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.
Digging Deeper Into the Declining Homeownership Rate
While many housing fundamentals have been nearing their pre-recession levels for months or even years in some cases, the nationwide homeownership rate sank to a 48-year low of 63.4 percent in the second quarter of 2015.
By the end of the year in 2015, the homeownership rate had clawed its way back up to 63.8 percent, but the full year of 2015 still represented the 11th consecutive year of decline since hitting an all-time peak of 69 percent in 2004.
“Perhaps this period represented an unsustainable shift of many financially weaker families out of rental housing into homeownership, which subsequently reversed with the bursting of the housing bubble and the onset of the Great Recession,” said Bill Emmons, Assistant VP and Economist with the St. Louis Fed.
From 1968 until the late 1990s, the homeownership rate fluctuated between 63 and 66 percent over the three decades, which is likely the range to expect in the future, according to Emmons.
“Evidence supporting the return-to-normal hypothesis includes greater-than-average declines since 2004 in the homeownership rates of younger, less-educated and nonwhite families—precisely the financially weaker groups that moved into homeownership most rapidly during the housing boom,” Emmons said.
Still another explanation is that homeowership today is not as attractive as it has been in past decades because of fluctuations in home values, the tightened standards for obtaining a mortgage loan, and the fact that many millennials consider the prospect of being “tied down” to a house and the obligations that come with it less attractive than previous generations.
While it is possible the homeownership rate could decline further and even dip below 60 percent under the “retreat-from-homeownership interpretation of recent experience,” it is still too early to determine if the homeownership rate is on the path to “normalization” or if is in the midst of retreating, Emmons said, but one thing is certain—that the homeowership rate is not likely to approach its peak of 69 percent in the near future.
With the release of the company’s Q1 2016 earnings statement right around the corner, Bank of America CEO Brian Moynihan said in hisletter to shareholders in the 2015 Annual Report that the bank is “no longer clouded over by heavy mortgage and crisis-related litigation and operating costs.”
Crisis-related litigation plagued Bank of America in 2014. The bank reached a settlement with the Department of Justice in August of that year for $16.65 billion over the sales of toxic mortgage-backed securities in the run-up to the financial crisis; litigation costs and other expenses related to that settlement took a big chunk out of the bank’s 2014 net income. The $16.65 billion settlement remains a record for a settlement between the Department of Justice and a single company over matters related to the 2008 financial crisis (it was eclipsed only by British Petroleum’s $20.8 settlement with the DOJ in October 2015 over the Gulf oil spill).
“This progress is the result of continued strong business performance, no longer clouded over by heavy mortgage and crisis-related litigation and operating costs,” Moynihan said. “Over the past several years, we’ve followed a strategy to simplify the company, rebuild our capital and liquidity, invest in our company and our capabilities, and pursue a straightforward model focused on responsible growth.”
For the full year of 2015, Bank of America more than tripled its net income from the previous year ($15.9 billion compared to $4.8 billion). The bank’s earnings for 2015 were the highest since the pre-crisis year of 2006 (net income of $21.1 billion).
“Other general operating expense decreased $16.0 billion primarily due to a decrease of $15.2 billion in litigation expense which was primarily related to previously disclosed legacy mortgage-related matters and other litigation charges in 2014,” the shareholder letter said.
Fannie Mae and Freddie Mac began their risk-sharing initiatives in 2013 as a way to transfer risk from taxpayers to private investors while the Enterprises remain in conservatorship of the FHFA. Since then, the GSEs have transferred a substantial portion of the credit risk for mortgages totaling hundreds of billions of dollars in unpaid principal balance (UPB).
According to a Urban Institute’s Monthly Chartbook for March 2016, titled “Housing Finance at a Glance,” Fannie Mae and Freddie Mac exceeded their credit risk transfer goals for 2015 which called for them to lay off at least $150 billion and $120 billion, respectively, for two types of transactions. Fannie Mae laid off $187 billion in back-end credit risk on reinsurers during 2015, while Freddie Mac laid off $210 billion.
Since 2013, Fannie Mae has transferred a portion of the credit risk on more than $590 billion in single-family mortgages through all of its risk-transfer programs, which include the Connecticut Avenue Securities (CAS) series and its Credit Insurance Risk Transfer (CIRT) series. The latest transaction under the CAS series was announced last week and priced at $1.03 billion; it was the 11th CAS deal since the program began nearly three years ago. The next CAS transaction is planned for mid-April.
“We’re seeing a positive response from investors, who see strong fundamentals in mortgage credit risk and Fannie Mae mortgage credit risk in particular. The CAS program provides investors with consistent opportunities to benefit from Fannie Mae’s innovative and industry-leading credit risk management approach while gaining exposure to the U.S. housing market,” said Laurel Davis, VP of credit risk transfer, Fannie Mae. “One of our primary areas of focus is to continue to work to expand the investor base, and with this deal we continued to see new investors come into the program.”
“One of our primary areas of focus is to continue to work to expand the investor base, and with this deal we continued to see new investors come into the program.”
Laurel Davis, Fannie Mae
Freddie Mac’s risk-sharing initiatives include the Structured Agency Credit Risk (STACR) series and the Agency Credit Insurance Structure (ACIS) program. Through its credit risk transfer initiatives, Freddie Mac has transferred a substantial portion of credit risk for more than $422 billion in UPB on single-family mortgages. The Enterprise’s investor base has grown to more than 190 unique investors (including reinsurers).
The latest ACIS transaction was announced on Friday, March 25. The latest ACIS transaction provides credit loss protection up to a combined maximum limit of approximately $336 million of losses on single-family loans and transfers much of the remaining credit risk associated with the second STACR debt issuance this year. Through 16 ACIS transactions since the program began in 2013, Freddie Mac has placed approximately $4.3 billion in insurance coverage.
"We are very pleased about the continued partnership Freddie Mac has developed with the reinsurance market. This market has proved to be a durable partner for credit risk transfer," said Kevin Palmer, SVP of Single-Family credit risk transfer for Freddie Mac.
According to Urban Institute, the new 2016 scorecard for the GSEs expresses the goal of targeting 90 percent of newly acquired loans for transfer. The report stated that Fannie Mae's issuance under the CAS series now cover 18.38 percent of its outstanding single-family guarantees; Freddie Mac's issuances under the STACR program cover 27.54 percent of its outstanding single-family guarantees, according to Urban Institute.
Click here to view the Urban Institute’s Chartbook for March.
Why Are Fewer Consumers Complaining About Mortgages?
Newfound optimism in the housing market from both lenders and borrowers is causing mortgage-related complaints to subside as customer satisfaction improves and financial institutions alter the way they do business.
For the first time since the Consumer Financial Protection Bureau (CFPB) began accepting complaints from consumers about financial products shortly after opening its doors in July 2011, mortgage-related issues are no longer the most unsatisfactory product on the list.
The mortgage market is the largest consumer financial marketplace in the country with more than $10 trillion in total value. The CFPB enacted new mortgage rules in 2014 to ensure strong consumer protections and also ensure that lenders offered affordable mortgages to consumers.
According to the CFPB's Monthly Complaint Report, mortgage complaints now total 218,407 and 4,529 of these occurred in February, up 6 percent from last month.
Beating mortgage complaints this month were debt collection issues. According to the data, debt complaints total 219,229 and 7,360 of these happened in February, which makes this sector the new most-complained about product in the Bureau's report.
Debt collection, mortgage, and credit reporting complaints continue to be the top three most-complained-about consumer financial products and services, representing about 69 percent of complaints submitted in February 2016.
As of March 1, 2016, the CFPB has handled approximately 834,405 complaints, including approximately 22,800 complaints in February 2016, the report said.
One plausible explanation behind the silenced mortgage complaints is the optimism surrounding borrowers and lenders, according to recent reports.
Mortgage lenders remain optimistic and unbothered by the news surrounding the dismal, but improving, state of the U.S. economy.
A recent survey of 200 mortgage lending professionals from Lenders One showed that lenders are exuding confidence in the real estate market. In addition, lenders say that millennials, Hispanics, and boomerang buyers will lead the expected gains in business.
According to the survey, 62 percent of lenders surveyed said that they expect mortgage purchase production to increase by an average of 11 percent in 2016. Another 87 percent indicated that the mortgage purchase market will be extremely active.
“The strong confidence levels we’re seeing among lenders highlight the continued bounce back from one of the most challenging real estate and lending environments in U.S. history,” said Lenders One Interim CEO Dan Goldman. “In an environment where lenders can once again focus on business growth initiatives, it will be more important than ever for mortgage professionals to have access to the tools and ongoing training they need to capitalize on these emerging trends.”
According to AEI's First-Time Buyer Mortgage Share Index (FBMSI) released Monday, first-time buyers accounted for 56.7 percent of primary owner-occupied home purchase mortgages with a government guarantee in February 2016. This number is up from 55.9 percent last February and up from January's share of 56.1 percent.
"The first-time buyer share has been trending higher on a year-over-year basis, pushed up by improvements in the labor market, riskier mortgage lending, and continuing low mortgage rates," the report stated.
“On a year-over-year basis, the first-time buyer share increased in February, reflecting a continuation of strong first-time buyer participation,” said Edward Pinto, Codirector of the American Enterprise Institute’s International Center on Housing Risk. “The current housing market, particularly at the entry-level, is exhibiting strong, leverage-fueled demand, which in combination with shortness of supply, will continue to drive home prices up faster than incomes and inflation.”