by Calculated Risk on 11/15/2012 06:08:00 PM

From HUD: Actuarial Review of the Mutual Mortgage Insurance Fund. Excerpts:

Based on our stochastic simulation analysis, we estimate that the economic value of the Fund as of the end of FY 2012 is negative $13.48 billion. This represents a $14.67 billion drop from the $1.19 billion estimated economic value as of the end of FY 2011.
...
We project that there is approximately a 5 percent chance that the Fund’s capital resources could turn negative during the next 7 years. We also estimate that under the most pessimistic economic scenario, the economic value could stay negative until at least FY 2019.

Update: A few comments from Tom Lawler:

The latest review concluded that the “economic value” of the FHA MMIF (ex HECMs) – defined as the sum of the MMIFs existing capital resources plus the present value of the current books of business, was NEGATIVE $13.478 billion at the end of FY 2012. Stated another way, the present value of expected future cash flows on outstanding business – a sizable negative $39.052 billion – outstrips the MMIF’s current capital resources (of $25.574 billion) by $13.478 billion. The FY actuarial review of FHA’s HECM business concluded that the “economic value” of the current FHA HECM book was NEGATIVE $2.799 billion at the end of FY 2012.

In last year’s actuarial review the “economic value” of the FHA MMIF (ex HECMs) at the end of FY 2011 was +$1.193 billion, and the projected economic value of the MMIF at the end of FY 2012 (under the “base case) scenario) was a POSITIVE $9.351 billion. In recent years, however, these “projections,” based on “reasonable” benign projections, have been ridiculously optimistic.

Contrary to what at least one press report said, the actuarial “unsoundness” of the FHA MMIF is NOT the result of mortgage loans insured at or near the peak of the housing bubble. The “honkingly big” losses (in dollars) are concentrated in the FY 2008 and FY 2009 “books (October 2007 – October 2009) – that is, loans insured in the first few years AFTER the peak in the housing bubble, when “private capital” for risky loans dried up and FHA experienced a surge in market share, AND took on a lot of very risky (by any standard) mortgages, a significant % of which should not have been made.

The “walk-forward” of the FY 2012’s economic value from a projection of positive $9.351 billion a year ago to negative $13.478 billion today is a little hard to follow or understand. On the positive side, the money FHA extorted from lenders in the mortgage settlement added about $1.1 billion, and higher-than-projected 2011-12 volumes, actual performance, and different-than-projected portfolio composition added about $3.8 billion. On the negative side, various model changes, especially in the loss severity model, took out about $11.0 billion; lower interest rate assumptions took out $8.4 billion; just slightly lower home price assumptions (beyond 2012) took out a surprisingly large $10.5.

by Calculated Risk on 11/15/2012 03:57:00 PM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in October. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.8% annualized rate) in October. The CPI less food and energy increased 0.2% (2.2% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for October here.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, the CPI rose 2.2%, and the CPI less food and energy rose 2.0%. Core PCE is for September and increased 1.7% year-over-year.

On a monthly basis, two of these measure were above the Fed's target; median CPI was at 2.3% annualized, core CPI increased 2.2% annualized. However trimmed-mean CPI was at 1.7% annualized, and core PCE for September increased 1.4% annualized. These measures suggest inflation is close to the Fed's target of 2% on a year-over-year basis.

The Fed's focus will probably be on core PCE and core CPI, and both are at or below the Fed's target on year-over-year basis.

by Calculated Risk on 11/15/2012 01:20:00 PM

From Fed Chairman Ben Bernanke: Challenges in Housing and Mortgage Markets. Excerpt:

Although the decline in the number of willing and qualified potential homebuyers explains some of the contraction in mortgage lending of the past few years, I believe that tight credit nevertheless remains an important factor as well. The Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that lenders began tightening mortgage credit standards in 2007 and have not significantly eased standards since. Terms and standards have tightened most for borrowers with lower credit scores and with less money available for a down payment. For example, in April nearly 60 percent of lenders reported that they would be much less likely, relative to 2006, to originate a conforming home-purchase mortgage to a borrower with a 10 percent down payment and a credit score of 620--a traditional marker for those with weaker credit histories. As a result, the share of home-purchase borrowers with credit scores below 620 has fallen from about 17 percent of borrowers at the end of 2006 to about 5 percent more recently. Lenders also appear to have pulled back on offering these borrowers loans insured by the Federal Housing Administration (FHA).

When lenders were asked why they have originated fewer mortgages, they cited a variety of concerns, starting with worries about the economy, the outlook for house prices, and their existing real estate loan exposures. They also mention increases in servicing costs and the risk of being required by government-sponsored enterprises (GSEs) to repurchase delinquent loans (so-called putback risk). Other concerns include the reduced availability of private mortgage insurance for conventional loans and some program-specific issues for FHA loans as reasons for tighter standards. Also, some evidence suggests that mortgage originations for new purchases may be constrained because of processing capacity, as high levels of refinancing have drawn on the same personnel who would otherwise be available for handling loans for purchase. Importantly, however, restrictive mortgage lending conditions do not seem to be linked to any insufficiency of bank capital or to a general unwillingness to lend.

Certainly, some tightening of credit standards was an appropriate response to the lax lending conditions that prevailed in the years leading up to the peak in house prices. Mortgage loans that were poorly underwritten or inappropriate for the borrower's circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy. However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.
emphasis added

Clearly Bernanke and the Fed are concerned that credit isn't flowing to a large segment of the population.

by Calculated Risk on 11/15/2012 11:13:00 AM

A few comments from Mike Fratantoni, MBA’s Vice President of Research and Economics, on the Q3 MBA National Delinquency Survey conference call.

• Significant drop in "shadow inventory" with the declines in the 90+ day delinquency and in foreclosure categories.

• This was the largest decline in foreclosure inventory ever recorded.

• Significant difference between judicial and non-judicial states. The judicial foreclosure inventory was at 6.61%, and the non-judicial inventory was at 2.42%. Both are now declining.

• There has been "dramatic" improvement in California and Arizona. Overall there is continued improvement, "perhaps more quickly than expected".

• There has been some improvement in FHA delinquencies because of the strong credit quality of recent originations. Most of the delinquent loans are from the 2008 and 2009 vintages.

Click on graph for larger image in graph gallery.

This graph is from the MBA and shows the percent of loans in the foreclosure process by state. Posted with permission.

The top states are Florida (13.04% in foreclosure down from 13.70% in Q2), New Jersey (8.87% up from 7.65%), Illinois (6.83% down from 7.11%), New York (6.46% down from 6.47%) and Nevada (the only non-judicial state in the top 13 at 5.93% down from 6.09%).

As Fratantoni noted, California (2.63% down from 3.07%) and Arizona (2.51% down from 3.24%) are now well below the national average.

The second graph shows the percent of loans delinquent by days past due.

Loans 30 days delinquent increased to 3.25% from 3.18% in Q2. This is just above 2007 levels and around the long term average.

Delinquent loans in the 60 day bucket decreased to 1.19% in Q3, from 1.22% in Q2.

The 90 day bucket decreased to 2.96% from 3.19%. This is still way above normal (around 0.8% would be normal according to the MBA).

The percent of loans in the foreclosure process decreased to 4.07% from 4.27% and is now at the lowest level since Q1 2009.

Note: "MBA’s National Delinquency Survey covers 41.8 million loans on one-to-four-unit residential properties, representing approximately 88 percent of all “first-lien” residential mortgage loans outstanding in the United States. This quarter’s loan count saw a decrease of about 733,000 loans from the previous quarter, and a decrease of 1,752,000 loans from one year ago. Loans surveyed were reported by approximately 120 lenders, including mortgage banks, commercial banks and thrifts."

by Calculated Risk on 11/15/2012 10:00:00 AM

The MBA reported that 11.47 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2012 (delinquencies seasonally adjusted). This is down from 11.85 percent in Q2 2012.

From the MBA: Mortgage Delinquency and Foreclosure Rates Decreased During Third Quarter

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease of 18 basis points from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
...
The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. ... The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 20 basis points from the second quarter and 36 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.03 percent, a decrease of 28 basis points from last quarter, and a decrease of 86 basis points from the third quarter of last year.
...
“Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” observed Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric. Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”

“The improvement in total delinquency rates was accompanied by a further drop in the foreclosure starts rate, which hit its lowest level since 2007. Moreover, the foreclosure inventory rate decreased by 20 basis points over the quarter, the largest quarterly drop in the history of the survey. The level however, is still roughly four times the long-run average for this series as we continue to see back logs of loans in the foreclosure process in states with a judicial foreclosure system. The foreclosure rate for judicial states decreased slightly to 6.6 percent and the foreclosure rate for non-judicial states showed a steeper drop to 2.4 percent. The difference in the foreclosure rates of the two regimes is at its widest since we started tracking this metric in 2006."

Note: 7.40% (SA) and 4.07% equals 11.47%.

I'll have more (and graphs) later after the conference call this morning.