Loanowners put too much faith in house price appreciation
Real estate appreciation is religion in California. Ever since the first bubble in the 1970s enriched a generation, everyone in California sees owning a home as a short cut to riches. The bubble of the 1970s saw dramatic price reductions in some areas and a lingering stagnation in others. Prices did not fall to previous levels of affordability, and learning nothing from that downturn, Californians quickly inflated another bubble in the late 1980s that peaked in 1990. The downturn from that bubble was a little deeper and a little longer, but Californians were undeterred in their faith in real estate wealth. When prices finally bottomed out in 1997, Californians waited a few years, but they they inflated a truly massive housing bubble. The resulting crash saw prices drop 30% to 50% or more and devastated an entire generation. You would think after repeated crashes, Californians would lose their faith in real estate as a path to unlimited wealth and spending power. Perhaps the wiser and more prudent saw the Light, but for California Ponzis, the cycle of boom and bust presents opportunities for free money they don't want to miss out on.
U.S. Homeowners Are Repeating Their Mistakes
By Brendan Greeley on February 14, 2013
If there's one thing Americans should have learned from the recession, it's the importance of diversifying risk. Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments.
If there's one thing Americans should have learned from the crash after the Great Housing Bubble is that real estate cannot appreciate at sustained rates greater than the growth in wages, usually less than 4%, and that money shouldn't be extracted and spent like income. Californians believe house prices can rise 10% to 15% or more per year, and it's free money they can spend. They don't know how or why, they just have faith that it does. While prices certainly can rise that high in any given year, it cannot possibly sustain such rates of appreciation because people can't afford it. And now with regulations in place banning most "affordability" products, it will be much more difficult to inflate another unsustainable bubble with rapid rates of appreciation. However, memories of rapid price rises are strong, and memories of the crash are quickly forgotten, particularly by those Ponzis who live on the free money during the rise and leave the bills to others during the crash.
Despite the hit many Americans took, there's little sign they've changed their dependence on homes as the mainstay of their wealth. Last year, Christian Weller, a professor at the University of Massachusetts, looked at Federal Reserve data for households run by those over 50. The number of families with what Weller calls "very high risk exposure"—a low wealth-to-income ratio, more than three-quarters of their assets in housing or stocks, and debt greater than a quarter of their assets—
These are Ponzis. The euphemism "very high risk exposure" is looking at these people's behaviors through the eyes of a prudent person. Ponzis don't care about risk. They don't consider it because they know they will avoid the consequences for their actions. The fringe buyers during the peak of the housing bubble that drove prices up the most were largely Ponzis. They saw housing as a chance for free spending money, so it didn't matter what price they paid as long as someone else came along to bid more, raise prices, and allow them to qualify for more HELOC money. As long as the possibility existed, they were going to play the game.
had almost doubled between 1989 and 2010, to 18 percent.
It shouldn't be surprising the the number of Ponzis went up during a period of declining interest rates. If there's anything that encourages Ponzi borrowing it's falling rates which allow borrowers to increase debts significantly without large increases in debt service.
That number didn't decline during the deleveraging years from 2007 to 2010; its growth just slowed to a crawl.
The numbers haven't declined because Bernanke continues to lower interest rates. Despite the obvious fact that we need to deleverage as a society, the banks don't want to see it and can't afford the write downs, so they respond by lower interest rates to near zero. Everything possible has been done to prevent deleveraging, but it's still going on. It's the main reason we haven't seen much inflation from our sustained period of very low rates.
The Fed will conduct a new wealth survey in 2013, but don't look for a rational rebalancing. The same pressures that drove families to save less before the recession are still in place: low income growth, low interest rates, and high costs for health care, energy, and education. Families have been borrowing less since 2007, but the rate of the decline has slowed. As soon as banks start lending again, Weller says, people will put their money back into housing. "The trends look like they're on autopilot," he says. "They don't suggest that people properly manage their risk."
Most people buy a house based on monthly payment. Further, most people assume that whatever they can finance they can afford. For as distasteful as I find paternalism in government, when it comes to mortgage finance, it's necessary. As we saw during the housing bubble, people have no clue the risks they are taking on. People will take on interest rate risk, refinance risk, collateral risk, income loss risk, and any other risk you can think of to buy a house, particularly if they believe free money will follow or that they will be bailed out if things go awry. In fact, the moral hazard of assured future bailouts makes government paternalism even more imperative otherwise taxpayers will be bailing out the next generation of Ponzis.
In a 2012 paper for the National Bureau of Economic Research, economist Edward Wolff concluded that from 2007 to 2010, the median American household lost 47 percent of its wealth. Average wealth—a number that includes the richest Americans—declined only 18 percent. Houses make up a smaller share of the wealth of a rich family. The wealthy also benefit from better financial advice, Weller says.
A home is what economists call a consumption good; you have to live somewhere. It's also a store of wealth.
It's a leaky store of wealth at best. In places like Texas, which didn't participate in the housing bubble, HELOCs are legally restricted to no more than 80% of a property's value. This puts some restriction on a loanowners ability to raid the housing piggy bank, but in places like California, which heavily participated in the housing bubble, there are no such restrictions, and whatever "wealth" appears through appreciation is almost immediately converted to spending money by Ponzis.
Unlike other assets, you can't buy a portion of a house. "You want to consume a big home," says Sebastien Betermier, an assistant professor of finance at Desautels Faculty of Management at McGill University. "But if you want to buy that home, it's a huge investment—probably more than you really want."
This guy obviously doesn't live in California.
Betermier, who studies consumers' financial decisions, says homeownership makes it harder to diversify risk. Since 1983, for the richest 20 percent of U.S. households, the principal residence as a share of net worth has been around 30 percent. For the next 60 percent—most of us—housing has risen from 62 percent to 67 percent of total wealth.
To compound the problem, home equity dropped for this middle group even as home values rose.
This was one of the most shocking facts I turned up when researching the housing bubble. Think about that. Home equity actually declined during the housing bubble.
Most people assumed that when prices doubled or tripled in about eight years that everyone was sitting on mountains of equity. The prudent owners who didn't tap their equity were, but the Ponzis were not. They extracted and spent it. And it wasn't just a few. 88% of refinances in 2006 had cash-out refinancing in excess of 5% of the property's value. As the daily debtor debacles I've featured every day for the last six years testify to, it was a very widespread practice.
Rising house values, low interest rates, and easy refinancing encouraged property owners to take out home equity loans.
No kidding.
The graphic above is not one of my cartoons. It's a real ad from 2006. Look at the vaguely happy people thrilled that some lender was willing to enslave them with a stupid loan you and I will end up paying for with our tax dollars when they can't pay it back.
And Wolff's analysis shows the middle class reducing their cash cushion from 21 percent of assets, starting in the early 1980s, to 8 percent just before the recession. Cash is bad luck insurance; you pay a premium because you don't earn a return on it, but it's available in case of an emergency. Americans borrowed against their homes, spent the cash, and were left only with risk. …
Which is why so many got wiped out during the recession.
Weller, Betermier, and Mitchell agree that the mortgage interest deduction contributes to the problem, as it encourages families to move their assets into housing. "When people think about renting vs. buying, the tax subsidy looms large," says Wharton's Mitchell. Weller endorses an approach suggested by Senator Barack Obama in 2008: Turn the deduction, which lowers taxable income, into a flat credit, which cuts your tax bill by a fixed amount. That would lead to slower growth in house prices, says Weller, since the credit wouldn't rise even if people took on a bigger mortgage to buy a more expensive house. As the price of housing climbs more slowly, the shift of a family's savings into housing would slow.
The home mortgage interest deductions should be eliminated. Taxpayers, which includes renters, have no business subsidizing a loanowners mortgage. However, since it won't likely be repealed, ideas for reform are welcome.
A flat credit for the deduction would be far more effective in promoting home ownership than our current policy. The current deduction merely encourages high wage earners to take on larger debts and inflate prices in places like Coastal California. It does nothing to encourage home ownership because this group would own anyway. The stated purpose government housing policy is to encourage home ownership among low- to mid- wage earning families, but since most of these families don't itemize, they don't gain from the HMID. A flat deduction would encourage low- to mid- wage earners to buy homes because they would gain the deduction. Of course, like any subsidy, the effect would be short lived as the market would find a new equilibrium, and entry level pricing would go up just like we witnessed during the bubble when subprime loans proliferated.
In 1999, Robert Shiller of Yale University proposed a way to hedge house values. New owners would buy an option with their mortgage, tied to an index of house prices (such as the one developed by Shiller and Karl Case). The option would function as home value insurance. But "when you buy insurance and you don't die," says Shiller, "you think how I spent all this money and got nothing. It takes sophistication." The problem with his idea, he says, as with similar approaches by the Bank of Scotland and Bear Stearns, was that house prices were rising. People don't buy insurance for a risk they don't see.
The problem with this idea goes way deeper than "sophistication." I really like Dr. Shiller's work, but this idea was flawed from the start. First, as he pointed out, nobody used this insurance. Most didn't know about it, and those that did know it existed didn't think such insurance was necessary. But let's reflect on this idea a bit further, and the true folly becomes apparent. In a future's market, you can bet on prices going up or down. Dr. Shiller envisioned millions of Americans buying the bet on downside price movement to hedge themselves against a loss. But what would people really do? Most people rather than hedging their risk by buying the "put" would instead magnify their risk and buy the "call." People are buying the house because they believe prices are going up. They don't want insurance. They want to make more money when prices go up. If Dr. Shiller's futures contracts on house prices ever became widely traded, most people would do the opposite of what he envisions, buy the contract betting on upside appreciation, and make their circumstances even worse when things go bad.
This leaves Shiller, like Wharton's Mitchell, pushing for education. At the Obama Treasury several years ago, he suggested the White House hold conferences on housing risk. "They would invite top financial organizations," he says, "and ask them 'What are you doing about this?' "
Educating people sounds great and noble. I hope I provide an education service with the writing of this blog. However, education only reaches those who care to be educated, and that's a very small fraction of the homebuying public. Most people who buy a house consider themselves experts on real estate already. After all, they've watched a few TV shows on flipping or house hunting, and they've lived in a house for years. The vast majority will not be receptive to education on housing risks, particularly if the message is don't take on too much debt, don't buy too much house, and don't abuse HELOCs. Even if the government put out this message, the prospective homebuyer's real estate agent and mortgage broker will be telling them the opposite, and people will listen more to the agents they mistakenly trust than they will to a paternal message from the government. in short, government education won't work.
At the time, Treasury and the banks had more pressing things to do. The federal government could also resort to regulation. Shiller points to the example of Franklin D. Roosevelt, who mandated that homeowners buy fire insurance with their mortgages. "I think it could be expanded to home value insurance," he says.
Government mandated home value insurance? That's a form of paternalism I can do without. If this were a really good idea, banks would simply require private mortgage insurance on every loan. It would have the same effect.
The best remedy of all would be a higher savings rate. Mitchell tells her daughters, who are in their twenties, to hold off buying a house and save 25 percent of what they earn. But, she says, "They don't find this very helpful."
LOL! That would cut into their entitlements.
The bottom line: Americans still have too much of their net worth tied up in their homes. There are limited options to encourage diversification.
Owning a primary residence is a solid part of a good financial plan. Eliminating a mortgage payment goes a long way toward stretching retirement dollars. Unfortunately, most people never pay off their primary residence, and many others foolishly take out reverse mortgages or HELOCs with hopes of borrowing their way to a prosperous retirement.
Real estate can still be part of a retirement plan. My family has purchased a number of rental properties that I plan to live on in my own retirement. I didn't buy these properties with any expectation of appreciation; I bought them for the rental cashflow. Most people don't get that concept, and they put all their faith in obtaining a lump sum through appreciation on their primary residence. I won't envy their retirement lifestyle. It won't be what they hope it to be.
26 responses to "Loanowners put too much faith in house price appreciation"
"Real estate can still be part of a retirement plan."
100% agree and I think a lot of people lack control as you stated above. They HAVE to keep up with the Jones which is their downfall. If you get a 30 year fixed rate mortgage you should really considered making 13 payment if possible. I know a lot of people say you can "use the cash for a better return". However, people I see in the best financial condition always pay off their debts quickly.
"I know a lot of people say you can "use the cash for a better return"."
A lot of people say this, and many of them even believe it, but very, very few people actually make it happen.
The affordable housing advocates miss the obvious. None of their compensating programs would be needed if government policies didn't favor inflating housing prices.
Report: Obstacles to Policies that Encourage Low-Priced Housing
Inclusionary housing policies—those which either require or encourage developers to provide low-priced housing within market-rate developments—have largely survived the recent housing downturn. However, several obstacles now stand in their way, preventing them from reaching their full effectiveness, according to a recent report from the Center for Housing Policy.
Major hindrances to these policies include shifts in development pattern, new restrictions regarding rental housing, and rising homeowner association fees, among others.
Inclusionary housing policies are often enforced through zoning codes, although some are voluntary and offer incentives for participating developers.
Proponents of these policies favor their "ability to harness the energy of the private market to create affordable homes while enabling economic integration and social inclusion" as well as their "ability to produce affordable homes without the need for public subsidies," according to the Center for Housing Policy.
About 400 mandatory inclusionary housing policies currently exist in 17 states and the District of Columbia. California claims almost half of these policies, according to the Center, which found only about eight policies eliminated during the housing crisis.
Our neighborhood has these "affordable housing" condos and townhomes. I think as much as 10% of the units built were required to be such. I remember seeing the eligibility matrix which was a list of maximum incomes next to family size. If your family was bigger than four, you were allowed to have a decent household income (< $70k) and qualify for a lower-priced, but substantially similar condo/townhome (the affordable housing units don't include granite counters, upgraded cupboards, upgraded appliances, etc.).
I understand the intent behind these development rules, but life is so much more complicated than a household income figure and family size. Why do those two factors require Family A pay more for their home than Family B? What if the parents of the family receiving a reduced-priced unit come from solid middle class homes and just chose routes that led them to earning less than $70k? And what if the parents of the family paying the full price (+ an additional percentage to cover the lower-priced unit) come from single parent poor homes and made choices that led to college and beyond and therefore a household income well-above $70k? It's all just so short-sided and arbitrary.
e.g. When we moved into our townhome I was driving an 11 year old Accord, while the garage of an affordable housing unit two doors down had a newer minivan and a brand new Acura TL. How's that for fairness?
Like any government program, the designers meant well, but the unseen consequences are there if you look below the surface. Basically, these programs all subsidize the level of entitlement of its recipients. Why couldn't these people simply go live in a community they could afford? How do we fairly apportion these subsidies?
As you pointed out, you had to pay more for your housing to subsidize the low-income component. Further, you subsidize them through your tax dollars to help pay for it. It's a win-win for them and a lose-lose for you.
Cutting off the supply has caused the housing market to bottom and REO prices to rise.
FNC: Foreclosure Market Stabilizing as Home Values Rise
With the ongoing housing recovery, the foreclosure market is also stabilizing and foreclosure prices are bottoming out, according to a report from FNC Inc.
Foreclosure price discounts are now at pre-housing crisis levels, averaging 12.2 percent in Q4 2012. In 2004, foreclosure discounts hovered near the same levels, averaging around 12 percent. At the peak of the crisis, discounts for foreclosed homes averaged 25 percent, data from FNC revealed.
Discounts though tend to be more steep for low-tier properties and average 18.4 percent, while high-end properties (more than $500k) have an average discount of 0.4 percent, with many selling above their actual market value.
The technology provider also reported single-family REO and foreclosure sales have been trending downward, accounting for 18.1 percent of sales in Q4 2012, down from 24.2 percent in the same quarter a year ago.
Out of all states, Michigan led with the highest concentration of foreclosure sales, with 56 percent of single-family home sales categorized as foreclosures in Q4 2012.
Rounding out the top five for foreclosure sales were Alabama (31 percent), Georgia (27 percent), Illinois (26 percent), Tennessee (25 percent).
When zooming in on performance in metro areas, FNC found Detroit had the highest percentage of foreclosure sales, 66 percent in Q4.
The metro areas that displayed the biggest declines in foreclosure sales over a one-year period ending in Q4 2012 were Las Vegas, Riverside, Sacramento, Phoenix, and Seattle.
In some of those metros—Phoenix, Sacramento, Las Vegas, Riverside, plus San Diego—FNC also noted many buyers bought foreclosures at prices that exceeded market values. On the other hand, FNC found price discounts tended to be higher in metros located in judicial states, such as New York, Boston, and Philadelphia, where price discounts were 30-33 percent.
Normally Silent Observer says:
If price discounts were 30-33 percent in judicial states, is that California's future due to its virtual elimination of the non-judicial foreclosure process? Hmmmm.
We've just assured that foreclosure processing will continue for many more years in California. Slowing them down doesn't make them go away. As long as people are living in houses they can't afford, the short sales and foreclosures will continue. And as long as the foreclosure process is artificially slowed down by procedural delays, squatters will continue to enjoy a free ride.
octal77 says:
"…Middle-class households had too much of their net worth tied up in their homes and were too exposed to stocks through 401(k)s and other investments…"
Yet the MSM keeps pushing the concept hard.
Example: Ric Edleman (KFI 640 AM Sundays 2PM) philosophy is to *never* pay off your mortgage [via serial re-financing] and put money into (surprise) stocks instead.
To be fair, other than cash savings, what are reasonable investment alternatives for the median household as described in pie chart? Not everyone can start a small business.
"…To be fair, other than cash savings, what are reasonable investment alternatives for the median household as described in pie chart? …"
That's the real point. If you're in the bottom quintile (or maybe bottom two?) of household incomes, this isn't an issue as you're scraping to get-by every day. If you're in the middle three quintiles, it might be an issue, but you're best-off reducing debt as soon as possible while saving 10-15%, if possible. So it's really only a question that need be asked of households in the top quintile. These families really have to find paths for the money every month. You can keep leasing a nice new car every couple years, or you can fully-fund your 401k (betting on equities heavily).
Report: Younger Generations Shouldering Greater Amount of Debt
A new report released by SaveUp.com, a national online financial rewards program for saving and paying down debt, shows today's younger generations are leading the nation with a burden of debt.
According to SaveUp.com, the average total debt load for an average member of Generation X or Y (those under the age of 47) is close to $37,000, slightly higher than the national average debt load of $36,157.
Of the two groups, Gen X appears at first to be worse off, with the average person harboring a debt load of $46,972 compared to the Gen Y average of $28,930. However, SaveUp.com finds that more than 60 percent of Gen Xers' debt comes from mortgage and student loans—considered "good debt" that helps build assets and job opportunities.
Members of this generation have an average mortgage debt of $181,706 (more than 21 percent above the national average) and an average student loan debt of $44,270 (about 82.2 percent higher than the U.S. average).
Gen Yers, on the other hand, have close to half of their obligations (48.4 percent) in non-asset building loans, which are generally considered "bad debt."
"Consumers under 47 are still recovering from the Great Recession and are shouldering a disproportionate share of our national debt," said SaveUp.com CEO Priya Haji. "Faced with higher debt earlier in life does make it more challenging for the younger generation to establish a secure financial future."
Haji called on financial institutions, policy makers and innovators to "work together to create solutions to help this next generation succeed financially."
Funny how students loans is concerned "good" debt. If you are 23 years old and a theater major with $100,000 in student loans it's not "good" debt. If you are a Doctor, I think it's good debt. It depends what degree the student debt was used to obtain, not the debt itself.
No wonder this guy is CEO, "If they don't have a job, they can't close the loan".
Why Sequestration Will Hit Housing on Several Fronts
Published: Wednesday, 20 Feb 2013 | 10:04 AM ET By: Diana Olick
Massive government budget cuts set to go into effect March 1 would be, "deeply destructive" to all aspects of the housing market, US Secretary of Housing and Urban Development Shaun Donovan told a Senate panel last week. From programs for the homeless to reconstruction after Superstorm Sandy, the sequester would, "harm numerous families, individuals, and communities across the nation that rely on HUD programs."
One of those programs that has been instrumental in the housing recovery is the government's insurer of home mortgages, the Federal Housing Administration (FHA). Should the FHA lose staff, which it likely would, it would lose much of its capacity to process new home loans and mortgage refinances as well as sell foreclosed properties that it owns. Twenty-three percent of all mortgage originations in 2012 were FHA-backed, according to a report released Wednesday by Ellie Mae.
The FHA, however, is just the beginning. Sequestration would affect all loans in process, just as housing enters the crucial spring market.
"Borrowers need to be employed to close on their home loan, so if they have lost their jobs during the loan process, they will not be able to close on their loan," said Craig Strent, CEO of Maryland-based Apex Home Loans. "As a quality control measure, lenders call a day or two before closing to verify an individual is still employed. If a loan is denied during the process due to the borrower losing their job, they are likely to lose their loan lock as well, so even if the sequester is reversed quickly, this has the potential to upset a lot of homeowners — particularly given that rates have risen in recent weeks."
The average rate on the 30-year fixed hit 3.78 percent this week, the highest since August of 2012, according to the Mortgage Bankers Association. Low rates have been one of the primary drivers of the housing recovery.
Sequestration could also hit the nation's home builders, especially those with a large footprint around Washington, DC and Northern Virginia, like Toll Brothers, which reported a first quarter profit Wednesday, and NVR.
"Industry tailwinds look to be gaining steam, but we believe Toll has one very large impediment to cross: The sequester," said housing analyst Stephen East at ISI Group. "With a large portion of its sales in the Mid-Atlantic area, the next few months order streams will be extremely important as the sequester knife is falling hard on well-paying defense industry jobs."
Sequestration could even slow the improvement in the nation's foreclosure rate. It would result in 75,000 fewer households receiving foreclosure prevention, pre-purchase, rental or other counseling through HUD grants, according to the government agency.
I wonder how many more times we have to go through this bullshit brinkmanship? I get tired of both parties stoking the fears of financial Armageddon to pass their respective agendas.
People who put too much faith in the belief their home will be worth more tomorrow than it is today are in for a rude awakening simply because the prospect is based purely on speculation. Too bad.
Keep in mind there are essentially 2 options ahead for the fed/politicians…
whack USD = cede their power + purchasing power of existing income streams will decrease along with the values of savings, pensions and other self interests may not remain in-tact.
whack economy = cede their power but purchasing power of existing income streams will increase along with the values of savings, pensions and other self-interests remain in-tact.
Reality is, it's a no-brainer as to how this clusterF is going to play out.
You just described the central dilemma of the 1960s and 1970s. Politicians and the federal reserve consistently chose to whack the dollar until things go so bad Paul Volcker had to raise interest rates to near 20% to save the dollar and crash the economy.
History always repeats, no?
Unless of course the current clusterF (battle?) underway pertains to the one world govt—one world currency 'conspiracy' theory some people have written about. If so, then, it's all gonna get whacked. Let's hope that is NOT the scenario currently playing-out.
Limited Mortgage Finance Role for U.S. Government Gains Support
By Jody Shenn & Clea Benson – Feb 19, 2013 9:01 PM PT
A bipartisan panel including former secretaries of the Department of Housing and Urban Development and retired U.S. senators is preparing to release a proposal for scaling back the government role in mortgage finance that would put taxpayer dollars at risk primarily under catastrophic circumstances.
The blueprint, which the Washington-based Bipartisan Policy Center is scheduled to release Feb. 25, is an attempt to jump- start the stalled debate over shrinking the government role in the $9.5 trillion mortgage market, according to three people familiar with the plan. The document was drafted over the past 16 months by a 21-member commission including industry representatives, consumer advocates, and former policy makers.
The panel will recommend that the U.S. replace Fannie Mae and Freddie Mac, which package loans into securities with guaranteed interest and principal payments, with mortgage-bond guarantees that kick in only after private firms take the initial losses, according to the people, who asked not to be identified because the report isn't yet published.
The commission is hoping the plan will "elevate housing to the top of the national policy agenda and provide a foundation for action in 2013," according to the website of the organization, which was founded in 2007 by a group of retired senators.
Top Ex-Officials
The panel is lead by Mel Martinez, who was HUD secretary under President George W. Bush, and Henry G. Cisneros, HUD secretary under President Bill Clinton, as well as former Democratic Senator George J. Mitchell and former Republican Senator Christopher "Kit" Bond.
Ashley Berrang, a spokeswoman for the commission, declined to comment on the contents of its report before its release.
The report will suggest government guarantees could come from a new entity similar to Ginnie Mae, the U.S.-owned corporation that currently backs bonds with loans insured by U.S. agencies including the Federal Housing Administration, the people said.
That entity could replace Fannie Mae and Freddie Mac, which were publicly traded companies with no explicit government backing before they were seized in 2008 after investments in risky loans pushed them to the brink of insolvency. The two companies have since drawn about $190 billion in taxpayer aid and paid Treasury $50 billion in dividends.
Parties Divided
The proposal comes as housing-finance reform has failed to gain traction in Washington, in part because Democrats and Republicans remain divided over alternatives, and as Fannie Mae and Freddie Mac have returned to profitability, sapping momentum for change. At the same time, taxpayers continue to bear the risk on about 90 percent of new home loans through agencies including FHA, the Department of Veterans Affairs and the two government-sponsored enterprises.
President Barack Obama, who has called for Fannie Mae and Freddie Mac to be wound down and replaced, has yet to release a detailed plan. Likewise, Congress has yet to move forward with comprehensive legislation.
The Obama administration's most significant contribution to the debate was a 2011 Treasury report that laid out three options, ranging from almost total privatization to a new and more limited government role as a catastrophic reinsurer. The BPC commission's proposal offers further indication that consensus may be building around the reinsurance option.
The commission's recommendations will echo plans put forward by the Mortgage Bankers Association, the Housing Policy Council, researchers at the Federal Reserve Bank of New York and Jim Millstein, who helped oversee the U.S. bailouts of firms including insurer American International Group Inc.
No Exit
The idea stops short of a dramatic government exit, and the details would be crucial to gauging the potential impact on various housing industry sectors, the relative effect on large and small lenders, the cost of credit for home buyers and the risk borne by taxpayers.
The approach has critics. The government would still need to correctly price risks and taxpayers could be exposed to losses from borrowers who don't need the backstop, said Joshua Rosner, an analyst at Graham Fisher & Co. and co-author of "Reckless Endangerment," a book which focused on Fannie Mae's role in the housing crisis.
Like Fannie Mae and Freddie Mac, the new arrangement could also pass government subsidies through private firms that may abuse the system to maximize profits, Rosner said.
"Proponents of the idea are basically saying, 'Let's sweep all that under the rug, claim a victory and go home,'" he said.
Given the increased reliance on the FHA and GSEs which flow from the new qualified mortgage rules, this report will be dead on arrival. Nothing substantive will be done to reduce the government's footprint until the bubble is fully reflated and the banks have offloaded the toxic crap from their balance sheets.
Squatting like it's 1999.
Non-judicial foreclosures get delayed for a reason
By Megan Hopkins February 20, 2013 • 4:13pm
The foreclosure process is notorious for taking time, especially over the last 12 to 18 months, but for some states using a non-judicial process, the cause of delays may be different than a judicial foreclosure but still take up some time.
At the Mortgage Bankers Association's National Mortgage Servicing conference in Grapevine, Texas, a panel of foreclosure experts sat down to break down the reasons for the delays often experienced with non-judicial foreclosures.
Caren Jacobs Castle, partner at Castle Law Group, started the session by discussing the federal, state and local regulations that affect the servicer's ability to proceed. Castle advised the room of servicers that, in order to avoid regulatory delays, it's crucial to keep their ducks in a row and be prepared with all paperwork prior to the foreclosure process.
"The more information servicers can provide attorneys at the beginning of the foreclosure will help minimize delays," Castle advised.
"Sometimes I just want to say 'can we just stop with all the new law?'" joked Lance Olsen, managing partner at Routh, Crabtree & Olsen.
Legislative issues are also a key factor in non-judicial foreclosure delays. It's crucial that servicers prepare themselves for pre-foreclosure mandated notice requirements (state specific), state mandated pre-foreclosure contact requirements and state mandated mediation requirements. State laws are also mandating cessation of efforts or time to appeal, which could cause issues in the process as well.
Process delays also include issues dealing with the poor documentation of affidavits, assignments and Due Diligence requirements.
The panel closed with a reminder that another huge player in the non-judicial foreclosure process continues to be the Consumer Federal Protection Bureau. "The CFPB will be the new reality for the next decade," added Susan DeMars Milazzo, executive director at the California Mortgage Bankers Association, in an indication of potentially longer delays as more regulations come into force.
Pwned says:
I think one of the big unknowns is how baby boomers respond to their lost equity. I'm not of the mind that they'll all downsize en masse causing a housing crash. But so many boomers are deep in debt, with little or no retirement savings. They bet the farm on real estate, leveraged to support their lifestyles and are now screwed (for lack of a better term). Even if the current bubble magically boosted prices to peak levels, that's still not enough. I have no idea what will happen, but it'll be an interesting ride….
http://www.businessinsider.com/baby-boomers-owe-more-than-millenials-2013-2
The old Ponzis with no savings will see a drop in their standard of living down to the level Social Security will support. I foresee huge battles over Social Security payments in the future. The Ponzis will want more than the workers can support, so it will be a big political battle.
iampredicting says:
how does one prevent peer pressures, am living in 1100 sq foot home ..i love it here, however friends getting 610-660k houses some new some old in (think irvine area)…have been holding out..however you r loosing out, why rent when you can own voices are begining to drown me out, specially with the bubble starting to inflate again..i can afford..however would be for lifestyle upgrade not physcological gratification.does it make sense to go buy .or continue renting…would love a feedback..thanks
If you value your freedom and if you're happy where you are, you should stay put. There are always good reasons to rent, and peer pressure is a poor reason to buy.
However, right now, it is cheaper to own than to rent, which is a rarity in Irvine. Financially, it is a good decision to buy at today's prices, assuming you can find a property.
thank you for the insight….yeah..how does one compete the cash buyers..agent says he says 6 offers and 3 are cash buyers :(.Also does one go for higher cost house as can afford it, however mainly owing to low interest rate or just look for similar size homes. The only reason for me to upgrade is lifestyle upgrade i.e getting a bigger house, however thats a vicious circle..