Kick The Can: FHA Needs Bailout Now Too

Just when you thought the worst of the government bailouts were over, now comes the next iteration of taxpayer funded market management.  From Newsday we read:

The cash-strapped Federal Housing Administration may need a $943 million taxpayer bailout to cover expected losses from loans it insured as the U.S. housing bubble was deflating, the Obama administration said April 10.

-snip- 

 The agency provides liquidity to the housing market by insuring lenders against losses on loans. Currently, it backs $1.1 trillion of loans and is a primary source of funding for first-time home buyers and those with modest incomes.

In November, an independent audit found that the FHA faces projected losses of $16.3 billion and was at risk of depleting its cash reserves.

-snip- 

Since then, the FHA has a taken a number of steps to shore up its books, including charging borrowers higher premiums. In addition, housing prices have continued to recovery, further helping to strengthen the agency’s balance sheet.    

This is our big government system at work.  FHA acted as a white knight in the housing market as it insured loans to guarantee against losses during very troubling times back in 2008-2010.  FHA is still the preferred lending method (via Fannie and Freddie) and makes up over 90% of the market.

Recently, we hear that since times are good again at Fannie and Freddie they are reconsidering their exit from the mortgage market.  This hesitancy to exit also creates a problem for private mortgage lenders who want to enter the market on competitive terms.

The bottom line is when you have taxpayer subsidized lending and all risk of losses are insured by the ability of the government to tax the people to pay for the losses, we have a system that defies natural market forces.    It's time for Uncle Sam to get out of the market.

EXIT: Uncle Sam Makes Escape Route From Mortgage Monopoly?

One of main supporters of the real estate market over the past several years has been Uncle Sam.  Through the Fannie Mae and Freddie Mac government enterprises, FHA loans have become the savior of mortgage lending.  The mortgage meltdown of 2008 left the finance market for homes in a ruinous state.  Government stepped in to pick up the slack and taxpayers have been shouldering the risk ever since.

This week one of my loan officers emailed me that FHA is increasing mortgage insurance fee.  The MI, as it is called, is a monthly fee paid in addition to the principal and interest for at least five years and can be terminated once the borrower gets to 20% equity on their home.The new change states that the fee will now be for the life of the loan.  That is a big change!

Some of these changes reflect the fact that FHA has not been as stringent in underwriting loans as it should have been and default rates are higher than they should be.  The longer payment of MI will help cover some of those losses.  But, this move does not happen in a vacuum.  As FHA loans become more expensive, it makes private lending more competitive.

Indeed, a news report from Housingwire seems to indicate movement on the private lending front:

  Mortgage real estate investment trust Cerberus Mortgage Capital filed for its IPO Friday, unveiling wide ranging plans to purchase residential mortgage-backed securites and mortgage servicing rights, according to the document at the Securities & Exchange Commission.
"We intend to pursue a broad range of investments in residential mortgage whole loans and other real estate-related assets, including securitized financial assets, mortgage servicing rights, excess mortgage servicing rights and residential housing for lease, which, together with RMBS, we refer to as our target assets," the filing states. 

New York-based Cerberus plans to raise $150 million in its IPO. 

"We expect to use borrowings as part of our strategy," the filing states. "We intend to purchase RMBS throughout the capital structure, including not only the highest rated AAA/Aaa securities but also securities rated below investment grade or unrated securities."

This is good news.  When private parties are willing to enter the market, it means that fundamentals make sense.  Although it will take a lot more than one company to put a big dent in the market, this is a move in the right direction and an indication that the mortgage market can and will right itself.
 

Turning The Corner: Private Mortgage Lending Returns

 

An interesting article out of Housingwire reports good news from the mortgage market.  Here is an excerpt:

 

Wells Fargo finalized a new division built to originate mortgages outside of Fannie Mae and Freddie Mac guidelines.

-snip-

The bank promoted Brad Blackwell, formerly a sales manager in charge of West Coast operations, to lead the new business. He will work with Wells Fargo community banks, wealth brokerages and retirement groups, and the non-agency, jumbo and home equity loans will be kept on the Wells portfolio.

If this isn't a clear indicator that we have entered the bottom of the current market cycle, I don't know what is.  Banks don't like to lend on collateral that is falling in value.  It follows the maxim: Never Try To Catch a Falling Knife.  When house prices stop falling, lending becomes a much safer bet for banks.  This is just the latest evidence that we have entered a turning point in the market.

For those of you waiting to buy a home, I would highly recommend that you take a look around the market.  Bargains abound and interest rates are ridiculously low.  Let me show you where the bargains are.   

Uncle Sam's New Mortgage Tax

Headlines today report of a discouraging new tax being levied on new purchase loans and refinances.

Here is a video from CBS:



This is what happens when government spends more than it generates in revenue. If they will tax mortgages, what else will they tax? Your auto loan? Your student loan?

The dark cloud that looms is that the Feds have now created a dependency on Federally backed financing to help generate tax revenue. That can create all kinds of mischief, including an incentive to increase government's involvement in its already near-monopoly in residential lending. However, there is a silver lining.  If the taxes increase to a substantial level, it may be an incentive for private lenders to step in and provide a more affordable option to borrowers.

The best policy decision would be to get the government out of the mortgage and housing business.

JUST SOLD! South Ogden HUD Home

I recently closed on a house with a buyer shopping for an affordable home.  During our shopping experience we stumbled upon this property on 39th Street in South Ogden.  

The home was a HUD property and listed at $87,200.  It had previously sold for $128,000 in September of 2008.  We placed an offer at $85,000 with $2,550 in seller concessions.  Our offer was accepted.

Then began the long winding bureaucratic road to close the transaction.  I will elaborate on my client's bewildering experience in a later post.  Let it suffice for now that HUD homes are not the wonderful thing they are touted to be.     

Anyway, congratulations to my client's for bearing through the tediousness of it all and coming out in the end with a bargain property that meets their needs.

Fudgery: Uncle Sam's Mortgage Manipulation Madness

I found this interesting video online today:



New guidelines for refinancing (aka HARP) have come out to "help" homeowners again who are underwater on their homes.  After the failure of the first push to modify mortgages, I doubt this push will be any more successful.

My favorite quote from the video:

"Will it be enough? Maybe.  Maybe not.  But its definitely a step in the right direction."

Really?  What direction might that be?  Entrenching people in their homes as debt slaves?  Creating dis-incentives for bond investors to enter the market so they can lend to folks who actually qualify?

The answer is to let the market find its equilibrium by allowing homeowners who are underwater and lack the income to service their debt to foreclose.  Foreclosure eliminates excessive and bad debt.  It resets home prices at lower and truly affordable levels that are related to household income and not manipulated according to gimmicky government programs.

Foreclosure is uncomfortable and often traumatizing to the homeowner.  However, with so many homes already reset to lower prices, the chances are high that a homeowner will be able to rent a home in the same neighborhood for less than they were paying on their mortgage prior to foreclosure.

Foreclosure is the natural solution to excessive debt.  The sooner that nature can take its course, the sooner our economy will be on the mend, and this tough period in history will be behind us.  

Depreciation Delusions: Why Falling House Prices Don't Matter

There are a few folks out there writing headlines about another down leg in housing prices.  Here is one from HousingWire:

Home prices could dip another 6% to 7%, before hitting rock bottom in early 2012, according to analysts at JPMorgan Chase.

If that is the case, prices will fall about 37% from peak levels reached before the 2008 housing meltdown.

For obvious reasons, this kind of headline puts a lot of prospective buyers on the sidelines while they wait for some good batch of housing news to come about.

The questions I ask is: If the market is going to fall another 7%, can it be to anyone's advantage to buy today? Or can anyone make money buying real estate today if it will be worth less tomorrow?

The answer is an emphatic YES!  How? The key is buying the right property.  There are two kinds of properties in the real estate market 1) RETAIL which is your sparkly shiny homes that are at full market value and 2)WHOLESALE which are the scratch-and-dent bargain bin properties that are typically bank owned, short sales, or estate sales.   

Fortunately, wholesale properties can be purchased for anywhere from 90% to 50% of Retail market value depending on condition.  What does this mean?  Well, it means that you can still pick up a lot of equity in a home in today's market and still keep a majority of that equity even if the market slides 7% or even 15%.


Let's say that you purchase a wholesale property today for $65K.  The retail value of the home is $95K.  You have $30K equity.  Now lets say the market slid 10% over the coming year.  Your equity position is reduced to $20.5K.  Yet, your net worth is still $20.5K better than it was before you purchased the property.  If you waited to buy the property after the market slid you could have purchased it for $58K  and its retail value would be about $85K.  You would have about $27K equity.  The questions one has to ask themselves is: What is the opportunity cost of waiting a year to net a possible $7K in additional equity?  Would that time have been better spent by acquiring additional bargains rather that waiting for the "perfect" property at the perfect moment?

Obviously, if you were going to just purchase one property in your entire life and you had the luxury of purchasing whenever you wanted, timing the market exactly right would be to your favor.  However, if you are interested in creating wealth through real estate acquisition, this is an unreasonable proposition.  Instead, wealth builders look for opportunities as they arise in any market.

Wealth builders and smart home buyers look to the wholesale real estate market for such opportunities.

Another fallacy out there is that owning real estate is not good if there is an overall trend toward lower home prices.  House prices are a product of supply and demand with an overlaid component of household income.  If population levels are declining like they are in Russia, Iran, Japan and Detroit, you can expect house prices to decline as demand declines and existing structures maintain supply.  If economic malaise arrives and wages decline, house prices will decline too.  That is what we have experienced as a nation over the last several years.

Keep in mind though, that over the long term that if house prices decline, typically so will the price of milk, clothes, and every other thing that has a price attached to it.  We call this deflation.  If you own rentals and the rents have declined because of deflation, typically it won't matter much because the cost of living will have declined as well.  Your standard of living will be unaffected...that is, unless you have mortgages on your property.

To beat the deflation effect you have to be out of debt on your properties and have little debt elsewhere.  This is why I advocate aggressive amortization or sizable down payments on property when possible.

A couple years ago I wrote We're Turning Japanese! and explored this scenario.  Here are the charts I put together:

 
Click to enlarge.  The point of this chart was to show where equity was in a financed retail property if long term deflation were to occur.

The other chart I put together shows what happens with a 10% downpayment:

As you can see, it would take a catastrophic hit to house prices over a sustained period to affect equity in retail homes with 10% down payments.  Otherwise, equity is sustained and grown over the long haul regardless of long term declines in value.

The way to make this situation even more favorable in the long term is to shorten the mortgage time to 15 years.  However, Utah has never and likely never will experience protracted price declines like you see illustrated here.  Population growth and limited supply of land will moderate our prices on the downside.  Even the worst housing collapse since the Great Depression has only knocked about 15% off Utah's house prices while the U.S. has suffered a 37% decline on average.

The bottom line is that house prices can't go down much more.  Even if they do, the wise investors and wealth builders will be pocketing the bargains while they are available now in today's market.  Why make money tomorrow when it can be made today?

Bargains abound.  Call me and I will show you where they are.

Mortgage Lending: Signs of Life In The Wasteland

The mortgage lending market has gone through some trauma since 2007.  For illustrative purposes let's liken the damage done to the mortgage lending business to the effects of a volcanic eruption...in this case Mt. St. Helens specifically.

Here is a picture of the as a lush forest pre-eruption.  Look at all those pretty trees living happily basking in the sun.  Think of each tree as a mortgage lender and the abundance and health of the trees in this photo as a representation of the Mortgage Industry in 2007.

Then, trouble brews and a cataclysm befalls the forest as Mt. St. Helens blasts the life out existence.

Uh oh!  Think of this as a visual representation of what happened to the mortgage industry after the housing crash of 2008.

Yet, with every disaster, there is renewal.  Here is a photo shortly after Mt. St. Helens erupted:

This looks like a lifeless moonscape.  How could anything live in this environment?

Well, lo and behold, there is life!

Please forgive the labored analogy.  The point I wanted to make today was that, as in all natural disasters, life goes on and nature has a tenacious way of springing up and clawing its way back from obliteration.  The same goes for the mortgage lending market for housing.  Just this week we get two very interesting headlines from Housingwire:

Redwood Lines Up Another Jumbo RMBS
Redwood Trust, the only company to launch private-label residential mortgage securitizations since the financial crisis began in 2008, is issuing the RMBS.  Redwood will bond 473 loans with a total balance of approximately $375 million.

This is good news!  Morgtage backed securities have been dead for nearly three years with Redwood being the recent innovator and initiating the creation of more of these products.  They anticipate doing another $1 Billions in RMBS this year.  Good for them.  Good for us.

Also we read today:

Banks May Skirt GSE Uncertainty With Covered Bonds
More banks based in the United States will establish covered bond programs to fund future mortgages on the perception of less risk and still lingering uncertainty over private and agency securitization markets, according to Moody's Investors Service.

New covered bond frameworks could take the place of mortgage-backed securities issued by either the government-sponsored enterprises or the private market.

-snip-

"New covered bonds in the U.S. will also not have the low quality assets that were common in pre-crisis residential mortgage-backed securities." Moody's said in a research note released Tuesday. "We expect future U.S. covered-bond deals will have much less market risk following a bank default than pre-crisis U.S. covered bonds because we assume future covered bond legislation will establish mechanisms permitting liquidation of a portion of the pool over a period of time."

What this is saying is that banks are seeing the writing on the wall that Fannie Mae and Freddie Mac's days of market dominance are numbered.  If the demand for home loans is going to be satisfied, banks will need to find other ways of meeting that demand than originating loans and sending them to Fannie or Freddie.  Thus, traditional banks have started to use tools called covered bonds to provide incentives for the creation of new home loans.   

Both of these reports show that the market is innovating and adapting to survive in the inevitable post-government-dominated mortgage market. 

Mortgage Interest Rates Lowest In 60 Years

If you listen to the radio you hear mortgage lenders announcing "Rate are at historic lows!  Refinance today!"

Is this claim even true?  Que today's chart from CalculatedRisk please....

This chart only goes to 1971 but other records show that rates were in the 4% range dating back to the 1950's.  Interestingly, it wasn't until the 50's that American's decided that we were not going to return back to a depression economy.  America's psyche had been scarred by a stymieing depression and then austerity and sacrifice during WWII.  Once the Great Depression began, it took 20 years for the economy to become vibrant again...long enough to have a lasting impact on the behavior and attitudes of an entire generation.  Lest I digress...

If you can qualify for it, money is incredibly cheap right now.  If you combine today's low rates with the near rock-bottom prices of bank owned and short sale properties, monthly payments on home loans are ridiculously low.  If you are an investor looking to purchase property, this translates into more positive cash flow.

Can rates go any lower?  They can and likely will for a short while as Europe's debt crisis creates a mass money exodus and everyone piles into U.S. Treasuries as a safe haven (relative to risk elsewhere in the world).  Much of the interest rate declines we have seen since 2008 have been the result of this activity.

So, when things start stabilizing in the rest of the world, look for rates to start climbing again.  Or, if we hit a bout of inflation here at home, look for the same.  In the meantime, lock in your rate, buy some real estate, and laugh your way to the bank.

 

Unindependence: The Case For Eliminating the Mortgage Interest Tax Deduction

There has been a recent call-to-action by the NAR and our state Realtor Association to fight against any actions that would eliminate the Mortgage Interest Tax Deduction (MID) that most homeowners presently enjoy.

As a full-time Realtor and the sole breadwinner in my home, it would make sense for me to parrot the talking points that it pays to support.  However, what is good for one special interest is not always good for everyone.  For many reasons, I believe the MID should be eliminated.

The history of the MID dates back to the institution of our income tax back in 1913.  Back then, most homeowners owned their homes outright.  They often built them from kits and purchased them with cash on hand.  Interest on debts were deductible because most loans at that time were business loans.  Businesses paid taxes on their revenues and therefore a tax deduction was allowed for the interest portion of loans incurred that enabled that business to create revenue.  Today, a person's private home is not a source of revenue that can be taxed.  Instead, it is a personal expense based on the person's willingness and ability the pay the price established in the market. In our day, that typically means borrowing a large portion of that purchase price.  Despite our homes coming with many enjoyable benefits like shelter, status, community, access to amenities, or even equity, it is still not a business nor a true investment per se.

Unfortunately, the government's manipulation of the tax code alters people's natural behavior and changes the fundamental dynamics of the housing market.  Ron Phipps, President of the NAR recently said: "....any changes to the MID now or in the future could critically erode home prices and the value of homes by as much as 15 percent, according to our research."  So, in other words, thanks to our government, housing is 15% more expensive than it should be.  These should be comforting words to first time homebuyers who want to purchase but simply cannot afford to do so.

The MID is basically a government subsidy of housing.  Will people go homeless without it?  No they will not.  However, some may opt to rent rather than own.  Is that so wrong?  I think not.  In a recent podcast Ron Phipps states that homeowners have an average net worth of $160,000 and renters have an average net worth of $4,000.  What is interesting about this statistic is that this is based on today's structure of subsidizing housing via the MID.  If somebody went from being a homeowner to choosing to be a renter instead, would that wipe out their net worth or their ability to make wise financial decisions?  I doubt it.  Interestingly, the NAR also states that the MID should be kept intact because 93% of people making less than $200,000 a year utilize the deduction.  That is because folks making more than $200,000 are likely paying cash for their homes.  I would argue that just because we created a system that makes a majority of the people dependent upon it doesn't mean we shouldn't work toward unwinding the system.

Another interesting aspect to consider is the natural balance that exists between owners vs. renters and, in a subsidy-free market, how these ratios gravitate to their normal levels.   

As you can see from this chart, home ownership percentages have been steadily declining since the burst of the housing bubble.  However, during the bubble, we were far above historical averages.  The cause: government (and Federal Reserve) intervention in housing.  What would this chart look like if government had had a laissez faire policy toward housing.  Would it be less volatile?   

Another reason the MID should be eliminated is the influence it has on household balance sheets.  Because of the tax deduction, many homeowners will justify taking on and maintaining debt on their balance sheets due to the deductible nature of the interest.  This defies the natural laws of economic prosperity that include frugality, thrift, and savings.  Adam Smith tells us the fastest way to opulence and wealth of a nation is for people to be employed so they can save.  Debt is a dead weight around the necks of those trying to obtain wealth.  For a government to create incentives to obtain and keep debt is folly.

Finally, eliminating the MID would create an incentive for more people to invest in real estate rather than purchase it for their own consumption as they see the comparative advantage of owning income property.  As a business asset, income properties are subject to 27.5 year straight line tax-deductible depreciation.  The rent is taxable income and therefore a tax deduction is given on the depreciation of the asset whose purchase made the generation of taxable income possible.  People would begin to treat their own homes as an expense rather than an asset and look at income properties as the true business assets that they are.  
 
The bottom line is that government intervention in markets has always resulted in unintended consequences.  I support a move away from the MID along with other government interference in the housing market.  Only then can we truly have a free market.

FAILURE: ModifyUtah

KSL reports that ModifyUtah, the mortgage modifier company based in Utah County, has closed it doors and is no longer servicing clients.  The article bemoans the loss of the company and laments all those homeowners negatively affected who may loose their homes now to foreclosure.

Why did ModifyUtah go out of business?  Here is what the story says:

According to a letter from the firm's attorney, Paxton Guymon, Modify Utah ceased doing business for several reasons, including "a significant portion of (its) customers have failed or refused to pay … for services provided, recently imposed restrictions impeding the company's ability to process or receive payments and lien holders unwillingness to work with loan modification companies.

The Federal Government's loan modification programs were an exercise in futility.  I know many people who applied for the program but I don't know any person that successfully modified their loan.  It was a bureaucratic mess and most of the folks couldn't qualify for the modification because their income was still too low for the payments.  This might also explain why customers didn't pay or wouldn't pay for services rendered.

That is why foreclosure is the best answer to this dilemma.  By wiping out the bad debt, house prices can be reset to affordable prices and those folks who lost their homes in the process can rent a home of equal caliber for less that their previous payments.  Foreclosure brings house prices (and their accompanying payments) back into the realm of affordability.  The situation may be stressful in the short term for these families but in the long term they will be better off.  This situation should also be a warning to all of us about the perils of excessive debt.       

Fed Survey On Lending

The Fed published a report on lending standards and surveyed banks on their lending practices.  Here is an interesting excerpt on residential loans:

Questions on residential real estate lending. On net, small fractions of domestic banks reported having tightened standards on both prime and nontraditional mortgage loans, marking a reversal from the slight net easing reported in the July survey for prime loans. The tightening of standards on prime mortgage loans was largely accounted for by smaller banks; large banks, on net, left standards about unchanged. Both large and other banks reported a net tightening of standards on nontraditional mortgage loans. Continuing a pattern seen since the start of the financial crisis, fewer than half of the respondents reported having made such loans. Modest net fractions of banks reported weakening demand for both prime and nontraditional mortgage loans to purchase homes.A modest net fraction of banks reported that standards for approving HELOCs hadtightened over the past three months. As with prime residential mortgage loans, that tightening in standards was largely accounted for by smaller banks. A small net fraction of respondents also reported having reduced the size of HELOCs for existing customers. On net, banks reported a slight weakening in demand for HELOCs.

So it looks like the banks are betting on more economic stagnation.  I do think the last comment on demand for HELOCs weakening is funny.  The banks have arbitrarily reduced the size of their client's HELOCs.  Is it any surprise their customers don't want more of that kind of loan product? Duh.   

COMING SOON: Exciting New Regulations

The Division issued its quarterly news letter and I found the message from Deanna Sabey quite sobering.  Here is a breakdown of changes that are coming to the real estate industry due to laws passed by our ever benevolent Federal government:

• TILA and RESPA disclosures will be changing again sometime in the next 12 months.  Look for more mortgage officers to be pulling whatever hair they have left out of their heads. 
• Yield Spread Premiums will be banned.  Any loan officer receiving a YSP will be fined treble damages (3 times damages) plus court costs.
• Communication between mortgage originators, underwriters, and processors will be stymied in an effort to make it appear underwriters are doing a good job.  
• New additional disclosure requirements, anti-steering provisions, restrictions on high-cost mortgages, a ban on pre-payment penalties...and more!
• BPO's are banned for use as a valuation tool on new loans.
• HVCC will sunset for appraisers. Hooray!
• Appraisal Management Companies will be required to pay "reasonable and fair" fees to appraisers.  So who determines what is reasonable and fair? The market?  The government?
• Agents, Loan Officers and Appraisers will all be put into an honor code system of being required to report bad players when they know about them.

Looks like we have lots of fun coming down the pipeline.  The only good thing I can see in all this is the sunseting of the HVCC program which made appraisals a nightmare for the last two years.  Lets hope they don't replace it with something even more ridiculous.

Tremors: The End of the 30-Year Mortgage?

The very fact that this conversation is being discussed is significant.



It appears to me that there is an unreasonable emphasis placed on home ownership rates. If we look at Spain, which is of the poorest of Western European countries, it has a home ownership rate of 85% compared to our 67%. Clearly, we can't use it as an absolute benchmark of prosperity.

However, I do think that shorter mortgage terms would be more advantageous. Although, due to the higher payments associated with the shorter term, it would force buyers to save more for down payments prior to making a purchase. Very interesting discussion. I do think government needs to get out of the housing business.

Are You On The 7-Year Blacklist?

It looks like "strategic" defaulting on loans is starting to plague Fannie Mae.  Here is an excerpt from a press release yesterday:

Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.

 That is some pretty strong medicine from Fannie Mae.  It looks like short sales and deeds in lieu of foreclosure will soon be more agreeable alternatives to Fannie Mae borrowers instead of just abandoning their property to the bank.