The housing market is anything but stable. Decisions by banks, government regulators, the federal reserve, congress, and Treasury department officials have tremendous impact on house prices. For example, decisions at the federal reserve regarding interest rates have imbued the market with such high payment affordability that buyers can finance the still-inflated prices of the previous bubble. 
Banks decided early this year to slow the rate they took back properties at foreclose auctions thus reducing MLS inventory of REO significantly. Government regulators changed accounting rules in 2009 to allow banks to keep delinquent mortgage squatters in place with delayed millions of foreclosures for many years. The GSEs, now run by the Department of Treasury, are liquidating their portfolios and changing the rules on short sales (more on that today). And congress has enacted various bailout programs and recently approved a series of looser qualification standards which are bailing out speculators and HELOC abusers. Congress has also eliminated any tax consequences for those who took the free money and spent it, and they are discussing extending these benefits further.
Senate panel backs extension of mortgage debt relief law
The law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven.
August 12, 2012|By Kenneth R. Harney
WASHINGTON — Here’s some encouraging news for financially stressed homeowners across the country: The Senate Finance Committee has approved a bipartisan bill that would extend the Mortgage Forgiveness Debt Relief Act through 2013.
No one should be surprised by this. This will be extended over and over again for years.
Why is this important? Several reasons: The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress.
I have no problem with people who couldn’t pay off a purchase-money mortgage. These were victims of bad timing more than bad judgement. However, if HELOC abusers and serial refiancers get debt relief, they are getting a tax break of free money they received from a stupid lender. In other words, they are being rewarded for theft. That will create serious moral hazard issues going forward as more and more borrowers will opt to take totally free money in the future.
The law, which is set to expire Dec. 31, has also provided relief to thousands of people who have debt balances written off as part of loan-modification agreements and is crucial to the $25-billion federal-state robo-signing settlement with large banks. Some Capitol Hill analysts predicted that, along with a host of other special-interest tax benefits, an extension might have trouble making it through the partisan gantlet in an election year.
I doubt the Republicans will stand in the way of this bill, particularly since it relates to people who obtained relief under the big bank settlement.
But the Senate committee managed to pull together enough votes Aug. 2 to pass the debt relief extension, after heavy lobbying by the National Assn. of Realtors and the National Assn. of Home Builders….
realtors and home builders desperately want to see any lingering tax consequences expunged because it will hinder the ability of these recycled buyers to get a home again in the future. Unfortunately, many of these people probably should not get a home again in the future.
Congress has other tax code market manipulations it’s extending.
The mortgage insurance deduction is another key housing benefit that made it into the Senate committee’s eleventh-hour extender bill. … Under a provision in the tax code that expired in December, certain borrowers could write off their mortgage insurance premiums on their federal income taxes, just as they do with mortgage interest. To qualify for a full deduction, borrowers could not have adjusted gross incomes greater than $100,000 ($50,000 for married taxpayers filing separate returns). …
The outlook for the extenders: Given the popularity of the housing deductions and credits, look for supporters to press the full Senate for early action in September to get these issues settled before election day. If there are serious objections in the Republican-controlled House, however, then all bets are off until the lame-duck session, when election losers as well as winners get to write federal tax policy.
Giving loanowners a tax break isn’t the only recent change in government policy. The Treasury department is making changes to wind down the GSE loan portfolios. This is a good move.
GSEs expected to unload delinquent loans after Treasury change
By Jon Prior — August 17, 2012 • 1:17pm
Analysts expect Fannie Mae and Freddie Mac to begin unloading more distressed mortgages from their portfolios after the Treasury Department accelerated their wind down.
Both government-sponsored enterprises will now be required to cut their retained portfolios by 15% annually over the next several years until hitting $250 billion. Treasury increased this from a 10% annual reduction. Fannie holds $672 billion and Freddie has $581 billion in their portfolios as of June, according to their latest monthly summary reports.
“However, it should be noted that the GSEs are currently reducing their investment portfolio at least this much,” said analyst Sarah Hu of RBS Securities.
Freddie is already below its target for 2012, but Fannie still has to trim $20 billion this year, according to JPMorgan Chase ($38.04 0%) analysts (click on the graph below to expand).
This move tells me the government is serious about reducing the market footprint of the GSEs. That is great news, IMO.
More than half of the GSE portfolios are made up of delinquent loans and other mortgages securitized into private-label bonds.
The GSEs are still holding their toxic waste.
The GSEs could sell more of these loans into rental programs, or they could bundle up previously modified mortgages on their books. Fannie has already started urging attorneys to foreclose faster after all possible options are exhausted, which could clear out more nonperforming mortgages.
When it is determined that “all possible options are exhausted,” the GSEs will ramp up their foreclosure efforts and push out the squatters. The major banks will likely follow suit. Amend-extend-pretend will someday end.
It does place more pressure on Congress to get moving on housing finance reform sooner rather than later. Mortgage industry trade groups used the Treasury action Friday to renew their call to do so gently.The government finances more than 90% of the mortgage market.
“We support efforts to protect the taxpayers, but want to emphasize the importance of ensuring continued liquidity that will provide the affordable mortgage financing necessary to support the housing market. It is critical that the transition of Fannie Mae and Freddie Mac’s role in financing real estate does not limit the availability, or increase the cost, of financing,” said Mortgage Bankers Association David Stevens.
There is no way to wind down a huge government subsidy program without causing an increase in cost or a limit on availability. To even suggest such a thing is laughable. The only real question is how much will a GSE wind down cause costs to go up and availability to be limited.
Short sales get easier
In an effort to deal with the huge volume of delinquent loans on their books, the GSEs are making it easier for loanowners to complete short sales.
Housing agency changes rule to boost short sales
By Alan Zibel – Aug. 21, 2012, 2:48 p.m. EDT
WASHINGTON (MarketWatch) — U.S. homeowners with collapsed property values could have an easier time selling their homes for less than the outstanding mortgage amount under changes rolled out by a federal housing regulator.
The Federal Housing Finance Agency, along with the mortgage-finance giants it regulates, Fannie Maeand Freddie Mac on Tuesday announced a set of steps to make these “short sales” easier to obtain.
Since the housing market went bust starting around six years ago, home buyers, sellers and real estate agents have been frustrated by the slow pace of negotiating these often-complicated transactions.
Under the changes, which are effective Nov. 1, homeowners with missed mortgage payments and serious financial problems will need to submit fewer documents to be approved for a short sale.
Previously, document requirements were intended to prevent short sales by people who had assets and simply didn’t want to pay the bills. The duress requirements prevented many strategic short sales (and probably encouraged more strategic defaults). Eliminating these barriers is a real sign the GSEs want more borrowers to complete short sales.
In addition, homeowners will be eligible to be considered for a short sale even if they have not missed any mortgage payments.
This will be a big improvement. People don’t have to become delinquent to sell their underwater homes. This should result in fewer strategic defaults.
Lenders will be permitted to go ahead with those sales without Fannie and Freddie’s approval if the borrower is experiencing a financial hardship such as a death in the family, divorce, job loss or job relocation of more than 50 miles.
That last provision is huge. One of the biggest problems with a quarter or more of the population being underwater is a lack of mobility. Our economy thrives on the ability of workers to move to where demand exists for their services. The housing bust severely curtained this mobility.
The two provisions above allow a loanowner to keep making payments and sell their house to take a job in a different city or state. That will be a big help to a struggling economy.
The guidelines demonstrate the regulator’s “commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” Edward DeMarco, the housing agency’s acting director, said in a statement.
The changes also are designed to get prevent holders of home equity loans and other second mortgages from blocking these transactions by demanding more money. The holders of those loans will now get a maximum payment of up to $6,000.
I recently reported how Second mortgages hold short sellers hostage. To help loanowners negotiate with the banking terrorists, the GSEs are going to pay them off. This is an indirect bailout of second mortgage holders by the US taxpayer. That $6,000 is going to a bank, and it is coming from the US Treasury. The fact that a loan owner and the GSEs are involved is smoke and mirrors.
Earlier this year, the housing regulator said mortgage companies would have to respond to a short sale offer within 30 days of receiving it, setting out formalized timelines that are designed to speed up short sales.
The speedier decisions on short sales are likely a response to the California Homeowners Bill of Rights. That change in government policy that manipulates the housing market bans dual track foreclosures. Within the foreclosure process, there is a 90-day redemption period where the loanowner can pursue loan modifications or short sales. Speeding the response time on short sales will prevent loanowners from gaming the system to delay a foreclosure in California.
A manipulated market is a dangerous one
Prior to the collapse of the housing bubble, the government’s footprint in housing was much smaller. The GSEs and the FHA had a much smaller market share, and the GSEs were private corporations. Government regulators didn’t bail out failed homeowners or give them tax breaks. The federal reserve didn’t buy mortgage backed securities to manipulate mortgage rates. And the list goes on. We will know when the housing market has reached a point of real stability when all this attention and manipulation ends. Until then, there are still serious risks of financial loss associated with home ownership.
At least this Ponzi improved his property
The former owner of today’s featured property was a Ponzi with a history of HELOC abuse, but in 2005 — perhaps in an effort to increase the value and accelerate the mortgage equity withdrawal — the owner rebuilt the property. Of course, he then refinanced it and removed any newly-created equity. Apparently, while he was quadrupling his mortgage, his income wasn’t keeping up.
- This property was purchased in 1993 for $435,000. I don’t have his original mortgage information, but safe to say, it was less than $435,000.
- On 8/3/1999 he obtained a stand-alone second for $76,006
- On 2/14/2002 he refinanced with a $621,250 first mortgage.
- On 8/28/2002 he obtained a $100,000 HELOC.
- On 6/6/2003 he refinanced with a $650,000 first mortgage.
- On 10/10/2003 he opened a $62,000 HELOC.
- On 7/27/2004 he refinanced with a $952,250 first mortgage.
- On 11/1/2005 he got a construction loan for $1,650,000.
- On 1/31/2007 he obtained a $500,000 HELOC.
- On 6/15/2007 he refinanced with a $1,987,500 first mortgage and obtained a $350,000 HELOC.
- Assuming he maxed out his HELOC, the total property debt was $2,337,500, and the total mortgage equity withdrawal was just shy of $2,000,000.
- He was also allowed to squat in the luxury he created for two years without making any payments.
You have to imagine guys like this serve as role models for Ponzis everywhere.
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Proprietary OC Housing News home purchase analysis
126 VIA TRIESTE Newport Beach, CA 92663
$1,445,000 …….. Asking Price
$435,000 ………. Purchase Price
4/6/1993 ………. Purchase Date
$1,010,000 ………. Gross Gain (Loss)
($34,800) ………… Commissions and Costs at 8%
============================================
$975,200 ………. Net Gain (Loss)
============================================
232.2% ………. Gross Percent Change
224.2% ………. Net Percent Change
6.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,445,000 …….. Asking Price
$289,000 ………… 20% Down Conventional
4.16% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,156,000 …….. Mortgage
$309,006 ………. Income Requirement
$5,626 ………… Monthly Mortgage Payment
$1,252 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$361 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$743 ………… Homeowners Association Fees
============================================
$7,983 ………. Monthly Cash Outlays
($1,321) ………. Tax Savings
($1,619) ………. Equity Hidden in Payment
$427 ………….. Lost Income to Down Payment
$201 ………….. Maintenance and Replacement Reserves
============================================
$5,670 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$15,950 ………… Furnishing and Move In at 1% + $1,500
$15,950 ………… Closing Costs at 1% + $1,500
$11,560 ………… Interest Points
$289,000 ………… Down Payment
============================================
$332,460 ………. Total Cash Costs
$86,900 ………. Emergency Cash Reserves
============================================
$419,360 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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$2,195,000 145 VIA UNDINE |
0.04 miles 3 bd / 3 ba 2,200 Sq. Ft. |
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$1,895,000 112 VIA QUITO |
0.09 miles 3 bd / 2.5 ba 2,340 Sq. Ft. |
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$2,149,000 148 VIA WAZIERS |
0.11 miles 3 bd / 2.5 ba 2,428 Sq. Ft. |
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$2,100,000 126 VIA XANTHE |
0.13 miles 4 bd / 4.5 ba 2,702 Sq. Ft. |
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$2,550,000 107 VIA YELLA |
0.15 miles 3 bd / 2.5 ba 2,400 Sq. Ft. |
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$16,900,000 901 VIA LIDO SOUD |
0.21 miles 5 bd / 5.5 ba - Sq. Ft. |
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$3,695,000 1120 West BAY |
0.29 miles 5 bd / 2.75 ba 2,639 Sq. Ft. |
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$2,149,000 2521 VISTA Dr |
0.34 miles 4 bd / 3 ba - Sq. Ft. |
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$1,395,000 2651 CRESTVIEW Dr |
0.47 miles 3 bd / 2.75 ba 1,875 Sq. Ft. |
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$2,995,000 814 West OCEANFRONT |
0.48 miles 4 bd / 3 ba - Sq. Ft. |
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Analysis: Investors Driving Recovery as Activity Surges
A recent analysis from John Burns Real Estate Consulting suggests that investors may be the biggest driving force in the housing recovery.
In a report from the company, senior research analyst Erik Franks noted that investors are buying homes at an increased pace and at prices that allow for a reasonable rental return.
“Investors are buying homes at a more rapid pace than ever before, and this time their investments actually make sense,” Franks wrote.
Across the 167 metro areas analyzed by the company, investor activity as a share of all transactions rose to 29.6 percent in the first quarter of 2012, up from a low of 23.6 percent in the last quarter of 2009. Furthermore, the company’s “on the ground” research leads analysts to believe this year’s second-quarter activity exceeded the first quarter’s, with investor activity spiking 2 percent.
Investor activity has returned to Stockton, Miami, Las Vegas, Riverside-San Bernardino, Sacramento, and Phoenix, all areas investors were previously reluctant to enter after their old investments crashed. According to the report, some markets are now “completely dominated” by investors, such as Las Vegas (where investor activity makes up 50 percent of total activity) and Phoenix (46 percent).
Investors also seem to be attracted to small markets-particularly those in inland California, the report notes. Second home buyers are also making their way into smaller markets, leading to large activity increases in Naples, The Villages, Tucson, and Panama City.
While Franks conceded that these signs of increased investor interest may point to a false recovery, he said John Burns Real Estate Consulting is not concerned and welcomes the return of private capital.
“Most of these investors are paying all cash and buying homes below replacement cost,” Franks wrote. “They are helping the market recover by removing supply at the low end of the market and driving real buyers to higher price points, including new homes.”
Franks also wrote that the company doesn’t foresee a scenario in which investors dump their stock on the market unless it’s clear prices are dropping again. For now, Franks said he and his colleagues feel comfortable for the near future.
“We are hyper-focused on the potential positive result, which is that rising prices get fence-sitting consumers off the fence. We are seeing this occur in some pockets around the country.”
The fact that speculators are now the driving force behind a supposed recovery and bureaucrats are using lower rates to get fence-sitters to buy homes is all that people need to know and understand about why another crash is just around the corner.
The speculators don’t have available to them this time around, no-doc option ARMs. They’re qualifying for any financing with reasonable underwriting guidelines.
I’m talking about real speculators who’re paying all cash to buy SFR’s, not the pretend kind, like OC homedebtors.
1/3 to 1/2 of all recent sales transactions have been cash deals. Some buyers are looking for a place to park cash; some are looking for income streams; some will flip. Nonetheless, that much speculative depth in the buyer-mix is a huge red flag because a large cadre of those folks are essentially momentum-chasers and can turn on a dime depending on which way the wind blows.
Also, they’re typically heavily leveraged in other venues and when margin calls hit their inboxes, they will offload ‘stat’ and that’s when ‘things’ will get interesting with regard to inventories/pricing.
With so many buyers at auction getting low-end properties and holding them as rentals, very few low-end properties are making it to the MLS. This is also causing the median to rise out of proportion to the actual increase in house prices due a shift in the sales mix.
I forget which Libertarian candidate it was, probably Harry Brown, but when asked what he would do if elected he said, “I will get ride of the IRS, get rid of the Federal Reserve, get rid of the Depts. of Education, Health and Welfare, etc., cut the military by 2/3, and then I will break for lunch.
That would be a huge step forward.
With Libertarian comments like that, the powers that be will not allow them to be elected. Look what happened to Allan Keyes — the only black presidential candidate in 2008 and his prior treatment while in the Republican party.
the statist mentality has entrenched itself in every strata of our society. we are so far from capitalism that ideas like this sound insane and impossible. They are actually the very ideas which would liberate our economy.
The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Where things get worse is when one looks at the number of new homes for sale. At 142,000 (of which just 38,000 actually completed), this was the lowest number. EVER.
the median new home price slid to $224,200, down from $229,100 in June, and the lowest since January, while the average home price declined from $266,900 to $263,200. This was the lowest average price posted so far in 2012.
http://www.zerohedge.com/news/spot-housing-bottom-new-homes-sale-drop-lowest-ever-average-new-home-price-plunges-2012-lows
“The reality: the actual number of new homes sold in July was 34,000, the same as in June, and the lowest since March. Of this, a massive 3,000 (yes, three thousand) homes were sold in the Northeast in the entire month.”
The difference between the Northeast and the Southwest is largely due to the foreclosure process. In the non-judicial states of the Southwest, prices have crashed, and now lenders are withholding resale product to get prices to go up, so the builders will do well. In the Northeast lenders have just now started to foreclose, inventories are higher, and the builders can’t compete.
The low available new home inventory is actually a good sign. It means builders are not letting their production get ahead of sales. Construction employment will start to pick up in the Southwest. More layoffs are coming in the Northeast.
I bought a short sale in Foothill Ranch last year for 550,000. Today the same floor plan on a smaller lot just went pending for 750,000 after rotting on the market for about a year.
I have been in escrow for 6 months on another short sale in Carson at 169,000. The same floor plan in an inferior location in the complex is now in escrow at 184,000.
There is reading articles and there is buying on the ground. You have to fight to get decent deals in the better neighborhoods. I am going to take a break and see if things get less crazy this winter.
I am a part time realtor and while I have closed plenty of deals, I am not so sure the amount of work the current market creates makes it worth it. I am happy to sit at the day job desk for awhile.
And work on my dot com.
Ah, Carson. I was born and raised there. My mom still lives there. Go Colts!
My first fixer upper was in Carson.
Walter,
I haven’t looked at neighborhood comps for your Las Vegas property lately, but I imagine it has appreciated significantly as well.
Zillow is saying up about 5%. Not bad for about 6 months.
While I do see the possibility of a 50% crash, the conditions that would happen under means we should be looking to buy farm land with well water. (A buy I have had in the back of my mind just in case.) Although the posters over at patrick have most likely bought it all up by now…
In the mean time, the returns on real estate are nice if you are willing to do the work…
Would like to chat with you about your plans for the flipping fund when you have a minute.
In the Great Housing Bubble, I proposed a limit on the allowable debt-to-income ratio as an effective way to prevent future housing bubbles. Four years later, the federal reserve has finally figured this out.
Research: Loan-to-income guidelines could have “forestalled much of the housing boom”
Fed Working Paper by Paolo Gelain, Norges Bank, Kevin Lansing, Federal Reserve Bank of San Francisco and Norges Bank, and Caterina Mendicino, Bank of Portugal: House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy
The researchers looked at the house bubble and several possible policy responses. It appears the most effective policy – for limiting the bubble – would have been to require lenders to focus more on loan-to-income.
From the paper:
Our final policy experiment achieves a countercyclical loan-to-value ratio in a novel way by requiring lenders to place a substantial weight on the borrower’s wage income in the borrowing constraint. As the weight on the borrower’s wage income increases, the generalized borrowing constraint takes on more of the characteristics of a loan-to-income constraint. Intuitively, a loan-to-income constraint represents a more prudent lending criterion than a loan-to-value constraint because income, unlike asset value, is less subject to distortions from bubble-like movements in asset prices. Figure 4 [see below] shows that during the U.S. housing boom of the mid-2000s, loan-to-value measures did not signal any significant increase in household leverage because the value of housing assets rose together with liabilities. Only after the collapse of house prices did the loan-to-value measures provide an indication of excessive household leverage. But by then, the over-accumulation of household debt had already occurred. By contrast, the ratio of U.S. household debt to disposable personal income started to rise rapidly about five years earlier, providing regulators with a more timely warning of a potentially dangerous buildup of household leverage.
We show that the generalized borrowing constraint serves as an “automatic stabilizer” by inducing an endogenously countercyclical loan-to-value ratio. In our view, it is much easier and more realistic for regulators to simply mandate a substantial emphasis on the borrowers’ wage income in the lending decision than to expect regulators to frequently adjust the maximum loan-to-value ratio in a systematic way over the business cycle or the financial/credit cycle.
…
… the most successful stabilization policy in our model calls for lending behavior that is basically the opposite of what was observed during U.S. housing boom of the mid-2000s. As the boom progressed, U.S. lenders placed less emphasis on the borrower’s wage income and more emphasis on expected future house prices. So-called “no-doc” and “low-doc” loans became increasingly popular. Loans were approved that could only perform if house prices continued to rise, thereby allowing borrowers to refinance. It retrospect, it seems likely that stricter adherence to prudent loan-to-income guidelines would have forestalled much of the housing boom, such that the subsequent reversal and the resulting financial turmoil would have been less severe.
Read more at http://www.calculatedriskblog.com/2012/08/research-loan-to-income-guidelines.html#xmkL27kAJlautusp.99
Will short sales hit home prices?
On Tuesday, the Federal Housing Finance Agency announced new guidelines that are supposed to make it easier for home owners to sell their properties in a short sale — when a home sells for less than the borrower owes on the mortgage.
In addition, the new guidelines, which kick in on Nov. 1, allow owners with a Fannie Mae or Freddie Mac mortgage to pursue a short sale even if they haven’t fallen behind on their mortgage payments but have a hardship, such as a job loss or divorce.
Consumer advocates say the changes will help some of the borrowers who’ve been unable to sell the estimated 11 million U.S. homes worth less than the value of their mortgage, according to CoreLogic. However, not all homes would qualify in this new program.
And while the changes provide new hope to distressed home owners, experts say they could negatively affect prices in neighborhoods that get an influx of new short sales. A rise in short sales will result in “downward pressure on home prices until we clear out the majority of these distressed properties,” said Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
Home prices had been rising in recent months, a trend experts say is due to the limited inventory and the smaller number of distressed properties on the market.
In June, median home prices were up 8% from a year prior, according to the National Association of Realtors. That marked the fourth back-to-back monthly increase in home prices — the longest streak since 2006. Inventory was down 24% from the prior year. And distressed sales — including short sales and foreclosures — accounted for 25% of all sales, down from 30% in June 2011.
For its part, the Washington-based NAR says it’s called for an expedited short-sales process to help boost inventory. The Federal Housing Finance Agency says that it expects short sales to settle at market prices and that they’ll help avoid foreclosures and long vacancy periods that result in declines in home values.
Still, data suggest that the impact on home owners who aren’t in distress could be lower values for their properties in the near term. Even if short sales fly off the market, they’ll likely go at a discounted price. According to the NAR, short sales sell at prices that are 15% lower than regular home listings, on average.
Instead, the benefits for homeowners could be bigger in the long term. “It’s a better idea to clear out the backlog of distressed homes rather than delay the process in the name of supporting [home] values,” said Brad Hunter, chief economist at Metrostudy, a market research and consulting firm.
Tighter lending standards are not bullish
Fannie Mae Tightens Mortgage Standards for Some Home Buyers
Fannie Mae, the largest source of money for U.S mortgages, told lenders that it’s tightening some of its qualification standards for people buying homes or refinancing loans.
The changes include a reduction of the maximum loan-to- value ratios for some adjustable-rate mortgages to 90 percent, from as much as 97 percent, and an increase in required credit scores for certain loans, the Washington-based company said yesterday on its website. Fannie Mae also will start demanding more tax returns from self-employed borrowers, according to Matt Hackett, underwriting manager at New York lender Equity Now Inc.
“This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago,” Hackett said of the tax-information demand, tied to an update of its underwriting software used by originators. Two years of personal and business returns will be required to verify incomes, up from one year of personal returns. “You’d be surprised how much of an effect this has,” he said.
Tougher guidelines from Fannie Mae (FNMA), which along with smaller rival Freddie Mac guarantees mortgage-backed securities financing about two-thirds of new loans, may add to challenges for a housing market that’s showing signs of recovering after a six-year slump. Pacific Investment Management Co., manager of the world’s largest mutual fund, said in commentary yesterday that while “record-tight” credit standards are impeding real- estate sales, they “will not last forever.”
Home Sales
Sales of existing homes rose 2.3 percent to an annual rate of 4.47 million in July from an eight-month low, National Association of Realtors figures showed today. The median forecast of 73 economists surveyed by Bloomberg called for an increase to a 4.51 million rate.
Andrew Wilson, a spokesman for Fannie Mae, declined to comment on the changes to its standards, most of which will start being applied in October. The company told lenders that the adjustments were part of regular reviews of data and loan performance.
The firm, which along with Freddie Mac has tapped almost $190 billion of U.S. capital since being seized in 2008, will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department announced Aug. 17.
Credit Scores
Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages not vetted by its Desktop Underwriter computer software. Scores will need to be at least 640, up from a previous minimum of 620, on a scale ranging from 300 to 850, according to the memo. It is also eliminating a policy that provided lenders the flexibility to accept scores 40 points below its normal requirements for specific products if borrowers had other strengths.
Changes to its guidance on so-called underwriting exceptions also will eliminate the concept of a “benchmark” ratio between borrowers’ income and housing costs of 36 percent, according to the memo. Instead, 36 percent will be the “stated maximum,” though the ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.
The new approach “provides more transparent requirements with regard to how compensating factors must be applied,” Fannie Mae said.
The company will end its FannieNeighbors product that offered underwriting flexibility for borrowers in so-called underserved areas. The loans were part of a program that also offers the aid to low-income individuals or public safety, education, military and health-care professionals.
Borrowers without traditional credit will be limited to loans for one-unit homes that they plan to live in, and the company will no longer accept “exterior-only” property appraisals for mortgages run through its computer software.
Fannie Mae is loosening some standards, according to the memo. The loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements also will fall for certain co-op loans, according to the document.
48% of loanowners under 40 are underwater. In other words, half of the nation’s young families are living in debtors prisons of their own making…
http://money.cnn.com/2012/08/23/real_estate/underwater-mortgage-borrowers/index.html
I thought that the idea behind a Ponzi scheme. Leave the next generation holding the bag.
If I work for 10 year to save $200,000, I need to work for 10 years, pay taxes $70,000 in taxes, and sacrifice on non-essentials. If I take out a HELOC or refinance for $200,000 more than the “purchase price of the house”, then default, I needed to fill out paperwork for 4 hours, waited 3 weeks, paid no extra taxes, spend like crazy, squat for a few years, and cry for more relief. Where’s the justice in that?
It’s not justice, it’s Gresham’s law.
The housing bubble was certainly a case of people getting rewarded far out of proportion for the value they created.
Hard work and saving was not rewarded, but foolish buying, imprudent borrowing and failing to take responsibility was rewarded handsomely.
“…living in debtors prisons of their own making…”
Welcome to the instant gratification society, where we buy things we don’t need with money we don’t have to impress people we don’t know.
That’s a sobering statistic. Then you have the 20 somethings who are deeply in student loan debt working $15/hr jobs who have no hope of being a loan owner. How this plays out in the next decade will be very interesting…
Don’t worry about the young’in earning $15 per hour not joining the house debtor’s club, the banks will bring back the liar loans for them or create a “projected earning loan” based on what you think will be earning in 10 years. That’s as long as the bankers are rewarded for making the loans, but not having to personally cover the bad loans.
IR, May I ask you a question: What’s going to happen to mortgage borrowers when GSE winding down? Is it harder to get loan, like higher cost, more tightening standard, for example? Thank you!
Higher costs, higher interest rates (think 12%, not 4.625%). Right now, lending standards are NORMAL and somewhat sane, (for GSE standards).
Interest rates are highly manipulated to the downside (0% fed funds, fed printing money to buy MBS and US treasuries). the pendulum always swings the other way.
A private mortgage market would be much stricter because they actually have consequences for making bad loans.
Remember, Fannie and Freddy are bankrupt and on life support. they should cease to exist. We print and borrow to keep them around.
All of this points to significantly higher interest rates and far less government involvement in the mortgage market. Bad for house prices but good for the economy. They will devalue the dollar in hopes of keeping nominal prices (priced in US dollars) from sliding further.
Underwriting standards would probably remain substantially similar. However, I could see rate spreads widening. e.g. A 3-5 year ARM might start at 5% in a few years, but the 30Y fixed could be 7% to account for the term risk.
HoangV,
I believe we will see some tightening of standards and moderately higher costs.
Scaling down the GSEs will mean less government subsidy in housing. Any time a subsidy is removed, it lowers availability and drives up costs. I can’t see this being any different.
The government won’t do away with the GSE loan guarantees any time soon. They are too important to the housing market. However, if they slowly tighten standards, they will leave a void which private lending can step into. Private lending will demand a higher return to compensate them for the risk. This should mean higher mortgage rates, but not by a huge amount. I agree with Perspective above; spreads will widen.
Scaling back the GSEs is yet another market headwind. The story of real estate over the next several years is going to be rallies followed by removing subsidies which makes the rally fizzle.
“I forget which Libertarian candidate it was, probably Harry Brown, but when asked what he would do if elected he said, “I will get ride of the IRS, get rid of the Federal Reserve, get rid of the Depts. of Education, Health and Welfare, etc., cut the military by 2/3, and then I will break for lunch.”
He’ll be JFKed before he makes it to lunch.
“Also, they’re typically heavily leveraged in other venues and when margin calls hit their inboxes, they will offload ‘stat’ and that’s when ‘things’ will get interesting with regard to inventories/pricing.”
I’m dying to know the profile of these cash buyers. Can they weather a downturn? The profile of the current buyers will determine whether this is another bubble or not. We can truly get an idea what we are in for. What are these people’s assets, liabilities, incomes, income sources, etc?