Daily Mortgage News & Commentary

May 28: Container homes & barndominiums perfectly acceptable; Lehman Bros. update; recession primer: what is the NBER?

Get up, stand up, stand up for your rights. Residential lending and the court system are inextricably linked. (See Lehman Brothers story below.) But we’re not alone. Intellectual property and copyrights are big things. For example, just ask The Verve. Remember the band’s hit “Bittersweet Symphony” in 1997? Mick Jagger and Keith Richards said, “Not so fast” and sued for songwriting credit and 100 percent of the royalties for the song, claiming that “Bittersweet Symphony” was built around a sample of an orchestral version of The Rolling Stones’ “The Last Time.” For over 20 years, Verve lead singer Richard Ashcroft didn’t receive a dime from the success of “Bittersweet Symphony,” but that changed a couple years ago year when Jagger and Richards granted back the rights. Perhaps a) Ashcroft learned his lesson and the Stones proved a point, and/or b) Mick and Keith have a combined net worth of approximately $1 billion already, so what the heck? (Although The Saturday Spotlight took today off for the holiday, for more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)

Thoughts on housing prices

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This week the Commentary had, “Fairway Independent’s Jennifer S. sent over this tweet from Congress. ‘The median annual pay during the Great Depression was 22 percent of the cost of an average home. Today it’s 14 percent. That means that pay relative to home cost made it easier to buy a home during the Great Depression than right now.’ Originators have their work cut out for them in becoming subject matter experts for their clients in this rate and affordability environment!”

The note prompted Banner Bank’s Aaron M. to scribe, “My initial thought (after reading this) was just how out of whack the price of housing is to income. But then I remembered a young homebuyer who once told me she’d never have a used toilet’ in her home so she demanded buying a new home. I’m sure I obliged, and put her into a 44% DTI with a smile and sent them down the road. The reality is she could have paid much less for a smaller, less glossy version of her dream at the ripe old age of 20-21 years old.

“I just wonder is it the price of housing out of whack or are our 3,000 + square foot bidet filled, marble finished homes out of whack because we just demand too much as a consumer and have confused need with want so the price for ‘standard’ equipment has just gone up. I visited Costco last weekend (admittedly buying things I didn’t need) and couldn’t get the video you posted a few weeks back out of my head.

“We want what we want, and I’m just as guilty of living large, but I’m inclined to think we have created our own hell over time by successive generations slowly demanding more and more until we’re here and the price point of not just housing but all goods and services is going to break America.” Thank you, Aaron!

Remember Lehman Brothers?

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If you weren’t in the biz in 2008, never mind reading this although it does give you an idea as to the perseverance of attorneys and accountants. I sold plenty of loans to Lehman Brothers and its subsidiaries, and why not? It offered great prices and underwriting tailored to meet the needs of lenders and borrowers around the nation. The company’s implosion was inextricably linked with the global financial crisis and whose subsequent bankruptcy is often rated as the starting line of the Great Recession, still in fact technically exists.

And Lehman Brothers is moving forward. Just ask any lender who it has gone after in the courts. It’s been in court since the implosion, and is staffed mostly by lawyers and accountants who have been in charge of selling off the company’s assets and paying out to creditors and doing a fine job of it. In 2012, only about 6 percent of outstanding Lehman Bros debt was paid, and overall the initial estimate for the percent of assets that unsecured creditors would eventually recover was a little over 21 percent. But as of this April, they’ve actually gotten back 46.5 percent of assets.

(This is not an ad, but if you’re a lender and want information on defending against repurchases or buybacks from a previous era, one place to start might be James Brody at Johnson | Thomas.)

Recession basics

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At some point those predicting a recession will be right, just as predicting an economic expansion will eventually be correct. Economies function in cycles, regardless of administration or foreign policy. And the “old” definition of a recession being two quarters of negative GDP, while simple and easy to understand, is stale and not accurate. And an inverted yield curve does not always predict a recession. Let’s take a look.

We saw this week that inflation remains too strong for the Fed’s liking and the committee discussed the negative GDP print in Q1 specifically. Participants commented that after its rapid growth in the last quarter of 2021, net exports and inventory investment’s large negative contributions to growth caused real GDP to decline in the first quarter of this year. These volatile components present few indications about subsequent growth and the Fed thinks that there is significant underlying momentum in the domestic economy due to advances in household spending and business fixed investment combined with the further tightening of labor market conditions. Fiscal policy is intended to act as a natural drag on the economy while the supply chain issues get worked out, and a few members noted that there were signs that the pandemic-related strains on labor supply were easing.

The National Bureau of Economic Research (NBER) has the responsibility of determining when a recession begins and when it ends. More specifically, it is the Business Cycle Dating Committee within the NBER that decides. Forget “a recession occurs any time you have two consecutive quarters of negative Gross Domestic Product (GDP) growth.” According to the NBER, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators like real GDP, industrial production, and wholesale-retail sales. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

So the NBER looks at multiple factors when determining whether or not we are in a recession. But because “a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity… the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis.”

And looking at employment, NBER’s Business Cycle Dating Committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.

Recall that the NBER officially declared an end to the economic expansion in February of 2020 as the U.S. fell into a recession amid the coronavirus pandemic. According to the NBER, the recession was the shortest on record ending only two months later in April 2020.

Loan officers should know that there is no single way to predict how and when a recession will occur since economists assess several metrics to determine whether a recession is imminent or is already taking place. NBER aside, according to many economists there are some generally accepted predictors that when they occur together may point to a possible recession. Leading economic indicators (the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator) are watched, as is the Treasury yield curve. Officially published data series from various government agencies that represent key sectors of the economy, such as housing stats and capital goods new orders data published by the U.S. Census, are also monitored. Changes in these data may slightly lead or move simultaneously with the onset of recession, in part because they are used to calculate the components of GDP, which will ultimately be used to define when a recession begins. Last are lagging indicators that can be used to confirm an economy’s shift into recession after it has begun, such as a rise in unemployment rates.

Container homes: perfectly acceptable, but an acquired taste?

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Sure many parts of the nation are turning to accessory dwelling units (ADUs) to help with the crunch. What about the role of container homes in helping solve some of the issues facing a housing shortage? A few folks have written to me about them, and more specifically if Freddie Mac and Fannie Mae will buy them. Yup, each Agency addresses them, but of course the question is whether lenders have collateral overlays!

In Freddie Macs Guide Section 5605.5(e). “Non-conformity to the neighborhood and non-traditional or unique property types. When the subject property does not conform to its neighborhood in terms of type, design, age, materials, or techniques used in its construction, the appraisal must evaluate the effect the nonconformance has on the property’s value and marketability.

“Mortgages secured by non-traditional types of properties are eligible for delivery to Freddie Mac. Examples of non-traditional or unique property types include, but are not limited to, “barndominiums” (barn conversions or barn-style buildings), “shouses” (living-space and work/storage combinations), berm homes, log homes, and geodesic dome dwellings. The appraiser must demonstrate that the dwelling type or style is marketable and must ensure the property has an acceptable quality and condition rating. Additional analysis may be required to determine whether the design or style represents a mixed-use configuration. (See Section 5601.5 for mixed-use requirements.)

“The appraiser may use traditional homes as comparable sales for non-traditional or unique properties as long as the appraiser determines and adjusts for any differences between the subject property and the comparable sales and can justify and support the use of the comparable sales in the appraisal report.

Fannie Mae also addresses “Unique Housing Types.” “In the appraisal and appraisal report review processes, special consideration must be given to properties that represent unique housing for the subject neighborhood. Mortgages secured by unique or nontraditional types of housing, including, but not limited to, earth houses, geodesic domes, and log houses, are eligible for delivery to Fannie Mae provided the appraiser has adequate information to develop a reliable opinion of market value. It is not necessary for one or more of the comparable sales to be of the same design and appeal as the property that is being appraised, although appraisal accuracy is enhanced by using comparable sales that are the most similar to the subject property. On a case-by-case basis, both the appraiser and the underwriter must independently determine whether there is sufficient information available to develop a reliable opinion of market value. This will depend on the extent of the differences between the special or unique property and the more traditional types of houses in the neighborhood and the number of such properties that have already been sold in the neighborhood.

“When appraising unique properties, if the appraiser cannot locate recent comparable sales of the same design and appeal, but is able to determine sound adjustments for the differences between the comparables that are available and the subject property and demonstrate the marketability of the property based on older comparable sales, comparable sales in competing neighborhoods, the existence of similar properties in the market area, and any other reliable market data, the property is acceptable as security for a mortgage deliverable to Fannie Mae.

“If the appraiser is not able to find any evidence of market acceptance, and the characteristics of the property are so significantly different that he or she cannot establish a reliable opinion of market value, the property is not acceptable as security for a mortgage deliverable to Fannie Mae.

“Fannie Mae does not specify minimum size or living area requirements for properties with the exception of manufactured housing (see B4-1.4-01, Factory-Built Housing: Manufactured Housing). There should be comparables of similar size to the subject property to support the general acceptability of a particular property type.

“For additional information, see B4-1.3-05, Improvements Section of the Appraisal Report.”

(Thank you to Mickey S. for this one.)

This old lady handed her bank card to the teller and said, “I would like to withdraw $10”. The teller told her “for withdrawals less than $100, please use the ATM.

The old lady wanted to know why.

The teller returned her bank card and irritably told her, “These are the rules, please leave if there is no further matter. There is a line of customers behind you.”

The old lady remained silent for a few seconds, handed her card back to the teller, and said, “Please help me withdraw all the money I have.”

The teller was astonished when she checked the account balance. She nodded her head, leaned down and respectfully told her, “You have $300,000 in your account but the bank doesn’t have that much cash currently. Could you make an appointment and come back again tomorrow?”

The old lady then asked how much she could withdraw immediately. The teller told her any amount up to $3,000.

“Well please let me have $3,000 now.”

The teller kindly handed over $3,000, very friendly and with a smile to her.

The old lady put $10 in her purse and asked the teller to deposit $2,990 back into her account.

The moral of this story is….

Don’t be difficult with old people, they spent a lifetime learning skills like this.

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is titled, “A Primer on the Federal Reserve and Mortgage Rates.” The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).

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