5 posts from October 2013

Recent past gives mixed signals for expanded mortgage lending

An improving economy and tight rental housing are leading more moderate-income renters to consider homeownership. In response, some community lenders are exploring whether to expand loan programs targeted to this market. With the housing collapse and high foreclosure rates still a fresh memory, new analysis by the Minneapolis Fed shows that the timing of home purchases can play a large role in foreclosure rates, especially when combined with credit scores.

Using data provided by Lender Processing Services (LPS) Applied Analytics, mortgages in Minnesota since 2000 were analyzed to better understand the likelihood of foreclosure. Borrowers with lower credit risk scores at loan origination had higher rates of foreclosure over this period. For example, among mortgages originated in 2003, 1.5 percent of borrowers with a 720+ credit score entered foreclosure within seven years, compared with 4.5 percent of borrowers with scores of 680 to 719 and 9.4 percent of borrowers with scores of 620 to 679 (see Chart 1).

Foreclosures Ch1 -- 10-29-13

Foreclosure rates were also strongly linked to timing. Mortgages originated in 2000 performed better than 2003 mortgages and much better 2005 mortgages with similar credit scores. For mortgages with low credit scores (620 to 679), the foreclosure rate after seven years was just 3.2 percent for mortgages originated in 2000, but reached 26.6 percent for mortgages originated in 2005.

These differences may partly reflect the boom and bust in Minnesota housing prices between 2000 and 2010. As home prices fell after 2007, homes with year 2000 mortgages were more likely to remain “above water”—that is, to have a value greater than the balance due on the mortgage—than homes with mortgages originated in 2003 or 2005. Borrowers with above-water mortgages have both stronger incentives and better options for avoiding foreclosure, such as simply selling. And many more mortgages originated in 2000 may have been refinanced early on, given that mortgage rates fell between 2000 and 2003.

High debt burdens were also linked to foreclosure (see Chart 2). For example, controlling for credit score, foreclosure rates for 2003 mortgages were about 50 percent higher for high-debt borrowers than lower-debt borrowers. For 2005 mortgages, foreclosures were considerably higher for both high- and low-debt borrowers compared with 2003 mortgages. The specific effect of debt levels was present but appears less pronounced, as foreclosures among high-debt mortgages were about 35 percent, while low-debt foreclosures reached almost 30 percent. (A comparison with 2000 mortgages was not possible due to insufficient data on debt-to-income ratios.)

If housing prices rise or at least remain stable over the coming years, the more encouraging performance of Minnesota mortgages originated in 2000 may provide useful guidelines to organizations contemplating new home lending programs. However, the weaker performance of loans from 2003 and 2005 shows the risks that could arise if housing prices or employment fall significantly again.

For related information, see the Minneapolis Federal Reserve Bank’s web page Housing Market and Mortgage Conditions in the Ninth District.

  Foreclosures Ch2 -- 10-29-13

After snowstorm, ranchers still surveying damage

Ranchers in the western Dakotas who were hit hard by a freak fall blizzard got some welcome news Tuesday—they can get some assistance from the federal government while they wait to find out if more aid is on the way.

For readers who are unfamiliar with the story, a little background: In early October, Winter Storm Atlas dumped several feet of snow on some parts of South Dakota, North Dakota, Montana and Wyoming. The storm came on the heels of heavy rains that left grazing lands a muddy mess, and many cattle were left exposed to a quick freeze and extremely high winds before they had a chance to grow thicker winter coats.

Reliable estimates of the number of cattle killed due to freezing, drowning or trampling aren’t available yet, but early estimates suggest that the number is easily in the tens of thousands. Anecdotal reports indicate that the devastation varied widely; some ranchers were barely affected, while others may have lost their entire herds.

The damage assessment itself has been complicated and delayed by muddy conditions created by melting snow. Immediately after the blizzard, South Dakota Gov. Dennis Daugaard announced an executive order waiving the standard requirement that ranchers dispose of carcasses with 36 hours under normal conditions. That waiver was set to expire on Friday, but was extended this week until the end of November.

Ranching is big business in the region—South Dakota is the nation’s fifth largest beef producer, and the state has five cattle for every one person. Grown cattle sell for $1,400 to $2,000. Added to cattle losses are the cost of cleanup and losses due to animal injury or sickness, all which will have a major economic impact on the state.

The other tough part about the timing of the storm is that it came during the federal government shutdown, delaying any action on a possible disaster declaration. In addition, funding for livestock disaster relief programs has expired because of the holdup over the passage of a federal farm bill.

However, on Tuesday USDA Under Secretary Michael Scuse announced that ranchers can apply for assistance under the Environmental Quality Incentives Program, a conservation subsidy that will help them pay for carcass removal and infrastructure repair.

This story will continue to develop as the extent of the destruction becomes clearer. The fedgazette Roundup will be following it, so expect updates in the future.

Negative equity declines in the Twin Cities regional housing market

A number of recent and positive trends, including home price appreciation and increased home sales, have been well documented in the Twin Cities housing market. Collectively, they suggest that the region’s housing market is continuing to recover.

More evidence of that recovery comes from the number of first-lien mortgages with negative equity, which declined by more than half between 2012 and 2013 (from 15.6 to 7.2 percent), according to calculations by the Minneapolis Fed using proprietary data from the CoreLogic Home Price Index and Lender Processing Services (LPS) Applied Analytics.

Negative equity—also referred to as being “underwater”—occurs when a borrower owes more on a mortgage than the current value of the property securing the loan. The recession and subsequent collapse of housing markets had a dramatic effect on home values, which pushed many homeowners underwater on their mortgages. In turn, this reduced the net worth of homeowners and became a drag on the economy.

Negative equity also has a number of harmful consequences for homeowners and communities. For example, despite historically low interest rates, underwater homeowners who opt to remain in their homes are typically unable to refinance into lower monthly mortgage payments. A lack of home equity removes a common financing option for home repairs and improvements. Those looking to move face high out-of-pocket costs to pay off their loan at the time of sale, which may have motivated some—particularly those severely underwater—to strategically default on the mortgage, adding to the pool of foreclosures.

Nationally, the percent of residential properties with a mortgage and negative equity dropped from 22.3 in the second quarter of 2012 to 14.5 a year later, according to CoreLogic. In the Twin Cities, easily the largest real estate market in the Ninth District, 15.6 percent of all active first-lien mortgages in June 2012 were in negative equity, according to an October 2012 analysis.

Most of these underwater mortgages were originated between 2005 and 2007 and had a negative principle equity balance amount between -1 percent and -20 percent of the appraised value of the property. The percent of underwater first-lien mortgages varied across the region, but areas especially hard hit include the east side of St. Paul, Brooklyn Park, Brooklyn Center, Farmington, Woodbury, and several suburban and exurban areas in the northwest metro and western Wisconsin (see left map).

By June 2013 (the date of the most recent figures available), the number of first-lien mortgages with negative equity declined by more than half from the previous June (see chart below). A ZIP Code analysis by the Minneapolis Fed reveals a substantial decline of underwater first-lien mortgages in many parts of the Twin Cities region, especially the northwestern suburbs of Wright and Sherburne counties (see right map).

Several areas of concern remain, though, especially where the housing market has not recovered as strongly. These areas include the east side of St. Paul, Maplewood, Brooklyn Park, Brooklyn Center, Zimmerman, and Isanti. While most areas of St. Croix County in Wisconsin improved, the share of first-lien mortgages with negative equity in that county remained higher than in the rest of the metropolitan area.

Underwater Ch1 -- 10-16-13


Underwater -- Map 1-2 10-16-13

Black fiscal gold: North Dakota oil taxes expected to keep pumping

In the midst of a federal government shutdown over raising the debt ceiling, it’s hard not to stop and gawk at North Dakota’s fiscal position stemming from rapidly rising oil and gas production in the western part of the state.

As recently as the 2003-05 biennium, oil and gas production taxes totaled just $120 million. A decade later, this tax revenue is expected to hit $5.2 billion in the current biennium through fiscal year 2015.

Comparatively little of that money—$300 million, by state statute—goes to the state general fund for lawmakers to spend as they please. Property tax relief has also been championed in recent budgets, but allocations for this priority remained unchanged at $342 million despite the rise in oil and gas tax revenue.

North Dakota has taken the unique step of funneling a significant amount of oil and gas taxes to permanent trust funds. This biennium, the state expects to divert $2 billion toward the Legacy and the Common Schools trust funds and does not include several hundred million in expected royalties from production on state lands that will also go to the school trust. (For more background and discussion on permanent trusts in North Dakota and other top energy producing states, see the recent fedgazette article, “Saving for a rainy, oil-free day.”)

But there was still plenty left over to finance new roads, schools and other infrastructure to deal with breakneck development across the Bakken oil-producing region. But rather than dramatically increase departmental budgets, the state has preferred to allocate money to special-use funds (which can be tapped for a variety of purposes), and to send more money directly to local governments to deal with local needs. These allocations also saw the largest increases in the current state budget. (For more on the fiscal trends among North Dakota local and state governments, see “Congratulations on your oil boom” in the July fedgazette.)

This tax revenue shows little sign of slowing. In late September, Department of Mineral Resources Director Lynn Helms told an audience of industry and local government officials that he expects the state’s daily oil production will double to 1.6 million barrels by 2017.

Oil & gas allocations -- 10-8-13

Refugees: From mayhem to Minnesota

Tens of thousands of refugees from global strife have settled in the Ninth District over the past decade, contributing to the workforce. In most district states, refugee arrivals have increased from year to year (see chart at bottom).

Many refugees fleeing war or oppression migrate to established immigrant communities with job openings, and that’s one reason Minnesota stands out from the rest of the district both in the number of refugees it accepts and the volatility of refugee inflows in recent years.

The state is welcoming to refugees (it ranks near the top among U.S. states in per capita refugee settlement) in large part because of the presence of social welfare organizations that serve refugees. Institutions such as Lutheran Social Services and the International Institute of Minnesota help newcomers learn English, find housing and land jobs—often in lower-paying occupations such as meatpacking, nursing assistance and grounds maintenance.

Refugee arrivals in Minnesota fell dramatically in 2008 because of a crackdown by the U.S. State Department on fraud in a program that allows refugees to join family members already in the country. Many refugees who claimed to be married or closely related to U.S. residents were in fact ineligible for settlement. Tightened federal oversight affected Minnesota disproportionately because many prospective migrants were natives of East African countries applying under the family reunification program. Minnesota refugee settlement has rebounded since 2009, and this year several refugee sponsors were expecting more arrivals than in 2012.

Montana is conspicuously absent from the chart; in contrast to Minnesota, the Treasure State accepts very few refugees. Why exactly is uncertain; one contributing factor is the small scale of social welfare initiatives in Montana compared with other district states. Most charitable groups are small, with scant resources to devote to refugee settlement.

For much more on refugees and other immigrant workers in the Ninth District, see the forthcoming October issue of the fedgazette.

Refugees -- 10-3-13