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» REPORT: REPURCHASE REQUESTS STAY HIGH, BUT NEW CLAIMS MOVE PAST PEAK An analysis released by Keefe, Bruyette & Woods (KBW) found representation and warranty costs for loan repurchases remained elevated in Q 3 2012. New mortgage repurchase requests were mixed for companies that reported them, while outstanding requests were mostly higher. According to the report, current losses can mostly be attributed to loans sold to the GSEs. Fannie Mae's repurchase requests totaled $2.02 billion in Q 3 2012, while its balance of outstanding buybacks increased to $16.2 billion from $14.6 billion in Q2. Freddie Mac's third-quarter requests totaled $819 million, and the dollar value of those outstanding ticked up to $2.94 billion from $2.91 billion the previous quarter. The outlier in terms of buybacks was Bank of America (BofA), which reported a decline in new repurchase claims—from $8.21 billion in Q2 to $4.98 billion in Q 3—even as the company expanded its rep and warranty loss reserves. Third-quarter claims fell in line with firstquarter levels of $4.7 billion. BofA attributed the sharp increase in Q2 to "both higher privatelabel claims and GSE claims as a result of the company's ongoing dispute with Fannie Mae." While KBW expects claims for the overall industry to remain elevated through next year, the firm notes that trends suggest new rep and warranty claims from the GSEs seem to have peaked in 2011. However, given the high level of outstanding requests, "lenders are likely to see elevated levels of provisions over the next year as well," KBW said in its report. In September, the Federal Housing Finance Agency (FHFA) released an announcement outlining a new rep and warranty framework for conforming loans sold to the GSEs beginning in 2013. The major changes include a 36-month statute of limitations for repurchase obligations on loans that meet specific requirements. The new framework also includes a 12-month statute of limitations for Home Affordable Refinance Program loans that meet the same conditions. These changes should be viewed as "a positive for the mortgage industry," KBW's analysts said. "Underwriting guidelines are very tight currently, partly because of uncertainty about GSE rep and warranty risk, and to the extent this risk becomes more transparent, lenders could potentially be more flexible in their underwriting standards," according to KBW. VISIT US ONLINE @ DSNEWS.COM RADAR LOGIC QUESTIONS RECOVERY'S SUSTAINABILITY Despite reports of improvements in home prices and sales, Radar Logic argues that upon closer examination, the housing market is not doing as well as assumed. According to a report released by the company in December 2012, as of September 25, 2012, Radar Logic's RPX composite price increased 5.2 percent year-over-year across 25 metro areas. In addition, sales activity rose 12.3 percent over the one-year period. However, the increase in prices tracked by Radar Logic is not a result of "significant appreciation in household-owned homes," the company said. Instead, it is due to a decline in "motivated sales," or sales of foreclosed homes and REOs, which are sold at significant discounts compared to non-foreclosures. Radar Logic's composite shows homes sold through motivated sales were 34 percent lower than the composite price for all sales in September. Motivated sales fell annually by 39.2 and monthly by 9.4 percent as of September 25. As a share of total sales, motivated sales have declined to just 13 percent, the smallest share since January 2008, according to Radar Logic. On the other hand, the share of "other sales" rose by 27.9 percent annually over the same time period. Radar Logic's report further stated "a significant and increasing share of demand in the last year has come from institutional investors rather than households." Among the 25 metro areas tracked, the share of purchases from institutional investors increased to 9 percent from 7 percent a year earlier. Monthly, investor purchases also jumped 42 percent. While investors are helping to push up prices, Radar Logic says the growth is not likely to last should prices for REOs see an increase. "If prices rise to a point where investors' expectations of future home price appreciation do not support their desired returns, then demand for REO will decline and prices could fall again," the company explained. Radar Logic's report also pointed to data from Lender Processing Services, indicating a total of 5.3 million properties are in distress. Radar Logic believes that at some point, "these distressed properties will make their way onto the market, and as they do they will weigh on home price metrics." In addition to the supply of inventory that hasn't yet hit the market, the more than 10 million estimated underwater borrowers also gives Radar Logic a reason to question the authenticity of the recovery. If prices rise high enough, the analytics company expects to see a supply of homes unleashed from homeowners who were once prevented from listing their properties due to negative equity. Thus, not only is demand expected to dry up from investors, but supply is also expected to increase. So, instead of a steady rise toward recovery, Radar Logic expects a different pattern to play out. "We believe that an alternative scenario is equally likely, one in which housing price metrics rise and fall in a saw-tooth pattern until the shadow supply has been substantially absorbed," the analytics firm stated. 35

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