“Wipeout”: Maneuvering Through the U.S.
Housing & Mortgage Markets
PRESENTERS:
Maureen Campbell – President, Pearce Plus Relocation & Senior Services
Ryan Huskey – VP, Corporate Lending Group
Melissa Graber – Director, Client Services, MSI (Moderator)
RECAP OF 2010
In 2010 and the first half of 2011, the economy,
unemployment, and real estate markets
continued to create some of the biggest
challenges since the Great Depression.
HR/Mobility professionals have been challenged
more than ever to adjust relocation programs in
an effort to continue to move employees in a
business environment focused on reducing costs
wherever possible.
Recap of Housing 2010
> An uptick in sales peaked in the first half of the year giving false hope of a robust
recovery.
> Expiration of home buyers tax credit caused a housing slump in the second half of the
year. In July, closed sales dropped 25% year over year.
> Accelerated foreclosure actions weakened prices.
> S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline.
> Interest rates were near historical lows and affordability improved, but fewer potential
buyers qualified for new loans due to the heightened credit standards.
> High unemployment, weak consumer confidence, and uncertainty about the future of
home prices still prevented some potential buyers from entering the market.
Current Market Statistics
Where Are We Now?
Unemployment Rate
> The July 2011 Jobs Report indicated that the unemployment rate still hovers around
9.1%.
2011 Mortgage Rates
Despite the lowest
mortgage rates in 50 years,
strict qualifying procedures
continue to stall the
housing recovery.
House Prices - June 2006 to march 2011 have
varied from -59% to +11%
Four-Quarter Price Change by State
Q1 2010 – Q1 2011
> Only 3 States Saw Price Appreciation
o North Dakota at 1.1%
o Alaska at 2.7%
o West Virginia at 2.2%
> The Biggest Declines:
o Idaho at -15.7%
o Arizona at -12.2%
o Oregon at -10.3%
SO WHAT DO THE “EXPERTS” SAY?
Lawrence Yun, Chief Economist for the
National Association of Realtors
“The dip in contracts may be
due to temporary factors. The
pullback in contract signings
is disappointing and implies a
slower than expected market
recovery in upcoming
months. The economy hit a
soft patch in April from
sharply rising oil prices,
widespread severe weather
with the heaviest precipitation
in 20 years, and a sudden
rise in unemployment
claims.” 05.27.2011
110.0
100.0
90.0
80.0
70.0
Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr
PENDING HOME SALES 2011
Future Home Sales Will Rise
Fannie Mae, Freddie Mac, Moody’s and NAR 5/2011
There is Optimism AMONG “Pundits”…
“If you don’t own a home buy one. If you
own one home, buy another one, and if
you own two homes buy a third and lend
your relatives the money to buy a home.”
John Paulson
Multibillionaire hedge fund operator,
September 2010
"Pricing is down so much in some markets that
when you analyze renting versus owning, it
makes much more sense to own“
Michael Larson
Real-Estate Analyst,
Weiss Research, February
2011
Fortune Magazine
Real estate: It's time to buy again
“Forget stocks. Don't bet
on gold. After four years
of plunging home
prices, the most
attractive asset
class in America
is housing.”
Home Price Expectation Survey
Macro Market Home Price Expectations Survey 03/2011
Economic Signs the Bottom is Close
> Housing is the most affordable it has been in decades
> Nationally, the cost of a house is the equivalent of about 19 months of total
pay for an average family, THE LOWEST LEVEL IN 35 YEARS.
> The average price has fallen to just over 2 years' income now - well below
its pre-bubble average of 2.6 years.
> Ultimately, affordability will drive people to buy homes.
o Attractive mortgage rates
o Greatly reduced housing prices
Moody’s Analytics & Wall Street Journal, February 27, 2011
Consumer Confidence
Point of maximum risk
in investment
Euphoria
Excitement
Denial
Optimism
Fear
Panic
Optimism
Hope
Despondency
Depression
Point of maximum
opportunity
Source: Westcourt Funds
THE “EYE OF THE STORM”
FORCLOSURES & SHORT SALES
Freddie Mac
“We expect the pace of our REO
acquisitions to increase in the
remainder of 2011, in part
due to the resumption of
foreclosure activity by
servicers, as well as
the transition of many
seriously delinquent
loans to REO.”
Fannie Mae
“Our foreclosure rates remain
high. However, foreclosure
levels were lower than what
they otherwise would have
been in the first quarter of 2011
due to the delays caused by
servicer foreclosure process
deficiencies and the resulting
foreclosure pause.”
Fannie Mae 5/6/2011
“Shadow” Inventory
> The number of months between the date of the borrower's last
payment and the date of liquidation is now at more than 18 months
on average. The highest figure on record.
> Discoveries of defects in the residential mortgage foreclosure
process further extended liquidation timelines - slowing the resolution
of shadow inventory and preventing home prices from finding a floor.
> Prior to the foreclosure moratoriums -The total number of troubled
loans peaked in early 2010 and began to show improvement.
Source: Fitch Ratings, NYC
Clearing of “Shadow” Inventory
> Florida has the largest shadow inventory:
o
Stemming from inflated foreclosure inventory which takes a very long time to clear
o New York & Florida:
>
>
Highest number of days loans are delinquent (644 & 638)
Taking longer for properties to come on the market
> Arizona & Nevada are faring better with shadow inventory:
o
o
o
Moving faster through the pipeline and comprising a larger share of existing sales
Arizona – 55% of existing sales are foreclosure
Nevada – 70% of existing sales are foreclosure
> The months’supply depends on saturation of distressed
sales:
o
o
New Jersey reported about 20% of existing sales to be distressed sales, therefore it will take longer
to clear
Nevada’s 70 % share will clear more quickly
Selma Hepp, Research Economist, March 21, 2011
Mortgage Default Warnings Surged in August
> The number of U.S. homes that received an initial default notice
jumped 33% in August from July
> Biggest monthly gain in 4 years
> Banks are now taking swifter action nearly a year after
processing issues led to a sharp slowdown
> This means a potentially faster turnaround time for the housing
market
o A revival is unlikely as long as a glut of potential foreclosures hovers
over the market
> There are 3.7 million more homes in some stage of foreclosure
now than there would be in a normal housing market
Foreclosures in Process
OCC and OTS Mortgage Metrics Report 3/2011
Share Of Distressed Sales
Shows the % of sales that are distressed in each state.
Months Supply of “Shadow” Inventory
*Months’ supply is
estimated by dividing
the shadow inventory
and the monthly
number of distressed
sales.
NAR May 2011
IS HOMEOWNERSHIP STILL THE
AMERICAN DREAM?
National housing survey
Americans believe that
homeownership has more
potential as an investment than
any other traditional investment
vehicle including stocks, bonds
and mutual funds.
Fannie Mae 4/2011
Pew Research Center
Percentage who agree that buying a home is the best
long-term investment a person can make.
Agree
81%
Pew Research Center 4/12/2011
Disagree
19%
Homeownership Rates
> Until 1995, home ownership rates historically hovered around 64%
> Between 1995 and 2004 homeownership rates increased when Congress urged
Fannie Mae and Freddie Mac to invest in mortgages targeted to lower-income
buyers, encouraging subprime lending and a deregulated mortgage industry
> In 2004 over 69 % of households owned homes
> In 2010, that number has decreased to 66.9 % . America's rate of home ownership
may be permanently declining from its 2004 peak
> The last time a lower percentage of Americans owned their own homes was in
1999, when the rate was 66.7 percent
> In today’s current housing market, the number of renters is on the rise
Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 2011
Desire for Homeownership Remains Strong
Though!
> Affordability has increased due to lower home
prices and interest rates
> Homeownership rates increase with age, and the
U.S. population is experiencing an aging trend
fueled by the Baby Boomers.
> There are 6 million more “Millennials” in the prime
future homeowners group than there were Baby
Boomers in 1977.
> The biggest first time homeowner opportunity in the
history of the country is ahead of us!
> People buy homes as their family and lifestyle
situations change
Source: Associated Press, "Homeownership Stays At Lowest Level In A Decade," November 2, 2010 and WSJ, February 27, 2011
Housing Affordability & Demographics
Source: US Census Bureau
WHEN IT COMES RIGHT DOWN TO IT,
REAL ESTATE IS LOCAL
Market Conditions Are Local
Median Sales Prices 2000-2010
$600,000
Median Sales Price
$500,000
$400,000
> Post-Bubble price declines
have been dramatic in some
markets
o AZ dropped 42%
o CA dropped 36%
o FL dropped 42%
Source: Federal Housing Financing Agency One
unit, non-condominium properties
$512,842
$330,037
$300,000
$252,727
$246,497
$237,466
$200,000
$144,501
$147,669
$129,577
$111,097
$100,000
2000
2006
2010
2000
2006
2010
2000
2006
$0
Median Price
ARIZONA
CALIFORNIA
FLORIDA
2010
Market Conditions are Local
Median Prices 2000-2010
$600,000
$537,740
$506,654
$500,000
$400,000
> In other markets, post-bubble price
declines have been more moderate
o DC dropped 6%
o ND increased 15%
o NY dropped 13%
Source: Federal Housing Financing Agency
One unit, non-condominium properties
$300,000
$281,796
$245,858
$235,474
$200,000
$151,845
$133,473
$113,144
Median Price
$100,000
$74,899
IDAHO2006
2000
2010
2000
2006
2010
2000
2006
2010
$0
Median Price
WASHINGTON, DC
NORTH DAKOTA
NEW YORK
To Evaluate Real Estate Market Conditions
> It’s essential to understand that markets and economies vary from
state to state, town to town, and neighborhood to neighborhood.
> Broad-based data is important for understanding overall economic
conditions, but to get a true reading, statistics must be gathered on a
local level with the assistance of a local expert.
> That’s why the ERC Broker Market Analyses addresses both the
macro and micro markets.
> Every property needs to be examined individually.
> Local data is critical to accurate pricing and marketing success!
Regional & Local Market Data
> To get the most accurate information on real estate markets and trends, it’s
important to look at regional and local data.
> RDC Members post quarterly market stats on:
o
o
o
o
o
o
o
Median/Average Sales Prices
Days on Market
Absorption Rate
# of Active Listings
# of Closed Sales (past 6 months)
Increase/decrease in value
List Price to Sales Price Ratio
www.relocationdirectorscouncil.org
HOW DOES THIS REAL ESTATE DATA IMPACT
HR & MOBILITY PROFESSIONALS?
Relocation Challenges
> Smaller Buyer Pool
> Unknown Impact of “Shadow” Inventory on Market Competition
> Property Management Needs
> Loss-on-Sale
> Negative Equity
> Extended Days on Market
> Extended Duplicate Housing Costs
The Need For Creative Approaches to
Recruiting & Relocation
> Pre-decision BMAs/Appraisals
> Extensive counseling on pricing strategies
> Customization
o As consumers, people want customization and flexibility.
o This is true of employers and employees as well
> Even homeowners have become renters – How does this impact their
benefits package?
o Extended temporary housing/duplicate housing costs
o Property Management
> Loss-on-sale assistance – Negative Equity - Short sale assistance
> Mortgage Interest Differential Adjustment (MIDA)
Positioning Properties for a Quick Sale
> Pricing! Pricing! Pricing!
> Staging:
o In this market, it’s important
o Lack of staging goes to condition
o Home repairs & improvements
> No matter what you do, if a property is not priced accurately to begin with, it
will not only sit on the market, but, in a declining market, will sell for a lot
less.
> Homes will sell in any market if all of the critical factors are in place. A
recent study showed that sellers who priced correctly from the start got 12%
more for their properties in half the time.
Industry Players
> To understand today’s lending environment, you need to
understand who the industry players are
> We have all heard the names Fannie Mae, Freddie Mac,
GNMA, FHA, and VA. But who are they and what do they
do?
Fannie Mae (FNMA)
> FNMA was established in 1938 after the Great Depression as part of
FDR’s New Deal
> Their purpose was to create a liquid secondary market by buying
FHA insured mortgages from banks
> In 1958, Congress passed legislation giving private investor’s access
to common stock while the federal government held preferred stock
> In 1968, FNMA converted to a publicly held corporation so that the
federal government could remove it from the budget
Fannie Mae (FNMA)
> When Fannie Mae went public, they split into two entities
o Fannie Mae retained responsibility for purchasing nongovernment guaranteed loans
o Ginnie Mae was created and assumed Fannie’s original charter of
purchasing government guaranteed loans
GSEs and Ginnie Mae
> In 1970, Freddie Mac (FHLMC) was created to expand the
secondary mortgage market for mortgages in the U.S.
> FNMA and FHLMC are Government Sponsored Enterprises (GSE)
> GNMA is a Government Owned Enterprise (GOE)
> What is the difference?
o The GSEs are publicly owned but have an ‘implicit guarantee’ that the US
Government will back their securities
o Ginnie Mae is owned by the government and has an ‘explicit guarantee’ that
their securities are backed by the full faith and credit of the US Government
The Meltdown of the GSEs
> In 2008, FNMA and FHLMC were placed into conservatorship
under the Federal Housing Finance Agency
> In 2010, FNMA and FHLMC were delisted from the NYSE
> Although not official, the GSEs appear to have the same
guarantee as GNMA
> What does this mean? Essentially, the US Government is
controlling all of the shots in today’s lending environment
GSEs and Ginnie Mae
> So what do the agencies do?
o They do not originate or service loans
o They purchase or guarantee mortgage backed securities that are
traded on the secondary market
o The GSEs set the lending guidelines for conforming loans that
they purchase or guarantee
o Ginnie Mae guarantees loans from the following government
agencies:
> Department of Housing and Urban Development (HUD)- FHA loans
> Department of Veteran Affairs- VA loans
> Department of Agriculture (USDA)- Rural Development Loans
GSE and Ginnie Market Share
> Between 2004 and 2007, the total market share of the
agencies was 51.5%
> Between 2008 and the present, the total market share of
the agencies is 97%
> What does this mean?
o The federal agencies have a monopoly on the mortgage market
o Until private money comes back, the agencies set the lending
rules
MBS Market Share
NOW THAT WE HAVE DISCUSSED THE IMPORTANCE
AND POWER OF THE AGENCIES, WHAT ARE THEY
DOING TO SHAPE TODAY’S MORTGAGE MARKET?
Loan Quality Initiative (LQI)
> In addition to stricter lending guidelines, the agencies are
implementing the Loan Quality Initiative
> LQI was implemented to promote complete and accurate loan data
> LQI is focused on four basic objectives:
WHAT AFFECT WILL LQI HAVE ON THE
CONSUMER?
Fraud Awareness
> Measures will be taken to eliminate all possibilities of fraud
> There will be an increased awareness on owner occupancy
> Fraud Guard Report – Detects undisclosed bankruptcies,
foreclosures, appraisal comps, parties to the transaction
> Social Security Verification Checks – Will confirm the social
security number directly with the social security
administration
Documentation Standards
> Documentation requirements have become very tedious for
the consumer and employers, but it may get worse
> How will this affect the three primary qualifying standards?
o Income
o Assets
o Credit
Documentation Standards – Income
> There will be more requests for employers to confirm salaries,
transfer dates, bonus history, bonus continuance, payroll
discrepancies, etc
> Tax returns are now needed more often, even for W2 wage
earners
> Tax Transcripts for every borrower
o
o
o
o
Unreimbursed business expenses
Real estate owned
Business owned
Verification of W2’s
Documentation Standards – Assets
> Underwriters are looking for more than just sufficient assets,
they are looking for the source of the assets as well
> Any deposit greater than $1K must be sourced in writing
> Assets necessary for the transaction must be liquid. Non-cash
assets must be liquidated to cash and verified by underwriting
prior to final approval
> Documenting assets are more difficult with relocating borrowers
due to expense reimbursements and regional banks
Appraisal Standards
> The Loan Quality Initiative is having a drastic change on the way appraisal
reports are completed
> To improve the quality and consistency of appraisal data, the GSEs have
developed the Uniform Appraisal Dataset (UAD), which defines all fields
required for an appraisal submission for specific appraisal forms and
standardizes definitions for key fields
> The Uniform Appraisal Dataset requirements are affective for all appraisals
originated on or after September 1, 2011
> Sale type: REO, short sale, estate sale, relocation sale, non-arms length,
and arms length
Appraisal Standards
> Property Style: Must include appropriate architectural design type such as
“Ranch”, “Colonial”, “Rambler”, “Farmhouse”, etc. Descriptions such as 1
story, 1 ½ story and 2 stories are no longer acceptable
> Property View Rating: Each property must be assigned a rating of neutral,
beneficial or adverse
> Property view factors: There are 12 established view factors: water view,
golf course view, industrial view, power lines, etc.
> How will be the affect?
o Appraisals will take much longer. The local MLS may or may not have the data
required under the UAD
o Realtors should expect increased calls from appraisers
o Increase of additional appraisal reviews i.e. desk review, field review or second
appraisal
Loan Limits
> A Jumbo loan is a loan in which the loan amount exceeds the limit set by the
agencies
> The standard conforming loan limit is $417,000 for a Single Family Residence
> Economic Stimulus Act (Expires 9/30/2011) – the higher of $417,000 or 125 percent
of the area median home price- not to exceed 175% of $417,000 or $729,750
> Housing and Economic Recovery Act – the higher of $417,000 or 115 percent of
the area median home price- not to exceed 150 percent of $417,000 or $625,500
> With median home prices dropping, the affect can be bigger than the equation
alone
> FHA has a standard loan limit of $271,050 but has the same high cost loan limits as
conforming loans
HIGHLIGHTS
PMI is Coming Back
> It is easier to qualify
> The premiums are cheaper
> Special relocation rates
> Eliminates the need for piggy back loans i.e. 80-10-10
> Up front single premiums
o Lender paid
o Borrower paid
o Seller paid
Low Down Payments
> Conforming loans require 3% down and the private
mortgage insurance companies are now providing this
> FHA loans require 3.5% down
> VA requires no money down
> USDA requires no money down
Jumbo Loans
> Jumbo loans still have very strict guidelines, but more banks are
offering them
> With the increase of banks offering jumbo loans, the rates are
starting to come down
> Turn times continue to be longer for jumbo loans and
consumers should plan a minimum of 45 days to get a jumbo
loan approved
Summary
> Fannie Mae, Freddie Mac, FHA and VA are setting the rules
> Common sense is pretty much useless in the approval process. It is
all guideline and rule driven
> Documentation requirements are all ready tedious; however, expect it
to get worse
> Increased verification measures will slow down the process and
potentially blow up deals in the end
> Although credit standards are more strict, we are seeing some
positive signs with an increase of financing options i.e. PMI, down
payment, and Jumbo
THANK YOU!