Real Estate: Can Falling Pay Support Rising Home Values?

New CFPB Form Cuts Borrower CostsThe real estate market is always a jumble of facts, stats and rumors. Each year seems to produce a fresh and fertile crop of worries and troubles, so I’d like to take a look at today’s pressing issues to see what’s real and what’s not. And get ready because there is one worry which is both real and hits at the heart of real estate.

Mortgage Requirements Are Too Tight

First, you have to admit, they just don’t make mortgages like they used to. The Mortgage Bankers Association tells us that its Mortgage Credit Availability Index (MCAI) stood at 113.5 in February, down from roughly 800 in 2007.

It’s true that credit standards were far-more relaxed in 2007 but let’s not ignore the COST of loose credit:

  • Lenders have paid out more than $100 billion to settle claims that representations and warranties from the go-go days of no-doc loans and toxic mortgages were allegedly subpar — and more settlements are on the way.
  • Home values have yet to recover — the Federal Housing Financial Agency says that residential real estate prices in February 2014 remained well below the prices seen in April 2007.

Here’s what happens if we bring back the good old days of 2007 and again loosen mortgage standards too much: Mortgage investors, the people with money, will reduce their purchases of mortgage-backed securities. The result is that mortgage rates will be pressured higher and real estate sales and values will be pressured down as marginal buyers fall out of the market.

Conclusion: Don’t be so quick to ignore the benefits of “tight” credit, what used to be called common-sense mortgage underwriting. At the same time, don’t forget the costs to everyone which resulted from the lower and looser application standards that helped fuel the mortgage meltdown.

The FHA Is In trouble

We keep hearing that the FHA is in trouble. If true it’s a big problem because according to Ellie Mae FHA loans represented 22 percent of all closed loans in February. HUD says that at the start of 2014 there were 7.8 million FHA loans outstanding.

Because it’s an insurance program the FHA maintains a reserve to cover claims. The reserve is supposed to equal 2 percent of all loans in force but the actual level is far lower. Indeed, HUD borrowed $1.7 billion from the Treasury last September to shore up the reserve fund.

So is the FHA program a deficit-plagued Ponzi scheme that’s soon to burst? Here are three facts you want to know:

First, the FHA had some $48 billion on hand as of October. In cash. It had to borrow from the Treasury because of arcane accounting requirements that do not fully recognize how the program has evolved or how much cash the FHA actually has in a vault. As well, it should be pointed out that not a single FHA claim has ever gone unpaid since the program was established in the 1930’s.

Second, the FHA has been profitable since 2010. The problem loans — the loans creating losses — were originated between 2000 and 2009. This year the FHA is likely to report a gross profit of $12.2 billion according to the Community Home Lenders Association. In fact, the FHA is so healthy CHLA wants HUD to cut FHA mortgage insurance premiums starting next year, something which would greatly help the real estate industry. (For context, consider that Google — no slouch when it comes to profits — had a net income of $12.9 billion in 2013.)

FHA Profits By Year

Third, the next time someone moans about the FHA and its finances, remember this: The FHA is required to maintain a 2-percent cash reserve to ward off claims during the next 30 years based on assumptions made today, perhaps by soothsayers and fortune tellers. Meanwhile the FDIC has cash reserves equal to 0.35 percent of the more than $7 trillion in bank deposits it insures and you don’t hear a word about it. Apparently, what’s good for the goose is not worth mentioning when it comes to the gander.

Conclusion: Worries about the FHA are — you guessed it — overblown.

Mortgage Rates Are Too High

We keep hearing about today’s “higher” mortgage rates. The fact is that mortgage rates in 2012 reached their lowest point in 65 years.

However, the idea of “higher” rates must be seen in context.

Are rates higher in 2014 than in 2012? Yes.

Are today’s rates high? No. According to Standard & Poors, the typical mortgage rate during the past 40 years was 8.6 percent — about double today’s rates. Freddie Mac says that the cost of a $200,000 mortgage in early 2014 is about $240 less than the same loan a decade ago.

Conclusion: Worries about today’s mortgage rates are — you guessed it again — overblown.

The Foreclosure Crisis Is Over

RealtyTrac reports that foreclosure activity in February reached its lowest level in seven years. MBA says that more than 90 percent of all seriously-delinquent mortgages stem from loans made before 2009.

Things are vastly better than they used to be but we’re not out of the woods yet.

Here are two examples:

First, short sales and foreclosures remain a big part of the marketplace. According to NAR, distressed sales represented 16 percent of all existing home transactions in February. These are homes that sell at discount so they impact neighboring home prices — and not in a good way.

Second, as of this writing Congress has refused to extend the Mortgage Forgiveness Debt Relief Act of 2007 meaning that distressed borrowers have less incentive to pursue short sales and deeds-in-lieu of foreclosure. The result will be more foreclosures than necessary and that helps no one.

Without foreclosure relief unpaid mortgage debt will now be considered taxable income. Imagine if Smith has a $200,000 loan but loses his home to foreclosure because his employer goes out of business. The sale of the property brings the lender $150,000 but without MFDRA the $50,000 in unpaid debt will now be regarded as taxable income for Smith.

Does this make sense to anyone? Will the government collect a dime going after a homeless and unemployed Mr. Smith? Does Smith have any reason to speed the foreclosure process or has he now been encouraged to fight the lender for months and perhaps years?

RealtyTrac Vice President Daren Blomquist tells us that in January the nation’s lenders held almost 525,000 REOs, a huge number and an inventory which will need to be substantially reduced before the housing market can fully return to better times.

Conclusion: We’re doing much better on the foreclosure front but persistent problems remain and we can do a lot better. This is an issue to watch.

The Real Threat To Home Prices

We know that existing home prices have risen 9.1 percent in the past year according to NAR, but can such a pace continue?

Not likely.

Pending home sales have declined for the past eight months. The S&P/Case Shiller Index tells us that while prices are up better than 13 percent during the past year, as of January home prices declined in 12 of the 20 major cities it follows. NAR’s latest metro housing report showed that in fourth quarter home values rose in 119 out of 164 metro areas. The same report also showed that values fell in 43 major population centers. Two were even.

And here’s one more: The Federal Housing Finance Agency says that home values rose 7.4 percent during the last year. It also tells us that home values today remain 8 percent below the 2007 peak.

Why is it that SEVEN YEARS later home values have yet to recover from the foreclosure meltdown? The answer is that there’s a brake in the marketplace: Household income in 2012 was 9 percent lower than in 1999 according to the Census Bureau and you have to ask: How can home values rise when take-home pay is falling?

Conclusion: Shrinking household incomes are a big deal. Without more jobs, better pay and more confidence a lot of potential buyers will never enter the marketplace.

No less important, many owners who now have financing will never move because they worry about taking on new debt in an environment where the workplace looks uncertain.

When you’re done sorting through all the polls and charts, the pressing issue which should most concern brokers, builders and lenders is the matter of jobs. That’s because — in the end — the future of the paycheck is the future of real estate.


From a speech presented by syndicated columnist and author Peter G. Miller before The Realty Alliance at their April 2014 meeting in Annapolis, MD. The Realty Alliance represents more than 100,000 real estate professionals nationwide. Copyright 2014 Peter G. Miller. All Rights Reserved. 

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