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STUDY REVEALS MISREPRESENTATIONS IN THE RMBS MARKET A prevalence of misrepresentations in the residential mortgage backed securities (RMBS) market at the height of the housing crisis has exposed investors to greater risk, according to a recent report authored by university researchers Tomasz Piskorski, Amit Seru, and James Witkin. The researchers studied private-label RMBS sold in 2007 in search of misrepresentations regarding occupancy status and second liens. Private-label RMBS totaled about $2 trillion in 2007. Overall, the researchers detected at least one of these areas misrepresented in one out of every 10 loans. When home equity lines of credit (HELOCs) were added to the mix of loans examined, the percentage with misrepresentations jumped to 12.2 percent. More than 27 percent of loans to non-owner occupants were categorized as owner-occupants, and more than 15 percent of loans with second liens were miscategorized to hide the second lien, according to the findings. While some might attribute these misrepresentations to low- or no-doc loans, the researchers explain they "find significant extent of misrepresentation even when we focus on fully documented loans." Misrepresentations of owner-occupancy are slightly lower for fully-documented loans, but the researchers found the opposite is true for second-lien misrepresentations, which are actually more prevalent among fully-documented loans. The researchers clarify that these instances are not simply cases where "buyers know less than the seller," but instead are cases in which "buyers received false information on the characteristics of assets." In fact, lenders—seemingly aware of the discrepancies in loan facts and representations— often charged higher interest rates on loans with misrepresentations when compared to similar, accurately-represented loans. However, the heightened interest rates were not effective in covering the added risk, according to the study. Importantly, the researchers state, "We find that these misrepresentations have significant economic consequences." Loans containing misrepresentations of occupancy status have a default likelihood 9.4 percent higher than accuratelyreported loans with otherwise-similar characteristics, while loans with non-disclosed second liens have a 10.1 percent greater likelihood of default, according to the researchers. "Because of their substantially worse performance, misrepresented loans account for more than 15 percent of mortgages that defaulted in our sample, a higher share than their proportion in the overall sample (about 10 percent)," the researchers stated in their report. They conclude industry regulation was not effective in preventing this type of fraud and detrimental behavior in the RMBS market. REPORT: RISE IN HOME IMPROVEMENT SALES CONFIRMS RECOVERY Increased profits at home improvement outlets underscore Fitch Ratings' view that the housing recovery is in its early stages. In a report released last month, Fitch pointed to "solid 4Q12 results" at Home Depot and Lowe's, which reported a 4.6 percent rise and 1.4 percent increase in 2012 same-store sales, respectively. Fitch projects the two home improvement giants will generate same-store sales growth this year of 2-4 percent, reflecting "a slightly faster growth rate in sales channels serving professionals." Fitch's forecast for Home Depot and Lowe's falls slightly below the agency's forecast of 4 percent growth in total home improvement spending in 2013 (which in turn falls below Fitch's estimated growth of 4.5 percent in 2012). The agency expects spending on home remodeling will continue to benefit from improvements in housing turnover this year. According to Fitch's forecast, existing- 44 home sales will advance 7.7 percent in 2013, while new single-family sales will increase 22 percent. Though the increase in home improvement sales reinforces Fitch's belief that the housing industry is seeing the start of a recovery, the agency says recovery will continue in "fits and starts." In the home improvement sector, Fitch said, "Growth patterns in the intermediate term are likely to be below what the industry experienced during the previous housing boom and the early part of the past decade due to slower growth in the U.S. economy and only moderately improved housing market conditions.Growth in this segment will also be restrained by tight bank lending standards, which will make it difficult for homeowners to use credit to finance remodeling projects." As such, Fitch concludes spending for bigticket remodeling projects will lag overall growth in the home improvement sector. FIRM SAYS NATIONAL HOME PRICE GAINS ARE UNSUSTAINABLE While some read recent home price gains as a sign of an improving market, Radar Logic warns the recent gains are "unsustainable" and may actually be dampening market recovery. Radar Logic attributes recent price increases to anomalous factors it considers temporary, including low interest rates and elevated investor demand. "None of these drivers are likely to last, particularly as housing prices increase," Radar Logic stated in its RPX Monthly Housing Market Report released last month, which covered market results through December 2012. The firm calculated an 11.8 percent price increase year-over-year in December, based on its RPX composite reading of 25 major metropolitan areas. Radar Logic anticipates prices will decline again as recent increases begin to repel bargain-hunting investors while simultaneously leading to bursts in supply as homeowners and financial institutions feel encouraged to list properties for sale. Already, homebuilders have begun to add to supply with a 23.6 percent rise in singlefamily housing starts year-over-year in January, according to data from the Census Bureau. According to Radar Logic, however, housing starts and sales will both subside as price declines once again attract speculative demand. Radar Logic anticipates prices will "follow such a saw-tooth pattern for a number of years." A true recovery in home prices is contingent on rising employment and a return of consumer confidence, "neither of which are much evident at the moment," Radar Logic contends. In the meantime, the firm has detected a decline in distressed home sales and a rise in corporate investor purchases. Corporate investors ramped up their activity last year, contributing 12 percent of total sales in November 2012, up from 8 percent a year earlier, Radar Logic reports. A majority of this increase took place in the nondistressed market, where corporate investors had previously been more active. Radar Logic attributes this shift away from foreclosure and REO sales to diminishing REO inventories and increasing REO prices. In fact, when corporate investors did purchase REO properties through November 2012, they paid 25 percent more than in the previous year. The prices they paid for other types of properties remained about the same. Corporate investors were most active during November in hard-hit markets. In fact, half of all corporate purchases took place in just five markets—ones considered especially affected by the housing crisis. Those markets include Miami, Los Angeles, Phoenix, Atlanta, and Las Vegas.

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