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PRO TECK EXPLAINS WHY CERTAIN MARKETS ARE UNRESPONSIVE TO LOW RATES While the trend of low mortgage rates seen in the last year has stirred up housing activity and helped to boost the market, Pro Teck Valuation Services posits a major question in its March Home Value Forecast (HVF): Why have home prices in some markets been less responsive to low rates? In Pro Teck's "Lessons from the Data" segment of its report, experts examined the type of effect the Federal Reserve's commitment to keep interest rates low was having on home prices, which have historically increased during such programs. They note that the inverse relationship between median home prices and 30-year fixed rates started to break down in 2008, exaggerating the recovery gap between markets, and they believe there are three dominant reasons why low interest rates and loose monetary policy are not boosting home prices as much as they have in the past. First, the "Lessons" writers note that credit scores for many households took a hit during and after the crisis as a result of loan modifications, foreclosures, and job losses, "and the breadth of the impact has been sufficient to affect millions of households who now must become or are already renters." Though recent studies have found buying to be cheaper than renting, those households that suffered have to remain on the sidelines for the time being until they can repair their credit situations. Second, tight underwriting has drawn out the time required to secure a loan and created more challenges for potential borrowers with less secure income streams. Those who are paid based on self-reported productivity are being affected most severely by this, the authors say, because lenders now require more conservative assumptions on future earnings. In addition, appraisals are being kicked back if they're not conservative in the selection of appraisal comps, "so the risk tolerance pendulum has swung towards extreme conservatism," according to the segment writers. Finally, it's possible the investment appeal of housing and presumption that prices will only go up "has lost its shine," as the writers say. "Affordability is definitely improved when interest rates are lower," said Norman Miller, professor at the Burnham-Moores Center for Real Estate at the University of San Diego and contributing editor to the HVF. "But it is very likely that the top tiers of the owner-occupied housing market are the ones benefitting the most from lower mortgage rates as this group has been less affected by credit score downgrades or more restrictive underwriting." PREPAYMENT RATES ELEVATED ON NEWER LOANS Mortgages originated from 2010 and into early 2012 are seeing elevated prepayment rates as low mortgage rates continue to encourage refinance activity, Fitch Ratings explained in a recent report. Despite the high levels of prepayment activity, the ratings agency suggested "the credit implications have been modest to date due to the high overall credit quality of the original pools." According to Fitch, pools of prime residential mortgages issued since 2010 had an average conditional prepayment rate (CPR) of about 42 percent. "This is more than twice as fast as the rates of outstanding prime loans securitized in earlier vintages," Fitch stated. Generally speaking, Fitch explained high refinance activity tends to lead to more "performance volatility" since loans remaining in mortgage pools are usually of poorer quality. However, Fitch is seeing a different trend this time around. "The change in credit composition of the recent mortgage pools due to high refinancing activity has been modest and the performance of the remaining loans has been excellent," said Grant Bailey, managing director at the rating agency. After comparing credit quality for prepaid loans to remaining loans, Fitch found only small 40 differences. For example, the FICO scores for prepaid loans and remaining loans averaged 774 and 771, respectively, while the loan-to-value ratio for prepaid loans was slightly lower at 63 percent compared to 66 percent for remaining loans. The ratings agency says as expected, prepaid loans have a higher coupon—4.8 percent compared to 4.4 percent for remaining loans—and prepaid loans have a much higher concentration of adjustable-rate mortgages—25 percent compared to 6 percent. Fitch also pointed to strong performance for the remaining borrowers, noting that out of the more than 6,000 prime loans securitized since 2010, only one loan is seriously delinquent as of the most recent reporting date. For loans securitized in the middle of 2012 and into 2013, Fitch expects prepayment rates to be much lower. "Stable mortgage rates are making refinancing less attractive to the newest mortgage borrowers, which should keep prepayment rates on loans originated over the last several months slower than those originated between 2010 and 2012," said Bailey. WATCHDOG REPORT IDENTIFIES FLAWS IN FORECLOSURE REVIEW PROCESS When federal regulators announced the abrupt ending of the Independent Foreclosure Review in place of a new agreement, the termination of the review process raised many questions from policymakers and analysts. To identify challenges in the foreclosure review process, the Government Accountability Office (GAO) undertook its own investigation. The GAO identified three hurdles that prevented the Office of the Comptroller of the Currency (OCC) and Federal Reserve from achieving their goals through the foreclosure review: complexity of the reviews, overly broad guidance, and limited monitoring. The foreclosure review process was first required through consent orders issued by federal regulators in April 2011. As part of the orders, 14 servicers were ordered to hire independent consultants to review foreclosure actions from 2009 through the end of 2010 in order to identify borrowers who were harmed by "deficient" foreclosure and servicing practices. However, in January 2013, federal regulators announced a new settlement with 11 of the 14 servicers. The new agreement replaced the foreclosure review process for those servicers with a broad payment process so eligible borrowers could receive compensation more quickly, regulators said. According to the GAO report, the foreclosure review process was complex and time-consuming for consultants and law firms since they had to deal with large files and a wide range of federal and state laws as well as multiple loan modification programs. Consultants who spoke to the GAO revealed a typical loan file contained as many as 50 documents and potentially more than 2,000 pages. Furthermore, third-party consultants said their reviewers spent as many as 50 hours just to complete one full file review. In addition, GAO said guidance was revised throughout the process, leading to delays, and at times, guidance was not specific enough. When it came to monitoring the reviews, GAO found "regulators lacked objective monitoring measures, resulting in difficulty assessing the extent of borrower harm." While the foreclosure review process ended for 11 of the 14 servicers, three remaining servicers (Ally Financial, EverBank, and OneWest) are continuing with the original foreclosure reviews. Two other institutions (Goldman Sachs and Morgan Stanley), who were not part of the 2011 consent orders, also entered into foreclosure agreements with the Fed in January to settle consent orders issued in 2012.

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