One of the main questions hanging over the Federal Reserve’s plan to buy up to $40 billion a month in mortgage-backed securities (MBS) to help spur the housing market is whether continuing tight underwriting requirements will offset any positive impact the effort will have on lowering mortgage interest rates.
NAR Chief Economist Lawrence Yun and other analysts have said that interest rates, already at historical lows, don’t need to come down further to spur home buying. What needs to happen instead is a change in lenders’ underwriting policies. Since the downturn, lenders have been imposing underwriting restrictions on borrowers that go above and beyond what Fannie Mae, Freddie Mac, and FHA require for loans. For example, borrowers in some cases need to have a credit score 100 points higher than what Fannie, Freddie, or FHA require.
These restrictions, or overlays as they’re sometimes called, on federally backed loans are crucial, because Fannie, Freddie, and FHA comprise so much of the mortgage lending market today. Lenders say they need these higher standards to ensure they don’t make loans on which borrowers subsequently default and then face having to take them back if Fannie, Freddie, or FHA say the loan violated the “representations and warranties” the lender made when they originated the loans.
As Yun said in his monthly press conference yesterday, to release August existing-home sales figures, despite improvement in home sales and prices, these standards are keeping otherwise creditworthy households from getting financing, which could lead to wide and troubling disparities in home ownership rates down the road. “The tight underwriting standards are not a trifle matter,” he said. They’re “limiting who can become home owners and setting the stage for possible highly unequal wealth distribution in five years, because who will be getting [home price] appreciation over the next five years? They’re limiting the number of people in the middle who can become home owners.”
Federal Reserve Chairman Ben Bernanke, at a press conference he held last week to announce the MBS purchase plan, known as QE3, (for “quantitative easing 3, because it’s the third such measure the Fed has taken since the downturn), said these tight underwriting standards are in fact easing. “As house prices have begun to rise, as the economy has gotten a little stronger, lending standards have eased just a bit,” he said. “There have also been other changes which are useful. I note for example that the FHFA (Federal Housing Finance Agency) and the GSEs (Fannie and Freddie) have recently changed their policy on put-backs, so that banks will have more certainty under what conditions a mortgage will be put back to them if it defaults. So, there are a number of things in train that will make the mortgage market a little bit more open. That is one factor actually that could make our policy more effective, rather than less effective over time. If more people have access to more credit, more people will have access to the low rates we’re providing.”
Other than the policy clarification on put-backs, also known as loan repurchases or loan buy-backs, Bernanke didn’t specify what those eased lending standards are. And, whatever they are, they don’t appear to be trickling down to many real estate practitioners on the ground. NAR just last week released survey findings that suggest tight standards continue to be a problem. In one of the findings, in about 75 percent of loans to Fannie and Freddie last year, borrowers had credit scores of 740 or above, compared to just 40 percent of borrowers between 2001 and 2004 who did so. The years 2001 to 2004 are considered stable and healthy, before the housing boom. The difference in credit scores suggests up to 700,000 more loans could have been made last year had that the tight restrictions not been in place.
”Financial institutions appear to be focusing on making loans only to individuals with the highest levels of credit scores,” Jed Smith, NAR manager of quantitative analysis, says in his anlaysis of the survey findings.
All this is just another way of saying, as many of the reporters at Chairman Bernanke’s press conference last week were saying (see first video), that the MBS purchase plan might be all the Fed can do, given it’s mandate to focus on monetary policy (matters affecting the supply of money in the economy), but it misses the point. The problem is in lenders’ underwriting policies. And interest rates that go lower than even today’s historically low rates seem unlikely to have much impact on those.
In the first video above, Bernanke makes some key housing market points, including about easing loan standards, as he talks about the Fed’s MBS purchase plan. In the second video, Yun talks about the continuing tight underwriting standards.
Existing-home sales last month were up almost 8 percent from July and home prices were up 9.5 percent from a year ago, to $187,400.
“More buyers are taking advantage of excellent housing affordability conditions,” NAR Chief Economist Lawrence Yun said in his national press conference today in Washington in which he released the latest home sales figures. “Inventories in many parts of the country are broadly balanced, favoring neither sellers nor buyers. However, the West and Florida markets are experiencing inventory shortages, which are placing pressure on prices.”
Home prices are up partly because the mix of housing is shifting toward more normal sales, with distressed sales comprising a smaller share of the market. But prices are also up because of appreciation, which NAR data as well as other price indexes show. Case-Shiller and the Federal Housing Finance Agency both show prices up based on repeat sales, which track price changes without regard to changes in the sales mix.
The positive sales and price trends come despite lenders’ continued tight underwriting practices. Yun said these overly tight policies could pose problems five years down the road, since mainly households with strong incomes and good credit profiles are getting loans today. That means a few years down the road, as homes appreciate, households with less income and less strong credit profiles won’t have been able to take advantage of today’s low home prices and historically low interest rates. That would leave many responsible households that could be successful owners today unable to get on the home ownership ladder.
Forthcoming rules, such as the qualified mortgage (QM) rule, which the Consumer Financial Protection Bureau (CFPB) is writing to meet requirements in Wall Street reform legislation enacted two years ago, could exacerbate the problem, Yun said. NAR wants the rule to be flexible enough so lenders can make safe and affordable loans to responsible buyers, but there’s a concern that the rule could be too restrictive and only those with the best credit profile would be able to get affordable financing.
The video above is from Yun’s press conference today, September 19, in which he report’s August 2012 home sales numbers.
The Consumer Financial Protection Bureau (CFPB) is writing rules that can have an enormous impact on real estate. The qualified mortgage (QM) rule, which sets out lender standards on what constitutes borrowers’ ability to repay, is one of them. So it was good to hear that among the members of CFPB’s new advisory board is Gary Acosta of New Vista Asset Management in San Diego.
Gary Acosta
Acosta is one of the founders of the National Association of Hispanic Real Estate Professionals (NAHREP) and knows real estate about as well as anybody can. His company, New Vista, which he launched with Jim Parks, the chair-elect of the Asian Real Estate Association of America (AREAA), specializes in helping to make home ownership a reality for moderate-income households who want to own and have the means and desire to be responsible owners.
Acosta says his goals for the board, which meets for the first time later this month, is to let the director of CFPB, Richard Cordray, and his staff know how important it is that any rules affecting real estate strike just the right balance between protecting consumers and maintaining financing opportunities for those who could so easily be knocked out of the market by overly restrictive regulations.
“I’m certain that, one of the reasons I was selected, is my work with the Hispanic community in the housing sector,” Acosta said last week. “Hispanics were disproportionately affected by the housing crisis, in a negative way, but I also think I have an opportunity to try to articulate the viewpoint that attempts to strike a balance between consumer protection and access.”
That balance is really what CFPB must keep in mind with everything it does, because if it goes too far in either direction, the real-world consequences will be significant. It’s certainly possible for CFPB to make residential mortgage lending rules so airtight that no loans could ever go bad—because only those with the most pristine credit profiles would get financing. CFPB could also go in the other direction and make rules so accommodating that financing would be available to many households, including those that aren’t ready for the long-term commitment that sustainable home ownership requires. So, getting the balance just right between the two is job one for Acosta and the other board members.
“The key is ensuring mortgage financing is available but not so loose that we see a repeat of the debacle we’re just getting through now,” he says.
The board has 25 members. The appointees come from a range of professional, academic, financial, and advocacy backgrounds. Acosta’s is in real restate investment and asset management. Among the entities represented are AARP, Neighborhood Housing Services, USA Cares, and Woodstock Institute. From academia are board members from the University of Minnesota, Georgetown Law School, and Dartmouth College. From industry are board members from Citigroup, American Express, and Bank of Hawaii.
CFPB was created as part of the big Wall Street reform law enacted in 2010 and it took over many of the consumer-focused regulatory responsibilities from other agencies, including HUD and the U.S. Department of Treasury. The QM rule is also a product of that Wall Street reform bill, as were some of the other key mortgage finance rules being written right now, like the qualified residential mortgage (QRM) rule. These and other rules are intended to protect consumers and help prevent the kind of mortgage excess that led to the financial crisis.
Although the board’s role is only advisory, it’s important that people with industry knowledge like Acosta be at the table with CFPB staff so they can ensure the industry’s voice is heard along with all the other perspectives that have a stake in how the agency writes its rules. The board by law will meet at least twice a year.
“The director of CFPB brought together this group so that he and his team can take these various perspectives into consideration when they’re making their decisions,” says Acosta.
To that end, it’s good the agency will have these diverse perspectives as it moves forward on QM and the other crucial mortgage finance rules.
The Federal Reserve hopes to drive down already low interest rates and reboot the sluggish economic recovery by buying up some $40 billion in mortgage-backed securities a month. But there’s a reason to wonder if a different kind of action would be better at getting the economy moving. And that’s a restoration of sensible underwriting standards by lenders so buyers can take advantage of these low rates.
As NAR Chief Economist Lawrence Yun and other economists and analysts have noted, mortgage and other interest rates are already at historical lows. So, for the Fed to try to drive rates down even more really raises the question of how much more demand in home ownership markets can realistically be expected if rates drop from 3.6 percent to, say, 3.3 percent?
What’s more, rates might not even go down as a result of the Fed action, because if inflation-fearing investors sell MBS holdings faster than the Fed buys new MBS issuances, then long-term rates might actually go up—just the opposite of what the Fed hopes will happen.
Be that as it may, as NAR has pointed out repeatedly, and as Federal Reserve Chairman Ben Bernanke has himself said, the sluggish housing recovery, which is keeping the broader economy from seeing faster growth, isn’t just a product of less-than-optimal market demand; it’s a product of too-tight underwriting standards among lenders.
Back in February, in his testimony before the House Budget Committee, Bernanke was very clear that he saw these restrictive standards as a part of what’s wrong with the recovery. “The problems with access to credit in the mortgage market mean the Federal Reserve’s monetary policy is not as effective as it otherwise would be,” Bernanke said on Feb. 3. “Because not as many as could be are taking advantage of the low mortgage rates that we have tried to create. . . . I don’t think this is purely a market phenomenon. I think there are a number of legal and administrative and regulatory barriers to hosing being as strong as it should be.”
Bernanke didn’t identify the legal, administrative, and regulatory barriers he was alluding to. But among the possible barriers that lenders have talked about are loan repurchase rules Fannie Mae and Freddie Mac have in place. Lenders have cited their loan repurchase risk as one of the reasons they’ve imposed underwriting standards on Fannie- and Freddie-backed loans that go beyond the minimum requirements of the agencies. Under these repurchase rules, Fannie and Freddie can require lenders to buy back their loans if the agencies determine the loans aren’t underwritten exactly in accordance with their standards. So lenders, to ensure they don’t get hit with a repurchase requirement, go above and beyond the agencies’ requirements. (FHA and private investors have repurchase rules, too.)
The Federal Housing Finance Agency, the conservator of Fannie and Freddie, has since issued a release intended to clarify the loan repurchase policies of Fannie and Freddie, but the policies themselves haven’t changed.
On top of that, the Consumer Financial Protection Bureau and other regulators are working on rules to implement the big Wall Street reform law enacted two years ago and these rules, even though they’re not finalized, have lenders concerned about what the underwriting picture will look like down the road. Those are the qualified mortgage (QM) and qualified residential mortgage (QRM) rules. QM requires lenders to make loans only to borrowers who can demonstrate the ability to repay and outlines how that’s defined and also under what legal standard lenders would have to meet if they’re charged with making a loan that’s outside the ability-to-repay standard. QRM requires lenders to retain 5 percent of the loan amount on their books if the loan is going to be securitized and sold to investors. The 5-percent hold-back requirement is waived for loans that meet banking regulators’ underwriting standards.
NAR has expressed concern with draft versions of both rules and has said the rules should be broad and flexible, otherwise we’ll see the same problem that we’re seeing with the loan repurchase rules: lenders will tighten standards so much that even creditworthy borrowers would be challenged to get financing at affordable costs and in a timely manner.
And then there are changes to bank capital standards by the international Basel III protocol, which isn’t implemented yet but is already causing concern among lenders because they could face increased requirements for holding capital on their books for every loan they make.
When you step back and consider all these matters together, you get an environment that’s not conducive to the kind of lending that’s needed to get the housing market back on a strong growth footing. NAR has been saying for years that lenders simply returning to the safe and reasonable standards they had in place before the housing boom would go a long way in getting the market going.
Along these lines, NAR this morning released survey findings that suggest we could see half a million more home sales a year, and possibly more, if lenders simply went back to their previous safe standards.
In the survey, 75 percent of mortgage loans made today go to borrowers with credit scores of 740 or higher, compared to before the boom—2001 to 2004—when about 42 percent of loans went to borrowers with scores that high.
“A loosening of the overly restrictive lending standards is very much in order,” Yun said in a statement that accompanied the release of the findings.
NAR also today sent a letter to Bernanke suggesting that the Fed, although it doesn’t have a formal role in all of the mortgage rules being drafted, it can play a role in communicating concerns over how the rules are written. “The Fed should work to ensure that these rules take reasonable steps to reduce risk without inhibiting access to mortgage credit,” NAR President Moe Veissi said in the letter.
When Paul Yorkis was young, his mother took him to the Democratic Party headquarters and asked him to stuff envelopes in support of Adlai Stevenson who ran for president twice during the 1950s.
“It was fun and people were happy I was there,” said Yorkis, president of Patriot Real Estate in Medway Mass., a member of the Massachusetts Democratic State Committee, a Democratic National Convention delegate, and national chair of the non-NAR affiliated REALTORS® for Obama.
That experience as a child was formative for Yorkis, who continued to explain that politics is deeply rooted in the lives and culture of those living in his home state of Massachusetts. “In Massachusetts, there’s a few sports – the Red Sox, the New England Patriots, the Bruins, the Celtics, and the other sport is politics.”
Yorkis decided to become a delegate representing Massachusetts at the DNC in Charlotte, N.C., last week, because real estate – among other issues – needs to be represented and addressed at the federal level. He knows how important it is to keep housing front and center when talking to lawmakers – especially the accessibility of the American dream of home ownership, as Yorkis himself experienced homelessness for a short time as a child.
“REALTORS® do amazing things. The reason I’m at the convention is because I believe it’s the little stuff that has the ability to impact politics,” Yorkis said.
Yorkis did leave his mark at the DNC. He submitted testimony to the drafting and platform committee of the Democratic National Committee. Part of the platform deals with housing and the last sentence of the approved platform was adapted from Yorkis’s testimony. It states: “The president remains committed to creating an economy that’s built to last, where home ownership is an achievable dream for all Americans.
Yorkis was one of approximately 20 REALTORS® who served as delegates at the DNC this year. This video looks at how members of the National Association of REALTORS® had an impact that the convention and why political involvement – whether it be Republican or Democratic – is vital to the real estate industry.
Some positive news from FHA today on its condo financing rules, with more changes expected to come in the near future.
The changes should make it easier for borrowers—both investors who want to buy more than one unit and those who are buying just their primary residence—to get financing, which has tended to be more of a challenge than in the single-family market. With condo financing it’s not just the borrower who has to be approved—the project itself has to be approved. And that’s been a source of frustration for borrowers and the sales associates working with them.
Investor purchases
Under changes announced today by FHA, investors can come in and buy more units in a project than they could previously. They can now buy up to half of the project units, up from just 10 percent before, but they have to jump through a hoop to get the okay: at least half of the units have to have already been conveyed to individual owners or be under contract as owner-occupied.
Commercial space
Projects can also have more space devoted to non-residential commercial uses than before. Up to this point, only a quarter of project space could be used for commercial purpose. Now half of the project can be, although certain authority for approval is reserved for the local FHA office.
These two changes together are fairly significant, but there are a few others worth noting.
Board certifications
One is a softening in the language about the representations made in condo board certifications. The penalties for false certifications by the board representative is the same, but with the new language, FHA is acknowledging that board representatives often rely on an attorney’s advice about the project’s compliance with state and local laws. It also removes language in which the person signing certifies he has no knowledge of circumstances or conditions that may cause a mortgage to become delinquent.
HOA dues
Finally, the agency is softening its stand on delinquent home owner’s association (HOA) dues. It’s now allowing up to 15 percent of a project’s units to be 60-days delinquent on HOA dues, up from just 30 days delinquent. This change acknowledges the tough times condo projects have faced as underwater owners of individual units struggle to pay their HOA fees.
Owner occupancy limits
Although these are good changes, one of the main impediments to FHA condo financing remains unchanged, and that’s the requirement that half of a project’s units be owner-occupied before anyone can get financing to buy. If the unit is an REO, the 50-percent rule is waived, but NAR wants to see the owner-occupancy requirement eliminated entirely. That’s probably the biggest hurdle for buyers today.
FHA financing limits
Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50 percent. That limitation remains unchanged.
‘Spot’ approvals
And what’s known as the “spot” approval process remains prohibited. FHA used to allow these spot approvals but eliminated them a few years ago and NAR would like to see them allowed again. These types of approval apply to new projects. FHA requires 30 percent of the units in a new project to be pre-sold before it will approve an application for an FHA-backed loan. With spot approvals, FHA used to allow individual buyers to get FHA financing even if the new building didn’t meet the 30-percent threshold, but that’s no longer allowed.
FHA says the changes announced today are interim measures and that it’s preparing a more formal and comprehensive rulemaking, so some of the changes NAR is seeking could still be forthcoming. In any case, NAR, which worked with other groups to play a lead role in getting FHA to make these changes, continues to talk to FHA officials about this important but still tough segment of the financing market, but today’s changes are a move in the right direction.
2014 seems like a long ways away but in Washington there are already concerns that a critically important program to the commercial real estate industry could end that year, which would make it hard for buyers and owners long before 2014 rolls around to get financing for their projects.
The program is called TRIA, the Terrorism Risk Insurance Act, and it was passed in 2002, not quite a year after the September 11 attacks, and its intent was to stabilize the availability of terrorism insurance so buyers and owners could get commercial property loans. In the wake of the attacks, insurers had started pulling out of the market because they couldn’t quantify the risk terrorism posed to their business.
It’s not hard to see why, because it’s the nature of terrorism to be unquantifiable—when and where, and even if—an attack occurs is unknowable, and the best actuary in the country can’t price risk that’s 100-percent unknowable.
TRIA was effective in stabilizing the insurance market and after it had been in place for a year or so the cost of insurance moderated. Then, in 2005, the authority was set to expire and the market started destabilizing again as Congress considered whether to extend it. The program was eventually extended before it expired, and now here we are in 2012 and the authority is once again facing expiration, although not until 2014. Yet the time for Congress to start looking into program extension is now, because as we saw in 2005, if reauthorization is delayed until the last minute, insurance costs can get volatile and some providers could leave the market.
If the insurance does go away, borrowers could actually find themselves in technical default on their mortgage, because the typical commercial mortgage agreement stipulates that borrowers carry terrorism insurance on the property. Today, 85 percent of commercial mortgages carry the coverage.
Against this backdrop, Linda St. Peter, the operations manager of Prudential Connecticut Realty in Wallingford, Conn., and vice-chair of NAR’s commercial committee, testified before a House Financial Services subcommittee earlier this week recommending lawmakers extend the program before the market becomes nervous about the program’s continued authorization.
“There’s a concern that the uncertain future of of TRIA may cause the prices to fluctuate,” she said at the hearing, “and this uncertainty may prompt insurers to drop terrorism coverage if a reauthorization is not in place by 2014.”
The conversation about program reauthorization must take place against the tough choices Congress faces on the federal budget, so St. Peter and the other witnesses at the hearing made a strong case for lawmakers to start the conversation sooner rather than later.
In the one-minute video above, St. Peter lays out the real estate industry’s concerns over the continuation of federal terrorism insurance.
The federal government is taking steps to ease a problem lenders have been complaining about for several years, and that’s the buy-back risk they face if they underwrite a federally backed loan that goes bad and the guarantor of the loan—whether FHA, Fannie Mae or Freddie Mac—determines that the loan was never underwritten in compliance with their “representation and warranty” requirements.
Lenders in the wake of the mortgage meltdown cited this buy-back, or repurchase, risk as one of the reasons they were imposing their own set of underwriting requirements above and beyond what the federal guarantor was requiring. With these credit overlays, as they’re called, loan applicants who met the requirements of FHA, Fannie or Freddie could still find themselves getting turned down for a loan, because they didn’t meet these more stringent lender overlays.
NAR in public statements has urged lenders to align their requirements on federally backed loans to what the federal government was requiring. Indeed, NAR Chief Economist Lawrence Yun has estimated that the home sales rate could improve considerably if these overlays were aligned with federal agency requirements.
Yet lenders remain concerned about the risk they face, and in fact earlier this year, in February, Bank of America announced it would stop selling loans to Fannie Mae because of its concerns over the company’s buy-back policies. (Bank of America shortly after the onset of the financial crisis took over Countrywide Home Loans’ book of business, increasing its exposure to buy-back risks from that lender’s loan activity during the housing boom.)
To be sure, banks have made it clear that this buy-back risk is only part of the equation when it comes to their credit overlays. As Chase executive Kevin Watters said a couple of weeks ago in a webinar he participated in with NAR, Chase’s credit overlays are based on its own internal analyses of how well borrowers do under its different loan products. It’s “less about repurchase risk and more about borrower ability to repay,” Watters said during the webinar. “We look at payment history on a specific program, so even though agencies say, ‘Here’s our credit box; it’s okay for you to sell to us,’ if our data indicates that the default rate is high for a borrower with a particular credit profile, we won’t make that loan. Even if the agencies’ credit box is a little wider than ours, we want to make sure we’re comfortable with it.”
Still, action taken yesterday by the Federal Housing Finance Agency (FHFA), the conservator of Fannie and Freddie, could go some way in addressing banks’ concerns over buy-back risk. In a release it issued yesterday, FHFA set out language that clarifies when Fannie and Freddie will, and will not, require lenders to buy back their loans.
Among the clarifications it issued is a 36-month performance standard, in which Fannie and Freddie won’t seek loan repurchases if borrowers make 36 months of consecutive, on-time payments.
For refinance loans that are originated under federal Home Affordable Refinance Program (HARP) guidelines, borrowers only need to make consecutive, on-time payments for 12 months. HARP is the federal program enacted during the mortgage crisis to give incentives to lenders and servicers to refinance loans of underwater borrowers. Borrowers get incentives, too.
The release also says Fannie and Freddie will start their quality control reviews earlier, make more information available to lenders about exclusions to their “rep and warranty” requirements, and provide more tools to keep lenders in compliance.
The new policy takes effect for loans originated beginning Jan. 1, 2013.
“We have listened to lenders and heard their concerns about the repurchase process,” FHFA says in an FAQ it distributed as part of its release.
NAR is looking at the changes and will provide input as needed once it has a better sense of how effective they’ll be at improving the lending environment for home buyers.
Commentators, bloggers, and the Twitterverse have been abuzz with praise for the rousing speeches coming out of the Democratic National Convention in Charlotte, N.C., this week, culminating Thursday night with President Barack Obama accepting his party’s nomination. But now that the political festivities have come to a close, where did housing fall in the ranks of Democratic priorities?
Although not as prevalently spotlighted as jobs, healthcare, or education, housing—specifically the mortgage interest deduction (MID)—did receive a nod in Obama’s acceptance speech.
“I refuse to ask middle class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut,” Obama said in his acceptance speech. In a jab at what Democrats see as a Republican platform that favors the wealthy, Obama said, “I want to reform the Tax Code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000—the same rate we had when Bill Clinton was president, the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a whole lot of millionaires to boot.” Continue reading »
Representatives from the National Association of REALTORS® were in attendance at both the DNC and RNC, appearing and speaking at various real estate-related forums in support of housing issues.
During the North Carolina and Charlotte REALTOR® associations’ breakfast Wednesday welcoming member delegates, First Vice President Steve Brown of Dayton, Ohio, celebrated the increasing strength of real estate markets nationwide. With five consecutive months of sales increases, home sales are currently up 10.4 percent over last year, he said.
Outside the DNC
“This is the first time we’ve seen five consecutive months of sales increases since 2006,” Brown said. “So if anyone asks you, ‘Are we better off today than we were four years ago?’—even though I represent the REALTOR® Party, I’m here to tell you that yes, we are.”
Looking ahead at 2013, whether it’s Obama or Romney who wins the election, Brown was clear on the issues at hand for REALTORS®: distressed properties and releasing shadow inventory into the market, addressing tight lending standards, and preserving the mortgage interest deduction. Continue reading »
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