IMF downgrades economic outlook

The International Monetary Fund (IMF) has sharply downgraded its outlook for the US economy through 2012 because of weak growth and concern that Europe won't be able to solve its debt crisis. The international lending organization expects the US economy to grow just 1।5% this year and 1।8% in 2012. That's down from its June forecast of 2.5% in 2011 and 2.7% next year. The IMF has also lowered its outlook for the 17 countries that use the euro. It predicts 1.6% growth this year and 1.1% next year, down from its June projections of 2% and 1.7%, respectively. The gloomier forecast for Europe is based on worries that Greece will default on its debt and destabilize the region. Overall, the IMF predicts global growth of 4% for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe. The US economy grew at an annual rate of just 0.7% in the first six months of the year. And the US unemployment rate has stayed above 9% for all but two months since the recession officially ended two years to Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF officials say. Europe's debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer have hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, such as Treasury bonds. In Europe, slower growth will make it harder for stressed nations to get their debt under control. US and European policymakers need to act more decisively to cut budget deficits, the IMF said. And European officials need to ensure that the region's banks have enough capital to withstand the debt crisis. The IMF said in its report that the US economy faces longer-lasting problems that go beyond high gas prices and disruptions caused by the Japan crisis. Employers are adding few jobs and giving out meager pay raises. Many homeowners owe more on their mortgages than their homes are worth. Banks are keeping credit tight.

NAR urges more short sales

In a letter sent to the US Department of Housing and Urban
Development, the Federal Housing Finance Agency, and the US
Department of the Treasury, the National Association of Realtors
(NAR) responded to the agencies’ recent request for input and
offered its recommendations for selling REO properties held by
Fannie Mae, Freddie Mac and the Federal Housing Administration.
According to NAR, improving access to affordable mortgage
financing for qualified home buyers and investors and committing
additional resources to loan modifications and short sales will
help reduce current and future inventories of real estate owned
(REO) properties held by government agencies. NAR urged the
agencies to create an advisory board as they explore new options
for selling foreclosed properties to ensure that efficiently
disposing of agency REO properties will minimize taxpayer losses
and reduce the negative effects that distressed properties have
on local real estate markets.

To prevent further REO inventory increases, NAR also recommended
that the agencies take more aggressive steps to modify loans
and, when a family is absolutely unable keep their home, to
quickly approve reasonable short sale offers that allow families
to avoid foreclosure. Phipps said that while federal programs
have been put into place to help keep families in their homes,
many of these have fallen short of expectations, and advocated
that those resources be applied toward modifying loans and
expediting short sales, which are typically less costly than
foreclosure. “Loan modifications keep families in their home and
reduce defaults, while short sales keep homes occupied, helping
stabilize neighborhoods and home values,” Phipps said.
“Expanding resources and ensuring the use of already allocated
funds for pre-foreclosure efforts is the best opportunity to
reduce taxpayer costs and creates more positive outcomes for
homeowners and their communities.”

NAR is also concerned about proposals that include lease-to-own
elements. Phipps said that agency policies should first be
focused on keeping families in their homes through loan
modifications or short sales if that’s a better option, and that
the agencies should not expedite foreclosures so that those
properties could be included in a lease-to-own program. He added
that any lease-to-own programs should not be administered by the
government, but instead should include the participation of
local investors or nonprofits that can manage the specialized
needs and challenges of the local market.

new wave of foreclosures coming

"Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months, well over 200% more month-to-month. A notice of default is the first stage of the foreclosure process in non-judicial foreclosures states, that is, where foreclosures do not go before a judge. The notice of default is usually sent when a borrower is 90 days or more overdue in payments, but that timeline has been extended significantly during this housing crisis, due to the so-called 'robo-signing' processing scandal and the sheer volume of troubled loans.

Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity, and his research points to Bank of America as the primary driver. I contacted a Bank of America spokesman, who responded: 'It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month.'

The foreclosure numbers are down very slightly year-over-year, but only because August 2010 was one of the highest foreclosure months on record, and of course was just before the 'robo-signing' scandal was uncovered. Delays in processing have artificially lowered the foreclosure numbers over the past year, so this new surge is likely addressing loans that have been long delinquent, but unaddressed. In other words, the foreclosure pipeline is filling again. RealtyTrac, a widely followed foreclosure sale and data site, is also confirming a surge in overall notices of default in its August numbers, to be released later this week. They do not cite Bank of America specifically, which bought Countrywide Financial, taking on millions of troubled loans. 'We've been seeing REO [bank-owned property] sales, and processing of loans through foreclosure. This increase may simply be the lenders and servicers starting the next cycle. August traditionally is a high month for foreclosure actions, so part of the increase might be seasonal,' says RealtyTrac's Rick Sharga. 'Could be any number of reasons - but with 3.5 million delinquent loans, this had to happen sooner or later.'

The question of course is, is this a one month catch-up purge or will it continue at high levels for a while? And if the latter, will other banks follow suit quickly? Because if other banks see Bank of America pushing more loans to foreclosure, which will inevitably means more properties heading out for sale, they may want to get in before that glut of properties pushes prices down even further. 'This proves once again that 'credit' as measured by legal defaults and foreclosures is not necessarily about borrowers missing payments, rather about what the servicers chose to do about it,' notes Hanson."

friction in Obama's refi proposal

"The response to President Obama's recent proposal to refinance more borrowers into lower interest rate mortgages was at best underwhelming and at worst scathing. The plan would expand the government's so-far disappointing, Home Affordable Refinance Program (HARP), which helps current but underwater borrowers with Fannie Mae and Freddie Mac loans to refinance. 'Mr. President, the housing market is the foundation of the US economy. It is cracked and chipping away,' writes Florida real estate consultant Jack McCabe in an editorial in the Herald-Tribune. 'The walls are beginning to cave. Your answer, anecdotally, seems to be put a new roof on it.' McCabe is calling for principal write-down for troubled mortgages, not refinances for borrowers who are current on their monthly payments. The argument so far against principal write-down is that it would cost banks and investors (including Fannie Mae and Freddie Mac) too much.

Unfortunately the plan, which could allow borrowers with more than 25% in negative equity to refinance, is being deemed too costly as well. While the Congressional Budget Office estimated it would cost investors in the original mortgages between $13
and $15 billion (while potentially saving 111,000 borrowers from defaulting), analysts at JP Morgan Chase say it would cost more: If such a policy were successful on a large scale, it would clearly devalue higher coupons, and would threaten lower coupons
with incremental gross supply. A more modest HARP overhaul, while less disruptive, still forces investors to require more conservative valuations until details emerge.

All these arguments, however, may be moot, as the overseer of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), which would have to approve the refinance effort, is sounding wildly cautious. In a statement following the President's speech, Director Ed DeMarco states, 'If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for the Enterprises, we will seek to do so.' He goes on to say, however, that there are 'several challenging issues to work through,' and then he uses the word 'uncertain' twice in characterizing any outcome. While DeMarco doesn't detail said 'frictions,' they are vast and not limited to investor cost. First of all, too many borrowers probably still wouldn't qualify if they just did away with the loan to value ratio of 125%. Of the 838,400 HARP refinancings done so far, only 62,432 had LTVs above 105%, according to Jaret Seiberg at MF Global. 'We believe lenders are reluctant to HARP a loan if they fear the borrower is so underwater that they might default anyway,' writes Seiberg. Then there are issues of loan origination dates, put-backs on loans that default and borrower qualifications. Frictions. Beyond the friction, however, is the simple fact that a refinance program, while potentially an economic stimulus, is not a housing stimulus and shouldn't be characterized as such. The HARP program is and always was for current borrowers and does nothing to address the millions of non-current borrowers, bank-owned foreclosed homes and falling home prices."