The softness in starts was solely a result of multifamily starts, which fell by 8.5 percent in August, following a 6.0-percent drop in July. Multifamily construction, which includes condos, has been trending down since February. Year-to-date multifamily starts are still ahead of last year’s by 1.4 percent, however. Single-family starts edged up by 0.1 percent, with year-to-date starts increasing by 5.2 percent from those in the first eight months of last year. 

Leading indicators for home building activity are mixed. Permits declined by 2.2 percent to 2.124 million units, but the number of units authorized but not yet started (the so-called backlogged starts) rose by 5.7 percent. Housing demand also remains robust, according to the Mortgage Bankers Association Purchase Application Index, which rebounded in early September.  

Home builders are less optimistic in September, however, with the National Association of Home Builders’ Housing Market Index declining for the third consecutive month to the lowest reading in more than two years. Concerns over higher interest rates, oil prices and Katrina’s impact on building material costs may have weighed on builders’ sentiment. 

The disruptive effect of hurricane Katrina on construction activity was minimal in August. The full impact will show up in the September data but should still be modest because the hurricane-affected metro areas accounted for just more than 1 percent of total permits in 2004. Going forward, the need to rebuild the destroyed homes or those no longer uninhabitable as a result of the floods will help increase the demand for residential construction in those areas. Experience from previous hurricanes suggests that rebuilding activity may occur slowly over a number of years, however.

As fully expected by the fed fund futures market, The Federal Open Market Committee (FOMC) raised the fed funds rate by 25 basis points to 3.75 percent. In its statement, the FOMC viewed Katrina’s negative impact on economic growth to be temporary but noted that higher energy and other costs could add to inflationary pressures. It also reiterated that the increase in interest rates probably will continue at a “measured” pace. The committee vote was not unanimous, as Fed Governor Mark Olson voted in favor of a pause—the first dissent since former San Francisco Fed President Robert Parry voted for a larger interest rate cut in June 2003.

Since late last week, the yield on the 10-year Treasury notes has surpassed its pre-Katrina level, following concerns of increased inflationary pressures. Specifically, post-Katrina regional manufacturing surveys indicated that prices that manufacturers paid for the input increased sharply, and the September University of Michigan Survey of Consumer Sentiment also indicated that consumers’ expectation of inflation increased significantly. The 10-year yield rose to 4.30 percent just before the FOMC announcement, but settled around Monday’s rate of 4.25 percent by late Tuesday afternoon.

(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She provides commentary and analysis on key monthly economic indicators. She can be reached at ovelz@mortgagebankers.org.)
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The average contract interest rate for 30-year fixed-rate mortgages increased by 9 basis points to 5.81 percent from 5.72 percent on week earlier, with points increasing to 1.21 from 1.18 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans, the survey found.  

The average contract interest rate for 15-year fixed-rate mortgages increased by 9 basis points to 5.38 percent from 5.29 percent one week earlier, with points decreasing to 1.25 from 1.31 (including the origination fee) for 80 percent LTV loans. The average contract interest rate for one-year adjustable-rate mortgages (ARMs) increased by 12 basis points to 4.94 percent from 4.82 percent one week earlier, with points decreasing to 1.00 from 1.04 (including the origination fee) for 80 percent LTV loans. 

The Market Composite Index stood at 772.2, an increase of 1.5 percent on a seasonally adjusted basis from 760.6 one week earlier.  On an unadjusted basis, the Index increased 11.9 percent compared with the previous week and was up 12.0 percent compared with the same week one year earlier.  The four-week moving average for the seasonally-adjusted Market Index is up 0.5 percent to 756.7 from 752.7. 

The seasonally-adjusted Purchase Index decreased by 2.6 percent to 500.3 from 513.4 the previous week. The four week moving average for the Purchase Index is up by 0.6 percent to 495.9 from 492.9.

The seasonally adjusted Refinance Index increased by 7.0 percent to 2353.7 from 2198.7 one week earlier.  The Refinance Index’s four-week moving average is up by 0.4 percent to 2274.3 from 2264.4. The refinance share of mortgage activity increased to 45.6 percent of total applications from 42.9 percent the previous week. The ARM share of activity increased to 29.8 percent of total applications from 28.2 percent the previous week. 

Other seasonally adjusted index activity includes the Conventional Index, which increased by 1.5 percent to 1160.5 from 1142.8 the previous week; and the Government Index, which increased by 1.1 percent to 124.1 from 122.7 the previous week. 

The survey covers 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.  Respondents include mortgage bankers, commercial banks and thrifts.
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Secured Funding, Costa Mesa, Calif., launched SF2, a redefined company culture that challenges employees to become experts in home equity lending. The initiative encourages employees at Secured Funding to focus on developing stronger product offerings, operational excellence, innovative technology, new consultative approaches and enhanced home equity processes.

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Fidelity National Information Services’ Hansen Quality, a division of Fidelity National Financial Inc., Jacksonville, Fla., launched HQ FraudID report, an automated fraud-screening tool with a focus on identity fraud. The product helps mortgage lenders and investors detect identity fraud and other intentional misrepresentation on new loans or on loans in existing portfolios. 

HQ FraudID searches more than 70 potential risk indicators to determine the level of risk associated with each potential borrower including multiple verifications of the borrower(s) name, address, social security number, phone number, as well as other pertinent information.

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Fiserv Lending Solutions, Brookfield, Wis., announced that Saxon Mortgage Services Inc., Glen Allen, Va., will use the MortgageServ loan servicing system to facilitate multi-site expansion of its servicing business.
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Borrowers, particularly in coastal regions, have greater difficulty finding insurers to provide mold coverage, according to industry analysts. Most insurers eliminated mold coverage from their standard policies, while many insurance companies stopped doing business in states with damp, warm climates and high detection rates of mold.

In the past few years, insurance companies did not provide mold insurance coverage but issued concise and clear exclusions to mold property damage. Insurance companies also listed a “contaminant” in its pollution liability exclusion and put mold under the contaminant category.

“We found 48 states filed mold exclusions and there was very, very limited mold coverage available [$10,000 to $25,000 of coverage],” said Don Glitz, vice president of corporate risk manager at GMAC Commercial Holding, Horsham, Pa.

One- to four-level properties hit by Katrina may remain intact, but many remain without air circulation because of power losses in New Orleans and surrounding areas. “The mere fact that the flood waters are receding does not mean that the mold growth is going to stop,” Glitz said. “There are complete shutdowns of electrical power, systems and buildings that people have not been in for [more than] three weeks. There most likely is mold growth that has initiated and will give rise to additional growth.”

Mold is not covered by property and casualty insurance policies or flood insurance. Borrowers would need to purchase mold coverage on its own to cover the clean up and decontamination of property. Insurance companies are treating a majority of losses coming out of New Orleans as flood losses and available coverage for flood damage falls significantly lower than windstorm damage.

“The conditions are ripe for mold to occur,” Glitz said. “In fact, it would be disastrous because there is no coverage available.”

The Mortgage Bankers Association (MBA) released a 72-page white paper last month, Mold: Steps Toward Clarity, that details mold issues in commercial properties and examines methods to mitigate mold and dampness issues. The document was written by the MBA Commercial Real Estate/Multifamily Finance Board of Governors' Loan Origination Committee's Mold Working Group. Glitz chairs the group. 

Investors and mortgage servicers continue to examine insurance coverage and wait for actual damage reports to determine future borrower costs. “We are hopeful that some of the larger commercial property owners would, in fact, have had coverage for [mold],” said Mary O’Rourke, senior director at Fitch Ratings, New York. “It is going to be awhile before we can assess the kinds of damages that might be occurring because of mold or the kinds of influences mold will have on the recovery of commercial properties in these states. Quite frankly, many of the borrowers still have not been able to get to their properties. They do not even know what happened to [their properties] yet.”

Income-producing properties can shut down from mold contamination, and while hotel and multifamily properties are most vulnerable to those actions, mold can also delay occupancy on office properties. “Historically, we have seen the swiftest actions occurring in properties where people are living,” O’Rourke said. “That can result in increases in defaults on those properties with NOI [net operating income] deficiencies.”

“In this situation, in most cases, [mold] is going to be due to flooding,” Glitz said. “This is not typical and the fact that this water has been laying there for some period of time is going to have a considerable impact so [mold] may arise in some places that you would not ordinarily expect it to. It may not be covered.”

According to Fitch, the limited availability of insurance makes mold site assessment procedures even more critical in commercial mortgage backed securities (CMBS) transactions. O’Rourke said CMBS loan originators should encourage borrowers to purchase additional insurance to cover mold claims in any region where additional coverage is available, and inspecting for mold should be part of routine Phase I and site inspections before securitizing loans.

“Mold exclusions in property and casualty policies are an added burden on site inspections, so the need for thoroughness and expertise on the part of the consultants is obvious,” O’Rourke said. “Most of the conversation [from Hurricane Katrina] has been about wind damage and flood damage. That is not the end of the story.”
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Multifamily borrowers with properties qualifying for individual assistance as designated by the Federal Emergency Management Agency (FEMA), and as a result of Hurricane Katrina, should contact their Freddie Mac seller/servicer for more information.

“We are taking this step to help ensure that our multifamily seller/servicers and borrowers have the financial resources they need in the wake of this unusually destructive storm,” said Richard Syron, chairman and CEO of Freddie Mac.

This forbearance policy for Freddie Mac’s multifamily seller/servicers and borrowers complements the forbearance policy set forth for its single-family borrowers, a $100,000 donation to the Red Cross, and a combined $10 million donation from Freddie Mac and the Freddie Mac Foundation to aid relief organizations.
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Gershman provided nearly $2.564 million in financing for Horace Mann. The loan on the 123-unit apartment complex is financed an FHA loan under Section 221 (d) (4). The project was made possible by additional financing from Hope VI Funds, tax credit proceeds and grants from the city of Gary, Ind. Construction has commenced on the apartment project.

Meanwhile, Westview Manor received $1.515 million in financing. The 101-unit apartment complex, financed with an FHA Section 223 (a) (7) loan, was made possible by HUD's Office of Affordable Housing Preservation Restructuring, the company said.
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Whether it is financial donations, on-the-ground outreach or other efforts, MBA will assemble its members’ Katrina relief measures. These efforts will be provided in a list to demonstrate to key audiences the work of MBA’s members.

MBA and its staff have pledged more than $608,000 in contributions to the American Red Cross and Habitat for Humanity.

Please provide your company’s efforts to Angela Waugaman, senior specialist in MBA’s public affairs department, at awaugaman@mortgagebankers.org, or call 202/557-2829. MBA would like to collect this information by Friday, September 28.
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CFA’s second annual consumer credit score survey, in conjunction with Providian Financial, also found that if consumers could raise their credit scores by as little as 30 points, they could save $16 billion annually in lower credit card finance charges alone.

"In the past year, consumer understanding of these scores has improved, in part because many consumers have obtained their scores," said CFA Executive Director Stephen Brobeck. "Unfortunately, most consumers still do not know basic facts about credit scores and their financial significance."

Consumer understanding of credit scores has improved over the past year in part because of industry efforts (such as the Mortgage Bankers Association’s Home Loan Learning Center, www.homeloanlearningcenter.com). Additionally, a law that went into effect last year entitles Americans to one free credit report every year. The provisions of the law, which phased in certain parts of the country starting last December, now extend to all regions.

Credit scores have also come under tighter scrutiny as of late with release of 2004 Home Mortgage Disclosure Act data. While consumer groups have asserted that the data show that lenders engage in discriminatory practices, particularly among minorities, MBA, the Federal Reserve and other industry groups note that most of the differences can be explained by differences in the groups' distributions of income, loan amounts and other borrower-related characteristics included in the HMDA data. The report specifically warned against making unwarranted accusations of illegal bias, which could discourage lenders from participating in the non-prime segment of the market.

“It is important to point out that HMDA data cannot be used to draw conclusions about why a loan was refused or made at a particular rate,” said MBA Chief Economist Doug Duncan. MBA plans to conduct its annual analysis of the HMDA data. The data, collected and analyzed by the Fed, provide a marketplace overview. But while for the first time a subset of the data includes pricing information, MBA noted that the data do not contain measures that convey important information regarding the credit risk associated with a loan and these are important elements in pricing decisions.

In late July 2004 and in early August 2005, Opinion Research Corp. conducted extensive surveys of consumer access to and knowledge of credit scores for CFA and Providian. In both 2004 and 2005, ORC surveyed more than 1,000 representative adult Americans. The margin of error in these surveys was plus or minus 3 percentage points.

In 2005, 31 percent of those surveyed said they had obtained their credit scores in the past year, compared to just 24 percent the previous year. The percentage getting their scores from credit bureaus increased from 28 percent to 36 between 2004 and 2005. In contrast, those obtaining their scores from mortgage lenders or brokers fell from 35 percent to 28 percent.

"Those who have obtained their scores know significantly more about credit scores than those who have not," Brobeck said.

According to the CFA study, the proportion of consumers who understand that making payments on time influences credit scores rose from 87 percent in 2004 to 93 percent in 2005. Similarly, the proportion who know that maxing out a credit card influences scores increased from 66 percent to 77 percent.

Despite this increased knowledge, the CFA study found that most consumers still lack essential knowledge about credit scores. More than three-quarters of consumers (76 percent) mistakenly believe that they have the right to obtain their credit score for free once a year, rather than obtaining a free credit report. Just 27 percent understand that scores measure credit risk, not credit knowledge, amount or attitude. And less than half (47 percent) understand that individuals have more than one score—one from each of three major credit bureaus and other scores as well.

The study also found that low-income and least educated consumers are least likely to understand credit scores and know their own scores. While nearly two-thirds of college graduates (64 percent) have obtained a credit score, just 27 percent of those without a high school degree have done so. Similarly, more than two-thirds of those with incomes at least $75,000 (71 percent), but only two-fifths of those with incomes below $25,000
(40 percent), have obtained their scores.

Many consumers do not understand how costly lower credit scores are, the study said. Using data from Fair Isaac’s Web site, on a $150,000, 30-year, fixed-rate mortgage, consumers with credit scores above 760 could be charged a 5.42 percent rate with monthly payments of $844, while consumers with credit scores below 620 could be charged a 7.0 percent rate with monthly payments of $998–an annual difference of $1,848.
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