Archive for October, 2011
Lawmakers continue to inch toward a new structure for housing finance in the U.S., one that may conceivably herald the end of the hugely popular 30-year, fixed-rate mortgage.
The Senate Banking Committee heard conflicting testimony Thursday about the issue.
Without some form of Fannie Mae and Freddie Mac, replacements to support these popular loans, many first time borrowers will be shut out, said Janis Bowdler, senior policy analyst at the National Council of La Raza.
"Without that guarantee lenders would not offer 30-year fixed-rate mortgages, at least not at rates the average person could afford," Bowdler said. "Yes, some would be available but not for the average family but for those with a large amount of inherited wealth they can put to a large down payment."
Others dared to unravel the nearly divine consumer sentiment toward the product. Anthony Sanders, a professor of finance at George Mason University, pointed out volatile interest rates – as the market is currently experiencing – actually threaten FRMs more than adjustable-rate loans because of massive refinancing waves – which the market is also currently experiencing (see the chart below Sanders provided).
"As interest rates rise and fall, mortgage origination volume is subject to massive swings. Mortgage originators and servicers have significant costs associated with managing such volatility," Sanders said. "Volatility in pricing also makes mortgage shopping more difficult for borrowers in that mortgage prices can vary significantly on a daily (or even intraday) basis."
Paul Willen, senior economist at the Federal Reserve Bank of Boston, said of the $2.6 billion worth of foreclosures he studied during the crisis, 88% suffered no payment shock. "The mortgage they made when they defaulted was exactly the same as the initial payment. Of those 59% of them had a fixed-rate mortgage. That alone should diffuse us of thinking the FRM is the safest of all mortgages," he said.
While he did say FRMs suffered lower default rates when compared to ARMs, he pointed out different borrowers take out these adjustable loans as they speculate on the property.With that considered, ARMs holders are more likely to default if they experience a negative event such as divorce, illness and especially job loss. This default risk increases even more if the mortgage is in negative equity.
John Fenton, president and CEO of Affinity Federal Credit Union, said without a doubt people of all backgrounds come to his bank preferring the 30-year FRM. He was concerned that if lawmakers cut too much of the government support for these loans, larger lenders with better access to capital market funding would hold an even larger advantage than they already enjoy.
"The 30-year fixed-rate mortgage remains the most popular. The ability of credit unions to write these loans and hedge the interest rate risk through the capital markets is crucial to a competitive mortgage finance system," Fenton said.
ARMs have a built-in safety valve that lowers interest rates for borrowers as rates fall, a feature borrowers with FRMs have to "beg and plead with their servicer for a refinance," Willen said.
But Susan Woodward, president of Sand Hill Econometrics, argued for preserving the stability of the FRM many consumers want. She said with interest rates already so low, the only direction to reset is up, which would strain already budget-strapped households.
"We haven't seen the full force of when ARMs reset upwards," Woodward said. "It's much more likely they would go up because they cannot go down much further."
One thing all of the panelists, Democrats and Republicans on the committee agreed on is that something should be done to help borrowers better understand adjustable-rate mortgages.
Sen. Richard Shelby (R-Ala.) raised the point when he asked one panelist if there was any way Congress could foster clearer terms on ARM documents. The Consumer Financial Protection Bureau, the agency he and other Senate Republicans are currently blocking a director for, advanced plans for revamped mortgage documents to present borrowers a clearer understanding of the terms.
In the end, any opinion on the future of the 30-year FRM, depends upon varying degrees of belief that the private market would shy away from such risk when Fannie and Freddie are wound down as Bowdler foresees or if lenders will return to meet the demand.
"Once we get out of this rut," Sanders said, "lenders will start making these loans again."
Write to Jon Prior.
Follow him on Twitter @jonaprior.
[Update 1: Adds comments from the Woodstock Institute]
Poverty rates rose to 15.3% in 2010 from 14.3% 2009 as the nation's economic malaise and housing crisis persist, according to Census Bureau data released Thursday.
Some 3.3 million more people were living in poverty in 2010 than in 2009 — or 46.2 million people compared to 42.9 million, according to the bureau, despite the National Bureau of Economic Research declaration that the Great Recession ended in June 2009.
The Census Bureau said 32 states saw poverty rise in 2010 with some states hard hit by foreclosures showing significant increases. Florida's poverty rate rose to 16.5% from 14.9%. Nevada saw its poverty rate rise to 14.9% from 12.4% in 2009, and California's rate rose to 15.8% from 14.2%. For 20 of those states with increased poverty, this was the second consecutive annual increase. No state saw a statistically significant decline in either the poverty rate or the number of people living in poverty.
"It is not surprising that default notices are up, given the high incidence and persistence of poverty," said Janneke Ratcliffe, executive director of the Center for Community Capital at the University of North Carolina at Chapel Hill. Ratcliffe is also a senior fellow at the Center for American Progress, a progressive think tank based in Washington, D.C.
"This evidence counters claims that defaults are strategic, especially among working-class families, and helps explain the inability of loan modifications and piecemeal, voluntary attempts to strengthen the housing market," she said. "No piecemeal approach is likely to work, especially as people continue to lose jobs and income."
Ratcliffe said the Census survey results also highlight the need for "a strategy to provide quality, affordable rental housing, especially as rents are becoming less affordable. It also raises implications that, as lower-earning households increasingly struggle, it starts to spill into and erode middle-class economic security."
Poverty rates for the 50 states and the District of Columbia ranged from a low of 8.3% in New Hampshire to a high of 22.4% in Mississippi. Poverty rates for Alaska (9.9%), Maryland (9.9%), Connecticut (10.1%), and New Jersey (10.3%) were among the lowest in the nation. Mississippi and New Mexico (20.4%) were the highest with the states showing the most poverty across the southern half of the nation. (Click on chart to expand.)
For large metro areas, the poverty rate varied from a low of 8.4% in the Washington, D.C., area to a high of 33.4% in the McAllen-Edinburg-Mission, Texas, area along the border of Mexico.
Tom Feltner, vice president at the Chicago-based Woodstock Institute, a nonprofit that promotes housing equality for low-income and minority residents, said many of the states with the largest increases in poverty rates are also states with high percentages of underwater homes.
"Rising poverty rates are — in many respects — a symptom of uncertainty in the housing market in states like Nevada and Florida where job creation and asset building are tied so closely to housing," Feltner said. "In these and other states where half of homes are underwater, housing ills continue to delay construction job creation and prevent many homeowners from tapping home equity to meet short- and long-term expenses."
The percent of people with income below 125% of their poverty threshold rose to 20.1% from 18.9%. Poverty status is determined by comparing annual income to a set of dollar values called poverty thresholds that vary by family size, number of children, and age of householder. Thresholds are updated annually to allow for changes in the cost of living but do not vary geographically.
The next chart shows the percentage of people by income-to-poverty ratio in the past 12 months by state. (Click on chart to expand.)
Write to Kerry Curry.
Follow her on Twitter @communicatorKLC.
The Republican presidential candidates let a great opportunity slip away during Tuesday night's presidential debate to explain how they would address the nation's housing problems to get the housing market and economy back on track.
There can be no economic recovery without a housing recovery, yet the silence on housing was deafening during the debate.
As a homebuilder from Reno, Nev., it is particularly ironic that with the debate in Las Vegas — the epicenter of the foreclosure crisis — the candidates chose to duck this topic and other critical housing issues.
But the absence of specific policy proposals to spur the housing market and promote homeownership is not limited to the GOP presidential contenders.
President Obama needs to take an affirmative position on homeownership as well. The failure of the administration to put forth pro-housing policies is impeding the economic recovery while hurting job growth and consumer confidence.
In normal economic times, housing accounts for more than 17% of the nation's economic output. Building 100 single-family homes generates 305 full-time jobs, $23.1 million in wage and business income and $8.9 million in taxes and revenue for state, local and federal governments.
Although more than 1.4 million residential construction workers have been idled since April 2006, several markets are showing signs of improvement, but policy headwinds are preventing workers from returning to their jobs, keeping homebuyers on the sidelines and harming the economic recovery.
Credit conditions remain extremely tight for homebuyers and homebuilders alike, preventing creditworthy borrowers from obtaining affordable home loans and small firms from getting construction loans to build even pre-sold homes and create jobs in their communities.
Policymakers are also considering mandating 20% down payments for homebuyers and abolishing Fannie Mae and Freddie Mac, which would make it even more difficult to obtain an affordable 30-year home loan, the major housing finance tool for most Americans. On Thursday, the traditional 30-year, fixed-rate mortgage came under attack during a Senate Banking Committee hearing.
Meanwhile, some leaders in Washington are calling for eliminating or drastically reducing the mortgage interest deduction, which would act as a tax on millions of middle-class homeowners, place more downward pressure on home values and further inflame the foreclosure mess.
Instead of arguing who is to blame for the downturn, all the 2012 presidential hopefuls need to be addressing these housing issues head-on. Housing and homeownership are critical to a strong and prosperous nation. If any of these anti-housing policies are codified, it could fundamentally alter the ability of the nation to sustain a middle class that has contributed to a century of economic progress.
Nielsen is chairman of the National Association of Home Builders, a Washington-based trade association representing more than 160,000 members involved in home building, remodeling, multifamily construction and related aspects of residential and light commercial construction.
Tags: economic recovery, Fannie Mae, fixed-rate mortgage, foreclosure, freddie mac, FRM, homebuilder, homebuyers, housing, housing recovery, Las Vegas, mortgage, mortgage interest deduction, National Association of Home Builders, obama, presidential candidates, presidential debate, Republican presidential candidates, single-family homes
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