What’s Next for Housing Finance Market Reform

No one said change is easy, however it’s necessary. That thought is reflected in the Treasury Department’s (Treasury.gov) white paper entitled, “Reforming America’s Housing Finance Market.” The white paper, released last Friday, is an assessment of the housing market and offers proposals for reforming the mortgage markets. Being the most significant reform of the housing finance markets in 80 years, the main points for this reform are to create a robust mortgage market by “winding down Fannie Mae and Freddie Mac” and “increase the role of private capital.”

Although it was admitted that housing finance reform “will make credit less easily available than before the crisis,” experts agree that reform is necessary. However, that’s where the consensus ends; for you see, there is disagreement about what kind of reforms are to be realized. Industry groups such as the National Association of Realtors® (Realtor.org) and the Mortgage Bankers Association (mortgagebankers.org) hail mortgage market reform, but offer slightly different solutions.

Two extreme positions of reform are complete privatization and nationalization; the white paper contrasts each with the notion that actual reform would be somewhere between the two. A complete privatization of the mortgage market would limit access to financing as well as increasing financing costs; while a nationalization of the mortgage market would increase taxpayer risk and market distortion.

As possible solutions, the white paper weighs several proposals against four criteria: access to mortgage credit; incentive to invest in the housing sector; taxpayer protection; and economic stability. The best path is described as a “balance of [these] priorities.”

The options discussed are several versions of option 1, which is: “privatizing housing finance but with government insurance limited to FHA, USDA and Department of Veterans’ Affairs for a narrowly targeted group of borrowers.” The stated benefits of this option include minimizing market distortions and limiting “moral hazards” within the lending industry. Although this option would reduce risk in private markets, there is concern that it may cause capital to retreat from housing into other economic sectors (which could have an undesirable effect on home prices). Additional concerns include increased mortgage costs, restricted access to the 30-year pre-payable mortgage, and the inability for the government to quickly respond to a credit crisis.

Option 2 is the same as option 1, but with a guarantee mechanism that would engage in a crisis. This would address the inability of a swift government intervention in option one; however there is a risk of increased moral hazard.

The 3rd and final option proposed in the white paper is same as option 1, but with catastrophic reinsurance behind significant private capital. (Reinsurance is the purchase and re-issue of mortgage insurance from mortgage insurance companies, which transfers the risk of the loans). This option has the government role as reinsuring mortgage securities, which is thought to reduce financing costs by increasing the flow of capital to mortgage markets. Although the Stated benefits of this option include affordable 30-year pre-payable mortgages for the average home buyer, as well as allowing small lenders to participate in the mortgage market; there are some concerns, which include the possibility of creating another housing bubble by artificially inflating housing prices due to the increased investment flowing into the housing sector.

Although it’s inevitable, there is no clear path to housing finance market reform; which means that the road ahead may be bumpy.

By Dan Krell.
Copyright © 2011

Comments are welcome. 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.

Optimistic about housing in 2011

sold

Would you have ever imagined that home prices could depreciate one third since the market peak? 33.5% is the overall decrease of the Standard and Poor’s/Case-Shiller Home Price Index 10 city composite from June/July 2006 through April 2009. If the index is expanded to the 20 city composite the decrease is only 32.6%; the peak to date decrease (through September 2010) is just under 29% (standardandpoors.com).

Although the latest index indicates another decrease in home prices, the Washington, DC metropolitan area was one of two metro areas that had a slight increase (the other metro area was Las Vegas, NV). DC metro area home prices increased 0.3% in the third quarter of 2010, preceded by a 0.2% increase during the second quarter.

Similarly, the Federal Housing Finance Agency’s seasonally adjusted House Price Index (HPI) also indicated an overall drop in home prices (a 3.2% decrease from Q3 2009 to Q3 2010). However, Washington, DC is one of ten cities that experienced price increases over the past four quarters (FHFA.gov).

If you haven’t yet become indifferent, some industry experts are expressing optimism for 2011 – for a change of pace.

Fannie Mae Vice President and Chief Economist, Doug Duncan, expressed cautioned optimism in Fannie Mae’s November Economic Outlook podcast (fanniemae.com). Dr. Duncan expects slight improvements in home sales and other economic factors in 2011. These slight improvements, along with expected low mortgage rates through 2011 will assist a slight recovery.

Freddie Mac Chief Economist Frank Nothaft shared some optimism in his December 6th commentary in the Freddie Mac’s “Executive Perspectives Blog, Insights on Housing Finance” (freddiemac.com). Dr. Nothaft expects that foreclosure inventories will continue to affect local markets and home prices. However, home affordability (which is at the lowest point in years) combined with low mortgage rates should give the housing market a boost in the second half of the year.

The National Association of Realtor’s Chief Economist, Lawrence Yun, expects that the biggest push for the housing market will be through the extension of the Bush tax cuts. In a November 16th NAR press release, Dr. Yun explains that the recovery of the housing market depends on jobs. He expects about 1.5 million jobs to be created if the Bush tax cuts are extended for those earning up to $250,000, and an additional 400,000 jobs to be created “if the Bush tax cuts are extended for everyone” (Realtor.org).

Of course, many factors can influence our presently impressionable economy. For example, recent Congressional testimony by two Governors of the Federal Reserve Board (Elizabeth Duke on November 18th and Daniel Tarullo on December 1st) discussed the impact of foreclosures going into 2011 (federalreserve.gov). Governor Tarullo concluded his testimony to the Committee on Banking, Housing, and Urban Affairs by stating, “…I regret to say that the hangover from the housing bubble of this past decade is still very much with us…”

The bottom line is that although most expect foreclosure inventories to continue to drag home prices, there is optimism – for the second half of 2011. As job numbers begin to improve, employment will be the big news. A slightly better employment picture combined with low mortgage interest rates and the most affordable housing market in decades will provide the spark that the housing market and economy have been seeking for over two years.

By Dan Krell
Copyright © 2010

Comments are welcome. 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.

The next real estate boom is already here

by Dan Krell © 2010
mid_town
A couple of years ago, I wrote an article about a future real estate boom that would occur as suburbanites would seek out urban homes. As I discussed in my May 2008 article, peak gasoline costs and increased traffic compelled many to seek housing closer to their employment; as well as being close to metro and mass transit. A recent Brooking Institution report appears to agree with my premise, and expands on the idea of urbanite living with a focus on sustainable and walkable neighborhoods.

The November 2010 article titled “The Next Real Estate Boom” (Leinberger & Doherty; The Brookings Institution) discusses how baby boomers and their children have been increasingly seeking out housing that is close in vicinity to commercial spaces, mass transit, and easily traversable by foot (walkable). The article discusses how the development of high density neighborhoods will once again spur on real estate growth, and ultimately forge a new economy in the United States.

Although, Leinberger & Doherty proclaim that the great recession was the climax for the change from suburban to urban lifestyles; the trend has been increasing for the last two decades, but actually had roots much earlier with planned communities such as Columbia and Greenbelt (MD). And although his first planned walkable community of Cross Keys (in Baltimore) came to fruition in the 1960’s, there is no mention of James Rouse in the Leinberger & Doherty report. It must also be pointed out that recent planned local communities such as King Farm and the Kentlands were built in the spirit of walkable and sustainable communities.

Mid_Town_livingThe trend, as Leinberger & Doherty discuss, is toward shifting from sprawl to revitalization. However, urban renewal has gone through many cycles and forms of re-development in many cities; from the revitalization of New York City in the 1950’s, by Robert Moses who seemed to transform the city single handedly, to the revitalization of Baltimore’s Inner Harbor in the 1970’s;

Notably, the May 20th signing of the Sustainable Communities Tax Credit by Governor O’Malley highlights the focus on revitalization. The tax credit expands the current tax incentive beyond historic properties so development is encouraged to renew and revitalize existing local communities.

A prime example of what Leinberger & Doherty describe is the redevelopment of the North Bethesda corridor along Rockville Pike (MD 355). The White Flint Partnership has been advocating and promoting the revitalization of this community to become one of Montgomery County’s newest walkable and sustainable neighborhoods. The project is transforming the area into high density living with adjacent commercial development that is described by the developers as sustainable, accessible, safe, connected, and containing an abundance of green spaces.

Additionally, market demands have and will transform existing neighborhoods to become the walkable and sustainable communities that are becoming vogue. And it may be that suburban renewal will become the trend in the near future, as isolated sprawling communities will eventually transform into smaller versions of Leinberger & Doherty’s vision.

Maybe the point is not to transform all communities into the high density, walkable communities that exist in mid-town Manhattan, but aim higher in community planning. Their description of a high density urban utopia appears healthy for residents, due to increased physical activity (i.e., walking); and healthy for the environment, due to green and sustainable buildings as well as reducing car emissions.

Comments are welcome. 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 November 8, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

Home sellers and sale prices; what is the data saying?

by Dan Krell © 2010
real estate for sale
As the housing market goes into a third year of turmoil, you have to wonder how area home sellers are coping with a prolonged challenging housing market. One indicator to consider is the home seller’s price expectation versus what home buyers are willing to pay; which is the list price as compared to the actual sale price of a home.

Before we check out the percentage of list price received at settlement, let’s review how home sellers may have become used to consistent and significant home price appreciation. One indicator to consider is the House Price Index (HPI), which is used by the Federal Housing Finance Agency (FHFA) to indicate changes to residential home prices. The HPI is the percentage home value change relative to the prior year; the HPI indicated in this column is for the local Metropolitan Statistical Area (MSA) of Bethesda – Rockville- Frederick.

During the 1990’s home price appreciation was sluggish at best and did not have significant quarterly appreciation until the late 1990’s. The HPI indicated that area home prices depreciated in Q4 1990 and Q1 1991. However through Q3 1992 to Q3 1997, home prices were mixed; there were eight quarters of depreciation and ten quarters of appreciation of less than 1%. The last two years of the decade showed increasing appreciation when the HPI ranged from 2.25 to 3.63; then a significant appreciation for Q3 and Q4 of 1999 when the HPI exceeded 5.

But oh the 2000’s! If you compare the sluggish housing appreciation in the 1990’s to the seemingly ever increasing market in the 2000’s, it appears to be a stark contrast. The 2000’s saw quarterly appreciation through the second quarter of 2007. During the beginning of the 2000’s, the HPI increased the first eight quarters from 6.76 to 13.82. Then from Q4 2003 through Q2 2006, the HPI did not fall below 12 and had four quarters when the HPI was above 20 (yes, there was annual appreciation over 20%)!

home for saleHistorically, area housing prices have not been affected by economic turmoil as much as it has recently. Even during recessionary periods in the 1970’s and the 1980’s, the HPI was negative for no more than four consecutive quarters (for example: Q4 1982 to Q3 1983). Unfortunately, recent housing prices have had a negative HPI for thirteen consecutive quarters (since the second quarter of 2007).

Thirteen consecutive quarters equates to just over three years of home price depreciation for the local MSA. So, just how well are home seller’s acclimating to the new housing market?

According to single family home data collected and reported by the local MLS, Metropolitan Regional Information Systems, Inc. (MRIS), Montgomery County home sellers received a price shock in 2007 and 2008; sellers received about 92% of list price in 2007 and about 89% of list price in 2008. Since then, Montgomery County home sellers seem to have adjusted to the market as indicated by more recent percentages of list price received at settlement, which appears to have returned to pre-crisis levels (about 94% or more of list price).

Now that the housing market changes are no longer dramatic, most home sellers have accepted the nature of the housing market and price their homes accordingly. For those who haven’t yet accepted the new housing market, you may be in for a (price) shock.

Comments are welcome. 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 November 1, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

Housing recovery may be in jeopardy; Allegations of foreclosure processing irregularities

by Dan Krell © 2010

For a housing market that seemed to have begun the healing process, the bandages appear to be unraveling. Recent reports of fraud during the foreclosure process as well as questions of mortgage note ownership have had several lenders, most recently Bank of America, freezing their foreclosure process until they can assure the foreclosure process is conducted legally and with integrity.

At first, everyone seemed shocked to learn of the alleged fraud involved in preparing foreclosure documents necessary to pursue a foreclosure. Some allege that the fraud, although not rampant within the industry, is systemic; it is a symptom of a high volume industry that is typically understaffed. Reports of robo-signing of thousands of documents per week (used to attest to the accuracy of the foreclosure documents) have become so vociferous that some state Attorney Generals are seeking investigations.

Most recently, news of a mortgage registry set up to facilitate the bundling and sale of mortgages on the secondary market cannot foreclose on delinquent home owners. The recent accounts of denying MERS (Mortgage Electronic Registration Systems) during the foreclosure process are just another blow to an already fragile housing market.

Much like allegations that foreclosure processing fraud is not new, the MERS situation should also not be a surprise. Way back in 1989, Henley Saltzburg (“Avoiding Legal Pitfalls”, Mortgage Banking; Apr 1989; 49, 7; pg. 38) highlighted documentation problems in secondary market by stating, “Incomplete or inaccurate documentation is a primary source of contractual litigation in the secondary market…” Furthermore, according to Steve Cook, of Real Estate Economy Watch, since 2006 Fannie Mae has ordered servicers to not name MERS as a plaintiff in foreclosure proceedings (“Straightening Out the MERS Mess”).

homeownerThe recent media coverage of these developments have people wondering about the short and long term affects on the housing market. Many fear that delaying the disposition of foreclosed properties by prolonging the foreclosure process may push home prices even lower. Even Mark Zandi, chief economist at Moody’s Analytics, was quoted in an October 4th Wall Street Journal article (Robbie Whelan. “U.S. News: Foreclosure? Not So Fast”) describing the current foreclosure situation as a “…growing mess in the foreclosure process…” and will be looking to a now prolonged housing recovery.

Industry experts are looking to clear up these matters as soon as possible. Fannie Mae Executive Vice President, Terry Edwards, issued a statement on October 1st saying that “steps” are being taken in coordination with regulators to ensure that servicers adhere to “the exact requirements of the law” as well as strengthen the review and due diligence procedure to protect borrowers’ rights while conducting the default process.

To highlight this crisis, the Senate Banking Commission Chair, Senator Chris Dodd (D-CT) announced that the commission will hold a hearing on November 16th to investigate allegations of impropriety in mortgage servicing and foreclosure processing.

Although some home owners are not fighting their lenders during the foreclosure process, some are clearly taking advantage of the foreclosure freeze by attempting to renegotiate their mortgage terms with the actual note holders. However, if you’ve purchased a foreclosure or short sale or you’re considering doing so- consult with your title attorney to ensure that your owner’s title insurance covers claims that may arise from such disputes.

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 October 11, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.