The Mortgage Corner
How can we thank Federal Reserve Chairman Ben Bernanke for keeping our economy afloat? Not only has the Fed kept interest rates low enough to prevent actual deflation, as has happened to Japan over the past 20 years and shrunk their economy. But the Fed is now proposing commercial banks under its purview take a more proactive position not only by modifying more ‘underwater’ loans on their books, but actually renting out those it has taken back in foreclosure to tenants; including their former owners.
It is currently circulating a White Paper entitled “The U.S. Housing Market Current Conditions and Policy Considerations” that asks both government supervisors—specifically those of GSEs like Fannie Mae, Freddie Mac, FHA and VA—and private mortgage holders to both loosen their overly restrictive underwriting standards, allow more loan modifications, as well rent out the REO properties they hold, until they are able to be sold!
This is medicine that was applied once before—during the Great Depression—by the Roosevelt Administration, under the Home Owner’s Loan Corporation. It sold bonds to bring down interest rates for something like 1 million homeowners, or rented them back to those who had lost their homes, until they could again be sold.
The data currently show that less than half of all lenders are currently offering mortgages to borrowers with FICO scores of 620 with a 10 percent down payment. Yet these loans are within the GSEs purchase parameters, according to the White Paper, which means little risk to the loan originators.
Particularly first-time homebuyers aged 29 to 34-year-olds are affected, with only 9 percent taking out a mortgage from 2009 to 2011, while 17 percent took out mortgages from mid-1999 to mid-2001.
Why the urgency now? “Perhaps one-fourth of the 2 million vacant homes for sale in the second of 2011 were REO properties…and the continued flow of new REO properties—perhaps as high as 1 million properties per year in 2012 and 2013—will continue to weigh on house prices for some time,” said the Fed.
And we know housing prices continue their decline in most areas, according to the S&P Case-Shiller Home Price Index and other indicators. The Case-Shiller 20-city composite is down a seasonally adjusted 0.6 percent in October following a revised 0.7 percent decline in September and a 0.4 percent decline in August.
Graph: Econoday
Individual cities show a decline in Atlanta where monthly rates of adjusted decline have been 4.1 percent, 4.8 percent and 2.9 percent the last three reports. Other weak spots include Minneapolis, Los Angeles, and Chicago as well as Las Vegas and Miami.
So this is a good time for lenders to rent their REO properties, as rents have been rising while national multifamily vacancy rates have plunged. Depending on whether you use U.S. Census Bureau or REIS, Inc. data, the vacancy rate is hovering around 9.8 percent or 5.2 percent, when they were as high as 11.8 percent during the recession.
Graph: Calculated Risk
“…the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” said the White Paper. “Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions—for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties—or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.”
So there is hope for real estate when the Fed decides it is time to assist housing, after Chairman Bernanke and others in various speeches have highlighted the drag that a devastated real estate market has on overall economic growth. That is to say, it is time for the banks holding all those vacant homes to get them off their books and back into the real economy.
Harlan Green © 2012
Comments are closed or deactivated
Harlan
I thought lenders “loosening their overly restrictive underwriting standards” is what got us into the housing “bubble” that led to the Recession? As I have stated repeatedly, there will be no real recovery until we return to the “mountain of debt” we had in 2007. Glad to see you are encouraging the return to that “mountain.”
Being in the mortgage biz for 30 years, Leo, I have seen all the tight/loose credit conditions, and would say we are now even more restrictive than the 1980s, so some easing is necessary; especially to bring in all the newly eligible first-timers who have basically been shut out of home buying. If the Fed does really get on the banks to do either rent out the vacant homes they now own, or real loan modifications, like HARP II, HAMP programs, that takes the vacant homes off their books, then we will see a real recovery this year. It is real estate that is now holding back employment, higher growth, as Bernanke has said. Editor
C’mon, take a breath. Let’s just relax. You see what happened when the government thought it ought to meddle around with housing. You see what happens when politicians want to buy the votes of the people by “correcting” the “problems” in the market. KNOCK IT OFF!
The current drag is the result of earlier manipulation and the human flaw of having difficulty in experiencing discomfort. You say, “Yes, but we must first fix this. This is unreasonably bad.” NO! You will always find a reason to “just do this first.”
STOP IT NOW!
Firewall FannieMae & FreddieMac from taxpayer rescue under ANY circumstances. Announce that, finally, failure means failure. Risk will naturally be contained.
LEAVE IT THE F*** ALONE!!!
The above goes for the over-tightening. Back to reasonable, realistic, standards.
the over-tightening AS WELL, that is.
The point is, risk wasn’t “naturally” contained, and the people that lost weren’t the risk takers, who were “too big to fail.” It was the 99% who lost, and will continue to lose, including homeowners without adequate oversight. There is no such thing as a free market, since only those at the top benefit from no regulation.
mehbouy,…groan,……EXACTLY! That’s the point! Risk was NOT naturally contained! Had they not had to meddle, trying to buy votes by making the agencies I named guarantee loans made under standards that should not have qualified them; had not Fan & Fred had an existing and implicit bailout underlying their very existence they would not have been able to back an onslaught of unqualified loans that were promoted and used by the “progressives” in Congress http://tinyurl.com/7v8ptn9, knowing there would be a housing boom they let loose the financial houses so they’d be able to compete,( likely more republicans behind that) so on and so forth. People only want to stand on one side and blame the other. We have to see the big picture and I think it was the Dems pushing, pushing the loans and, Repubs joining in, both sides finding ways to make money off of it all, damn the consequences. Manipulation screwed up the health of the market. So, like I said: LET IT BE!