Affordable Housing For All

affordable_housing In a piece in the New York Times today, Edward Glaeser, the famed Harvard economist, made the following comment:

“When housing prices soared, ordinary Americans found it increasingly hard to afford a house. I would certainly cheer if Detroit produced a wonder car for $10,000 that could get 50 miles to the gallon and go from 0 to 60 in five seconds. I would also cheer if the housing industry could produce a beautiful and energy efficient 3,000-square-foot home for $100,000. The same logic pushed me to boo when housing became outrageously expensive. During the boom, I hoped that housing prices would stop rising and even decline.”

Glaeser’s sentiment leads to the following reflection: Isn’t there something appealing about a big beautiful home for $100,000? If housing is a basic right of all Americans (let alone all human beings), then wouldn’t it follow that low housing prices would be a good thing?

Imagine a world in with housing prices were so low that individuals purchasing their homes with cash was commonplace. While mortgages would still exist, they would no longer be necessary for all homebuyers. Perhaps a mortgage would become an option, like the decision purchasers make every day when deciding to make a purchase with cash, credit, or debit. Or, arguably more accurately, like the decision car buyers make when choosing whether to take out a loan or pay with cash.

It is true, as Glaeser pointed out, that low housing prices do have a more dramatic effect on the financial markets than most expected. However, this is only due to the symbiosis that exists between the housing industry, the mortgage industry, and the home goods industry. So many of the problems in the housing crisis were caused by homes being used as an investment vehicle. When home prices fell, borrowers were stuck with homes that were worth much less than their mortgage payments. As more and more borrowers lost their jobs in the subsequent Great Recession, even many whose homes still retained equity found themselves unable to afford their mortgages. And the housing crisis was exacerbated.

The idea of affordable housing for all is a very appealing one. While it does seem hard to imagine a world in which affordable housing for all could be made a reality and where housing prices could fall so as to make homeownership affordable without crashing the economy, before we spend all our time wishing housing prices would go back up, we should consider solutions (esp. long term) where housing does become more affordable, home ownership more stable, and an individual’s right to housing less susceptible to the whims of the economy.

Taking in a Renter to Help Pay the Mortgage or Increase Income

An article in the Wall Street Journal today focused on a noteworthy new phenomenon: more homeowners are taking in renters. In some cases, homeowners are taking in renters in homes they still live in as a way to help make ends meet. In others, homeowners are becoming landlords, renting out homes they are unable to sell. This seems to be a popular option when the homeowners are forced to make a quick move- especially in the distressed real estate market. While to qualify for a reverse mortgage, a single family residence cannot be a rental property, nor can any portion of it be a rental property, renting out a home may be a good option for those who do not qualify for a reverse mortgage, but need the income from their home. In addition, multi-family homes with separate apartments may be rented and still qualify for a reverse mortgage as long as the homeowner continues to occupy the home.

There are some additional costs that come with being a landlord. Landlord insurance is about 25% higher than homeowners insurance, and landlords who use property manages may wind up paying them 3-12% of the rent. However, a tenant can be a good source of income, helping homeowners be able to continue to afford mortgage payments or break even on a property. When homeowners need to relocate in a short time frame, taking on a tenant helps alleviate the financial burden of paying for two mortgages at once (or a mortgage and rent).

Pending Home Sales Improve in July

Pending home sales improved for the sixth straight month in July to a level of 97.6 on the National Association of Realtors (NAR) index. While the index has improved dramatically from January, when it was around 80, levels still are nowhere near what they were during the housing bubble. In 2005, the pending home sales index neared 130.

Although pending home sales have increased, some of the factors behind the increase include falling home prices, low mortgage rates and the Obama administration’s $8,000 tax credit for first-time home buyers. But with the tax credit expiring towards the end of the year and home prices beginning to go back up (or decrease less rapidly), some question whether the rise in pending home sales will be sustainable.

(Reference: The Wall Street Journal print edition)

Google To Begin Offering Mortgage Quotes Online?

Speculation is increasing that Google will begin offering mortgage quotes online as early as this month. The service is rumored to resemble that offered by Lending Tree, which allows borrowers to quickly receive quotes and compare offers from a variety of mortgage companies. The buzz has begun due to a lawsuit filed by Lending Tree against Mortech. Lending Tree alleges Mortech has agreed to make its technology available to Google, allowing Google to launch this product in competition with Lending Tree, which is a violation of the contract between Lending Tree and Mortech.

It remains to be seen whether or not reverse mortgages will be affected by or included in Google’s new product. However, Google offering mortgage quotes would likely have an affect on the mortgage industry due to Google’s large market share.

NMLS to Help Monitor Loan Officers

One of the most common questions we get from borrowers is whether we know a licensed loan officer in their area. Sometimes we do and sometimes we don’t. However, soon the question will be even easier to answer. Bob Tedeschi’s Mortgage column in the New York Times today focuses on the ways in which NMLS, the Nationwide Mortgage Licensing System, is growing in importance and will become accessible to consumers within the next year.

Currently, the Nationwide Mortgage Licensing System (NMLS) is being used by 48 states with California set to join soon. Minnesota is the loan holdout, but if it does not comply, it is likely to be forced to do so by HUD as a result of the Secure and Fair Enforcement for Mortgage Licensing Act. As a result of the act, all states are required to participate in the licensing system. NMLS requires all loan officers at state-chartered banks to complete at least 20 hours of prelicensing education, to pass a test, and to complete 8 hours of continuing education annually. Those with a felony conviction in the last 7 years are not eligible for a license.

Perhaps most importantly for consumers, NMLS is establishing a database of complaints against loan officers, which will soon be searchable by the public. The searchable database will also include loan originator’s licensing credentials and employment histories. This information should help protect consumers from bad loan officers, and provide consumers with just another safeguard in the process.

Countrywide Can Be Sued by Investors, Rules Federal Judge

A federal judge in Manhattan ruled yesterday that the Helping Families Save Their Homes Act of 2009 did not exempt Countrywide from investor lawsuits. Countrywide had argued that the federal legislation automatically voided its pledge to buy back loans from investors if those loans were modified for troubled borrowers. The Helping Families Save Their Homes Act of 2009 was meant to help encourage servicing companies to modify loans, in part by providing some protection under liability arising from loan changes.

However, many of the mortgages owned by Countrywide (which has since been purchased by Bank of America), are owned by investors. The investors receive interests and principal payments from borrowers over the life of the loans. When the loans are modified, these payments are typically reduced. The investors are arguing that when Countrywide and Bank of America agreed to modify the loans, they breached their contract with the investors.

The ruling in the case said that the legislation did not prevent Countrywide’s investors from trying to enforce their rights under the mortgage servicing contracts. It would be up to the investors to prove that Countrywide’s pooling and servicing agreement requires it to repurchase the loans the bank modifies. The case would be in state court, outside of federal jurisdiction. Countrywide wanted the case to take place in federal court, due to the law being a federal law.

This case has some interesting implications. Right now, the Obama Administration has made it their priority to modify mortgages for borrowers, attempting to help the over 13% of homeowners who are currently delinquent on their mortgages. However, this case shows that even if the servicing companies and lenders agree, other parties, such as investors and hedge funds, may object. Certaintly there are bound to be losers from the housing bust and subprime mortgage crisis- the question is who will bear the brunt of the blow. As individuals argue in their self interest, it appears dangerously likely that the good of the collective whole will suffer.

Concerns with Appraisals Captivate Major Papers

Appraisers are under pressure to inflate property values.

Over the last two days, both the New York Times and the Wall Street Journal have published lengthy articles on the effects of the new Home Valuation Code of Conduct on appraisers. The Home Valuation Code of Conduct, which went into effect May 1, has made lenders responsible for ordering appraisals and negotiating with appraisers. As a result, appraisal companies are complaining that they are being paid less to do more work. In addition, appraisers are often required to travel farther to appraise homes, raising questions as to whether they are familiar enough with the area to provide a valid appraisal. A case highlighted in the Wall Street Journal article was that of a homeowner in Palm Beach Gardens, FL where the appraiser drove 44 miles to evaluate the home and came back with an appraisal that was around $70,000 less than the second appraisal. Furthermore, while the fees the appraisers are being paid have been decreasing, the cost to the consumer has risen by $100 in the past year, with most of the proceeds going to middle men.

Another concern raised by the industry is that being hired by lenders puts more pressure on the appraisers to return with a value that makes the deal possible. Appraisers need to keep the lenders happy to stay employed. If they demand fees that are higher than another appraiser or produce an unfavorable result, the lender may look elsewhere. As a result, some feel that the legislation risks putting ethical appraisers out of business.

Appraisal issues are common in reverse mortgages, and many of the issues raised in the article extend through both the conventional and reverse mortgage industries. As appraisals travel farther, there are more opportunities for mistakes. As appraisers worry about their fees and costs ride, the burden on consumers grows. Thus while the legislation has attempted to curb price inflation in appraisals and reduce the conflicts of interest, it appears to have arguably caused more problems than it has solved. Some in Washington are trying to get the legislation postponed until 2011.

"Cram Down" Legislation Threatened

US Rep. Barney Frank (D-MA)

In the wake of a meeting between mortgage servicers and representatives of the US Treasury Department last week, US Rep. Barney Frank (D-MA), chair of the Financial Services Committee, threatened to revisit the “cram down” legislation that had failed in the Senate last year. The legislation, which passed the House last year and is supported by the President, would allow bankruptcy judges to rewrite mortgage contracts when homeowners file for bankruptcy. While it remains to be seen what effect this would have on both the mortgage companies, and the borrowers, some believe that borrowers would be granted a great deal of relief from bankruptcy judges if the cramdown legislation were passed.

The problem is that there is no reason that a borrower should have to declare bankruptcy to get their mortgages modified or refinanced. And as more and more homeowners fall behind on mortgages, find themselves with motgages that are greater than the value of their homes, or both, the number of homeowners either unable or unwilling to make their mortgage payments will only increase. We talked yesterday about the problem of upside down homeowners encompassing about 32% of homeowners. The category of homeowners potentially in need of a refinance or modification is even larger.

And so while there are times when it might be useful for bankruptcy judges to be able to rewrite mortgage contracts, hopefully the government and the mortgage industry can work together to make mortgage modifications a more workable reality before the “cram down” legislation becomes necessary.

Increasing Number of Homeowners Upside Down on Mortgages

At the end of June, 24% of homeowners were upside down on their mortgages. In other words, 24% of homeowners owed more on their mortgages then their homes were worth. When added to those with no equity remaining in their homes, the percentage climbs to 32%. Nevada, Arizona, California, and Colorado are the biggest offenders with rates of 40%, 37%, 33%, and 31% respectively of homeowners whose homes are worth less than their mortgages. In some of these markets, homeowners are walking away from homes where they may owe twice as much as the home is worth or more. And when the home is worth less than the mortgage, borrowers no longer qualify for some of the programs that might be able to help them, such as a reverse mortgage.

In response, some are urging the government to begin reducing loan balances to help borrowers cope with the problem. Lowering loan payments or rates will only make the mortgages drag out interminably, and still not recoup the home’s equity (unless it appreciates again over time back to levels that are higher than during the time of the boom). If the government reduces the loan balances, borrowers will be inclined to continue to invest in their homes and stay in their residences, rather than walk away. This will reduce foreclosures, hopefully, as well as abandoned properties.

What do you think?

Housing Market Rebound Freezes Out The Previously Well-Off

A front page story in the Wall Street Journal this morning highlighted an interesting trend; high-end homeowners are being left behind in the housing market rebound. Stimulus programs, such as the $8,000 new homebuyer tax credit and low mortgage rates, are dependent upon income and home values. The jumbo mortgages necessary to take out a high-cost home have come with higher rates and lenders requiring an increasingly large portion as the down payment (20-30% of the property value). All this comes at a time when prospective buyers have had an even harder time selling their homes, making coming up with money up front difficult. As a result, while the market has begun to turn upwards for many first-time buyers and lower value homes, the market is still stagnant for those in the upper and upper-middle classes.

While it is perhaps unsurprising that stimulus programs might choose to target those with lower incomes, the recession has hit those with higher incomes as well. Many of the people affected by the stock market crash and financial fraud scandals are those who were making upwards of $150,000/year. After losing their jobs and/or the majority of their 401Ks, some members of this group are taking pay cuts in order to land new jobs. As home values decline however, this group also is beginning to have a hard time making mortgage payments and qualifying for relief. Jumbo mortgages are currently the type of mortgages with the highest default rate.

The government should do something to make sure that the upper middle class and upper classes are not completely cut out of the stimulus programs–at least so far as real estate is concerned. Their homes are taking some of the largest hits in a distressed market, to the point where selling is not possible without losing hundreds of thousands of dollars. And in markets such as California, some are extremely upside down on their mortgages. While they may be well off in comparative terms, they could still lose their homes (and many are), could still lose their jobs and source of income (and many have), and they still should be granted some form of relief.