Aug132015
Fake crisis needed to prompt reforms at the GSEs
In a cynical example of bad governance, lawmakers created circumstances that will result in a crisis providing them political cover for their actions.
Washington is so polarized that politicians need a crisis to get anything done. To that end, politicians created circumstances at the GSEs likely to result in a future crisis that will generate need for political action. Concerned citizens hoping for careful deliberation and a consensus solution (good governance) will be disappointed.
Everyone in Washington knows the GSEs must be eliminated because the GSEs can’t exist outside government conservatorship. The taxpayer liabilities from backing most mortgage loans are enormous, and taxpayer backing for the GSEs ensures the misallocation of credit. Ed DeMarco prepared for final shutdown of GSEs, but the final implementation was left to Mel Watt and Congress, but they failed to make any progress.
After earning billions in profits, Fannie, Freddie reform further than ever
By Ruth Mantell, Published: Aug 10, 2015
WASHINGTON (MarketWatch) — Despite years of hand wringing on Capitol Hill over the need to protect taxpayers by reforming the U.S. housing-finance market, it may take a financial hit to mortgage giants Fannie Mae and Freddie Mac to spur decisive congressional action.
It’s been almost seven years since the government sponsored enterprises were put into conservatorship, but U.S. lawmakers have yet to approve a plan that replaces the companies and rebuilds the country’s housing-market infrastructure. It’s a huge, complex undertaking, and no elected official wants to be the one who gets reform wrong.
“They are concerned with the unintended consequences,” said Isaac Boltansky, an analyst at Compass Point Research & Trading, a Washington-based investment firm. “None of these guys want their name attached to a bill that helped tank the mortgage markets.”
This is why the bill either needs a visionary leader or a crisis. A visionary leader would have the courage of his convictions. Absent that, a crisis gives the herd political cover for any mistakes because they were “forced” to act by outside circumstances — even if they created those circumstances themselves.
Fear of failure isn’t the only obstacle to reform. Some U.S. lawmakers may be loath to revamp a system that has helped the government to narrow its deficit. A bailout arrangement forces Fannie and Freddie to send their profits to the U.S. Treasury Department each quarter. The GSEs have sent more than $50 billion to the Treasury than the bailout funds they received.
Last week, Fannie Mae reported a $4.6 billion second-quarter profit, and Freddie Mac reported a $4.2 billion second-quarter profit.
Politicians are fond of free money.
With windfalls like these, some officials are more interested in maintaining than slaughtering their cash cows. …
“It makes the government even more reliant on the GSEs as a source of funding for government programs,” analysts with Keefe, Bruyette & Woods, a New York-based investment bank, wrote in a research note.
The government will drain every resource possible from these entities leaving an empty carcass for the investors.
Here’s why the companies may take a financial hit in the foreseeable future. Their bailout agreement with the government prevents Fannie and Freddie from building capital, and forces them to narrow their capital buffer until it reaches zero by 2018. The idea is to gradually move Fannie and Freddie closer to winding down, spurring legislative reform.
Not only will the companies’ eventually have no capital buffer, their quarterly earnings are volatile, dependent on economic fluctuations that impact their revenue streams and derivatives held to hedge fluctuations in interest rates. …
“It won’t take much, they are very close to needing a draw already,” said David Stevens, president of the Washington-based Mortgage Bankers Association. “Any aberration can cause a draw.”The hysterical headlines generated the day of the draw announcement may be a powerful enough prod to move lawmakers to action, experts said. However, a time of panic isn’t ideal for legislating, said Jim Parrott, a former housing-policy adviser for the White House’s National Economic Council and a senior fellow at the Urban Institute, a Washington think tank.
“We’re just putting off the inevitable, letting an unpredictable market dictate our timing and making it likely that when we finally do struggle with this difficult topic it’s in a moment when no one will be thinking straight,” Parrott said. …
I find this reprehensible. Policymakers intentionally set up circumstances that will create a crisis in order to give them political cover for their actions.
Is creating crisis anyone’s idea of good governance?
“Unfortunately, all the signals would suggest that there’s no reform imminent [by Congress],” Cisneros said. “It’s my hope that Mel Watt, who has done a thoughtful job with respect to consumer protection and creating the conditions for a stable housing market, will remain on the job.”Ed DeMarco, the former head of the GSE regulator, said Watt’s greatest challenge will be ensuring ongoing liquidity and stability as markets await congressional action to end the conservatorships.
“With the uncertain timing and outcome of such legislation, making long-term business judgments as conservator is very challenging,” DeMarco said.
Is this anyone’s idea of good business management?
Home finance reform is inevitable. The GSEs can’t operate forever under the constraints of conservatorship, and lawmakers set up circumstances guaranteed to fail to provide the political cover necessary to act. Hopefully, when the crisis hits, lawmakers implement the right solution. After seven years studying the situation so far, lawmakers have no excuse for mistakes.
[dfads params=’groups=3&limit=1&orderby=random’]
[dfads params=’groups=23&limit=1&orderby=random’]
[listing mls=”OC15176276″]
There will be no GSE reform. The current structure works well for everyone. Don’t be fooled by the Right’s disingenuous attacks. They just need a whipping boy other than gay and poor folk.
Government has rarely shown the ability to shrink itself, especially at the Federal level. Ed DeMarco was trying to be different and went so far as to lay out a road map for Congress to follow. As thanks, he lost his job.
Survey: 52% of Americans likely to buy a home in next five years
Reality: Most will not follow through on their plans
Just over half of Americans — 52% — say they are likely to buy a home in the next five years, according to the 2015 BMO Harris Bank Homebuyers Report.
In addition, Americans surveyed are willing to pay an average of $296,000 for a home and will average a 21% down payment.
“Getting preapproved helps buyers understand their budget as they start their home search. That means estimating monthly mortgage payments and how much you can borrow,” said Alex Dousmanis-Curtis, Group Head, U.S. Retail and Business Banking, BMO Harris Bank.
The report, conducted by Pollara, also found that:
* Among likely buyers, 78% plan to get preapproved before seriously searching for a home.
* Three quarters of current homeowners set a budget before looking for a home. Sixteen% ended up spending less while 13% went over their budget.
* The majority (74%) of those looking to buy a new home will consult a real estate agent, while 59% said they will visit online real estate websites and 37% will seek recommendations from friends and family.
According to the report, 63% of American homeowners spent under six months looking for a new home before they made a purchase. In addition, 8% bought their home without participating in an active real estate search – or even any plan to buy at all – because a specific property caught their attention.
The report also found that many likely homebuyers are interested in a real estate mobile app that would help in their home search. Over three quarters (78%) of homebuyers said the biggest draw for a mobile app would be the ability to look at house listings in their specific desired area and the ability to obtain information about these neighborhoods (77%).
“In addition, Americans surveyed are willing to pay an average of $296,000 for a home and will average a 21% down payment.”
I guess when you are in fantasy land you might as well dream big. considering the average down payment has not exceeded 16% in 11 years I doubt those large down payments will ever materialize.
http://www.realtytrac.com/news/home-prices-and-sales/q1-2015-u-s-home-purchase-down-payment-report/
Trulia: Where schools matter and where they don’t in homebuying
Either schools are of critical importance to a homebuyer, or they matter not at all.
There’s very little middle ground because either homebuyers have kids or they don’t.
Trulia’s recent survey found that when searching for a home, the quality of the local schools is an important factor for families with children.
According to a recent Trulia survey, 19% of Americans indicated that their dream home is located in a great school district. But among parents of children under 18, the percentage of Americans who want to live in a great school district jumps to 35%, in contrast to 12% of those without kids.
Also, the survey also revealed that a great school district is almost twice as important to those who search online for their dream home on a weekly or monthly basis than those who only search annually.
Here’s what they found.
http://www.housingwire.com/ext/resources/images/editorial/Trey-7/FvPQpr6VZud1KQYKD0lpiEiH1N9aVEeSOemLf_4fIwxcLjx-jO5_bSfYmaC1uKk_D2KLU0LbxOOdcYJejrGs62TzbBGamtGvo2I4s5haYM_hvws0-d-e1-ft.png
Orange County is #1.
Half of a new village in Irvine, Orchard Hills, is served by Tustin Unified and the other half by Irvine Unified. There isn’t much difference in the scores of the schools serving Orchard Hills, but there’s a perception that IUSD is the best. Guess which half is selling better…
I went to IUSD, and honestly I thought my previous high school abroad was much better.
IUSD isn’t “good” because it teaches well. It’s “good” because it gets a good selection of students. They are mostly either A) well off upper-middle to upper class students, or B) lower-middle to middle class house-poor families who move there solely because of the good school district.
Either way education is important in these families, and they are mostly free of problems that pull the lower classes down.
This is a secret most people don’t realize. I believe the general perception is that good school test scores are a result of good teachers, but that isn’t always the case. If you get enough good students together, even mediocre teaching can produce good test scores.
I think even people that don’t have kids are mindful of the school district because they know it translates into property values. When we bought our place 5 years ago, none of my kids were school aged, but obviously I wanted to be in an area with good rankings. It turns out that in a practical sense it hasn’t mattered, because we ended up putting our kids in private Christian school. Still, it provides comfort knowing that good schools will attract quality buyers to our area, which should prevent the neighborhood from going down the drain.
Sellers’ delight frustrates homebuyers as affordability falls in all but one California market
Thanks to California’s surging housing market, affordability for house shoppers got worse in all but one key statewide market – Kings County – in the second quarter.
And in Kings County, north of Bakersfield in the San Joaquin Valley, the widely watched affordability measurement was just flat.
That’s the glum conclusion for house hunters from the California Association of Realtors’ latest tally of who can afford to buy a home in the state.
The association’s median selling price for a single-family house rose 11 percent to $437,040 in the 12 months ended in June. Good news for owners was bad news for buyers.
That price – the highest since November 2007 – sliced the association’s affordability index to 30 percent in the second quarter, down from 34 percent in the previous quarter and equal to the year-ago level.
Regionally, Orange County’s second-quarter affordability fell to 21 percent from 22 percent in the first quarter. A year ago, it was 20 percent – one of just five counties with any year-over-year improvement in this affordability benchmark.
When statewide affordability reaches 17%, Bruce Norris says to sell.
http://www.aoausa.com/magazine/?p=2065
That’s a great article. Thanks for sharing.
I like his analysis, but if Dodd-Frank is successful in keeping toxic mortgage products off the market, I don’t think we can push affordability that low again. If we can get down to 17% again, it may happen over the next few years if prices keep rising while mortgage rates go up.
The Dry Rot in America’s Housing Stock: A Sad Legacy of the Foreclosure Era
What would an influx of 3.8 million entry-level homes do for housing affordability?
Limited inventory and strong demand continue to push home prices higher in America’s hottest housing markets, leading to declining affordability. Forecasters are raising their predictions as tight inventories of homes, particularly lower priced properties, keep first-time buyers on the sidelines.
Those 3.8 million homes, nearly twice as many as the total listings currently on all of the nation’s MLSs, are vacant. They do not include the 1.3 million vacation homes occupied part of the year or the 2 million used only occasionally.
These are units being held off the market by their owners for any number of reasons, such as repair or bank-owned properties not yet on the market for sale or rent. Many are foreclosures that fell through the cracks and ended up in in such bad condition and bad location that it doesn’t pay their owners to rehab them for sale or rental. Some are on ice because the investors, lenders developers are waiting for better ties or can’t get it together to get them back on the market. A large proportion of them are literally lost. The Census Bureau admits that a “large proportion” of vacant units that it classifies in the “other” category might not be properly classified due to “the difficulty on the part of the enumerators to determine the status for these vacant units.”
Saying Yes to a New Car Can Make a Mortgage Lender More Likely to Say No
Washington Post, Aug. 12, 2015–Harney, Kenneth R.
http://www.washingtonpost.com/realestate/saying-yes-to-a-new-car-can-make-a-mortgage-lender-more-likely-to-say-no/2015/08/11/fc35f41e-3f71-11e5-bfe3-ff1d8549bfd2_story.html
Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move up to a different house? Could your growing debt load — for autos, student loans and credit cards — make it tougher to come up with all the monthly payments you owe?
Absolutely, and some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.
New debt taken on to finance autos accounted for 81 percent of the increase, a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup in April was $33,560, according to Kelly Blue Book researchers.
Student-loan debt also is contributing to strains on homeowners’ budgets. Those balances are up more than 55 percent since 2006. Credit card debt is another factor, but it has not mushroomed like auto and student loans. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.
The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration and Veterans Affairs home loans. These borrowers, who typically have lower credit scores and make minimal down payments — as little as 3.5 percent for FHA, zero for VA — now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads — an average $22,414 — but typically have much higher credit scores and have made larger down payments.
Is there reason for concern here? Bruce McClary, vice president at the National Foundation for Credit Counseling, believes there could be if the debt-gorging pattern continues.
“Some people have lost sight” of the ground rules for responsible credit and are “pushing the boundaries,” he told me last week. For example, McClary says auto costs — monthly loan payments plus fuel and maintenance — shouldn’t exceed 15 to 20 percent of household income. Yet some people who already have debt-strained budgets are buying new cars with easy-credit dealer financing that knocks them well beyond prudent guidelines.
According to a recent study by the credit bureau Equifax, total outstanding balances for auto loans and leases surged by 10.5 percent in the past 12 months. Of all auto loans originated through April of this year, 23.5 percent were made to consumers with subprime credit scores.
Ben Graboske, senior vice president for data and analytics at Black Knight, cautions that although rising debt loads may look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30-day delinquencies on mortgages are just 2.3 percent, he said in an interview, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low, at 4.53 percent.
But Graboske agrees that there are other consequences of high debt totals that could limit homeowners’ financial options: They “are going to have less wiggle room” when refinancing a current mortgage or obtaining a new mortgage to buy another house.
Why? Because debt-to-income ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student and credit card debt you’ve got, along with other recurring expenses such as alimony and child support, the tougher it’s going to be to refinance or get a new home loan.
If your total monthly debt for mortgage and other obligations exceeds 45 percent of your income, lenders that sell mortgages to Fannie Mae and Freddie Mac may reject your application for a refi or a new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.
Car loans tend to hurt DTI ratios the most because the payments are large relative to the item being financed. The reason is because the length of the loans is short and the interest rates can be high, especially for subprime borrowers.
One myth that I see constantly perpetuated is that signing up for a credit card will hurt your chances at a mortgage. This is only marginally true and not in the way most people think. The worst effect of signing up for a credit card is that it lowers your FICO by a few points due to the hard pull on your credit. If you are on the borderline of a typical FICO bucket, say right at 700, that hard pull could increase the mortgage rate you end up paying by dropping you to 697.
The mythical part is that you will somehow be denied for a mortgage due to a credit card. That would be exceptionally rare because the minimum payment isn’t likely to affect your DTI all that much. It would only affect people that are already leveraged to the max. Also, the lender will just require a Letter of Explanation as to what the hard pull was for. They don’t care that you got a credit card. Many people won’t get a credit card for 18-24 months before a applying for a mortgage, but it’s not helping them qualify at all.
All of this is informational only. Obviously, I would advise people not to carry balances on their credit cards ever.
The back-end DTI limit of 43% is going to really hurt mortgage lending due to all those other debts. I could easily foresee circumstances where a borrower wants to consolidate loans with a HELOC or cash-out refinance, and they get denied because the can’t meet the back-end DTI limits at origination. Everyone will decry how wrong this is, but it only serves to prevent borrowers from sentencing themselves to perpetual debt servitude.
“It would only affect people that are already leveraged to the max.”
That statement applies to a lot of people.
The ability to pay only 1% of a credit card balance as a minimum payment means even a sizable amount of CC debt isn’t going to move the needle much when determining DTI. Cars and student loans will amount to a much higher percentage of the debt obligations for most people.
New Senior Housing Raises Concerns Supply Will Outpace Demand From Baby Boomers
Occupancy rate for all senior housing in 31 major markets fell this spring for the second consecutive quarter, data show
The supply of senior housing is expanding at a rapid clip in many major metropolitan areas across the Sunbelt and elsewhere, raising concerns that builders are racing ahead of demand.
Analysts said the building spree could lead to higher vacancy rates and lower rent increases for real-estate firms that own housing dedicated to seniors.
Shares of big U.S. companies that own a lot of senior housing have already tumbled this year as investors fret over rising interest rates. Health Care REIT Inc. ’s stock is down 11% for 2015, while HCP Inc. has shed 14% and Brookdale Senior Living Inc. is down 20%, through Monday’s close. In comparison, the S&P 500 is up 2.2% for 2015.
ENLARGE
The potential overbuilding will likely add to the pressure on companies, analysts said.
“The construction really hasn’t slowed, and it’s continuing to be an issue,” said Kevin Tyler, who tracks the sector as an analyst for Green Street Advisors.
The wave of Americans born after World War II who will retire in coming years will expand the pool of potential clients, analysts and executives note. The Social Security Administration estimates that 9,600 people a day will turn 65 in 2015, up from 7,800 a day in 2010.
But it is difficult to predict what type of living arrangements they will seek out as they age, and when they may need senior housing, particularly given longer lifespans and changing attitudes about such types of housing.
The occupancy rate for all senior housing in 31 major markets fell this spring for the second consecutive quarter, according to the National Investment Center for Seniors Housing & Care, known as NIC, an Annapolis, Md., nonprofit that tracks the market.
Fed Funds Future Nearer Than You Think
When it starts tightening monetary policy, the Federal Reserve will likely raise its target range on overnight rates by a very modest quarter of a percentage point. But interest rates themselves may rise by even less than that.
The good news here for investors is that the Fed’s first move may have less of an impact than they think. The bad news is that the chances that the Fed will begin tightening next month may actually be higher than they think.
Before the financial crisis, raising rates was a simpler operation for the Fed than it will be now. It would sell bonds through its open-market operations, withdrawing reserves from the banking system, thereby making it harder for banks to meet the reserves they are required to hold at the Fed. This would drive up demand, and costs, for borrowing funds overnight from other banks, driving the federal-funds rate higher.
ENLARGE
But thanks to the massive bond purchases the Fed made following the crisis, banks now hold about $2.5 trillion of reserves in excess of what is officially required. So rather than raise rates by draining reserves, the Fed will use two rate-setting tools.
One is a reverse-repurchase facility run out of the Federal Reserve Bank of New York that a number of money-market funds, federal home-loan banks and other institutions have signed up for. Lately this has been offering rates of about 0.05%. The other is the interest the Fed pays on reserves that banks keep with it, now set at 0.25%.
Advertisement
A bank will place overnight money deposited with it into reserves, offering a lower rate than the 0.25% it gets from the Fed, but usually more than what money funds could get from the Fed’s repo facility. The federal-funds rate, which banks use to facilitate this process, has averaged 0.13% over the past month—right near the midpoint of the range of zero to 0.25% the Fed currently targets.
Investors surveyed by the New York Fed in June expected that when the Fed raises its target range to an expected 0.25% to 0.5%, the federal-funds rate will average 0.35%, again right near the midpoint. But it may actually be lower than that.
When you think about what the rate really means. A 0.15% rate means that assuming a completely risk free investment, it is in the economy’s interest to invest in all investments with a return on investment in less than 667 years.
Pretty ridiculous if you ask me. 0.35% with 286 years is still pretty ridiculous.
In all practicality, the cost of money for any investment is far far lower than the risk of that investment. Of course, as an end user, the banks’ risk towards you is factored into the cost of money for you. Additionally all loans made are based on predictions of future rates.
It is therefore my conclusion that increasing the stability and the outlook of the economy in non-monetary ways is much more important than slightly lower rates in the present.
The impact of what the FED rate increase implies for future policy is much greater than the impact of slightly higher rates in the present.
Are you arguing that the federal reserve should raise rates to create the perception of an improving economy even if the current data is a bit shaky?
It’s an interesting idea. We are still in the grips of a deflationary mindset, but then again, we may still need to fear deflation, so perhaps that caution is warranted. I think it would be premature to raise rates, but everyone seems to think it will happen.
I think just the opposite is true.
Investors are worried that the FED will continuously be at the bleeding edge (hurting the economy) rather than the trailing edge (inflation overshoots targets) in terms of rate hikes as the economy heats up in the upcoming years.
Investors would much rather want the attitude “we are raising rates to keep inflation under control” than “we’re raising rates because the economy can handle it”. Sure it can handle it, but why hold the economy back?
[…] Claren Road Asset Management has been experiencing redemptions that may have increased the selling pressure on Fannie and Freddie securities making now an opportunistic time to buy in the event that the rule of law provides that the companies producing the profits are able to use a portion of those profits to rebuild capital. […]
[…] Claren Road Asset Management has been experiencing redemptions that may have increased the selling pressure on Fannie and Freddie securities making now an opportunistic time to buy in the event that the rule of law provides that the companies producing the profits are able to use a portion of those profits to rebuild capital. […]