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REPORTS BURST HOUSING BUBBLE CONCERNS While rapid price gains have recently prompted fears of another "housing bubble," recent reports from Capital Economics and Redfin asserted no such bubble is forming … at least not on a national level. Capital Economics addressed concerns that home price increases, which are rising twice as fast as gains in income and residential rental rates, are not sustainable in the long run. "[T]here are several reasons to think that emerging concerns about the next bubble in U.S. housing are premature," economist Ed Stansfield wrote in the Capital Economics report. One argument the firm made is housing actually has more to gain than lose from rapid price increases since such movement would help more homeowners rise out of negative equity and improve the positions of those with low equity. "This could boost mortgage demand and the supply of existing homes on the market, in time helping to cool the pace of house price gains," the report stated. Capital Economics also reasoned that when considering the 35 percent peak-to-trough drop between early 2006 and late 2011, housing actually appears "significantly" undervalued. Thus, even if home prices were to rise by 8 percent each year and incomes by 4 percent, the firm estimates housing would still not be back at its "fair value" until 2018. "That is hard to reconcile with talk of a bubble which implies that prices have become fatally detached from their fundamental drivers," the firm stated. Redfin agrees there is no bubble, but agents of the brokerage did express concern that minibubbles may be forming in Washington, D.C. 44 and the California markets of San Francisco, Los Angeles, and to a lesser extent in San Diego. Redfin noted prices in San Diego have not "shot up" as much. Since rapid gains in home prices in comparison to incomes is one sign of a bubble, Redfin compared the two factors using the Case-Shiller home price index and data from the Bureau of Economic Analysis. The company found that Washington, D.C. and Los Angeles have both seen prices rise 26 percent faster than incomes since January 2000. In San Francisco and San Diego, prices have risen at a pace 12 percent and 13 percent faster, respectively, than incomes since the turn of the millennium. Redfin also noted that in one of its surveys, 58 percent of buyers in D.C. and 62 percent in Los Angeles said "low interest rates" are a motivating factor to buy now. Since this lowinterest-rate environment won't last forever and homebuilders are adding a fresh supply of homes to the market, Redfin suspects inventory will increase and demand will eventually moderate. Even if certain markets appear to be forming a mini-bubble, Redfin doesn't expect to see a repeat of the 2008 crash since many potential buyers are not able to obtain approval for financing. According to the brokerage, the "frenzy" seen today is investor-driven, with 46 percent of homes purchased done so with all cash and only 6 percent of sales bought with zero-down loans in the first quarter of this year. By comparison, in the first quarter of 2006, 26 percent of homes were bought with zerodown loans, and many of those homes ended up as foreclosures or short sales, Redfin noted. FORECLOSURE TIMELINES CONTINUE TO LENGTHEN Foreclosure timelines are getting longer, according to industry analysis. A recent Servicer Dashboard report from Moody's Investors Service indicates the timeframe for processing foreclosures increased for all servicers during the final quarter of last year. GMAC had the longest foreclosure timelines across all categories of loans in Q 4 2012. Moody's attributes this to GMAC's "high concentration of foreclosures in judicial states." The ratings agency says judicial states, in general, with their large backlogs of foreclosures, are weighing heavily on the industry, and New Jersey, Florida, Pennsylvania, and Ohio, in particular, were especially arduous during the fourth-quarter period. At the other end of the scale, Bank of America experienced improvement in its foreclosure timelines, which Moody's attributes to the bank's recent transfers of nonperforming loans to specialized servicers. REO timelines were not much changed in the fourth quarter, but Moody's did find shortened timelines in California and Florida. The firm pointed out Ocwen has a large presence in both these states. "We expect REO liquidation timelines to improve at a slow and steady pace going forward as the broader housing market improves as well," Moody's said. RealtyTrac reported the average time to foreclose went up in 39 states in the first quarter of this year compared to the previous quarter. The online foreclosure marketplace explained recent foreclosure prevention efforts in certain states have lengthened timelines. Nationwide, RealtyTrac found the number of days to complete a foreclosure increased from 414 days in the fourth quarter of last year to 477 days in the first quarter of 2013—the highest average seen since the first quarter of 2007. Prompted by a recent lawsuit involving Nationstar, Moody's also highlighted the importance of net present value (NPV) models in the loss mitigation process for residential mortgage-backed securities in its latest dashboard. "The NPV model and related assumptions used by mortgage loan servicers play a critical role in a servicer's decisions about defaulted loans," said Bill Fricke, VP of Moody's servicer quality team. NPVs can vary in accuracy, according to Moody's. Therefore, the firm advises servicers to "update their model inputs according to the most recent reliable information available." Property valuations, home price trends, REO discounts, and borrowers' income and willingness to pay are all important factors for NPV, Moody's noted.

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