Romney Housing Plan; Thoughts on Q4 Mortgage Profits; Price Appreciation to Defeat Eminent Domain?


In 1970, Marian McQuade began a campaign to establish a day to honor
grandparents which finally paid off in 1978 when President Jimmy Carter signed
a federal proclamation approving the first Sunday after Labor Day as National
Grandparents Day. Did you know that one out of ten children in the U.S. live
with their grandparents?
That’s right – per the Census Bureau there are
seven million grandparents whose grandchildren (younger than 18) living with
them in 2010. Unfortunately, per the Bureau, $45,000 is the median income for
families with grandparent householders responsible for grandchildren under 18.
Among these families, where a parent of the grandchildren was not present, the
median income was $33,000.

Huh? San Bernardino County might not need the eminent domain tool,
given recent price appreciation? That would be good news indeed for the
industry – here is the report on property values. (For more information or to schedule a meeting to speak with Dr. Villacorta who
is responsible for it, please contact Faith Murphy, Manager, Customer
Development at Clear Capital, at faith.murphy@clearcapital .com.)

Speaking of changing values, I was asked by several folks about the USDA
changes, specifically its list of communities which may be impacted by the
October 1 changes. Here you go.

Are low rates great for everyone? Maybe not. PIMCO’s Bill Gross is
warning the Fed’s actions to cut bond yields in the market to stimulate lending
could hurt banks over the longer term and serve to contract lending. Mr. Gross
has been wrong before (who hasn’t?), but he worries borrowing costs are so
cheap that banks will stop making loans
and be merged out given the
difficulty of making a reasonable return on their capital if things go on too

wonder if the Republicans will abolish Dodd Frank
and, thus,
the CFPB, if they win the White House in two months. I doubt it, but here is a
more educated view.
Up until recently, Romney had said little to illuminate his views on the topic,
except to say that when it comes to foreclosures, the government should butt
out. “Let it run its course and hit the bottom,” Romney told the Las Vegas
Review-Journal last October, per Fox News. And since then, the former
Massachusetts governor has largely avoided references to housing policy, except
when criticizing President Barack Obama’s. Romney’s 59-point economic growth
plan contains no housing initiatives. Among two dozen issues addressed on his
campaign website — from taxes to trade policy — foreclosures are not
mentioned. But a Romney housing plan of sorts has been put forth, and
here it is:
It includes, “A Plan To End The Housing Crisis: ‘Responsibly sell the
200,000 vacant foreclosed homes owned by the government’, ‘Facilitate
foreclosure alternatives for those who cannot afford to pay their mortgage’,
‘Replace complex rules with smart regulation to hold banks accountable’,
‘Restore a functioning marketplace and restart lending to creditworthy
borrowers’, and ‘Protect taxpayers from additional risk in the future by
reforming Fannie Mae and Freddie Mac’.”

Here is a humorous note on current trends I received: “Hey Rob, there are
some ‘funny’ things going on right now. The rally in MBS prices is due to the
market believing that the Fed will probably do a MBS purchase program to lower
, yet another agency – the FHFA announced that they are raising the g-fee
s another 10 bps, or 35-40 basis points in price. On the political side,
Obama’s campaign spent more than it brought in last month – a deficit – is that
a surprise? And here is a political conundrum of the mortgage banker: Obama is
going to do everything in his power to refinance everyone on earth, even
renters, but it seems that Romney would like to do away with Fannie
Freddie HUD. So do we want to have the wealth to distribute, or be taxed
less on no money?”

NAR is good at statistics: who, what, when, where, and how. And now we
have “how long?” Homes are spending less time on the market as supply
conditions tighten
: the median time (half above, half below) homes stayed
listed was down about 30% to 69 days in July compared to 98 days in July 2011.
While the overall median is down, the report stated one in five homes bought in
July stayed on the market for at least six months. (Like the two on either side
of my house!) Per NAR, at the current sales pace it would take 6.4 months to
clear the supply of homes available as of the end of July, a 31% decrease from
a year ago when there was a 9.3-month supply. Of course, all real estate is
local, and there are still areas where houses just aren’t moving. But still,
house prices are not falling off of a cliff, which is sure to help investor’s
views of owning residential mortgages and MBS’s. In balanced market conditions,
NAR said it’s typical to see prices rise by 1 to 2 percentage points above the
rate of inflation as measured by the Consumer Price Index. Looking ahead, Yun
said, “Our current forecast is for the median existing home price to rise 4.5
to 5 percent this year and about 5 percent in 2013, which is somewhat stronger
than historic norms because of the inventory shortfall that is most pronounced
in the low price ranges.”

But a person can buy a house using cash, or financing it. So will
purchases replace refi’s? And if they don’t, then what? (Consultant Joe Garrett
points out that consolidation in residential mortgage banking is alive and
well, and I agree: the top five originators have funded 47% of all mortgages
so far this year, and the top 25 lenders represent 85% of all loans

Although not totally applicable, there’s that old saying that in a
consolidating industry, you either are the consolidator, you sell to the
consolidator, or you go out of business. “The new factor in consolidation just
might be compliance.  We’re starting to hear from a few clients who are
worried about the CFPB and the cost of compliance and might be interested in

I received this note: “Having been through many refi cycles, we know
that the end is generally not pretty as companies adjust to the drop in volume

I think the end of this one could be the ugliest I’ve seen in my 25 years in
the biz when – in the absence of a major purchase market bounce – we could see
volumes decline by 60-70% (or more) when we finally run out of gas. Right
now, all you have to do is own a home and be making your payments to get a refi
loan, but once the refi train stops the feeling I have is that the fear of
regulatory and/or repurchase retribution will continue to constrict lending

for people who actually have to qualify for a new purchase mortgage. 
Everyone that I know feels that there are all kinds of eyes looking over their
shoulders and they don’t want to be the ones who get thrown under the bus for a
loan that has any issues later. Eventually, industry attrition will result
in the fact that there will be very few people who really know how to make a
credit decision
. They’ve become nothing but paperwork assemblers and
AUS submission specialists.  It’s like a friend of mine once said about
auto repair shops: ‘There are no more mechanics. They’re all just
‘parts replacers’.”

We aren’t quite there yet, however, and I also received this note from someone
within one of the agencies addressing the recent fantastic profit margins being
seen in the industry. “I would expect Q4 profits to be even higher.  We
saw a surge in the primary-secondary pricing during in Q1, the benefits of
which we would have expected to see in Q2.  The spread narrowed a bit during
Q2, so profit margins in Q3 could dip a bit as well.  However, the pricing
spread rebounded to its highest point of the year during Q3.  This
could manifest itself in a great 4th quarter in loan sale profitability.
It appears that many lenders are managing capacity through pricing.” I agree,
although it seems like volumes are slipping just a shade. And we’re only in the
third quarter. The refi market’s legs seem to be becoming a little tired – just
a sense. Of course, thousands of companies and individuals are sure hoping this
person is right.

And for some reader input on house flipping, Dan Stone expressed
some views. “I think the Agencies and HUD have it right, by allowing only owner
occupant buyers 1st right to purchase their foreclosed properties.  I have
seen too many flippers supposedly upgrade a good home with cheap improvements
which benefit the short-term look of a home.  A couple years down the
road, the outdoor lamps are tarnished, the paint is chipping, the molding is
separating from eaves, the cheap carpeting is worn, etc.  The flippers
want to maximize their financial gain, not install quality improvements in the
home.  By allowing the owner occupant buyers to upgrade when financially
possible, I believe their emphasis is on quality that will last during their
time in the house and longer, as they know they will be required to fix or
maintain any upgrades or changes.”

Yesterday, early on, Mario Draghi delivered his highly anticipated speech and
the big line was that the ECB is going to launch “monetary outright
transaction”, in other words, the ECB will be buying bonds of
governments like Spain and Italy, whose high yields are threatening their
economic recovery.  This was not a big surprise; in fact, the net effect
after some of the details was a modest improvement from the lows on bonds and a
pullback from the pre-market highs in stocks. Still, bonds sold off (don’t they
like stability and happiness in Europe?) and stocks rallied.

Continuing with that news, there would be no quantitative limit to the bond
purchases – this means what it says, the ECB is not putting in a limit like QE1
or QE2, but will instead purchase “whatever it takes to save the
Euro.” The ECB will not be printing money to purchase these bonds, but
will sell other assets to raise this money – therefore the ECB doesn’t expand its
balance sheet or money supply and potentially stoke inflation – Germany likes
this. And the purchases will be focused on the very short end of the yield
curve, one to three year maturities.

By the time the dust settled, and after combining the Europe chatter with
decent jobless claims, ADP, and ISM numbers here, our 10-yr yield closed at
1.68%. Agency MBS prices fell/worsened about .375 on above-average sales
volumes. But geez – are rates really going to move that much before 2015? The
Fed is continuing to buy $1-1.5 billion per day – that certainly helps the
demand side of things (for now).

MBS Prices are up sharply on the weak jobs number.

The following list of phrases and their definitions might help you
understand the mysterious languages of science and medicine. These special
phrases are also applicable to anyone working on a Ph.D. dissertation or
academic paper anywhere. (Part 2 of 3)
“In a series of cases” = thrice.
“It is believed that” = I think.
“It is generally believed that” = A couple of others think so, too.
“Correct within an order of magnitude” = Wrong.
“According to statistical analysis” = Rumor has it.
“A statistically oriented projection of the significance of these
findings” = A wild guess.

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