Document Sample
					 Vol. 2, No. 4, April 2011

 Regulatory and Legislative—Origination
    •    SEC Goes After GSEs; FDIC Charges WaMu [Posted March 23, 2011]
    •    GSEs Increase Foreclosure Preventions in 2010: FHFA [Posted March 16, 2011]
    •    GSE Dissolution to Take Two Years to Commence: Geithner [Posted March 9, 2011]
    •    Freddie Sets 95 Percent Loan-to-Value Ratio [Posted March 9, 2011]
    •    Appraiser Identifiers Required under New Fannie Guidelines [Posted March 2, 2011]
    •    GSEs Stem Losses in Fourth Quarter, Request More Aid [Posted March 2, 2011]
    •    GSEs Plan “Robo-Signing” Penalties, Anti-Foreclosure Rewards [Posted March 2, 2011]

 Regulatory and Legislative—Asset Management and REO
    •    Regulators Back 20 Percent Down Payment for Qualified Residential Mortgages [Posted March 30,
    •    House Committee Votes to Kill another Two Housing Bills [Posted March 16, 2011]
    •    FHFA Extends Refinance Program by One Year [Posted March 16, 2011]
    •    Obama to Servicers: Pay into $20 Billion Foreclosure Fund [Posted March 2, 2011]
    •    FHA’s REO Inventory Volume Spikes 47 Percent; Worth $9.1 Billion [Posted March 2, 2011]

 In the States
    •    Housing Intelligence: 6 of 20 Healthiest Housings Markets Are in Texas [Posted March , 2011]
    •    Four States Consider Legislation Barring Distressed Sales as Comparables [Posted March , 2011]
    •    Nebraska Latest State to Enact AMC Regulations [Posted March , 2011]
    •    Utah Legislation Alters State’s AMC Law [Posted March , 2011]
    •    Connecticut Legislative Committee Removes BPO Language from Law [Posted March , 2011]

 Around the Industry
    •    Large Down Payment Could Thwart Many Homebuyers: CoreLogic [Posted March 30, 2011]
    •    Pending Home Sales Continue Upswing: NAR Index [Posted March 30, 2011]
    •    Consumers Shying Away From Housing Debt: Fed [Posted March 30, 2011]
    •    January Home Prices Fall in FHFA’s Home Price Index [Posted March 30, 2011]
    •    New Home Sales Fall in February: Commerce [Posted March 30, 2011]
    •    S&P/Case-Shiller: Home Prices Dip in January [Posted March 30, 2011]
    •    February Home Sales Drop Nearly 10 Percent: NAR [Posted March 23, 2011]
    •    February Housing Completions Perform Better Than Expected [Posted March 23, 2011]
    •    AI President to Regulators: Include Appraisals in Qualified Residential Mortgages [Posted March 23,
    •    Bank of America Case Study Finds 20 Percent HAMP Eligible [Posted March 16, 2011]
    •    Mortgage Process Overhaul, Court Challenges Slow Foreclosure Activity [Posted March 16, 2011]
    •    Foreclosures Down 27 Percent Year-over-Year: RealtyTrac [Posted March 16, 2011]
    •    Underwater Borrowers Increase to 11 Million in Fourth Quarter: CoreLogic [Posted March 16, 2011]
    •    New Mortgages, Refis Harder to Get in 2011: Mortgage Group [Posted March 16, 2011]
    •    Million Dollar Home Sales Spike in 2010 after Four Years of Decline [Posted March 16, 2011]

550 W. Van Buren St., Suite 1000, Chicago, IL 60607 | T 312-335-4100 F 312-335-4400 |
     •    Housing Deflation Continues, Expect More Pressure in 2011: Zelman [Posted March 9, 2011]
     •    Home Prices to Drop 2.3 Percent this Year, Economists Say [Posted March 9, 2011]
     •    Attitudes toward Housing Warming: Fannie Mae Survey [Posted March 9, 2011]
     •    New Home Sales Drop 12.6 Percent: Commerce [Posted March 3, 2011]
     •    Residential Originations to Drop by 40 Percent in First Quarter: MBA [Posted March 3, 2011]

 Economic Indicators – February 2011

2 | Residential Update Vol. 2, No. 4, April 2011
Regulatory and Legislative – Origination
SEC Goes After GSEs; FDIC Charges WaMu
The Securities and Exchange Commission is looking to charge both former and current Fannie Mae and
Freddie Mac executives with failing to properly inform investors about the companies’ mortgage holdings
as the U.S. housing market began to collapse in 2008, according to a March 18 article in The Washington

Reportedly, the SEC may file claims against at least four senior executives for violations related to the
financial crisis, though the Federal Housing Finance Agency has expressed disagreement with the
proposed suit. The FHFA said in its review of financial documents from the two GSEs prior to public
release of them that the agency considered them as sufficient and sent a letter to the SEC opposing the
proposed suit.

While the SEC has not yet filed charges, according to the Washington Post, it has notified the executives
they may be facing civil suits. The newspaper reported the SEC claims Fannie Mae and Freddie Mac
executives knew they were exposing investors to risky mortgage products and failed to alert them.

Executives who may face charges include former Fannie Mae chief executive Daniel Mudd, former
Freddie Mac chief executive Richard Syron, former Freddie Mac chief financial officer Anthony Piszel and
current Freddie Mac executive Donald Bisenius.

When the two GSEs were near collapse in 2008, the federal government seized both, taking them into
conservatorship, resulting in some $150 billion in aid from taxpayers.

Fannie and Freddie executives are not the only ones facing lawsuits. On March 16, the Federal Deposit
Insurance Corporation slapped top executives of Washington Mutual Bank with lawsuits, charging
company officers as well as their spouses with extremely risky mortgage lending practices that ultimately
led to the largest bank failure in U.S. history.

While the FDIC has not yet specified the amount of damages it is seeking, reports indicate it could be in
excess of $900 million, according to a March 18 article in American Banker.

WaMu officers being targeted include former chief executive officer Kerry Killinger, chief operating officer
Stephen Rotella, and the manager of the Seattle company’s home loans division David Schneider. The
suit also indicates Killinger’s and Rotella’s wives were involved in property transfers both before and after
the bank’s September 2008 collapse.

The suit claims the officers “recklessly made billions of dollars in risky single-family residential loans,”
increasing the risk profile for the bank’s loan holdings and that the bank took on the risks knowing it did
not have the infrastructure to support massive loan defaults.

In a statement released on behalf of Killinger on March 17, lawyers said, “The legal conclusions are
political theater. Trial in a courtroom that honors the rule of law — and not the will of Washington, D.C. —

3 | Residential Update Vol. 2, No. 4, April 2011
will confirm that Kerry Killinger’s management, diligence and commitment to Washington Mutual
responsibly and consistently served the interests of its depositors, customers and shareholders.”

Killinger’s attorneys also noted that WaMu had not benefited from the federal assistance of many other
large and failing Wall Street institutions and thus cost taxpayers nothing. Rather, the FDIC transferred
WaMu's operations to JPMorgan Chase & Co.

The FDIC suit claims, however, that WaMu executives focused on short-term gains over the long-term
health and safety of the bank, putting countless investors and the economy at risk.

GSEs Increase Foreclosure Preventions in 2010: FHFA
Fannie Mae and Freddie Mac doubled to 946,305 the number of foreclosure actions they prevented in
2010 when compared to 2009, according to the Federal Housing and Finance Agency’s Foreclosure
Prevention and Refinance Report, released March 3. The GSEs prevented 431,098 actions in 2009.

The report showed loan modifications declined for the second time in the fourth quarter – a decrease of
18 percent from 146,507 to 119,778. It also indicated the performance of loans modified in the first three
quarters of 2010 “improved relative to loans modified in earlier periods, as payment reductions
increased.” By the fourth quarter of 2010, almost half of completed loan modifications lowered monthly
payments by over 30 percent.

Refinancing through the Home Affordable Refinance Program increased 30 percent in fourth quarter 2010
to just over 621,800. HARP allows existing GSE borrowers who are current to refinance and reduce
monthly payments at loan-to-value ratios up to 125 percent without new mortgage insurance. Despite
recent gains, the House Financial Services Committee voted March 9 to kill the housing relief program.
(See “ House Committee Votes to Kill Another Two Housing Bills.”) The Federal Housing Finance Agency
countered March 11, announcing that it was extending the program, set to expire June 30, for another

In terms of the Home Affordable Modification Program, in the fourth quarter, about 24,100 HAMP trials
transitioned to permanent modifications, bringing the total number of modifications to more than 284,100,
according to the FHFA. The Home Affordable Modification Program allows payments to be reduced to an
affordable amount through an interest rate reduction (down to 2 percent), a term extension (up to 480
months), or principal forbearance.

The FHFA findings also showed 60-plus days and serious (90-plus days delinquent or in foreclosure)
delinquencies continued to decline slightly in 2010. Those 60-plus days fell from 1.588 million to 1.514
million, while the serious delinquencies fell from 1.272 million to 1.256 million. The report also claimed the
GSE’s delinquency rate was below industry standards.

With an industry moratorium on foreclosures in the fourth quarter, the GSEs experienced a decline in this
area – dropping heavily from 138,000 in the third quarter to 77,000. With steady increases since 2008,
the third quarter of 2010 had the highest rate of foreclosures. Foreclosure starts also decreased slightly
from 339,000 to 310,000 in the fourth quarter.

To read the full report, go to

4 | Residential Update Vol. 2, No. 4, April 2011
GSE Dissolution to Take Two Years to Commence: Geithner
The Obama administration wants Congressional approval by 2013 to begin dissolving Fannie Mae and
Freddie Mac, Treasury Secretary Timothy Geithner told the House Financial Services Committee March
1. Geithner added that the entire process could take up to seven years to complete, according to
Appraiser News Online sources.

Committee Chairman Spencer Bachus, R-Ala., characterized Geithner’s testimony as a good starting
point for bipartisan negotiations and added he was eager to meet and begin writing legislation, The
Washington Post reported.

Geithner’s appearance before the committee came three weeks after the President issued a report calling
for a reduction of the federal government’s role in the nation’s housing market. Obama proposed limiting
the number of mortgages the GSEs can buy and raising their fees so that borrowers will favor private
lenders. Both actions would require congressional approval. Additional steps, such as decreasing the size
of loans the GSEs may buy and restricting the Federal Housing Administration’s role in making loans, do
not require congressional action.

When the housing crisis occurred, the federal government provided a $150 billion bailout to the GSEs.
Geithner said the administration predicts the ultimate cost of the bailout will be $75 billion at most,
according to the Post. According to an ANO source present at the meeting, Geithner told the committee
that taxpayers “will not recover” the cost of the bailout.

The Obama administration is touting three options for the dissolution:
     •    Limit the GSEs to assisting poor and middle-class borrowers via agencies like
          the FHA;
     •    Allow the GSEs to back private mortgages, specifically during an economic crisis;
     •    Allow GSEs to reinsure mortgage investments already guaranteed by private

At the hearing, Geithner said that under all three options, “it will be more expensive to buy a home” than it
is currently with the GSEs and FHA dominating the market.

While both parties agree on dismantling the GSEs, they differ on the speed and aggressiveness with
which the dissolution should be completed. Republicans favor far-reaching moves, while Democrats want
to protect low-income borrowers. The Post reported some Democrats have criticized Obama’s report for
not adequately addressing low- and moderate-income families or minorities that need protection from
discrimination in lending.

The bad news for borrowers is that if the GSEs are eliminated, the 30-year mortgage may disappear. The
30-year loan became available by an act of Congress in 1954. Most 30-year loans have been issued
since then only with government support. Most private lenders cannot make that accommodation. The
New York Times reported March 3 that most private lenders will prefer a 20-year mortgage with an
adjustable rate. However, some lenders may offer 30-year financing for borrowers who can make large
down payments or those who have better credit scores.

5 | Residential Update Vol. 2, No. 4, April 2011
Freddie Sets 95 Percent Loan-to-Value Ratio
As of June 1, Freddie Mac will cover only loans with a maximum loan-to-value ratio of 95 percent,
according to its March 1 bulletin to lenders. Meanwhile, regulators are drafting rules to exempt certain
mortgages from the 5 percent risk retention rule of the Dodd-Frank Act.

Freddie Mac’s new requirement affects all conventional loans by the government-sponsored enterprise,
including home equity lines of credit, other than relief refinance mortgages.

According to the bulletin, mortgages with higher loan-to-value ratios have not performed acceptably, and
the change is an “effort to support responsible lending and sustainable homeownership.” The rule is
designed to ensure lenders bear a portion of the risk of the mortgages they sell, and it is in line with the
risk-retention requirement of the Dodd-Frank Act, which calls for mortgage lenders to retain 5 percent of
the risk of each loan.

For more information on current proposals to create qualified loan guidelines that avoid this requirement,
see “ OCC, FDIC Propose 20 Percent Down Payment Requirement.”

For Freddie Mac’s full bulletin, visit

Appraiser Identifiers Required under New Fannie Guidelines
Appraiser license or certification numbers are required for all loans delivered to Fannie Mae on or after
July 29, according to a Feb. 22 Fannie Mae letter. Those identifiers are already required for loans
secured by properties located in states that have met their deadlines for transitioning licensing with the
Nationwide Mortgage Licensing System and Registry.

Lender Letter LL 2011-02 announced that the system will begin accepting registrations for mortgage loan
originators employed by agency-regulated institutions. In accordance with the Secure and Fair
Enforcement for Mortgage Licensing Act and the agencies’ final rules, lenders must deliver the loan
originator identifier and the loan origination company identifier for mortgages with loan application dates
on or after July 29 that are delivered to Fannie Mae.

The full Lender Letter is available at

GSEs Stem Losses in Fourth Quarter, Request More Aid
Despite stemming losses in fourth quarter of 2010, Fannie Mae and Freddie Mac have requested a total
of $3.1 billion more in aid from the Treasury Department, according to news releases issued Feb. 24 by
the government-sponsored enterprises. Together the two GSEs own or guarantee more than half of all
U.S. home mortgages.

Freddie said its fourth-quarter loss decreased to $113 million, compared to a $2.5 billion loss in the third
quarter of 2010. Meanwhile, Fannie reported net income in the fourth quarter of $73 million. Fannie
experienced a net loss of $1.3 billion in the third quarter of last year.

6 | Residential Update Vol. 2, No. 4, April 2011
Both Fannie and Freddie indicated their deficits have been due largely to the quarterly dividends they pay
to the U.S. Treasury. The two GSEs have been operating under government conservatorship since 2008,
with Treasury owning more than 79 percent of both companies.

Fannie requested $2.6 billion from Treasury to help cut its $2.5 billion net-worth deficit, while Freddie
asked for $500 million.

Since taking over conservatorship, Treasury has poured $154 billion into the companies, $20 billion of
which has been returned to taxpayers through dividend payments, according to a Feb. 25 Bloomberg
article. Bloomberg also reported taxpayer aid to Fannie and Freddie could total $224 billion by the close
of 2012, with $55 billion of that being returned in dividends.

Fannie ranked as the largest issuer of secondary market mortgage-related securities in 2010, accounting
for 44 percent of the market for single-family homes. In addition to new loans, the company said it
modified 403,506 loans in 2010, including those under the Home Affordable Modification Program. That’s
more than a four-fold increase from 2009, when Fannie modified 98,575 loans.

Freddie’s CEO Charles E. Haldeman, Jr., said the GSE has been substantially strengthened in the last
year, noting in the Feb. 24 news release, “We did this by improving the quality of our new business,
streamlining our operations and efficiently managing our expenses – reducing administrative expenses by
over $100 million from the prior year.”

Fannie’s CEO Michael J. Williams was equally optimistic, noting his company has built “a strong new
book of business.”

However, as reported in Appraiser News Online, both GSEs are scheduled for eventual dissolution under
the Obama administration’s white paper on mortgage finance reform issued Feb. 11. For more
information on the housing reform plan, visit

GSEs Plan “Robo-Signing” Penalties, Anti-Foreclosure Rewards
Fannie Mae and Freddie Mac will issue penalties on mortgage servicers who participated in “robo-
signing” last year, according to a Feb. 24 article from Bloomberg. Conversely, the two government-
sponsored enterprises announced Feb. 23 the creation of a rewards program designed to encourage
servicers to help homeowners avoid foreclosure.

Fannie’s and Freddie’s penalties, which will be announced by the end of the first quarter, could include
fines based on unpaid loan balances, length of loan delinquency and other factors, Bloomberg reported.
Among the mortgage servicers under review by the Financial Fraud Enforcement Task Force are
JPMorgan Chase & Co., Bank of America Corp., Citigroup, Wells Fargo & Co., PNC Financial Services
Group, U.S. Bancorp and HSBC Holdings.

However, servicers who support housing market recovery by helping Americans stay in their homes could
see rewards. In a Feb. 23 news release, Fannie announced its Servicer Total Achievement and Rewards
program, which will offer incentive awards and recognition to servicers based on their performance in
helping homeowners and improving customer experience.

7 | Residential Update Vol. 2, No. 4, April 2011
“The efforts of servicers are critical to preventing foreclosures and providing homeowners assistance,”
Leslie Peeler, vice president of servicing portfolio management at Fannie, said in the news release. “By
creating measurable expectations for our services aligned with Fannie Mae’s business objectives, we
hope to sharpen servicers’ focus and encourage them to continue to work with us toward our shared
priority: keeping people in their homes.”

For more information on the STAR program, visit;jsessionid=1HJENTQW0Q1IDJ2FQSHSFGQ?p=Me

8 | Residential Update Vol. 2, No. 4, April 2011
Regulatory and Legislative – Asset Management
and REO
Regulators Back 20 Percent Down Payment for Qualified Residential
Proposed Federal Deposit Insurance Corp. rules released March 29 leave room for qualified appraisals
for mortgage lenders and bond issuers wanting to avoid any risk retention requirement as mandated by
the Dodd-Frank Act.

The proposal, meant to overhaul the mortgage-backed securities market and other financial tools, could
require securities issuers and lenders to retain 5 percent of the risk for mortgages not meeting the
qualified residential mortgage definition. Among other requirements, mortgages involving properties
having at least a 20 percent down payment and that are fully documented would be exempt as qualified
residential mortgages. The proposal calls for written appraisals on qualified residential mortgages.

“These requirements are intended to ensure the integrity of the appraisal process and the accuracy of the
estimate of the market value of the residential property,” the rule states.

Broker price opinions or automated valuation models would not be acceptable for any securities based on
qualified residential mortgages.

But some fear that in the desire to avoid risk retention stipulations financial institutions will concentrate on
qualified residential mortgages, effectively restricting the pool of mortgages available to people with less
than 20 percent for a down payment.

As John Taylor, president and CEO of the National Community Reinvestment Coalition, told The Wall
Street Journal on March 29, the 20 percent requirement will “ensure broad swaths of working and middle-
class people will not be able to get a loan.”

FDIC Chairman Sheila Bair did not see the qualified residential mortgage definition having such a large

“This does not mean that under the rule all home buyers would have to meet these high standards to
qualify for a mortgage,” Bair said in a news release. “On the contrary, I anticipate that QRMs will be a
small slice of the market, with greater flexibility provided for loans securitized with risk retention or held in

The proposal was drafted by the FDIC, the Office of the Comptroller of the Currency, the Federal Reserve
Bank, the Securities and Exchange Commission, the Federal Housing Finance Agency and the
Department of Housing and Urban Development.

The proposal does not apply to loans backed by Fannie Mae, Freddie Mac or the Federal Housing
Administration, the Journal reported. Download the proposal here:

9 | Residential Update Vol. 2, No. 4, April 2011
For more information visit:

House Committee Votes to Kill another Two Housing Bills
The House Financial Services Committee voted March 9 to kill Obama administration’s housing relief
programs: the Home Affordable Mortgage Program and the Neighborhood Stabilization Program. The two
bills, sponsored by Rep. Patrick McHenry, R-N.C., and Rep. Gary Miller, R-Calif., respectively, would cut
off funding for the two programs, effectively ending them.

Republicans have called the program an “unqualified failure” and are calling for its termination well before
its scheduled December 2012 closing.

Rep. Patrick McHenry, R-N.C., introduced H.R. 839, the HAMP Termination Act of 2011, which would
amend the Emergency Economic Stabilization Act of 2008 to eliminate the Treasury’s authority to offer
any new assistance to HAMP, essentially saving $29 billion in Troubled Asset Relief Funds, MBA
NewsLink reported. Homeowners already participating in HAMP would not be affected should the bill

Former Treasury Special Inspector General for TARP Neil Barofsky had previously advised the
subcommittee that HAMP really only benefited a small portion of struggling homeowners. But Treasury
Department Assistant Secretary Tim Massad said March 9 that eliminating HAMP would keep tens of
thousands of distressed families from obtaining necessary loan modification assistance, NewsLink

The other bill that came to a vote, H.R. 861, the NSP Termination Act, would eliminate the third round of
funding for NSP. The bill’s sponsor, Rep. Gary Miller, R-Calif., said the NSP’s termination would save $1
billion and that it serves lenders and real estate speculators far more than it does struggling homeowners,
NewsLink reported.

Committee Democrats argued the elimination of both programs would leave many struggling
homeowners and neighborhoods hanging in the balance, but Republicans countered that the two
programs are providing no real benefits to taxpayers.

Both bills will go to the House, where Republicans hold a majority, for vote. Neither bill has a companion
in the Senate, however, where Republicans are in the minority.

FHFA Extends Refinance Program by One Year
The Federal Housing Finance Agency has extended for another year the Home Affordable Refinance
Program, according to a March 11 statement from Acting Director Edward J. DeMarco. The refinancing
program administered by Fannie Mae and Freddie Mac was set to expire on June 30.

In addition, Freddie Mac will exempt HARP loans from their recently announced price adjustments and
Fannie Mae will conform their eligibility date to May 2009, DeMarco said. The announcement came two
days after the House Financial Services Committee voted to kill the housing relief program. (See “House
Committee Votes to Kill Another Two Housing Bills.”)

10 | Residential Update Vol. 2, No. 4, April 2011
The program expands access to refinancing for qualified individuals and families whose homes have lost
value. Through 2010, Fannie Mae and Freddie Mac purchased or guaranteed more than 6.8 million
refinanced mortgages. Of this total, 621,803 were HARP refinances with loan-to-value ratios between 80
percent and 125 percent. This is up from 190,180 such loans in 2009, when HARP began.

For more information on Fannie Mae and Freddie Mac refinance activity, see FHFA’s Fourth Quarter
2010 Foreclosure Prevention & Refinance Report, available at For more information on HARP, visit

Obama to Servicers: Pay into $20 Billion Foreclosure Fund
The Obama administration is trying to implement a settlement over mortgage-servicing breakdowns that
could force America's largest banks to pay more than $20 billion in civil fines or to fund a comparable
amount of loan modifications for distressed borrowers, according to a Feb. 24 Wall Street Journal article.

Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan
balances of underwater borrowers, sources told the Journal. The cost of those write downs would be
borne by banks, not the investors who purchased mortgage-backed securities, sources said.

But developing a settlement may be challenging. A deal would have to win approval from federal
regulators and state attorneys general, as well as some of the nation's largest mortgage servicers,
including Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co., the Journal reported.

The settlement terms remain flexible and haven’t been presented to banks, sources told the Journal.
Exact dollar amounts haven't been agreed on by U.S. regulators and state attorneys general. The deal
wouldn't create any new government programs to reduce principal. Instead, it would allow banks to devise
their own modifications or use existing government programs, sources said. Banks would also have to
reduce second-lien mortgages when first mortgages are modified, the Journal reported.

The settlement proposal focuses on requiring servicers who mishandled foreclosure procedures to writing
down loans that they service on behalf of clients. Those clients include Fannie Mae and Freddie Mac, as
well as investors in loans that were securitized by Wall Street firms, according to the Journal.

According to bank executives, principal cuts don't necessarily improve payment patterns, and principal
reductions could raise new complications. First, it will be difficult to determine who gets reductions and
who doesn't. And even if banks agree to a $20 billion penalty, the number of mortgages that can be cured
with that number is limited, sources told the Journal.

An amount of $20 billion "would accomplish little" in addressing borrowers who currently owe $744 billion
more on their mortgages than their homes are worth, Chris Flanagan, a Bank of America mortgage
strategist, told the Journal.

Asking servicers to assume the costs of all write downs is unfair unless the administration can pinpoint
the "source of harm," Bob Davis, executive vice president of the American Bankers Association, told the
Journal. If the loans are going bad because of economic conditions and job loss, "it's not clear why
servicers would bear the brunt because it's outside their control," he added.

11 | Residential Update Vol. 2, No. 4, April 2011
FHA’s REO Inventory Volume Spikes 47 Percent; Worth $9.1 Billion
As of December 2010, the Federal Housing Administration held 60,739 properties repossessed through
foreclosure worth $9.1 billion on its books, up 47 percent from a year ago, according to a Feb. 22 report. Combined with Fannie Mae and Freddie Mac’s third quarter figures, the federal
government REO inventory totaled roughly 360,000 units.

Such REO properties, combined with number of delinquent loans still in the process, are of concern to
analysts who have dubbed them the country’s “shadow inventory.” Estimates of shadow inventory vary

Data provider CoreLogic, in Santa Ana, Calif., estimates shadow inventory to be at roughly 1.3 million
properties, while Toronto-based analytics firm Capital Economics estimates it to be closer to 5.3 million.
With such high levels of problem loans and devalued properties after foreclosure, house prices are
expected to decline throughout 2011, Capital Economics said in a Feb. 22 report cited by HousingWire.

According to FHA’s report, nearly 600,000 mortgages are in serious delinquency, which represents 8.78
percent of the FHA insurance currently in force, HousingWire reported.

12 | Residential Update Vol. 2, No. 4, April 2011
In the States
Housing Intelligence: 6 of 20 Healthiest Housings Markets Are in Texas
Recent statistics showed Texas is one of the leading areas for economic recovery in the United States,
according to Housing Intelligence’s Market Health Report released March 11. In ranking the markets,
Housing Intelligence considers data such as unemployment rate, job and income growth, and home price
appreciation, among other factors.

Six out of the 20 healthiest housing markets are in Texas, according to the report. In January, Texas
recorded increases in employment more than double the national growth rate. Likewise, the Lone Star
State’s unemployment rate is declining.

The six Texas markets listed in the top 20 are Austin at second with a health index of 86.5; College
Station at seventh with 78.6; Houston at 11th with 77.3; San Antonio at 14th with 75.6; Amarillo at 19th
with 73.6; and Dallas at 20th with 70.7.

Housing Intelligence’s report states that even though the pace of economic recovery is uncertain, there
are pockets of strength in some local housing markets across the country For example, North Carolina is
home to the markets with the best and worst index rating.

While Raleigh, N.C., scored the highest in the index, another North Carolina area, Rocky Mount, scored
the lowest index – 6.0. Of the 200 markets surveyed across the United States, Housing Intelligence
reports only 22 would receive the letter grade C or better if they were being graded on a 100-point scale.

The Housing Intelligence released selected information from its monthly Market Health Report.

Four States Consider Legislation Barring Distressed Sales as Comparables
Four states – Illinois, Maryland, Missouri and Nevada – are considering legislation that would prohibit or
restrict the use of “distressed sales,” such as foreclosures and short sales, as comparable sales as a part
of a residential real estate appraisal.

Homebuilders and real estate sales agents are concerned that the prevalence of distressed sales, and
their subsequent use as comparables, is resulting in the appraised value of residential properties not
matching the contract sales price, or in the case of new construction, the cost to build.

The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that
has been sold at a foreclosure sale as a comparable. Similar to the Missouri proposal, the Illinois
legislation would prohibit appraisers for the next five years from using as a comparable sale “a residential
property that was sold at a judicial sale at any time within 12 months.”

The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained
in the Maryland legislation are somewhat broader and include any property that was sold under “duress
or unusual circumstances, such as a foreclosure or short sale.”

13 | Residential Update Vol. 2, No. 4, April 2011
There is, however, conflicting language in the Maryland legislation that appears to allow for the use of
distressed properties as comparables if the appraiser takes into account factors such as the motivation of
the seller, the condition of the property and the property’s history or disposition before the sale.
Appraisers in Maryland will oppose this legislation during a hearing March 29.

If these bills were enacted into law, appraisers would be put in the difficult position of having to choose
which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of
Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers
“must analyze such comparables sales as are available.” Further, the standard cannot be voided by a
state or local government.

Not following USPAP could subject the appraiser to having action taken against their license. Therefore,
appraisers would have to make the decision to commit a USPAP violation – which in the case of federally
related transactions would be a violation of state law – or to violate the law prohibiting the consideration of
distressed sales as comparables.

To read the Illinois legislation, go to To view the
Missouri proposal, go to To see the
Maryland legislation, go to And to see the Nevada
proposal, go to

Nebraska Latest State to Enact AMC Regulations
Nebraska became the 21st state to enact comprehensive legislation regarding appraisal management
companies when Gov. Dave Heineman signed Legislative Bill 410 into law on March 10. The bill will
require AMCs operating in Nebraska to register with and be overseen by the Nebraska Real Property
Appraiser Board effective Jan. 1.

Under the new law, AMCs operating in Nebraska will have to certify as part of the registration process
that they comply with the appraisal independence standards of the federal Truth in Lending Act, including
the requirement for the payment of reasonable and customary fees. Under this provision, an AMC
operating in Nebraska that is found to have not paid an appraiser a reasonable and customary fee could
be subject to disciplinary action by the Board, including having their registration revoked, for having
provided a false certification to the Board. In addition, AMCs may not knowingly prohibit an appraiser from
reporting the fee that they were paid for the appraisal within the body of the appraisal report.

AMCs operating in Nebraska also will be required to post a $25,000 surety bond with the Board, and will
be required to utilize Nebraska licensed or certified appraisers for any appraisal review that is performed
according to Standard 3 of USPAP. Traditional appraisal firms that operate on an employer/employee
basis, and relocation management companies, are exempt from registration and oversight.

There are currently 20 other states that have laws that are similar to the Nebraska law. Similar bills
passed by the Kentucky, Mississippi and South Dakota legislatures await gubernatorial action. Legislation
is pending in several other states.

To view Nebraska’s new law, go to:

14 | Residential Update Vol. 2, No. 4, April 2011
Utah Legislation Alters State’s AMC Law
The Utah State Legislature mandated significant changes to the state’s appraisal management company
regulations March 21, including redefining an AMC as a “third-party broker of an appraisal service
between a client and an appraiser.” This change clarifies that appraisal firms are not subject to state
registration and regulation.

House Bill 91 also clarifies that an individual who has a criminal history involving the appraisal industry,
the appraisal management industry or a felony conviction based on an allegation of fraud,
misrepresentation or deceit is precluded from owning an AMC or serving as a “controlling person.”

The bill also adds a provision to the Utah statutes that prohibit an AMC from requiring “an appraiser to
indemnify the appraisal management company against liability except liability for errors and omissions by
the appraiser.”

Lastly, the legislation allows for the Utah Appraiser Board to initiate a disciplinary hearing if an AMC
violates the provisions of the Dodd-Frank Act that require that it pay appraisers a reasonable and
customary rate.

House Bill 91 was sent to Gov. Gary R. Herbert March 21. If not signed by April 10, it will become law.

To view a copy of HB 91, go to

Connecticut Legislative Committee Removes BPO Language from Law
Connecticut’s Joint Committee on Insurance and Real Estate removed from H.B. 6510 language that
would have permitted agents and brokers to perform broker price opinions for the holders of mortgages
(as well as for their agents and attorneys) for the purposes of foreclosures, short sales and loan

The move came after a March 8 public hearing on the bill, during which the Connecticut Chapter of the
Appraisal Institute testified, “Given the critical nature that the value of real estate would play in any of
these decisions, it is evident that a real estate appraisal, completed by a properly trained and certified
individual, should be used in the decision making process.”

The chapter, which retains a professional lobbyist as well as maintains grassroots contact with legislators,
added that, “A broker’s price opinion, while appropriate in the broad pricing spectrum, when offering
property for sale, certainly does not have the level of content and analysis that is necessary when
attempting to value real estate in a changing market.”

Under current Connecticut law, real estate agents and brokers are permitted to provide “estimates [of] the
value of real estate as part of a market analysis” that is performed for the owner of real estate in
conjunction with a listing, sale or purchase. Agents and brokers are allowed to receive compensation for
providing this service.

To view a copy of HB 6510 as originally proposed visit,
R00-HB.htm. The language in Section 2 has been removed in the “Joint Favorable Substitute” bill that
has been passed by the Joint Committee.

15 | Residential Update Vol. 2, No. 4, April 2011
Around the Industry
Large Down Payment Could Thwart Many Homebuyers: CoreLogic
With a 20 percent down payment mandate on the horizon, CoreLogic has released statistics showing 70
percent of buyers will be left out in the cold if it is enacted.

Regulations in the Dodd-Frank Act require a 20 percent down payment for a loan to be deemed a
“qualified residential mortgage.” If a buyer does not have that much for a down payment, the lender must
retain 5 percent of the credit risk of any loan they securitize. Costs, then, will be passed from lenders to
borrowers in the form of additional fees on loans with less than a 20 percent down payment.

Preliminary numbers from CoreLogic’s recently released figures on “Equity Segments for 2010 Mortgage
Originations and Mortgage Debt Outstanding” show about 2.7 million borrowers made down payments of
less than 20 percent in 2010. In addition, 10.8 homeowners with outstanding mortgages have loan-to-
value ratios of more than 80 percent. And another 11 million homeowners owe more than their home is

Six federal agencies are expected to issue a proposal next month defining qualified residential mortgages
as having at least 20 percent equity from the borrower, according to a March 22 article in American

Should the 20 percent become standard, more homebuyers may seek out Federal Home Administration
mortgages, which allow down payments as low as 3.5 percent. The FHA is not in favor of a customer
increase, as they are looking to decrease their 30 percent share of the mortgage market, according to the
American Banker. As such, they have raised annual premiums and plan to enact higher loan limits in

Industry advocates such as the Center for Responsible Lending, the National Association of Realtors and
the National Association of Home Builders have opposed the 20 percent down payment rule. They claim
the American household carries more debt now than it has in the past and that it now takes nearly 10
years for the average family to save for even a 10-percent down payment, according to American
Banker’s website.

Regulators will most likely reach a compromise, noting they are sensitive to not kicking everybody out of
the market, Mark Calabria, the director of financial regulation studies at the libertarian Cato Institute, told
American Banker.

Others agree that regulators could address the problem without driving so many consumers out of the
market. James R. Bennison, senior vice president of strategy and capital markets at Genworth Financial
Inc.'s mortgage insurance unit, told American Banker that loans getting the qualified residential mortgage
exemption should be fully documented instead of requiring a standard down payment.

In addition to the down payment controversy, experts are concerned shadow inventory will also affect the
market negatively. There are approximately 6 million foreclosure homes that are not yet on the market
and another 3 million that are headed for foreclosure, according to the American Banker. Should

16 | Residential Update Vol. 2, No. 4, April 2011
regulators eliminate low down payments, shadow inventory is likely to remain on the market longer than

Pending Home Sales Continue Upswing: NAR Index
The National Association of Realtors’ pending home sales index, released March 28, rose more than 2
percent in February, continuing its upward trend since bottoming in June. The index is down 8.2 percent
from the same period a year ago.

The index increased to 90.8 in February from January’s figure of 88.9. An index of 100 is equal to the
average level of contract activity during 2001, which was the first year NAR examined existing-home
sales data.

NAR Chief Economist Lawrence Yun noted that because the data reflects contracts and not closings, it’s
important to look at the broader trend when analyzing the data.

“Month-to-month movements can be instructive, but in this uneven recovery it’s important to look at the
longer term performance,” Yun said in an accompanying news release. “Pending home sales have
trended up very nicely since bottoming out last June, even with periodic monthly declines. Contract
activity is now 20 percent above the low point immediately following expiration of the home buyer tax

The pending home sales index rose in three of the four regions. The West gained 7 percent in February
to 105.6, up 0.6 percent from a year ago. The Midwest increased 4 percent to 81.1, down 15.9 percent
from year ago. The South inched downward 2.7 percent to 100.3, 5.3 percent lower than a year ago. The
Northeast cooled, sliding 10.9 percent to 65.5, down 18.4 percent from a year ago.

February’s data was a positive sign for the struggling housing market. "The fact that pending home sales
rose bodes well for existing-home sales in the months ahead," Michael Sheldon, chief market strategist at
RDM Financial, told Reuters in a March 28 article.

To view the index, visit:

Consumers Shying Away From Housing Debt: Fed
U.S. consumers have been paying down their mortgage debts in the past couple of years just as they
have their other forms of debt, according to a March 21 report from the Federal Reserve Bank of New

“While consumers were on average extracting equity and increasing their mortgage debt until 2007, they
have started to pay down debt since then,” Fed economists Meta Brown, Andrew Haughwout, Donghoon
Lee and Wilbert van der Klaauw wrote in the blog entry.

Within the housing segment of the economy, consumers increased their indebtedness by an average of
$130 billion each year between 2000 and 2007, the economists wrote. “In 2008, this series turned
negative. Consumers paid down $140 billion in mortgages debt in 2009 and $220 billion in 2010.”

17 | Residential Update Vol. 2, No. 4, April 2011
The authors based their analysis on the Federal Reserve Bank of New York Consumer Credit Panel
formed late last year.

January Home Prices Fall in FHFA’s Home Price Index
U.S. house prices slipped 0.3 percent on a seasonally adjusted basis in January from the previous month,
according to the Federal Housing Finance Agency’s monthly House Price Index released March 22.
January’s figure, which is down 16.5 percent from its April 2007 peak, marks a 3.9 percent drop in prices
from a year ago.

December 2010’s previously reported drop of 0.3 was downwardly revised to 1 percent.

For the nine U.S. Census Bureau regional divisions, seasonally adjusted monthly price changes from
December to January ranged from a 1.3 percent drop in the Mountain and South Atlantic divisions to a
1.6 percent gain in the West South Central Division.

There is some anecdotal evidence that the accuracy of the agency’s data is not far from reality. For
example, in the West North Central Division, which includes Nebraska, North Dakota, South Dakota,
Minnesota, Iowa, Kansas and Missouri, the index showed a 0.2 percent decrease from December to

“ While there is some evidence here in Lincoln that we have experienced a slight decline in value for
residential housing from December to present, it would be difficult to show a trend,” Ronald Wick, MAI,
SRA, of the Nebraska Chapter of the Appraisal Institute, told Appraiser News Online. “Our economy here
is stable, our unemployment rate is among the lowest in the nation, and inventory of homes for sale is
declining. Several homes are currently being placed under contract and are pending so it’s likely that we
will see a slight increase in housing prices in the next quarter.”

The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have
been sold to or guaranteed by Fannie Mae or Freddie Mac.

To view the FHFA’s monthly House Price Index, visit

New Home Sales Fall in February: Commerce
New single-family home sales fell 16.9 percent to a seasonally adjusted annual rate of 250,000 units in
February from January’s revised rate of 301,000, according to Department of Commerce data released
March 23. February’s rate marks a 28 percent drop in new home sales compared to a year ago.

All four regions tracked by the government agency saw sales slip in February with the Northeast plunging
57.1 percent, the Midwest falling 27.5 percent, the West sliding 14.7 percent and the South losing 6.3

Median new home prices logged in at $202,100 in February, while the average sales price came in at
$246,000, according to Commerce Department data.

New home inventory fell in February from the previous month to 186,000 units on a seasonally adjusted
basis, according to Commerce Department data. Based on the current sales pace, there is now an 8.9-

18 | Residential Update Vol. 2, No. 4, April 2011
month supply of new homes on the market on a seasonally adjusted basis, down from January’s supply
of 7.4 months.

To view the report download this file:

S&P/Case-Shiller: Home Prices Dip in January
January single-family home prices fell in 19 metropolitan areas, as well as in both the 10-city and 20-city
composites, compared to December, according to the latest Standard & Poor’s/Case-Shiller Home Prices
Indices released March 29.

The 10-city composite was down 0.9 percent compared to the previous month, while the 20-city
composite fell 1 percent. On a year-over-year basis, the 10-city composite was down 2 percent in January
and the 20-city composite was down 3.1 percent. However, the 10-city and 20-city composites remain
above their April 2009 lows of 2.8 percent and 1.1 percent, respectively.

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in
sight for the near future,” David Blitzer, chair of Standard & Poor’s Index Committee, said in the report.
“With this month’s data, we find the same 11 MSAs posting new recent index lows. The 10-city and 20-
city composites continue to decline month-over-month and have posted monthly declines for six
consecutive months now.” An MSA is a metropolitan statistical area.

As reported in the Case-Shiller findings, only Washington, D.C., and San Diego showed positive annual
growth rates in January of 3.6 percent and 0.1 percent, respectively. With a gain of 0.1 percent,
Washington, D.C., was the only market where home prices rose in January compared to the previous

The report noted that January home prices across the country were at summer 2003 levels. From peak
levels, the 10-city composite was down 31.7 percent as of January, and the 20-city composite was down
31.8 percent.

To view Standard & Poor’s latest Case-Shiller Home Price Indices, visit

February Home Sales Drop Nearly 10 Percent: NAR
Other parts of the U.S. economy may be improving, but existing home sales continue to struggle,
according to National Association of Realtors existing-home sales data released March 21. Sales were
down 9.6 percent in February for a seasonally adjusted annual rate of 4.88 million homes.

That amount compares to the 5.4 million rate in January, and it was 2.8 percent less than the 5.02 million
rate in February 2010.

The unevenness of the economic recovery -- highlighted by unnecessarily tight credit and contracts being
canceled because the appraisals do not support prices – is at fault, NAR Chief Economist Lawrence Yun
noted in an accompanying news release. “This tug and pull is causing a gradual but uneven recovery,” he
said. “Existing home sales remain 26.4 percent above the cyclical low last July.”

19 | Residential Update Vol. 2, No. 4, April 2011
First-time buyers bought 34 percent of the homes in February, an increase over the 29 percent rate in
January. A year ago, first-time homebuyers bought 42 percent of homes.

All-cash sales accounted for 33 percent, up from 32 percent the previous month and 27 percent a year
ago. Distressed homes accounted for 39 percent of sales in February, an increase from 37 percent the
previous month and 35 percent a year ago, according to NAR.

Single-family home sales, at 4.25 million in February, were 9.6 percent less than the January total of 4.7
million, and 2.7 percent less than the February 2010 total of 4.37 million. The median existing single-
family home price was $157,000 in February, 4.2 percent less than a year ago.

Condominium and co-op sales decreased from 700,000 in January to 630,000 in February, a 10 percent
drop from January, NAR said. The median existing condominium price was $150,400 in February, an
11.1 percent decrease from a year ago.

By regions, the Northeast fared better than others did. Existing home sales, at a 770,000 annual rate in
February, were down by 7.2 percent from January. The median home price was $230,200, a 9.5 percent
decrease from a year ago.

Home sales in the West stood at 1.26 million in February, an 8 percent decrease from January. The
median home price was $190,000, a 5.2 percent decrease from last year.

At a 1.84 million annual rate in February, home sales in the South were unchanged from January. The
median home price was $134,000, a 3.9 percent decrease from February 2010.

Home sales in the Midwest fell the sharpest from January to February with 1.01 million units sold in
February, a 12.2 percent decrease from January. At $122,000 the median home price was 5.4 percent
less than in February 2010.

February Housing Completions Perform Better Than Expected
Housing completions in February came in higher than forecasted, but housing starts were far below U.S.
Census Bureau expectations, according to Census Bureau data released March 16. At 581,000 units,
February housing completions were 13.9 percent above the 510,000 the government agency estimated in

Despite the better-than-expected numbers, the February 2011 rate was 13 percent less than the year-ago
rate of 668,000, the Census Bureau said. The February 2011 rate for buildings with five or more units was

But, housing starts, a figure that shows the number of new home construction projects started, totaled
479,000 in February, 22.5 percent less than the January estimate of 618,000, and 20.8 percent less than
the February 2010 rate of 605,000.

The February 2011 rate for buildings with five or more units was 96,000.

20 | Residential Update Vol. 2, No. 4, April 2011
Also, February building permit activity of 517,000 was 8.2 percent less than the January estimate of
563,000, and 20.5 percent less than the February 2010 rate of 650,000.

Building permit activity for buildings with five or more units tallied 121,000 in February, the Census
Bureau said.

By region, activity was mixed for all three construction segments. Overall housing completions in
February fell 3.1 percent in the Northeast; were flat in the Midwest; increased 24.9 percent in the South;
and increased 11.3 percent in the West compared with the previous month. Overall housing starts in
February fell by 37.5 percent in the Northeast, 48.6 percent in the Midwest, 6.3 percent in the South and
28 percent compared with the previous month.

Overall building permit authorizations in February were down in all four regions with authorizations in the
Northeast 27.8 percent less than in January; 5.4 percent less in the Midwest; 1.4 percent less in the
South; and 13.6 percent less in the West.

The full report is available at

AI President to Regulators: Include Appraisals in Qualified Residential
Appraisal Institute President Joseph C. Magdziarz, MAI, SRA, urged federal regulators March 7 to include
appraisal requirements in upcoming rulemakings that will define mortgages qualifying for exemption from
risk retention requirements under the Dodd-Frank Act. He made his comments at a National Association
of Home Builders event in Washington, D.C.

Magdziarz also called on regulators to pay closer attention to collateral valuation and not to rely solely on
credit and capacity issues.

“There are three ‘C’s for a reason, Magdziarz told NAHB’s Mortgage Roundtable, referring to the basic
lending tenets of credit, capacity to repay and collateral. “If regulations are going to call for full
documentation loans and sound underwriting, they should specify that USPAP compliant appraisals are
required.” A bevy of alternative non-USPAP compliant valuation services are misused and misunderstood
in the marketplace, he continued. “Home builders in particular, as they seek to advance energy efficiency
in new construction, deserve a more robust collateral valuation policy than has been given to them.”

Magdziarz’s comments relating to risk retention (or “skin in the game”) relate to Section 941 of the Dodd-
Frank Act, which addresses credit risk retention for mortgages pooled and sold in securities. This section
requires loan originators and securitizers to hold at least five percent of the credit risk. Congress provided
exceptions to the risk retention requirements to focus attention on lax underwriting and risky product
features, rather than all residential mortgages. Statutory exemptions include Federal Housing
Administration and Department of Veterans Affairs loans, and another is provided for loans that meet the
Qualified Residential Mortgage standard to be developed by the bank regulators, the Securities and
Exchange Commission, the Department of Housing and Urban Development and the Federal Housing
Finance Agency.

21 | Residential Update Vol. 2, No. 4, April 2011
The Qualified Residential Mortgage standard is supposed to encourage sound underwriting and risk
management practices. While not specifically referenced in the statute, a loan to value limit or down
payment threshold is expected to be included in the definition, to which Magdziarz made his comments
regarding specificity of appraisals.

The Mortgage Roundtable draws on input and feedback from major real estate trade organizations,
government officials and public policymakers for open and frank discussions about current issues facing
homebuilders. The Appraisal Institute is a regular participant at the NAHB events.

Bank of America Case Study Finds 20 Percent HAMP Eligible
An internal Bank of America survey of 100 60-day delinquent mortgages revealed only 20 are eligible for
Home Affordable Modification Program, a federal program designed to help troubled homeowners,
HousingWire reported March 8. Of those, only 14 made it past the trial stage, requiring three on-time

The federal program’s lack of connection with at-risk homeowners is attracting criticism from legislators.
Since its March 2009 inception, HAMP has recorded 600,000 loan modifications – far below the Treasury
Department’s original estimate of 3 million to 4 million. On March 9, the House Financial Services
Committee voted 31-24 in favor of H.R. 839 – the HAMP Termination Act of 2011, which would shut it
down before its projected end date of December 2012.

Of the 100 loans Bank of America surveyed, 28 were eliminated because contact could not be made with
the borrower in spite of numerous phone calls and letters, HousingWire reported. Of the 72 borrowers
who provided financial information to the bank, only 20 passed the underwriting guidelines.

Among the 52 borrowers that did not pass the guidelines, HousingWire reported 50 percent already had
mortgage payments at or below 31 percent of their monthly income. About 23 percent did not have
enough monthly income to qualify, and 17 percent did not submit hardship documentation.

Bank of America Executive Vice President Terry Laughlin, who is in charge of the new mortgage servicing
division responsible for legacy and delinquent mortgages, said the bank has “reached a crossroads” and
despite its best efforts to avoid it, some foreclosures will move forward, according to HousingWire.

Mortgage Process Overhaul, Court Challenges Slow Foreclosure Activity
Foreclosure activity fell 14 percent in February compared to the previous month as federal regulators and
state attorneys general finalize settlement proposals relating to the mortgage “robo signing” investigation,
according to a March 10 Los Angeles Times report.

Revelations that surfaced last fall that some of the nation’s largest lenders were signing key foreclosure
documents without proper review has led several institutions to issue a foreclosure moratorium until they
examine internal systems. Courts have also delivered setbacks to some lenders by ruling on behalf of
homeowners in key foreclosure cases.

"The foreclosure process is stalled, and the seemingly impending settlement is delaying foreclosures,"
Mark Zandi, chief economist at Moody's, told the Los Angeles Times. "The whole process is slowing down
because of these issues."

22 | Residential Update Vol. 2, No. 4, April 2011
In seeking a settlement, state and federal officials sent the nation's largest mortgage servicers a 27-page
document outlining terms. Investigators have proposed penalties against banks ranging from $5 billion to
$20 billion, which would be used to fund principal write-downs for borrowers who are underwater with
their mortgages. Lenders also would be prohibited from starting foreclosure proceedings while a
homeowner is trying to modify their mortgage terms.

Iowa Attorney General Tom Miller said at a March 7 National Association of Attorneys General meeting
that a deal could be struck in as little as two weeks. However, Miller acknowledged that not all of the
proposals will make it into the final settlement, reported March 8. “Not everything in the
27 pages will be agreed to,” Miller said.

According to bank officials, the costs associated with maintaining compliance with the proposals will be
exorbitant. “These costs were not anticipated by anybody and therefore they were not captured
anywhere, so a lot of this is about who pays,” Ken Kohler, a partner at Morrison & Foerster, said in a
March 9 American Banker article.

Bankers argue that the actions by state attorneys generals and the federal regulators amount to a
bankruptcy cramdown. “It seems inappropriate. The robo-signing is terrible and any misdeed should be
dealt with … but it seems this is an end run around Congress,” Phil Swagel, a former Treasury
Department official, told American Banker.

Consumer groups disagree. “I don’t believe it’s bankruptcy cramdown,” David Berenbaum, executive vice
president of the National Community Reinvestment Coalition, told American Banker. “This is more of a
best practices approach where servicers are being asked to examine what is in the best interest of the
investor and coupled with that, it would benefit the consumer.”

Lenders also are concerned that the proposals would further expose them to liability. As outlined in the
settlement, if a servicer violates a provision, it could face prosecution on grounds of “deceptive acts or
practices,” American Banker reported.

Republicans have been voicing opposition against the proposal as well. House Republicans sent
Treasury Secretary Timothy Geithner a letter March 9 asking him to explain the government's legal
justification for trying to impose sweeping changes on the way banks process problem loans, The Los
Angeles Times reported.

Foreclosures Down 27 Percent Year-over-Year: RealtyTrac
Banks foreclosed on 64,643 U.S. properties in February, down 17 percent compared to the previous
month and 18 percent from a year ago, according to RealtyTrac’s U.S. Foreclosure Market Report for
February 2011, released March 9. One in every 577 U.S. properties received a foreclosure filing in

The number of households that received a foreclosure-related notice fell 14 percent from the previous
month to 225,101 properties, down 27 percent from a year ago, according to RealtyTrac. Meanwhile, the
number of households that received a default notice fell 16 percent from the previous month to 63,165

23 | Residential Update Vol. 2, No. 4, April 2011
properties, down 41 percent from a year ago. The number of default notices hit a 48-month low in
February, down 55 percent April 2009’s peak of 142,064 notices.

A default notice is an early indicator of a potential foreclosure. Depending on the state, there are up to
four stages before a foreclosure sale takes place.

Foreclosure auctions were scheduled for the first time on 97,293 properties in February, down 10 percent
from the previous month and 21 percent from a year ago. Scheduled judicial foreclosure auctions
decreased 7 percent in February from the previous month, down 49 percent from a year ago. Non-judicial
auctions decreased 11 percent from the previous month, down 7 percent from a year ago.

RealtyTrac said that foreclosure activity dropped in light of the mortgage “robo-signing” investigation.
(See also “Mortgage Process Overhaul, Court Challenges Slow Foreclosure Activity.”)

“Foreclosure activity dropped to a 36-month low in February as allegations of improper foreclosure
processing continued to dog the mortgage servicing industry and disrupt court dockets,” James Saccacio,
chief executive officer of RealtyTrac, said in an accompanying news release. “While a small part of
February’s decrease can be attributed to it being a short month and bad weather, the bottom line is that
the industry is in the midst of a major overhaul that has severely restricted its capacity to process
foreclosures. We expect to see the numbers bounce back, but that will likely take several months.”

By state, Nevada led the nation with the highest foreclosure rate in February for the 50th consecutive
month. One in every 119 households received a foreclosure notice. Arizona followed with one in every
178 households receiving a notice. California came in third (one in every 239), followed by Utah (one in
every 273) and Idaho (one in every 298).

The report showed that California had the largest volume of foreclosure activity in February with 56,229
households receiving a foreclosure notice. Florida followed with 18,760 properties. Arizona had the third
largest volume with 15,485 households, followed by Michigan with 15,757 and Georgia with 12,807.

Underwater Borrowers Increase to 11 Million in Fourth Quarter: CoreLogic
Nearly one fourth of residential mortgages had negative equity at the end of fourth quarter 2010,
according to a March 8 CoreLogic report. In addition to the 11.1 million mortgages – up from 10.8 million
in the third quarter – another 2 million borrowers had less than 5 percent equity.

The total brings to 27.9 percent the number of homeowners with negative or near-negative equity, which
“holds millions of borrowers captive in their homes, unable to move or sell their properties,” Mark Fleming,
chief economist with CoreLogic, said in the report. “Until the high level of negative equity begins to
recede, the housing and mortgage finance markets will remain very sluggish."

Nevada had the highest negative equity percentage with 65 percent of all of its mortgaged properties
under water; Arizona was next with 51 percent; Florida had 47 percent; Michigan had 36 percent; and
California had 32 percent. Other than California, those states also had the highest average loan-to-value
ratio at 118 percent, 95 percent, 91 and 84, respectively. Georgia rounded out the top five at 81 percent.
New York had the lowest LTV at 50 percent; followed by Hawaii (54 percent), Washington, D.C. (58
percent), Connecticut (60 percent), and North Dakota (60 percent).

24 | Residential Update Vol. 2, No. 4, April 2011
While the aggregate level of negative equity increased to $751 billion in the fourth quarter of 2010, it
remained significantly lower than the $800 billion at the end of 2009. CoreLogic reported that more than
$450 billion of the aggregate is attributable to borrowers who are underwater by more than 50 percent.

CoreLogic predicted home prices will fall another 5 to 10 percent in 2011, which could impact those states
with the highest number of loans that are near-negative equity, such as Alabama, Idaho and Oregon.
New York, North Dakota and Hawaii have the least amount of at-risk loans.

For CoreLogic’s fourth quarter report, visit
NAL.pdf. By comparison, its third quarter report is available at

New Mortgages, Refis Harder to Get in 2011: Mortgage Group
Due to regulatory changes and stricter underwriting standards, borrowing costs will increase for even
those with great credit, making it difficult for prospective borrowers to get a new mortgage or refinance
their current mortgage in 2011, mortgage lender John Walsh wrote in a March 4 National Mortgage
Professional blog post.

Among the eight reasons Walsh listed for why it will be harder to get a mortgage in 2011 than any time in
the recent past, were higher risk-based fees from Fannie Mae and Freddie Mac, lower conforming loan
limits, negative equity, and the new risk-retention requirements under the Dodd-Frank Act’s financial
reform parameters.

Fannie’s and Freddie’s increased fees will hit everyone other than those with significant equity in their
homes and the highest credit scores. Many borrowers, especially those with second mortgages, could be
subject to risk hits that could increase rates up to a full one percent when refinancing, according to Walsh.

High-balance conforming limits are set to decrease from $729,750 to $625,500 in high cost areas on
Sept. 30. This means that Fannie, Freddie and the Federal Housing Administration will no longer be able
to purchase loans in the higher cost bracket. That being said, private investors will charge higher rates on
these mortgages than the government-sponsored enterprises, and the cost of these loans will increase.

New risk-retention requirements under Dodd-Frank financial reform will require lenders to retain capital
reserves equal to 5 percent of all but the safest loans, known as “qualified residential mortgages.” While
the definition of a QRM has yet to be announced, many suspect that a mortgage will require a 20 percent
down payment to qualify. Anyone who cannot qualify for a QRM will be forced to pay a higher mortgage
rate as a result of the increased risk-retention requirements, Walsh said.

In 2011 there will be fewer lenders. In 2009 and 2010, 297 banks failed. This year, 18 banks have already
closed. A reduction in mortgage lenders equals less competition and fewer options for borrowers, Walsh

25 | Residential Update Vol. 2, No. 4, April 2011
Walsh also said negative home equity will continue to be problematic for the market. According to a Feb.
9 Zillow survey, 27 percent of American homeowners with mortgages are underwater. The vast majority
of these people do not meet minimum loan-to-value ratios in order to refinance their homes.

Rounding out the list, Walsh also pointed out that many Americans’ credit scores have been decimated
by the recession, preventing them from getting a new mortgage or refinance their current mortgage; that
many people have seen their personal debts grow, and their incomes plateau or even decrease, leading
to a high debt-to-income ratio; and the fact that mortgage rates are starting to rise.

For the full post, visit

Million Dollar Home Sales Spike in 2010 after Four Years of Decline
Although home sales in 2010 remained weak around the nation, sales of homes costing $1 million or
more increased 18.6 percent after four consecutive years of decline, according to DataQuick Information
Systems data cited March 7 by HousingWire.

DataQuick data showed that the San Jose/Sunnyvale/Santa Clara, Calif., region posted the highest
change in million dollar home sales, up 27.4 percent compared to 2009; followed by Riverside/San
Bernardino/Ontario, Calif., up 27.1 percent; and the New York/Northern New Jersey/Long Island
metropolitan statistical area, up 24.7 percent. Although sales rose, every single market is considerably
below its 2007 peak, Housing Wire reported.

More indicative of the recovery in the jumbo sector is the number of homes worth more than $5 million
sold in 2010, DataQuick representative Andrew LePage told Housing Wire. Due to the fact that much of
the market in high-cost areas such as California and New York is $1 million or more, an increase in those
sales is merely indicative of an increase of home sales overall, according to LePage. However, "the
increase in sales of $5 million homes is really saying something," LePage said.

In 2010, 975 homes sold in the more than-$5 million bracket, up nearly 14 percent from 2009, with 323
such homes sold in the New York/Northern New Jersey/Long Island MSA, and nearly 300 such homes
sold around Los Angeles/Long Beach/Santa Ana, Calif., Housing Wire reported.

Housing Deflation Continues, Expect More Pressure in 2011: Zelman
House prices will dip another 2 percent in 2011, according to a Feb. 25 report from investment analyst
firm Zelman & Associates. In “The Art of Measuring Home Prices,” Zelman also addresses the various
methodologies of measuring home prices and the inability to recognize any single one as a “flawless”

Zelman’s price index was aggregated from data from various sources, including the National Association
of Realtors, Standard & Poor’s/Case-Shiller, CoreLogic, the Federal Housing Finance Agency, Radar
Logic and Zillow.

According to the report, the aggregated home price index shows a year-over-year decline of 3.1 percent.
Zelman estimates that home prices are down 28 percent since the peak in May 2006. Zelman also
projects a 1.5 percent sequential decline in January, resulting in 3.3 percent year-over-year deflation.

26 | Residential Update Vol. 2, No. 4, April 2011
Distressed transactions are at the root of excessive deflation, according to data cited from CoreLogic, and
entry-level price points account for the most price declines, according to Case-Shiller data.

Based on the observed rate of deflation and tempered beginning to the spring selling season, Zelman
modestly lowered home price expectations, forecasting a 2 percent drop by the end of the year. Zelman
predicts that improving employment, confidence and home transactions will drive demand for solutions to
the deflation, but competitive foreclosure supply will remain a headwind.

Zelman notes that each data source used in the report holds incremental value in understanding overall
market trends, but none is considered an entirely accurate source. The assertion follows closely on the
heels of CoreLogic’s Feb. 15 report that called into question NAR’s methodologies. Both organizations’
data are used by Zelman. (For more information, see “NAR’s Existing Home Sales Figures from 2007 to
Present Called into Question” in the Feb. 23 issue of Appraiser News Online, at

The statement underscores Zelman’s assertion that “measuring home prices is more of an art than a
science.” In support of this notion, Zelman notes three factors for consideration when measuring home
prices – stock vs. flow, averaging vs. point-to-point measurement, and seasonality.

Stock vs. flow – When viewing transactions as a sample of home pricing, there can be disparity between
the value of the home and the actual selling price. This is especially true if it was a distressed transaction
such as a short sale or foreclosure, which Zelman estimates to be 30 percent of home sales in the current
market. As such, those transactions cannot be compared apples-to-apples when measuring other home
prices, Zelman said.

Averaging vs. Point-to-Point – These two differing methods of measurement can yield significantly
different answers to the same question, according to Zelman. Averaging home prices over a single period
can skew results dramatically over measuring change from a given point to the next. Each method is
used for different valuation purposes but there can be no single correct answer.

Seasonality – Home price indices exhibit a clear seasonal pattern, tending to soften in fall and winter and
strengthen in spring and summer; these patterns can be attributed to a number of factors and reasons,
which can dilute their significance for the purpose of analysis, Zelman said.

Home Prices to Drop 2.3 Percent this Year, Economists Say
Existing home prices are expected to fall 2.3 percent in 2011, despite a recent upswing in sales, followed
by a slight recovery in 2012, according to a Reuters survey of economists released March 2. The survey
showed that prices should be down roughly 35 percent since peaking in 2006.

According to the survey, which analyzed predictions from 26 leading economists, the pace of existing
home sales likely will inch up to an annualized rate of only 5.48 million units by the fourth quarter of 2011
from January 2011’s rate of 5.36 million units.

While the rise in distressed home sales has helped clear the path for a recovery, survey respondents
doubt the momentum will last as the pace of foreclosures drags out. "One of the big question marks that

27 | Residential Update Vol. 2, No. 4, April 2011
people are not paying enough attention to is not just the number of foreclosures, but the speed of
foreclosures," David Wyss, chief economist at Standard & Poor's, told Reuters.

Meanwhile, 18 of the 26 respondents indicated that foreclosures should begin to subside in 2011. "Price
expectations are probably more important than foreclosures at this time," Donald Ratajczak, an economist
at Morgan Keegan, told Reuters.

Respondents also indicted that interest rates likely will not have a negative effect on the housing market
in 2011. They predicted the average 30-year fixed-rate mortgage will settle at 5.1 percent in 2011. The
rate was at 4.84 percent the week of Feb. 24, according to Freddie Mac – up from the 4.19 percent it hit
in mid-October, its lowest reading since 1951.

Attitudes toward Housing Warming: Fannie Mae Survey
Fannie Mae’s latest national survey shows that while Americans are more confident about home prices
than they were one year ago, they still have doubts about the strengthening economy. The results of
Fannie’s Fourth Quarter National Housing Survey of more than 3,400 homeowners and renters were
released Feb. 28.

Fannie Mae found that 78 percent of respondents believe housing prices will remain the same or increase
in 2011 – up from 73 percent in January 2010. However, the number of those polled who thought prices
will go up, dipped – with 26 percent forecasting an increase compared to 37 percent in January 2010 –
while 52 percent forecast they would remain steady, compared to 36 percent in January 2010.

Nearly two-thirds (62 percent) of respondents believe the economy is on the “wrong track,” a statistic that
remains unchanged since the January 2010 survey.

Hispanics, African-Americans and Generation Y – defined as ages 18-34 – are more positive about
owning a home compared to the general population, according to Fannie Mae. Thirty-four percent of
Hispanics and 35 percent of African Americans indicated they will buy a home in the next three years.
Only 23 percent of all other Americans plan to buy a home in that timeframe.

Generation Y showed the sharpest decline in homeownership of all age groups during the housing crisis
from nearly 44 percent when housing prices peaked in 2006 to fewer than 40 percent in 2009.

Fannie Mae also found that 84 percent of consumers believe in owning a home versus renting. That
statistic is unchanged since January 2010. Of those that rent, 28 percent believe renting makes more
sense than purchasing a home – up from 20 percent in January 2010.

Although Americans’ attitude toward housing is improving, the survey showed the majority of respondents
(64 percent) don’t believe home ownership is a safe investment. In addition, 74 percent believe it will be
harder for future generations to obtain a mortgage.

Of delinquent borrowers, nearly one out of three (31 percent) told surveyors they considered defaulting on
their mortgage in the fourth quarter. However, the percentage of those that considered defaulting fell from
39 percent in the first quarter.

28 | Residential Update Vol. 2, No. 4, April 2011
For more information on the survey results, go to:;jsessionid=JEDV0OAXR300ZJ2FQSHSFGQ.

New Home Sales Drop 12.6 Percent: Commerce
New single-family home sales jumped 12.6 percent to a seasonally adjusted annual rate of 284,000 units
in January from December’s revised rate of 325,000, according to Department of Commerce data
released Feb. 24. New home sales are down 18.6 percent from the January 2010 rate of 349,000 units.

Sales in the Northeast and Midwest moved up 54.5 percent and 17.1 percent, respectively, in January
from the previous month. However, sales in the West and South slid 36.5 percent and 12.8 percent,

Median new home prices logged in at $230,600 in January, while the average sales price came in at
$260,300, according to Commerce Department data.

New home inventory fell in January from the previous month to 188,000 units on a seasonally adjusted
basis, according to Commerce Department data. Based on the current sales pace, there is now a 7.9-
month supply of new homes on the market on a seasonally adjusted basis.

Residential Originations to Drop by 40 Percent in First Quarter: MBA
Residential mortgage originations are projected to plummet to $960 billion by 2012 after reaching $995
billion in the fourth quarter of 2010, according to a Feb. 23 report. The drop in
originations is in line with the current fall in refinance activity.

In its Mortgage Finance Forecast, the Mortgage Bankers Association said it expects originations to reach
$271 billion during the first quarter of 2011, down from $462 billion the previous quarter. According to
MBA, volume is expected to inch up to $275 billion in the second quarter of 2011 before bottoming at
$181 billion in the first-quarter 2012.

Refinance activity came in at 78 percent in the fourth quarter of 2010, up from 74 percent the previous
quarter. Refinancing is expected to log in at 63 percent in the first quarter of 2011 before plunging roughly
to 25 percent in the fourth quarter of 2011.

The share of borrowers opting for an adjustable-rate mortgage is expected to increase to 6 percent in the
first quarter of 2011, up from 5 percent in the fourth quarter of 2010, before topping out at 7 percent in the
second quarter – where it is expect to remain steady until at least the end of 2012.

29 | Residential Update Vol. 2, No. 4, April 2011
Market Rates and Bond Yields
                                                        Feb11         Aug10           Feb10           Aug09         Feb09         Feb08
 Reserve Bank Discount Rate                             0.75          0.75            0.59            0.50          0.50          3.50
 Prime Rate (monthly average)                           3.25          3.25            3.25            3.25          3.25          6.00
 Federal Funds Rate                                     0.16          0.19            0.13            0.16          0.22          2.98
 3-Month Treasury Bills                                 0.13          0.16            0.11            0.17          0.30          2.12
 6-Month Treasury Bills                                 0.17          0.19            0.18            0.26          0.45          2.04
 3-Month Certificates of Deposit                        0.28          0.32            0.19            0.30          1.16          3.06
 LIBOR-3 month rate                                     0.41          0.52            0.40            0.69          1.65          3.12
 U.S. 5-Year Bond                                       2.26          1.47            2.36            2.57          1.87          2.78
 U.S. 10-Year Bond                                      3.58          2.70            3.69            3.59          2.87          3.74
 U.S. 30-Year Bond                                      4.65          3.80            4.62            4.37          3.59          4.52
 Municipal Tax Exempts (Aaa)†                           4.79          3.44            3.91            4.17          4.56          4.44
 Municipal Tax Exempts (A)†                             5.67          4.14            4.71            5.12          5.46          4.63
 Corporate Bonds (Aaa)†                                 5.22          4.49            5.35            5.26          5.27          5.53
 Corporate Bonds (A)†                                   5.64          5.00            5.84            5.78          6.47          6.26
 Corporate Bonds (Baa)†                                 6.15          5.66            6.34            6.58          8.08          6.82

Stock Dividend Yields
 Common Stocks—500                                      1.80          2.10            2.00            2.12          3.07          2.10

O t h e r B e n c h m a r k s^
 Industrial Production Index*,¶                         95.5          93.6            90.5            87.8          88.5           99.9
 Unemployment (%)¶                                      8.9           9.6             9.7             9.7           8.1            4.8
 Monetary Aggregates, daily avg.¶
  M1, $-Billions                                       1,872.9†† 1,751.5†† 1,703.2†† 1,655.3†† 1,562.1                             1,367.5
  M2, $-Billions                                       8,890.2†† 8,660.8†† 8,537.1†† 8,428.7†† 8,340.7                             7,601.6
 Consumer Price Index
  All Urban Consumers                                   221.3         218.3           216.7           215.8           212.2        211.7

                                                        4Q10         3Q10          4Q09           3Q09         4Q08        3Q08       4Q07
Per Capita Personal Disposable
 Income Annual Rate in Current $s††                     36,990       36,778        36,049         35,888       35,677 36,060 35,042
Savings as % of DPI††                                   5.4          6.0           5.5            5.6          5.2    3.6    2.1

* On June 25, 2010, the Federal Reserve Board advanced to 2007 the base year for the indexes of industrial production, capacity, and electric power
   use. This follows the November 7, 2005, change to a 2002 baseline, from the previous 1997 baseline. Historical data has also been updated.
   As of March 2008, the Federal Reserve stopped issuing the “Member Bank Borrowed Reserves.” As such, this figure no longer appears in
   Appraisal Institute publications.
   Seasonally adjusted
   Source: Moody's Bond Record
   Revised figures used

30 | Residential Update Vol. 2, No. 4, April 2011
Conventional Home Mortgage Terms

                                                          Feb11       Aug10           Feb10       Aug09         Feb09          Feb08
 New House Loans—U.S. Averages
 Interest rate (%)                                        4.94          4.67          5.08         5.32          5.09            5.96
 Term (years)                                             27.4          28.4          28.2         28.4          28.9            29.2
 Loan ratio (%)                                           74.1          73.2          74.0         73.5          74.2            78.1
 Price (thou. $)                                          332.0         348.6         314.9        330.1         340.1           373.1

 Used House Loans—U.S. Averages
 Interest rate (%)                                        4.91          4.76          5.13         5.33          5.12            5.94
 Term (years)                                             27.1          27.2          27.4         28.0          28.0            27.8
 Loan ratio (%)                                           74.8          73.3          74.9         74.8          74.4            76.0
 Price (thou. $)                                          302.7         299.9         288.3        308.3         290.3           298.1

Conventional Home Mortgage Rates by Metropolitan Area

                                                       4Q10       4Q09       4Q08       4Q07
Atlanta                                                4.63       5.04       6.14       6.42
Boston-Lawrence-NH-ME-CT#                              4.51       4.78       5.78       6.27
Chicago-Gary-IN-WI#                                    4.55       5.11       5.97       6.44
Cleveland-Akron#                                       4.40       5.05       6.17       6.57
Dallas-Fort Worth#                                     4.51       5.06       6.07       6.40
Denver-Boulder-Greely#                                 4.50       5.12       5.85       6.39
Detroit-Ann Arbor-Flint#                               4.56       4.98       6.34       6.53
Houston-Galveston-Brazoria#                            4.60       5.03       5.91       6.40
Indianapolis                                           4.45       5.32       6.34       6.65
Kansas City, MO-KS                                     5.22       4.94       5.74       6.12
Los Angeles-Riverside#                                 4.60       5.10       6.06       6.43
Miami-Fort Lauderdale#                                 4.64       5.19       6.17       6.59
Milwaukee-Racine#                                      4.50       5.09       6.09       6.38
Minneapolis-St. Paul-WI                                4.51       5.09       5.98       6.36
New York-Long Island-N. NJ-CT#                         4.45       5.06       6.00       6.44
Philadelphia-Wilmington-NJ#                            4.49       5.14       6.06       6.41
Phoenix-Mesa                                           4.79       5.18       6.30       6.45
Pittsburgh                                             4.42       5.14       6.07       6.16
Portland-Salem#                                        4.44       5.03       5.83       6.35
St. Louis-IL                                           4.59       5.13       6.15       6.62
San Diego                                              4.59       5.08       6.03       6.43
San Francisco-Oakland-San Jose#                        4.54       5.03       6.09       6.46
Seattle-Tacoma-Bremerton                               4.47       5.00       5.88       6.36
Tampa-St. Petersburg-Clearwater                        4.63       5.13       6.08       6.49
Washington, DC-Baltimore-VA#                           4.41       5.07       6.02       6.49

As of the first quarter 2003, the Federal Housing Finance Board no longer reported on the markets of Greensboro, Honolulu and Louisville.
  Consolidated Metropolitan Statistical area

31 | Residential Update Vol. 2, No. 4, April 2011