The concept of utilizing a large scale refinance program to aid the ailing housing market and to stimulate the economy has been floating around since 2008 (1). Since then, rates eased below 4.0%, yet millions of Americans have not taken advantage of the opportunity because of the upfront costs of refinancing and other frictions unique to the current market. On May 8th, Senator Robert Menendez (D-NJ) and Senator Barbara Boxer (D-CA) proposed a bill that would attempt to deal with these issues.

The proposal by Senators Boxer and Menendez follows several of the recommendations made by President Obama earlier this year and includes:

• Extending streamline refinancing for Fannie and Freddie borrowers
• Elimination of up-front fees on refinances
• Eliminating appraisal costs for all borrowers
• Allowing lenders not currently servicing a loan to refinance the loan with the same representations and warranties and streamline ability as the current servicer, thereby creating competition and lower costs to the consumer
• Requiring second lien holders who unreasonably block a refinance to pay “restitution to taxpayers”
• Requiring mortgage insurers who unreasonably fail to transfer coverage to refinanced loans “to pay restitution to taxpayers”

To analyze the impact of the proposal, data generated by Lender Processing Services (2) was used to estimate the universe of mortgages held by Fannie Mae and Freddie Mac that are both eligible and likely to refinance under such a program. An average 30-year fixed rate mortgage of 4.0% along with a Federal tax rate of 25%, a state tax rate of 5%, and an average loan balance of $150,000 (3) were used to estimate the effect of the refinance program in the first year. It is assumed that borrowers with a current mortgage rate of 5% or higher will refinance (4) and there is no change in mortgage insurance premiums. The proposed changes would result in:

• Just over 3 million refinances
• Reduce the average annual payment by roughly $2,800
• Save borrowers $4.5 billion to $4.8 billion per year (after tax considerations) and more than $45 to $48 billion by 2022
• Some of the reduction in payments might result in increased savings, but much would be spent on goods and services (5). The lower payments would have a multiplier effect resulting in an injection to the economy of possibly the full amount of the money saved by borrowers or perhaps more.

The impact of a refinance program would extend beyond the savings to the consumer. The CBO (6) estimated that a similar program extended to loans securitized by the GSEs and FHA might result in 111,000 fewer defaults. Given the significant proportion of likely GSE refinances, the large number of loans held in portfolio that were not included in the CBO analysis, and lower subsequent CBO forecast for Treasury rates (and thus mortgage rates), it is reasonable to assume that the number of foreclosures averted by the GSE refinance plan would be substantial.

While the number of REO sales, modifications, and short sales have risen in recent quarters, the number of loans in foreclosure or REO remains high, thus underlining the need to staunch the flow of properties into this bucket. REOs are a significant problem for home sellers, the market and local communities:

• NAR estimates a price discount of 20% on REOs relative to non-distressed properties and some groups estimate this to be as high as 30%
• By one estimate, the sales price of a home was lowered by approximately 2.5% for every percentage increase in foreclosures in the same census tract, other factors constant.
• Homes that are vacant for an extended period impose costs on municipal governments ranging between $5,000 and $35,000, depending on length of vacancy, maintenance requirements, and damage to the home.
• Another study found a one percent increase in county foreclosure rate, increased the burglary rate by 10.1 percent. The impact was also significant on larceny and aggregated assault.

Finally, resurgent concerns about European financial conditions as well as the impending fiscal cliff in the Unites States will weigh on the 10-year Treasury and mortgage rates in the near term, allowing more time for consumers to take advantage of a refinance program.

While the estimated $4.5 to $4.8 billion in savings and reduced defaults may seem like small figures, these refinances could have a significant impact in the local areas where the refinances would be concentrated. Furthermore, the relaxation of representations and warrants and loan level pricing adjustments sets an important precedent that could help to ameliorate the tight lending conditions on the originations side of the market.

This year homeowners are paying, on average, $128 more per year for new homeowners insurance policies than they were at the beginning of the year. In some states, rates are up as much as 39 percent.

HomeInsurance.com found that homeowners are paying, on average, 19 percent more per year for new homeowners insurance policies than they were at the beginning of the year. Twelve-month home insurance premiums for policies written in December 2011 were $810 nationwide, a $128 increase from January 2011 at $682. HomeInsurance.com’s data represents approximately 15,000 policies sold across the United States with such top-rated carriers as Travelers, Safeco, The Hartford, and ASI/Ark Royal.

Some state premium increases were much higher than the national average. New policies in December 2011 were carrying roughly 29-39 percent higher premiums than those sold a year earlier in Mississippi, Montana and New Mexico.

With the overwhelming increases in 2011, there were some bright spots where policyholders saw lower rates towards the end of 2011 such as Washington D.C., where homeowners were paying about 7 percent less for new policies. Likewise, new policies sold in December 2011 in Vermont, Virginia, West Virginia and California decreased in price as compared to earlier in the year when they were 1 to 3 percent higher.

“Rate fluctuations are normal and can be caused by a variety of factors,” said Carlos Lagomarsino, founder of HomeInsurance.com. “The best thing homeowners can do is to comparison shop and ask their agents to qualify them for all eligible discounts, such as a home-auto package, which can provide substantial savings.”

The HomeInsurance.com RateReport is released quarterly and shows average premiums paid by homeowners across the United States for home and auto insurance.

Earlier this week, I wrote about the drop in the rate of homeownership, now at its lowest level since 1997. One of the biggest reasons for the overall drop is the falloff in the number of new households.

The Census Bureau reports that the rate at which Americans set themselves up in new homes or apartments is recovering slightly, but its growth is still down considerably from prerecession levels.

New household growth typically comes from young adults moving out on their own, but the recession has resulted in many of them being forced to move back in with Mom and Dad.

The weak job market is largely to blame. College and post-college graduates who can’t find jobs and are carrying student loan debt are finding additional expenses like rent or a mortgage unattainable.

According to the Pew Research Center, more than a fifth of young adults between age 25 and 34 live with their parents, the highest level since the 1950s. The job market has been slowly improving for young people, but analysts say that due to the effects of the recession, many young people are also delaying the responsibilities of adulthood and choosing to stay in school longer or live with their parents rather than finding a place of their own.

As the job market continues to improve, these analysts believe, young adults will fly the coop and begin setting up households, which will improve the housing market.

Do you live with your parents, or do your adult children live with you because they can’t afford their own place?

Keep up with your wealth and mortgages and follow me on Twitter.

Many famed columnists, pundits and commentators have made brilliant careers of using anecdotes to draw insights and conclusions and even predict the future.

“I was in a taxi cab in Karachi and the driver told me… therefore…”

I am jealous, I admit.

I wish my job were as easy as traveling the world, talking to people, drawing conclusions and making recommendations on which basis my clients would comfortably invest hundreds of thousands of dollars.

But as a researcher, I’m on the hook for my recommendations. I need more than opinions; I need data to support my conclusions.

Yet, as for political predictions, pundits, armed with stories and anecdotes, intelligence and intuition, may well be close to getting it right 50% of the time.

If so, what is wrong with anecdotal evidence? It’s definitely cheaper and a lot easier to gather than serious data!

Here’s what’s wrong: in our business, recommendations are a zero-sum game. You have to get it right for your clients to win — win money, brand equity, market share, customer loyalty or employee motivation. A 50% hit rate just won’t do.

To illustrate, here’s an anecdote about anecdotes: On a recent assignment, a colleague offered evidence for the validity of an assumption, saying essentially; “Well definitely x is a huge issue, it makes sense, the other day even my wife said x.”

Taken at face value, this seemingly logical and reasonable assumption underscored by a compelling quote from my colleague’s spouse could have been the death of actual research. Yet, I persisted. I conducted the research and discovered that the assumption was indeed statistically dead wrong. Actual system users, when tested directly contradicted the opinion of my colleague’s spouse. By an enormous margin they rejected the assumption.

Why do we trust anecdotes when they can be so faulty? The paradox lies in the fact that we rely on anecdotes and sound bites to make sense of our world and make everyday decisions: what to buy, what to think, who to vote for (or against). Both mass media and the Internet encourage us to operate that way.

It is a profound human trait, well known to marketers: we respond to emotions a lot more than… well, pretty much anything else. A good story or anecdote stirs us in a way pure analytical reasoning doesn’t. We gravitate towards it and are rarely able to step back and analyze the issue critically (or marketing would be a very different business).

In fact, I use anecdotes and quotes all the time just because I know how powerful they can be to persuade and bring across key points to my clients. But anecdotes should illustrate a point of research; they should not be the research. The data proves, the anecdotes illustrate, or, to put it another way: if your research surfaces enough same-anecdotes (data points as anecdotes) then you have a real story to tell.

In business, try remembering to go against your natural and media-reinforced instinct. Be critical and remain a skeptic until you know what the research says. And if there is no research – demand it.

A great story does not make research, but it sure will make data a lot more fun!

Author: David Bartel     David Bartel on the Web David Bartel RSS Feed

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This article originally appeared on Piehead Blog and has been republished with permission.

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