Thanks to the several readers who sent in Saturday’s article by David Streitfeld in the N.Y. Times.  For more color, here’s a link to CR’s post, and it’s ensuing 445 comments.

The article can be summed up here:

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

My thoughts:

1.  It seems like the banking industry is running the housing market, not the government.

If the mortgage servicers would promptly foreclose on the defaulters, we could get this over with in the next couple of years.  But with the mortgages being owned by investors around the world, and the banks working them over for service fees, there is no incentive for banks to hurry this along – and there isn’t much the government can do about it. Without the pressure of foreclosure looming, defaulters aren’t pricing their short-sale listings very aggressively, and there’s a growing inventory that makes buyers hestitate even more.  Conversely, if we saw more well-priced, bank-owned homes coming to market and selling, buyers would be more interested in buying.

2. When the Fed stopped buying MBS, everyone predicted that rates would skyrocket.  Instead they went lower.  When the government tried to step in and help provide assistance with short-sale processing, we thought this would be the ‘Year of the Short Sale’.  Instead, the processing has gotten worse, and I haven’t seen the pre-approved short sales, as promised. The government’s involvement is not helping.

The only place government’s involvement is critical in the mortgage arena, where the support of Fannie/Freddie has given the mortgage industry a clearinghouse.  If Fannie/Freddie were phased out, would the private sector be able to fund loans with reasonable rates and terms?

Surprisingly, the government is helping to lead the way, though in two different directions.

The federal and state governments are teaming up to bolster the Cal-HFA mortgages, here’s the link:

The California Housing Finance Agency (CalHFA) launched a new, 4% fixed-rate, 30-year mortgage insured by the Federal Housing Administration (FHA) to attract borrowers who had been priced out of the market. The CalHFA is also claiming that it will provide origination below market interest rates.

Borrowers must meet income requirements in the state that vary by county. In Los Angeles County, the income must be less than $111,020 per year. The mortgage loans are limited to $417,000 under FHA guidelines. Borrowers must also complete a homebuyer-education program and have a 620 FICO score.

Borrowers can also apply for the California Homebuyer’s Downpayment Assistance Program, which could provide up to 3% of the purchase price of the home for downpayment or closing-cost assistance.  A minimum contribution of 1% of the sales price is required from the borrower’s own funds.

More info here: http://www.calhfa.ca.gov/homebuyer/programs/30fha.htm

It’s doubtful that bankers from the private sector would find much appeal in providing a similar program to Cal-HFA (which has been around for years), or the new, combined Cal-HFA-FHA loan because of the ultra-low down payment required.  Maybe the government could still find a way to help provide limited access to funding for qualified first-time homebuyers?  If not, then so be it.

But the seeds of the future of mortgage lending are being sown in the new FHA loans.

Beginning October 4th, the FHA will be raising the monthly mortgage insurance charged, from 0.55% to 0.90% of the loan amount.  On a $600,000 loan it adds $450 per month in mortgage insurance, but only $175 per month higher than before.

Will buyers start to balk at the high cost of mortgage insurance? This is roughly the same as the PMI premium on 95% LTV loans back in the day, but buyers didn’t mind the extra fee when prices were going up.  The upfront premium has been reduced from 2.25% to 1%, but because that can be added to the loan amount, there isn’t a big difference to the buyers’ monthly payment either way – it’s the monthly MI cost that’s hefty.

If buyers are willing to endure higher mortgage-insurance cost, there might be hope that the private sector can find a way to carry their own baggage, rather than be dependent on Fannie/Freddie to survive.  Then the government can let Fannie/Freddie fade into the sunset, and get out of the mortgage-propping-up business.

Banks used to keep their loans, and use mortgage insurance to hedge the risk – which I think they are doing today with jumbo loans.  Can they get back to that model, and survive without taxpayer bailouts?  We need to find out.

Tax-deductibility of mortgage interest?  If the U.S.A. coverts to a flat tax, or a consumption tax, the mortgage-interest deduction could be revised, or go away completely.  Then could we say that the government was out of the housing industry?

If the government got out completely, would there be a crash?

I’m not so sure; the servicers are going to drag this out either way.  The Fed is expected to hold down rates for the foreseeable future due to the overall economy, which would keep mortgage rates attractive. If the private sector had mortgages available at reasonable costs, and buyers felt like the deadbeat-era was closing out, it might feel like there was more certainty about the future. Would it give the bubble-sitters who can afford to buy at these prices enough confidence to proceed? I hope we get to find out!

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