The nationwide shortage of housing inventory is a daily topic in the industry in 2018, with accelerating home prices combining with inventory shortfalls to make it very difficult for many potential homebuyers to find an actual home to purchase. The problem also extends to the rental side of things, with rent prices also increasing and renting becoming an increasingly popular option for many would-be homebuyers who decide renting is a better or more economically feasible option than saving up for a downpayment on a home. However, those inventory shortages are hitting the low-income segment of the population particularly hard, according to a report by the National Low Income Housing Coalition (NLIHC).
The NLIHC has released its 2017 Gap Report, spotlighting the widespread shortage of affordable housing within the U.S. rental market. The Gap report defines “low-income renters” as those “whose income is at or below the poverty guideline or 30% of their area median income.” The NLIHC report found that, on average, only 35 affordable and available rental homes exist for every 100 extremely low-income renter households. Those statistics vary from market to market, ranging from 15 available and affordable rental homes for every 100 renters in Nevada, but coming in at 61 for every 100 renters in Alabama.
The NLIHC report found that the 11.4 million extremely low-income (ELI) renter households accounted for 26 percent of all U.S. renter households, and 10 percent of all households overall. The U.S. marketplace is short 7.4 million affordable and available rental homes for ELI renters. To make matters worse, the report states that 71 percent of ELI renter households are “severely cost-burdened,” spending more than half of their income on rent and utilities.
States with the greatest percentage of severely cost-burdened ELI renter households include Nevada (83 percent), Florida (79 percent), California (77 percent), Oregon (76 percent), Hawaii (75 percent), Colorado (75 percent), and Virginia (75 percent). The degree of the shortages varies significantly by state, but the problem is nationwide. Wyoming is short 8,731 available and affordable rental homes for ELI renters. California, already known to be suffering severe inventory shortages across the board, is short by 1,110,803.
According to the report, The states where ELI renters face the greatest challenge in finding affordable and available homes are Nevada, with only 15 affordable and available rental homes for every 100 ELI renter households, California (21 homes for every 100 ELI renter households), Arizona (26 homes for every 100 ELI renter households), Oregon (26 homes for every 100 ELI renter households), Colorado (27 homes for every 100 ELI renter households), and Florida (27 homes for every 100 ELI renter households).
You can read the full NLIHC Gap report by clicking here.
With markets across the country suffering from pronounced inventory shortages, it would seem that anything that puts more homes on the market would be a good thing. A new report by Pro Teck Valuation Services found delved into that thesis, with an influx of foreclosed properties and REO sales causing very different results in two studied markets.
The latest installment of Pro Teck’s Home Value Forecast (HVF) examined the state of the market in both Newark and Jersey City, New Jersey. Citing a recent Wall Street Journal piece entitled “Why New Jersey’s Soaring Foreclosures Are Good for the Housing Market,” Pro Teck set out to test the WSJ’s thesis that New Jersey’s skyrocketing foreclosure rate would help offset the Garden State’s housing inventory shortages and generally be good for the state’s housing market.
For Newark, Pro Tech’s study found that the local market would not see much benefit from the high foreclosure rates. Foreclosures in Newark are at an all-time high, surpassing the 2010 volume. Pro Teck’s report explains that “In times of a ‘hot’ market, like in 2006 and 2012, the difference in price between REO and Regular sales begins to tighten, as the REO discount shrinks.” However, the REO discount has been on the upswing in recent years in Newark, which is depressing local home sale prices.
In contrast, Pro Teck found that Jersey City, while also seeing increases in REO sales in recent years, REO sales have averaged less than 10 percent of total sales, thus having less of an impact on Jersey City’s home sale values. In fact, Pro Teck notes that Jersey City’s home prices surpassed the local pre-crash highs more than three years ago.
According to a 2017 CoreLogic report entitled “United States Residential Foreclosure Crisis: Ten Years Later,” foreclosure inventory in New Jersey peaked at 89,000 in September 2012. Between 2007-2016, CoreLogic reported that New Jersey ranked third among the ten states with the highest peak foreclosure rate, coming in behind Florida and Nevada, respectively.
New FHA Changes Streamline Loss Mitigation Protocols
The Federal Housing Administration (FHA) released a Mortgagee Letter containing new procedures to strengthen the process mortgage servicers use to help struggling families avoid foreclosure and remain in their homes, according to an announcement from The Federal Housing Administration (FHA). The release says FHA is streamlining its loss mitigation protocols that servicers must use when evaluating and deploying ‘home retention options,’ foreclosure alternatives that allow delinquent borrowers to retain their home. The release also says that mortgagees must implement the policies set forth in the Mortgagee Letter no later than December 1, 2016.
The release notes that FHA’s revised procedures streamlines the process servicers use to engage borrowers, particularly when evaluating them for the FHA-Home Affordable Modification Program (FHA-HAMP). It states that these changes will decrease the number of steps a servicer and borrower need to follow in order to resolve a delinquency and enter into a loss mitigation home retention product. In addition, it also says that FHA is eliminating particular obstacles that will allow servicers greater flexibility for evaluating an unemployed borrower’s financial condition and special forbearance agreements.
Specifically, FHA reports that they will:
Require servicers to convert successful 3-month trial modifications into permanent modifications within 60 days instead of the average four-to-six months.
Allow borrowers with three missed mortgage payments to qualify for a partial claim to bring their arrearages current versus the previous four-month minimum.
End the traditional stand-alone Loan Modification option so borrowers can access the FHA-HAMP option, with its greater payment relief, sooner.
Eliminate the minimum 12-month delinquency term to qualify for FHA’s special forbearance option. This will allow servicers extend this option to unemployed households sooner in their delinquency.
FHA’s Loss Mitigation Program was created in 1996 to reduce the economic impact to the Mutual Mortgage Insurance Fund, and subsequently has resulted in options available to Mortgagees in order to aid borrowers in avoiding foreclosure, when possible. The FHA states that the evolution of their loss mitigation guidance has also led to improved consumer engagement, the streamlining of FHA’s PreForeclosure Sale option, and a new loan modification by which Mortgagees provide borrowers with a more sustainable monthly mortgage payment.
Additionally, HAMP was created in 2009, at the height of the economic crisis. The FHA shares that these efforts combined with those of other federal regulators (U.S. Department of Veteran Affairs, U.S. Department of Treasury, etc.) have helped stabilize the nation’s housing market as well as demonstrate that a mortgage modification is an effective loss mitigation home retention option.
The portfolio contracted at an annual rate of 27.8 percent in February, which translated to a month-over-month decline of more than $11 billion down to a value of about $337.2 billion by the end of the month.
In January, Fannie Mae’s gross mortgage portfolio experienced a rare expansion, increasing at an annual rate of 5 percent. With February’s contraction, the portfolio has now contracted in all but four months out of the last 67 months (since June 2010). The four months in which the portfolio expanded were January 2016, March 2015, January 2015, and December 2012. At the beginning of that stretch in June 2010, the amount of unpaid principal balance (UPB) of the loans in the portfolio was $818 billion.
According to a report from Urban Institute released last week which examined the GSE portfolio wind down under the FHFA’s conservatorship, the fact that Fannie Mae’s portfolio expanded in January “should not be an issue as the GSEs are reasonably close to the year-end 2016 portfolio goal. Relative to January 2015, Fannie Mae contracted by 16.4 percent, and Freddie Mac by 14.2 percent. They are shrinking their less liquid assets (mortgage loans and non-agency MBS) at close to the same pace that they are shrinking their entire portfolios.”
Fannie Mae’s gross mortgage portfolio contracted at an annualized rate of 16.5 percent for the full year of 2015 and is back on that pace for 2016 following February’s contraction. For the first two months of 2016, the portfolio has contracted at an annualized rate of 13 percent and the aggregate UPB of the portfolio at the end of February ($337.2 billion) was below the 2016 cap of $339.3 billion.
Fannie Mae's total book of business, which includes the gross mortgage portfolio plus total Fannie Mae mortgage-backed securities and other guarantees minus Fannie Mae MBS in the portfolio, increased at a compound annualized rate of 0.4 percent in February up to a value of about $3.098 trillion, according to Fannie Mae.
The serious delinquency rate on single-family loans backed by Fannie Mae declined by three basis points from January to February, from 1.55 percent down to 1.52 percent, its lowest level since July 2008. The number of loan modifications completed by Fannie Mae was nearly unchanged from January to February at 6,592 (compared to 6,599). For 2014, the monthly average of loan mods completed was 10,235. For 2015, the monthly average declined to 7,851.
Click here to view Fannie Mae’s entire February 2016 Monthly Volume Summary.
Banks’ Share of the Servicing Universe is Shrinking
The number of first-lien mortgage loans serviced by eight national banks, which comprise about 41 percent of all outstanding residential mortgages in the country, has declined every quarter since Q4 2013, according to the OCC Mortgage Metrics Report for the fourth quarter of 2015 released Wednesday.
As of the end of Q4 2015, those eight national banks (alphabetically)—Bank of America, JPMorgan Chase, CIT Bank (formerly OneWest), Citibank, HSBC, PNC, U.S. Bank, and Wells Fargo)—were servicing approximately 21.47 million first-lien residential mortgage loans nationwide. This number represented a decline of more than one million from the year-ago quarter (23.1 million for the end of Q4 2014) and nearly three and a half million from two years earlier (24.9 million for the end of Q4 2013). The number of first-lien loans serviced by the banks has now declined every quarter for eight straight quarters.
The aggregate outstanding balance of those first-lien loans serviced by the eight banks as of the end of Q4 2015 was $3.67 trillion and has also declined every quarter for eight straight quarters. At the end of Q4 2013, the aggregate balance was $4.2 trillion.
The good news for the servicers is that more of the first-lien mortgages that remain in their portfolios are performing. According to the OCC, 94.1 percent of the loans in the portfolio were current and performing as of the end of Q4, nearly a full percentage point higher than the year-ago quarter (93.2 percent as of the end of Q4 2014).
The foreclosure metrics were also down in Q4. Servicers at the eight banks initiated 63,387 new foreclosures during the quarter, which is a decline of 16 percent year-over-year. The number of home forfeiture actions, which include short sales, deeds-in-lieu of foreclosure, or foreclosure sales, was down by 23 percent year-over-year in Q4 (down to 38,112).
According to the OCC, servicers at the banks completed 35,118 modifications during Q4, and 92 percent of those were “combination modifications”—or modifications that included multiple actions that affect the affordability and sustainability of the loan. Also, out of those 35,118 modifications, 87 percent of them reduced the loan’s pre-modification monthly payment.
Dodd-Frank Suffers a Setback With MetLife Decision
A federal judge has issued an order to remove the designation of nonbank systemically important financial institution (SIFI) from MetLife Insurance which was imposed by the federal government more than a year ago.
U.S. District Judge Rosemary M. Collyer in the U.S. District Court for the District of Columbia issued the order to remove the nonbank SIFI tag from MetLife. The global insurance provider was originally designated as a nonbank SIFI by the Financial Stability Oversight Council (FSOC) in December 2014 under the authority granted to the council by Dodd-Frank.
The court's removal of the SIFI tag from MetLife is a victory for opponents of the Dodd-Frank Act who claim that the controversial Wall Street reform legislation enables “Too Big to Fail.” The FSOC, like the Consumer Financial Protection Bureau, was created out of the Dodd-Frank Act. While supporters of Dodd-Frank claim that the legislation put an end to the taxpayer-funded bailouts for institutions deemed “Too Big to Fail,” its opponents claim that the law actually codifies “Too Big to Fail” by giving the FSOC the authority to designate certain institutions as “systemically important.”
According to reports, other nonbanks to receive the SIFI designation were American International Group (AIG), Prudential Financial, and General Electric. MetLife was the first institution to challenge the SIFI designation.
“Of all of the Council’s activities, none generates more controversy than its designation of non-bank financial institutions as ‘systemically important financial institutions,’ or SIFIs. Designation anoints institutions as Too Big to Fail, meaning today’s SIFI designations are tomorrow’s taxpayer-funded bailouts,” said Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, during a hearing in December.
MetLife has fought to have the SIFI designation removed since it was named such. The company sued the FSOC in the U.S. District Court for the District of Columbia in January 2015 to have the designation removed because as a nonbank SIFI, MetLife was subject to heightened regulation which the company said increases compliance costs, which in turn increases costs to consumers without any added safety benefit for the financial system. The company even set up a portion of its website devoted to providing a “central point for information related to the judicial review of FSOC's designation.”
In mid-May, the U.S. Department of Justice made a non-public motion to have MetLife's suit against the FSOC dismissed. MetLife filed a motion for summary judgment with the U.S. District Court in the District of Columbia on June 16. Later in June, the National Association of Insurance Commissioners (NAIC), the American Council of Life Insurers (ACLI), the Academic Experts in Financial Regulation (AEFR), and the U.S. Chamber of Commerce all filed briefs backing MetLife’s attempt to have the SIFI tag removed.
Existing-home sales have suffered in recent months due to the continuous imbalance of extremely low inventory levels and rapid home price appreciation, and industry experts believe that this trend will not end anytime soon.
Ten-X's Residential Real Estate Nowcast expects existing-home sales to perform better in March with a 4.8 percent increase from the previous month and a 2.6 percent year-over-year increase. The company projects that sales will fall between seasonally adjusted annual rates of 5.15 and 5.55 million, with a targeted number of 5.32 million.
“Though U.S. home sales have seen significant volatility in recent months due to external factors, sales remain at a high overall level,” said Peter Muoio, Ten-X Chief Economist. “The housing market stands on solid ground despite global economic volatility and weaker U.S. GDP growth, with the firmer labor market and enhanced household budgets from low oil providing a boost to consumer confidence.”
Rick Sharga, Ten-X's EVP, does not believe that existing-home sales will normalize anytime soon with inventory shortages prevalent in the market.
“Both January and February home sales were slightly better than a year ago, and our Nowcast predicts that March will continue that trend," Sharga said. “But inventory levels remain low, and home price appreciation continues to outpace wage growth. These factors suggest that, even with mortgage rates near their historic lows, a return to more ‘normal’ levels of home sales is still off in the distance.”
The National Association of Realtors (NAR) reported that existing-home sales fell in February 2016 after reaching the highest annual rate in six months in January. The report found that existing-home sales decreased 7.1 percent to a seasonally adjusted annual rate of 5.08 million in February from 5.47 million in January. However, the report noted that despite last month's large decline, sales remain 2.2 percent higher than a year ago.
The existing-home sales report from NAR for January 2016, showed that lenders are well on the path to recovery from TRID delays. The report found that existing-home sales increased 0.4 percent to a seasonally adjusted annual rate of 5.47 million in January from a downwardly revised 5.45 million in December. Existing sales are now 11.0 percent higher than a year ago, the highest annual rate in six months and the largest year-over-year gain since 16.3 percent July 2013.
"The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers," said Lawrence Yun, NAR Chief Economist.
The decline in existing-home sales in February did not slow down home price appreciation. According to the NAR, the median existing-home price in February was $210,800, up 4.4 percent from last February's median price of $201,900. This marks the 48th consecutive month of year-over-year gains. Home prices fell within Ten-X's range of $209,607 to $231,671 predicted in last month’s Nowcast. Now, Ten-X expects that sales prices for existing homes will fall between $209,207 and $231,229 for March with a targeted price of $220,218, representing 4.5 percent month-over-month and year-over-year gains.