Never in my 30 years as a mortgage banker did I think I would see interest rates this low -- as low as during Harry Truman's presidency. Yet very few homeowners are able to take advantage of those rates, which have dropped more than 2 percent since 1997, the beginning of the market crash. And we know why, whether it was the loss of a job, health insurance, or equity in their home with housing values down as much as 50 percent in some states.
This is while the foreclosure backlog is so great it could take more than 60 years in some states to work through, according to New York Times reporter David Streitfeld. So when two presidents -- President Obama in his new jobs plan and former President Clinton on the Sunday TV talk shows touting his Clinton Global Initiative -- say that real estate has to recover for our economy to recover, it should take precedence in discussions on how to boost economy growth.
And there are concrete steps we can take now to cure much of the housing malaise of vacant homes and deteriorating neighborhoods. Obama's inclusion of $15 billion in his new jobs plan to rehabilitate depressed neighborhoods is one such. But much more can be done if he can convince Fannie Mae and Freddie Mac to cooperate in loosening some of their almost draconian qualification requirements for both purchase and refinance transactions made more restrictive after the housing crash.
Credit scores, for instance, do not have to be 680 or better, if there are other so-called compensating factors, such as long term employment, or good assets. Or, the almost set-in-stone 45 percent maximum overall debt-to-income ratio could be more flexible with good job security and assets.
And much more can also be done with HARP, the Housing Affordable Refinance Program that was touted to help millions of homeowners, but has helped just 838,000 to date. Hence President Obama's pronouncement that loan modifications would be allowed for "responsible applicants" can mean that compensating factors should be considered when qualifying borrowers.
But there is another restriction keeping many homeowners from refinancing or buying -- the declining equity in their current home. Whereas just 10 years ago average equity was 61 percent, it is now just 38.6 percent, according to the Federal Reserve's latest Flow of Funds report. If Fannie and Freddie would qualify someone with good credit and assets that is, say, 50 percent underwater, the case in many neighborhoods, then they should be allowed a haircut -- meaning a reduction in their principal balance -- that would enable them to refinance at today's record low rates with a new loan that brought it back to 100 percent of current value. The 30-year conforming fixed rate today is hovering at 4 percent.
What is holding Freddie and Fannie back from offering this now, which could in fact refinance an additional 2.9 million homes without significantly increasing tax payers' liability, according to a recent CBO report? Once again, it seems to be Republicans' opposition to any more government liabilities, and the fact that an independent agency, the Federal Housing Finance Authority is Fannie and Freddie's administrator, charged with limiting their losses now that they are government-owned.
But the CBO study showed that it could save homeowners about $7.4 billion in just the first year and help about 111,000 homeowners avoid default with just a net cost of $600 million. What's not to like about this program?
Harlan Green © 2011
Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen
Lets start with the moral hazard. About 25% of mortgaged homes are underwater which means 75% aren't. The vast majority of homeowners have paid down their mortgage or put a sizable amount as a downpayment. Their mortgage is probably the largest household bill they pay and most have had to do without things they need in order to pay it regularly.
You are telling me that giving people who jumped into an overheated market or used their homes as an ATM to take cash out get a heck of a break when the rest of us don't? I don't think so.
How about let's just streamline foreclosures and quickly get all the deadwood cleared through the market. That will most certainly force force banks and bondholders to write down loan balances.
Until potential homebuyers think the market has finally bottomed out--and houses are actually affordable to average buyers--real estate is going to continue to be a drag on the economy.
The Problem: Grossly Inflated Housing Prices
The Solution: Dramatically Lower Housing Prices
The solution is coming to every state, city and town in America. Why buy a house today when you can buy later for 60% less?
When things look dismal, that is often when opportunity presents itself.
Lowest home prices in many years combined with the lowest interest rates ever.
45% is too high???
What happened to the 28% of a few years back?
The 28 % refers to the ratio between mortgage payment and income.
The 45% addresses Total Debt to income.
And if you think housing prices are going to "rise again", you're in for a very big surprise.
The real problem is massive unemployment and general economic malaise.
There will be a recovery but it may take several more years.
http://www.bloomberg.com/news/2011-10-02/falling-wages-threaten-u-s-rebound-as-consumers-may-retrench-on-spending.html
Wages have basically flat-lined in macro terms with some people getting pay increases, some taking pay cuts, and most staying about the same. New and younger employees, many of whom are saddled with monthly student loan payments in the hundreds of dollars, are typically starting at pay rates that are significantly lower than the starting pay that was received by their predecessors. Many of these young people are postponing marriage and child raising because they can't afford to live away from their parents. There has been an actual decline in household formation over the last several years. The shrinking pool of employees who receive employer provided health insurance are paying a greater share of their ever increasing premiums. Those who have to buy health insurance in the private market are paying the equivalent of a small monthly mortgage payment for it.
House prices will continue to come down until the sale prices of homes reflects the economic circumstances of buyers.
Read my blog. This is a serious idea seeking one good pol or journalist to pick it up and run. It will also be one of the greatest tax free stimulus in history. Please click below:
http://theaccidentalhumanist.blogspot.com/2011/09/simple-fix-to-our-economic-woes.html
Dream on.
Under mark to market accounting rules the bank has already taken the loss and written off the difference between the face value of the mortgage and its fair market value.
That money is POOF!, Gone! It doesnt exist and is nowhere to be found on the banks balance sheet. My issue is that as a result the bank would sell that mortgage (actually a pool of them) at the reduced value to a hedge fund in a hearbeat. But they wont sell it to you and me. We are still on the hook for the value that the bank and the regulators agree is no longer there.
That my friend, is a real world example of behind the scenes crony capitalism in action. The bank doesnt believe it exists, the regulators dont believe it exists but the working class is on the hook for it anyway.
The only way the bank can recoup that value is if someone buys the home for at least the original mortgage value. Last week Fair Isaac published a survey of bankers, a strong majority of whom believe that real estate values will not return to 2007 levels until 2020.
Its not a dream. its just applying the same rules to everyone. Read the post on my blog.
http://theaccidentalhumanist.blogspot.com/2011/09/simple-fix-to-our-economic-woes.html