issue: Housing

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.

San Bernardino County Strikes Measure to Use Eminent Domain

Posted on by The Progressive Policy Institute

Earlier today the Joint Power Authority, municipal body constructed by the county of San Bernardino, California voted not to consider using the power of eminent domain to seize residential mortgages held in private label securitizations (PLS).

The proposed move, authored by “Mortgage Resolution Partners”, a private firm out of San Francisco, had long been a controversial measure strongly opposed by private investors. The concept would have used the local “takings” power to write down principal on underwater mortgages and refinance the new loans onto the books at The Federal Housing Administration (FHA).

In a policy brief titled “Can Eminent Domain Help Underwater Homeowners” published on  July, 2012, when this plan first began to surface, I argued that eminent domain deserved credit for being creative, but was not in the best interest of homeowners. Please see the memo here.

New ‘Ability to Repay’ Rules Highlight Need for Affordable Housing

Posted on by The Progressive Policy Institute

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” →

Why the Housing Market Can’t Move On Without More First-Time Homebuyers

Posted on by The Progressive Policy Institute

Writing for U.S. News & World Report, Jason Gold argues why the housing market needs more first-time homebuyers:

Home values are now increasing nationwide. While that’s certainly better than the alternative, a deeper dive into the data reveals a serious crack in the foundation: too few first-time homebuyers.

First-time homebuyers are the vital first rung on the home ownership ladder. They are usually buying from a seller who is “trading up” to a more expensive home or building a new one. When potential new buyers sit on the sidelines, existing homeowners are stuck, unable to move out and up.

In October, the first-time buyer’s share of the purchase market stood at about 35 percent according to the Campbell/Inside Mortgage Finance HousingPulse Survey. That’s down from 37 percent as recently as June and it’s the lowest percentage recorded in the survey’s history. Typically, a healthy housing market sees first-time homebuyers occupy around 40 percent of the purchase market.

The survey results also revealed that first-time homebuyers heavily relied on the Federal Housing Administration for financing, thanks to its low down-payment requirement of 3.5 percent. With the FHA’s recent announcement that it will tighten credit standards, first-time homebuyers will see the barrier to homeownership grow even more.

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

Fannie and Freddie’s Fate

Posted on by The Progressive Policy Institute

In a Letter to the Editor of The New York Times, Jason Gold argues that the Times’ editorial gets it wrong and the Obama administration should act now on Fannie Mae and Freddie Mac:

Your Dec. 2 editorial “The Mortgage Challenge” drew welcome attention to a problem that neither party has done enough to fix. But it misses the mark by urging the Obama administration not to get “sidetracked” by discussions about reprivatizing Fannie Mae and Freddie Mac. That’s bad advice.

It’s been four years since Fannie and Freddie were taken into conservatorship. Until their fate is decided, we won’t see private capital get off the sidelines and back into mortgage lending. We need more first-time homebuyers participating in the market, not just investors snapping up bargain-basement homes.

The essential precondition for graduating Fannie and Freddie from conservatorship was stopping the decline in home prices. Mission accomplished. This should make it easier for Congress to pass long overdue measures for helping underwater homeowners, and to begin reducing Washington’s huge footprint in our housing markets.

Read the letter at The New York Times.

Fiscal Cliff Shouldn’t Scare Homeowners, But 2013 Should

Posted on by The Progressive Policy Institute

Writing for U.S. News & World Report, Jason Gold  explains the impact of the fiscal cliff on homeowners.

With the clock ticking, the nation is engrossed in Washington’s horse wrangling over the fiscal cliff, a nasty double whammy of spending cuts and tax hikes that experts predict could usher in another crippling recession.

But while Democrats defend entitlements and Republicans defend against tax increases, no bigger constituency seems to be more in the cross-hairs than homeowners. The popular mortgage-interest deduction (MID), long thought to have hands-off status, is now on the table as lawmakers try to steer the country away from plunging headlong over the fiscal cliff.

To what degree eliminating or reducing the MID, which costs the government an estimated $98 billion annually, impacts the housing market is debatable. While a potential change in the MID has caused a great deal of coverage in the news—and no doubt great anxiety for the average homeowner—most can sit back and take a deep breath … for now. The MID won’t be part of the fiscal cliff fix.

Read the entire article here.

 

How the Latino Vote Will Shape Future Housing Policy

Posted on by The Progressive Policy Institute

Writing for U.S. News & World Report, Jason Gold explains how the Latinos will influence the future of housing policy:

A “Modern Family” coalition of single women, African-Americans, and progressive young voters who are passionate about hot-button social issues helped propel President Barack Obama to a second term this election. But it was the commanding Hispanic vote—Obama won 71 percent of Latino voters—that truly powered the president’s successful run for re-election.

So what helped drive the Latino turnout in key swing states such as Nevada, Arizona, Colorado, and Florida? While a lot can be credited to anti-immigration stances taken by some GOP candidates in the primaries, the struggling housing market in key states also had an impact: The same swing states (Nevada, Arizona, and Florida) that turned out high Latino votes were also the hardest hit in the housing crisis. Moreover, 28 percent of Latino homeowners surveyed earlier this year were underwater, compared to only 14 percent of the general population.

That might have made a big difference when it came to looking at the differing approaches of the Obama and Romney campaigns. While the Obama administration and congressional Democrats crafted legislation and campaigned on broad refinance bills aimed at helping those same underwater borrowers, Mitt Romney took a more hands-off, market clearing approach, infamously telling the Las Vegas Review-Journal to “Let it [housing market] run its course and hit bottom.”

Read the entire piece.

5 Housing Issues Hanging in the Balance Going Into Obama’s 2nd Term

Posted on by The Progressive Policy Institute

In U.S. News & World Report, Jason Gold outlines the five housing issues that will need attention in Obama’s second term:

“Underwater homeowners, tight credit availability, and foreclosures have continued to threaten the nascent economic recovery. So when the nation’s serious housing issues were barely mentioned during election campaigning, it left many scratching their heads, especially with the battleground states of Florida, Nevada, and Arizona among the hardest hit by the housing crisis.

But even if housing was absent from serious debate this election, it will play a significant role in President Obama’s second term. With the election behind us, Americans from Wall Street to Main Street are curious how the President will address the issue that has crippled household budgets and stunted the broader economic recovery.”

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

Housing Recovery: Getting Stronger or Weaker?

Posted on by The Progressive Policy Institute

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?” →

Housing Summit Wrap Up

Posted on by The Progressive Policy Institute

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.

Rising Home Prices May Not Spell Recovery

Posted on by The Progressive Policy Institute

In recent months, a slew of new data from several major indices suggests home prices have found a floor nationally and are now slowly rising. While that may be welcome news to homeowners and a real estate industry battered by years of lost equity and sluggish sales, they might want to keep the champagne on ice for now. This is not to suggest the data is wrong and house prices aren’t going up, it’s just worth taking a closer look at the fundamentals behind the recent price trends and asking if there is a corresponding “housing recovery.”

Here are four reasons to temper optimism with caution:

  1. Investors drive a significant share of home buying. Many former homeowners and new households have chosen the safety of renting over the risks (and potential benefits) associated with homeownership. This increased rental demand, combined with home prices that are only now getting back up to 2004 levels, have driven residential rental rates to all-time highs.

    Naturally, this combination has attracted the attention of investors. These include seniors looking for income opportunities at a time when near-zero interest rates are punishing savers, to large investment funds and international speculators that see an attractive real estate opportunity.

    As of May 2012, investor purchases made up 25.3% of all real estate transactions. That’s simply unsustainable.As prices continue to rise, the opportunity for investors to reap sweet returns begins to fall. In fact, we’re already seeing signs of diminished demand as investor purchases fell to 21.9 percent of all real estate transactions in July, down from 23.5 percent in June and 25.3 percent in May. Continue reading “Rising Home Prices May Not Spell Recovery” →

Romney’s stance on housing: ‘Let it run its course’

Posted on by The Progressive Policy Institute

PPI’s Jason Gold was quoted in foxnews.com about the way Romney wants to fix the ailing housing market:

“Romney’s running as Mr. Fix-it on the economy, but he has nothing to say  about one of the biggest pieces of the puzzle,” said Jason Gold, a senior fellow  at the Progressive Policy Institute, a Washington D.C. think tank  affiliated with the Democratic Party.

Gold, who specializes in housing policy, questioned whether Romney’s  selection of Ryan as a running mate indicates he supports privatizing Fannie Mae and Freddie Mac, as Ryan called for in a budget blueprint last year. Romney  hasn’t said.

Many conservatives argue such a move would finally untangle government — and  taxpayers — from the mortgage business. Gold calls it an impractical step that would almost  certainly end the days of 30-year fixed mortgages. “It would take a sledgehammer to the housing market and throw us right back into recession.”

Read the entire article here. 

 

Why Congress Shouldn’t Let Up on Housing

Posted on by The Progressive Policy Institute

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” →