Home Ownership Drops to Great Depression Levels

 

CNN Money.com  Les Christie, On Friday October 7, 2011

The percentage of Americans who owned their homes has seen its biggest decline since the Great Depression, according to the U.S. Census Bureau.

The rate of home ownership fell to 65.1% in April 2010, 1.1 percentage points lower than it was in 2000. The decline was the biggest drop since the 1930s, when home ownership plunged 4.2%.

The most recent decade-over-decade drop, however, only tells half the story.

Home ownership during the 2000s “was really high in the middle of the decade, up to almost 70% at one point around 2004,” said Ellen Wilson, a survey statistician with the bureau.

The crash from that peak was more than 4 percentage points in just about five years — a far more dramatic decline than the 1.1% drop over the 10-year period.

Certain regions have been hit harder than others. The West had the lowest home ownership rate at 60.5%, while the Midwest had the highest rate at 69.2%.The South came in at 66.7% and the Northeast at 62.2%.

A rough 10 years for the middle class

Among the states, New York had the lowest home ownership rate of 53.3%, but the District of Columbia‘s home ownership rate was below that at 42%.

West Virginia (73.4%) led the way with the highest home ownership rate, while Minnesota (73%), Michigan, Delaware and Iowa (all 72.1%) were also well above the norm.

Number of vacant homes grows by 44%

Thanks to the housing bust there has been a substantial increase in empty homes. The number of vacant housing units jumped an astonishing 43.8% to 15 million (or 11.4% of all housing units) in 2010, up from 10.4 million in 2000.

During that 10-year period, the number of homes in the U.S. increased by 16 million to 131.7 million housing units, according to Census.

Many Sun-Belt states suffered large vacancy increases. In Nevada, ground zero for foreclosures over the past few years, vacancies grew nearly 120% to 14.3% of all homes. Georgia vacancies jumped 82.7%, Florida’s 62.6% and Arizona’s 61%.

Although vacancies in Maine grew by only 23%, the state had the highest percentage of vacant homes overall at 22.8%. Vermont was close behind with 20.5% of its homes empty. Florida was third with 17.5%.

Many of the nation’s residents have also become renters, especially in large metropolitan areas.

Foreclosure backlog deepens

Of the 10 largest cities, New York had the highest ratio with a whopping 69% of all homes in the five boroughs — Manhattan, Brooklyn, Queens, the Bronx and Staten Island — occupied by renters. Los Angeles had a 61.5% rental rate and Dallas was 55.9%.

San Jose had the lowest percentage of renters for any of the 10 largest cities with just 41.5%. San Antonio (43.5.%) and Phoenix (42.4%) had comparatively few renters as well.

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Equities Slide Chilling Housing Recovery

Homebuyers Hunker Down as Housing’s Drag on Economy May Worsen

(Bloomberg) — Sanjay Jain called his real estate broker four days ago to cancel a deal to buy a three-bedroom home in Folsom, California, unnerved by another plunge in the most volatile equities market on record.

“Seeing what’s happening on the stock market made me think that it’s not a good time to be buying a home,” Jain said. “I’m going to wait and see.”

As the U.S. economy shows signs of sputtering, instability on Wall Street is sapping the confidence of would-be property buyers, said Karl Case, co-founder of the S&P/Case-Shiller home- price index. That means housing, which aided every recovery except one before the most recent recession, may deepen its five-year drag on growth.

“There’s a dramatic effect on an economy when a major sector is flat out,” said Case, professor emeritus of economics at Wellesley College in Massachusetts. “If housing takes another leg down, it’s an accelerator. It’s going to make a recession happen faster and deeper.”

Home sales in July fell to the lowest point this year, the National Association of Realtors said in a report last week. Applications for mortgages to buy homes dropped to a 13-month low in the week ended Aug. 12, even as borrowing costs tumbled, according to the Mortgage Bankers Association. The Bloomberg Consumer Comfort Index sank to the lowest since the recession.

Equities Slide

The Standard & Poor’s 500 Index has fallen for four straight weeks, losing 16 percent since July 22. On the day Jain canceled his deal to buy the Folsom house, global stock markets erased $1.8 trillion of wealth as Morgan Stanley said the U.S. and Europe were “dangerously close” to recession. After S&P cut the U.S. credit rating on Aug. 5, the Dow Jones Industrial Average had the biggest one-day loss since 2008, igniting memories of the housing-induced financial crisis that triggered a global recession and wiped out more than 8 million U.S. jobs.

“A lot of people have seen their down payments for a home disappear in the stock market,” said Keith Gumbinger, vice president of HSH Associates, a loan-data firm in Pompton Plains, New Jersey. “It served as a reinforcement to the hunker-down mentality that a lot of homebuyers already had.”

Before the start of the economic recovery in mid-2009, the U.S. had not exited a recession without being aided by housing, its largest asset class, except for in 1981, according to data from the Bureau of Economic Analysis. That year, the recovery was followed by a second, and deeper, recession in 1982.

Since the 2006 real estate bust, a measure of homebuilding and brokers’ commissions known as residential investment has drained gross domestic product by almost three-quarters of a percentage point annually, on average.

Limiting Growth

For 2010, the first full year of the U.S. recovery, residential investment fell 4.3 percent. Going back to the Great Depression, it gained an average of 22 percent in the first year of expansion, excluding 1946, when it tripled as soldiers returned from World War II.

The U.S. recovery is weakening. The world’s largest economy grew at a 1.3 percent annual rate in the second quarter, the Commerce Department said on July 29. That was less than the increase of 1.8 percent forecast by economists surveyed by Bloomberg. Jobless claims climbed to the highest in a month in the week ended Aug. 13, according to the Labor Department.

“The typical homebuyer gets rattled when confronted with economic turmoil,” said Stan Humphries, chief economist of Zillow.com, an online real estate information service in Seattle. “The type of fear we’re seeing could substantially worsen the housing market.”

Falling Sales, Prices

The real estate market has been struggling after a federal tax credit spurred demand in the second half of 2009 and early 2010. Home sales last month were 9.1 percent below their level at the beginning of the economic expansion two years earlier, data from the National Association of Realtors show. As of May, home prices were 7.3 percent below the start of the recovery, according to the Federal Housing Finance Administration.

The degenerating housing market has confounded attempts by Federal Reserve Chairman Ben S. Bernanke to revive demand by lowering interest rates. The Fed purchased more than $2 trillion of mortgage-back securities and Treasury bonds in the last two years to hold down long-term borrowing costs.

Bernanke got the cheaper home-loan financing costs he wanted — last week, rates for 30-year fixed mortgages fell to 4.15 percent, the lowest in more than half a century, according to Freddie Mac. Still, rates that have been below 5 percent in all but two weeks of this year have failed to spur sales enough to support economic growth.

‘Depressed’ Market

Bernanke and the other rate-setting members of the Federal Open Market Committee described the housing market as “depressed” in statements following their last 11 meetings, including the latest on Aug. 8. They pledged at that gathering to keep their benchmark interest rate at a record low for at least two years.

“Low mortgage rates are only helpful to homebuyers who aren’t paralyzed with fear after watching their 401(k) disappear,” said Mark Goldman, a lecturer at the Corky McMillin Center for Real Estate at San Diego State University. “For now, people see the stock market as a casino table.”

Homebuyer cancellations in the past two months rose about 10 percent from a year earlier, Lawrence Yun, chief economist of the Realtors group, said at a news conference on Aug. 18. He attributed the jump to trouble getting appraisals that match the loan amount and “overly stringent” lending standards. In addition, member agents mentioned a rise in “other problems,” which include waning buyer confidence, he said.

Waiting for Deals

Jim Hamilton, Jain’s agent at Lyon Real Estate in Folsom, said he is seeing more buyers hold back on purchases because they expect home prices to fall.

“People are watching the stock market as a major indicator of what’s going on in the economy,” he said. “Buyers are beginning to think that if they wait, they’re going to get a better deal in a few months.”

Last week, Freddie Mac said it expects home prices to decline 6 percent in the fourth quarter from a year earlier, worse than the 2 percent slump it estimated last month. The McLean, Virginia-based mortgage-finance company also reduced its 2011 GDP growth forecast to 1.6 percent from 2.7 percent.

The Aug. 16 report compared this month’s stock market turmoil to the Cyclone roller coaster at the Coney Island amusement park in Brooklyn, New York.

“In sharp contrast to the thrills provided by the Cyclone, those who rode the capital markets in recent weeks have had a far more shrilling cry,” wrote Chief Economist Frank Nothaft and his staff. “Heightened uncertainty, unfortunately, can be harmful to the overall economy. Perhaps it’s best not to look up nor down, but keep one’s eyes on the track ahead.”

Thoughts About the Latest Fed Action on Rates….

Is the Fed Preventing a Housing Market Rebound?

Daniel Indiviglio, August 18, 2011

Its latest policy to keep interest rates near zero through mid-2013 could backfire and prevent home sales instead of encouraging them

Basic economic theory says that when mortgage interest rates are low, consumers should feel more encouraged to buy a home. But right now, that intuitive theory might not hold. Kathleen Madigan at Real Time Economics proposes that the Federal Reserve’s latest proclamation — that short-term interest rates would be kept near zero through mid-2013 – might discourage home buying. Could this be possible?

When Certainty Can Hurt

This might seem like a backwards idea. To be sure, the last thing that the Fed would aim for is to make the housing market worse off. So why would it allow one of its policies to keep home sales artificially low? This might be an unfortunate and unintended consequence of its desire to calm the broader market.

The logic works here because home prices are declining. Nobody is sure how far they might fall or when they’ll finally hit bottom. But we can feel fairly confident that prices aren’t there yet. But what do we now know? Interest rates will be low for another two years. So why hurry to buy a home now?

Savvy potential home buyers who can wait the market out now have a good reason to do so. They don’t have to worry about interest rates rising before the market bottoms. Instead, they can wait for the market to continue to decline. If it appears to bottom out in the next two years, then they can step in and finally buy at that time. But if prices keep declining over this period, then they’ll be smart to buy in the first half of 2013, just before interest rates might begin rising. In the near-term, you might be better off waiting.

This actually makes a lot of sense. Prior to the Fed’s August revelation, one of the best arguments for why it might make sense to buy a home in the near future was that interest rates will rise. As long as the Fed is holding them down, then this argument begins to disintegrate.

Some Reasons to be Skeptical

But there are a couple of reasons why the Fed’s action might not endanger home sales.

Mortgage Interest Tracks Long-Term Rates

First, the Fed’s action specifically targets short-term interest rates. They’ll certainly be very low through mid-2013. But a 15-, 20-, or 30-year mortgage will face prevailing long-term interest rates. While short-term interest rates often have some influence over longer-term rates, the two aren’t always directly correlated. In other words, we could see longer-term interest rates begin to rise even as short-term rates are kept low.

For example, in October, the government may no longer guarantee very large mortgages in some markets. That should cause their interest rates to rise a little, since banks and investors will add a default risk premium to those rates. These and other market shocks specific to housing or longer-term rates could still affect mortgage interest rates.

Home Price Movements Are Regional

Second, home prices may continue to decline nationally, but some markets will stabilize faster than others. Some already appear to be healing. So the question of whether to take advantage of low interest rates really depends on where you want to buy a home. In worse-off markets, it may be wise to wait. But in markets showing signs of recovery, low rates might make now the perfect time to buy.

Will the Fed’s Words Do More Harm Than Good?

Are we seeing this theory in action? We actually might be. On Wednesday, the Mortgage Bankers Association revealed that mortgage purchase applications plummeted 9% last week to their lowest level in more than a year. While they explained the reason for this decline as general consumer nervousness, what if the Fed was partially responsible? It did, after all, announce its new policy on Tuesday afternoon last week.

If this counterintuitive theory holds, then the Fed might want to revisit its decision. The U.S. economy would benefit significantly if home sales began to rebound. Residential investment is providing very little support to the nation’s economic growth at this time, and the construction sector remains one of the hardest hit by layoffs. Perhaps in this case, a little uncertainty could have been a good thing.

 

Housing Bubble Crushes American Middle Class

How the Bubble Destroyed the Middle Class

by Rex Nutting
Friday, July 8, 2011

Commentary: Sluggish growth is no mystery: No one has any money

A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009?

But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class?

And make no mistake, the middle class has been ruined: Its wealth has been decimated, its income isn’t even keeping pace with inflation, and its faith in the American economy has been shattered. Once, the middle class grew richer each year, grew more comfortable, enjoyed a higher living standard. It was real progress in material terms.

But that progress has been halted and even reversed. In some respects, the middle class has made no progress in a generation, or two.

This isn’t just a sad story about a few losers. The prosperity of the middle class has been the chief engine of growth in the economy for a century or more. But now our mass market is no longer growing. How could it? The middle class doesn’t have any money.

There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion.

That’s the amount of wealth that’s been lost from the bursting of housing bubble, according to the Federal Reserve’s comprehensive Flow of Funds report. It’s how much homeowners lost when housing prices plunged 30% nationwide. The loss for these homeowners was much greater than 30%, however, because they were heavily leveraged.

Leverage is an amazing thing: When prices go up, the borrower gets all the gains. And when prices go down, the borrower takes all the losses. Some families lost everything when the bubble collapsed, others lost very little. But, on average, American homeowners lost 55% of the wealth in their home.

Most middle-class families didn’t have much wealth to begin with — about $100,000. For the 22 million families right in the middle of the income distribution (those making between $39,000 and $62,000 before taxes), about 90% of their assets was in the house. Now half of their wealth is gone and it will never come back as long as they live.

Of course, rich folk lost lots of wealth during the panic as well. Their wealth is mostly in paper not bricks — stocks, bonds, mutual funds, life insurance. The market value of those assets fell further than home prices did during the crash, but they’ve mostly recovered their value now. The S&P 500 (^GSPC – News) lost 56% of its value when it crashed, but it’s doubled since then. Stocks are down about 13% from peak.

The rich recovered; the rest of us didn’t.

If losing half your meager life savings weren’t bad enough, the middle class has also been falling behind in terms of income for decades. Families in the middle make most of their money the old-fashioned way: Working their fingers to the bone for 40 years for wages and a modest pension.

Their wages have been flat after adjusting for inflation. In the late 1960s, the 20% of families right in the middle were earning almost their full share of the pie: they had 17.5% of total income. Their share has been falling steadily ever since. Now, that 20% is earning just 14.6% of all income. Meanwhile, the top 5% captured a growing share, going from 17% in the late 1960s to 22% today.

The housing bubble was the last chance most middle-class families saw for grasping the brass ring. Working hard didn’t pay off. Investing in the stock market was a sucker’s bet. But the housing bubble allowed middle-class families to dream again and more importantly to keep spending as if they were getting a big fat raise every year.

I don’t think we’ve quite grasped how much the bubble distorted the economy in the Oughts, and how much it continues to distort it today. We’re still paying the bills from that binge.

During the last expansion from 2003 to 2007, according to an analysis by Fed economists, American homeowners took $2.3 trillion in equity out of their homes through cash-out refinancing and home-equity loans, and they spent about $1.3 trillion of it on cars, boats, vacations, flat-screen televisions and shoes for the kids.

All that spending circulated through the economy, creating millions of jobs here and in China, where they make those TVs and shoes.

During that period, the economy grew at an annual average rate of 2.7%, which is about typical for our economy. But growth would have been closer to 2% if we hadn’t had a housing bubble; if we hadn’t had the extra consumption financed by the bubble and if we hadn’t built millions of surplus homes. That’s a huge difference. At 2.7%, the economy can create a significant number of jobs. But 2% is stagnation, not even keeping pace with population growth and productivity improvements.

Now that the bubble has burst, homeowners are putting money INTO their homes, not taking it out. The impulse to pay down the mortgage and the credit card is reducing the amount of money we’re spending on other things. Since 2007, instead of taking $2 trillion out of their house, homeowners have put $1.3 trillion into them.

You think that might be having an impact on consumer spending?

Even with trillions in debt being paid off or written off, very little progress has been made in deleveraging. The debt-to-disposable income ratio has slipped from 130% at the height of the bubble to 115%, but that’s still far more than the 90% recorded in 2000 or the 80% of 1989 or the 60% of 1976. No one knows how far it needs to fall before American families are comfortable with how much they owe.

The slow growth in the economy is no mystery: Most families don’t have any extra money to spend. It will take a long time for the middle class to rebuild its wealth, especially if we don’t find some work.

The crazy thing is that our leaders aren’t even talking about this crisis. With the upper classes prospering and global markets booming, they don’t need the U.S. middle class any more. The market is up, profits are soaring, and the corporate jet is fueled and ready for takeoff.

And if the middle class can’t buy bread? Let them eat cake.

 

Housing Still Hasn’t Hit Bottom

BREAKOUT By Jeff Macke May 19, 2011

Housing bulls have wanted to get bullish ever since the bubble popped in 2008. They better grab a chair because it’s going to be a while, according to Richard Suttmeier. The chief market strategist of ValuEngine.com says home prices simply aren’t going to bottom no matter what the government or banks may do to push them higher.

Suttmeier, whose firm uses a blend of technical and fundamental analysis to drive its investment recommendations, offers some discouraging data for contrarian housing bulls. Housing prices haven’t just been “correcting” in the context of a recovery, observes Suttmeier. Housing actually never recovered in the first place. The economic truth of supply and demand is in play; during the bubble years we simply built way too many houses, and the glut isn’t going to be worked off anytime soon.

None of which is particularly new information for those paying attention to Federal Housing Finance Agency data or watching the S&P/ Case-Shiller Home Price Index approach the 2009 lows. What is of note are the investment conclusions Suttmeier reaches based on this and other observations. He says the bad mortgage problem still exists for regional banks in particular and that foreclosure rates would be much higher were it not for the fact that it’s often less expensive to allow people to stay in a home than it is to evict. After the federal bailout the regional banks are, in many cases, left holding the housing bag, stuck with massive inventory of homes that need to be sold off to a market with no demand.

By extension Suttmeier says companies such as Caterpillar (CAT), which has been on a torrid run of late, are poised for a fall. When my partner Matt Nesto observes that an enormous percentage of CAT’s revenues come from foreign sources, Suttmeier says emerging markets are following close behind the U.S. in the creation of a capacity glut. This echoes the observations of Vitaliy Katsenelson, who last week asserted that the Chinese government has resorted to building massive and unoccupied “ghost towns” in order to keep up the appearance of growth.

Suttmeier is also in the Breakout camp in keeping an eye on the recent drop in copper. He says the leading economic indicating metal dropped below its 200-day moving average on May 11 for the first time since July 2010. This is a warning, according to Suttmeier, that the global recovery is sputtering.

Before dismissing Suttmeier as a perma-bear, please note that he’s a truly agnostic strategist, simply following the lead of his proprietary screening methodology, which follows 5,500 stocks. When the fundamentals flash a warning sign, he plugs in the technical and other observations to arrive at his conclusions. This system has proven prescient in the past for Suttmeier’s clients, who were warned about bank stocks in 2007. This was early enough to be actionable, which is distinct from the countless number of bears who “saw the housing market bubble coming” well before such an observation made, or saved, them money.

The Next ‘Shoe to Fall’ for California Housing

Federal Retreat on Bigger Loans Rattles Housing

DAVID STREITFELD, On Wednesday May 11, 2011, 1:40 am EDT

MONTEREY, Calif. — By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In this seaside community of pricey homes, the dread of yet another housing shock is already spreading.

“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.

But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.

Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”

As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.

The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.

Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.

If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”

Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.

He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority.

“Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”

Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.

A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. “Larger loans for more expensive homes will once again be funded only through the private market,” it declares.

Brokers and agents here in Monterey said terms were much tougher for nonguaranteed loans since lenders were so wary. Borrowers are required to come up with down payments of 30 percent or more while showing greater assets, higher credit ratings and lower debt-to-income ratios.

In the Federal Reserve’s quarterly survey of lenders, released last week, only two of the 53 banks said their credit standards for prime residential mortgages had eased. Another two said they had tightened. The other 49 said their standards were the same — tough.

The Mortgage Bankers Association has opposed letting the limits drop, although a spokesman said its members were studying the issue.

“I don’t want to sugarcoat this,” said Mr. Barr, the former Treasury official. “The housing finance system of the future will be one in which borrowers pay more.”

The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. In many affected counties, the loan limit will fall about 15 percent, to $625,500.

Monterey County, however, will see a much greater drop. The county is really two housing markets: the farming city of Salinas and the more affluent Monterey and Carmel.

Real estate records show that 462 loans were made in Monterey County between the current limit and the new ceiling since the beginning of 2009, according to the research firm DataQuick. That was only about 1 percent of the loans made in the county. But it was a much higher percentage for Monterey and Carmel — about a quarter of their sales.

Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans.

“That can definitely blow a lot of people out of the water,” Ms. Daunt said.

Can’t Get a Mortgage Loan – Part II

Fed unveils proposal on mortgage standards

REUTERS/George Frey

On Tuesday April 19, 2011

By Dave Clarke

WASHINGTON (Reuters) – Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.

The law does provide protections from this type of liability if a loan meets the specific standards that are part of a “qualified mortgage.”

In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.

Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.

Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower’s employment status and debt obligations.

The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.

Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.

“This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio,” the Fed said in a statement.

The Fed is seeking comments on the proposal through July 22.

The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.

Can’t Get a Mortgage Loan – Join the Party!

David Griffith’s Note: Another unintended consequence of our financial crisis, which we can blame on the failure of government watchdogs and Wall Street greed, is that the pendulum has now swung back too far in the other direction, from easy credit to non-existent credit, and home buyers can’t get a loan, even with great credit and substantial cash in the bank.

Les Christie, April 6, 2011

Yep, mortgage interest rates are low, but there’s a catch: It doesn’t matter how cheap rates are if you can’t get a loan.

And these days, only highly qualified borrowers can get financing — let alone the best rates.

Nearly a quarter of people who apply for loans are turned down, according to the Federal Reserve.

“Good borrowers with one or two blemishes on their credit are being denied credit,” said Lawrence Yun, chief economist for the National Association of Realtors.

The denial rates tell only half the story. Many potential buyers aren’t even applying for loans because they assume they can’t get one.

“A lot of people know it’s very difficult to get a mortgage and they’re not even trying,” said Alan Rosenbaum, CEO of GuardHill Financial, a New York-based mortgage broker.

That shows up in credit scores for loans financed with backing from Fannie Mae and Freddie Mac. The average credit score has risen to 760 from 720 a few years ago. For FHA loans, the average score has gone to 700 from 660. Loans made to borrowers with sub-620 scores are almost nonexistent.

Another factor keeping people out of the mortgage market is that lenders now require much more up-front cash. The median down payment for purchase is about 15%. During the housing boom, it approached zero.

On most loans, banks want 20% down. On $200,000 purchases, that’s $40,000, an insurmountable obstacle for many young house hunters. Or, in New York City, where the median home price is $800,000, buyers need $160,000 up front.

Industry insiders say all these factors have reduced the pool of buyers, lowering demand for homes and hurting prices.

“We feel it really reduces the demand for houses,” said Mike D’Alonzo, president of the National Association of Mortgage Brokers. “It’s an unbelievable buyer’s market, but there hasn’t been as much activity as you would expect because not as many people qualify for loans.”

Jerry Howard, CEO of the National Association of Home Builders said, “You only have to look at the recent sales reports to see what the impact of the credit crunch has had. The statistics speak for themselves.”

Sales of existing homes in February, despite very affordable prices, were 30% off their peak, and home prices fell for the sixth consecutive month in January.

Anthony Sanders, director of Real Estate Entrepreneurship at George Mason University, speculates the tougher credit standards may have stripped as much as 30% of the buyers off the market, compared with normal times.

And it’s about to get harder for buyers. Federal regulators proposed rules last week that are designed to discourage risky lending but that will also likely further restrict lending.

Banks would be required to keep 5% of some loans, specifically those with less than 20% down payments, on their books rather than selling them all off as securities. As a result, banks make be unlikely to issue loans where less than 20% is put down. So much for first-time buyers.

“We think the new rules are appalling,” said the NAHB’s Howard. “Only the wealthy will be able to buy homes at low interest cost.”

It could also further erode consumer demand for homes.

“It’s disturbing,” said Lennox Scott, head of John LA. Scott Real estate in the Pacific Northwest. “We’re just starting to feel healthier in inventory levels and prices and this is a potential headwind.”

The immediate impact, should the new regulations get adopted, should be minor, according to Steve O’Connor, spokesman for the Mortgage Bankers Association. That’s because Fannie, Freddie and FHA loans are all exempt from the requirements and they represent more than 90% of the market right now.

The government, however, wants to reduce the presence of all three agencies in favor of private lenders, and banking experts fears the long-term impact of abandoning the field to mostly private companies.

“For the first time in 100 years,” said Howard, “the government is discouraging you. It’s saying ‘We intend to make it more difficult for you and your kids to buy homes.'”

Housing – Time to Buy?

What It Will Take to Fix the Housing Market

Rick Newman, On Wednesday March 30, 2011

If you’re a squeamish homeowner, you probably can’t bear to follow the housing news anymore. Home prices have fallen by more than 30 percent over the last five years, yet the pain still isn’t over: After a respite when it looked like the bust was ending, price declines have been accelerating once again. Sales are abysmal, despite the lowest interest rates in a generation. The inventory of foreclosures and other fire-sale homes is going up, not down, which will put further downward pressure on prices for much of 2011. Housing usually rebounds after a recession, giving the recovery legs. But the housing market is so bad that some analysts worry it could drag the whole economy back down into a dreaded double-dip recession.

Economists have continually misread the housing market over the last five years, as it metastasized from a modest correction into a once-a-century debacle. Part of the problem now is the uncertainty caused by rising gas prices, which tend to unnerve consumers far more than the added cost warrants, and the nationwide slowdown in foreclosures due to legal questions over fishy bank practices. There’s also a lot of disquiet over unrest in the Middle East, ongoing sovereign debt problems in Europe, and Washington’s own mushrooming debt problems. It doesn’t help that there’s talk of ending some housing subsidies, making it harder to qualify for a 30-year mortgage and even slashing the mortgage-interest deduction that makes homeownership cheaper for millions of middle-class families.

Still, the recovery has absorbed a couple of global shocks, and apparently continues apace. The job market is improving, shoppers are more willing to spend, and corporate profits remain strong. Those are all preconditions for a housing rebound, which is inevitable as long as the nation’s population continues to expand and the economy keeps growing. The only question–and it’s a big one–is when. Here are six missing pieces that still need to fall into place for a housing rebound to take root:

More job gains. The employment picture has been improving for over a year, with the economy adding nearly 1.3 million jobs since the low point in February 2010. That’s a start, but the pace of job growth needs to be about twice that to generate a self-sustaining recovery in which consumers spend more because they’re confident about their jobs, and companies hire more because they need the extra workers to meet growing demand. And we’re not quite at that point yet. While private-sector firms have been hiring, state and local governments have been slashing jobs, slowing overall job gains. That’s likely to continue. And the twin shocks of Middle East unrest and the damage from the Japanese earthquake have added fresh doubts about the sustainability of a global recovery. So it will still take a major ramp-up in private hiring to make the recovery look lasting.

The unemployment rate has been a key indicator of the economy’s health, but even that has become a bit suspect. Since last November, the unemployment rate has dropped sharply, from 9.8 percent to 8.9 percent. That seemingly reflects a dramatic improvement in the job market. But that has happened as the number of people looking for jobs has fallen, too. So in effect, America’s labor force is shrinking at a time when it ought to be growing. Meanwhile, the economy is still down about 7 million jobs from peak levels before the recession, which has hollowed out the pool of potential home buyers. Some of those people need to get back to work before the demand for housing improves.

Outlook: Moody’s Analytics predicts that the pace of job creation by the end of 2011 will be at least 2.5 million new jobs per year, more than twice the current rate. If that holds, it will boost confidence and bring many needed home buyers back into the market.

Fewer foreclosures. It’s impossible to hold the line on retail prices when distressed merchandise keeps hitting the market, and that’s been the problem with an endless stream of foreclosures in hard-hit states like California, Nevada, Arizona, Utah, Michigan, Georgia, Mississippi, and Florida. As foreclosed homes get repossessed and resold, they drag down the prices of most other homes, which perpetuates the vicious cycle of holdout sellers who can’t afford to take a loss and reluctant buyers who don’t want to commit to purchase until they’re sure prices are nearly done falling.

Outlook: The number of delinquent mortgages has been declining, which means foreclosure rates should slow, as long as the job market continues to improve and the economy doesn’t slide back into recession. But there’s an enormous inventory of foreclosed or soon-to-be-foreclosed homes that will depress prices in many markets for months or years. The good news is that 15 to 20 states, mostly in the Northeast and Midwest, have modest foreclosure rates and are better-poised for a housing recovery. It will also help once the state regulators who are dickering with banks over “robosigners” and other fishy foreclosure practices reach some kind of global settlement that will allow normal foreclosures to proceed. News reports suggest a settlement could come within weeks, which would ease delays that have dragged out the whole foreclosure fiasco.

A stable homeownership rate. Until the last decade, the homeownership rate was mostly steady at around 64 percent. Then it rose to a peak of 69 percent in 2004, which was obviously too high. As people who can’t afford homes sell or default, the homeownership rate has been drifting back down, and it’s now around 67 percent. It probably needs to fall back to the historical average of 64 percent or so for the housing market to return to normal.

Outlook: At the current pace, homeownership rates could hit 64 percent again in 2012 or 2013, but there’s a risk they’ll overshoot and go lower than that–which would stretch the huge gap that already exists between the supply of homes and demand. The good news is that housing affordability is the best it’s been in more than 40 years, and banks are starting to ease up on loans, which could lure buyers back sooner.

Clarity from Washington. Buying a home is a complicated ordeal to start with, and now, home buyers also need to worry about battles in Washington over tax policy, housing subsidies, and the entire future of housing finance. Some budget hawks want to reduce the mortgage-interest deduction, to help cut Washington’s huge deficits, which would probably affect purchases of more expensive homes the most. Other proposed changes could effectively require higher down payments and shorter-term mortgages, which would shrink the pool of eligible buyers. And something needs to be done about Fannie Mae and Freddie Mac, the wrecked housing agencies that are now completely run by Washington, at a huge loss to taxpayers. But if changes are too abrupt, it could cause another ruinous pullback in housing.

Outlook: For all the intense talk in Washington, the biggest issues, such as what to do about Fannie and Freddie, probably won’t be addressed until after the 2012 presidential election. And if there ever is a cut in the mortgage-interest deduction, it will probably be phased in slowly, to minimize voter revolt. The biggest risk for buyers today isn’t an abrupt change in housing policy. It’s not leaving enough margin for error in case there’s an unexpected pullback in the future. That’s one more reason to make conservative decisions and leave a lot of cushion in case something goes wrong.

Rising rents. Fewer homeowners means there are more renters, which drive the demand for apartments up, along with rents. That’s a hardship for renters, since it cuts into their disposable income. But it also gives them a good reason to consider buying. With the affordability of homes at record levels, that should eventually turn some renters into buyers, raising demand for homes and helping stabilize prices.

Outlook: Rents have already started going up, and research firm REIS predicts a healthy 3.4 percent rise in rents, on average, in 2011. In a few cities, rents could rise by nearly 10 percent. And in most cities, rents will outpace inflation and wage growth. That won’t turn renters into buyers overnight, since loans are still hard to get and a lot of people can’t come up with money for a down payment. But it will help restore the normal equilibrium between the rental and purchase markets, and increasingly motivate renters to look into buying.

Some courageous buyers. The conventional wisdom at the moment is that the housing bust still has a ways to go, which means it would be foolish to buy until it’s clear that prices have stopped falling. But smart money rarely follows conventional wisdom, and there are good reasons to buy, even now. Getting a good deal on a home is a function of two things: price and interest rates. Prices may fall a bit further, but it’s very likely that interest rates will go up over the next several months, as the global recovery picks up steam and investors begin to anticipate the end of the Federal Reserve’s super-stimulative policies. So in terms of mortgage rates at least, the bottom may be now.

Outlook. “Housing markets across the country are increasingly a good buy,” economist Mark Zandi of Moody’s Analytics said in a recent conference call. “They’re undervalued.” In fact, he predicts that the best buys may be in the most distressed areas, where prices have fallen the most. It might take guts to act on that, and muster a down payment while other buyers are still on the sidelines. But sooner or later, predictions of a housing recovery will turn out to be right.

Life Without Fannie or Freddie

Without Loan Giants, 30-Year Mortgage May Fade Away

NEW YORK TIMES

by Binyamin Appelbaum  Friday, March 4, 2011

How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.

“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”

Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.

“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans — a cost that would be passed on to the borrower.

Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.

Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.

“I myself am eager to see whether there needs to be a guarantee,” said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.

Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”

Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.

They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.

And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.

Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.

“There needs to be a systematic way of preventing” fragmentation, said Professor Wachter. “That’s what we need a bulwark against. Because if there isn’t, it will occur.”

The government seems least likely to maintain a final set of benefits — leniencies in loan terms that taxpayers effectively have subsidized for borrowers.

Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.

A quirkier example is the ability to “lock in” an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies’ absence, borrowers seeking rate locks may need to pay for them.