This week, the Consumer Financial Protection Bureau (CFPB) released long-awaited new mortgage rules aimed at protecting consumers from abusive loans.

The new rules, when they take effect next January, will effectively shut down some of the worst practices leading up to the 2007-2008 housing crash: “interest-only” loans, predatory fees, and “teaser rates” that trapped people into mortgages they couldn’t afford once the low initial rates expired. Mortgages with these features are now excluded from what the CFPB defines as “qualified mortgages” shielded from consumer lawsuits.

Most significantly, the new rules will also require lenders to ensure that borrowers can pay back their loans. Among the new requirements, a borrower’s monthly debt payments (including the mortgage) can’t exceed 43 percent of pre-tax income.

Without doubt, the mortgage lending landscape will now be much safer for homebuyers, who once faced a confusing and potentially toxic array of “exotic” products. These rules will also provide much needed certainty to the mortgage finance industry, which has had a rocky few years. Continue reading “New ‘Ability to Repay’ Rules Highlight Need for Affordable Housing” →

Recent gains in home prices in the authoritative S&P Case Shiller Index seem to confirm the growing impression that a housing recovery is underway. While the data is clear that home values are indeed rising, it is unclear, as I have pointed out previously, whether the fundamentals behind the rise (record low interest rates, investor participation, and high levels of refinancing) are sustainable.

This does not mean that prices inevitably are set for a decline. The point here simply is to warn policy makers not to take their eye off the ball. Housing markets remain weak, and there is a very real possibility of a double-dip decline in home values early next year.

A closer look at Case Shiller (CS) reveals two trends that could temper enthusiasm about recent index gains. First, the rise in home prices seems to be decreasing month to month. Second, year-over-year (Y-o-Y) increases in home values could falter as many metro regions come up on the one-year anniversary of their lowest price points. This is key since many areas have seen meaningful Y-o-Y gains and that metric has been a large part of the media, policy, and investment narrative driving the recovery. So what happens to housing markets if home price appreciation starts slowing down?

It’s an important question, because investors account for a significant share of housing demand, representing 27 percent of home purchases. Without a continued upswing in prices, they’re likely to stop buying.

DATA DIVE

Home prices rose 0.9% from July to August, 2012. While welcome, it does represent a decrease of the previous month-over-month reading from June to July 2012 of 1.6%. That number followed three consecutive decreases from 2.2% and 2.3%, respectively. Some of the hardest hit areas that have been key drivers of the home price rebound show similar, albeit erratic, signs of slowing growth over the same period:

	August/July Change %	June/July Change %	May/June Change %	April/May Change %	March/April Change %
S&P CS 20 city (NSA)	.9%	1.6%	2.2%	2.3%	1.4%
AZ-PHX	1.8%	2.2%	2.5%	2.7%	2.5%
FL-MIA	1.0%	2.1%	1.6%	1.4%	0.4%
NV-LAS	1.6%	0.7%	1.5%	1.9%	1.1%

Continue reading “Housing Recovery: Getting Stronger or Weaker?” →

America’s stricken housing markets appear to have hit bottom, as home prices rise modestly in many areas across the nation. Now is the time to reduce government’s overwhelming dominance of home lending – Washington guarantees more 90 percent of all new home loans – but don’t expect Congress to decide the fate of mortgage giants Fannie Mae and Freddie Mac next year. And the mortgage interest deduction may be one of those tax loopholes that everyone is talking about closing, but that would deal a blow to housing markets just as they are finally showing signs of life.

Such were the main takeaways from a major, bipartisan housing conference at the National Press Club co-sponsored by the Progressive Policy Institute and the American Action Forum.

Kicked off by the Secretary of Housing and Urban Development, Shaun Donovan – with a vigorous defense of the administration’s handling of a housing market that faced historic challenges the past four years. Donovan argued, “Despite the fact that our progress has not been made in a straight line, it’s clear that housing is stronger than most expected it to be at the time when the president took office. There were challenges along the way. But today housing is in a significantly better position, by this measure, home prices, than most economists and market analysts expected at that time.”  The secretary also called on Congress to pass the broad refinance Menendez-Boxer bill. PPI has been, and continues to be a strong advocate of this proposal.

Experts sounded the alarm that that large-scale action was necessary in the next Congress, not only to decrease the size of government’s role in the housing market but to give some clarity to private capital to participate for the future. While Doug Holtz-Eakin noted that there has been some consensus building behind the scenes in Congress, he cautioned that “, Only the White House can make that step (on GSE reform). Professor Chris Mayer from Columbia Business School agreed, but pointed to the November elections, “it does matter” who is the next president because Mayer believes the two candidates have very different policies and that “FHFA becomes the place that sets de facto policy without Congressional guidance.” The panel backed Donovan’s plea to pass Menedez-Boxer, with the exception of Holtz-Eakin who said we’ve got enough housing programs.

With the nations “fiscal cliff” looming, the mortgage interest deduction set off a raucous exchange by Mark Zandi of Moody’s Analytics, who called for the housing industry to lead the way by promoting reduced limits on the $90 billion annual housing subsidy. Jerry Howard, CEO of National Association of Homebuilders, responded with a passionate defense that the industry could not weather any more hits in addition to the tsunami of upcoming regulation.

New data from the S&P Case Shiller Home Price Index reinforce the conventional wisdom: home prices have found a bottom and are rising. That is certainly welcome news for beleaguered homeowners, as well as a skittish housing industry desperate for a psychological boost. It should not mean, however, that Washington policy makers can simply sit back and let market forces take their course. Now, as the economic headwinds are finally easing, policy makers should double down and strengthen public initiatives that have helped us get to this point.

While the vast majority of housing price indices are certainly showing improvement, it’s important to remember that those are national averages of the largest metro areas. Big cities where housing markets are doing well, like Washington, DC and other heavily populated coastal metros carry greater weight in the stats than places like the Rustbelt where prices are recovering more slowly.

Continue reading “Why Congress Shouldn’t Let Up on Housing” →

Edward DeMarco, the beleaguered chief of the Federal Housing Finance Agency, announced this week that Fannie Mae and Freddie Mac will take steps to accelerate “short sales” to reduce home foreclosures. Short sales allow the owner of a mortgage, in this case Fannie Mae and Freddie Mac, to accept a loan payoff for less than a full balance. This way, Fannie and Freddie take a much smaller financial hit than if they had to foreclose on a home altogether. And this saves taxpayers money.

So far, so good. But I’m puzzled as to why DeMarco only goes half way. PPI has a better idea: enable short sales back to the homeowner. That would have the dual benefit of saving taxpayers money and keeping people in their homes. But this would mean reducing the amount of principal on an underwater loan, and DeMarco is adamantly opposed to principal reduction. Continue reading “DeMarco Half Right on Short Sales” →

Even as Mitt Romney basks in praise for his “bold” choice of Rep. Paul Ryan, he’s begun to distance himself from his running mate’s controversial proposals for revamping Medicare and Medicaid. Progressives should also ask Romney what he thinks of another of Ryan’s “bold” ideas: privatizing Fannie Mae and Freddie Mac.

Ever since Washington bailed them out four years ago – costing taxpayers $140 billion – the two mortgage giants have been in federal conservatorship. In Path to Prosperity, his budget blueprint, Ryan calls for their “eventual elimination.”

Where does Romney stand on Fannie and Freddie? It’s hard to tell, because since locking up the GOP nomination, Romney has been extremely reticent on the subject of housing. During the Nevada primary – in a state considered ground zero in the housing crisis – he did not exactly ooze sympathy for people at risk of losing their houses. Instead, he advised that government “not try and stop the foreclosure process. Let it run its course and hit the bottom.” In Florida, another hard-hit state, Romney focused not on solutions but on assailing Newt Gingrich for being a highly paid consultant to Freddie Mac as the housing bubble blew up. Continue reading “Will Mitt Follow Ryan on Housing?” →

The Washington Post waded into the principal reduction battle yesterday, endorsing Federal Housing Finance Agency Acting Director Edward DeMarco’s refusal to allow Fannie Mae and Freddie Mac to write down principal balances on delinquent underwater mortgages. The Post editorial endorsed what is a fatally flawed assessment by FHFA of the large potential savings to taxpayers from a carefully crafted program to reduce principal balances for delinquent underwater borrowers.

FHFA’s “analysis” of the presumed risks and rewards of principal reduction appears to be aimed at justifying the hard line that DeMarco and Fannie and Freddie have drawn against granting principal forgiveness in any form other than through short sales. In fact, both Fannie and Freddie, with FHFA’s approval, have recently moved to ramp up their short sales volumes. In a short sale transaction, the homeowner sells her house for less than the amount owed on her mortgage and the lender accepts the net sales proceeds without requiring additional payment. This is a forgiveness of mortgage principal that is equal to the amount by which the mortgage loan balance exceeded the net sales proceeds. Why principal writedowns are allowed in the form of short sales, but not in any other form, simply is incomprehensible. Continue reading “WaPo Wrong on Principal Reduction” →