How will Hurricane Florence impact MSR values?
How will Hurricane Florence impact MSR values?
Hurricane Florence caused between $38 billion and $50 billion in damage and economic losses, according to an article in The Wall Street Journal on Sept. 21. Within this estimate is damage to an estimated 391,000 homes with mortgages, including an estimated 283,000 homes in 18 North Carolina counties that FEMA has declared disaster areas, according to a Sept. 25 article by the Mortgage Bankers Association.
While the residential mortgage industry waits to see the resulting delinquencies and foreclosures in the coming months and over the long term, MountainView Financial Solutions, a Situs company, showed its clients how potential fallout from the hurricane will impact its independent valuation of mortgage servicing rights (MSR) for the region.
In emails to clients the week of Sept. 21, MountainView’s MSR valuation team shared a detailed protocol it expects to follow in adjusting its valuations. The process started with identifying ZIP codes within the affected counties and will soon – within weeks or months – move into a phase where mortgage servicers have assigned one of several possible dispositions to individual mortgages, based on property inspections. The possible dispositions include continued timely payments, temporary or extended forbearance, repayment plans, loan modifications, or defaults, and MountainView will document the assigned disposition at the property level as the servicer provides that information.
As MountainView thinks about modeling this impact to the value of the MSR asset, the first assumption change is an increased cost of servicing, due to the additional time mortgage servicers will be communicating with borrowers over the next three months.
The second change is to add an incident of default by taking an expected level of default and running it through a foreclosure pipeline for 12 months. MountainView has historically used a default rate of 10% of impacted properties.
The third change is to add in default severity, in terms of the servicer’s cost of a foreclosure loss or its unreimbursed payment advances to investors.
In thinking about these potential costs at the most severe extreme, where borrowers walk away from their homes and default on their mortgages, several nuances come into play, according to Mark Garland, Managing Director and Head of MSR Valuation at MountainView. These nuances include the type and level of property damage, wind vs. flood damage, and what type and level of property insurance was in place.
“With Hurricane Florence, we’re finding that there are really radically different levels of flood insurance between properties near rivers and properties on or near the coast,” said Garland. “Many people may be surprised that there’s actually more flood insurance in place near the rivers, and that’s the type of nuance or complication we need to think about in terms of the value determination for each MSR.”
While Garland said his team will start adjusting MSR values in October and November, he added that part of the complication in determining value is that this issue will take several months and potentially a few years to fully resolve.
FHA will require second appraisal for some reverse mortgages
The Federal Housing Administration (FHA) will now require lenders originating certain new reverse mortgages to offer a second property appraisal in cases where property valuations may be inflated.
The agency says that the additional appraisal validation policy will reduce risks to the mutual mortgage insurance fund and protect home equity conversion mortgages, also known as reverse mortgages.
“The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value or condition,” the agency said in a press release.
The property value is used to decide the amount of equity that is available to the borrower, and is also used by the FHA to determine the amount of insurance benefits paid to a borrower.
Read more: American Banker
Gauging crisis readiness
In a post on Fannie Mae’s Perspectives blog, Fannie Mae VP of Single-Family Risk Management Jude Landis discussed the strengths of the current mortgage market, boosted by advancements in technology, underwriting and quality control since 2008.
“Lenders have strengthened their mortgage origination processes, including improved underwriting and collateral assessment,” said Landis. “Additionally, appropriate regulations, such as the ability-to-repay and qualified mortgage rules, have formed guardrails for mortgage lending standards that did not exist 10 years ago.”
According to Landis, the safety of the mortgage market has been improved by changes in credit eligibility standards following the 2008 crisis. For example, Fannie Mae now no longer purchases newly originated low- or no-credit documentation, negatively amortizing, or interest-only single-family loans, nor single-family loans with prepayment penalties or balloon payment features, which Landis says fosters “sustainable homeownership while continuing to provide opportunities for creditworthy borrowers to obtain financing and become homeowners.”
Read more: DSNews
UBS: The housing markets in these 6 cities are closest to a bubble
Housing costs are rising in almost every major city in the world. At least six are at risk of being in a bubble, defined as a persistent rise in prices to the point where properties are well above their fundamental value.
“Most households can no longer afford to buy property in the top financial centers without a substantial inheritance,” UBS said in its 2018 Global Real Estate Bubble Index.
“Rents continue to consume a significant share of income.” Policymakers will be required to intervene in affordability crises, by granting subsidies to first-time homebuyers, for example.
But other policies could be more detrimental, UBS said. If governments impose heavy property taxes in expensive cities, they could chase away foreign investors. They could also cause prices to plummet too quickly, hurting existing homeowners who want to sell.
Bubbles are often hard to identify until they burst, but UBS has handpicked six cities that are at “bubble risk.” Only two of the major cities they examined — Boston and Singapore — were considered “fairly valued.” Here’s the list of cities on bubble watch in ascending order:
- Hong Kong
Read more: Business Insider
The impact of a sellers’ market on home sales
Pending home sales dropped slightly in August according to the National Association of Realtors (NAR). The NAR Pending Home Sales Index has now decreased on an annual basis for eight straight months, down 1.8 percent to 104.2 in August from 106.1 in July. Additionally, contract signings are down 2.3 percent year over year.
According to Lawrence Yun, NAR Chief Economist, the housing market slowdown has been impacted in part by the low inventory.
“Pending home sales continued a slow drip downward, with the fourth month over month decline in the past five months,” said Yun.
“Contract signings also fell backward again last month, as declines in the West negatively impacted overall activity,” he added. “The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points.”
Read more: The MReport