issue: Housing

The Foolish Push to Scrap Fannie Mae and Freddie Mac

Posted on by The Progressive Policy Institute

It appears that Washington is finally getting around to grappling with the largest unresolved question left over from America’s housing meltdown: What’s to become of the government-backed mortgage giants, Fannie Mae and Freddie Mac? Their fate has been in limbo since the federal government bailed them out and put them in conservatorship in 2008.

Now, however, the two government-sponsored enterprises (GSEs) are reaping enormous profits as housing markets rebound. This has gotten lawmakers’ attention. House Republicans have introduced a typically radical bill that would eliminate Fannie and Freddie altogether.  A bipartisan Senate proposal would wind down Fannie and Freddie over five years and replace them with a similar functioning institution that charges a fee to insure loans in the event of catastrophic losses.  And President Obama weighed in recently as well, saying it’s time to end Fannie and Freddie “as we know them.” Though widely misinterpreted as a call to eliminate the GSEs, this artfully ambiguous formulation actually left the president a lot of wiggle room.

Continue reading at U.S. News & World Report.

Experts Project Home Values Index to End 2013 with Prices Up by 6.7 Percent

Posted on by The Progressive Policy Institute

On Thursday, Zillow released its quarterly Home Price Expectations Survey showing forecasters expect the website’s Home Value Index to end 2013 with prices up 6.7%. The numbers surveyed from 106 real estate experts across the country (I am a panel member), showed a significant jump from the 5.4% reported by the survey last quarter.

While price appreciation looks like it will show continuing strength through the end of the year, panelists mostly agreed that the sharp rise in prices we have seen over the last 12-18 months will begin a slower pace through 2017.

“Short-term expectations for home value appreciation through the end of this year are consistent with a nationwide housing market recovery that is both strengthening and widening, but still coping with high levels of negative equity, high demand and low inventory. Combined, these factors will continue putting upward pressure on home values for the next few months,” said Zillow Senior Economist Dr. Svenja Gudell. “But the days are numbered for these kinds of market dynamics, as investors begin to pull out of some markets, mortgage interest rates rise and more inventory becomes available. Over the next few years, these trends will help the market stabilize and will bring home value appreciation more in line with historic norms. As long as mortgage interest rates don’t rise too far and too fast, most markets should be able to absorb these changing dynamics while still remaining healthy.”

Panelist were also asked if a recent rise in mortgage rates, almost 100 basis points in the last 3 months, posed a serious threat to the recovery. A whopping 88% said no, and of those more than 60% said rates would need to hit 6% (currently around 4.5%) to reverse the bullish trend.

A Simple Solution for America’s Looming Commercial Debt Crisis

Posted on by The Progressive Policy Institute

As the housing sector continues its apparent recovery, some U.S. lawmakers are turning their attention to a looming crisis in the commercial real estate market, which is threatened by an avalanche of debt as loans made during the heady days of the early aughts start coming due over the next five years.

Reps. Kevin Brady, R-Texas and Joseph Crowley, D-N.Y., this week introduced a bill that would make it easier to finance this coming wave of debt. Following similar proposals in the Senate and President Obama’s budget, it would stop penalizing foreign investors in U.S. commercial property.

Here’s the problem they’re trying to solve: colossal amounts of real estate loans – totaling more than $1.7 trillion – are due to mature from now to 2018. Commercial mortgages are not like your average home mortgage. They aren’t fixed at a rate for 30 years. The standard commercial loan must be refinanced, paid down or sold after 10 years. What’s coming now is a huge wave of commercial debt that originated in the bubble years between 2003-2008.

Back then, real estate values were inflated and lending standards much looser. That means we can expect significant volumes of maturing mortgages to be in some sort of distressed state. In a 2010 Congressional oversight report, lawmaker’s panel served up this scary scenario:

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment.

Continue reading at U.S. News & World Report.

How to Build a New Detroit

Posted on by The Progressive Policy Institute

Following a half-century of economic decay and depopulation, there was a tragic inevitability to Detroit’s decision last week to declare bankruptcy. Motown must now restructure $18 billion in debt owed to 100,000 creditors and bondholders, deciding who gets paid, how much and when.

That’s the plan to deal with Detroit’s past. But what about a plan for the city’s future?

Like Pittsburgh, Baltimore and other former industrial hubs, Detroit must now reinvent itself. At this stage, no one knows what a New Detroit might look like. So before they start courting businesses and looking for investments that generate new jobs and tax receipts, city leaders should focus on the fundamental preconditions for an economic revival.

That means making Detroit safe and livable for its citizens, and “right-sizing” a city that once was home to 2 million people but now has only 700,000 residents. How do you do that? One answer lies in the 78,000 abandoned homes that litter Detroit proper.

In 2010, Mayor Dave Bing launched a pilot program called “Project 14.” The city took 200 foreclosed homes and offered them to police officers for $1,000. They then used federal stimulus funds to offer up to $150,000 to owners to re-hab the homes into good condition. That’s a start, but with a murder rate at a 40-year high, 5,000 fires a year and an ailing public school system, Detroiters still have plenty of good reasons to flee for the suburbs.

To help staunch the bleeding, the city should engage in wholesale “urban homesteading”: Take those 78,000 abandoned homes and offer them for free – that’s right, for free – to new police officers, firefighters, EMS and public school teachers.  This would create a new infusion of human capital into Detroit, and help it emulate the success of other big cities in bringing down crime rates and replacing “dropout factories” with new and better schools. It would implant the backbone of a new middle class.

Continue reading at U.S. News & World Report

Killing Immigration Reform Hurts the Housing Recovery

Posted on by The Progressive Policy Institute

It is looking more likely that the comprehensive immigration bill the Senate passed last month will end up stalling in the GOP-controlled House. Although Republican partisans probably don’t realize it, killing immigration reform could do serious collateral damage to the housing recovery.

Most economists believe that bringing 11 million undocumented immigrants out of the shadows would be a boon to the economy, and boost tax revenues in the bargain. It could also put as many as three million legalized immigrants in the market for a home, according to the National Association of Hispanic Real Estate Professionals.

The housing market has seen such a sharp and furious rebound in the last year that many experts are now wondering if we are repeating the crazy go–go days of 2007. That’s not likely with rates still at historic lows thanks to the Federal Reserve. We could see some corrections, but nothing like the sickening 30 to 40 percent plunge housing prices took when the bubble burst last time.

One troubling sign, however, is the dearth of first–time homebuyers. In normal times, first–time homebuyers account for about 40 percent of new home sales. In May, that number fell to just 28 percent, down from 36 percent two years ago. The decline was due to cash–heavy investors, a tepid job recovery and tighter credit. That number won’t sustain growth in housing.

Continue reading the article at U.S. News & World Report.

Why We Should Relax and Learn to Love Rising Mortgage Rates

Posted on by The Progressive Policy Institute

Mortgage rates have been scraping the cellar floor in recent years, bottoming out at around 3.5 percent for 30-year loans. Economics 101 says cheap money can’t last forever and, sure enough, goverment backed mortgage giant Freddie Mac reported last week that fixed rates jumped, now up a full percentage point, to 4.5 percent

For the average homebuyer, that’s not trivial. On a $270,000 loan, roughly the national median price of a single family home, it will boost monthly interest payments by around $125 a month. That could be just enough to deter a first-time homebuyer or to eat into the savings of families trying to refinance their homes before rates get any higher.

In housing finance circles, there’s been a lively debate over the recent surge in housing prices: Is the sector’s recovery real – that is, built on market fundamentals? Or are we seeing yet another housing bubble inflated by the Fed’s policy of monetary easing?

Surging interest rates – and all indications are they aren’t going back down – will likely give us the answer by testing the resilience of U.S. housing markets. Here are some key indicators housing experts will be keeping their eyes on:

What happens to credit that many claim is already too tight? The idea that credit is too tight – that capable borrowers can’t get mortgage loans despite low interest rates – is widespread, but is it really true? In fact, the real issue may be bank origination capacity, not credit.

Continue reading at US News and World Report.

Are Fixed-Rate Government-Backed Mortgages Over?

Posted on by The Progressive Policy Institute

In an article for The Fiscal Times, National Correspondent Josh Boak quotes PPI’s senior fellow Jason Gold:

Congress has restarted its slog about the fate of Fannie Mae and Freddie Mac – and at stake could be the future of your standard issue 30-year fixed-rate mortgage.

The two mortgage giants became wards of the state in 2008, when the housing bust brought them to their knees and a government conservatorship kept the entire industry afloat.

“Government Sponsored Enterprises” – the bureaucratic name for Fannie and Freddie Mac – currently account for 75 percent of all mortgages that get bundled into securities. Between them, Fannie and Freddie control a portfolio of 31 million mortgages worth a combined $5 trillion.

No public official disputes the need for the government to play a smaller role in the housing market. But the basic disagreement is whether the government should still guarantee the principal and interest on your mortgages. Supporters say the guarantees make financing affordable, while opponents say it inflates prices and puts taxpayers on the hook.

“The GSEs’ existence is essential to a housing finance market Americans want, not need,” said Jason Gold, a senior fellow at the Progressive Policy Institute. “Fixed rate loans are the foundation on which the entire system is built. The necessary ingredients for fixed loans on a widespread affordable basis are securitization and a government guarantee. There are only two significant places that combination runs through – GSEs and the Federal Housing Administration.”

Read the entire article here.

 

Recovering Housing Market Solves Principal Reduction Dilemma

Posted on by The Progressive Policy Institute

Senate Republicans are drawing a bead on Rep. Mel Watt (D-NC), President Obama’s pick to take over as Director of the Federal Housing Finance Agency(FHFA). A key reason is that Watt supports principal reduction, which is anathema to the GOP. It would be a shame, however, if Watt’s confirmation were scuttled over a dispute that has been overtaken by events. U.S. housing markets have come roaring back to life, and while that’s great news, it has probably closed the window for principal reduction.

During the depths of the housing crisis, many progressives called for reducing the mortgages of homeowners who are “underwater,” meaning they owe more than their house is worth. Conservatives bitterly opposed principal reduction, saying it would reward irresponsible borrowers and expropriate the property of legitimate lenders.

FHFA Director Ed DeMarco, the man Watt has been nominated to replace, resolutely resisted pressure from the Obama administration and Congressional Democrats to use principal reduction remedies on mortgages backed by the two Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac

Recently, the White House announced a two-year extension of their central housing modification program, Home Affordable Modification Program (HAMP). The program differs from the Administrations similarly titled refinancing initiative, Home Affordable Refinancing Program (HARP) in that it allows underwater homeowners structural changes to their loans whereas HARP just lowers the interest rate.

According to a memo circulated by Compass Point Research and Trading,” The extension of the HAMP gives the Obama Administration the necessary optionality to push for principal reduction on GSE-backed mortgages through the HAMP if there is a change in leadership at the Federal Housing Finance Agency (FHFA).”

Download the policy brief.

More Good News for Housing

Posted on by The Progressive Policy Institute

As the New York Times reported yesterday, the housing market is recovering, consumer confidence is at a five-year high and the market is in the midst of a strong recovery– The housing market is enjoying sustained momentum alongside record highs in the stock market, and is leading the broader recovery. Fannie Mae and Freddie Mac (GSEs) are making money-lots of it. Fannie has paid about $95 billion and Freddie about $37 billion of the approximate $182 billion used to put them in federal conservatorship. The mortgage giants are now on schedule to pay back the taxpayers for the bailout that lead to their conservatorship. Rates are expected to remain relatively low for the next few years and, according to Core Logic, another 1.8 million mortgages are expected to be freed from negative equity with just a 5% increase in prices.  According to data from the Case-Schiller index, prices had appreciated 10.2% in March, ahead of analysts’ expectations.

All of these indicators point to emergency measures no longer being required.

The housing market is not the only factor driving this recovery, however. In addition, the closest thing to a silver bullet solution-more jobs- is happening, slowly, but surely. A declining unemployment rate is the essential precondition to any recovery. And that’s been the case from a high of 10.0%, in October 2009 shortly into President Obama’s first year, to a recent low of 7.5%. An expanding workforce means consistent incomes to get mortgages paid on time and save for future down payments. This translates directly to fewer delinquencies, defaults and more first-time homebuyers to keep the housing market churning.

Why FHFA’s Ed Demarco Isn’t Going Anywhere

Posted on by The Progressive Policy Institute

If confirmed by the Senate, Rep. Mel Watt, D-N.C., will replace Ed DeMarco, the current – and controversial – acting director of the Federal Housing Finance Agency. While Democrats have been calling for DeMarco’s head for years as he has pushed back on more extreme housing remedies, Republicans have quietly supported DeMarco’s decisions.

But the president’s pick portends big changes in housing policy. After all, the FHFA is the main federal regulator overseeing housing policy, and whoever runs it will have a major impact on home ownership, mortgage lending, and the future of Fannie Mae and Freddie Mac, the two mortgage giants in federal conservatorship.

But for all the fanfare surrounding the nomination of Watt, there’s one small matter standing in the way. Though DeMarco is a holdover from the Bush administration, the current political climate in Congress means he isn’t going anywhere anytime soon.

That’s because nominees for FHFA Director must be confirmed by the Senate. In years past, Congress routinely ratified the President’s choices. No longer. Nowadays Senate confirmations are the political equivalent of a reality TV show, in which lawmakers preen for the cameras, fight among themselves and nominees are subjected to a merciless and microscopic scrutiny of their personal lives.

Continue reading at US News & World Report.

Why You Should Ignore the Housing Experts

Posted on by The Progressive Policy Institute

Housing is center stage in the news and around the water cooler again, with newspaper and magazine stories dissecting minute fluctuations in home prices and questioning if this is the right time to buy a home or whether Americans should ever own real estate again.

The experts and economists quoted in these pieces are smart thought leaders who do important work that impacts lots of people and places.

But don’t listen to them.

If you are Ms. Smith in Heartland, USA trying to figure out whether to rent or buy, you shouldn’t care what they think.

The thought process on homeownership has veered off track in post-crisis America. People overcomplicate the pros and cons, and try too hard to factor in things they hear on TV or read in news stories like “risk profile,” “cost benefit” and “adjusted for inflation.” “How much will your house be worth in 6 or 7 years, adjusted for inflation?” is a common refrain. (Answer: NO ONE knows).

Forget about all that and go back to the basics: Buy if you can responsibly afford it, if you will be in one place for a while and if you don’t want anyone else to tell you can’t paint the walls burnt orange.

That’s it. That’s the list.

Continue reading at US News & World Report.

Why the Federal Housing Administration Is Better Off Than You Think

Posted on by The Progressive Policy Institute

Writing for US News & World Report, Jason Gold notes that the Federal Housing Administration is outperforming most analysts expectations.

Normally a small part of the mortgage landscape, the Federal Housing Administration dramatically expanded lending in 2008 when the housing bubble burst and private capital fled.

While progressives hail the FHA’s role as key in blunting steep home price declines and providing much needed liquidity to the market, critics argue that the agency’s intervention was just another bailout that put taxpayers on the hook, and is now discouraging private lenders from coming back.

To be sure, the FHA took serious losses as home values tanked through 2011, and many were quick to focus on an independent audit in 2012 that cited the possibility of a $16.3 billion shortfall if housing conditions deteriorated. But recent estimates suggest the agency’s balance sheet doesn’t look nearly as bad as many analysts expected. President Barack Obama’s new budget, for example, anticipates that FHA will need to borrow less than $1 billion from the Treasury to cover capital shortfalls next year. If home prices keep rising and defaults keep falling this year as expected, even that deficit could evaporate. An improving financial situation would allow FHA to start rebuilding its capital reserves, which have fallen below the congressionally-mandated 2 percent.

Read the piece here.

Why Fannie and Freddie Should Exist in the New Mortgage Market

Posted on by The Progressive Policy Institute

They may be in federal conservatorship, but a funny thing is happening to the two “troubled” mortgage giants, Fannie Mae and Freddie Mac: They are making tons of money.

It’s enough to give federal bailouts a good name.

With double-digit home price appreciation and more buyers coming off the sidelines, there have been fewer defaults and more revenues on GSE (government sponsored enterprises) loan guarantees. That’s translated into a handsome $17.2 billion profit in 2012 for Fannie Mae, while its twin, Freddie Mac, posted gains of $11 billion.

With these eye popping numbers, the game has changed. With profits expected to continue and even rise for the foreseeable future, it is now likely that the $180 billion in taxpayer funds used to bail out the GSEs will be paid back in the next few years. It also puts additional pressure on Congress to figure out the government’s future role in housing, specifically as it relates to the GSEs.

But high-level conversations in Washington, D.C. about reforming (or replacing) the GSEs often center around financing challenges for single-family housing, overlooking the crucial role GSEs have played in commercial real estate lending.

Read the entire article here.

Guidelines for Federal Housing Administration Reform

Posted on by The Progressive Policy Institute

After the housing bubble burst, the Federal Housing Administration (FHA) rapidly expanded the scope of its mortgage insurance well beyond its traditional mission of helping low-to-moderate income, first-time home buyers.  Instead of lending directly to borrowers, the FHA insures mortgages in exchange for a premium, and only pays out the cost of those mortgages when borrowers stop making payments. In response to the massive loss of private liquidity, the FHA gained significant market share at a time when banks stopped lending and home prices were still falling. Congress also raised the FHA’s loan limits in order to provide more liquidity, pushing its lending higher up the income scale. The FHA’s intervention resulted in the most severe delinquency and default rates in the agency’s history. Normally self-funded, FHA is facing the possibility of a first-ever bailout, with some estimates as high as $16.3 billion. Now, as home prices have finally started to rebound, pressure is mounting to resolve the FHA’s fate and limit financial losses.

Unsurprisingly, the debate over reforming the FHA has been polarized. Liberals maintain that home prices would have fallen dramatically had the FHA not stepped in when private mortgage insurers and investors retreated from the market. In their view, the FHA provided an important countercyclical function and any taxpayer funds currently needed to make it whole are well worth paying. Conservatives, however, say that FHA‘s emergency lending made homeownership possible for many people, especially in working class neighborhoods, who could not really afford to buy a house. They see the FHA as blocking the return of private capital, wreaking havoc in economically hard-hit neighborhoods, and promoting risky, government-backed lending at a sizeable risk to taxpayers.

That debate, however, is mostly over the past. The critical question now is what should be done to assure FHA’s solvency, and return it to its original mission. U.S. policymakers must decide on a course of action that averts a taxpayer bailout of the FHA and lowers its loan limits to enable private capital to resume its normal role in mortgage lending.

Download the policy brief.

Financial Innovation Key to Future of Homeownership

Posted on by The Progressive Policy Institute

The housing bubble and ensuing financial crisis not only wreaked havoc on the U.S. economy, but it also shook public confidence in financial markets and robbed Americans of their faith in homeownership as a stable iconic pillar of middle class security.

Much of the fallout can be blamed on the exotic financial “innovations” hawked by Wall Street in the run-up to the financial bust: “liar loans,” where no verification of income was required; synthetic derivatives, whose highly speculative design put the entire financial system at risk; and home equity lines of credit that exceeded the value of homes by up to 125 percent.

Today, housing prices are finally rising and the stock market is going gangbusters. But the idea of “financial innovation” retains its negative aura. That’s a problem, because just as there are good and bad witches in Oz, there’s good and bad innovation on Wall Street.

Read the entire piece at U.S. News & World Report.

Why Fannie and Freddie Aren’t Going Away Anytime Soon

Posted on by The Progressive Policy Institute

Writing for US News & World Report, Jason Gold argues that despite conservatives and progressives’ demand for a reform of Fannie Mae and Freddie Mac, the two GSEs are going to stay as they are for some time.

Fannie Mae and Freddie Mac, the two formerly private mortgage giants, have been in limbo since 2008 when the federal government took them into conservatorship.

Since then, Congress and President Barack Obama have proposed sweeping reforms of Fannie and Freddie—conservatives demand the government-sponsored enterprises (GSEs) be privatized if not abolished altogether, while progressives favor a more gradual phasing out of the two mortgage giants, which have become critical to the housing market recovery during the past several years.

There seems to be no hurry among policymakers to decide the fate of Fannie and Freddie, but it looks increasingly as if the GSEs are here to stay. Fresh evidence of this came last month, when the Consumer Financial Protection Bureau (CFPB) endorsed guidelines Fannie and Freddie now use in making new mortgage loans. The details are complicated, but in essence the bureau’s much anticipated qualified mortgage rule exempts Fannie and Freddie from the strict guidelines private bankers must now follow to ensure that borrowers can repay their loans.

This could mark a turning point in the GSEs’ fortunes.

Read the piece at US News & World Report.