TheMReport

48 | TH E M REP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING THE LATEST Road to Recovery Expected to Lengthen Home sales have not increased as expected, and that means there are other, deeper problems. T he Wells Fargo Eco- nomics Group released its Housing Chartbook for May 2014, finding that most markets are "wildly out of balance" from inflated home prices driven by investor purchases, as well as exception- ally tight inventories that are well ahead of any improvement in demand. The group said that the "lack of a rebound in home sales this spring has reinforced our view that there was more than harsh winter weather behind the recent slide in home sales and mortgage applications." The group notes that the road to housing recovery will be longer—and much bumpier—than expected. Housing demand is still reel- ing from last spring's spike in mortgage rates. The Wells Fargo Economics Group commented that a 70-basis-point rise in mortgage rates coupled with a 6.2 percent rise in prices resulted in a 17.1 percent jump in monthly principal and interest payments. Payments on an existing home, ir- respective of a slight dip in home prices, have risen 11.9 percent. Consumer confidence in pur- chasing a new home within six months fell in May to 4.9 per- cent, below the 12-month moving average of 5.7 percent. Overall economic growth will also hamper housing growth, according to the group from Wells Fargo. Real gross domestic product (GDP) is expected to rise just 2.0 percent in 2014, with new home sales and single-family housing starts expected to rise much more slowly. The group forecasts that new home sales will climb 8.4 percent to 465,000 units, while single-family housing starts will climb 10.9 percent. New home prices will moderate, rising just 2.6 percent to $276,000 in 2014. Refinancing activity is also expected to slow down. "The refinancing share of mortgage activity rose to 52.2 percent, up from 48.7 in early May, which was the lowest share since July 2009. Recent gains in refinancing activ- ity are not sustainable, however, as rates will eventually increase," the group said. Mortgage applica- tions are also down, falling in five of the past six weeks. Housing starts continued to improve, rising for the third consecutive month in April and nearly offsetting the December and January weather-related drop. The improvement might be short-lived, however, as the level of permits is running well below starts. Permits rose just 0.3 per- cent in April, which will restrain future completions, further limit- ing inventory and exacerbating problems with affordability. Existing home sales rallied slightly in April, up 1.3 per- cent after three consecutive months of decline. Distressed sales accounted for 15 percent of activity, and all-cash transac- tions edged slightly higher to 18 percent. First-time home buyers have risen from recent lows, but remain well short of long-term trends. Easing of credit condi- tions and inventory remain the key factors for near-term sales, but the group doesn't believe that credit conditions will ease up in the coming months. Agencies Issue Guidance on End- of-Draw HELOCs A true test of moral compasses: how will lenders handle pre-crisis home equity lines of credit coming due? B efore the market crashed in 2008, home equity lines of credit, or HELOCs, were all the rage. But times have indeed changed, and as the tab is now coming due and many HELOCs are nearing their end-of-draw period, the federal government wants to make sure that banks do not run into trouble trying to collect from customers whose stations may have changed for the worse. Four federal financial regula- tory agencies and the Conference of State Bank Supervisors (CSBS) issued risk management guidelines in July for financial institutions that need to be aware of the chal- lenges that borrowers may face in paying off their HELOCs. While many borrowers will continue to meet their contrac- tual obligations when their loan resets to an amortizing payment or reaches a balloon maturity, some may find it difficult to make higher payments or to refinance their existing loans due to changes in their financial circumstances or declines in property values. According to the guidelines, fi- nancial institutions should be fully aware of end-of-draw conditions and stipulations, develop a clear picture of scheduled end-of-draw period exposures, and identify higher-risk segments of portfolios. Management reports should also identify contractual draw- period transition dates for all HELOCs, showing maturity schedules that look at product types, post-draw payment charac- teristics, origination channels, and borrower characteristics. Managers should also evaluate near-term risks. Some HELOCs approaching their end-of-draw periods may already have line availability sus- pended due to decreased property values or repayment performance problems, for example. The most proactive recom- mendation for lenders is to open the lines of communication with HELOC customers, preferably six months before individual end-of-draw periods kick in. Working with customers, manag- ers can ensure that refinancing, renewal, and modification pro- grams are consistent with regula- tions and still develop plans the borrower can handle. The guidelines also recom- mend that lenders develop their own internal rules and processes for end-of-draw actions as well as alternatives. They should also establish end-of-draw reporting that tracks actions taken and subsequent performance. Part of this should involve offering practical information to higher- risk borrowers. More than anything, the government and CSBS want to head off an alternative ver- sion of the mortgage crisis, in which products such as option adjustable-rate mortgages created a meltdown when the heftier terms kicked in and left many borrowers unable to meet their loan obligations. "When borrowers experience financial difficulties," the guide- lines stated, "financial institutions and borrowers generally find it beneficial to work together to avoid unnecessary defaults."

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