Housing Finance Reform Time

housing finance reform
Mortgage process

Earlier this year, President Trump released a memorandum indicating the need to reform the current structure of housing finance.  Although some believe this initiative is a distraction, the reality is that housing finance reform has been in the government sights for years.  In fact, the current state of mortgage markets was only meant to be a temporary fix after the financial crisis of 2007

Housing finance reform has been a popular political subject for years.  Even before the financial crisis that resulted in the Great Recession, housing finance reform was front and center as a means to increase homeownership.  However, it wasn’t until after the financial crisis that touched off in late 2007 that Congress saw the need to make immediate major reforms to the mortgage industry.  Although a strategy was mapped out, not everyone agreed on the plan. 

One of the first steps taken by Congress was passing the bipartisan Housing and Economic Recovery Act of 2008 (HERA).  The purpose of HERA was to be a comprehensive attempt addressing the identified problems and concerns (at that time) that caused the financial crisis.  HERA created the Federal Housing Finance Agency (FHFA) to provide oversight of the Government Sponsored Entities (GSE).  Among the goals set by HERA was to “modernize” FHA and reduce Fannie and Freddie’s role in mortgage markets.  The fate of Fannie and Freddie has been debated ever since. 

The subsequent government takeover of Fannie and Freddie all but froze out any private participation in the mortgage markets.  A 2010 CBO report indicated that 90 percent of all mortgages were owned by Fannie Mae, Freddie Mac, and Ginnie Mae.  Some estimate government’s involvement has been much higher when including FHA and VA loans.   

Fast forward to March 27th 2019, when President Trump issued a memorandum on the urgency of housing finance reform.  Although the memorandum provides a rationale to change the system, the timing couldn’t be any more ideal (to help a seemingly plateaued housing market).  The President’s push for reform acknowledges the dominant role of the GSE in mortgage markets without much competition from the private sector.  The plan is to reduce taxpayer risk by expanding the private sector’s role.  Furthermore, the goal is to “modernize government housing programs, and make sustainable home ownership for American families [our] benchmark of success.”

On September 5th, the Treasury Department submitted its plan on housing finance reform.  The pan, as described by a Treasury press release (Treasury Department Submits Housing Reform Plan to President; treasury.gov)  “includes nearly 50 recommended legislative and administrative reforms to define a limited role for the Federal Government in the housing finance system, enhance taxpayer protections against future bailouts, and promote competition in the housing finance system.”

Although the result of HERA was a government monopolized housing finance industry, it was not the intention.  Housing finance reform means returning to a competitive market that includes the private sector.  However, it does not imply the end to government participation. Prior to the financial crisis, the competitive mortgage industry helped a record number of home buyers achieve homeownership.  Reforming housing finance markets is key in returning to a stable and reliable housing market across all sectors and price points.  Housing finance reform will increase homeownership opportunities for those who have struggled with the prospect of buying a home.  And of course, home sellers will benefit from increasing numbers of home buyers entering the housing market.

Original article is located at https://dankrell.com/blog/2019/10/07/housing-finance-reform-time/

By Dan Krell
Copyright© 2019

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Saying goodbye to Fannie and Freddie

homesA recent Housingwire report (housingwire.com; Senators launch bill to boost secondary mortgage market) described a bipartisan effort to modernize the government sponsored housing finance entities.  The Senators’ plan will wind down Fannie Mae and Freddie Mac and replace them with one government “guarantor,” which is to be called the Federal Mortgage Insurance Corp.

This bipartisan effort is the latest in a succession of moves to repair and improve the nation’s housing finance markets, which began with the Housing and Economic Recovery Act of 2008 (HERA).  HERA was comprehensive legislation that was intended to address issues that caused or resulted from the financial crisis.  Besides focusing on modernizing FHA, HERA also set its sights on Fannie and Freddie by creating the Federal Housing Finance Agency (FHFA) to oversee the Government Sponsored Entities (GSE) and possibly reducing Fannie and Freddie’s role in the housing industry.

Although FHFA acted as “conservator” for Fannie and Freddie because of capitalization problems, poor financial performance and deteriorating market conditions; the role was intended to be temporary.  The oversight agency provided guidance in increasing liquidity so Fannie and Freddie would become streamlined and profitable.  Since FHFA took control, experts have speculated on the fates of the mortgage giants; some articulated an eventual shut down of Fannie and Freddie, while others described a modified role in housing finance.

For those not plugged into the industry, the replacement of the GSEs might be a surprise.  However, Housingwire reported in April (FHFA gears up for single GSE securitization platform) of FHFA’s initial plan to reduce Fannie and Freddie’s mortgage backed securities holdings.  The idea was to create a new single entity to facilitate the reduction of the GSEs secondary market involvement so as to increase private capital participation.

A June 25th press release quoted Senator Bob Corker (R-TN) (corker.senate.gov) as saying, “Five years after the financial crisis, it is past time for us to modernize our unstable system of housing finance”… “The framework we’re presenting here will protect taxpayers while maintaining market liquidity, and is the best opportunity we’ll have to finally move beyond the failed GSE model of private gains and public losses.”

Because there has not been much reform to housing finance since the financial crisis, the proposed legislation was crafted in response to the consequences of a $188 million Fannie and Freddie bailout.   The bailout resulted in a mortgage market where “nearly every loan made in America today comes with a full government guarantee,” and that private capital has all but disappeared from the mortgage secondary markets.

Co-sponsor Senator Mark Warner (D-VA) was quoted to say, ““Housing finance is the last piece of unfinished business remaining after the 2008 economic meltdown” …“We have designed thoughtful reforms that will protect taxpayers from future downturns while responsibly preserving the availability of the 30-year fixed-rate mortgage for homebuyers. We believe the housing market is ready for reforms like this, and that the private sector has been waiting for new rules of the road.”

Besides having the intention of protecting taxpayers from future bailouts, the Housing Finance Reform and Taxpayer Protection Act (S. 1217) is intended (among other purposes) to “wind down” within five years the FHFA, Fannie Mae, and Freddie Mac; “ensure that lending institutions of all sizes have access to the secondary markets;” and “transfer duties and functions” to a new entity – the Federal Mortgage Insurance Corporation (FMIC).

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By Dan Krell
Copyright © 2013

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.

Has the housing market improved in the last four years

Dan Krell, Realtor®
© 2012

HousingIn 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).

HousingDespite the recent slowdown in foreclosure activity, there is disagreement about the projected number of foreclosures going into 2013.  A March 29th 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 9th 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.

President Signs Historic Housing Legislation

by Dan Krell

The lack of fanfare over the signing of The Housing and Economic Recovery Act of 2008 on July 30th by President Bush was the anticlimax of the long Congressional battle of proposed housing legislation. The long awaited and highly anticipated legislation is historic for its wide reaching changes in the mortgage and housing industries as well as foreclosure assistance.

For the mortgage industry, the Housing and Economic Recovery Act of 2008 changes how the Government Sponsored Entities (GSE’s), FHA and VA will conduct their mortgage businesses. In addition to the recent loan limit increases ($625,000 for conforming mortgages and $625,000 for FHA loans in high cost areas) becoming permanent for Fannie Mae, Freddie Mac, and FHA, the new law will increase oversight and offer more options and protections to home buyers.

For the GSEs (which include Fannie Mae, Freddie Mac, and Federal Home Loan Banks), the new law provides temporary assistance to the financially beleaguered Fannie Mae and Freddie Mac from the United States Treasury in the form of discount loans to help stabilize the mortgage giants. Additionally, a new and “independent” regulator to oversee the GSEs will act like a federal regulator to ensure that the GSEs are financially stable.

The new law includes the FHA Modernization Act of 2008, which gives the venerable government insured mortgage a face lift. There have not been such significant changes to FHA since its inception in 1934. Among the many changes, FHA will have a more streamlined process, increase the down payment to 3.5% of the purchase price, bar down payment assistance programs, and require home ownership counseling for home buyers.

The new law seeks to prevent mortgage fraud by launching efforts to license all mortgage originators. Although many states now require mortgage originators to be licensed, the new law will focus on those originators who are exempt from current laws (which typically include mortgage originators who are employed by federally chartered banks).

New mortgage disclosure requirements expand the Truth In Lending Act (TILA) to require lenders to provide meaningful information to consumers about their loans. The time frame will be three days from application and seven days before settlement. This is meant to allow consumers to compare mortgage rates and terms within a reasonable time frame.

Home buyers who purchase a home between April 9, 2008 and June 30, 2009 will have the opportunity to qualify for a tax credit which is repayable over fifteen years. However, the credit is limited to ten percent (up to $7,500) of the purchase price of a principal residence, and only for first time home buyers who meet income restrictions. Other restrictions apply, so you should consult your accountant for additional information.

For home owners facing foreclosure, the new legislation includes the HOPE for Homeowners Act of 2008. The program will allow the home owner’s present mortgage be refinanced through FHA. However among other qualifications, the program requires the home owner’s present lender to agree to accept losses to 85% of appraised value of home.

To the average person, these sweeping changes may seem dull and unimportant; many remain critical of the new legislation. However, because the Housing and Economic Recovery Act of 2008 is so wide reaching, it is truly historic.

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 August 4, 2008. Copyright © 2008 Dan Krell.