by David Thorpe, CEO of First Title Limited
February 2010
According to one estate agent in Orange County, California, there are plenty of desirable bachelor pads for sale if Tiger Woods is thinking about buying something a little smaller and a bit closer to Las Vegas. The other bit of good news for Tiger is that he will probably end up getting himself an absolute bargain. It is the top end that appears to be sticking depending on who you believe. So while Tiger decides what to do next, it is unlikely that he is about to join the ever-growing number of unemployed and homeless people in the USA. The Mortgage and Bankers Association (MBA) predicts that the unemployment rate in the States will peak at 10.2% in Q2 of next year. This will only pile on more misery for US homeowners. However there are so many mixed messages coming out of the States it is really hard to make any sense out of what is really going on. Just staying with California (and at this point I have to disclose a small interest in so far as I spend a lot of time there trying to explain to my employers just how bad things are in the UK mortgage market right now!) many commentators in the States believe that the housing market has a long way to go before it ever returns to the feeding frenzy of 2003/4 (not that everyone hopes it ever will). On the other hand, some are saying it's time to hang on to your horses again as rates are expected to remain extremely attractive throughout 2010. I suppose the truth lies somewhere in between.
According to the MBA mortgage demand fell at the end of last year, which was particularly worrying as rates had dipped a bit. This could of course be explained away as one of those seasonal blips or it could be a worrying sign for housing (or at least those of us who make a living from housing).
The good news is that the MBA also expects to see an increase in home buying activity this year with home sales up 11% from 2009 levels and new home sales increasing 21%. Good news indeed! In addition to this, national average price declines should finally stop by early 2010 (but will vary by State and home value) and.demand from first-time buyers will be the greatest. Sounds familiar?
At the same time the MBA also said its index of remortgage applications rose 11% during the first 2 weeks of December 2009. While the index of loan demand remains low, there has been an increase in cash buyers in some markets like Orange County. In fact the home buying world has become a place of extremes with cash buyers on one side and Federal Housing Administration buyers paying 3.5% deposits on the other. In fact the MBA says the increasein purchase applications "reflected a 10% increase in government purchases and a 0.2% decrease in private purchases”. They go on to say that remortgage activity increased to 74.4% of total mortgage applications from 72.1% in the prior period and that that the average interest for a 30 year fixed-rate mortgage increased to 4.88% from 4.79%. This ended a 6-week run of declining 30 year fixed rates that probably triggered the increase in remortgage applications.
But what about toxic loans? This year the Federal Reserve announced it had been buying up mortgage backed securities from Fannie Mae and Freddie Mac in an attempt to stabilise mortgage markets and as a result interest rates were stable during 2009. So this has led both Fannie and Freddie to begin contemplating whether they could also begin selling their non-performing mortgages - roughly $250 billion worth of residential mortgage products - in the open market. But could it ever happen and if so who would come up with the cash? According to some investment bankers who play in the non-performing loan market, Wall Street firms and several hedge funds are already in discussions with Fannie and Freddie about how they might unload their bad assets. The buyers would in all likelihood be hedge funds and investment partnerships. One idea they are said to be contemplating involves the securitisation of NPL’s. In order to achieve this all of the properties would need to be valued and the securitisation would take into account the revised property values. It is thought that if they could get 80% of the current valuations they would be ecstatic. However it is hard to see the current Obama administration allowing Fannie and Freddie to unload so many toxic mortgages onto private investors.
So how are all those US defaulting mortgage borrowers coping three years in to this property melt down? In the UK repossessions are, according to the CML, beginning to decline from earlier forecasts. I'm not so sure. In the States they have a Loan Modification Program that is meant to allow borrowers to change the terms of their mortgage and keep homeowners in their homes. A bit like what is meant to be happening in the UK. Apparently JP Morgan offered 199,033 loan modifications last year. Of those just 2% have completed the modification process. There are similar stories with many of the other US lenders. The biggest obstacle appears to be the borrowers themselves. They don't appear to be too keen to submit the full documentation to qualify. Nobody knows for sure why but to qualify they need to be able to prove income and submit tax returns and basically come clean with their finances. The suspicion is that many of them lied on their original mortgage application form. It wouldn't happen over here eh!
This article first appeared in the February edition of Mortgage Finance Gazette