A new housing finance system is one step closer

Closing Fannie & FreddieThe 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.

by Dan Krell
© 2014

Protected by Copyscape Web Plagiarism Detector

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.

Another government shutdown article – what home buyers and sellers should know

Housing Market

Yes, another column about the federal government shutdown (like you need to read another column about the shutdown, right?). Although it is expected that the majority of home purchases won’t be affected by the shutdown, home buyers and sellers should be on their toes to avoid possible pitfalls; buyers and sellers should be aware of what could affect their purchase/sale. And even if both houses of Congress agree to some continuing resolution before publication, the shutdown information could be useful during the next budget battle (which is likely to occur in about two weeks).

Many experts agree that the government shutdown won’t last long. Regardless, there is a consensus that the longer the shutdown continues, the potential increases to impair the housing market. Additionally, some experts expect the shutdown to dovetail into an anticipated bitter debt ceiling battle later this month.

It has been widely acknowledged that the recovering housing market has been a major contributor to the 2% GDP growth. Economists have agreed that it would be logical to maintain government functions that compliment and support the still fragile housing recovery.

However, regardless of what you hear; the shutdown will certainly affect the housing market. Some mortgage originations and closings will be affected, and some buyer activity may be put on hold until the government shutdown ends (like the sequester). Although there appears to be a commitment to maintain FHA and VA loan operations during shutdown, new loan processing may experience delays (Federal department shutdown contingency plans can be viewed on Whitehouse.gov).

FHA’s (Department of Housing and Urban Development) contingency plan states that: “The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. (FHA endorsements currently represent 15% of the market.) Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site.”

The VA’s (Department of Veteran Affairs) contingency plan states that during 1995-96 government shutdown, “Loan Guaranty certificates of eligibility and certificates of reasonable value were delayed.” However, learning from that experience, the shutdown contingency plans indicate that there will be 95% of employees who are either fully funded or required to perform “excepted” functions.

Conventional loans should be unaffected as Fannie Mae and Freddie Mac operations continue through the shutdown; Fannie and Freddie operations depend on lender paid fees.

Unlike shutdowns in the past (the last Federal shutdown was 1995-96), approximately 90% of all current mortgages in the country are insured, guaranteed, and/or purchased by federal entities. During the last shutdown, a thriving private sector mortgage industry existed; private investor groups that purchased mortgages on the secondary market, as well as many portfolio lenders (lenders that keep and service loans they originate) offered alternatives to home buyers. During the last shutdown, home buyers who were unable to obtain or wait for government loan approval, had other options for financing that included “Alt-A” and sub-prime mortgage programs that seem to not widely exist today.

If you are planning to settle on a home in the next few days, confirm with your lender that there are no delays. If you are in the process of looking for a home, check with your loan officer about a reasonable closing date before you enter into a sales contract.

Protected by Copyscape Web Plagiarism Detector

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.

By Dan Krell
Copyright © 2013

Rising mortgage interest rates – what that means for housing market

by Dan Krell © 2013

Mortgage lendingOver the last few weeks, the 30 year fixed rate mortgage has slowly climbed from the historical low we have become accustomed over the last few years to well above 4%, as reported by Freddie Mac’s Monthly Average Commitment Rate as of July 3rd. And although it’s still relatively low and not bad as interest rates go; keep in mind that the mortgage rate averaged over the last 40 years is much higher – some report it to be 8.75%.

If you haven’t noticed, average mortgage rates have been below 7% for about ten years. And even when the housing market was bubbling, rates were not as low as where rates are today. After the financial crisis, mortgage rates were kept low by the Federal Reserve’s commitment to purchasing mortgage backed securities; which was an attempt to stimulate interest in real estate purchases at a time when the housing market all but screeched to a halt. Shortly after the Fed ended the mortgage backed securities purchase program, a broader securities buying program began with the intent to stimulate the overall economy; commonly called quantitative easing, this was considered the second round, which targeted the purchase of U.S. Treasury Bonds. The Quantitative Easing program was extended into a third phase (QE3) through 2013, which many are speculating will begin tapering off by end of the year.

Recent Fed comments may have hinted to tapering off the QE program, which could have been the source of some Wall Street panic earlier this month that resulted in a volatile market; besides affecting your 401k, the result has been a jump in mortgage interest rates.

Of course, many experts are worried about mortgage rate increases and the effect on home buyers, citing a decreased home buying ability as well as the possibility of suppressing existing homes sales. For some home buyers, it might be true that increased interest rates could be a wrench in their home buying plans; however, the reality may be that increasing mortgage rates are a sign that the housing market is healthier than some think.

Although mortgage interest rates are just one aspect of a multi-factor dynamic housing market; housing demand is not necessarily gauged by mortgage interest rates alone. For instance, the height of the housing bubble, mortgage interest rates were much higher than they are today. One sign that slightly increased mortgage rates have not negatively affected the overall market is a recent report by the National Association of Realtors (realtor.org) that May 2013 existing home sales (completed sales) increased about 11.4% compared to May 2012. Additionally, the NAR reported that existing home sales are the highest since 2009.

There has been criticism that the “artificially” low interest rates have helped home sale prices jump, especially during a time when there has been little housing inventory; some are concerned that increases in mortgage rates will pressure home sale prices lower. But just like the housing demand concern, these factors alone are not in a vacuum; factors today may warrant mortgage rate increases to thwart abnormal housing price spikes (which are common in bubble markets).

Of course, rising mortgage rates and the thought of paying more for a mortgage is not always good news to home buyers. However, given the circumstances and looking at the broader perspective, the result may be much better than anyone could imagine – a stable housing market.  But that is yet to be seen.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of July 8, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

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).

Protected by Copyscape Web Plagiarism Detector

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.

More news and articles on “the Blog”
Protected by Copyscape Web Plagiarism Detector
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.