Where is mortgage money going to come from?

David Goldsmith

All Powerful Moderator
Staff member

Mortgage demand drops as interest rates bounce higher​


Diana Olick
  • Total mortgage application volume fell 7.7% last week as mortgage rates jumped higher.
  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.39% last week from 6.18% the previous week.
  • Applications to refinance a home loan dropped 13% for the week and were 76% lower than the same week one year ago.

After falling for five straight weeks, mortgage rates jumped last week, triggering a decline in mortgage demand.
Total mortgage application volume fell 7.7% last week, compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.39% from 6.18%, with points rising to 0.70 from 0.64 (including the origination fee) for loans with a 20% down payment. The rate was 4.05% one year ago.
"Mortgage rates increased across the board last week, pushed higher by market expectations that inflation will persist, thus requiring the Federal Reserve to keep monetary policy restrictive for a longer time," said Joel Kan, MBA's vice president and deputy chief economist.
Applications to refinance a home loan dropped 13% for the week and were 76% lower than the same week one year ago. At the current rate, 100,000 fewer borrowers can benefit from a refinance compared with just one week ago, according to data from Black Knight. A year ago, with mortgage rates at 4.05%, there were just under 4 million refinance candidates.
Mortgage applications to purchase a home fell 6% for the week and were 43% lower than the same week a year ago. Real estate agents across the country are reporting a jump in buyer demand in the past few weeks, perhaps indicating an early start to the historically busy spring market.
"I actually thought, my God, this is amazing. Look at how fast it turned on a dime," said Dana Rice, a real estate agent with Compass, who was running a busy open house in Bethesda, Maryland, on Saturday. "We went from no showings and nobody coming to open houses, that every single thing that I've launched in the last couple of weeks has had multiple offers."
There is, however, an abnormally high level of all-cash buyers in the market. Peter Fang is one of them. He was at the open house.
"I'm very surprised to see so many cash offers in the market. I thought I would be at a much better position but the competition is still there," Fang said.
Mortgage rates continued to move up this week after a government report on inflation showed it was higher than expected in January.
 

David Goldsmith

All Powerful Moderator
Staff member

The Only Way Is Up​


Higher and Higher​

Bond traders are finally coming around to the realization that the only way is up for US interest rates.
But just how far will the Federal Reserve take them?
Fed presidents Loretta Mester and James Bullard last week signaled they may favor returning to 50-basis point rate hikes in the future.
On Wall Street, Deutsche Bank economists now expect a high point of 5.6%, above the 5.1% previously forecast and the current 4.5% to 4.75% range.
Among the reasons: A resilient labor market, easier financial conditions and elevated inflation.
One useful, albeit it sometimes faulty, economic model points to a need for even tighter credit.
As Torsten Slok of Apollo notes, the eponymous rule of Stanford University’s John Taylor currently points to a rate of 9% based on the current levels of inflation and unemployment.
“The bottom line is that the Taylor Rule framework normally used by the Fed for evaluating the stance of monetary policy is saying that the Fed is still significantly behind the curve,” Slok wrote in a report to clients.

Taylor Rule​



Source: Bloomberg

Earlier this month, Dominique Dwor-Frecaut, a senior market strategist at the research firm Macro Hive, said she already sees the Fed reaching 8%, in part because of the Taylor Rule.
According to Mohamed El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist, the Fed may ultimately need to declare victory when inflation is north of its 2% target.
“You need a higher stable inflation rate. Call it 3 to 4%,” El-Erian told Bloomberg Television. “I don’t think they can get CPI to 2% without crushing the economy.”
Even so, the higher the Fed goes, the greater chance it will inflict a recession.
Deutsche still forecasts a downturn this year although it’s delayed the start date until the fourth quarter.

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David Goldsmith

All Powerful Moderator
Staff member

US mortgage rates rise for the third week in a row​

By Anna Bahney, CNN
Updated 12:01 PM EST, Thu February 23, 2023
article video


Washington(CNN)Mortgage rates shot up for the third-straight week, as inflation concerns make rates more volatile.
The 30-year fixed-rate mortgage averaged 6.5% in the week ending February 23, up from 6.32% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.89%.
Rates had been trending downward after hitting 7.08% in November, but are now climbing again, up about half a percentage point in a month. A slew of robust economic data suggests the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.

"The economy continues to show strength, and interest rates are repricing to account for the stronger than expected growth, tight labor market and the threat of sticky inflation," said Sam Khater, Freddie Mac's chief economist.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.

Inflation concerns remain​


The mortgage rate for a 30-year, fixed-rate loan continued to climb as the 10-year Treasury yield has surged. The 10-year yield this week reached its highest level since November.
The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed's actions, what the Fed actually does and investors' reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
"On an ordinary day, strong retail sales data and a 53-year low unemployment rate would be a cause for celebration among investors and businesses," said Jiayi Xu, an economist at Realtor.com. "However, under current conditions, these robust data raise uncertainties in the markets."
On one hand, she said, the hotter-than-expected inflation might force the Fed to revisit faster interest rate growth, which is unwelcome news for both investors and businesses.
"On the other hand, some policymakers did not interpret January's data as signs of accelerating growth, choosing to wait for more information before deciding," she said. "As a result they are in favor of implementing smaller rate hikes in the coming months, which would be welcomed by markets."

Housing market will be 'nobody's'​


With rates moving back up and turning off buyers as the spring home buying season gets underway with hopeful sellers entering the market, the housing market will continue to be 'nobody's market' said Xu -- not friendly to buyers nor to sellers.
"Mortgage rates are likely to move in the 6% to 7% range over the next few weeks, which continues to pose a significant challenge to affordability," she said.
Existing-home sales have retreated for the 12th straight month, though at a slower pace. In addition, the West is the only region where home prices decreased year-over-year, suggesting reduced demand for housing.

"This decline may be due to a combination of multiple factors such as high housing prices, high mortgage rates, and the recent wave of tech layoffs on the West Coast," said Xu. "With more companies announcing their return-to-office mandates last week, some remote workers may choose to relocate back to major cities or tech hubs. As home prices are still high and mortgage rates are up compared to one year ago, people who move back may prefer to stay in the rental market, driving up the already high rental demand in these areas."
Khater said that Freddie Mac's research suggests that there is a wider range of rates borrowers lock in as average rates go up. All borrowers can benefit from shopping around for rates from different kinds of lenders including traditional banks, online lenders or credit unions.
"Homebuyers can potentially save $600 to $1,200 annually by taking the time to shop among lenders to find a better rate," said Khater.
 

David Goldsmith

All Powerful Moderator
Staff member
Mortgage demand from homebuyers drops to a 28-year low
Published Wed, Mar 1 2023 7:00 AM ESTUpdated 3 Hours Ago

Diana Olick
@DianaOlick@DianaOlickCNBC@in/dianaolick
WATCH LIVE
KEY POINTS
  • Mortgage demand fell for the third straight week as interest rates increased.
  • Mortgage applications to buy a home dropped 6% last week from the previous week.
  • Mortgage rates have moved half a percentage point higher in the past month.
107201772-16776950241677695022-28399019278-1080pnbcnews.jpg

Mortgage rates moved higher again last week, pushing buyers back to the sidelines just as the spring housing market is supposed to be heating up.
Mortgage applications to purchase a home dropped 6% last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was 44% lower than the same week one year ago, and is now sitting at a 28-year low.
This as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.71% from 6.62%, with points rising to 0.77 from 0.75 (including the origination fee) for loans with a 20% down payment. That is the highest rate since November of last year.
Mortgage rates have moved 50 basis points higher in just the past month. Last February, rates were in the 4% range.
Homes in Rocklin, California, on Tuesday, Dec. 6, 2022.
David Paul Morris | Bloomberg | Getty Images
"Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates," said Joel Kan, an MBA economist.
Applications to refinance a home loan fell 6% for the week and were 74% lower year over year.
"Refinance applications account for less than a third of all applications and remained more than 70% behind last year's pace, as a majority of homeowners are already locked into lower rates," added Kan.
Mortgage rates haven't done much to start this week, but the trajectory now appears to be higher, after a brief respite in January. Lower rates to start the year caused a brief surge in homebuying, but mortgage demand from homebuyers would seem to indicate a very slow spring is ahead.
 

David Goldsmith

All Powerful Moderator
Staff member
Last time mortgage rates topped 7% it crushed new buyer demand.
https://www.mortgagenewsdaily.com/markets/mortgage-rates-03022023



Mortgage Rates Now Back Above 7%​

By: Matthew Graham
58 Min, 1 Sec ago
Mortgage rates have been hit hard on two fronts over the past month. The first front is the obvious one: the bond market has moved in a way that forces rates to go higher. To be fair, it's almost always the bond market that forces rates to go wherever they're going.
A vast majority of the day-to-day movement in rates is a simple function of the trading levels in specific bonds. This has been and will continue to be the case, possibly forever. February (and now early March) economic data caused traders to worry about higher inflation and resilient economic growth. This makes traders want to sell bonds more than buy them, and that results in higher interest rates.
But bonds aren't always everything when it comes to rate movement. The "everything else" category changes in composition depending on the landscape. For instance, during the 2020-2021 refi booms, rates were often limited by mortgage lenders' capacity to handle new business. The bond market actually allowed for much lower rates at times, but lenders simply couldn't handle the volume.

There's a different problem in the "everything else" category right now. The regulator overseeing Fannie and Freddie recently changed some of the upfront fees required for all conforming mortgages (conforming = guaranteed by Fannie and Freddie). Depending on a borrower's credit score and the amount of a home's value they wish to borrow, their rate could instantly rise by 0.125% simply because a lender implemented the new fee requirements.
Without the impact of those fees, rates could still be in the high 6% range, or close to it. As it stands, the average lender is now back up into the low 7's for a well-qualified 30yr fixed scenario. These aren't the highest levels we've seen during this cycle, but they are the highest in more than 4 months (and not too far away from the long-term highs just under 7.4%).
Incidentally, Freddie Mac's rate survey came out today and it showed 30yr fixed rates at 6.65. Understand that most of Freddie's survey responses come in on Monday and rates have risen since then. The survey also includes upfront points and does not include the new fees that are hitting a vast majority of borrowers. If we were to adjust for the market movement that's happened since Monday, the upfront costs, and the fees, Freddie's number would likely be right in line with 7.1%.

 

David Goldsmith

All Powerful Moderator
Staff member

Fed Chair Powell says interest rates are 'likely to be higher' than previously anticipated​

PUBLISHED TUE, MAR 7 2023 10:00 AM ESTUPDATED TUE, MAR 7 2023 3:42 PM EST

Jeff Cox
@JEFFCOXCNBCCOM@JEFF.COX.7528
WATCH LIVE
KEY POINTS
  • Federal Reserve Chairman Jerome Powell on Tuesday cautioned that interest rates are likely to head higher than central bank policymakers had expected.
  • "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," the central bank leader said in prepared remarks for appearances this week on Capitol Hill.
  • Powell said the current trend shows that the Fed's inflation-fighting job is not over.
107204768-1678235672720-1678204054-28481863723-hd.jpg

Federal Reserve Chairman Jerome Powell on Tuesday cautioned that interest rates are likely to head higher than central bank policymakers had expected.
Citing data earlier this year showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy.
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"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell said in remarks prepared for two appearances this week on Capitol Hill. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
Those remarks carry two implications: One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials, and, two, that the switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continues to run hot.
In their December estimate, officials pegged the terminal rate at 5.1%. Current market pricing moved higher following Powell's remarks, to a range of 5.5%-5.75%, according to CME Group data. Powell did not specify how high he thinks rates ultimately will go.
The speech comes with markets generally optimistic that the central bank can tame inflation without running the economy into a ditch.
Stocks fell sharply while Treasury yields jumped after Powell's remarks were released. Market pricing also titled sharply to a strong possibility of a 0.5 percentage point interest rate hike when the Federal Open Market Committee meetings March 21-22.
Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on The Semiannual Monetary Policy Report to the Congress on Capitol Hill in Washington, U.S., March 7, 2023.

Federal Reserve Chair Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to the Congress" on Capitol Hill in Washington, U.S., March 7, 2023.
Kevin Lamarque | Reuters
January data shows that inflation as gauged by personal consumption expenditures prices — the preferred metric for policymakers — was still running at a 5.4% pace annually. That's well above the Fed's 2% long-run target and a shade past the December level.
Powell said the current trend shows that the Fed's inflation-fighting job is not over, though he noted that some of the hot January inflation data could be the product of unseasonably warm weather.
"We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do," he said, adding that the road there could be "bumpy."
Powell speaks Tuesday before the Senate Banking, Housing and Urban Affairs Committee then will address the House Financial Services Committee on Wednesday.
The chairman faced some pushback from Democrats on the Senate panel who blamed inflation on corporate greed and price gouging and said the Fed should reconsider its rate hikes. Sen. Elizabeth Warren, D-Mass., a frequent Powell critic, charged that the Fed's inflation goals will put 2 million people out of work.
"We're taking the only measures we have to bring inflation down," Powell said. "Will working people be better off if we just walk away from our jobs if inflation remains at 5, 6%?"
The Fed has raised its benchmark fund rate eight times over the past year to its current targeted level between 4.5%-4.75%. On its face, the funds rate sets what banks charge each other for overnight lending. But it feeds through to a multitude of other consumer debt products such as mortgages, auto loans and credit cards.
In recent days, some officials, such as Atlanta Fed President Raphael Bostic, have indicated that they see the rate hikes coming to a close soon. However, others, including Governor Christopher Waller, have expressed concern about the recent inflation data and say tight policy is likely to stay in place.
"Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time," Powell said. "The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done."
Powell noted some progress on inflation for areas such as housing.
However, he also noted "there is little sign of disinflation" when it comes to the important category of services spending excluding housing, food and energy. That is an important qualifier considering that the chairman at his post-meeting news conference in early February said the disinflationary process had begun in the economy, remarks that helped send stocks higher.
Markets mostly had expected the Fed to enact a second consecutive quarter-point, or 25 basis points, rate increase at the Federal Open Market Committee meeting later this month. However, as Powell spoke markets priced in a 69% probability of a higher half-point increase at the March meeting, according to CME Group data.
Powell reiterated that rate decisions will be made "meeting by meeting" and will be dependent on data and their impact on inflation and economic activity, rather than a preset course.
Watch our live stream for all you need to know to invest smarter.
 

David Goldsmith

All Powerful Moderator
Staff member
Q4 Update: Delinquencies, Foreclosures and REO

REO: lender Real Estate Owned​


CalculatedRisk by Bill McBride

7 hr ago
13



In 2021, I pointed out that with the end of the foreclosure moratoriums, combined with the expiration of a large number of forbearance plans, we would see an increase in REOs in late 2022 and into 2023. However, this would NOT lead to a surge in foreclosures and significantly impact house prices (as happened following the housing bubble) since lending has been solid and most homeowners have substantial equity in their homes.
Last week, CoreLogic reported on homeowner equity: US Annual Home Equity Gains Cool Again in Q4 2022, CoreLogic Reports
The report shows that U.S. homeowners with mortgages (which account for roughly 63% of all properties) saw equity increase by 7.3% year over year, representing a collective gain of $1 trillion, for an average of $14,300 per borrower, since the fourth quarter of 2021.
With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.
Some simple definitions (for housing):
Forbearance is the act of refraining from enforcing mortgage debt.
Delinquency is the failure to make mortgage payments on a timely basis.
Foreclosure is when the mortgage lender takes possession of the property after the mortgagor failed to make their payments. “In foreclosure” is the process of foreclosure.
REO (Real Estate Owned) is the amount of real estate owned by lenders.

Here is some data on REOs through Q4 2022 …​

This graph shows the nominal dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs.
The dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) increased from $818 million in Q3 2022 to $829 million in Q4 2022. This is increasing, but still very low.


Fannie Mae reported the number of REOs increased to 8,779 at the end of Q4 2022, up 23% from 7,166 at the end of Q4 2021. Here is a graph of Fannie Real Estate Owned (REO).

This shows that REOs are increasing, however, this is still very low - and well below the pre-pandemic levels.



Here is some data on delinquencies …​

It is important to note that loans in forbearance are counted as delinquent in the various surveys, but not reported to the credit agencies.

Here is a graph from the MBA’s National Delinquency Survey through Q4 2022.



Note The percent of loans in the foreclosure process increased in Q4 with the end of the foreclosure moratoriums. Loans in forbearance are mostly in the 90-day bucket at this point, and that has declined recently (although it increased in Q4). From the MBA:

Compared to last quarter, the seasonally adjusted mortgage delinquency rate increased for all loans outstanding. By stage, the 30-day delinquency rate increased 26 basis points to 1.92 percent, the 60-day delinquency rate increased 13 basis points to 0.66 percent, and the 90-day delinquency bucket increased 11 basis points to 1.38 percent.
...
The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 0.57 percent, up 1 basis point from the third quarter of 2022 and 15 basis points higher than one year ago.
emphasis added
Both Fannie and Freddie release serious delinquency (90+ days) data monthly. Fannie Mae reported that the Single-Family Serious Delinquency decreased to 0.64% in January from 0.65% in December. The serious delinquency rate is down from 1.17% in January 2022.

Freddie Mac reported that the Single-Family serious delinquency rate in January was 0.66%, unchanged from 0.66% December. Freddie's rate is down year-over-year from 1.06% in January 2022.

This graph shows the recent decline in serious delinquencies:



The pandemic related increase in serious delinquencies was very different from the increase in delinquencies following the housing bubble. Lending standards have been fairly solid over the last decade, and most of these homeowners have equity in their homes - and they have been able to restructure their loans once they were employed.

And on foreclosures …​

Black Knight reported that active foreclosures have increased from the record lows last year, but foreclosure starts are still 37% below pre-pandemic levels. From Black Knight: Black Knight: Sellers Retreat From the Market, Increasing Inventory Shortage and Buoying Home Prices; Affordability Takes Step Back on Rising Interest Rates

According to Black Knight, there were 32,500 foreclosure starts in January 2023, up from 28,200 in December 2022, and up from the record low of 22,900 last July.



The bottom line is there will be an increase in foreclosures in 2023 (from record low levels), but it will not be a huge wave of foreclosures as happened following the housing bubble. The distressed sales during the housing bust led to cascading price declines, and that will not happen this time.
 

David Goldsmith

All Powerful Moderator
Staff member
The list of Co-op & condos on Fannie Mae's unavailable list appears to be growing. What happens to prices in your building when all deals have to be 100% cash?

Condos in disrepair across US revealed​

See which condos Fannie Mae won't touch
Condos in disrepair across US revealed

By Tony Cantu
02 Mar 2022
Share
Florida, by far, has the nation’s greatest number of condominium developments – more than 400 – needing substantive structural or financial repair work with which Fannie Mae will not do business. California and South Carolina are a distant second and third, respectively.
New lending requirements by Fannie Mae and Freddie Mac are rooted in the collapse of the Champlain Towers in Surfside, Fla., that left nearly 100 people dead last June. The federally chartered corporations drafted guidelines to ensure structures are safe for condo borrowers and lenders. Although neither originates or services its own mortgage, each agency buys and guarantees mortgages issued through lenders in the secondary mortgage market.
Fannie Mae sent a letter to lenders outlining new requirements to qualify for loans on condos – namely detailed records regarding repairs, plans for future maintenance and a maintenance history.

Deferred maintenance is just one characteristic that would make a project ineligible for Fannie Mae loans. The majority of projects that are currently listed as ineligible have other eligibility issues, such as active litigation or hotel- or resort-type characteristics.
To further emphasize its point, Fannie Mae subsequently issued an “unavailable” list of more than 950 condominium projects across the US now deemed ineligible for government-backed loans given varying states of disrepair.
Mortgage Professional America obtained a copy of the list typically accessible through Fannie Mae Seller Services CPM credentialed access. The list shows Florida – the very state of the condo collapse that inspired the new lending requirements. According to the list, the Sunshine State has 414 projects no longer eligible for Fannie Mae loans.

It appears states with leisure activities that draw condo dwellers are most represented on the list. Following Florida, beach-abundant California is listed with 80 projects in enough disrepair to make the line-up. Famed for its shoreline of subtropical beaches and marsh-like sea islands, South Carolina appears on the list with 57 condo projects off limits to Fannie Mae and Freddie Mac. Hawaii has 30 condos on this list – including four in Honolulu.

Size doesn’t necessarily equate to greater numbers of developments either. Texas had just 19 condo projects listed in Fannie Mae’s “unavailable” list, including three in the state capital of Austin.
Orest Tomaselli (pictured), president of Project Review at CondoTek, told MPA the new rules will make sales of certain condo buildings difficult at best and impossible at worst. The reason is that other lenders have followed suit and are opting not to provide financing either.
“What that means for the industry, if you’re a condo development on that list not only are you not compliant with Fannie Mae’s guidelines and lenders can’t sell loans to Fannie Mae, but every other underlying mortgage lender for cooperatives and every other lender in the industry – whether it’s a non-warrantable, non-QM loan type of lender or investor – they’re all looking at this list. And they’re also aligning with that list and not lending in those sites.”
The domino effect has already begun as Freddie Mac followed Fannie Mae’s lead in rendering such condo units ineligible for financing. Tomaselli said mainstream lenders had already begun aligning themselves with the same stance.

“Fannie Mae and Freddie Mac are really focusing on three specific aspects of condominiums and cooperative lending,” Tomaselli said. “Those are the infrastructure of the condominiums or cooperative developments to make sure they’re not in serious disrepair, to make sure that those infrastructure components are being maintained or replaced appropriately. Number two, they’re looking at the financial wherewithal of these developments to make sure they have enough money to actually do the repairs to the structure and foundation and everything else that’s necessary.
“And the third aspect of it is really to enforce the gathering of information about these developments so they can compile the appropriate list which comes in the form of updated questionnaires specifically pertaining to structure, condominium and finances of a condominium development. Those are the three aspects of this new guidance. If you’re out of line with any of those, Fannie Mae is going to put you on this unavailable list that they created, and that’s what’s going to make major changes in the industry because nobody wants to be on that list.”
The granular level of detailed information now needed for mortgage financing will lay bare for condo owners their building’s state of disrepair, Tomaselli said. He predicted some may go into foreclosure as a result of the heightened requirements.
“I’ve seen projects in the past you couldn’t lend to,” he added. “Inevitably what happens is that values plummet and people start going into foreclosure for various reasons – they can’t make their mortgage payments, they can’t make the increased contributions for the repair work that needs to be done to the development – and once that starts to happen, when financing isn’t available in those sites, it just leads homeowners down this path of going into foreclosure.
“And the worst part about it is the people who bought those units had no clue because this information had never really been required before when a lender was providing mortgage financing. So, when you signed a contract to buy a unit, yeah, there was some due diligence that went on but not to this extreme. I think what’s going to happen is, for a lot of homeowners, they’re going to have a rude awakening their development isn’t structurally sound.”



 

David Goldsmith

All Powerful Moderator
Staff member

Mortgage Rate Update​


CalculatedRisk by Bill McBride

Apr 6
19



Mortgage News Daily reports that the most prevalent 30-year fixed rate is now at 6.18% for top tier scenarios. Usually there is a fairly steady spread between the ten-year Treasury yield and 30-year mortgage rates, although - as housing economist Tom Lawler explained in Mortgage/Treasury Spreads, Part I and Part II - the spread has widened due to several factors including volatility and pre-payment speeds.
With the ten-year yield at 3.3%, and based on an historical relationship, 30-year rates would currently be around 5.0%. So, mortgage rates are higher than expected based on the ten-year yield - for reasons Lawler explained.

The graph shows the relationship between the monthly 10-year Treasury Yield and 30-year mortgage rates from the Freddie Mac survey. Note that the red dots are the last 12 months of data.


Freddie Mac has a similar graph here with a linear fit (using data since 1990). Using their formula, 30-year rates would also be around 5.0%.



This suggests that if volatility declines then mortgage rates will move back towards the historical spread. However - if the Fed stops raising rates - it is possible the ten-year Treasury yield might increase (and the yield curve will flatten), and mortgage rates will stay close to 6% (it isn’t simple!). Currently the 3-month T-bill yield 4.86%, more than 1.5 percentage points above the 10-year yield.

What has happened to Refinance Activity?​

In an article over year ago, I predicted that refinance activity would fall off a cliff.

The following graph shows the MBA Refinance Index (Blue) since 1990.



The general rule of thumb is refinance activity will be strong if current mortgage rates are 50bps lower than the maximum of the previous year (this is just a general rule - but it works pretty well).

Since rates have fallen from the highs in October and November, we might see a slight pickup in refinance activity for these recent buyers (usually buyers have to wait 6 months if using the same lender).
 

David Goldsmith

All Powerful Moderator
Staff member
Another revolting development.

Biden to hike payments for good-credit homebuyers to subsidize high-risk mortgages
A home for sale is seen on Dec. 8, 2020, in Orlando, Fla. Sales of previously occupied U.S. homes fell in September 2022 for the eighth month in a row, matching the pre-pandemic sales pace from 10 years ago, as house hunters faced sharply higher mortgage rates, higher home prices and a still tight supply of properties on the market. (AP Photo/John Raoux, File)
. Sales of previously occupied U.S. homes fell in September 2022 for the eighth month in a row, matching the pre-pandemic sales pace from 10 years ago, as …
By Dave Boyer - The Washington Times - Tuesday, April 18, 2023
Homebuyers with good credit scores will soon encounter a costly surprise: a new federal rule forcing them to pay higher mortgage rates and fees to subsidize people with riskier credit ratings who are also in the market to buy houses.

The fee changes will go into effect May 1 as part of the Federal Housing Finance Agency’s push for affordable housing, and they will affect mortgages originating at private banks across the country. The federally backed home mortgage companies Fannie Mae and Freddie Mac will enact the loan-level price adjustments, or LLPAs.


Mortgage industry specialists say homebuyers with credit scores of 680 or higher will pay, for example, about $40 per month more on a home loan of $400,000. Homebuyers who make down payments of 15% to 20% will get socked with the largest fees.


The new fees will apply only to Americans buying houses or refinancing after May 1.

Lenders and real estate agents say the changes will frustrate homebuyers with high credit scores and homeowners seeking to refinance because the rule punishes them for their relatively strong financial positions.

“The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well,” Ian Wright, a senior loan officer at Bay Equity Home Loans in the San Francisco Bay Area, told The Washington Times in an email message. “It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing.”

He said the rule will “cause customer-service issues for lenders and individual loan officers when a consumer won’t understand why their interest rate and fees suddenly changed.”


“I am all for the first-time buyer having a chance to get into the market, but it’s clear these decisions aren’t being made by folks that understand the entire mortgage process,” Mr. Wright said.

The new fees “will create extreme confusion as we enter the traditional spring home purchase season,” said David Stevens, a former head of the Mortgage Bankers Association who served as commissioner of the Federal Housing Administration during the Obama administration.

“This confusing approach won’t work and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months,” Mr. Stevens wrote in a recent social media post. “To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders.”


The housing market has been hit hard by a series of Federal Reserve interest rate hikes that have driven mortgage rates above 6%, roughly double the level from early 2022. The Fed has raised rates rapidly to bring down inflation, which hit a four-decade high of 9.1% last summer.

“In the wake of a 3-percentage-point increase in mortgage rates, now is not the time to raise fees on homebuyers,” Kenny Parcell, president of the National Association of Realtors, told the Federal Housing Finance Agency earlier this year.


Under the new mortgage financing rules, homebuyers with riskier credit ratings and lower down payments will qualify for better mortgage rates and discounted fees.

Federal Housing Finance Agency Director Sandra Thompson, a Biden appointee, said the fee changes will “increase pricing support for purchase borrowers limited by income or by wealth.” The agency calls the overall fee changes “minimal” and said the moves will ensure market stability.

After a storm of criticism, the agency delayed to Aug. 1 an upfront fee for debt-to-income ratios of 40% or more. The ratio is calculated by dividing the homebuyer’s monthly debt payments by gross income. It’s one of the key measures lenders use to determine whether a mortgage applicant qualifies for a loan.


Ms. Thompson said the postponement will help “to ensure a level playing field for all lenders to have sufficient time to deploy the fee.”

The fee changes are intended to subsidize higher-risk borrowers by imposing “an intentional disruption to traditional risk-based pricing,” Mr. Stevens said.

“Why was this done? The answer is simple, it was to try to narrow the gap in access to credit especially for minority home buyers who often have lower down payments and lower credit scores,” he wrote in a post on LinkedIn. “The gap in homeownership opportunity is real. America is facing a severe shortage of affordable homes for sales combined with excessive demand causing an imbalance. But convoluting pricing and credit is not the way to solve this problem.”


He predicted that the Federal Reserve will soon complete its course of tightening its balance sheet and mortgage rates will fall.

“Demand for homes will begin to rise and the same challenges for first-time homebuyers will return,” he said.

Lenders also are worried about the impact of the debt-to-income fee that takes effect in August because homebuyers might feel as if they are in a game of “bait and switch” on their projected borrowing costs.


“When a lender is quoting a borrower, there’s a lot they don’t know yet, such as what the property taxes and insurance payments are per month,” Mr. Wright said. “Changes happen to the mortgage payment and income during escrow, so this will cause frustration to borrowers and lenders for the sudden rate/fee changes. Most of us loan officers will then say let’s ‘eat’ the cost for the borrower to keep them happy (resulting in losses for the lender and loan officer).”

He said the added uncertainty will cause delays “during an already competitive real estate market lacking inventory.”


“For example, due to the low inventory and fierce competition, many buyers must close their transactions in less than 30 days to get their offer accepted,” Mr. Wright said. “The sudden rate changes will cause lenders to ‘re-disclose,’ adding additional days to the transaction. This puts extreme timeline pressure on the buyer and lenders forced to re-underwrite the file for the changes.”

In a letter to Ms. Thompson in February, Mortgage Bankers Association President Bob Broeksmit said the timing of the fee changes was “especially troubling” and that the debt-to-income ratio fee creates “operational issues and quality control” for lenders.


“A borrower’s income and expenses can change several times throughout the loan application and underwriting process, especially considering evolving assumptions concerning the nature of debt and income, and the growth in self-employment, part-time employment, and ‘gig economy’ employment,” Mr. Broeksmit said.
 

David Goldsmith

All Powerful Moderator
Staff member

Affordable housing inventory is limited due to foreclosure prevention efforts​

Releasing pandemic-deferred foreclosure volume could increase housing supply by 12%

A key source of affordable housing inventory was cut in half over the last three years, resulting from well-intended but heavy-handed efforts to keep delinquent borrowers in homes.
That key source of affordable housing inventory: distressed properties sold to third-party buyers or repossessed by lenders at foreclosure auction. Once the transfer of ownership occurs at foreclosure auction, a distressed property can be renovated and returned to the retail market as affordable housing for homeowners or renters.
“[I am] renovating homes at a reasonable price so that people in our community can hopefully have good quality, affordable housing to purchase,” said Pam Franklin, a Kansas-based Auction.com buyer who purchases one to two distressed properties a year and resells them to owner-occupants after renovation. “[My renovated homes are] reducing the number of rental properties, which in our town has become a source of demise.”
Picture1

In the three years prior to the pandemic, completed foreclosure auctions represented a potential affordable housing supply of 250,000 homes a year on average, according to public record data from ATTOM. In 2019 the number was 200,000. When including the approximately 900,000 single family homes constructed by new homebuilders during the year, according to data from the Census and U.S. Department of Housing and Urban Development (HUD), that 200,000 represented close to 20% of all single-family homes supplied to the market in 2019.

More Affordable than New Homes

Not surprisingly, housing supplied by new homebuilders is higher priced than housing supplied by distressed property renovators. New single-family homes sold for an average price of more than $377,000 in 2019. By comparison, renovated foreclosures that sold in 2019 had an average sales price of $244,000 — $133,000 (35%) lower than the average price of new homes.
Affordable for Local Families
Renovated foreclosures aren’t just affordable relative to the overall retail market. They’re affordable for local families making the median income in the surrounding neighborhood.
The monthly house payment to buy a renovated foreclosure — assuming a 5% down payment, the going 30-year fixed mortgage rate at the time of sale and including property taxes and insurance — represented just 20% of the median family income in the surrounding Census tract. That’s according to an analysis of more than 275,000 properties brought to foreclosure auction on Auction.com in the last seven years, between 2016 and 2022.
“I pay the closing costs for veterans, first responders and educators to help expand homeownership among these groups,” said George Russell, a Texas-based Auction.com buyer.
A little more than half of renovated foreclosures end up as owner-occupied homes. The remainder provide a healthy supply of affordable rentals. The analysis of 275,000 homes brought to auction over the last seven years shows those held as rentals had an estimated rent that represented 22% of the median family income in the surrounding Census tract.
“I am providing safe and affordable housing in markets that have limitations of those offerings,” said Tiffany Bolen, a Georgia-based Auction.com buyer who said her primary investing strategy is renovating and holding properties as rentals. Bolen noted that she provides transition assistance to help current occupants of distressed properties exit gracefully.
The affordability of renovated foreclosures extended into underserved neighborhoods as defined by the Federal Housing Finance Agency. Buying a renovated foreclosure required 16% of the median family income in low-income Census tracts and 18% of the median income in minority Census tracts. Renting a renovated foreclosure required 17% of the median family income in minority Census tracts and 19% in minority Census tracts.
“I purchase homes in transitional neighborhoods. Then I renovate properties from the outside to the inside,” said James Barber, a Birmingham, Alabama-based Auction.com buyer who said his typical renovation budget is between $20,000 and $50,000. “This provides modern-feel homes to mostly newer homeowners. This also raises the properties and neighborhoods values. … Currently I am investing 30k of my own funds into a home I purchased on Auction.com. I will then sell it to a first-time homebuyer.”

Affordable Supply Disruption

But this critical supply of affordable housing was cut in half, if not more, over the last three years. Had foreclosure volume continued at the same pace as 2019, an additional supply of about 600,000 affordable homes would have been produced between 2020 and 2022. Instead, 250,000 completed foreclosure auctions — less than half of the expected volume — actually occurred during that timeframe, according to ATTOM data.
This sharp reduction in foreclosure auction volume was largely the result of well-intended and aggressive foreclosure prevention efforts enacted in the wake of the COVID-19 pandemic declaration in March 2020. A nationwide foreclosure moratorium on government-backed mortgages took effect in April 2020 and lasted through August of 2021. A nationwide mortgage forbearance program was legislated into reality by Congress through the CARES Act, also in April 2020.
Although the foreclosure moratorium expired more than a year ago and the forbearance program is winding down — slated to end in May 2023 along with the end of the national emergency triggered by the pandemic — foreclosure auction volume has been slow to return to pre-pandemic levels. Data from the Auction.com platform, which accounts for close to half of all U.S. foreclosure auctions, shows volume at just 60% of pre-pandemic (Q1 2020) levels in the first quarter of 2023.
The slow-to-return foreclosure volume is likely the result of a regulatory environment in which mortgage servicers are fearful of moving forward with foreclosure — particularly if there is a chance that a delinquent borrower has any equity in the home.
“My biggest fear is the amount of equity [that delinquent borrowers may have],” said a representative from one national mortgage servicer during a panel at the Five Star Government Forum in Washington, D.C., in April. “[We] don’t want to foreclose on people with equity … [but] people don’t know they have equity or put their head in the sand.”
The slow return of foreclosure volume has resulted in a growing backlog of pandemic-deferred distress. This backlog is comprised of delinquent mortgages that have exhausted all foreclosure prevention efforts but continue to languish in pre-foreclosure limbo.
More than half a million mortgages (520,000) had exited forbearance and were still delinquent with no loss mitigation program in place as of February 2023, according to the Black Knight Mortgage Monitor. That was an increase of 174,000 (50%) from a year ago.
“Who’s going to be the first one to open the floodgates?,” asked Bill Bymel, founder and CEO of First Lien Capital, at a default industry conference in March. Bymel said he knows of large mortgage servicers with tens of thousands of foreclosures being held back in fear of the headlines that might result. “There’s more skeletons in the forbearance closet than we think.”
But despite Bymel’s dire language, opening the floodgates would likely not result in a catastrophic flood of foreclosures that would drag down the overall housing market. Using historical pre-pandemic roll rates from seriously delinquent to foreclosure, the backlog of 520,000 delinquencies would translate into about 150,000 completed foreclosures over the next 12 months. That would keep total foreclosure volume under the 250,000-a-year average seen between 2017 and 2019.
A 12% Boost in Supply
Still, even a return to the relatively low pre-pandemic volume of foreclosures would make a non-trivial contribution to the nation’s affordable housing supply.
Given that 2022 foreclosure volume was at about 40% of 2019 levels, returning to 2019 levels in 2023 would mean an additional 127,000 homes entering the housing market supply chain. That would represent a roughly 12% boost to the overall supply of single-family homes that were produced by new home builders in 2022. And a disproportionately large share of that supply would be in the affordable segment of the market.
“We have a lack of housing in this area. We have a lot of military buyers here and it’s hard to find them affordable, updated homes in a timely manner,” said Julie Bridges, a New Mexico-based Auction.com buyer. “My investing is helping provide renovated, updated homes to people that would have to rent otherwise.”
In addition to supplying affordable housing inventory, renovated foreclosures also represent more opportunity for the local community developers who are buying and renovating the homes.
“My investing is helping me and my family,” said Kerry Wojtala, an Alabama-based Auction.com buyer who said she buys and renovates one or two properties a year. “I was a single mother for many years … Personally, investing affords me financial independence with a goal of creating a solid platform for my sons so they never have to rely on welfare or government sources.”
 

David Goldsmith

All Powerful Moderator
Staff member

That was Fast: Mortgage Rates Re-Spike to 7% Range as it Sinks in that the Fed Won’t Cut Rates “Anytime Soon,” Mortgage Applications Plunge to 1995 Levels. Even Investors Pull Out​

by Wolf Richter • May 31, 2023 • 175 Comments

Spring selling season was a dud. But what comes next may be worse, that’s what mortgage applications and investors tell us.​

By Wolf Richter for WOLF STREET.​

The 7% mortgages are back. The average interest rate on 30-year fixed-rate mortgages with conforming balances jumped to 6.91%, the highest since November, according to the weekly measure by the Mortgage Bankers Association today.
The daily measure by Mortgage News Daily already went over 7% a few days last week and earlier this week.
“Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon,” is how the Mortgage Bankers Association explained today what has been obvious to us here for months.
US-mortgage-rates-2023-05-31-MBA.png


And so, with these kinds of mortgage rates, spring selling season – the time of the year when sales and prices nearly always rise from the dreary days of the winter – has turned into an amazing dud.
Applications for mortgages to purchase a home dropped for the third week in a row, from already low levels, to the third-lowest volume since 1995, the two lowest volume-weeks having been in late February this year, according to the MBA today.
Purchase mortgage applications plunged, compared to the same week in:
  • 2022: -31%
  • 2021: -41%
  • 2019: -40%.
US-mortgage-applications-2023-05-31-MBA-purchase_.png

What comes next may get sloppy. Mortgage applications to purchase a home are a forward-looking indicator of where home sales as measured by closed deals are headed in a month or two. The 7% mortgages are indigestible at current home prices – something has to give, and it’s not going to be mortgage rates.
And the backward-looking data on sales volume, such as those by the National Association of Realtors, has already been lousy, amid rising supply, plunging volume, and increased days on the market, while even investors pulled out.
That investors pulled out of the housing market was confirmed by Redfin today: Purchases by investors plunged by 49% year-over-year in Q1 in the metros tracked by Redfin.
US-investor-purchases-Redfin-2023-05-31.png

“Widespread economic uncertainty and recession fears are also prompting investors to pump the brakes. Some investors may be moving their money into other asset classes that offer better returns, such as stocks and bonds,” Redfin said.
The biggest year-over-year drops of purchases by investors:
  • Nassau County, NY: -67.9%
  • Atlanta, GA: -66%
  • Charlotte, NC: -66%
  • Phoenix, AZ: -64.2%
  • Nashville, TN: -60.4%
  • Las Vegas, NV: -60.2%
  • Jacksonville, FL: -56.6%
  • Philadelphia, PA: -56.5%
  • Tampa, FL: -54.8%
  • Orlando, FL: -54.7%
“Borrowing costs climbed even higher in May, meaning investors may pull back from the housing market further in the second quarter. Investor home purchases typically rise on a quarter-over-quarter basis in the spring, but we may see them fall flat or decline when second-quarter data comes in,” Redfin said.
So there goes that. The high mortgage rates had given rise to the theory that investors, who wouldn’t need a mortgage as they can finance at the institutional level, would just swoop in and pick up the pieces left behind by potential buyers staying out of the market. But that’s not happening. Investors don’t like to overpay for properties.
With the 7% mortgages now hammering the end of spring selling season, and investors pulling out on a large scale, home sales going into the summer could turn out to be dismal.
Applications to refinance existing mortgages collapsed in 2022, as mortgage rates surged, and have since then been wobbling along at the lowest volume since January 2000. The mortgage industry was among the first industries to announce mass layoffs in late 2021 and into 2022. Refinancing mortgages was a huge portion of the revenues for mortgage lenders and brokers, and it vanished.
US-mortgage-applications-2023-05-31-MBA-refinance.png
 

David Goldsmith

All Powerful Moderator
Staff member

The chaos wrought by the FOMC keeps unfolding​

As we look forward to the start of Q2 2023 earnings, financials of all descriptions are facing rising levels of liquidity risk. Banks are fighting to keep deposits on the books, while independent mortgage banks (IMBs) worry about and access to wholesale warehouse credit. But these short-term considerations may be missing the big picture staring us all in the face.Over the past several decades, increasing volatility in interest rates caused by the manic policy swings of the Federal Open Market Committee, caused a structural change in the mortgage market. Refinance opportunities became more frequent and larger in terms of volumes, allowing the industry to carry more overhead per dollar of volume. Veteran mortgage executive Bill Dallas provided some insight into that question in what's interesting is almost none [of my clients] have a lot of perspective about the mortgage business. A lot of them have never been in an environment that is predominantly purchase. I was raised in that environment. I spent my first 20 years in an environment where we didn't have refinances really. Everything was a purchase. I think they're struggling with that. And then the second shoe that hit them all is margin compression, and product compression, which they weren't expecting. Almost everybody's business model that I saw underestimated the amount of compression on the gross revenue side of their business."

Remember the glib characters who were talking about an end to Fed rate hikes and 5% mortgage loans earlier this year? Now, with [] and the U.S. consumer essentially ignoring the FOMC, the question comes as to how much higher do interest rates need to go in order to cool off the housing sector? Moreover, there is a growing sense among economists that low single-digit interest rates maintained by the Fed during 2020-2021 may have caused more damage than benefit.
For mortgage lenders, the prospect of interest rates [R] suggests a return to a business model that is predominantly focused on purchase mortgages. Since the cost of closing [R], the expense structure of the industry must change to accommodate. For many lenders accustomed to reaping profits from refinance transactions, a return to purchase lending likely means the end of the road.
Adding to the already substantial challenge facing lenders in the shift to a purchase loan market is the continuing distortion of the money markets caused by the Fed. Because the FOMC so far refuses to sell its $3 trillion portfolio of mortgage-backed securities, the shape of the yield curve is inverted, with the yields for securities around 10-12 years in maturity far lower than short-term rates. The $3 trillion in MBS owned by the Fed is a dead weight holding down long-term bond yields.
What this means in layman's terms is that lenders are losing money on loan sales into the secondary market. Since the price for Fannie Mae 6s in July is above current prices, lenders are losing money on every loan they carry from close to secondary market sale – the opposite of a normal market. This inverted or "contango" market is usually seen in physical commodities when prices rise suddenly, but by "going big" in 2020, the Fed has managed to disrupt the term structure of interest rates to an alarming degree.
When lenders do actually sell the mortgage loan into the secondary markets, the execution is likely to be less than a point premium. Indeed, many lenders are forced to sell the servicing with the loan in order to enhance the overall sale proceeds. Given the toppy valuations for mortgage servicing rights, selling is not the worst thing in the world, but the list of IMBs monetizing MSRs is growing as operating cash flows fall.
For example, United Wholesale Mortgage completed two bulk MSR sales as well as two excess servicing strip sales in the first quarter of 2023, based on servicing assets with a total UPB of approximately $98 billion. Net cash proceeds approximated $650 million from MSR and excess sales in Q1 2023 or 66 bp on the total UPB.
UWMC reported an [COLOR=var(--primaryColor1)]operating loss of $138 million in Q1 2023[/COLOR] and a negative mark on the firm's MSR over $330 million – due to falling interest rates! The machinations of the FOMC have actually increased market volatility so much that firms like UWMC are taking negative marks on MSRs when interest rates are supposed to be rising. What's wrong with this picture?
The mortgage industry faces several threats. In the near term, rising rates are hurting volumes and pricing refinance transactions out of existence. Secondary market execution is poor and likely to get worse, especially as lenders see carry on closed loans forced deeper into the red. How much money will mortgage firms lose before they simply shut their doors?
"The Federal Reserve's Dot Plots indicate that up to two more hikes could be on the table for 2023," writes Erica Adelberg of Bloomberg. "If this occurs, mortgage carry could be even further challenged relative to funds, which could push forward mortgage prices even higher relative to current months."
But perhaps the bigger existential question is whether the post-COVID world will be one with less interest rate volatility from the FOMC and an effective floor under interest rates that is well above the past decade. How will the industry look a year from now if mortgage rates stay at or above 7% for an extended period of time? Will the growth in market share of IMBs be reversed over the next decade as they slowly sell servicing assets to survive?
With interest rates rising slowly and inflation measured by home prices remaining stubbornly elevated, the world of mortgage lending in 2024 and beyond may look more like several decades ago than the past five years. If the FOMC takes the proper lesson from the errors of the COVID period, then the future movement of interest rates is likely to be muted.
As opportunities for refinancing existing residential loans shrinks relative to the overall business of mortgage lending, the structure of the industry and the flow of mortgages into the capital markets will change. Expenses per loan will rise, headcount in the industry will fall and prepayments on existing loans will fall dramatically. And once again, the mortgage finance industry will be forced to remake itself to fit this new reality. [/COLOR][/COLOR]
 

simplending

New member
Here are the typical sources of mortgage money:

  1. Banks and Lenders: The most common source of mortgage money is through banks, credit unions, and other financial institutions. These institutions provide home loans to borrowers and earn interest on the loan amount over the repayment period.
  2. Mortgage-backed Securities (MBS): Banks and private money lenders sometimes bundle and sell their mortgage loans as securities to investors in the secondary market. These securities are known as mortgage-backed securities (MBS), and investors earn returns based on the interest and principal payments made by the borrowers.
  3. Government-Sponsored Entities: In some countries, there are government-sponsored entities like Fannie Mae and Freddie Mac in the United States. These entities buy mortgages from banks and lenders, providing them with more funds to issue new loans. Fannie Mae and Freddie Mac then package these mortgages into MBS and sell them to investors.
  4. Private Investors: Besides MBS, some individual and institutional investors directly invest in mortgage loans through various channels, including real estate investment trusts (REITs) and private mortgage funds. These investors receive returns from the interest and principal payments made by borrowers.
  5. Individual Investors and Home Sellers: In some cases, home sellers may offer seller financing, where they act as the lender and finance a portion of the home's purchase price. Individual investors may also directly finance mortgages for buyers.
  6. Central Banks: In extraordinary circumstances, central banks may indirectly influence mortgage rates by setting monetary policies that impact the overall interest rate environment. This can affect the cost of borrowing for banks and, consequently, mortgage rates for consumers.
 

David Goldsmith

All Powerful Moderator
Staff member

Banks say conditions for loans to businesses and consumers will keep getting tougher​

Published Mon, Jul 31 2023 2:43 PM EDTUpdated Mon, Jul 31 2023 4:42 PM EDT

Jeff Cox
@JeffCoxCNBCcom@jeff.cox.7528
WATCH LIVE
KEY POINTS
  • The Fed's closely watched Senior Loan Officer Opinion Survey, released Monday, showed that while credit conditions got stricter, demand declined as well.
  • On the issue of consumer lending, banks "reported having tightened standards for credit card loans and other consumer loans," the survey said.
The U.S. Federal Reserve Building in Washington, D.C.

The U.S. Federal Reserve Building in Washington, D.C.
Win Mcnamee | Reuters
Lending conditions at U.S. banks are tight and likely to get tighter, according to a Federal Reserve survey released Monday.
The Fed's closely watched Senior Loan Officer Opinion Survey showed that while credit conditions got more strict, demand declined as well.
Those results are important as economists who expect a recession believe that the most likely source will be from the banking system, which has had to respond to a series of 11 interest rate hikes as well as a momentary crisis in March when three midsize institutions failed.
"Regarding banks' outlook for the second half of 2023, banks reported expecting to further tighten standards on all loan categories," the Fed said in a survey summary. "Banks most frequently cited a less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans as reasons for expecting to tighten lending standards further over the remainder of 2023."
On the issue of consumer lending, banks "reported having tightened standards for credit card loans and other consumer loans, while a moderate net share reported having done so for auto loans."
Banks also said they are raising the minimum level for credit scores when giving personal loans and are lowering credit limits in the $1.9 trillion consumer-loan space.
In the critical $2.76 trillion commercial and industrial lending segment, the survey noted that a "major" share of banks said they have seen lower demand for loans amid tightening standards across all business sizes.
Commercial real estate also saw a large share of banks saying they have put more restrictions on standards along with weaker demand.
Fed officials say they are aware of conditions in the banking sector, though they continue to raise interest rates to try to bring down inflation.
At his-post meeting news conference last week, Fed Chair Jerome Powell said he expected the loan survey to be "consistent with what you would expect."
"You've got lending conditions tight and getting a little tighter, you've got weak demand, and you know, it gives a picture of a pretty tight credit conditions in the economy," Powell said.
The Fed hiked its key interest rate another quarter percentage point at the meeting, taking it to a target range of 5.25%-5.5%, the highest in more than 22 years.
 

David Goldsmith

All Powerful Moderator
Staff member

U.S. Mortgage Rates Jump to Highest Level Since 2002​

The average 30-year fixed-rate mortgage has climbed above 7 percent, making it harder for buyers to afford homes, which are already in short supply.
U.S. average 30-year fixed-rate mortgage

Mortgage rates surged to a 21-year high this week, a jump that will make it even harder for buyers to afford homes in a market hampered by high prices and low inventory.
The average 30-year fixed-rate mortgage — the most popular home loan in the United States — was 7.09 percent, up from 6.96 percent last week, Freddie Mac said on Thursday. A year earlier, the 30-year rate was 5.13 percent.
Analysts say they expect mortgage rates to remain lofty in the near term, and to start cooling only gradually by the end of the year. The current rate is the highest since April 2002. Since then, home buyers enjoyed years of falling rates, which even dipped below 3 percent at the beginning of the pandemic.
But as mortgage rates began abruptly rising last year, when the Federal Reserve started lifting interest rates to rein in rapid inflation, the housing market has stagnated, as owners with low mortgage rates have been unwilling to put their homes up for sale.

In June, sales of existing homes fell nearly 19 percent from the year before, according to the National Association of Realtors. The scarcity of listings has kept housing prices elevated: The median price of an existing home was $410,200 in June, the second-highest since the organization began tracking the data in 1999, down only marginally from a high of $413,800 a year ago.

And experts do not think the housing market will cool off anytime soon. On Tuesday, Goldman Sachs revised upward its forecast for home prices, predicting a 1.8 percent rise in prices this year and 3.5 percent jump in 2024. “Affordability remains burdensome,” analysts at the bank said in a report, citing a tighter housing supply and a steady demand for homes.

That’s bad news for would-be home buyers like Kathleen Schmidt, who rents a house in Toms River, N.J., with her husband and two teenage children. She said that they were trying to save for a 20 percent down payment on a townhome nearby, and that the jump in mortgage rates was discouraging.

“I just felt in the pit of my stomach: We are never going to be able to buy a home,” said Ms. Schmidt, who owns KMSPR, a public relations firm for authors and publishers.

“My dream forever was to own a home someday because it’s something my parents never did,” she added. “We want something left for our kids.”

Affordability is a persistent challenge for home buyers, said Jeff Ostrowski, an analyst at the personal finance company Bankrate, who predicted that rates would remain elevated for some time.

“I think buyers are going to have to buckle their chin straps and figure out how to make it work,” he said.

The scarcity of existing homes for sale has pushed buyers to consider new construction. The sale of new homes climbed nearly 24 percent in June from the same period a year earlier, the Census Bureau reported. Housing starts, a measure of the construction of new homes, increased about 6 percent in July from the previous year.
“The builders are making profits, and their stock margins have increased from a year ago,” said Lawrence Yun, the chief economist at the National Association of Realtors. He added that national builders like KB Home, Lennar and Toll Brothers would continue to add inventory to make Wall Street happy, but that they were focused more on higher-priced homes.

For home buyers, finding affordable options remains difficult. The Federal Reserve has lifted its policy interest rate, which underpins borrowing costs across the economy, to the highest level in 22 years as it tries to slow inflation by cooling the economy. Although price pressures have abated, with the annual rate of inflation moderating from nearly 9 percent last year to just above 3 percent last month, a recent uptick in gasoline prices could prop up inflation figures.
Officials at the central bank have suggested that further rate adjustments could be possible this year. They expect to cut rates in 2024, but they think it could be several years before rates return to the lower levels that were common before the pandemic.

Mortgage rates generally track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to it all. On Thursday, the 10-year yield rose above 4.3 percent for the first time since 2007.
For home buyers and market watchers, the question remains, how long will mortgage rates remain high?
Mr. Yun predicted that rates would slowly start to ease by next spring or even by the year’s end, coming down to 6.5 percent, which is still more than double the rate in 2021. But he said the Fed’s fight against inflation and the recent downgrade in the nation’s credit rating continued to put pressure on mortgage rates.
“The housing market is in a tough spot,” he said.
 

David Goldsmith

All Powerful Moderator
Staff member

Banks Don’t Love Rich Mortgage Borrowers as Much as They Used To​

The Fed’s interest-rate hikes and recent bank failures mean lenders aren’t competing so fiercely for jumbo loans​

im-837888

PHOTO ILLUSTRATION BY EMIL LENDOF/THE WALL STREET JOURNAL; ISTOCK
By
Ben Eisen
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Rachel Louise Ensign
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Updated Aug. 21, 2023 12:00 am ET




Sheila Smith was set to get a mortgage for about $750,000 to buy an investment property in Sedona, Ariz., earlier this year. The lender, a regional bank, offered a starting interest rate of about 5%, well below the going rate.
 

David Goldsmith

All Powerful Moderator
Staff member

As mortgage rates soar over 7%, an unaffordable housing market is becoming even more expensive —​

An already miserably unaffordable housing market is getting more expensive.
As mortgage rates top 7% — the highest they’ve been in 21 years according to Freddie Mac — home buyers face ballooning costs. Some housing experts are warning that rates could keep climbing toward 8%.
What does this mean for house hunters? Even ever-optimistic real estate pros say buyers and sellers must adjust their expectations.

“I don’t like to be ‘doom and gloom,’ this is my book of business,” said Bess Freedman, CEO of Brown Harris Stevens, a national real estate firm. “I still say real estate is the best long-term investment. But there has been a shift. It is flawed for people to assume that just because inflation has started to move in the right direction, that mortgage rates will go down, too.”
Despite recent reports that inflation is cooling, it’s still too high and the economy too hot — and for the housing market, that’s not good, said Freedman.

“The fact that we are seeing rates at these highs is having an impact on the housing market,” Freedman said. “Rates have doubled. Inventory is constrained. Prices are still elevated. Those three things are creating a sluggish housing economy.”
And there is little to suggest much of that will change in the near term, Freedman said, given the Federal Reserve’s continued concerns about inflation, which puts further rate hikes back on the table.
“Could rates go higher? Possibly,” Freedman said. “I don’t see any catalyst for them to go down. Because of that, people have to get their minds wrapped around where rates are now.”

Impact on the housing market​

As rates for a fixed-rate 30-year mortgage have surged during the past 31 months — up from the lowest weekly average rate of 2.65% in January 2021 according to Freddie Mac — the payment made by a home buyer of a median priced home who put 20% down has risen by more than $1,200 a month. This has pushed buying a home out of reach for many people.
Buyers who are still in the market are finding historically low available inventory.
Because mortgage rates were so low during the pandemic, with people buying or refinancing into loans at 2% or 3%, there is little incentive for them to sell and buy another home at 6% or 7% or higher.

And due to the low inventory, prices are staying elevated. Median home prices hit their second highest level on record in June. At $410,200, they were just 0.9% less than the all-time high of $413,800 hit just the year before.
“We are at a critical juncture,” Lawrence Yun, chief economist for the National Association of Realtors, wrote in an online post on Thursday.

Minutes from the last Fed meeting, released this week, revealed continued concerns about inflation if the economy and labor markets don’t cool down, suggesting another rate hike may be on the table during the three remaining meetings this year.
That, along with Fitch’s downgrade of US debt, have exerted upward pressure on longer term borrowing rates, Yun said.
This week, the yield on 10-year US Treasuries crossed over the 4.2% threshold it had been bumping up against to 4.3% on Thursday, its highest level in over a decade. That’s a tipping point, according to Yun.
“If it breaks past that, then the momentum, however irrational, could push it up toward 5%,” he wrote. “That’s bad news for mortgage rates which correspondingly may rise to 8%,” he said.
At the current average mortgage rate of 7.09% the buyer of a median priced $410,200 home will pay $2,203 a month in principal and interest, according to calculation using a Freddie Mac tool. In January 2021, when the median home price was about $100,000 lower at $309,900 and interest rates were more than 4 percentage points lower at 2.65%, a home buyer locked into $999 a month payments.
“The increased mortgage rate is exacerbating housing affordability as home prices are climbing in this limited inventory environment,” said Jessica Lautz, deputy chief economist at NAR. “Something has to give for rates to come down, and that something is the next decision by the Fed.”

How did we get here?​

This isn’t where forecasters thought we’d be, said Melissa Cohn, regional vice president at William Raveis Mortgage.
“We thought mortgage rates would be much lower by now,” she said. “All these Fed rate hikes were intended to slow inflation down much more quickly. But the economy has defied the rate hikes.”
Fed officials hiked interest rates to the highest level in 22 years. And although the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates.
The market is pricing in the potential for another rate hike, Cohn said, and there is a fair amount of risk in the economy, at this point. Lenders are taking note of that risk, keeping rates higher.

“The banks are protecting themselves,” she said. “Banks are trying to protect their bottom line.”
Unfortunately for home buyers, rates could go higher and are expected to stay elevated, said Cohn.
The consumer continues to spend and hiring continues, she said.
“Inflation will only truly drop when people are spending less money and there are fewer jobs,” Cohn said. “As long as the employment situation remains as strong as it is, it will be hard to get inflation down on an ongoing basis.”
The Fed will hold three more rate-setting meetings this year, in September, November, and December.
“The rest of the year we will be waiting to see what the Fed is going to do,” Cohn said. “I don’t see any true relief until next year.”
 

David Goldsmith

All Powerful Moderator
Staff member

Nervous lenders retreat in NYC​

JPMorgan becomes No. 1 in New York property financing as caution, distress grip industry

After more than a decade of rock-bottom interest rates, real estate lenders and borrowers in New York City are in a precarious situation.
The rapid rise of rates and declining property values in some sectors have prompted lenders to be more selective about what sectors they lend in — and to whom. Most are sticking with current customers but being extremely cautious about adding new ones.


“Their expansion is very guarded. It’s more opportunistic,” said Valley National Bank executive Chris Coiley.
As a result, the volume of loan issuance has plummeted over the past year. Owners of properties with sinking values have found it difficult to refinance expiring debt, and holders of that debt have no good options for how to proceed.

This is especially true in the office sector, where the expansion of work-from-home policies has punctured occupancy rates, driven down rents and turned some lower-class office buildings’ debt into something resembling a toxic asset.
Lenders-chart-1.jpg

Lenders are trapped in the sinkhole. They can either allow borrowers to kick the can down the road over and over again, or foreclose on the properties. Lenders have little appetite for the latter because selling them wouldn’t cover the debt and most don’t have the bandwidth, financial flexibility or expertise to hold, renovate and re-tenant office properties to improve their valuations.
The situation leaves everyone involved with just one viable option — buy time in hopes that macro conditions improve.
The Real Deal examined mortgages recorded in city records between July 2022 and July 2023 to rank the biggest lenders in New York City real estate. According to the data, the dollar volume issued by the top 20 lenders in NYC dropped to $26 billion from $30.5 billion in the previous year. The total number of loans for the top 20 dropped to 12,080 from 16,682 — a 28 percent decline.

Lenders’ individual rankings, meanwhile, were greatly affected by mergers and acquisitions. The banking crisis earlier this year led to some distressed banks being sold to other institutions.
“We’ll see a little more consolidation,” said Marcia Kaufman, CEO of Bayport Funding. “I think that’s normal. That’s a cycle, too. We’ve seen it in the past. They consolidate, and then there’s little guys that pop up again.”
Indeed, Signature Bank, which collapsed this year, had been launched in 2001 by an executive whose bank had been acquired in 1999 by HSBC.

JPMorgan Chase once again tops the list of most active New York City lenders, with nearly $5.1 billion issued on 3,527 loans. However, those numbers were inflated by the bank’s acquisition of the collapsed lender First Republic Bank.

First Republic issued $1.8 billion in real estate loans, without which JPMorgan’s volume would have been $3.3 billion. Even with First Republic’s loans, JPMorgan’s total fell by 25 percent, from 4,692 in the previous ranking.
Lenders-chart-2.jpg

Strip out the First Republic purchase and JPMorgan’s dollar amount would have been No. 2 behind Wells Fargo, which issued $3.6 billion on 1,096 real estate loans. Wells Fargo was second on the 2022 list.
Mergers and acquisitions affected other lenders in the top 20 as well. Valley National Bank jumped from No. 12 last year to No. 5 on the basis of its acquisition of the United States division of Israel’s Bank Leumi International. Combined, the two banks issued $1.3 billion in loans, primarily in multifamily, after Valley alone lent $844 million the year before.
Similarly, New York Community Bank jumped to No. 7 after not being ranked last year. Its purchases of Signature Bank loans and Flagstar Bank helped vault its dollar amount from $780 million last year to $1.2 billion this year, with almost all of it coming from the commercial sector. NYCB did not buy Signature’s multifamily loans, prompting speculation about the portfolio’s quality.

M&T Bank’s lending total jumped from $275 million last year to $1 billion. It purchased People’s United Financial in April 2022, but it’s unclear how much the acquisition juiced its real estate lending in New York City.
The largest lending deal of the year was by ING Capital, which handed Brookfield Properties a $750 million mortgage on 660 Fifth Avenue, formerly known as 666 Fifth Avenue. That was the only New York City real estate loan the firm issued for the entire year, but it was enough to rank it No. 17.
JPMorgan’s two biggest loans were for $200 million each. One went to the Durst Organization on its 51-floor office building 4 Times Square, which Durst developed in the 1990s. The other was to Josh Gotlib’s Black Spruce Management for a block of 408 rental apartments at 685 First Avenue in Murray Hill.
Wells Fargo scored four loans above the $300 million threshold, led by $385 million to SL Green for One Madison Avenue. Wells Fargo also issued a $189 million loan to SL Green for the property.
Breaking out residential loans from the total shows JPMorgan topping that category with $3.1 billion issued on 2,705 deals, and Wells Fargo at No. 2 with $1 billion on 1,005 loans. On the commercial side, Wells Fargo topped JPMorgan with $2.6 billion despite issuing only 58 loans. JPMorgan hit $1.8 billion on 719 loans.

Apollo Capital, part of Apollo Global Management, stepped up its real estate lending over the last year with $1.3 billion, of which $1.1 billion went to commercial properties. It issued just $232 million in real estate loans the prior year.

 

David Goldsmith

All Powerful Moderator
Staff member

The 1% down payment is here. Is it a win-win — or should cash-strapped homebuyers avoid it?

Small down payments can be a boon for some, but others worry about a possible wave of defaults

Home buyers, beware.

With mortgage rates at multi-decade highs, business has dried up for mortgage lenders. Few home buyers are keen to take on a 30-year mortgage with a rate of over 7%, and even fewer homeowners find the need to refinance, having secured ultralow rates from the pandemic days.

To drum up business, some lenders have positioned various products to entice homeowners — particularly allowing buyers to put down just 1%. Lenders say they are trying to make homeownership more affordable for the prospective home buyer.


Last month, real-estate listing company Zillow Z recently announced a new program that allowed eligible buyers in Arizona to put down as little as 1%, with Zillow contributing an additional 2% at closing to meet the conventional minimum requirement. Borrowers are required to take out mortgage insurance, as the amount is less than 20% of the property’s purchase price.

Rocket Mortgage, another large lender, offered a very similar 1% down-payment product to its clients in May. Rocket would cover the remaining 2% needed to reach the minimum requirement for conventional loans. This product also eliminates mortgage insurance, which is typically required when buyers put less than 20% down.

Lenders say they are trying to make homeownership more affordable and say the 1% down payment comes with strict requirements. But skeptics see shadows of the subprime mortgage crisis.

The typical U.S. home buyer is putting down $42,000 on their home, according to a recent report from real-estate brokerage Redfin RDFN . The median down payment was equal to 10% of the purchase price. Many young homeowners in particular rely on family for that down payment, the company’s chief economist also wrote in a September blog post.


But the emergence of some of these promotions has some industry watchers concerned that lending 99% of the purchase price — without more due diligence on borrowers’ ability to repay their loans — led to the subprime mortgage crisis.

Mortgage originations will reach a projected $1.7 trillion in 2023, down an estimated 60% from 2021, after the U.S. Federal Reserve raised its benchmark interest rate in an effort to curb rising inflation over the last 18 months.

“The mortgage industry is getting crushed,” said Jason Mitchell, chief executive of Jason Mitchell Group, a Scottsdale, Ariz.-based real-estate brokerage. “You’ve got to find a way to produce mortgages,” he told MarketWatch.

Hence, the tempting 1% down payment. “There are not enough people that are buying houses because no one wants to sell their home,” he added. “They have to find ways to get people into the funnel with things like a 1% down payment.”


A cautionary tale
Glenn Migliozzi, a professor of finance at Babson College, a private business school in Wellesley, Mass., recalled a conversation he had 17 years ago, which turned out to be a cautionary tale. When working with a hedge fund in 2007, he came across a man who owned five condos, despite only making $50,000 or $60,000 a year.

“I almost fell out of the chair,” he told MarketWatch. “I said, you know, I have great interest — can you walk me through it?”

The man told Migliozzi, “prices just go up.” There was one other red flag — the budding property mogul told him: “They’re not checking my income. I’m making money hand over fist.” When the Great Recession happened, Migliozzi said the man with the five condos ended up declaring bankruptcy.

When he heard about some of the mortgage products that lenders are offering home buyers today, in the face of high rates and high home prices, Migliozzi said he’s feeling a sense of deja vu.

“Folks are putting down 1% — this looks and smells like the ‘no income-check loans, risk profile from 2006/2007,” Migliozzi said.

Lenders defend 1% down payment
Lenders stand by their 1% down-payment offers. For those who have locked out of the real-estate market due to the upfront costs, “down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,” Orphe Divounguy, a senior macroeconomist at Zillow, said in a statement.

To qualify, buyers must be in Arizona, and first-time buyers, and must complete an education course on homeownership, and intend to occupy the property as their primary residence. They require a minimum qualifying FICO FICO score of 620, and an income of no more than 80% of the median income in the area where the property is based.

Bob Walters, CEO of Rocket Mortgage, expressed similar sentiments. “We talk with people from all walks of life every single day – many of whom are ready to own a home, and could easily make the monthly mortgage payments, but are having trouble saving for a down payment,” he said in a statement.

To qualify, Rocket also has the FICO requirement of a score of 620 or better, requires the home purchased to become a primary residence, that buyers can’t make more than 80% of the median income in the area they are looking to buy.

The program “is a response to that feedback and the latest example of Rocket’s commitment to creating programs that help make homeownership more attainable,” Walters added.

A 1% down payment comes with one big risk: negative equity if the house value falls. If the owner runs into financial difficulties, that makes it more difficult to sell to avoid foreclosure.

But putting so little down and having 1% equity in a home comes with one big risk: If the value of the home falls and the owner has difficulty making mortgage payments, selling the home to avoid foreclosure is off the table — at least without incurring significant losses.

Prior to the subprime mortgage crisis, ‘NINJA’ loans were more common. NINJA stands for “no income, no job, no assets.” Lenders have become much more strict about who they lend to since the 2008 financial crisis.

Yet being able to put down very little on a home is “a very powerful tool to expand access to credit, if it is done responsibly,” Mitria Wilson-Spotser, vice president and federal policy director at the Center for Responsible Lending, told MarketWatch.

“Most lenders actually write mortgages to the conventional mortgage standard, which is the standard that’s established by Fannie Mae and Freddie Mac, and the Federal Housing Administration,” she said. “A 1% down payment does not violate any of those requirements.“

Credit quality and financial stability
In order to avoid predatory lending, Wilson-Spotser said it’s not so much a question of how much you put down as a down payment, but it’s more a question of whether or not you have the credit quality, and have the financials to honor the terms of the loan.

Lenders aim to originate “responsible” loans that borrowers can actually afford over 30 years, Wilson-Spotser added. “All those controls were put in place after the last housing crash, so that’s why there’s less concern about the 1% figure itself — because the underwriting standards are much more stringent now.”

That said, putting as little as 1% down also means buyers don’t have as much of a stake in a home, Mitchell said. One could theoretically walk away from the home if payments were an issue, and not lose too much money.

If a homebuyer only puts down 3.5% on a Federal Housing Administration mortgage, or 1% down on a Rocket or Zillow mortgage, that person may be more likely to say, “Let it go, I’m only losing six grand,” Mitchell said. “It’s a much bigger pill to swallow if you’re losing $80,000.”

While home prices look steady for now given the lack of inventory on the market, “no one knows what three or four years down the road looks like,” he added. “It’s hard to say if that creates a foreclosure environment. But what I can say is, it certainly makes it more susceptible.”
 
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