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.

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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.

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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