The Center for Responsible Lending (CRL) and a research institute of the University of North Carolina just released the results of an exacting study on how borrowers would fare under different QRM scenarios and they don’t look good. Let’s hope CRL made its results available to federal regulators and lawmakers so they have a picture of what could happen if regulators proceed with their plan to require a high down payment for loans to fit under the qualified residential mortgage (QRM) definition.
To refresh your memory, the idea behind QRM loans comes from the big Wall Street reform law enacted about two years ago. The law requires lenders to retain 5 percent of the value of the loans they originate for securitization and sale to investors. That’s a requirement that will drive up the cost of financing for borrowers because it forces lenders to put up capital against risk.
But there’s an alternative to this expensive scenario, and that’s QRM loans. If the loans meet these QRM standards, they’re considered safe, so lenders that originate the loans for securitization don’t have to put up 5 percent. That’s good, except that regulators drafted a definition of QRM loans that would require a large down-payment—as high as 20 percent—along with other credit requirements.
The position of NAR as well as some 40 other organizations, including consumer organizations, is that the Wall Street reform law never intended QRM to impose a minimum downpayment requirement; rather, it only sought to ensure that loans are soundly underwritten.
As it is, the Wall Street law includes another provision that in fact does base loan safety on sound loan terms rather than downpayment amount: the qualified mortgage (QM) provision. Among other things, only conventional 30-year fixed and adjustable-rate mortgages can qualify as QM Loans, and lenders have to assess borrowers based on their ability to repay. There’s nothing in the provision that talks about minimum downpayments or other credit reqirements.
Under CRL’s analysis, which is based on about 20,000 loans made between 2000 and 2008, the default rate for loans that meet the QM definition—at a bit under 6 percent– is about half the default rate for all loans made during that period. Almost 6 percent is historically high, but as CRL points out, the period between 2000 and 2008 is not a typical period from a historical persective, since it encompasses the housing market crash and the extremely deep recession that followed on its heels.
But the difference between the two sets of loans shows that the QM standard does what it’s supposed to do: keep defaults at a comparatively reasonable level while still allowing creditworthy borrowers to get financing. This latter point is key, because it’s easy to keep default rates low—if you make standards so tight that only wealthy borrowers with the best credit profile can get financing. What the QM standard shows is you can limit defaults while still keeping financing available.
But as soon as you turn those QM loans into QRM loans and add minimum down payment requirements and other credit restrictions on borrowers, you in fact improve default rates a bit more but at the tremendous cost of pushing most borrowers out of the market. In the CRL data, the default rate on QRM loans with 20-percent down drops something over a percentage point, but to get that modest improvement more than 60 percent of otherwise creditworthy borrowers are pushed out of the market.
The take-away from CRL’s findings is pretty clear: if the federal government wants to curb bad loans without pushing out millions of otherwise creditworthy households from the market, the QM standard seems to do the job just fine. The downpayment and other credit requirements of QRM are unnecessary and harmful.
Lawmakers should look at these findings carefully. Here’s a link to the full study, called Balancing Risk and Access.
If you’re given a choice to either invest $1,000 in a two-year bank certificate of deposit or bury that money in your backyard, don’t spend too much time thinking about it, because for all practical purposes you’ll come out the same either way.
Researchers at the University of Alabama at Birmingham (UAB) say you’ll earn 83 cents more with the CD than burying your money, so the CD’s probably the better deal. But after you factor in the gas to get to the bank to buy your CD you’re probably better off going with the buried money and just taking advantage of inflation.
So, where should you put your money? Andreas Rauterkus, an assistant professor of finance at the UAB School of Business, says you should buy a house.
“First-time home-buyer rates are around 3.8 percent for a 30-year mortgage, so if you can afford a $1,000 mortgage payment monthly for 30 years then you can buy a $250,000 home right now,” says Rauterkus.
Lary Cowart, an assistant professor of real estate and finance at the school, says you don’t want to wait too long, though. Because once prices start moving, it won’t take long before price changes affect the advantage of today’s low rates.
“Holding out to try and find the lowest price is not a good strategy because if the house were to go down 10 percent but the interest rate goes up 1 percent you are not gaining anything,” says Cowart. “If rates go up 1 percent, say from 4 to 5 percent, that is a 25 percent increase in the interest rate; so the mortgage payment goes up by more than 10 percent and the amount of house that can be purchased goes down by more than 10 percent. People fail to realize that and it is another little thing that will cost them big over the 30-year life of the loan.”
Of course, whether you can buy at all depends on lenders’ willingness to make a loan today to anyone except those with the best credit profile and plenty of money for a downpayment, and that’s a big question today. It makes you wonder if the reason banks aren’t lending is because they don’t have any money available because it’s all buried in the bankers’ yards.
Read the UAB press release in which the researchers talk about buying a home today.
More from NAR on why home ownership matters.
How easy would it be to launch the initiative to help underwater home owners that President Barack Obama talked about in his state of the union speech on January 24?
Policy experts speaking with politically active REALTORS® in Washington this week said it would be relatively easy to create the program if an agency like FHA or even if the two secondary mortgage market companies Fannie Mae and Freddie Mac were given responsibility to do it. As policy consultant and former HUD official Brian Chappelle put it, the program could be implemented “almost overnight” because FHA already has its lenders and refi procedures in place.
But Chappelle and others said if FHA or the GSEs undertook the program, it would be best for the government to create a separate insurance fund to cover the new refinanced mortgages. That way, the entities’ main insurance funds wouldn’t be at risk should a portion of the loans go bad.
Brian Gardner, a Wall Street analyst, said the program would require close coordination with the Federal Reserve, otherwise investors in mortgage backed securities would demand a risk premium in interest rates to account for future political uncertainty of the program.
Patrick Swire, a former Obama administration domestic policy advisor and now an analyst with the Center for American Progress, said Obama’s refi initiative is a logical extension of the administration’s previous efforts to help underwater home owners since the economic crisis hit several years ago. The Home Affordable Refinance Program (HARP) was a first attempt to give lenders, investors, and troubled borrowers an incentive to modify their mortgage before the house is lost to foreclosure. This new program would provide an opportunity to implement lessons learned from that earlier effort.
Would lenders even want to participate? Ann Schnare, a policy consultant who formerly was an executive with Freddie Mac, said lenders are worried about getting hit with loan repurchase penalties, which previously happened infrequently but since the mortgage market upheaval have become far more common. So, unless that issue is addressed, lenders would likely be worried about the risks of participating.
Of course, whether the program will even pass Congress is another matter altogether, and that remains the big question. But the panelists appeared to agree that implementation was clear-cut should it pass.
Under the refi initiative President Obama discussed in his speech, underwater home owners who are struggling to stay current on their mortgage would be able to refinance to take advantage of today’s historically low rates.
The video excerpt above shows the discussion, Wednesday, Jan. 26, among the panelists. At about eight minutes, the video is relatively long, but the discussion is substantive and interesting, so it’s worth the investment in time to watch if you’re interested in these policy issues. Session moderator is Alan Zibel of the Wall Street Journal/ Dow Jones News Wire.
By Brian Summerfield, Online Editor, REALTOR® Magazine
A subject we’ve talked about a great deal here on the Speaking of Real Estate blog got some play during the Republican presidential debate last night in Jacksonville. (Transcripts are available here.) A question was asked of the four candidates about how to phase out government-sponsored enterprises Fannie Mae and Freddie Mac.
However, none of them gave satisfactory answers. Former Massachusetts Gov. Mitt Romney started out by claiming that “we’ve had this discussion before,” then attacked fellow candidate and former Speaker of the House Newt Gingrich for his business ties to Freddie Mac. Romney concluded by saying creating jobs was crucial for improving the housing market — which I believe is true, but that doesn’t answer the question.
In his response, Gingrich defended his involvement with Freddie and charged that Romney had made a fortune off of his investments in the GSEs. The two candidates went on for a couple more minutes trading barbs about who, exactly, had benefitted more from their Fannie and Freddie affiliations.
Rick Santorum, a former Senator from Pennsylvania, said he “stood tall” against the GSEs back in 2006 when he wrote a letter with other senators asking for Fannie and Freddie reform that involved gradually reducing the number of mortgages underwritten by the two. He then criticized both Romney and Gingrich for criticizing each other instead of focusing on the question. Continue reading »
President Obama in his third State of the Union speech last night called on Congress to pass a plan to help millions of underwater home owners refinance into loans with historically low interest rates by charging banks a fee to help expedite these transactions.
“I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates,” Obama said. “No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.”
Congress has previously looked at a proposal to charge banks a fee to help home owners who remain underwater, but it’s not clear from the details Obama provided how similar this plan is to the one Congress has already considered.
NAR, without weighing in on the merits of the fee, says it stands ready to help with any effort to streamline the mortgage refinance process. Beyond that, NAR calls for making the struggling housing market a national priority, because until housing recovers, the economy can’t recover. “REALTORS® believe that more must be done to stem the rising inventory of foreclosed homes and address the lack of available and affordable mortgage financing, which is inhibiting a meaningful housing market recovery,” NAR President Moe Veissi said in a statement released last night.
Obama also talked about efforts to hold lenders to account for making loans during the housing boom they knew households couldn’t afford. He said he’s asking the U. S. Attorney General to create a unit of federal prosecutors and state attorneys general to expand investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. “This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans,” he said.
He also pointed to provisions in the big Wall Street reform law enacted two years ago that’s intended to make future bank bailouts unnecessary by requiring financial institutions to provide the government with a plan for the orderly wind-down of their operations should they become insolvent. “The rest of us are not bailing you out ever again.” he said.
To help create what he called more tax fairness and to help reduce the federal deficit, the President talked about tax code changes so that “millionaire” taxpayers pay tax rates of at least 30 percent, while taxpayers earning under $250,000 wouldn’t face any increase in taxes.
More broadly, Obama spoke about tax code changes to encourage businesses to keep manufacturing and other jobs in the United States or return them to the country if they’re already outside it.
In the video clip above, President Obama describes his plan for helping underwater home owners refinance theur mortgage.
We don’t know if President Obama is going to talk about housing in his State of the Union speech tonight, but with the economy still struggling it’ll be important to hear his take on things—and, just as importantly, there’s an opportunity for you to share your views after the speech.
The White House has announced that, as it did last year, it’s hosting a panel of advisors after the speech to answer questions about the address from a studio audience and also from you via three social media channels: Facebook, Twitter, and Google +.
It’s impossible to know how many question will actually get answered. No doubt just a tiny fraction, but that shouldn’t stop you from voicing your opinion. Apparently questions will be taken for several days after the speech, so the process won’t end tonight.
The panelists will be—
- Mark Zuckerman, deputy director of domestic policy
- Roberto Rodriguez, special assistant on domestic policy
- Brian Deese, deputy director of the National Economic Council
- Ben Rhodes, deputy national security advisor, and
- Jennifer Palmieri, deputy communications director
The speech tonight is at 9 pm,. Eastern Time. Following its conclusion, at 10 p.m., Eastern Time, you can pose your questions via twitter (use #WHChat & #SOTU) and on Facebook at the White House page, and on Google +.
If you’re not near a TV tonight, you can watch the speech on YouTube at this page.
REO sales are a big part of today’s market and it might make a lot of sense for you to consider getting into this niche. But after talking to two REO specialists in Northern Virgina, it’s clear that this niche isn’t for everyone. To succeed, your practice has to become volume-based, because the margin on REOs isn’t as big as it is on regular sales. So, if you’re not already set up to be successful at handling large volumes of listings at one time, you have to move your business in that direction. That means adding team members and adding computer systems to oversee a lot of what you do, including tracking properties and tracking all those team members you’re adding.
On top of adding team members and systems, you have to get up to speed on rules that can come into play when you’re handling REOs, and that includes working with the occupants of homes that are now owned by banks. Are the occupants the former owners of the house? Are they tenants that the bank has put in the house until they sell it? What are the rights of the people who are living in the house?
It’s a lot to consider, but there’s no doubt that it’s a niche that’s thriving today given the high levels of distressed sales. And it can be rewarding to help people who might be facing tough times today but are fully expecting to be back in the market tomorrow once things turn around.
In the video above, REO specialists Leo Pareja of Keller Williams Realty and Jonathan Spinetto of Champion Homes talk about what’s involved in the niche from their perspective.
You can also read what Pareja and Spinetto have to say in a REALTOR® Magazine feature in the January-February 2012 issue. The piece, “How to Make REO Sales Work for You,” is part of a special feature that looks at several aspects of distressed sales, including short sales.
By Robert Freedman, Senior Editor, REALTOR® Magazine
In the flood of information we try to process on a daily basis, it’s easy to miss something that can be genuinely useful. If you work with commercial property owners, you might have missed the Small Business Administration’s announcement around this time last year that it’s making its Section 504 loan program available for refinancing commercial mortgages on a temporary basis.
The move was a response to the problems property owners were having refinancing their mortgage loan before the loan term ended.
It took SBA several months to actually come out with its program rules, but it finally did so, in October of last year, so the program is now up and running.
What’s attractive about the program is the new loan term can be fairly long and borrowers can use a portion of the proceeds as working capital. And since the loans are backed by the federal government, rates should be fairly reasonable, although you can expect to fill out more forms. The other point to note is that the program expires around the same time as the end of the federal fiscal year (end of September), although that could change if Congress decides to extend it. Continue reading »
Since the market downturn several years ago lawmakers in Washington have been talking about reforming the secondary mortgage market but nothing has come out of Congress yet. This year, though, a lot of progress is expected to be made toward reform, so it will be especially important for real estate brokers and sales associates to stay engaged in what’s happening, particularly this spring.
Although we’re still waiting for legislation to come out, lawmakers have been working on the issue quite a bit. Four bills have been introduced that would take a comprehensive approach to reform, including a bill by Rep. Gary Miller (R-Calif.) that very closely matches up with NAR’s priority, which is to encourage private investors to return to the secondary market while replacing Fannie Mae and Freddie Mac with an entity that continues to back conforming loans but as a nonprofit, not as a for-profit company.
NAR wants the federal government to keep a presence in the market out of a concern that mortgages remain available and affordable even in bad markets, when it’s too risky or not profitable enough for purely private participants to be counted on.
Sen. Johnny Isakson (R-Ga.) also has a bill out that matches up with NAR aims in many respects, and the association is working with the senator and his staff to refine his approach this spring. In a key point about his bill, it would define conforming loans as those that are based on sound underwriting, not on the amount of downpayment.
That’s important, because banking regulators have drafted Wall Street reform rules that would define conforming loans—what they call qualified residential mortgages (QRM)—as those that meet minimum downpayment requirements and other standards. NAR and others have been vocal about how bad that would be for the market, and the Isakson bill would address that.
In addition to these and a couple of other comprehensive reform bills, lawmakers have introduced 19 other bills that look at specific aspects of reform. NAR has never come out in support of any of these single-issue bills because it wants reform to be comprehensive, not piecemeal. All of the aims of these many bills will get looked at and, as NAR would like to see it, folded into a comprehensive bill where that makes sense.
So, a lot will be going on in the next few months, and NAR members can expct to hear more shortly. But whether all of this activity results in a single bill for a vote this year is uncertain. For one thing, starting around summer lawmakers will begin focusing on the upcoming national elections, so that could mean putting off a big vote like this until 2013, when the dust from the elections has settled.
But that’s all the more reason NAR members have to be engaged now. Because even if legislation takes until 2013 to pass, key decisions could be made in the next few months.
You can learn more about what to expect on reform in the 6-minute video with NAR analyst Tony Hutchinson.