In the lead up to our presidential election, I noted that the housing bubble creates no-win political situation for either presidential candidate. As a result, both Obama and Romney have been largely silent on this important issue. It was absent from the debates, and with the exception of a sketchy housing plan that lacks fresh ideas from Romney, housing has been ignored by both candidates. In a final effort to bring pressure on the candidates to acquiesce to his wishes, a prominent realtor (if there is such a thing) has released a scathing attach on both candidates for failing to embrace his self-serving agenda.
Recently, Dave Liniger, co-founder and chairman of RE/MAX, LLC, had some choice words for the presidential candidates regarding their stances—or lack thereof—on the nation’s housing crisis.
In an open letter addressing both President Obama and Governor Romney, Liniger calls out the two candidates for avoiding the issue when it comes to the current state of affairs in American housing. Liniger points out that the two nominees are focusing all their energy and resources on the economy at large and chides them because “as leaders, you ignore housing at our peril,” he says.
By “our” he means realtors. The candidates benefit by ignoring this issue because any substantive policy proposals would be unpopular and counter-productive.
Liniger writes, “Although the economy is recognized as the single most important issue in the campaign, and housing is commonly blamed for the recession and sluggish recovery, it is unimaginable that relevant solutions to housing issues have not been front and center.”
Liniger says housing has the ability to promote a stronger overall economic recovery “if it is allowed to do so.” He says “it will take real political leadership in the White House and Congress to acknowledge this fact.”
Why? Washington has already done too much. They have allowed banking regulators to look the other way with mark-to-fantasy accounting which prevented a flood of foreclosures. They instituted widespread government bailouts of both banks and borrowers at the expense of those who didn’t participate in their private transactions. They took control of the GSEs to ensure financing would be readily available rather than subject to market forces. What more does he want them to do in order to “acknowledge” the role real estate plays in the economy?
He goes on to point out that while there have been positive shifts in market movement recently, the housing industry is still far from being out of danger.
Liniger backs up his statement by breaking down four basic, yet significant, obstacles he sees as blocking the road to recovery for housing, and ultimately the economy.
First, Liniger believes the Mortgage Forgiveness Debt Relief Act must be extended. Initially approved in 2007, this act is set to expire on December 31, barring any action to preserve it. Without an extension, Liniger projects a possible reduction in the nation’s home sales by an immediate 20 percent.
“The CB0 [Congressional Budget Office] says a two-year extension will save distressed families about $2 billion,” Liniger notes, adding that troubled homeowners who qualify for a loan modification or short sale are not likely to pursue either of these options if the act expires, making their remaining mortgage balance taxable income.
A month ago I reported that The debt forgiveness tax break may not be extended. If it isn’t extended, it will force many people into bankruptcy. Also, anyone who signed up for a loan modification rather than a short sale or strategic default had better keep paying. The consequences of short selling or defaulting later will be much more severe. A great many loanowners signed up for loan modifications under HAMP 2.0. Most of those modifications will at least make it into 2013 before they implode or otherwise need to sell. With no tax forgiveness on a short sale, even fewer people will be able to sell their homes which will exacerbate the inventory shortage we have today.
The bigger question here is why we should be subsidizing loanowners losses with tax dollars. If the debt relief were limited only to first-time homebuyers seeking relief on purchase-money mortgages, I could support it that far, but as written, it applies to Ponzis and others who borrowed irresponsibly. Their woes should not be a taxpayer problem.
Second, Liniger lobbies for reasonable lending standards to be established. In response to the crisis, lenders have enforced strict lending requirements in order to cover their own interests,
Shouldn’t lenders restrict lending to only those who can repay? Isn’t what’s in their best interest also in the best interest of the US taxpayer and the housing market as a whole? Putting people in homes who don’t have the ability to sustain ownership was one of the big problems of the housing bubble. What Mr. Liniger wants to see is a reflation of the housing bubble at taxpayer expense.
but Liniger argues the pendulum has swung too far in the direction of conservatism, to the point that even those individuals with good credit face difficulty obtaining a loan. This schism only further halts the movement of real estate.
Financing appears to be getting more difficult to secure, not less, according to Liniger. “In August, the average FICO score of a rejected mortgage application at Fannie and Freddie was 734, two points higher than one year ago,” he writes.
Some creditworthy families will always be denied mortgages. In any group of potential borrowers, there are some that will default, and there are some that won’t. Despite default rates north of 50%, there are still some subprime borrowers dutifully paying their mortgages. Should we bring back subprime lending because the 40% who would make it are currently being denied access to a mortgage? The job of credit underwriters and actuaries is to properly classify people into the appropriate groups, then draw a line across the shades of gray. For the sake of bank solvency, this line will always be drawn conservatively.
Related to these financing difficulties is Liniger’s third point—housing-specific provisions of the Dodd-Frank Consumer Protection Act, more specifically, defining a “qualified mortgage” as directed by the act. Liniger says if regulators craft an unreasonable definition, it will become even harder to obtain a mortgage and potentially add to financing costs. “Even the authors of this legislation have said this was not their intent,” he writes.
This is a convenient straw man for realtors and lenders to attack. The intent of the legislation was to stabilize the housing market and reduce the government’s risk exposure by making sure originating lenders kept some. As I pointed out yesterday in Tighter mortgage standards for GSEs will encourage private lending, 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. It’s primarily these groups who operate on the origination-to-sell model that are lobbying to relax the Dodd-Frank standards. And of course realtors who perceive this as an impediment to completing a few more transactions.
Liniger describes the fourth obstacle as one that “really shocks most of us in real estate,” and that’s reducing or eliminating the mortgage interest deduction. Regarded by some as merely a loophole for the wealthy, Liniger urgently ushers in the opinion that “this is the wrong approach at the wrong time,” and “even a gradual elimination gives pause to many potential homeowners.”
It’s shocking to me as well, not because it shouldn’t be eliminated or curtailed — it should — but because politicians are actually considering it. Is the home mortgage interest deduction really at risk? Do we really need to give high wage earners a huge tax break as an encouragement to take on excessive debts? That’s what the home mortgage interest deduction really does. If the deduction were eliminated, home values in areas like Orange County populated by high wage earners would drop to establish a new equilibrium, but nobody would go without. In fact, the home mortgage interest deduction does little or nothing to increase home ownership rates because the low wage earners at the fringe of affordability don’t use the deduction anyway. Studies have show home ownership rates are just as high in countries like Canada that do not have the deduction. So why do we keep it?
While Liniger gives the readers of his letter much to think about and discuss, perhaps his most telling statement is a bold order that leaves little room for interpretation. Simply stated, he commands the candidates to “first, do no harm.” His message is clear and concise, calling for a “less is more” mentality in regards to correction and forced action.
Imploring the candidates to consider the repercussions of their policy choices, Liniger asks of whomever is elected, “Do not disrupt the ability of a fragile housing market to positively impact a stalled economic recovery at this critical time.” He goes on to assure Obama and Romney that “[h]ousing is a powerful economic engine that can easily add a large number of jobs and cash to the overall economy if not prevented from doing so.” …
He makes his bad proposals sound noble by wrapping them in the Hippocratic Oath. Or is that the Hypocritical Oath, you can never be sure with a realtor.
Fewer sales at lower price points
The problems Mr. Liniger identifies are all items which will serve to either lower sales volumes or lower prices which ultimately hurt realtors bottom lines. realtors have convinced themselves whatever’s good for them is good for America. It’s not. realtors care far less about stabilizing the market than they do about maximizing commission revenues. American homeowners need a stable housing market not prone to bouts of irrational exuberance and painful crashes. None of Mr. Liniger’s proposals will give us that. However, they will help realtors make a few bucks.
What we really need is a stable housing market free from government interventions and manipulations. The government’s role should be to provide sensible regulations that respect contracts, encourage lending only to those who have capacity to repay the loans, and prevent Ponzi loans programs from destabilizing the market (the bubble wouldn’t have inflated without interest-only loans and Option ARMs). Dodd-Frank fell far short of achieving those lofty goals, and lenders are decrying even those sensible reforms.
Unfortunately, today’s featured REO doesn’t appear in my data source. I don’t know about you, but I am curious what bank was stupid enough to to loan these people $10,000,000. I hope they lose enough to think twice about making loans that large again in the future. Properties at these price points should be paid for in cash. Applying $10,000,000 in debt simply inflates prices, and when the loans disappear, prices crash. Banks still have a lot of high-end bad loans to write down. We will see many more of these over the next several years.
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Proprietary OC Housing News home purchase analysis
$9,499,000 …….. Asking Price
$9,031,827 ………. Purchase Price
9/19/2012 ………. Purchase Date
$467,173 ………. Gross Gain (Loss)
($722,546) ………… Commissions and Costs at 8%
($255,373) ………. Net Gain (Loss)
5.2% ………. Gross Percent Change
-2.8% ………. Net Percent Change
30.6% ………… Annual Appreciation
Cost of Home Ownership
$9,499,000 …….. Asking Price
$1,899,800 ………… 20% Down Conventional
3.97% …………. Mortgage Interest Rate
30 ……………… Number of Years
$7,599,200 …….. Mortgage
$1,860,864 ………. Income Requirement
$36,148 ………… Monthly Mortgage Payment
$8,232 ………… Property Tax at 1.04%
$767 ………… Mello Roos & Special Taxes
$2,375 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$550 ………… Homeowners Association Fees
$48,072 ………. Monthly Cash Outlays
($3,231) ………. Tax Savings
($11,008) ………. Equity Hidden in Payment
$2,607 ………….. Lost Income to Down Payment
$1,207 ………….. Maintenance and Replacement Reserves
$37,647 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$96,490 ………… Furnishing and Move In at 1% + $1,500
$96,490 ………… Closing Costs at 1% + $1,500
$75,992 ………… Interest Points
$1,899,800 ………… Down Payment
$2,168,772 ………. Total Cash Costs
$577,000 ………. Emergency Cash Reserves
$2,745,772 ………. Total Savings Needed