The decline is broad-based across regions, with sales declining sharply in the Northeast (22.0 percent), West (17.9 percent) and Midwest (10.6 percent). The South experienced only a modest decline (2.2 percent). Year-to-date sales continued to be robust relative to last year’s, however. In the first eight months of this year, new home sales were 7.4 percent ahead of those in the first eight months of last year.

The supply of new homes on the market increased by 2.6 percent to a record 479,000 units. The rise in inventories, combined with a sharp drop in sales, pushed up the months supply (the inventory/sales ratio) to 4.7, the highest since June 2000.

New home prices continued to be soft relatively to existing home prices, with the median price rising by only 1.0 percent from a year ago, compared with 15.8 percent for existing homes. The weak price gains continued in August even though the share of high-priced homes sold has risen considerably from a year ago. Hurricane Katrina, whose impact was not yet reflected in the August home sales data, will likely cause shortages of building materials, pushing up new home prices going forward.

Katrina and the resulting soaring energy prices sapped consumer confidence in September. The Conference Board Index of Consumer Confidence plummeted by nearly 18 points to 86.6—the biggest decline in nearly 15 years and the lowest reading since October 2003. The report indicated a marked deterioration in households' assessments of labor market conditions and a surge in inflation expectations to the highest level since the late 1980s. 

The Conference Board consumer confidence report is consistent with the preliminary reading of the September University of Michigan Survey of Consumer Sentiment, which showed a dramatic decline in the index as well as a jump in inflation expectation. (The final reading of the index will be released on Friday). 

Yesterday’s Richmond Fed Manufacturing Survey also echoed other Fed manufacturing survey. Although the survey showed a stronger expansion in manufacturing activity in the area, the index of prices that manufacturers paid for raw materials increased to the highest reading since May, indicating some pass-through from the energy price spike of the past couple of months.

The possibility of an energy price pass-through to underlying inflation has been the main focus of recent speeches by Federal Reserve officials. Specifically, Monday’s speeches by Kansas City Federal Reserve Bank President Thomas Hoenig and Chicago Fed President Michael Moskow, and yesterday’s speech by San Francisco Fed President Janet Yellen all noted that the Fed should continue to raise interest rates in an effort to combat brewing inflationary pressures. 

Given the hawkish stance by Fed officials, the odds of a fed funds rate hike in November are quite substantial. The yield on 10-year Treasuries remained elevated near Monday’s close of 4.30 percent by mid-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 to 5.85 percent from 5.81 percent on week earlier, with points decreasing to 1.19 from 1.21 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. Since September 2, 30-year rates have increased by 21 basis points from 5.64 percent. 

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.44 percent from 5.38 percent one week earlier, with points decreasing to 1.23 from 1.25 (including the origination fee) for 80 percent LTV loans. The average contract interest rate for one-year adjustable-rate mortgagees (ARMs) increased to 5.02 percent from 4.94 percent one week earlier, with points increasing to 1.01 from 1.00 (including the origination fee) for 80 percent LTV loans. 

The Market Composite Index stood at 721.2, a decrease of 6.6 percent on a seasonally adjusted basis from 772.2 one week earlier. On an unadjusted basis, the Index decreased by 7.1 percent compared with the previous week and was down by 0.5 percent compared with the same week one year earlier. The four-week moving average for the Market Index is down by 0.1 percent to 756.4 from 756.7. 

The seasonally-adjusted Purchase Index decreased by 3.4 percent to 483.1 from 500.3 the previous week. The four-week moving average for the Purchase Index is up by 0.6 percent to 499.0 from 495.9.

The seasonally adjusted Refinance Index decreased by 10.5 percent to 2106.6 from 2353.7 one week earlier. The four-week moving average for the Refinance Index is down by 0.9 percent to 2254.0 from 2274.3 the previous week. The refinance share of mortgage activity decreased to 43.9 percent of total applications from 45.6 percent the previous week. 

The ARM share of activity decreased to 28.8 percent of total applications from 29.8 percent the previous week. 

Other seasonally adjusted index activity includes the Conventional Index, which decreased by 6.2 percent to 1088.8 from 1160.5 the previous week; and the Government Index, which decreased by 13.0 percent to 108.0 from 124.1 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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"Little empirical data has been collected with regards to security program management practices within the financial services industry," said Chris Noell, vice president of marketing for Solutionary. "While there is isolated technical data about vulnerability and incident trends from CERT and CSI/FBI, no study has provided insight on the state of overall security controls. As a result, individual financial institutions have little empirical data from which to assess program performance and determine whether their security program is 'reasonable' in addressing risks. And from a national perspective, we do not have much data to assess the security of the financial services industry as a whole."

The report is based on a Web-based self-assessment of 46 financial institutions. Over 384 questions covering nearly 2,800 security controls. "We hope to raise awareness with the financial community about the importance of standards-based program design," said Hugh Voigt, CEO of Espiria. "Too often, we are seeing significant gaps between business-derived security goals set by senior management and actual security program performance. In part, we believe this is due to the lack of a standard rating methodology and empirical data on which to base strategic security decisions."

Financial institutions set the highest security goals of any industry, averaging 4.0, the report said. Other industry segments set average security goals considerably lower, in the 3.0 to 3.5 range. High performers tend to have an enterprise-wide security program, not just an IT security program, the report said. They also had centrally managed IT organizations whose security program was enforced across the board.

Financial institutions averaged a 2.4 versus average performance across all industries of 1.7. Some financial institutions did considerably better, achieving security scores up to 3.9. Unfortunately, the report identified a significant gap in performance between professed risk-based goals and actual security performance (4.0 vs. 2.4, respectively), according to the report. No institution achieved its goal, some were close (.4 was the smallest gap identified) while some had very material gaps (3.2 was the highest gap identified).
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“Renting may be logical, particularly for people who do not plan to stay for a long time in a community or cannot afford to buy in a highly desirable neighborhood,” said Jeremy Bencken, founder and president of ApartmentRatings.com. “Renting an apartment often fits busy lifestyles, as most communities cover all maintenance, and many offer amenities designed to make a renter's life less complicated.

ApartmentRatings.com used satisfaction ratings from thousands of renters, combined with information from the U.S. Census Bureau about apartment vacancy rates and affordability, to analyze and create a renter's livability and satisfaction index for 95 U.S. cities.

"For many, having a home does not necessarily mean owning a house,” Bencken said. “It is great to know that there are extremely livable communities out there that are especially favorable for renters."

Larger cities, with higher rents and occupancy levels, ranked near the bottom of the list, compared to mid-size markets with a supply of housing that has grown faster than the population. “Landlords have to work overtime to attract and retain the best renters,” Bencken said.

Raleigh, N.C.; Ann Arbor, Mich.; Fort Wayne, Ind.; Grand Rapids, Mich.; and Kalamazoo, Mich. topped the list of attractive rental markets. Atlanta had the 22nd spot and Chicago was the lowest major city at 25.

Ron DeVries, vice president at Appraisal Research, Chicago, said rental concessions are significantly declining in Chicago because of the high rate of condominium conversions. More conversions occur in downtown than in the suburbs. However, that trend is beginning to change.

"In the downtown [Chicago] market, we are seeing a tremendous number of condo conversions with less supply. There is very little product coming online," DeVries said. He expects Chicago to set a record with 4,000 to 5,000 conversions compared with the previous record at nearly 2,000 condo conversions.
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NorthMarq arranged second mortgage financing of $6 million for Southbury Plaza, in Southbury, Conn . and $3.9 million in first mortgage financing for an office property in East Greenbush, N.Y .

Southbury Plaza, a 259,568 square-foot retail property, includes K-Mart and Sears as major tenants. Edward Tamer, vice president in the Albany regional office, arranged financing for the borrower, Southhaven Associates LLC , by NorthMarq through its correspondent relationship with Sun Life Assurance Company of Canada, Wellesley Hills, Mass. Financing was based on an eight-year term with a 20-year amortization schedule.

Tamer arranged the first mortgage financing of $3.9 million on the 39,950 square-foot office in East Greenbush. It is home to major tenant, Seton Health Systems. Financing was based on a 10-year term with a 25-year amortization schedule and was arranged for the borrower, Mannix Road Associates II LLC, by NorthMarq through its correspondent relationship with Berkshire Life, Pittsfield, Mass.

Christopher Feeley, senior vice president of NorthMarq’s Washington regional office, arranged acquisition financing of $40.95 million for the condominium conversion of the Ashley Knoll Apartments, in Charleston, S.C . The 408-unit luxury multifamily property is two miles west of historic Charleston in the West Ashley region. Financing was arranged for Atlanta-based Julian LeCraw & Company (JLC) by NorthMarq through Corus Bank of Chicago.

“[Corus Bank] met an extremely tight time frame for closing in on this acquisition and conversion,” Feeley said.

Matthew Kohlhoss, vice president of NorthMarq and also in the Washington regional office, arranged first mortgage financing of $27 million for Rocky Top Markets. The 27 service stations and convenience stores throughout Eastern Tennessee were financed based on a 10-year term with a 20-year amortization schedule. Financing was arranged for the borrower, Rocky Top Market LLC, through NorthMarq’s correspondent relationship with Nationwide Life Insurance Co., Columbus, Ohio. 

In Florida, Lee Weaver, vice president in the Tampa regional office arranged equity investment and construction loan financing of more than $26.6 million for the 276-unit Cabana Beach Apartments, located in San Marcos, Texas. Financing was arranged for the borrower, Cabana Beach Apartments LLC, by NorthMarq, through its relationship with Legacy Capital Partners, Milwaukee,  and Compass Bank, Birmingham, Ala.

The construction financing was based on a 24-month term, while equity financing was based on a five- to 10-year term. Weaver reported that the equity investor provided 90 percent of the equity over the 85 percent construction loan. “The borrower had to put up very little equity on a to-be-built project,” Weaver said. “The equity investor offers great flexibility and will stay in the deal for a longer holding period than most at 5 to 10 years.”

The Polo Club in Tallahassee, received first mortgage financing of $5.8 million. Bruce Foster, senior vice president and managing director of NorthMarq’s Atlanta regional office arranged the 15-year term financing with the 15-year amortization through correspondent Artesia Mortgage, Issaquah, Wash. The borrower on the 99-unit multifamily property is High Road Tallahassee Ltd.
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Bring a new vision to your team and attend MBA's Management Track sessions.

The Disney Approach to Leadership Excellence
October 24, 2:00-3:15 p.m.
Take the fundamental leadership philosophies guiding the success of the Walt Disney World Resort and adapt them to your organization. Combining classroom sessions, application exercises, field experiences and interaction with Disney leaders, this session guides you in discovering the leadership principles that are at the core of Disney's organizational strength.

The Art and Science of High Performance
October 24, 3:30-4:30 p.m.
Andrew Bennett, founder of Bennett Performance Group, weaves together a compelling case about the need for inspiration in our work, and how it is closely linked to financial success. He discusses how inspiration builds enduring, positive energy into your organization's culture, connects the hearts and minds of customers, employees, suppliers and communities, and creates compelling reasons for staff members to work with their organizations. Walk away from this session with six tools for building inspiration-driven, high performance into your organization.

Four Generations in the Workplace: Searching for Common Ground
October 25, 11:00 a.m.-12:15 p.m.
For the first time in history, four distinct generations-Matures, Boomers, Xers and Millennials-are employed side by side in the workplace. In this session, retention and generations expert Cam Marston discusses common generational characteristics, specific leadership needs of each generation, the new definition of company loyalty and fresh guidelines for team building. And, he provides valuable advice about the common ground employees share-the intensity with which each generation holds fast to its value systems.

Organizational Change and Performance
October 25, 2:45-4:00 p.m.
Corporations often struggle in creating a common vision and in communicating that vision throughout their companies. In this session, executive coach, John Parker Stewart provides senior managers with guidance on organizational structure, personnel placement and identifying company needs. He specializes in melding together corporate cultures and uniting people with differing backgrounds and heritages.

Register Today
Join the largest gathering of residential real estate finance professionals at MBA's 92nd Annual Convention & Expo. The convention offers strategies so you can adapt and adjust your business to thrive in a constantly changing marketplace. While providing opportunities to network with your peers, the convention also offers the opportunity to gather valuable information on innovative business practices, learn about winning products and services, get updates on the latest technology, and to meet and exchange ideas with industry leaders.

For more information, visit the Convention Web site at http://events.mortgagebankers.org/92nd_Annual/default.html.
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The survey, "Offshoring in the Financial Services Industry: Risks and Rewards," found that 25 percent of respondents currently offshore between 10 percent and 20 percent of their headcount. However, by 2008, nearly half of respondents expect this to be the case.

Respondents—156 executives of financial institutions—cited cost savings as the main reason for offshoring, at 79 percent. In the longer term, 74 percent of financial services firms said they saved costs by offshoring activities. Other benefits of offshoring identified by those surveyed were strategic flexibility and improved quality of service.

But the survey also noted that benefits to offshoring were less immediate in the first year of the project; nearly a third of survey participants actually experienced no change in costs in the first year after offshoring functions and 15 percent of respondents reported no change in cost base even after five years of offshoring.

"Financial services executives who are looking to reap the most rewards need to view offshoring as a long-term process to improve performance in the organization as opposed to a cost-cutting mechanism,” said Jeremy Scott, chairman of PricewaterhouseCoopers’ Global Financial Services Leadership Team. “Some companies fall victim to initial over-enthusiasm but successful firms will be realistic when drawing up savings targets. They should plan ahead exhaustively when considering offshoring as there can be hidden risks for the unwary, not least to a company's reputation if there are any offshore security breaches."

Steve Kropper, senior vice president with Equinox, based in Mumbai, India and San Francisco, said that historically, offshoring mortgage processing has been a marginal and unattractive proposition because domestic vendors could offer only limited cost savings driven primarily by re-engineering the mortgage process. But today, he said, communications technology, offshore mortgage domain experience, and wage differentials make it more than attractive to offshore certain processes to India. 

“Claims of quality, efficiency and single point of contact management in offshore processing are real. And there are now offshore centers of mortgage expertise,” Kropper said. “However, the easiest measurable force is the lure of lower Indian wage rates. Here's the motivation: $20,000 for a newly minted MBA, $3-4,000 for a college educated entry level staffer and $13,000 for a floor manager (without an MBA).”  

Public backlash to offshoring, especially the reaction to job losses at home, has kept many businesses from taking operations abroad, according to a recent report by The Conference Board. Employment loss is not the only downfall of offshoring but also cost the loss of a local tax base and damage to their brand. The negatives don't only affect a company's home workforce; rapid growth in offshore destinations often strains local infrastructure and creates damaging cultural stresses, the report said.

"Even for companies that believe they exist solely to create value for shareholders, the social or sustainability implications of offshoring warrant considerable consideration, since, on a practical level, companies' reputations—their brand, desirability as employer, and, therefore, their financial success—are at stake," said Ton Heijmen, senior advisor to The Conference Board on Offshoring and Outsourcing.

The Pricewaterhouse survey noted some of these concerns. The survey noted that half of those surveyed were satisfied with the overall impact of offshoring activities. The top three risks highlighted included finding and attracting people of the right quality to work in offshore centers, deteriorating quality of service and cultural differences between home and host markets. Other concerns were rising wages caused by the demand for educated staff and rising turnover in the most popular offshore destinations.

According to another recent Pricewaterhouse report, "The Evolution of BPO in India," the turnover of staff in main centers in India can be between 40 and 60 percent. Training and career development opportunities were cited by four out of five of executives as the most effective way to retain offshore employees. These staffing pressures will only intensify as the trend to offshore gains ground.

"Regulators are watching to ensure that standards of compliance and governance are maintained, particularly as offshoring shifts into areas which are more critical to business continuity and where concerns over client confidentiality and data protection prevail,” said Paul Horowitz, a partner at Pricewaterhouse. “Institutions need to stay close to the regulators whilst developing transparent processes and visible risk management procedures."

But as the Pricewaterhouse study and others have demonstrated, the benefits to offshoring have begun to weigh more heavily than the negatives. Business process outsourcing (BPO) market size for the U.S. mortgage market in India is poised to grow to nearly $1 billion over the next five years, according to a recent research report by Trinity Partners, Tucson, Ariz., and Avendus Advisors, Mumbai, India.

According to Trinity/Avendus, the offshoring potential by mortgage companies has barely been tapped. It said the offshore addressable BPO market size for the US residential mortgage ecosystem is in the range of $6-$7.4 billion. The existing mortgage processing BPO market in India is nearly $150 million, employing 7,500.

"We believe that the future growth of BPO will be driven by an increased focus on domain-specific, vertical processes that provide not only cost savings, but other long-term benefits in the areas of productivity and capacity management for the client," said Francesco Paola, Trinity's vice president of sales and marketing.

The Pricewaterhouse survey found that nearly half of financial services firms currently offshore transaction-based IT activities, while only 12 percent of companies surveyed do not offshore any activities at all. By 2008, however, a further third of respondents plan to offshore HR activities such as payroll and a further 25 percent expect to offshore customer contact activities such as scripted sales calls. Knowledge-based activities such as financial research and modeling, will be offshored by 2008, predict 22 percent of the organizations surveyed.

The report is available at http://www.pwc.com/financialservices.
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