Rate increases continue to hamper Banks and the Market

Weitz - More evidence that the increase in interest rates is taking a negative toll on the RE market.

Bank executives have been hoping they could dull the pain of a plummeting mortgage-refinance market by shifting focus to loans for home purchases. So far, that isn't working out.

The Mortgage Bankers Association said Wednesday that mortgage applications dropped 13.5% in the week ended Sept. 6 from the previous week. The data, which include an adjustment for the Labor Day holiday, reflect a 20% drop in refinancing and a 3% decline in purchase loans.

"Demand is significantly down," said Glenn Kelman, chief executive of real-estate brokerage Redfin, which works in 22 U.S. markets. "Anybody who was going to buy a house this year tried to get it done in June or July because they saw the writing on the wall and worried about the rate increase."

Interest rates on 30-year fixed-rate mortgages rose to 4.80% from the prior week's 4.73% in the latest data from the mortgage bankers group. That is up from 3.60% at the end of April.

Weitz - As I've mentioned, that is a tremendous increase in a short period of time. Unless this trend changes, we'll see continued problems in the Seattle Real Estate market.

Refinancing has been a big casualty of the rate jump, starting with a sharp drop three months ago. Refinancings stand at the lowest level since June 2009 and are down 71% from a recent peak in May, the trade group said.

But recent data from the mortgage group show that demand for home-purchase loans also has softened, beginning in April. Purchase applications are still running 7% above their levels of a year ago but are less than expectations.

That bodes ill for lenders that have begun emphasizing loans for home purchases in hopes that it would help offset the refinancing slowdown.

To be sure, rising mortgage rates don't usually affect home purchases made in cash. Roughly one-third of all home purchases were made in cash in July, according to the National Association of Realtors.

Refinancing activity, meanwhile, is much more sensitive to rising rates than is purchase activity.

The MBA on Aug. 22 forecast that overall lending would shrink nearly 32% next year to $1.09 trillion, with a 60% decrease in refinancing but a 14% rise in home-purchase lending.

Still, the most expensive markets tend to get hit hardest when rates rise quickly.

Rising interest rates also mean house hunters might be forced to lower their sights in terms of what they can afford, resulting in smaller loans.

Weitz - Exactly, this is the problem.

Citigroup Inc., C -0.93% which scaled back its home-loan business after the financial crisis, is closing an office in Danville, Ill., that is dedicated to refinancings, a bank spokesman said Wednesday.

The New York lender had opened the office in the small eastern Illinois city "to handle the surge in demand for refinancing; however, due to the ongoing decline in refinance volumes, the excess capacity Danville provided is no longer needed," the firm said Wednesday. The bank notified its employees July 15.

The bank reported $17.2 billion in mortgage originations in the second quarter, down 4% from the previous quarter.

Citigroup is just one big bank o cut jobs in the mortgage business.

Wells Fargo & Co. has cut 3,000 jobs since July. Bank of America Corp. in late August told about 2,100 employees they were being let go due to a decline in refinancing activity. J.P. Morgan Chase JPM -1.92% & Co. is accelerating plans to cut as many as 15,000 jobs in its mortgage division by the end of 2014. The bank now expects to be roughly two-thirds of the way through with those reductions by the end of this year, a spokeswoman said.

All told, the Mortgage Bankers Association expects refinance volume to fall from $1.2 trillion in 2012 to less than $400 billion in 2014, which would be the lowest level for refinancing since 2000.

"What we're going through today is not a temporary, short-term anomaly," said David Stevens, the trade group's chief executive, at a banking conference in Raleigh, N.C., Tuesday. "This is a substantive change in the cycle of our industry."

A slew of lenders this week have warned investors to expect a significant drop in mortgage profits for the rest of the year.

"We're still making money out of it, but it's being really stressed," Kelly King, chief executive of regional bank BB&T Corp., BBT +0.03% said on Tuesday at a banking conference held by Barclays PLC.

BB&T, which is based in Winston-Salem, N.C., expects mortgage production to fall as much as 14% and revenue to drop as much as 28%.

For more information, contact a Kirkland Real Estate Broker. 

Our Firm:

Rylee Park Properties 

520 Kirkland Way, Ste 103

Kirkland, Wa 98033

(206) 306-4034

www.ryleepark.com/

United States Financial Industry - why nothing has changed

Weitz – A great opinion piece from the Wall Street Journal this morning. I will comment where appropriate.

Written by Alan Binder, a professor of Economics at Princeton and former Vice Chairman of the Federal Research.

Next Sunday marks the fifth anniversary of the fateful day that investment bank Lehman Brothers filed for bankruptcy, signaling the start of a frightening financial meltdown. It's a good time to ponder how the U.S. economy was nearly brought to ruin. But will we? Or are we already forgetting?

Consider the stark historical contrast between the 1930s and this decade:

Years of financial shenanigans in the 1920s, some illegal but many just immoral, conspired with a variety of other villains to bring on the Great Depression. Congress and President Roosevelt reacted strongly, virtually remaking the dysfunctional U.S. financial system, including establishing the Securities and Exchange Commission to protect investors, the Federal Deposit Insurance Corp. to protect bank depositors, and much else. The financial beast was comparatively tamed for almost 75 years.

Years of disgraceful financial shenanigans in the 2000s, some illegal but many just immoral, brought on the Great Recession with virtually no help from any co-conspirators. Congress and President Obama reacted comparatively weakly with the Dodd-Frank Act of 2010, which certainly did not seek to remake the U.S. financial system. I am a big supporter of Dodd-Frank, despite its timidity, because laws must be graded on a curve. Sadly, even this good-though-weak law now seems to be withering on the regulatory vine. Far from being tamed, the financial beast has gotten its mojo back—and is winning. The people have forgotten—and are losing.

Here are four examples. There are others.

1. Mortgages and securitization. Piles of unconscionably bad mortgages—underwritten by irresponsible bankers, permitted by somnolent regulators, and passed on like hot potatoes to investors via securitization—were a major contributor to the financial crisis.

One response in Dodd-Frank was a "risk retention" rule requiring issuers of asset-backed securities to retain at least 5% of the credit risk, rather than pass it all on to investors. The idea was that a little "skin in the game" would make Wall Street firms a bit more cautious about what they securitized.

But there was a catch. The 5% requirement does not apply to "qualified residential mortgages" (QRMs)—a term left to regulators to define, but intended to exempt safe, plain-vanilla mortgages with negligible default risk. Dodd-Frank does not ban mortgages that do not qualify as QRMs, nor even does it prevent such mortgages from being securitized. It only requires that lenders retain a tiny portion of the credit risk.

Weitz- what is the point?!...almost ALL of the loans securitized are for 'residential loans' that this makes this law virtually mute.

The law mandated that a specific rule be written within 270 days. More than 1,100 days have now passed, and the country is still waiting. 

Weitz - insert congress joke here.

Just days ago, the regulators issued yet another notice of proposed rulemaking, soliciting comments on (among many other things) two ways to define QRMs. The lighter-touch option would exempt almost 95% of all mortgages from the skin-in-the-game requirement. The "tougher" option would exempt almost 75%. Does anyone doubt which option will be favored by interested commentators? After that, what will be left of the Dodd-Frank requirement?

2. Derivatives. Disgracefully bad mortgages created a problem. But wild and woolly customized derivatives—totally unregulated due to the odious Commodity Futures Modernization Act of 2000—blew the problem up into a catastrophe. Derivatives based on mortgages were a principal source of the reckless leverage that backfired so badly during the crisis, imposing huge losses on investors and many financial firms. Dodd-Frank calls for greater standardization and more exchange-trading, which would create a safer and more transparent trading environment. Wonderful ideas. But the law exempts the vast majority of derivatives. Do you see a pattern here?

It gets worse. Gary Gensler, the chairman of the Commodity Futures Trading Commission, is one of the few real reformers. But he ran into a wall of resistance from the industry, from European regulators, and from some of his American colleagues when he tried to implement even the weak Dodd-Frank provisions for derivatives. And Mr. Gensler's days leading the CFTC look numbered.

3. Rating agencies. The credit-rating agencies also contributed mightily to the financial mess. These private, for-profit companies were presumed responsible for calling out hazards. Instead, they blessed financial junk with coveted triple-A ratings. Honest mistakes? Perhaps. But many critics have pointed out a flaw that cries out for fixing: The agencies are hired and paid by the very companies whose securities they rate.

Weitz - not just paid, but paid VERY well, and arguably, they are entirely dependent on the Banks for their survival. Its a very flawed system.

Unfortunately, Congress could not decide how to fix this flaw. So Dodd-Frank instructed the Government Accountability Office to study "providing incentives to credit rating agencies to improve the credit rating process" and report back within 18 months. The law also instructed the Securities and Exchange Commission to study "strengthening credit rating agency independence" and report back within three years. The GAO issued a report 18 months later, laying out a number of options; it has gathered dust ever since. And the SEC? Well, don't get me started. Amazingly, the rating agencies are still compensated as they were on the day Lehman Brothers crashed.

4. Proprietary trading. The Volcker rule, part of Dodd-Frank, bans proprietary trading by banks, to prevent them from gambling with FDIC-insured funds. President Obama embraced (and named) the rule very late in the legislative game, over the objections, according to multiple press reports, of his chief economic adviser at the time, Lawrence Summers.

The Volcker rule is not the only way to accomplish Paul Volcker's worthy objective. The United Kingdom and the European Union, for example, have proposed different means to the same end. But the Volcker rule is the law of the land here.

Sort of. In practice, the rule is hortatory until detailed regulations are written and promulgated. Dodd-Frank was signed into law in July 2010. The Volcker rule has been tied up ever since by internal bureaucratic squabbles and external pressure from the banking industry.

In sum, the Dodd-Frank Act is taking on water fast. What can be done to help Americans remember the horrors that led to its passage?

Here's one step. Mr. Obama will soon nominate a new chair of the Federal Reserve Board. The Fed chief is not a regulatory czar, but she or he is primus inter pares among the nation's financial regulators. The Fed's next chair can set a new, more determined tone going forward—or not. So it is vital that she or he be prepared to move bureaucratic mountains and fend off hordes of lobbyists opposing financial reform, not to bleed sympathy for Wall Street.

Weitz - obviously, these are just some of the many ineffective tools used to "regulate" the banks. The reality is that the 'Too-Big-To-Fail banks are bigger than ever with more power than ever. I find it repugnant. Its one thing to run a great business and grow to a large size (ie. Microsoft). If you recall, Microsoft faced incredible challenges from the Department of Justice as a monopoly. The banks, on the other hand, were effectively rewarded for their utter failure(s) via bailouts and other benefits that are too numerous to mention in this particular blog-post.

For more information on your rights against with your home loan, contact a Kirkland Real Estate Broker. 

Rylee Park Properties 

520 Kirkland Way, Ste 103

Kirkland, WA 98033

(206) 306-4034

Increase in interest rates begin to hurt market

AP - A rise in interest rates is slamming homeowners' demand for mortgages, prompting large and midsize banks to cut jobs and warn investors of declining profitability in the home-loan business.

SW- Exactly as we predicted…. See past article here.

Wells Fargo, the nation's largest mortgage company by loan value, on Monday told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter.

On Aug. 29, Bank of America Corp., notified about 2,100 employees that they were being let go largely due to a decline in refinancing activity, said a bank spokesman. Mortgage originations include loans for home purchases and refinancings.

Rates are rising on investor worries the Federal Reserve soon will take steps toward reducing an $85-billion-a-month bond-buying program designed to help stimulate the economy.

The average rate on a 30-year fixed-rate mortgage stood at 4.73% for the week ended Aug. 30, up from 3.60% at the end of April, according to the Mortgage Bankers Association.

SW- As discussed, that is a HUGE drop in purchasing power. For example, it would cost over $5000/ your more for a $500,000 mortgage.

All told, Mr. Miller expects lenders to originate $1.654 trillion of mortgages this year, down from $1.75 trillion in 2012. The decline is expected to bottom at $1.46 trillion in 2014 before rising again in 2015, according to FBR estimates.

The slowdown is the latest hurdle for the banking industry, which already is grappling with tepid loan demand from corporate borrowers and higher compliance costs as regulators crack down on a broad swath of banking practices.

The warnings come even though the U.S. housing market is posting its strongest year-over-year gains since the tail end of the real-estate boom in 2006. Many lenders had ramped up their mortgage businesses in the past two years to take advantage of a surge in refinancing activity that was spurred by historically low rates.

Ultimately, big banks should benefit as they will be able to raise interest rates on new loans. That will widen the gap between their cost of borrowing and the income they earn from lending. But that won't happen for several months, as banks work through pending applications and loans.

"We are bullish on the long term, but the short term is going to be rocky," said Mr. Miller.

San Francisco-based Wells Fargo, which financed nearly one in four U.S. mortgages in the second quarter, has already cut 3,000 jobs in the mortgage business since July. The reductions represent roughly 1% of the bank's total workforce.

At J.P. Morgan, mortgage originations are on pace to drop as much as 40% from the first half of 2013, said Marianne Lake, J.P. Morgan's chief financial officer, at the conference. She attributed the decline to a drop in refinancings. She said refinance applications are down more than 60% from the peak in May 2013.

Mortgage-banking income dropped 3% at Wells Fargo and 14% at J.P. Morgan in the second quarter from a year earlier. At Bank of America, the decline was 22% from the year-ago period.

The mortgage slump also is taking a toll on smaller lenders, some of which pumped up their home-loan business to help offset a slowdown in commercial lending.

The slowdown is perplexing to industry veterans like Gerald Lipkin, who has been chief executive of New Jersey lender Valley National Bancorp since 1989.

SW- As discussed, this is a very large issue that few are talking about. We believe it will take a toll in the RE Market, and is reflected with recent King County numbers with Inventory of properties for sale increasing and sales decreasing.

For more information, consider contacting a Kirkland Real Estate Broker. 

Rylee Park Properties 

520 Kirkland Way, Ste 103

Kirkland, WA 98033

(206) 306-4034

www.ryleepark.com

Nation & Seattle Housing Update

AP - A story from CNBC Realty Check discussing the drop in home sales for the month of July, 2013:



Overview:

1) Pending Home Sales Dropped 1.3% in July
2) Home Sales West Coast down 4.9%
3) Mortgage Rates increased to highest level since 2011
4) Jumbo borrowers could be effected by new regulations (Loans over $625,000) See definition of Jumbo Loan here.

Weitz:

What does this all mean for Home prices in Seattle?

Admittedly, I have been quiet on the blog due to 1) a lack of free time at the office; and 2) the real estate market hasn't been that interesting as of late. All the news has been positive, and as I've told everyone who will listen...this positive news is simply not warranted.

We believe the increase in prices is primarily due to two factors that are likely unsustainable:

1) Inventory of homes was extremely low by historical standards down to 3265 in March of 2013 (currently at 4602 for King County SFH)...that is a nearly 50% increase in inventory in just 6 months;

2) Interest Rates rates were historically lows (3.4% in May, 2012) but have since rose to nearly 4.5% (see Bankrate.com). That is a HUGE drop in purchase power for the average consumer According to mortgagerate.com, that increase would increase the payment for $500,000 30 year fixed mortgage from $2738 to $3074/ mo.

Accordingly, we are looking to see a decrease in sales and an increase in inventory and another fall in prices for the intermediate future. If you have questions for Seattle area Short Sale experts, please consider contacting a Seattle Short Sale Attorney.

Our Firm:

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033 425.889.9300

weitzlawfirm.com