US Mortgages

Warren Buffet, head of multi-billion dollar investment firm Berkshire Hathaway, said Tuesday he is surprised Americans are not “lining up now to get mortgages to buy a home.” He is puzzled by the sluggish rebound in US home construction amid near record-low interest rates and a broader recovery in the economy.

At a conference hosted by Fortune magazine in Laguna Niguel, CA, Buffet said, “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
Buffet reiterated Tuesday that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades. Berkshire is the largest shareholder in Wells Fargo & Co, the biggest US home lender.
Vacancy rates for US apartments have been at 5 per cent or less since 1Q 2012, according to Reis Inc, a property research firm.
Elsewhere,  David Crowe, chief economist with the National Association of Home Builders, was in St. Louis, MO, also Tuesday to address the Home Builders Association of St. Louis and Eastern Missouri.
“While a firming job market is helping to unleash pent-up demand for new homes and contributing to a gradual, upward trend in builder confidence, we are still not seeing much activity from first-time home buyers,” Crowe said. “Other factors impeding the pace of the housing recovery include persistently tight credit conditions for consumers and rising costs for materials, lots, and labour.”


US new-home sales nationally have been uneven, dropping in June before rising in July and August. The shares of publicly traded homebuilders have fallen 7.9 per cent this year, compared with a 6.3 per cent increase in the Standard & Poor’s 500 Index.
Many are pointing to changes with US home lending policy as a big reason for this apparent drag.
The housing recovery is being held back because first-time homebuyers with low credit scores cannot afford the high mortgage insurance premiums that the Federal Housing Administration (FHA) is charging, according to a Bank of America Merrill Lynch report.
“We estimate that the 12-month rolling FHA purchase mortgage production is down by roughly 50 per cent — from US$215 billion to US$105 billion — from its peak rate in 2010,” said BofA Merrill Lynch Global Research in a note to clients Monday. “While FHA no longer needs to provide countercyclical support to housing, its market retreat brings ‘underserved’ mortgage financing conditions back to low income, often first-time homebuyers, with significant implications for economic recovery measures such as housing starts and new home sales.”

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Company analysts start by establishing that the Federal Reserve Board’s Quarterly Senior Loan Officer Survey of credit conditions indicated that mortgage credit loosened in 2Q 2014.
The higher premiums are helping the FHA to replenish its mortgage insurance fund but it means “less available mortgage financing for the all-important first-time homebuyer segment,” the mortgage strategists say. “Given the constraints facing FHA and subprime private mortgage, we have little reason to believe meaningful change to recent activity is coming anytime soon.”
Federal Housing Administration loans, given to borrowers with weaker credit scores and requiring small down payments, plummeted 19 per cent in the nine months ending June 30 compared with a year earlier. A mid-September meeting at the White House between government officials and banking executives ended without an announcement of any breakthroughs on the dispute. The largest US home lenders are curtailing FHA mortgages due to concerns that they will be penalized for what they consider immaterial underwriting errors when loans default.
American home buyers who put less than 20 per cent down will have to pay mortgage insurance depending on the type of loan borrowed. For an FHA loan with 3.5 per cent down, an FHA Mortgage Insurance Premium (MIP) is required. For a conventional loan with as low as 5 per cent or 10 per cent down payment, Private Mortgage Insurance (PMI) is required. These insurance plans protect the lender against losses should the borrower default.

FHA insured 420,709 purchase loans in the nine months through June 30, compared with 516,588 mortgages during the same period a year earlier, according to HUD data. A record 1.1 million loans were backed by FHA in the 12 months ending September 30, 2010. The annual average for the prior 10 years was 589,242.
The average credit score for an FHA loan was 680 for 2Q — well above FHA’s minimum of 580 for low down payments, according to HUD. An increased FHA focus on loan defects could make lenders less likely to originate mortgages to people with lower FICO scores who still meet FHA guidelines since their loan files may be thicker and more complicated, increasing risks of minor errors in applications, said Scott Olson, executive director of the Community Home Lenders Association to Bloomberg after the September meeting at the White House.
Buffet’s investment Wells Fargo had the biggest drop in FHA originations among the five largest FHA lenders. They fell 82 per cent to US$2.6 billion in the first six months of this year compared with the same time period in 2013, according to Inside Mortgage Finance Thursday. Bank of America’s 72 per cent drop was the second biggest, followed by JPMorgan, with a 55 per cent decline.
Mortgage lenders delivered US$47.82 billion of single-family home loans with private mortgage insurance coverage to Fannie Mae and Freddie Mac during 3Q 2014, said Inside Mortgage Finance. That was up 29.9 per cent from 2Q as the private MIs piggybacked on the surge in purchase-money mortgages securitized by the two government-sponsored enterprises.