The end is near for Fannie and Freddie. The next step to remaking the housing finance system.
Like FHA, Fannie Mae and Freddie Mac were also financially battered during the financial and housing crises. While FHA became the mortgage to rescue many distressed home owners, the Federal Housing Finance Agency (FHFA) was created in 2008 as conservator for the hemorrhaging Fannie and Freddie. Although the writing was on the wall about necessitating change in the conventional mortgage sector, there could only be speculation about what that change would entail.
Fast forward to June 2013, and the bipartisan bill S.1217 Housing Finance Reform and Taxpayer Protection Act of 2013 was introduced as the groundwork for replacing Fannie and Freddie with the (to be created) Federal Mortgage Insurance Corporation (FMIC). Moving along to last week, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a draft for “A New Housing Financing System” (banking.senate.gov).
Building upon S.1217, the Bipartisan Housing Reform Draft’s intention is stated to “…protect taxpayers from bearing the cost of a housing downturn; promote stable, liquid, and efficient mortgage markets for single-family and multifamily housing; ensure that affordable, 30-year, fixed-rate mortgages continue to be available, and that affordability remains a key consideration; provide equal access for lenders of all sizes to the secondary market; and facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single-family and multifamily housing types.”
In addition to supervision and enforcement authority, the purpose of the FMIC is to maintain a re-insurance fund that will insure mortgage backed securities meeting FMIC guidelines. The re-insurance fund is to be modeled after the Deposit Insurance Fund (maintained by the FDIC), and to be funded by private companies. Additionally, the new system is meant to protect taxpayers by requiring future mortgage backed security guarantors to be private and hold a minimum of 10% private capital as a first loss position; bailouts of these private institutions are to be prohibited.
The FMIC will also institute underwriting guidelines that are to “mirror” the Qualified Mortgage (QM). The recent definition and rules for the QM announced by the Consumer Finance Protection Bureau (CFBP) were effective January 10th. The QM is characterized to be a safer loan compared to some loans originated prior to the crises because the lender must assess and the borrower must demonstrate the ability to repay the loan; the ability to repay is based on typical factors that include the borrower’s income, assets, and debts. Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.
Conforming loan limits will be maintained, so as to provide the additional credit needed to purchase homes in “high-cost” areas. If you’re a first time home buyer, you will need a minimum down payment of 3.5%; however if you’re not a first time home buyer you will need at least a 5% down payment for your home purchase.
The transition period is expected to be at least 5 years, however possible extensions may be required to prevent market disruptions and cost spikes to borrowers. The plan is to simultaneously wind down Fannie and Freddie’s operations while increasing expansion of the new system. The FMIC will take over the functions and duties of FHFA; and as of the FMIC’s certification date, Fannie and Freddie won’t be able to conduct new business.
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.
Decades of futurists dreamed about and designed their vision of a “smart home” intended to make living easier and more comfortable. The 1933 World’s Fair envisioned that all homes would have helicopter pads; the 1962 World’s Fair highlights an electronic central brain in the home; the 1964 World’s Fair was about computerizing the home with time saving appliances. And of course, who can forget Disney’s “House of Tomorrow?”
Retro-futurism seems almost cartoonish today, much like watching an episode of the Jetson’s. However, like the retro-futuristic home, today’s smart home is meant to make life easier. Filled with devices and appliances that are connected to the internet, remote access to your home’s systems and appliances is becoming increasingly commonplace. There is an increasing ability for you to control your home, even when you are not there. You can remotely monitor cameras in your home, change thermostat settings, and even program the DVR.
Realtor Magazine (Homes Are Getting Smarter, More Connected; January 09, 2014) reported that smart home tech is a growing sector showcased at the annual Consumer Electronics Show. Besides the growing number of devices that can be remotely controlled, there is also a trend for appliances to send text messages and email. Although smart home technology today is about producing individual gadgets that are programmable and controlled by smart phone apps, it appears that there is a trend toward integrating devices as well. As smart home technology advances, home appliances and systems will be integrated with each other allowing them to communicate with each other; which expected to make the home function more efficiently.
All this technology is great, but there appears to be a downside as well. Although there have been warnings about hacking smart home devices for a number of years, the recent report of hacked smart refrigerators that sent spam has attracted and focused attention on the hackers’ ability to take control of a smart home (phys.org/news/2014-01-cyberattack-hacked-refrigerator.html). A Forbes article published July 2013 (When ‘Smart Homes’ Get Hacked: I Haunted A Complete Stranger’s House Via The Internet) discussed the ease of identifying and gaining access to smart home devices via the internet. Security specialist indicated that they were able to access and control smart devices (such as lighting, thermostats, garage doors, and security systems); more importantly, they were able to access personal data (including names) and device IP addresses from these devices as well. The consensus among security specialists about protection from such intrusions is to basically stay “unplugged.”
While we wait for the perfect smart home, we can continue dreaming of the home of the future. “1999 A.D.” (A 1967 Ford-Philco production; the video featuring Wink Martindale is posted above) is one of the best retro-future depictions of a home that incorporates technology considered to be state-of-the-art by today’s standards, as well as technology that we have yet to perfect. Central to the home is a computer that collects and maintains information from all home devices, including biometric data that is sent to the medical center for analysis. 3D television, a “home post office” (email), push button meals, and shopping from a home computer is standard in this home. As technology advances, there seems to be a post-modern sentiment exclaimed in the video that may ring true, “…if the computerized life extracts a pound of flesh, it has some interesting rewards…”
Original published at https://dankrell.com/blog/2014/03/14/the-pros-and-cons-of-smart-home-tech/
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.
A recent study may indicate that housing market may not fully recover for most cities until 2018.
The “long slog” housing recovery prediction appears to be relevant as a recent study published by the Demand Institute (DI) now estimates that the recovery may take several more years. DI, a non-profit that studies consumer demand, suggests that home values may not rebound until 2018.
The DI study was reported by Realtor Magazine (Uneven Recovery to Continue for 5 Years; March 03, 2014) to be comprehensive and include 2,200 cities across the country and 10,000 interviews. Overall, the report concludes that the recent sharp increase in home prices was mostly due to real estate investors who purchased distressed properties. Now that distressed home sales are declining, values are not expected to increase as precipitously; the continued housing recovery is expected to be driven by new household formation.
The study reported the appreciation rate of the 50 largest metro areas in the country through 2018; home prices are estimated to appreciate about 2.1% annually. However, the top five appreciating cities will average an overall increase of 32% through the recovery; while the bottom five will only average about 11% (Washington DC is listed among the bottom five). Cities that experienced the highest appreciation and subsequently sharpest depreciation in home prices will likely have the longest and protracted recovery, and yet may only recover a fraction of the peak home values by 2018.
Not highlighted, and not yet expected to be an impact on the housing recovery, is the move-up home buyer. The typical move-up home buyer is sometimes characterized as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home. Similar to previous recessionary periods and real estate down markets, the move- up home buyer was the missing piece to a housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek. However, it seems as if psychological barriers hold back many move-up buyers today as it did in past recoveries. During the current housing recovery, many potential move-up buyers have remained in their homes. And until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”
Much like the DI study, there has been a lot of discussion and debate about the effects (on housing) of the lack of housing formation during the recession and in the subsequent recovery. Andrew Paciorek, an economist at the Federal Reserve Board of Governors, described household formation during a presentation given at the Atlanta Fed’s Perspectives on Real Estate speaker series (June 2013); “Think of the unemployed or underemployed college graduates living in their parents’ basements instead of renting or buying their own place. When a person establishes a residence, whether that’s an apartment or a house or another dwelling, that person is forming a household. Mainly because of a weak labor market that held down incomes, the rate of household formation cratered during the recession and subsequent recovery…”
To give perspective to the issue, the rate of decrease of household formation during the great recession was significant (an 800,000 per year decrease compared to the previous seven years). Additionally, household formation between 2007 and 2011 was at the lowest level since World War II, and was 59% below the 2000 to 2006 average. Most significantly: during 2012, 45% of 18 to 30 year olds lived with older family members; compared to 39% during 1990, and 35% during 1980. He described the household formation crash as an indirect contributor to declining home prices, which diminished household wealth linked to home values.
Although household formation continues to be a concern as the labor participation rate has decreased, Paciorek points to improvements in the job market as the spark to increasing household formation. He forecasts that household formation should increase to 1.6 million over the next several years, and could possibly exceed the pre-recession average due to pent up demand of those who waited to form a household during the recession. However, a disclaimer was provided saying his forecast is “based on assumptions that could prove overly optimistic;” and has “lots of caveats and lots of uncertainty” – much like the housing recovery.
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.
Although the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while. Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process. Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).
RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals. Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.
RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing. An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent. The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender). In most cases, you’re not required to use the referred affiliated businesses.
RESPA violations are serious, and penalties can be severe. For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.”
The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance. And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).
In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations. Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor. More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).
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.
As interest increases to use eminent domain to assist underwater homeowners, there is opposition in Maryland.
Eminent domain has not received as much attention since the controversial decision in the 2005 case Kelo v. City of New London. However, the issue could become a hotly debated topic in the current session of the Maryland General Assembly, since the introduction of HB1365/SB850 Real Property – Prohibition on Acquiring Mortgages or Deeds of Trust by Condemnation on February 7th; the bills propose the prohibition of acquiring mortgages through eminent domain, stating, “The use of eminent domain to acquire mortgages undermines the sanctity of the contractual relationship between a borrower and a creditor.”
The issue of using eminent domain as a vehicle to restructure underwater mortgages became a national conversation in 2012, when a few municipalities began the discussion as a means to assist underwater homeowners. The plan caught the attention of Baltimore officials, who began a discussion last year of doing something similar.
As the housing market slowly recovers, many homeowners are emerging from a negative equity position on their homes. According to the Zillow Negative Equity Report (zillow.com), the national negative equity rate for homeowners with a mortgage dropped to 21% during Q3 2013 (from a peak of 31.4% during Q1 2012); while 14.7% of homeowners who own their home free and clear are underwater. Regional statistics vary depending on the strength of the local markets compared to peak home values.
The Baltimore Sun reports that about 13% of mortgages in the Baltimore-Towson area are underwater; neighborhood percentages vary, and there some with significantly more underwater homeowners (Some call on city to explore eminent domain to combat blight; Program targets underwater mortgages, By Natalie Sherman; The Baltimore Sun; November 25, 2013).
A recent industry article looks at the back story and status such plans, as well as discussing some practical considerations. The article asserts that the concept is “far from dead,” stating that “…Local government and community leaders have legitimate concerns about their constituents, many of whom are struggling with mortgage payments on inflated loans that have made their homes unaffordable, and nearly impossible for them to sell without sufficient equity to pay off the loans…” However, the conclusion states that such a plan at present “…appears wrought with complications and does not appear likely to lead to any significant chance of furthering its stated “public” purpose-economic development…” The result may be “lengthy and expensive legal battles; and possible disruptions or changes to the credit industry, which decrease access to mortgages and/or increase interest rates (Dellapelle & Kestner (2013). Underwater mortgages: Can eminent domain bail them out? Real Estate Issues, 38(2), 42-47).
In response to the effort to implement eminent domain in such a way, the Federal Housing Finance Agency (FHFA.gov), the regulator and conservator of Fannie Mae and Freddie Mac as well as the regulator of the Federal Home Loan Banks asked for public input; and subsequently issued a General Counsel Memorandum on August 7th 2013:
The General Counsel Memorandum was a summary and analysis of the public comments and input regarding the use of eminent domain to restructure mortgages. The memo discussed a number of legal issues as well as issues that relate to the FHFA. The memo stated the pros and cons of such a plan too: Proponents claimed “…if securities have lost value, then the proper and fair valuation of mortgages backing the securities through eminent domain results in no loss to a securities investor, but permits a restructuring of a loan that would benefit homeowners and stabilize housing values…” while opponents point to “…numerous legal problems with the proposed use of eminent domain; some centered on the proper use of eminent domain itself and others on attendant constitutional issues related to taking of property or sanctity of contract. Opponents noted strong reaction of financial markets that support home financing in terms of upsetting existing contracts but as well creating an unworkable situation for providing and pricing capital based on the uncertainty of such a use of eminent domain…” However, the conclusion states, “…there is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are “underwater” on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law…”
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.
The end is near for Fannie and Freddie. The next step to remaking the housing finance system.
The end is near for Fannie and Freddie. The next step to remaking the housing finance system.
