For those in the real estate finance and home building industry, the coming of Mel Watt as the newly inducted Director of the Federal Housing Finance Agency could not have come at a more propitious time. Since assuming the office in January of this year, Mr. Watt, a former Democratic congressman from North Carolina and one time Chairman of the Congressional Black Caucus, is the official regulator of the FHA, Fannie Mae and Freddie Mac.
The exciting element of Mr. Watt's new tenureship, at least according to the US Senators that confirmed his appointment in December 2013, is that in comparison to his predecessor Edward DeMarco, who some might describe as socially awkward and whose political leanings and economic philosophy were more consistent with famed libertarian economist and social conservative Milton Friedman, Mr. Watt's presence is a step forward. In another words, while DeMarco favored an unregulated financial market, where the underserved of the economy (think poor people), are on their own and should try their best on minimum wage to save up enough money for a 20% down payment to purchase a house, Mr. Watt is diametrically opposite and favors economic incentives to assist those that are financially qualified. In another words, what's good for the housing industry is good for America.
DeMarco operates under what I call the "Mary Poppins School of Make Believe." While DeMarco says that by reducing the government role in housing you make room for more "private capital" --- that is "code" (and what DeMarco is really saying), lets provide less assistance to those that need it the most --- since at the end of the day, if you're not upper middle class and don't have a 750 FICO score, you aren't really deserving of assistance anyway.
Kinda like suggesting that social security and Medicare should be eliminated, since if you just let church groups, non-profits, and community organizations pick up the slack, then everything will be okay. (Right?)
Predictably, the housing industry as a whole could not be more excited about Mr. Watt's philosophical beliefs, since they are coincident with the economic objectives of an industry that got its ass kicked during the last recession. And hence, with scar tissue still visible, the housing industry is exceptionally well obliged by Mr. Watt's arrival, which could not be timelier.
Although there have been a number of 20%+ per annum appreciation run-ups in select housing markets during the past three years, it always helps to have a Plan B. In a world of Plan B's, Mr. Watt has a host of other high wattage fire works that are sure to keep the housing industry well feed at the trough. Which is good, since a working America is a good America.
For those Plan B aficionados, they include the following: An expansion of the conforming loan amount. Presently, the amount is $417,000. That dollar amount becomes perceptively smaller; since as homes appreciate in value, $417,000 buys less home. Hence, $417,000 isn't what it used to be. Thus, kicking the conforming amount up to $487,000 for example, enables a wider breath of the public to buy a home. Which ultimately makes everybody happier. The happy crowd includes the following: the mortgage lending industry, the home buyer, the Home Depots' of the world, the furniture stores, the truck moving companies --- etc., etc., etc. You get the idea. In short, the economy prospers in the big picture. It's what this author calls the "The butcher, the baker, the candlestick maker" School of Economics.
"FHFA will not use its authority as conservator to reduce current loan limits," Mr. Watt said at a recent gathering of housing experts. "This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market." In which Mr. Watt added, "Our overriding objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound."
Yet despite the latter statements, and perhaps in a 'good cop, bad cop' reverse psychology strategy --- where Mr. Watt didn't want to give the impression that his arrival is déjà vu all over again, he has gone on record as not in favor of cram down mortgages.
In mortgage industry jingo, a cram down mortgage is a legal practice of lenders opting to reduce the outstanding principal a borrower owes on their mortgage in order to make the monthly payments more affordable. Although this makes affordable housing advocates and civil rights groups nervous --- since it is their black and brown constituents that stand to lose the most if cram down strategies fall out of favor; it may not seem as bad as a predicament at first blush.
Why is the latter of importance to those civil advocacy groups? With the increase of home values over the past three years and less homeowners under water, who are now able to sell their home without having to write a check at escrow --- since the sale price is likely to cover the outstanding principal balance, having a cram down is less urgent. As an alternative, Mr. Watt kicked off a loan modification program in Michigan that offers generous terms then even the current HARP and HAMP programs so widely promulgated in most US markets.
For an industry that is hell bent on reconstituting itself as the savior of American economic enginuity and survival-ship, Mr. Watt is an unexpected --- but welcomed guest to an industry dominated by wealthy Republicans. In addition, Mr. Watt has the enviable position of casting a thousand points of light --- and as a ray of hope, for several industries whose lights were dimmed seven years ago, but have flickered to resurgence for American hope and prosperity. Much ado to Mr. Watt's bright and illuminative thinking, whose presence has sparked a 1,000 watt smile within the US housing industry that radiates from coast to coast.