Mel Watt poised to reflate the housing bubble
Mel Watt now runs the Federal Housing Finance Agency (FHFA). As FHFA director, Mel Watt establishes policy for Freddie Mac and Fannie Mae, the government sponsored entities (GSEs). This responsibility gives Mr. Watt tremendous influence over mortgage qualification standards, the secondary mortgage market, and ultimately house prices. As new agency leader, Mel Watt replaces Edward DeMarco, and many housing experts anticipate changes in key policies that may reflate the housing bubble.
My disdain for Mel Watt roots in his public statements and policies as a US Representative. While in Congress he steadfastly supported lending quotas to unqualified borrowers, and after the housing bust, he championed efforts to award these unqualified borrowers free money through principal reductions. I asked the question What would Watt do as the new head of the GSEs? Most conservative analysts believe Mel Watt would loot the GSEs for political gain. The conscientious bureaucrat Mr. Watt replaces, Edward DeMarco, consistently placed the interests of the US taxpayer ahead of posturing politicians or greedy bankers. It probably cost him his job.
By Nick Timiraos — December 5, 2013, 3:15 PM
It seems unlikely that Mr. Watt would make immediate, dramatic changes. But there are important ways Mr. Watt could shift the agency’s direction at the margins. Here are four:
1) A different approach to the “wind down”
Edward DeMarco, the agency’s acting director for the last four years, has set about shrinking the roles of Fannie and Freddie as part of a gradual “wind down” of the companies by raising the fees they charge lenders and, more recently, by contemplating reductions in the maximum loan limits for the firms below their current levels, which were raised by Congress in 2008….
The Obama administration says that loan-guarantee fees need to go up and that loan limits need to decline. But, for now, officials have suggested that other initiatives to draw back private capital might be prioritized ahead of those more blunt tools, out of fear of jeopardizing the housing recovery. “We want to see a much broader, more comprehensive effort to bring back private capital to take credit risk before you just squeeze and raise fees and lower loan [limits],” said Michael Stegman, a senior Treasury Department adviser, at an industry conference in October. “It’s all got to be of one piece.”
Apparently, the FHA didn’t get the White house memo. (See: FHA lowers the boom on Coastal California housing markets) Mike has an article coming up this weekend on the recently approved increases in guarantee fees.
2) Prioritizing access to credit for borrowers
…. “There is more that needs to be done on access to credit,” said Gene Sperling, the director of the White House National Economic Council in a speech last month.
Industry economists have pointed to average credit scores on new purchase loans backed by Fannie and Freddie that exceed 750 as one indication that lending standards may be too conservative after having been too lax during the past decade. At the same time, new regulations should make it much more difficult for many of the most toxic mortgage products that fueled the housing bubble to return anytime soon. …
Access to credit is not the problem; Qualifying for credit is. Too many potential borrowers behaved as Ponzis during the housing bubble. As a consequence, many people have poor FICO scores and represent poor credit risks. Lenders are wise not to give out loans to people who won’t pay them back.
3) Developing a more detailed transition plan
The FHFA has issued a strategic plan for operating the companies in the absence of congressional action, but former administration officials have suggested Mr. Watt is likely to provide a broader blueprint. Mr. DeMarco has “viewed his mandate as a very narrow mandate,” said Jim Parrott, a former White House housing adviser, at the October conference.
“There’s an increasing sense that what we now need from that institution…is more help in thinking through what transition should actually be.”
Mr. Parrott said that Mr. Watt is likely to bring key stakeholders together and to “take some time to map out what a coherent transition plan looks like and then begin to move down that path.”
4) Revisiting borrower aid
Mr. DeMarco nixed a Treasury offer last year to subsidize the cost of loan-balance reductions for a portion of Fannie and Freddie-backed mortgages that were underwater. The FHFA said that the program was unlikely to reach more than 500,000 borrowers and more likely to reach far fewer. “This is not about some huge difference-making program,” he said at the time.
If the program was likely to offer only a marginal benefit in 2012, that’s even truer today because home price gains have taken even more borrowers out of negative equity. At the same time, that could make the decision to implement a tailored principal-forgiveness option—a major crusade for liberal political activists last year—less controversial now.
Mr. Sperling made clear last month that the White House still thought principal reduction made sense for the broader economy and for the mortgage-finance giants. “We believed it then. We believe it now,” he said. …
With rising home prices and the inevitable bureaucratic delays, I don’t believe widespread principal reduction is forthcoming — at least I hope not.
The political Right bemoans the Watt appointment, and with good reason.
Mel Watt is a long-time champion of mortgage quotas for affordable housing. Here we go again.
Mr. DeMarco’s actions have aroused the opposition of the left. Critics complain that his underwriting standards are too high, meaning that many low-income borrowers will not be able to buy homes. This is the same argument community activists made when they pressed Congress to adopt the affordable-housing goals. Today, the idea underlying the goals goes by a new term—”opening the credit box.” But the objective is the same: reduce underwriting standards so borrowers who have poor credit records and don’t have down payments will be able to buy homes.
This is exceptionally bad policy. Even Barney Frank, the principal backer of the affordable-housing goals for much of his career in Congress, admitted in 2010 that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
Barney Frank realized the error of his ways. In the post Banks lobby to underwrite bad loans with no risk retention, Barney Frank sides with conservatives on regulatory issues and opposes the policies he used to endorse when he was in Congress.
The only way to maintain a stable housing market is by requiring reasonable underwriting standards. This means a down payment of at least 10%, a FICO credit score above 660, and a debt-to-income ratio, after the mortgage is closed, of no more than 38%. When those standards were generally in force between 1970 and 1992, mortgage defaults in the U.S. were under 1% and the national homeownership rate was 64%—about where it is today after all the foreclosures in recent years.
Those standards fluctuated more in California as we inflated two housing bubbles, but those standards maintained a stable housing market for the better part of 50 years from about 1945 to 1995. Banking should be boring. Innovation in banking leads to Ponzi schemes and unstable loan products. Banking should be prized for its stability, not its creativity.
Unfortunately, Mr. DeMarco’s underwriting standards will almost certainly change, and for the worse, once Mr. Watt is in charge of the Federal Housing Finance Agency. The stage has already been set. The Consumer Financial Protection Bureau (CFBP), an agency created by the Dodd-Frank Act, has outlined a minimum quality mortgage that will permit a borrower to get a loan with a 3% down payment and a FICO credit score well below 660. Under Dodd-Frank, a lender could be subject to severe penalties if it turns out that the borrower cannot repay the loan—but the CFPB’s rule protects the lender against liability if Fannie and Freddie’s automated underwriting systems approve the loan.
Enter Mr. Watt. The North Carolina congressman is a consistent, long-time supporter of affordable-housing quotas. He joined Barney Frank in 2003 to block the Bush administration’s attempt that year to increase government oversight of Fannie and Freddie. And in 2007 he cosponsored legislation that would have pushed the two GSEs even deeper into the subprime mess. One can be sure that there will be many low-quality mortgages approved by Fannie and Freddie on his watch. …
As we gaze into the open credit box the financial regulators have set before us, is there any doubt where the housing market is headed?
Can we really be sure? I am concerned, and so are many on the right who supported Edward DeMarco, but will Mel Watt really be that bad?
Mel Watt is a politician; He pandered to his constituents to get reelected. He may or may not believe in those principals strongly. Since politicians are born liars, there’s no way to be certain. If he walks the talk, we may be in trouble because Mel Watt may give loans to unqualified borrowers, inflate house prices, and recreate the conditions that caused the last housing bust. Let’s hope he gained the wisdom of perspective Barney Frank demonstrates; otherwise, we’re doomed.
$100,000+ in mortgage equity withdrawal
The former owner of today’s featured property paid $167,000 back on 6/9/2000. She used a $161,990 first mortgage and a $5,010 down payment — less than most single-family home renter’s security deposits. Over the next seven years, she extracted just over $100,000, but by Ponzi standards, she was restrained. She undoubtedly left money on the table, or in the walls is it were.
50 LOBELIA Rancho Santa Margarita, CA 92688
$399,900 …….. Asking Price
$167,000 ………. Purchase Price
6/9/2000 ………. Purchase Date
$232,900 ………. Gross Gain (Loss)
($31,992) ………… Commissions and Costs at 8%
$200,908 ………. Net Gain (Loss)
139.5% ………. Gross Percent Change
120.3% ………. Net Percent Change
6.4% ………… Annual Appreciation
Cost of Home Ownership
$399,900 …….. Asking Price
$13,997 ………… 3.5% Down FHA Financing
4.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$385,904 …….. Mortgage
$122,243 ………. Income Requirement
$1,960 ………… Monthly Mortgage Payment
$347 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$83 ………… Homeowners Insurance at 0.25%
$434 ………… Private Mortgage Insurance
$334 ………… Homeowners Association Fees
$3,158 ………. Monthly Cash Outlays
($453) ………. Tax Savings
($506) ………. Principal Amortization
$23 ………….. Opportunity Cost of Down Payment
$70 ………….. Maintenance and Replacement Reserves
$2,292 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,499 ………… Closing Costs at 1% + $1,500
$3,859 ………… Interest Points at 1%
$13,997 ………… Down Payment
$28,854 ………. Total Cash Costs
$35,100 ………. Emergency Cash Reserves
$63,954 ………. Total Savings Needed