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!
Doesn’t PMI only kick in when the down payment is less than 20%?
If anything I’d bet that what happens is those are are going F&F because they don’t have the down payment will run the numbers and realize that they would actually be smarter to keep saving and get themselves over the 20% hurdle rather than throwing money away on PMI.
PMI is a penalty extracted from those who can’t/won’t save.
What I’d be curious about is whether the added PMI makes buying no longer a wise financial choice. At some point, your financial benefit from owning vs renting vanishes when the cost to own equals or betters the cost to rent.
It would all be easier if prices where allowed to drop to where people COULD save and make that 20%, thus avoiding PMI altogether.
As always, everything comes back to price. The longer pricing is distorted, the more creative financing schemes have to be invented to get buyers on the line. F & F and PMI are a symptom, not the disease.
I’d agree that if everyone had to use a 20% down payment or higher, we would experience crash-like events, and pricing would correct rapidly in most areas.
Not sure it would matter in the ultra-high end (La Jolla & RSF) because it’s already 20% down only. But they have their own challenges with pricing currently.
I can speak to the PMI issue because I’m just finishing closing on a house.
Though rates are currently at 4.5-4.75 for “high balance conforming”, if you want to go FHA for the remaining 17% or even 10% or 15%, PMI becomes prohibitively high. I did the math on it (which confounded the 20 something loan broker I was talking to) and found that the effective rate of those last 17% (or whatever) came out to be just over 12% if you count the fully amortized upfront PMI and ongoing PMI. It’s quite astounding how there’s a disconnect between perception (FHA is propping up the market), and reality (FHA is doing their best to cover their assets). Needless to say, I put 20% down, it was a no brainer, because it’s hard work to get 12% per year returns, every year.
Also, perception is that it’s not that hard to get funding… well, I have an 800 credit score, and let me tell you, that process of funding was WAAAAAY worse than I thought it would be. Banks really are scrutinizing each and every jot and tittle of the borrower. And that was AFTER putting 20% down and having reserves of more than 50% of the remaining balance after the down payment. If you have cash, that’s the only easy way to buy a house now, everything else means you will go under a microscope for every sneeze you have made over the past 5 years.
Just my experience.
Chuck
As a buyer this writeup states exactly how I feel…
With all the intervention going on market correction is a serious threat. NOTHING is going to sway my mind otherwise. Let prices fall and first time homeowners can buy again without sacrficing their furture.
Jim, how do I get out of my FHA PMI?
I refinanced a few months and went through the ringer. We have 55% equity in our home, have very low debt, my husband has stable employment (with same company 10 years), credit scores at (or near) 800, ample cash reserves, and the lender still put us under the microscope. It was a major pain – I spent countless hours on the phone, digging up papers, faxing, getting things notarized. I didn’t mind so much because I figured everyone had to go through this and it’s healthy for the market. But according to this program, you can buy a house for 1% (or less!) down. I just don’t get it.
I’m at the (hopeful) end of a refi and I’ll echo what everyone else said: be prepared for the microscope. I was figuring I was getting it worse because I’m and independent contractor, but I’ve been hearing plenty of stories that suggest that anyone buying is going through hell.
I’m like Chuck – FICO over 800, well documented tax returns (gave them 3 years) documented current income from clients, documented my DBA filing with the County Registrar….This is roughly twice the level of documentation that I went through in 2002.
–Which I’m grateful for, I’d rather be put under the microscope than infuriated at jumbo loans being given out to anyone who can fog a mirror and taxpayers like myself cleaning up afterward–
I also have a hard time believing that people are out there buying at 1% down and being able to close those deals….
I think the 20 percent D.P. requirement disproportiately hammers the lower end of the housing market. Not too many multi-million dollar homes purchased with 100 percent financing. My sense, however, is many of you would believe this “eat the poor” approach to fixing the housing crisis is a feature, not a bug.
It is somewhat funny how the MSM is coming full circle on the thought process of housing. Ultimately what we’ve seen for the past 2 years is a housing market that wants to be stable but doesn’t want to decline to the prices that would make it stable. If housing was going for 3x income (maybe more like 3.5x in San Diego) then the market would indeed be stable but instead we are trying to create a stable market at 4-5x income.
We do have some stability right now but that’s on the back of ultra low rates, tax credits, and FHA/VA financing. Well at least in the average San Diego market, I’ll concede that NC Coastal is a bit different.
I still think the government and banking sector has done everything possible to stabilize the housing market without further compromising on price. The only thing that is left is probably reduced prices unless you want to spin up 15K housing credits and sub 4 mortgage rates.
hey, Jim…O/T, and maybe i missed it in the last few months, but was always curious to see what would happen with that one pricey property where you made the offer that declined in price every month? (and the listing agent was not pleased to say the least)
anything happen there or is it still sitting?
Well,
It wasn’t just the microscope of the underwriter. There was also the issue of the appraiser the bank hired that scrutinized more than the inspector… things like peeling paint and a half-full hot tub became funding contingencies and would have torpedoed the deal if it were not for some extra time at a house I did not yet own.
And, if you think, why didn’t we just ask the seller to do it, I as in return, have you ever bought something from a belligerent prick? That’s what it’s like dealing with banks on an REO.
Chuck
Jinx, same thing happened to me last year when I bought a small foreclosed office condo at Irvine. They checked me out as if I am Osama Bin Ladin trying to borad a United Flight to JFK.I am not going to buy again until the price drops another 20 % to 40% … as the trouble is not worth it.
Former RB, it is my opinion that homeownership for those of limited means is a bad choice.
1) Owning locks you down and reduces your mobility to take a better job someplace else. If there is one thing you need when you are trying to pull yourself up by the bootstraps is the ability to move as your skills and options improve.
2) Limited financial means places you in the worst school districts. Someone with limited financial means would be much wiser to rent in a better school district than to own in a lousy one. This isn’t an issue for someone like me without kids, but no way would I have bought in this neighborhood if I had school age kids. If I had kids, I’d be renting in the next zip code over (where I can’t afford to buy.)
3) For someone who is poor, money saved is, quite frankly, better spent on continuing adult education and skill improvement, rather than buying a dumpy little house in bad neighborhood. The job market is undergoing a tectonic shift right now and getting the skills you need to make yourself employable in the future are more important than sitting around not building equity for the next 3 years while the housing market recovers.
Wow, Chuck Ponzi bought a house?
Congratulations, Chuck! 🙂
No offense to you or the other “scrutinized” buyers, but this greater scrutiny means we are getting back to healing (as you know). I’m glad to hear about it, and look forward to being under the microscope ourselves, someday.
Enjoy your new home!
I also congratulate you Chuck on biting the bullet and buying a home. Someone once said, “A wise man changes his mind after confronting the facts! A fool never does!”
Go Hawks!
Under no. 1 of “My thoughts” in your post you seem to suggest that banks should foreclose as soon as possible on homeowners that are in default with regard to their mortgages, and then they should offer these houses for sale as soon as possible.
As a result the housing market in the USA would get back to “normal” as soon as possible.
Your opinion is that if banks do not follow this policy, they are disturbing the housing market.
I beg to disagree with your opinion.
In a free housing market every party may pursue their own interest.
Suppose you were the director of a big bank in the San Diego area, and your bank has repossessed hundreds or maybe thousands of houses in a short period of time. Would you put those houses on the market all at the same time? Would this not have an adverse effect on house prices? Could it be in the interest of your bank to spread the sale of these repossessed houses over a longer period?
The main concern of banks at this moment is to prevent a further decline of house prices. Thus banks can live with a further five years of uncertainty in the housing market, as long as prices do not significantly decline, during which period they can gradually off-load their inventory of repossessed houses. They already revalued those homes to current market prices.
Beejay, Rotterdam, The Netherlands.
Beejay,
With respect to your suggestion that banks sit on the inventory, that would be fine as long as taxpayers weren’t backing them in any way.
Prices NEED to come down. It’s the only way out of the crisis.
The crisis happened during the 2001-2007 period when prices rose well beyond their fundamental values due to loans being given to people who had neither the ability nor desire to pay the loans off. What happened in 2008 was the healing process, but the govt stepped in the way and has managed to prevent us from getting beyond the crisis (overvaluation) so that we can build a sustainable economy from the ground up.
Deflation (including foreclosure) is the solution to the problem of too much debt.
Thanks for the well wishes. I spent my weekend gutting the property. What did you do?
Sorry, I’m a little tired now.
Chuck