It’s The Lending, Stupid. Here’s What The Government Can Do To Help Housing Get Out of the Funk

We see it even in Texas: price declines, low mortgage rates and rising rents have made owning more affordable now than renting. But despite agents’ most positive view of the Dallas real estate market, housing is still kind of stuck in the mud, even here. Many markets report continued price declines, while Dallas is struck by another problem: lack of inventory. Our funky, fun Austin is now the most expensive place to live in Texas because of rising rents. Hardest of all is qualifying for a mortgage, which brings in cash buyers a.k.a. bottom feeders, and gives them even more power to drive down prices in hard ball negotiations. With this scenario, the market for the average American home is shrinking as fewer Americans than ever own homes. And it doesn’t take a rocket scientist to figure out that rising rents will beat the average American even more.

What to do? I don’t want this to give anyone a heart attack, but the Wall Street Journal says economists, including some at the Federal Reserve, are urging President Barack Obama to do more than he has done in four years. Clearly, in four years Obama has been the most impotent president in history when it comes to housing. It is almost as if he wants us all to rent. He promises to be taking a newfangled ”aggressive on housing” stance in tomorrow’s State of the Union address, or so his housing secretary told the WSJ. What he will likely outline: a refinancing initiative and programs to convert some foreclosed properties into rentals. That will likely make the mortgage holding neighbors of these properties upset, but it may be better than having a vacant home sprouting weeds.

I have said some of this before, but now it’s coming out the mouth of top experts. We need three things to happen to get this market out of the junk: stimulate lending, which everyone is afraid to do because they got burned and federal regulators have the banks shackled; enact more intelligent regulation if any, and something the banks don’t like: write down the debt on some of those underwater mortgages.

Here’s a link to the full article, but you must subscribe to the WSJ.

1. Be nice to the Mom and Pop investors trying to buy up foreclosures.  WSJ says banks owned around 440,000 homes at the end of October, but an additional 1.9 million loans were in some stage of foreclosure, according to Barclays Capital. It’s the REFINANCING, STUPID!  

“While there’s no shortage of investor demand in many markets, financing remains an obstacle. In 2008, Fannie Mae and Freddie Mac, the main funders of mortgages, faced soaring losses from speculators (and a stupid CEO) and reduced to four from 10 the number of loans they would guarantee to any one owner. Fannie now backs as many as 10 loans, but some banks have kept lower limits.”

Why those lower limits? When I ask, I’m told it’s the feds at work.

“If that number were raised…to 25, you would very quickly start whittling down this very big backlog,” said Lewis Ranieri, the mortgage-bond pioneer, in a speech last fall. He said loans should be made on conservative terms that include 30% or 35% down payments.”

Great point to sink through the Fed’s head: Today’s investors are not the speculators who  bought on the prospect of ever-rising values, which inflated the real-estate bubble. Look at the market fundamentals. Today’s cash-rich investors buy to lease properties. But because they cannot get financing, those with cash are king in the bargaining process and are keeping home prices down. I mean, who else is buying?

“The mortgage-finance companies and their regulator “are ignoring the market fundamentals of who the buyers are and where the money is,” said Tim Rood, a partner at the Collingwood Group, a housing-finance consultancy. “Right now, investors are treated like pariahs. You want to clear some inventory? Finance them.”

I’ve talked about CoreLogic: strip out foreclosures and other “distressed” sales, U.S. “normal” prices were down just 0.6%.

Here’s an idea that would likely make the current administration cringe: eliminate capital-gains taxes on properties bought as a longer-term investment and converted to rentals, or allow them to accelerate the depreciation of those properties. How about first-time investor tax credits?

2. It’s the topic of cocktail party chatter: the banks are stingy with credit. If you are self-employed, get ready to see the Proctologist. Here’s a good one the WSJ pointed out vis a vie the NY Federal Reserve:

“Fannie and Freddie are pushing banks to repurchase any defaulted loans that they can prove ran afoul of underwriting standards, even if the loan went bad for another reason, such as job loss. The “blanket repurchase regime” has led banks “to focus only on the lowest-risk customers,” said William Dudley, president of the New York Federal Reserve, in a speech this month.”

 3. Write down that debt. Sure, this is about as controversial as granting amnesty to illegal aliens living and working in the USA (which I think we should just do) but if we don’t get give some borrowers a breath of fresh air, they will never get ahead. Mortgage investors and banks should consider reducing debt for more troubled homeowners. After all, they made some of these bad loans and made millions off the process. Look at places like Las Vegas and Phoenix, where more than six in 10 borrowers owe more than their homes are worth. Think outside the box:

“Prof. Wheaton said investors in the loans should be given equity stakes in homes in order to deter all but the most desperate borrowers from seeking relief, and that relief should be limited to borrowers who are deeply underwater.”

 

 

 

 

 

 

 

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  • They should also crack down on credit reporting agencies!

  • They should also crack down on credit reporting agencies!

  • It is also a problem of investors who are have good accountants not showing enough income to carry the properties. I see it every day. The people who are actually great landlords are frozen out of the market ! By the way I have two investors who go up to 10 properties !

  • It is also a problem of investors who are have good accountants not showing enough income to carry the properties. I see it every day. The people who are actually great landlords are frozen out of the market ! By the way I have two investors who go up to 10 properties !

  • Great article Candy and I agree the government could make some positive changes.

    However, a couple of comments I would like to make is that although credit guidelines have been tightened over the last several years money is still available and at record low rates. First time buyers and step up buyers will have little trouble securing excellent mortgages.

    In my 15 years of lending I have seen few investors that carry over 10 mortgages. Those that do would probably benefit from securing a blanket commercial mortgage. Those types of loans are more income and collateral based and do not rely on any government entity to define lending guidelines.

    In my time I have seen guidelines go from reasonable to almost nonexistent to today's very conservative guidelines. But the fact is, with average credit and at least 3.5% down the average Texan can purchase an average Texas home and with 20% down they can buy a rental property. With 10% down and a good credit history they can buy a luxury home, and with 20-30% down the can buy a mini mansion.

  • Great article Candy and I agree the government could make some positive changes.

    However, a couple of comments I would like to make is that although credit guidelines have been tightened over the last several years money is still available and at record low rates. First time buyers and step up buyers will have little trouble securing excellent mortgages.

    In my 15 years of lending I have seen few investors that carry over 10 mortgages. Those that do would probably benefit from securing a blanket commercial mortgage. Those types of loans are more income and collateral based and do not rely on any government entity to define lending guidelines.

    In my time I have seen guidelines go from reasonable to almost nonexistent to today's very conservative guidelines. But the fact is, with average credit and at least 3.5% down the average Texan can purchase an average Texas home and with 20% down they can buy a rental property. With 10% down and a good credit history they can buy a luxury home, and with 20-30% down the can buy a mini mansion.