Joshua Campbell

House prices in the U.S. continued to depreciate in the second quarter 2009 but at a much more moderate rate compared to the fourth quarter 2008, the peak of the collapse in home prices, according to a quarterly housing valuation analysis by IHS Global Insight.

Prices fell at a 2.7% annualized rate in the second quarter 2009, compared to 2.1% in the first quarter and a 12.5% rate of decline in the fourth quarter 2008, according to the new House Prices in America, the quarterly U.S. housing valuation analysis from IHS Global Insight, one of the world's leading companies for economic and financial analysis and forecasting.

Nationally, house prices have fallen 11.0%, on average, below their peak in the spring of 2007; when weighted by market value, the nation is now 11.1% undervalued, and 12.6% undervalued when weighted by housing units.

Prices declined in slightly more than one-third- 113 metros- of the 330 metropolitan areas in the study, down from 191 areas in decline in the first quarter, and down sharply from 317 areas registering declines in the fourth quarter of 2008.

Metro areas in California, Florida, and Nevada, states that experienced the highest levels of overvaluation as the housing bubble expanded, and Michigan, which has been hit hard by the recession and cutbacks in the auto industry, have experienced the greatest declines.

More than one-third of the nation's metro areas- 127- have seen prices decline by more than 10%, and nine have seen prices drop by more than 50%, with Merced, Calif., experiencing price declines of 65% off their peak. The largest second quarter home price decline was 6.1%, in St. George, Utah.

Only 16 metro areas, most in the middle of the country and six in Texas, have escaped net home declines during this cycle. Extreme home price overvaluation is essentially nonexistent. Only Atlantic City, N.J., remained extremely overvalued, in stark contrast to 2005 when 52 metro areas, fully one-sixth of the nation's metropolitan areas, were extremely overvalued.

For more information, visit www.ihsglobalinsight.com.

National Home Loan Advocates

An estimated 1.4 million individuals have used the $8,000 federal tax credit for first-time home buyers, according to the Internal Revenue Service.
A Dec. 1 deadline looms for first-time buyers to purchase a house to qualify for the tax credit.

The credit equals 10 percent of the purchase price of a home, up to $8,000. It either reduces the individual's tax payment or will be returned as a higher refund next year. There are income limits to the program.

Why the First-Time Buyer Tax Credit is likely to be extended:

1. IT WORKED and studies have shown that hundreds of thousands of homes were SOLD , in part due to this tax credit. The article above says over 1 million buyers are already receiving this credit. If we do not have this credit we will see fewer sales and with more foreclosures coming to market, this could have a negative effect on housing

2. When a house is sold it keeps stimulating the economy because it creates jobs for contractors, home amenity suppliers, etc. And we all know that a house is never done!

3. Housing was at the center of this recession, to stop a program that is working so well, at this time, could be a mistake.

4. Housing and housing related services STIMULATED THE ECONOMY and that's good since much of the stimulous package hasn't been put to work yet.

5. Some of the credits that were given in the past for other things were not spent and went into savings instead. The first-time homebuyer tax credit is being spent by new home owners on their home so it definitely stimulates the economy as intended.

6. The first-time buyer tax credit should also be extended to ALL HOME BUYERS for a period of time. The jumbo market is still sufferring and prices in those communities continue to decline. At least give a buyer of an expensive home something for moving forward today.

Having said that, it is not without costs. The original cost estimates for the current program were for $4.6 billion. According to latest estimates, it appears that the current tax credit will have cost $15 billion when it expires.

The FHA critics I suspect are thinking I told you so with Friday's announcement that the FHA "reserves" have fallen below 2%. But they would be wise to consider the following episode.

The story is legend among the HUD career staff: many, many years ago, an unnamed HUD Secretary upon learning the FHA "reserve" fund had surpassed $20 billion instructed the staff to print a rather large check, imprint it with the dollar amount and make it payable to the White House (whose budget office was looking for revenue). With the check and the photographer in tow, the group proceeded to the White House. With much fanfare, the Secretary presented the check to the White House budget office who was rather surprised at the Secretary's gesture. Why? What he didn't know, was that the FHA reserves (technically it is called a "Capital Reserve") only existed in the ethereal and arcane world of actuarial accounting.

In short, each year a contractor hired by HUD estimates 30 years into the future how FHA loans will perform year-by-year. If you wondering how exact can an opinion of what the economy will be like each year now until 2039 you're not alone. As a reminder the FHA is a mortgage insurance product plain and simple. It collects premiums from borrowers (revenue) and also pays out claims to lenders when loans go into default and foreclosure (outlays). The contractor estimates whether or not the revenue exceeds the expenditures. The Congress has told HUD that the capital ratio must exceed 2% of the economic value of the loan portfolio which today numbers more than 5 million homes.

What happens to FHA if the value of those homes continues to erode and thus devalues their value within the FHA portfolio? Or if the economy is sluggish and more people lose their jobs and can no longer make their mortgage payments? While FHA did not take part in the housing boom, it is nonetheless feeling its effects through declining house prices which in turn drives down the economic value of their portfolio.

Additionally, one year ago Congress, with much prodding from the FHA, finally banned a form of down payment assistance that utilized so-called "gift" funds. Many of these entities that offered buyers "zero down" loans essentially funneled a donation from the seller through their charity to the borrower. With absolutely no "skin in the game" from the borrower (many of whom had to repay the "gift" when it was added to the sales price) it is no wonder those loans defaulted at a rate 3 times greater than loans without the "gift" down payment. Unfortunately, those loans became 1/3 of FHA's new loan portfolio by 2007. FHA twice tried to end the practice but was rebuked by the Courts. Congress finally ended the program, but those loans are still in the FHA portfolio and there are hundreds of thousands of them. Coupled with the struggling economy and declining home prices, the FHA loan portfolio must also endure the "gift" down payment loans for many years to come.

On the bright side, the last 18 months has put an exclamation point on why we have an FHA. FHA has saved close to a million sub-prime/Alt-a borrowers from possible financial ruin by allowing them to refinance into a safe and secure 30 year fixed rate mortgage. And I say "allow" since prospective borrowers must verify income and job history as part of a rigorous underwriting process.

Another 2 million qualified borrowers (80% of them first-time homebuyers) have taken advantage of the declining house prices and historically-low interest rates to purchase a home using FHA. And through it all FHA has helped pump more than $400 billion of mortgage activity and liquidity into the market since 2008 and with a higher credit quality borrower whose average FICO score is 700.

One can only imagine how much worse our economy would be right now without the FHA.

But there are areas of concern with FHA. For more than two years I implored Congress to give FHA the funds for more staff and to upgrade their IT systems whose average age was 18 years. It is still a mystery to me why we never got the much-need funds especially when FHA went from 7%-10% of the mortgage market to close to 30% in a matter of weeks. American taxpayers should be grateful to the FHA career staff who endured that massive run-up in volume without any additional staff.

So what happens next? In an effort to increase the capital ratio back above 2% FHA could do some or all of the following:

• Tighten underwriting criteria
• Increase premiums
• Raise the down payment requirements above 3.5%
• Overlay a credit score cut-off
• Utilize other efficiency and risk management measures

And it may be the case that home prices will no longer decrease and thus the economic value of the portfolio could improve on its own.

I would add another fix: FHA should strongly consider lowering its loan limits. While the maximum loan limit of $729,000 is only in 75 high-cost counties, another 600 counties have a loan limit between $275,000 and $729,000. With a nationwide median home price of less than $200,000 I think it is time to consider lowering them. I think most Americans are asking themselves that regardless of the location, why is the federal government helping someone buy a $729,000 home or a $600,000 one for that matter?

One year from now, FHA will again see how the FHA fund endured the withering economy. While that outcome is not known, what is known is this: the FHA which is celebrating its 75th anniversary this year has performed its counter-cyclical role as designed. And in so doing, saved millions of families from possible foreclosure. That is a success story too few people know, unless you are one of the families FHA helped save. Congress needs to do whatever it can to help ensure FHA is around another 75 years - and beyond.

Regulatory Alert R-1366

As you have probably heard by now, the Federal Reserve Board has issued two proposed rules making significant changes to Regulation Z (Truth in Lending). This stems from proposals in H.R. 1728 - the Mortgage Reform and Anti-Predatory Lending Act - which passed the house on May 7, 2009.

Essentially, the new amendments are positioned to provide new consumer protections for all home-secured credit... which by intent proposes many good things. But, as happens most of the time, this proposal has very dangerous components tucked within it.

One proposal that is embedded, which is written in an ambiguous way, would essentially wipeout the current compensation structure to loan officers... retail, correspondent, and broker. The FRB proposal would require mortgage lenders to pay originators - again, retail, correspondent, and brokers - a flat fee, which would be stated and disclosed upfront, and would not increase based on changes in the interest rate or other loan terms. This all sounds fair, but make no mistake, the target is on YSP, SRP, and compensation paid to all mortgage originators... with a goal of regulating and restricting them. In fact, in HR 1728 the term "banned" was used relative to YSP and SRP.

For all mortgage transactions the proposal would:

• Prohibit payments to a mortgage broker or the creditor's loan officer based on the loan's interest rate or other terms.
• Prohibit a mortgage broker or loan officer from "steering" consumers to a lender offering less favorable terms in order to increase the broker's or loan officer's compensation.

When you read this it sounds fair - especially to a consumer, but imagine the unintended consequences of eliminating the ability to structure financing options for a consumer based on their specific needs. Should you also make the same "flat fee" for a $100,000 loan as you would on a $1.3 million loan? And, as you know, the industry has self-regulated the "excessive" YSP and SRP abuses that were so prevalent in retail and third-party originations.

Please review these links and submit comments as you see fit. After going to this link, scroll down to proposal R-1366 to review the proposal and submit your comments.

http://www.federalreserve.gov/generalinfo/foia/proposedregs.cfm

Additionally, if you are a business owner, you can contact the SBA Advocacy group with your concerns and coments- they are very interested to support you as well.

http://www.sba.gov/advo/laws/law_regalerts.html

You may also want to email your Senator to articulate your position and concerns.

http://www.senate.gov/general/contact_information/senators_cfm.cfm

We have a link to a document that highlights all of the proposed rule changes for you to review. We have also attached a link to HR 1728 which will give you a greater sense of the big picture- too lengthy to highlight in this email. It is riddled with dangerous proposals to the housing industry.

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090723a1.pdf

http://www.house.gov/apps/list/press/financialsvcs_dem/summary_of_hr_1728_--_03_26_09.pdf

We believe that the industry has self-regulated this topic effectively and while we should always be looking for ways to enhance consumer protection from unfair lending practices, we are of the opinion that there is a need for more debate and vetting of these proposals to ensure we get it right. Unfortunately there is a lot on the agenda on K Street and this could easily pass without a visible position from the industry.

We also believe that legislators are targeting things that were merely functions of the real problems that caused over-speculation in housing credit. Loose underwriting standards that were coupled with unregulated leverage (remember the Bear Stearns subprime fund that used 80:1 leverage?) created by Wall Street are more appropriate targets for regulation, certainly not compensation of a loan officer. There has also been an overly intense focus on any third-party originators- broker or correspondent- who were, at the end of the day, simply offering products and YSP structures allowed by the primary lenders / banks.

Too many times, we hear about these changes after they are accepted. This is your opportunity to voice your comments and opinion. This opportunity to make public comment ends on November 27, 2009!

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