A boost for refinancing mortgages

The following is a piece I wrote for the News and Observer and that it where it was originally posted.

Since January 2009, decision-makers in Washington have been hit or miss when it comes to solving the housing crisis. Perhaps a more accurate portrayal is that there have been a lot more misses than hits.

During this political season it is common for both parties to talk about what they will do after the election for jobs, the economy and the housing market. What they seem to forget during the election season is that work can still be done.

In the coming weeks, North Carolina Sens. Richard Burr and Kay Hagan will have a chance to do that work and assist struggling homeowners in this state by helping them to lower their interest rates.

Nationally, almost a third of homeowners are “underwater” on their mortgages, meaning they owe more than the house is worth. Despite historically low-interest rates right now, these homeowners are often saddled with higher interest rates because they cannot refinance while underwater. Many other families cannot refinance either, because the closing costs and fees are too high.

Burr and Hagan will have a chance to act on a package of three bills in the Senate – Sens. Barbara Boxer and Robert Menendez’s Responsible Homeowners Act, Sen. Dianne Feinstein’s Expanding Refinancing Opportunities Act and Sen. Jeff Merkley’s Rebuild Equity Act – that would impact the economy and the housing market.

This package would allow all homeowners to refinance into today’s low rates, including Fannie Mae and Freddie Mac loans, by expanding the Home Affordable Refinance Program to remove restrictions on who is eligible. Homeowners would also be allowed to refinance to a 20-year mortgage and keep the same payment; this allows underwater homeowners to get “above water” faster with more money going to principal.

Finally, the high closing costs that prevent many from refinancing would be eliminated because the federal government would cover them. All homeowners who are current and have a 580 FICO score would qualify.

In North Carolina alone, 368,962 families would qualify and save on average $2,900 a year, according to a recent report by the Center for Responsible Lending. That is a savings of over $1 billion in lower mortgage payments that can affect our state’s economy. Across the nation, over 4 million homeowners would be able to save over $10 billion; this not only saves homes from potential foreclosures and abandonment but also puts millions of families on more stable financial ground.

The mortgage crisis isn’t over yet, and the decision-makers in Washington need some hits to make up for all their misses. This is work that can be done now, and is more important than empty campaign promises. Homeowners can’t wait until after the election, while the housing market drags down our state’s economy.

This is not an end-all solution, but a first step in the right direction. If we want to truly address the housing crisis, we can’t just help those behind on their mortgage; we must also help those who make their payments despite higher rates and being underwater. Burr and Hagan need to take a stand for our state’s homeowners and economy and support this package of bills.


Why Housing is going to Struggle

I have written several times about the housing market from several different directions, and so I wanted to share another voice on the issue.  The following post is written by Adam Rust and is a cross-post from www.banktalk.org.  I would encourage everyone to follow his blog as well for more in-depth analysis of the financial world.


Today I am going to argue why housing prices are going to stall.

It is an argument based on a few “big stories.” The first reason is that people are not forming households like they have in the past. Unfortunately, the problems are compounded by a significant difference in the asset base of future buyers. Growth in household formation has been on hold. How long can people put off buying a home?

Today I am going to list a few reasons why housing prices are not going to recover anytime soon. There are a few problems in play. The root of the issue is household formation. If you think that people are finally going to start trying to set out on their own, then you are probably optimistic about housing. If you think it is the other way around – where people are going to stay put – then you are probably skeptical.

Household formation is a product of jobs. When a person gets a steady job with a decent paycheck, they can start looking for a place to live. It is also a product of household leverage. No one with student loans and no job decides to rent an apartment if they can instead live with their parents.

For a long time, more and more Americans have been setting off to have their own place. Back in the 50s, the average household consisted of 3.6 people. Now that number is just 2.6. It isn’t for a lack of room, either. Houses have been getting bigger. The idea that people are going to get a place to live just because they are tired of sleeping in a guest bedroom does not hold up.

The decision to move into a home of your own is driven by economics.

Economics is also the driver of whether or not you decide to buy a home or to rent. Sometimes people rent because they want to remain mobile, but more often they do so because they don’t have enough money saved to make a down payment.

The force of demography cannot be ignored: In the future, the renting or owning decision will be further factored by demographics. Simply put, the kinds of people who are going to be forming households in the near future are most likely going to be people without a lot of money. Harvard’s Joint Center for Housing Studies says that minorities will make up 7 of every 10 new households over the next decade. This is no knock against people of color. It is just an unfortunate fact that wealth isn’t distributed equally across lines of color. It actually growing more and more disparate. According to Pew, assets held by white households are now 19 times greater than those held by African-Americans and about 17 times that of Latinos.

Voila! More renters and fewer buyers. Homeownership rates are already less than half for Latinos and African-Americans.

Fewer immigrants are coming to America.

The jobs problem spills over to demographics, as well. According to the Census Bureau, the number of new immigrants has dropped during each of the last four years. There were 400,000 fewer new immigrant households coming to America by 2010, relative to 2007. If all of those people bought a home or rented a house, the pace of household creation would go up 25 percent. They didn’t, though, and home prices are going nowhere.

There is a cascading effect when first-time homebuyers are shut out of the market: It becomes a real problem for sellers when the people offering to buy your home can not put down three percent. The GSEs have abandoned that segment of the buyer market and private mortgage-backed securities seem unlikely to be the destination for those loans. In effect, new households won’t be home-buying households. They will be renting households.

That means that housing prices are going to stay depressed. Investors will move in as home prices fall, but the market for single-family rental housing is never going to reach an economy of scale that attracts real capital. Single-family renting is largely a habit of “mom-and-pops,” because it takes so much time to find tenants, collect rents, and maintain property. Black Rock and Goldman Sachs don’t want to own single-family housing. They will buy multi-family units where ongoing costs are lower, but they’ll need a lot of coaxing before they buy a scattered assortment of ranch homes in El Paso and Fayetteville.

Less capital means lower prices for homes.

Until we can find a way to reconcile the needs of the GSEs with the economic interest of the housing market, then home prices are going to be stay low. For the last several years, the GSEs have been doing their best to step away from low-down payment buyers. The Loan Level Pricing Adjustments have been under the radar ever since they were established in 2007, but they drive the forces that make it hard to get a loan. The LLPA rules make it difficult for anyone but 720 plus credit score borrowers to get a home with less than ten percent down.