possible, the agencies also have conducted extensive outreach with housing counselors and mortgage servicers, including the development of call center phone scripts, a training plan and detailed guides, to prepare them for incoming inquiries from borrowers in the wake of the guidelines release. An expanded online resource will soon be available for borrowers, and agency representatives will fan out across the country in the coming weeks to conduct outreach at homeownership events in communities hardest hit by the housing crisis.

Let's go CONSUMER CONFIDENCE....I see you turning the corner - but what corner is that?

Bay Area home sales top last year again; median drops to $300K (Holy Cow)
Bay Area home sales rose above a year ago for the fifth consecutive month in January. Home buying remained slow in pricier coastal markets but was robust in many inland areas where steep price declines have boosted affordability and, in some cases, driven sales of existing houses to record levels. The role of foreclosures in the housing market continued to grow, representing 54 percent of the Bay Area homes that resold last month. A total of 5,050 new and resale houses and condos closed escrow in the nine-county Bay Area last month. That was down 26.7 percent from 6,889 in December but up 40.8 percent from 3,586 in January 2008.
Last month's sales were the third-lowest for a January since 1988. Discounted foreclosures have helped fuel the surge in inland resale activity. They've also made it far more difficult for builders to compete with resale prices, helping to explain why sales of newly built homes fell last month to the lowest point for a January since at least 1988, when DataQuick's statistics begin. Conversely, resales of single-family detached houses hit record levels last month in San Pablo, Richmond, Pittsburg, Antioch, Oakley, Fairfield and San Pablo - areas that have attracted bargain hunters with their relatively large price drops and abundant foreclosures.
"One of the most common questions for the real estate pundits is, 'When will things get better in the housing market?' The question comes from the perspective of sellers, the industry, and those concerned about the downturn's impact on the economy," said John Walsh, DataQuick president.
"But from the perspective of a lot of first-time buyers and investors," he continued, "it's clear things have only been getting better for months. It's hard to imagine resale activity getting much stronger in many inland areas, especially if the deep discounts fade as a result of new efforts to stem foreclosures and stabilize prices."
The median price paid for all new and resale houses and condos combined in the nine-county Bay Area fell to $300,000 last month. That was down 9.1 percent from $330,000 in December and down a record 45.5 percent from $550,000 in January 2008.
The January median sale price - the point where half of the homes sold for more and half for less - stood at its lowest since it was $299,000 in December 1999. It was 54.9 percent below the peak median of $665,000 reached in June and July of 2007.
The median has fallen on a year-over-year basis for 14 consecutive months. Its dramatic plunge is partially the result of the regional decline in home values. But the decline also reflects a shift toward more sales in the less-expensive inland markets; slower high-end sales; and buyers' preference for lower-priced foreclosures.
Last month 54.2 percent of all homes that resold in the Bay Area had been foreclosed on at some point in the prior 12 months, up from 50.1 percent in December and 18.8 percent a year ago.
At the county level, foreclosure resales last month ranged from 16.4 percent of resales in San Francisco to 75.2 percent in Solano County. In the other seven counties, January foreclosure resales were as follows: Alameda, 51.9 percent; Contra Costa, 64.4 percent; Marin, 26.2 percent; Napa, 48.1 percent; Santa Clara, 45.6 percent; San Mateo, 34.1 percent; Sonoma, 55.6 percent.
San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Because of late data availability, sales in late January were estimated in Alameda and San Mateo counties.
In October, use of FHA, government-insured mortgages allowing a down payment of as little as 3 percent rose to nearly 25 percent of Bay Area home purchase loans. That's a record in DataQuick's statistics and is up from less than 1.0 percent a year ago. At the same time, use of larger mortgages known as "jumbo loans," common in higher-cost coastal neighborhoods, continued to fall. Before the credit crunch hit in August 2007, 62 percent of Bay Area sales were financed with jumbos, then defined as over $417,000. Last month just 12.5 percent of purchase loans were over $417,000.
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $1,297 last month, down from $1,471 the previous month, and down from $2,571 a year ago. Adjusted for inflation, current payments are 50.5 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 63.4 percent below the current cycle's peak in June 2006.
Indicators of market distress continue to move in different directions. Foreclosure activity has waned recently but remains near record levels, while financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable. Non-owner occupied buying activity has edged higher recently and is above-average in some markets

2009 Stimulus Package and The Housing Market

One component of the plan would lower the average homeowner's mortgage payment, which can easily take up 38 percent of a family's income. The goal of the plan is to lower most homeowners' mortgages to 31 percent of their income. A family with a household income of $50,000 will, on average, put $19,000 toward their mortgage. Under the president's plan they'd pay $15,500 toward their mortgage for a savings of $3,500. Lenders would also be required to write down a mortgage principal rather than interest rates, with the goal of helping to reduce the chances of default. The plan would also allow bankruptcy judges to modify mortgages, but only mortgages closed before the law is enacted are eligible. Homeowners would also need to inform their lender or loan servicer in advance of their intention to file for bankruptcy protection. According to a February 3rd article in the Charlotte [NC] Business Journal, the Charlotte Home Builders Association is petitioning members of the US Congress, upset over the total disregard for the housing market when developing the so-called “stimulus package” of $800+ billion.
The Homebuilders would like to at least see the $7500 tax credit for first-time buyers raised to $10,000, and extended through the end of 2009. I have also heard some folks argue that it should be doubled, and not required to be paid back. But in any event, I would like to at least see the Congress of the United States acknowledge that the housing market needs help. After all, it was the housing market that first felt the effects of the recession.
The Democrat-controlled house didn’t have any problem seeing the value in $300 million for contraceptives, $75 million for tribal alcohol and substance abuse reduction, and another $75 million for smoking cessation. They are also ready to pay back Hollywood for its extreme left-wing support during the campaign last year, by allocating $246 million in tax breaks for movie producers to buy motion picture film. The $7500 tax credit will not have to be paid back.

The home buyer tax credit will work like this. All taxpayers who buy a home in 2009 will get up to 10% of the purchase price back in a tax credit up to $15,000 (on a $150,000 home). The bill will not be retroactive and only affect home purchases after the bill is passed.
Where’s the help for the housing industry in this package? It seems to have been totally ignored. If you are in the business of building or selling homes, or in any of the supporting trades, like furniture, carpet, appliance sales, etc, this stimulus proposal doesn’t do much to help you out. Write or email your representative or your senator, and let them know that you shouldn’t have to be a chain smoking alcoholic Native American independent filmmaker to get help from the stimulus package.

The Slow Train Wreck Continues...

The slow train wreck continues. We can't help but rubber kneck. I read this today and wanted to share it with you.
By Jody Shenn
Feb. 9 (Bloomberg) -- JPMorgan Chase & Co. analysts almost doubled their projections for losses on some prime-jumbo mortgages underlying securities, created at the start of the U.S. housing slump, because of soaring defaults.
Losses on so-called hybrid adjustable-rate mortgages backing 2006 and 2007 prime-jumbo securities will reach 8 percent to 10 percent, according to a Feb. 6 report by New York- based analysts John Sim and Abhishek Mistry.
“The pickup of defaults in prime during the second half of 2008 has caused us to nearly double our loss projections on prime hybrids,” the analysts wrote.
Defaults on home loans not labeled as “subprime” that back so-called non-agency mortgage securities, the debt that sparked the global financial-market meltdown, have soared as home prices continue to tumble and the U.S. recession deepens. The share of prime-jumbo mortgages at least 60 days late climbed 0.71 percentage point to 5.29 percent in the month covered by January bond reports, according to JPMorgan.
About $500 billion of prime-jumbo bonds exist, according to Memphis, Tennessee-based FTN Financial. Jumbo loans are larger than what government-chartered Fannie Mae and Freddie Mac can buy or guarantee, currently $417,000 in most areas and as much as $625,500. Hybrid ARMs offer a few years of fixed interest rates, before switching to payments that vary with indexes.
Lower-Loss Sector
Losses on prime-jumbo mortgages with completely fixed rates in “recent vintage” bonds will be lower than losses on hybrid ARMs, partly because more of the borrowers will be able to qualify to refinance out of the loans, JPMorgan said.
“Although historical experience would lead us to increase prime fixed losses to 4 percent, faster prepayments could prevent many future defaults, keeping losses in the 2 percent range, a decrease from last month’s 2.3 percent to 2.8 percent” projection, the analysts wrote.
The share of Alt-A mortgages underlying bonds at least 60 days late, in foreclosure or already turned into seized properties climbed 1.53 percentage points last month to 22.88 percent, JPMorgan said. Defaults on so-called option ARMs rose 2.47 percentage points to 30.96 percent, the report said.
With the market for prime-jumbo mortgage bonds closed since early 2008 and banks issuing fewer loans to keep on their books, the average rate on a typical 30-year fixed-rate jumbo mortgage was 6.91 percent on Feb. 6, compared with 5.44 percent on similar “conforming” loans, according to Bankrate.com data.
Shares of Thornburg Mortgage Inc., a mortgage real-estate investment trust that specializes in jumbo-loan debt, and Redwood Trust Inc., a REIT with a similar focus, have fallen almost 100 percent and 75 percent over the past 24 months.
Santa Fe, New Mexico-based Thornburg gained 2 cents to 10 cents in over-the-counter trading as of 4:00 p.m. in New York today, while Mill Valley, California-based Redwood climbed 42 cents to $15.30 in New York Stock Exchange composite trading.

Simple Trumps Fancy Right Here Right Now

I spent the day viewing homes in Tiburon. This home really excited me. Built in 1977 - and the great view. 1/2 acre mostly flat lot - very nice @ $803/sq ft. Who says you can't go back home, toss aside the fancy and give me simple. Wonderful family home with 5BD & separate 1BD au pair, lrg level lawn, great kitchen/family rm, & plenty of space for separation including a great 2nd story office w/ built-ins & SF view. Approx 4,800sf on over level 1/2 acre w/ stunning Golden Gate Bridge and San Francisco skyline views, end-of-street location & near miles of open space trails. Tall windows, temp-controlled wine cellar, decks, hot tub, fenced & private. 6 bedrms, 5 1/2 bath total.

REO TO BE RENTALS

Fannie Mae Announces National REO Rental Policy
Renters in Fannie Mae-Owned Foreclosed PropertiesEligible to Stay in Their Homes
WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today announced the establishment of a new National Real Estate Owned (REO) Rental Policy that will allow qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. The company currently has an eviction suspension in place through the end of January which will allow for the new policy to be fully operationalized prior to the suspension concluding.
"Renters in foreclosed properties have often been a casualty of the foreclosure crisis the country is facing," said Michael Williams, chief operating officer of Fannie Mae. "This policy will allow qualified renters to remain in Fannie Mae-owned properties should they choose to do so, mitigate the disruption of personal lives that foreclosures can cause, and help bring a measure of stability to communities impacted by high foreclosure rates."
The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.
While the company markets the properties for sale, Fannie Mae will manage the properties through a real estate broker or a property management company. The company will not require security deposits to be posted in connection with this program.
Renters in the foreclosed properties will be asked to pay market rate rent under the new leases. Rates may be determined by reviewing local comparable rents, conducting a neighborhood survey, or through other relevant indicators. Rates will also be subject to any legal rent control restrictions. The company will review each instance where the market rate may require a tenant to pay additional rent and will work to reach an equitable resolution.
On behalf of the company, property managers are contacting renters in Fannie Mae-owned foreclosed properties to notify them of their options.

Comprehensive Housing Strategy - Loan Limits

The drop in mortgage loan limits for conventional financing at the end of 2008 is hurting home sales and trade-up activity in higher price ranges across the country, according to the National Association of Realtors®.
The latest existing-home sales data shows transactions under $400,000 are 3 percent below a year ago. However, sales of homes priced at $750,000 or more have declined a whopping 47 percent.
Outside of FHA, Fannie Mae and Freddie Mac, mortgages that do not have government backing are still experiencing a credit crunch. Buyers who need jumbo mortgages must pay interest rates that are nearly 2 percentage points higher than conventional financing; as a result, the high-end market is not moving.
Lawrence Yun, NAR chief economist, said restoring higher mortgage loan limits is critical to this part of the market. “Buyers in higher price ranges are at a severe disadvantage because they have to pay higher interest rates,” he said. “Lower loan limits are having a pronounced impact on trade-up activity at the upper end of the market, which depends more on large downpayments to keep mortgage amounts below the maximums for conventional financing.”
While homes above $750,000 are considered luxurious in many areas, they are modestly sized homes in the midprice ranges of many high-cost markets. “However, the lower mortgage limits for conventional loans mean upper middle-class home buyers in much of the country, including many areas in the Midwest and South, also have to pay higher interest rates,” Yun said. “As a result, we are seeing a universal stalling of sales in higher price ranges across the country.”
To illustrate in dollar terms, if mortgage limits are permanently raised to $729,750, the maximum limit that expired at the end of December, the mortgage payment on such a loan would drop by $942 per month by lowering interest rates 2 percentage points. Over the life of a 30-year loan, the homeowner would save $338,000.
NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said all consumers should have access to today’s historically low mortgage interest rates. “It’s only fair that all hard-working, tax-paying, successful people who want to purchase a home have equal access to low interest rates regardless of where they live or where they want to buy,” he said.
“Every segment of the housing market needs a turnaround to spark an overall housing recovery, which will help the economy to begin to recover,” McMillan said.
While the National Association of Realtors® is pleased that Congress and the incoming Obama administration are working to ensure that any additional Troubled Asset Relief Program initiatives or economic stimulus package include provisions to stimulate home sales, prevent foreclosures and restore confidence in the housing market, NAR will continue its push for a comprehensive housing strategy.
“The housing sector is at the core of the current economic crisis,” NAR President Charles McMillan said. “A renewed, revitalized and robust housing market is essential to generating commerce and helping families build wealth and stability. We are eager to see this happen and look forward to working with the Obama administration and Congress to quickly implement housing stimulus efforts.”
NAR expressed support for Chairman Barney Frank’s, D-Mass., proposal, H.R. 384, the TARP Reform and Accountability Act, introduced last week. This bill contains key components of NAR’s Housing Stimulus Plan, including enacting a mortgage buy-down program to reduce interest rates below prevailing rates, increasing foreclosure prevention and mitigation efforts, and providing needed liquidity to the residential and commercial mortgage markets to ensure that financing is available. “We also applaud the chairman’s efforts to strengthen accountability and increase transparency in the use of TARP funds,” McMillan said.
NAR has pushed to refocus the TARP to end the credit crisis and jumpstart mortgage lending. “It is imperative to get TARP back on track by targeting funds for mortgage relief, which will help lower mortgage rates and reduce foreclosures,” said McMillan.
Even if H.R. 384 is not enacted, it will provide the Obama administration with a clear statement of congressional intent as Congress moves forward to implement the second half of the TARP. NAR has and will continue to advocate NAR’s positions to the new administration and regulatory agencies.
Realtors® pledged to work with Congress and the administration to pass an economic stimulus plan that is expected to include many components championed by NAR to improve housing. “We are pleased that eliminating the repayment feature of the first-time home buyer $7,500 tax credit will be addressed in this proposal. However, we still are working to have the credit expanded to all home buyers, and to extend the program through December 31, 2009. NAR is also working to ensure that any stimulus legislation reinstates the higher 2008 mortgage loan limits for FHA, Fannie Mae and Freddie Mac. These actions will have a meaningful impact on the housing market and will help protect home values,” McMillan said.
NAR’s Housing Stimulus Plan includes both legislative and regulatory fixes. Its focus includes keeping mortgage interest rates low, boosting home buyer confidence, and reducing the current foreclosure rate. It also asks that regulators be encouraged to help financial institutions resolve problems in the short-sale process, make it easier for servicers to modify existing loans, remove unreasonable underwriting guidelines and insist that credit reporting agencies correct errors promptly.
“We must all work together to stimulate and unclog the housing and financial system. Low interest rates, tax credits and higher loan limits will be effective only if people can get a loan. We hear every day from our members that even home buyers with good credit are having trouble getting mortgage loans. This must be corrected,” said McMillan.NAR expressed hope that the new administration will keeps its focus on a housing recovery as it moves forward with a larger stimulus package.