Sequestration will affect real estate and housing markets

by Dan Krell
DanKrell.com

(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

September 6, 2012October 11, 2012

Has the housing market improved in the last four years

Dan Krell, Realtor®
DanKrell.com
© 2012

In retrospect, the beginning of the global recession in late 2007 was the end of the housing boom and may have spawned the foreclosures crisis and the financial crisis of 2008. And although this period of time will undoubtedly become the basis of many future dissertations examining the “Great Recession;” you might ask “how much has the state of housing improved since 2008?”

If you recall, the Housing and Economic Recovery Act of 2008 (HERA) was anticipated to have wide reaching changes in the mortgage and housing industries as well as supposed to have assisted struggling home owners. This multifaceted piece of legislation consolidated many individual bills addressing issues that were thought to either be the cause or the result of the financial crisis. Besides raising mortgage loan limits to increase home buyer activity, the historic legislation was the beginning of changes meant to “fix” Fannie Mae and Freddie Mac, as well as “modernizing” FHA to make the mortgage process easier for home buyers and refinancing easier for struggling home owners. Additionally, this law was the origination of the Hope for Homeowners program to assist home owners facing foreclosure (www.govtrack.us/congress/bills/110/hr3221).

The Federal Housing Finance Agency (FHFA), originated from HERA, has been the “conservator” of the then sinking Fannie Mae and Freddie Mac. Since the FHFA took control, there has been conjecture as to what would become of the mortgage giants: some talked about closing their doors, while some talked about changing their role in the mortgage industry. Since FHFA became the oversight agency, Fannie Mae and Freddie Mac has strengthened their role in maintaining liquidity in the housing market by helping struggling home owners with their mortgages as well as freeing up lender capital by the continued purchases of loans (fhfa.gov)

The inception of Hope for Homeowners was the beginning of a string of government programs designed to assist home owners facing foreclosure, or assist underwater home owners refinance their mortgage. Although there have been individual success stories, there has been criticism that these programs did not assist the expected numbers of home owners. A January 24th CNNMoney article by Tami Luhby (money.cnn.com) reported that “…the HAMP program, which was designed to lower troubled borrowers’ mortgage rates to no more than 31% of their monthly income, ran into problems almost immediately. Many lenders lost documents, and many borrowers didn’t qualify. Three years later, it has helped a scant 910,000 homeowners — a far cry from the promised 4 million…” and “HARP, which was intended to reach 5 million borrowers, has yielded about the same results. Through October, when it was revamped and expanded, the program had assisted 962,000…” (money.cnn.com/2012/01/24/news/economy/Obama_housing/index.htm).

Despite the recent slowdown in foreclosure activity, there is disagreement about the projected number of foreclosures going into 2013. A March 29^th Corelogic news release (www.corelogic.com/about-us/news/corelogic-reports-almost-65,000-completed-foreclosures-nationally-in-february.aspx) reported that there have been about 3.4 million completed foreclosures since 2008 (corelogic.com). And although an August 9^th RealtyTrac® (www.realtytrac.com/content/foreclosure-market-report/july-2012-us-foreclosure-market-report-7332) report indicated a 3% decrease from June to July and a 10% decrease from the previous year in foreclosure filings; July’s 6% year over year increase in foreclosure starts (initial foreclosure filings) was the third straight month of increases in foreclosure starts.

So, if you’re wondering if housing is better off today than it was four years ago, the answer may be a resounding “maybe;” It all depends on your situation.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 3 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

April 13, 2010October 5, 2019

Inquiring about the financial crisis

by Dan Krell © 2010

If you’re still wondering about the cause of the financial crisis, don’t worry- the Fina ncial Crisis Inquiry Commission (FCIC) is [still] looking into it. The Fraud Enforcement and Recovery Act of 2009 established the FCIC to examine the causes of the financial and economic crisis within the United States and submit its findings to the President on December 15th, 2010. The Commission is comprised of ten congressionally appointed members who are “prominent private citizens with significant experience in banking, market regulation, taxation, finance, economics, housing, and consumer protection.”

The Commission is charged with twenty-two areas of inquiry. Some of those areas that are related to the housing market include: monetary policy and credit; the concept that certain institutions are “too-big-to-fail”; fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector; legal and regulatory structure governing investor and mortgagor protection; financial institution reliance on numerical models (including risk models and credit ratings); the legal and regulatory structure of the United States housing market; lending practices, and securitization (including transferring risk). To do its job, the Commission is given the authority to hold hearings, issue subpoenas, and refer anyone who violated the law (with regard to the financial crisis) to the U.S. or State Attorney General.

Although Last week’s testimony of former Federal Reserve Chairman Alan Greenspan made headlines, not only because of the sometimes seemingly antagonistic questioning and defensive responses, the back and forth garnered the highly publicized “Greenspan sound bites” such as: “congress has amnesia” and “I was right 70% of the time.” As his testimony came to a close, a power outage dimmed the lights and disabled the microphones; which the Chairman of the FCIC attributed to Greenspan’s “lights out performance.”

Throughout his testimony and questioning, Mr. Greenspan cited a string of temporal events that may have led to the crisis, which included: higher affordable housing goals set in 2000; huge accumulations of subprime loans by Fannie Mae and Freddie Mac (to meet the new goals); and the increased European demand for subprime financed Collateralized Debt Obligations (CDO).

According to Mr. Greenspan’s testimony, subprime loans were not a major problem before 2002 because they were a small sector of the market. However, after new affordable housing guidelines were set, the subprime market grew rapidly (which may have also been the cause of rapid appreciation of home prices). He stated that if Fannie Mae and Freddie Mac had not accumulated the huge amounts of subprime loans (the accumulation was a contrast to their intended function); they probably would not have failed. Additionally, those subprime loans were graded “AAA” (rather than subprime) which probably increased the European appetite for the CDO’s (because of the unusual high yields for the grade). Mr. Greenspan differentiated the recent financial crisis from the Great Depression by saying that the recent financial crisis was “the greatest financial crisis” due to short term availability of funds; but the Great Depression was “the greatest economic crisis.”

So far, the FCIC has held two hearings and a forum of academic experts who presented working papers of their research on the causes that led up to the crisis.

Originally published at https://dankrell.com/blog/2010/04/13/inquiring-about-the-financial-crisis-the-financial-crisis-inquiry-commission-is-on-the-job/

June 24, 2007October 5, 2019

Looking for Blame in the Mortgage Crisis

The daily media reports of abuse, fraud, and other problems in the sub-prime mortgage industry attempt to make sense of a real estate industry in turmoil. It appears that the problems in the real estate industry are similar to those in Big Business. Like many of the recent business scandals, schemes and wrongdoing are carried out because the financial rewards seem greater then the risk. Those who are caught usually point their finger at their boss claiming that they were told to do so in fear of losing their job.

The present mortgage crisis is similar to some extent. Sensationalized media accounts of what went wrong and who is to blame seem to be in the daily headlines. The blame of the present crisis was first placed on the lenders and investors, who with their lenient underwriting guidelines, allowed many to borrow beyond their means. The new focus in the crisis is on inflated appraisals and how appraisers are “forced” to provide these appraisals in order to maintain business. Additionally, there has been some discussion about the loan officers who originated the loans, without regard to the consequences to the borrower.

The story of inflated appraisals on the mortgage industry is about how some appraisers are “forced” to provide appraisals with an inflated price or they will lose business. For a real estate appraiser, the pressures of complying with lenders’ requests to inflate appraisals are inherent to the business, but not necessary. To demonstrate the extent of the problem, the Baltimore Sun reported (April 10, 2007) that appraiser groups are asking regulators to crack down on the lenders who pressure appraisers for inflated appraisals.

On the other hand, not enough has been said about the loan officers who originate these loans. Many loan officers who originate sub-prime mortgages are mortgage brokers and are paid on commission; they only get paid if the loan closes. Most mortgage originators act ethically in the borrower’s best interest. However, some will say or do just about anything to get the loan to close, including making unrealistic promises to the borrower as well as pressuring others to ensure loan closure. Unless there is blatant fraud, loan originators are not usually held responsible for a “bad loan.”

There are reports of possible federal investigations of mortgage misrepresentation and non-disclosure of loan terms. A recent MSNBC article (April 10, 2007) reports that many sub-prime borrowers who were deceived by mortgage brokers and loan officers are filing law suits for violations of the Federal Truth in Lending Act. These borrowers include those who were misled to believe the terms of their mortgage, as well as others who were misguided to obtain a high interest rate mortgage when they qualified for a more favorable loan. Under the law, the full terms and conditions of loans must be disclosed to consumers. Additionally, some have interpreted that any misrepresentation, written or verbal, is a violation of this law.

Although most real estate professionals are reputable and act within the guidelines of the law and the ethics code of their profession, unfortunately some do not. Like Big Business, it appears that some of the problems in the real estate industry exist not just because of a lack of ethical behavior, but a lack of character as well.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 23, 2007. Copyright © 2007 Dan Krell.

by Dan Krell DanKrell.com

Dan Krell, Realtor® DanKrell.com © 2012

So, if you’re wondering if housing is better off today than it was four years ago, the answer may be a resounding “maybe;” It all depends on your situation.

by Dan Krell
DanKrell.com

Dan Krell, Realtor®
DanKrell.com
© 2012