The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closing, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Last month, NAR reported that February total existing home sales saw the first increase in seven months. The drop in pending home sales suggests that existing home sales should resume their declining trend in the near term. 

Recent aggressive actions by the Federal Reserve have failed to spur housing demand, given tighter lending standards, softening labor market and higher risk premiums. While the 10-year Treasury yield—the benchmark for fixed mortgage rates—declined considerably in March and remained low in early April, the spread between the 10-year and conforming mortgage yields has remained wide at about 230 basis points. In addition, the jumbo market continued to be stressed, with the spread between jumbo and conforming rates widening to about 150 basis points. 

Also yesterday, the Federal Reserve released minutes from the March 18 Federal Open Market Committee meeting. At that meeting, the FOMC reduced the federal funds rate 75 basis points, to 2.25 percent. While the FOMC members did not use the word recession during their discussion, they acknowledged that the Fed’s new forecast showed a “substantial” downward revision of growth outlook. Economic growth is likely to contract in the first half followed by a slow growth in the second half. 

Some members noted that they found little signs that housing market has reached bottom. Members added that there was a risk that the economic slowdown could continue into 2009 if the housing and financial markets do not improve. There were concerned that an “adverse feedback loop” could restrict credit, hurting economic activity and thus causing lending to contract further. They also noted that financial market stress, combined with declining home prices, could lead to a "more severe" and "protracted downturn." 

Members also expressed concerns about inflation, especially from the pass-through of rising energy prices. Finally, members admitted that interest rate cuts alone might not be enough to deal with underlying problems in the housing and financial markets.

Long-term yields were little changed. The yield on 10-year Treasuries rose three basis points and hovered around 3.56 percent by mid-Tuesday afternoon.

(Orawin Velz is senior director of economic forecasting with the Mortgage Bankers Association. She can be reached at ovelz@mortgagebankers.org.)
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“What drives the scratch and dent market is the seller of the loan who has a need for liquidity; otherwise the seller would not sell the loan at a discount,” said Jon Daurio, chairman and CEO of Kondaur Capital Corp., Santa Ana, Calif.

Daurio said a loan is scratch-and-dent for any of the following three reasons: loan performance —the loan is either in default or was previously in default; a loan where a regulation was violated in the origination process; or for underwriting reasons that involve fraud.

Companies such as Kondaur Capital have entered the market, buying loans at huge discounts with the potential of repackaging and selling the loans.

“The process involves high-touch due diligence management,” Daurio said. “We might refinance or restructure the loans or we may resell them. If it’s a nonperforming loan, we may get a died-in-lieu. What we do is characterize borrowers as those who have the ability and desire to pay and stay, those who should sell and go, and those who do nothing.”

Daurio said that loan attributes play a significant part in purchasing decisions. From a due diligence perspective, the company conducts a two week to four week review of the loans to verify accuracy.

“In the scratch and dent world, most sellers don’t have accurate information and many times the information is off,” Daurio said. “Factors such as the status of the loan, unpaid balance and collateral values information result in us adjusting our price. Regardless, sellers should be figuring out what is a fair and reasonable amount for these loans.”

As homeownership preservation efforts makes headlines, the scratch-and-dent market could make additional progress. “It’s a win-win situation,” Daurio said. “In the event that we may have to foreclose on a home, it's usually after we make every other effort to keep the borrower in the home. More often than not, the reason is because we can’t reach the borrower at all.”
 
“The incredible magnitude of repurchase obligations has led to a liquidity crisis in the mortgage banking industry,” Daurio said. “Loan sellers typically do not have sufficient cash to repurchase the loans nor the ability to borrow sufficient cash. As a result, a scratch-and-dent loan buyers will arrange with the loan seller to buy the loan from the loan buyer at less than par, with the loan seller making up the difference. Such differences can and likely will, in the aggregate, amount to billions of dollars.”
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The Market Composite Index rose to 725.6, an increase of 5.4 percent on a seasonally adjusted basis from 688.3 one week earlier. On an unadjusted basis, the Index increased 5.7 percent compared with the previous week and was up 10.9 percent compared with the same week one year earlier. The four-week moving average rose by 1.8 percent to 758.0 from 744.5. 

The seasonally adjusted Refinance Index increased by 3.4 percent to 2724.7 from 2636.0 the previous week. The four-week moving average rose by 2.4 percent to 2987.8 from 2918.6. The refinance share of mortgage activity decreased to 52.2 percent of total applications from 53.4 percent the previous week.

The seasonally adjusted Purchase Index increased by 8.1 percent to 384.7 from 356.0 one week earlier. The Conventional Purchase Index increased by 6.1 percent, while the Government Purchase Index (largely FHA) increased by 15.2 percent. On an unadjusted basis, the Conventional Purchase Index increased by 6.3 percent to 561.1 from 527.7 the previous week. The four-week moving average rose by 1.1 percent to 377.4 from 373.4.

The seasonally adjusted Conventional Index increased 3.8 percent to 935.8 from 901.8 the previous week; the seasonally adjusted Government Index increased 12.9 percent to 375.2 from 332.4 the previous week.
 
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.78 percent from 5.75 percent, with points decreasing to 1.11 from 1.19 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.39 percent from 5.27 percent, with points decreasing to 1.11 from 1.13 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year adjustable-rate mortgages increased to 7.06 percent from 7.00 percent, with points increasing to 1.46 from 1.39 (including the origination fee) for 80 percent LTV loans. The ARM share of activity increased to 6.5 percent from 5.4 percent of total applications from 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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Attend the MBA Government Housing and Loan Production Conference 2008 and gain insight into the dramatic changes made to government housing programs. This conference provides insight on how to make the most of the Federal Housing Administration's (FHA) programs such as FHASecure; the Veterans Affairs (VA) Loan Guarantee Service and the Department of Agriculture's (USDA) Rural Housing Service, as well as the chance to discover alternative sales approaches and evaluate new strategies, products and technology.

Government officials and industry experts lead sessions exclusively designed for mortgage professionals with loan production and regulatory compliance responsibilities, including CEOs, heads of production, credit policy professionals, lenders of government loans and loan officers and brokers.

Who Should Attend:
Wholesale and retail originators, brokers and loan correspondents, residential underwriting professionals, credit policy professionals, quality assurance professionals, executives involved in the development of their organizations strategic plan, and anyone interested in learning more about the current government housing programs.

Speaking Opportunities:
Contact Norman Edwards at nedwards@mortgagebankers.org or call (202) 557-2793.

Network with Attendees:
Conference sponsorship is the ideal vehicle to grab the attention of this important audience and position your company as a leader in the industry. All sponsorships include a tabletop exhibit opportunity, but space is limited. For more information contact Phil Giorgianni at phil@mortgagebankers.org or call (202) 557-2733.

Web Site:
For more information about MBA’s Government Housing and Loan Production Conference 2008, visit http://events.mortgagebankers.org/ghlp2008/default.html.
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FHA Central is convenient for you and your business. Popular one-day classroom-based courses take place throughout the year at different locations across the United States. LIVE Online Workshops and Guided Web-based Courses leverage the value of interactive instructor-led learning at the comfort of your desk (or even on the road). FHA Central also offers publications and print-based courses that can be studied and completed at your own pace.

Visit CampusMBA FHA Central to learn more: www.campusmba.org/AllLearningProducts/FHACentral.htm?WT.mc_id=FHANL022708.

For your staff: most FHA Central programs can be offered at your location or online for your employees at your convenience. Visit www.campusmba.org or call (800) 348-8653 for more information about bringing FHA Central to your staff.

DE (Direct Endorsement): Several FHA Central programs, including FHA Fundamentals Workshop, FHA Underwriting & Operations Workshop and the FHA Fundamentals Guided Web-based Course, provide complete information on all origination, processing and underwriting requirements unique to FHA loans. Lenders across the country use these courses as part of a certification program for their processors and underwriters who are looking to become DE (Direct Endorsement) Underwriters.

Upcoming FHA Central Programs include:

• Senior FHA Bimonthly LIVE Online Conference, March 27. For more information, visit http://www.campusmba.org/products/default.aspx?product_code=E2801716K/REGIS&wt.mc_id=FHANL022808.

FHA Central Classroom-based Courses
FHA Fundamentals Workshop:
• April 10 in Chicago http://www.campusmba.org/products/default.aspx?product_code=E2801618C/REGIS&wt.mc_id=FHANL022808;

• May 1 in Miramar, Fla. http://www.campusmba.org/products/default.aspx?product_code=E2801618D/REGIS&wt.mc_id=FHANL022808, and

• July 16 in San Diego http://www.campusmba.org/products/default.aspx?product_code=E2801618E/REGIS&wt.mc_id=FHANL022808.

FHA Underwriting & Operations Workshop:

• April 11 in Chicago http://www.campusmba.org/products/default.aspx?product_code=E2801620C/REGIS&wt.mc_id=FHANL022808;

• May 2 in Miramar, Fla. http://www.campusmba.org/products/default.aspx?product_code=E2801620D/REGIS&wt.mc_id=FHANL022808; and

• July 17 in San Diego http://www.campusmba.org/products/default.aspx?product_code=E2801620E/REGIS&wt.mc_id=FHANL022808.

Special Bundled Pricing: Attend both FHA Fundamentals and FHA Underwriting & Operations Workshops in the same location and save on registration fees.
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"We commend the Board for developing a comprehensive set of rules to address abuses in the mortgage market," said MBA Chairman Kieran Quinn, CMB. "We support many of the provisions in the proposed rule, but we do have concerns about the increased regulatory burden, liability and reputational risks that lenders might face. If the rules are not revised, many borrowers will pay more for their mortgage and fewer loans will be made to those borrowers most in need of credit."

The Board’s proposed rule to amend Regulation Z under the Truth in Lending Act (TILA) and HOEPA comes at a critical point for the economy and the real estate finance industry, a development noted by MBA in its letter.

As the Board is well aware, the mortgage industry has been in the eye of a dangerous storm threatening the availability of credit in the nation and in the global economy,” MBA said. “This crisis has many victims and causes. These include economic conditions, excess capacity and escalating prices in the real estate market, out-sized investor and borrower appetites, as well as some originator abuses, with the victims including borrowers, future borrowers, communities and the economy at large. MBA believes that while these rules address only the mortgage related aspects of the crisis, their implementation, with some prudent changes, will not only better protect consumers, but will increase investor confidence to help return liquidity to the markets.”

With Congress and others calling for tighter regulation of loans and loan processes, particularly in the subprime lending arena, the Fed issued its proposed rule earlier last December and established a 90-day comment period.

The proposed rule outlines four protections for “higher-priced” mortgage loans, prohibiting creditors from extending credit without considering a borrower’s ability to repay; requiring creditors to verify income and assets; limiting the scope of prepayment penalties; and requiring creditors to establish escrow accounts for tax and insurance. Additionally, the rule defines “higher-priced mortgage loans” as a first-lien mortgage with an annual percentage rate that is three percentage points or more above the yield on comparable Treasury notes. It also generally prohibits lenders from compensating mortgage brokers through yield-spread premiums, creates a brighter line between lenders/brokers and appraisers and requires companies that service mortgage loans to provide additional consumer protections.

Quinn said MBA's greatest concern is that the Board's definition of subprime loans is “overly broad and could capture too many prime loans, subjecting those products to overregulation and higher costs for borrowers.” In addition, he said MBA is “troubled by the extraordinary new legal risk created by the Board's decision to propose the rule under its unfair or deceptive practices authority. These provisions include penalties that are disproportionate to the potential violations.” 

MBA's letter contains recommended changes to improve the rule, including:

• Strengthening safe harbors in consideration of ability to repay. "The current rebuttable presumption is insufficient to protect lenders from unreasonable litigation risk," MBA said.

• Coordinating with HUD on disclosure of broker's compensation. "The Board's current approach is incompatible with HUD's proposed new [Real Estate Settlement Procedures Act] rule," MBA said; and

• Assuring a reasonable implementation period. "The proposed changes require major operational, staffing and training challenges for lenders," MBA noted.

"The proposed rule shows an appreciation of the fact that ill-conceived restrictions can stifle innovation in the mortgage market and can limit the availability of credit for all consumers," Quinn said. "We hope that the Board will move quickly to finalize these rules after addressing the concerns that we have raised on our members' behalf."

MBA also noted in its letter that the market and other policymakers have already reacted to tighten credit standards and that regulators in federal and state governments are addressing many of the issues addressed here through legislation, regulations and guidance.

“Recently, real estate prices in many markets have declined and credit has been constricted,” MBA said. “In the interest of current borrowers and borrowers to come, MBA urges the Board to take a balanced approach in devising final regulations so that the credit crisis is not worsened. MBA is extremely concerned that the availability of mortgage credit may continue to tighten in the coming months and that it will be difficult for the industry to continue to serve consumers and homeowners in need of mortgage finance.”
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Rangel’s bill, the Housing Assistance Tax Act of 2008, differs from legislation currently under consideration in the Senate with its broader emphasis on tax credits to first-time home buyers and a greater emphasis on credits for creators of affordable housing. Rangel said his bill provides "relief to the buyers and families themselves, not just the banks and builders."

"The House bill puts families first—offering a refundable tax credit to first-time homebuyers, essentially a zero-interest loan to help defray the cost of purchasing a house,” Rangel said. “The bill will also expand and improve the successful low-income housing tax credit to put builders to work and create affordable alternatives for families seeking new housing."

Key provisions in the bill include:

• A first-time home buyer tax credit that would provide individuals and families with a refundable credit—Rangel said it would be the equivalent of an “interest-free loan”—of 10 percent toward the purchase price of their home, up to $7,500. Recipients would be required to repay any amount received under this provision to the government over 15 years, in equal installments. The credit would be phased out for taxpayers with adjusted gross income in excess of $70,000 ($110,000 in the case of a joint return);

• An additional standard deduction for real estate property taxes to help homeowners who claim the standard deduction by allowing them to claim and additional standard deduction of up to $350 ($700 for joint filers) for state and local real property taxes. This provision would apply for 2008.

• A temporary increase in the low-income housing tax credit and simplification of credit. The bill would increase the current limit of the credit from $2 for each person residing in a state by an additional 20 cents per resident. Rangel said this would “help put builders to work to create new options for families seeking affordable housing alternatives.” The credit will also be simplified to improve its effectiveness.

• A temporary increase in mortgage revenue bonds to allow for issuance of an additional $10 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance construction of low-income rental housing.

Rangel will hold a committee hearing on the bill today at 11:00 a.m. ET in room 1100 of the Longworth House Office Building. The hearing can be viewed live on the Internet at http://waysandmeans.house.gov/media/graphics/video.htm.

A draft of the bill, which does not yet have a number, can be found at http://waysandmeans.house.gov/media/pdf/110/housingtext.pdf.

Also today, the House Financial Services Committee begins a two-day hearing on draft “rescue” legislation proposed by Chairman Barney Frank, D-Mass. The hearings take place today and tomorrow at 10:00 a.m. ET in room 2128 of the Rayburn House Office Building. The hearing can be viewed at http://financialservices.house.gov/hearings.html.

Scheduled to testify today:

• Sheila Bair, chair of Federal Deposit Insurance Corp.
• John Dugan, comptroller of the Office of the Comptroller of the Currency
• John Reich, director of the Office of Thrift Supervision
• Randall Kroszner, member of the Board of Governors of the Federal Reserve System
• Brian Montgomery, assistant secretary for housing and federal housing commissioner at HUD
• Brian Wesbury, chief economist with First Trust Advisors LP
• Alan Blinder, the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University
• Allen Sinai, chief global economist, strategist and president of Decision Economics Inc.

Scheduled to testify tomorrow:
• Maryland Gov. Martin O’Malley (D)
• District of Columbia Mayor Adrian Fenty (D)
• Boston Mayor Thomas Menino (D)
• Las Vegas Mayor Oscar Goodman (D)
• Doug Garver, executive director of the Ohio Housing Finance Agency
• David Lizarraga, chairman of the U.S. Hispanic Chamber of Commerce
• Sheila Crowley, president of the National Low Income Housing Coalition
• Hilary Shelton, director of the NAACP Washington Bureau
• Victor Burrola, director of the Homeownership Network with the National Council of La Raza

Frank’s legislative proposal (http://financialservices.house.gov/FHA.html), in partnership with the Senate proposal drafted with Senate Banking Committee Chairman Christopher Dodd, D-Conn., would permit FHA to provide up to $300 billion in new guarantees that would help to refinance at-risk borrowers into viable mortgages; in exchange for lenders agreeing to a “substantial” write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA guaranteed loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The bill also permits the loan program to be used to refinance and guarantee mortgages through a facility that would provide for auction or other mechanism to refinance loans on a bulk basis; and provides $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible.

Meanwhile, the Senate continues debate on its housing proposal, with a final vote expected this week.
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