After the collapse of lending caused by skyrocketing delinquency rates which ultimately brought down the housing market, lending was taken over by the US government. The FHA, which was an existing government program, saw its share of mortgage origination balloon from 4% to 25%. The government sponsored entities of Fannie Mae and Freddie Mac were taken into conservatorship by the Department of Treasury and injected with about $150 billion to keep them solvent. With takeover of the GSEs and the increase in FHA lending, the government insured the loans on as much as 98% of the housing market. The current footprint is still well over 90%.
Most of the parties involved with supervision of the GSEs and FHA agree that the government footprint in lending should be reduced. However, any proposals to accomplish this end is always greeted with the same shrill cries about increasing costs or reducing eligibility. Lenders have morphed from companies with large portfolios of loans to an origination model where they underwrite the loan to government standards then sell them in the secondary market. This new origination model requires little capital to operate because they don’t have to keep any of the loans they originate on their own balance sheets. These new players vehemently oppose a new requirement in the Dodd-Frank law that mandates they keep 5% of the origination value of loans on their books that do not conform to the new “qualified mortgage” standard. It’s primarily these groups who operate on the origination-to-sell model that are lobbying to relax the Dodd-Frank standards.
Study: New Mortgage Rules Could Shrink Lending by 20%
By Nick Timiraos — October 26, 2012, 8:30 AM
Pending mortgage regulations could lock today’s tight lending standards in place and result in nearly 20% fewer mortgages being issued in the coming years, restraining home sales and construction, according to a new study.
What these studies don’t understand — likely through the willful ignorance of the report sponsor — is that tight standards are exactly what we want and need. First, we don’t want the taxpayer taking on risk. Taxpayer-backed loans should be of the highest standard with the least amount of risk. It provides a stable base we can fall back to in times of crisis. This conservative standard does not inhibit private lenders from taking risks on looser underwriting standard. It merely requires those lenders to keep 5% of that risk on their own books to keep skin in the game. I think this is a great requirement. Realistically, it probably doesn’t go far enough. The idea that conservative underwriting standards will inhibit future lending is sensationalist nonsense. It will merely shift the burden of risk from the US taxpayer to private lenders, which is where it should be.
The report from the American Action Forum, a center-right think tank, provides an estimate of the potential impact of three important mortgage regulations set to take effect next year:
- Higher bank capital standards under the Basel III agreement
- The “qualified mortgage” rule regulating ability-to-repay standards, which is part of the Dodd-Frank financial-overhaul law
- The “qualified residential mortgage” rule setting standards governing loans that are issued as securities, also part of Dodd-Frank.
Together, the new rules “will raise the cost of borrowing for millions of home buyers and tighten access to credit beyond pre-boom standards, a period of much more responsible lending than in the lead-up to the housing crisis,” says the AAF paper.
Yes, it will. These regulations should be embraced by everyone who cares about seeing their tax dollars kept safe from dodgy loan originators.
Of course, regulators have yet to finalize the “qualified mortgage” and “qualified residential mortgage” rules. As a proxy for where those rules might land, the report roughly assumes that today’s tighter lending standards won’t return to those that prevailed before the housing boom as a result of the impending regulation.
“It would make permanent the current, tighter standards,” says Douglas Holtz-Eakin, the president of the AAF. While he says he won’t pretend that his estimate is “perfect,” he says it is a “sensible” forecast.
Again, this will only effect those who operate on the origination-to-sell model. Private lenders who operate on the traditional model will not be negatively impacted because they often hold these loans on their books anyway.
Mr. Holtz-Eakin and his co-authors attempt to quantify the potential impact of the regulations by comparing today’s mortgage lending standards with those that prevailed in 2001, which they use as a “baseline” for more normal lending standards.
Banks have tightened up their standards over the past three years—and kept them tight—largely to address the threat of mortgage “put-backs” from investors, from lawsuits, and from the higher costs associated with handling delinquent mortgages.
Mortgage put-backs from the GSEs are the only check-and-balance in the system. This threat keeps the taxpayers safe by keeping lenders on their best behavior when originating loans.
The paper concludes that if lending standards that are in place today don’t moderate to the 2001 baseline level, there would be roughly 14% to 20% fewer loans originated over the coming three years. That decline, they estimate, would reduce total home sales by 9% to 13%, depending on the ability of all-cash buyers to pick up any slack.
Nonsense. The tightening standards will create opportunity for private lending to reenter the market.
The decline in home sales, in turn, would reduce housing starts by 1.01 million through 2015 and GDP growth by 1.1 percentage points.
“The issue is, if we want to have tighter standards for mortgage origination—as a safety-and-soundness issue for banks, or as a matter of not having people get in trouble on their loans—you have to cut back on what you originate,” said Mr. Holtz-Eakin.
In other words, if you don’t give loans to anyone who can fog a mirror, you will make fewer loans. No kidding? Perhaps that’s why owner-occupant demand is so much lower than it was six years ago.
While no one is arguing for a return to the lax standards that prevailed during the housing bubble, Mr. Holtz-Eakin said he’s surprised that more policy makers haven’t focused on the potential impact on the housing market should regulation enshrine banks’ current defensive position when it comes to making mortgages.
Consumer advocates say they are cautiously optimistic that the Dodd-Frank rules can ensure stronger consumer protection without limiting new lending. “If Dodd-Frank is done right, we should see somewhat expanded lending from what we have right now,” said Julia Gordon, housing policy director at the Center for American Progress, a liberal think tank. “It’s important to raise these concerns, but it’s also important to be specific, and not just anti-regulation.”
I used to be anti-regulation. I saw the lingering effects of over-regulation during the 1970s, and when Ronald Reagan rolled many of these back, I thought it was a good idea. Then I witnessed the housing bubble. Deregulation can be taken too far, and the Conservative movement of the late 90s and 00s proved that. We did away with Glass-Steagall and many other Depression Era protections that served us for 80 years. We knew better. In less than a decade we blew up our financial system and created the Great Recession. Unfortunately, we haven’t gone far enough to prevent a recurrence. I hope our children don’t end up in an even larger mess.
The former owner of today’s featured property paid $106,000 back in 1988. In 2002 he had only a $86,850 first mortgage, but in 2003 he refinanced with a $220,000 first mortgage and imploded. He stuck American First Credit Union with his final refinance for $235,000. They let him squat for two years, then they sat on the property for a year themselves before finally releasing it to the market.
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Proprietary OC Housing News home purchase analysis
19788 CLAREMONT Ln Huntington Beach, CA 92646
$264,900 …….. Asking Price
$106,000 ………. Purchase Price
12/29/1988 ………. Purchase Date
$158,900 ………. Gross Gain (Loss)
($8,480) ………… Commissions and Costs at 8%
============================================
$150,420 ………. Net Gain (Loss)
============================================
149.9% ………. Gross Percent Change
141.9% ………. Net Percent Change
3.9% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$264,900 …….. Asking Price
$9,272 ………… 3.5% Down FHA Financing
3.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
$255,629 …….. Mortgage
$73,498 ………. Income Requirement
$1,144 ………… Monthly Mortgage Payment
$230 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$66 ………… Homeowners Insurance at 0.3%
$266 ………… Private Mortgage Insurance
$193 ………… Homeowners Association Fees
============================================
$1,899 ………. Monthly Cash Outlays
($170) ………. Tax Savings
($404) ………. Equity Hidden in Payment
$10 ………….. Lost Income to Down Payment
$53 ………….. Maintenance and Replacement Reserves
============================================
$1,388 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,149 ………… Furnishing and Move In at 1% + $1,500
$4,149 ………… Closing Costs at 1% + $1,500
$2,556 ………… Interest Points
$9,272 ………… Down Payment
============================================
$20,126 ………. Total Cash Costs
$21,200 ………. Emergency Cash Reserves
============================================
$41,326 ………. Total Savings Needed
The property above is available for sale on the MLS.
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22 Responses to “Tighter mortgage standards for GSEs will encourage private lending”
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Yesterday I reported that the lack of MLS inventory is spurring new home sales. Apparently, the sudden sales increase caught production by surprise.
Inventory of New Homes Down to Lowest Level in Nearly 50 Years
The U.S. housing market “has entered a sustainable period of improving conditions,” Pro Teck Valuations CEO Tom O’Grady says in the company’s most recent Home Value Forecast.
Pointing to “very low mortgage rates, stable to rising home prices, declining unemployment, declining housing inventories and a strong rental market,” O’Grady says housing is in a good position to continue growth. Those positive trends should lead to growth in the overall economy, he adds.
“As real estate has historically been one of the most important leading indicators of economic activity, this has positive implications for the economy,” he says in the report. “This is particularly true for the new home market. Even though new homes represent only a small percentage of the overall housing market, they have a disproportionate effect on the economy since data shows that on average, three new jobs are created for a year for every new home built.”
Each of the company’s forecasts picks a housing trend and studies its influence on the market. This particular update shines a spotlight on months of remaining inventory (MRI) of new homes listed for sale and examines how that statistic affects median single family home price changes. The report also examines why there has been a divergence between new and existing home prices in the recent down-cycle.
According to recent data, the inventory of new homes for sale has fallen dramatically since 2008 to 4.5 months, closing in on its lowest level in 50 years.
“The primary reason for the low months of remaining inventory for new single family homes is the historically low number of new homes for sale,” O’Grady writes. “In recent years, new housing supply has been running at the lowest levels since the 1960’s due to the slow down in new home construction, the size of homes being built, and the complicated process for selling/buying distressed properties.”
Home builders hungry for land
You would think they would have tons of undeveloped land.
Homebuilders need more land as housing recovery continues
By Christina Mlynski October 26, 2012 • 12:04pm
While the U.S. housing industry continues to stay positive, obstacles remain in the wake of the next decade, according to Moody’s Investors Service analysts.
In regards to land, companies that turned down inventories quickly and proficiently during the housing bust performed better through the crisis. Many of those must now replenish their supplies to handle the growth they see coming in the next few years, the credit rating agency said.
“Firms’ need to replenish their land inventories, to delever and obtain revolvers, as well as the availability of mortgages and the possible scaling back of government support,” vice president and senior credit officer Joseph Snider of Moody’s Investors Service said.
Some U.S. homebuilders still lack revolving lines of credit as a result of the recent downturn. However, Moody’s believes this will not affect company ratings as long as companies can handle growth expectations and remain level with cash.
“In answer to questions about firms’ increased debt leverage from new land purchases, our position is that we can tolerate this as long as it not excessive and we do not expect it to be permanent,” Snider said.
During the housing bubble, many builders bought remaining lots of land to build new homes. This has resulted in a scenario where companies cannot sell the lots with homes priced at values comparable to estimates set when the lots were first acquired.
The challenge still remains that a firms’ rapid growth could limit leverage. While the debt-to-capitalization ratios remain high, these can gradually be worked down as earnings top up depleted book net-worth positions.
Completed Foreclosures Down 31% from Year Ago, but Remain High
Completed foreclosures continued their descent into September, falling 31 percent from a year ago, according to data from CoreLogic.
The analytics company reported the number of homes lost to foreclosure in September dropped to 57,000. The decline is a steep drop from 83,000 in September 2011, and a decrease from the upwardly revised 59,000 in August.
In addition to the monthly and yearly declines, Mark Fleming, chief economist for CoreLogic, said completed foreclosures are also down 50 percent since the peak month in September 2010 and are 22 percent less than the beginning of the year.
Before the housing crises, completed foreclosures were much lower than the sinking figures reported recently. Between 2000 and 2006, completed foreclosures averaged 21,000 per month.
“While there is significant progress to be made before returning to pre-crisis levels, the trend is in the right direction as short sales, up 27 percent year over year in August, continue to gain popularity,” said Fleming.
Since the start of the financial crisis in September 2008, about 3.9 million homes have been lost to foreclosure in the United States.
Foreclosure inventory is also depleting, with the number of homes in foreclosure inventory falling to 1.4 million, or 3.3 percent of all homes with a mortgage, in September. Mortgaged homes in any stage of the foreclosure process are counted as foreclosure inventory.
A year ago, approximately 1.5 million homes, or 3.5 percent of homes with a mortgage, were in foreclosure inventory. The month-over-month drop in foreclosure inventory was 1.1 percent.
“The continuing downward trend in foreclosures along with a gradual clearing of the shadow inventory are signs of stabilization and improvement in the housing market,” said Anand Nallathambi, president and CEO of CoreLogic. “Increasingly improving market conditions and industry and government policy are allowing distressed homeowners to pursue refinancing, loan modifications or short sales rather than foreclosures.”
California had the highest number of completed foreclosures, 108,000.
Actually, tighter standards alone may lure-in some dumb-money PL, but it will be minimal in scope.
What will encourage private lending more so than anything else: mort rates with acceptable risk/reward ratios. And…. as long as 30yr money remains <6%, and 15yr money <3.5, not much PL is gonna happen
A return to private lending will drive up costs and necessitate higher margins to compensate for risk. That in turn will put pressure on home prices currently sustained by artificially low rates and low borrowing costs.
Private lending is not dumb enough to try and compete with government backed insane lending standards. No one can compete with the treasury.
Fannie/Freddie/FHA have created MASSIVE distortion in the mortgage/housing market. It has lured giant institutions to park money in the mortgage market with its Government “Guarantee” (false sense of security). It is a DISASTER to have government put you, the taxpayer, on the hook for house loans. Are we that politically spineless and inept? Anyone not in favor of abolishing all 3 is a COLLECTIVIST and contra-educated enemy of capitalism and free citizens.
Somebody has got to say it.
An argument can be made that keeping the FHA as a backstop in times of severe market turmoil has value, but when times are good, market share should be at a minimum. Right now, the three entities are well over 90% of the housing market, and that doesn’t look like it will change any time soon.
“Mortgage put-backs from the GSEs are the only check-and-balance in the system. This threat keeps the taxpayers safe by keeping lenders on their best behavior when originating loans.”
These mortgage lenders keep crying about the mortgage put backs. The strongest language has been removed, but at least some of it is still there.
Funny, how a lender taking responsibility for underwriting a bad loan is now called “extreme”. They just need to put a date on something, by 2016 GSE’s will be privatized or at least lower the limits to only small loans.
“Funny, how a lender taking responsibility for underwriting a bad loan is now called “extreme”. ”
That aptly describes what happened to our business culture when banks became too-big-too-fail. The next logical step for them is to become too-big-too-lose-money which means they must pass the risk on to someone else, probably the taxpayer.
“Taxpayer-backed loans should be of the highest standard with the least amount of risk. It provides a stable base we can fall back to in times of crisis.”
Maybe I misinterpreted your point, but I am not sure I agree with this statement. I am sure highest standard mortgages can be comfortably serviced by the private sector.
Taxpayer-backed loans should be targeted to specific policy goals (i.e., first time home buyer, veterans, etc.). Today’s climate of 90% taxpayer-backed is far from targeted and needs to change. So I think we are of the same mind here.
The FHA has historically been the lender of last resort in a time of crisis. They provide plain vanilla loans with very low risk profiles. When the private lending market collapses, the FHA provides loans in an environment when other lenders won’t. I think there is some room in the system for an entity with this stabilizing effect. Typically, the government footprint in mortgages through the FHA is between 4% and 8% of the market, and many of those loans are targeted to specific borrower groups as you mention. I totally agree that today’s market more than 90% insured by the government is completely untenable and undesirable. Nobody thought we could experience such an extreme crash so that the government would need to step in, and the depth of the crash has caused losses at the FHA far in excess of what anyone modeled. However, the FHA will eventually earn its way back to solvency because the FHA insurance premium is so high.
The time is coming where we must stop whimpering about silly little nuances like whipped dogs (socialists, collectivists) and start rethinking things in their entirety.
The government has NO BUSINESS meddling in the housing market. If all citizens were intelligent enough to understand the unintended consequences of meddling, we wouldnt be in this mess. But, being the whipped dogs that we are, we roll over for this crap and accept it. It is bankrupting our nation, gutting our economy. High house prices divert capital from productive ventures into the housing arena. It is bleeding us dry. We can either ditch this economic boat anchor of gov subsidized mortgages or we will be forced to by true austerity.
Shiller sides with the bottom callers
Yale University economist Robert Shiller believes housing might have seen the lowest point it will for some time, but the health of the job market will be the key factor in the future direction of home prices.
New home under construction: Credit AP Shiller offered his comments as a housing price measure he helped create, the Standard & Poor’s/Case Shiller index, revealed that prices for homes in the U.S. rose 2% in August vs. the same month in 2011. Many economists and housing market watchers have grown more optimistic that the sector is truly turning this year, and the index also showed that home prices were higher in all but one of the 20 markets it uses to gather its reading.
“This may well be the bottom for housing for some years,” Shiller said in an interview, but he’s not convinced it’s the end of uncertainty. Housing, and the broader economy for that matter, still have to contend with the upcoming presidential election, the looming deadline for avoiding the “fiscal cliff” and continuing questions about the steadiness of Europe’s economies.
Adding to his worries, Shiller cited a Congressional Budget Office report that said cuts to government spending, paired with tax increases (in short, the fiscal cliff) would run the risk of pushing the U.S. back into a recession, dealing a new blow to the housing market. GOP presidential candidate Mitt Romney has promised that, if elected, his administration would strive to reduce federal spending.
Longer term, single-family home prices likely will come under downward price pressure as retiring baby boomers sell their houses to move to other locations, including cities, and as younger people choose urban dwellings over suburban living, Shiller said.
However, he also said there’s good news for the home market at the moment, even if further out, housing could have a new set of problems to deal with. Data released earlier this month showed that housing starts rose 15% in September to an annual pace of 872,000, the best performance since mid-2008, while the National Association of Home Builders/Wells Fargo Housing Market Index this month reached 41, its best point since June 2006.
“Yale University economist Robert Shiller believes housing might have seen the lowest point it will for some time, but the health of the job market will be the key factor in the future direction of home prices.”
It seems like he short of calling bottom. I don’t know, it seems like he should just yes or no. This is like saying bottom for the next 24 months.
I believe up to a couple of months ago he was still saying up to another 20% drop. No one and I mean no one believed to the extent the Fed is trying to hold up the market, going on 4 years now. The Fed is now even talking about QE Hurricane Sandy. Pretty soon we will have QE events based on box office numbers for movies premiers.
The need to replace Bernanke or he will just turn on the printing press and forget the off switch.
The next guy won’t be any better.
We are past critical mass. QE meets the law of diminishing returns.
The Fed cannot stop. They’re painted into a corner. They are betting the farm.
We are headed to full blown currency crisis.
Unless the forces of deflation cancel out the inflationary forces of printing money, I think a currency crisis is coming. Right now, banks are writing down lots of debt, so the printing money is having negligible effect, but at some point, the deflation will stop, and the federal reserve probably won’t. That’s when we start having real problems.
Sandy will serve the purposes of housing market bulls well. When home sales numbers disappoint, everyone will blame the weather rather than the underlying weakness in market fundamentals.
Sandy may squelch home sales, building
NEW YORK (MarketWatch) — As the superstorm Sandy moves west, the housing market along the East Coast is already beginning to feel its aftershocks.
Regional flooding, power outages and other infrastructure damage caused by Sandy — which struck the East Coast Monday night and may result in $20 billion or more in damages, according to early estimates — have brought many pending home sales in the Northeast and Mid-Atlantic regions to a standstill. They have also temporarily postponed home viewings and new-home building.
Though there is no data yet tracking the storm’s effects on the real estate market, experts say national home sales for October could drop due to a decrease in sales along much of the East Coast. And while it’s too soon to know what will happen, some analysts say sales will likely slump for weeks or months in the areas that have been hit hardest by Sandy.
Longer term, the picture is less clear. In some coastal areas where homes remain flooded, recent sales growth could be reversed; homeowners may decide to move to a neighborhood that’s less prone to flooding, while buyers may stay away because of the risk of another natural disaster. A drop in buyer demand would likely also result in a drop in prices, though experts say it’s still too early know.
“It depends on how severe this storm turns out to be,” says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles. “Where we are on the spectrum [with Hurricane Katrina] will largely determine implications for the housing sector.”
So far, the damage estimates from Sandy remain a far cry from Katrina, which ended up costing $135 billion. But costs continue to rise. Many residents along the eastern seaboard are just starting to cope with major flooding and damage to their home’s infrastructure. And by the time the full scope of disruption is known it could impact housing in several ways.
I don’t know if I’m wrong here. But weren’t most of the homes destroyed 2nd homes or vacation in New Jersey? Now construction and remodeling companies will see some business.
OK, I thought I had an article saved.
Hurricane deductible could cost homeowners thousands
By Les Christie @CNNMoney October 29, 2012: 10:30 PM ET
NEW YORK (CNNMoney) — Thanks to a little-known hurricane deductible, homeowners with property damage from Hurricane Sandy could be on the hook for thousands of dollars before their insurance payments kick in.
Increasingly, insurers in hurricane-prone states — including almost all of those in states affected by Sandy — have been adding hurricane deductibles to their homeowner’s insurance policies that go into effect when named storms have sustained winds of 74 miles per hour or more, as measured by the National Weather Service.
Unlike regular deductibles that require you to pay a set dollar amount, typically $500 or $1,000, hurricane deductibles often require homeowners to cough up 1% to 5% of their property’s value. In places like Florida, the deductible can run as high as 10%.
That can result in thousands of dollars in out-of-pocket costs. A loss on a $200,000 house covered by a policy that carries a 5% deductible could cost the homeowner $10,000 before the insurer pays any part of the tab. As a result, many claims result in no insurance payoff at all.
Sandy will cause a housing boom. Insurance claims will cover much of the loss. If history repeats itself, the federal govt will cover those without flood insurance base on compassion/elections. The president, after a generous campaign contribution from a hard hit insurance company, will pass an executive order and/or legislation to bailout some insurance company. Remember Bill Clinton. The jobs in manufacturing building supplies and construction will have a definite uptick. Many marginal house or underwater houses will have sudden electrical and gas ;ome fires like Boston in the 1960′s.
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