Looking at 2017 – Perspectives on Housing  

Much has been written about the impact of rising rates on mortgage volume but, more importantly, housing. To help think about the next year I would suggest we consider some of the facts about the market today. This starts with us focusing on just a few key variables that will likely be positive for all housing demand rental and owned. Please remember that the economy always has risk and uncertainty, but these variables are fact based and important elements for consideration as we look into the next year:

  1. Perspective: While rates are rising from their lows, they will remain at the very low end when compared to a decades long historical look at 30 fixed rate mortgages. To highlight this, take a look at this historical perspective of Freddie Mac’s 30 year fixed rates going back to the 1970’s as tracked by the St Louis Federal Reserve. As you will see below, rates in the 4%-5% range still pose great opportunity for home buying when you compare to any historical perspective. In fact, looking at history, one could argue that rates have more risk of rising than declining, especially in this growing economy. My assumption – borrowing now is still a bargain and will remain so for this next year.
  2. Demographics: As PEW Research showed in their April, 2016 release (Millennial overtake baby boomers) the Millenial generation is now larger than the baby boom generation and significantly larger than Gen X which created a more sluggish interlude between the two larger generations. The point here is this massive generation is here now and will dominate housing demand, new job formation, and spending in this country for the next couple of decades. Just look at this simple chart from Pew. Looking out to 2050, this younger generation will create a consistent demand for housing units, both rented and owned.
  3. Homebuying sentiment: As many economists have proven through good research, Millenials want to own at some point. As an example, look at this research from Fannie Mae on homeownership sentiment for millenials. As of this survey in 2014, in an economy not as strong as 2016, 90% of young renters want to own at some point:  

Conclusion? Low rates in historical terms, impacts on housing demand by the largest generation in history, and a desire to own, are all data points that lead to forecasts by the MBA and others for continued home purchase mortgage demand for the next decade, growing at a steady pace. MBA forecasts mortgage purchase volume growing from approximately $990 bb in 2016 to $1,245bb in 2019. Likewise we forecast annual appreciation at steady rate between approximately 5% – 3.5% each year.

The greatest element to all of this is that this demand cycle for housing will be built in a world of qualified mortgages; fully documented, sustainable homebuyers, will be completely unlike the housing bubble of a decade ago which was built on many unsustainable programs. This foundation should help comfort consumers considering homeownership that they are not buying into an irrational market. This cycle ahead starts with a strong, credible, foundation and simply good demographics. As a matter of fact, one of our greater concerns will be access to credit for entry level buyers and availability of affordable first time homebuyer housing stock, and affordable rental housing near key employment markets and mass transit, but that is for another discussion.

Some thoughts to consider as you look ahead to 2017. Happy Holidays!!

Housing Recovery?


The facts are clear; The housing market is in a period of stabilization. Home values are increasing in many markets http://finance.yahoo.com/news/us-housing-inks-another-uptick-102324993.html, foreclosure sales have risen and are at price levels near BPO (broker price opinion), and consumer confidence is rising. Home sales in August 2012 increased 7.8% – the highest level in two years. Should we claim victory? Maybe – and maybe not. Lets look at a few of the things we should be considering:

1. The Economy and Unemployment – Ultimately for Americans to buy they need good credit, a job, and a down-payment. With unemployment rates in the 8% range, we still have a long way to go before we can view the employment market as a positive contributor to the housing sector. Household formation is still far below normalized levels as Americans delay moving into their own home. The US has had a significant decline in new household formation driven by the economic slowdown. Until the unemployment numbers return to normalized levels, this will remain as an issue to watch.

2. Deficit and the fiscal cliff. As of June 2011, the US ranks as the nation with the single highest amount of debt, closely behind the combined European Union. http://en.wikipedia.org/wiki/List_of_countries_by_external_debt. How we address this issue will affect the rating of our countries debt, the drain on available revenues as we pay interest on this debt, and will most certainly delay or impair any hope for long term recovery. Looking at the table in the link above clearly reflects the question as to why we should think our path may differ from that of so many EU nations. For each $1 trillion in debt, a 5% difference in bond rates caused by a ratings downgrade could result in $50 billion in annual cost. This concern may not be far from reality. Today (9/24/12) the US 10 year is 1.62%, the the Italian 10 yr is at 5.19%, and the Greek 10 yr is at 19.2%. Our yields are low today, but could they rise suddenly? We benefit today from two things. First in a relative sense we are far stronger so ‘flight to quality” benefits us. Second, some investors of US debt help drive the yields lower. Asia depends upon us a as a consumer of their goods so keeping our debt low, by buying it, creates more consumer demand. This cycle cannot continue long term especially if the China economy slows. How we deal with this issue in the next congress may be the single most critical issue for this country to address.

3. Regulatory uncertainty and access to credit. Fed Chairman Bernanke said in Feb 2012, “In the housing sector, affordability has increased dramatically as a result of the decline in house prices and historically low interest rates on conventional mortgages,” Bernanke said. “Unfortunately, many potential buyers lack the down payment and credit history required to qualify for loans; others are reluctant to buy a house now because of concerns about their income, employment prospects and the future path of home prices.”

The fact is that credit tightening is directly associated with the risks of making a mistake that might result in violating a new regulation, litigation, or repurchase. In fact, in the same speech Bernanke said, “We had risk-amnesia going into the crisis and I think now we’ve gone a bit too far in the other direction,” he said. Bernanke said Fed surveys show that even when home buyers can make a 20 percent down payment, banks are often reluctant to offer mortgage money to any but the best qualified. “Most banks indicated that their reluctance to accept mortgage applications from borrowers with less-than-perfect records is related to ‘put-back risk’ – the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way,” he said.

The fact is that the opportunity for a true recovery, one that is long term, exists for the US Housing market. Attacking unemployment, addressing the deficit in order to protect our credit rating and control the use of tax revenues, and eliminating uncertainty in order to expand credit – these are three of the big ones that go beyond party and politics.

The Risk of Excess


If there is one thing that this past decade has taught us, it’s that excess and layering of risk without objective and balanced oversight can lead to systemic failure. We have learned this painful lesson resulting in an approximate 34% peak to trough home price decline.

The combined impact of the actions, or lack of action, by lenders, investors, realtors, borrowers, regulators, rating agencies and legislators has destroyed trust, eradicated personal wealth, and brought the economy to the brink of complete failure.

The fact is that this lack of trust is what has motivated the most extensive intervention in all aspects of housing finance that the nation has ever seen. Multiple regulators, legal agencies, legislators, states attorneys, private class action lawyers, and more have all decided to respond to the mistakes of the past with their own interventions. Legal action, mass settlements, new regulations relating to literally every aspect of the housing purchase process are being addressed. The result will be an entirely changed system; one that is still uncertain, but one that will certainly involve greater disclosure, more oversight, and stiffer enforcement…..

And tighter credit resulting in less access to homeownership.

The qualified mortgage rule as written in the Dodd Frank legislation requires lenders to prove “ability to repay” or be faced with the most costly penalties on a per loan basis ever enacted. With the potential per loan penalties so high, lenders of the future from community banks to credit unions will have one rule: don’t make any loan that could be determined by any court as violating the “ability to repay” provision or you will face costly fines.

So, what determines “ability to repay”? Right now the CFPB is trying to define that. I do know that wealthy borrowers with lots of assets and big down payments – the 1% – will certainly be able to prove that ability. They have disposable income after expenses, lots of money in reserve just in case something arises, and likely a good credit history.

But what about the rest of America? Middle class workers who didn’t get an inheritance, families with stable jobs who want to own a home but don’t have the large monthly residual income, or non traditional households with multiple income sources or cash income or variable income? Will banks lend to these families and face the risk that if one family defaults in the future a court could rule that they did not meet ability to repay provisions required by law, and slap the lender with an enormous penalty?

The Kennedy school at Harvard released their “state of the nations housing” and forecasts approximately 14 million new households in the next decade. Much of this growth will come from the Hispanic community and first time homebuyers. The question is whether the rules being created to protect these future borrowers will elimante their ability to buy at all.

Excess. We let the pendulum swing too far and created too much risk and we are all sharing that outcome. Excess works both ways. We need strong consumer protection and clear transparent disclosure. The question is will we simply end up with homeownership for the wealthy? In the end we cannot force banks to lend. They won’t lend if the risks of penalties are too great. Creating accountability is critical but so is maintaining access to homeownership itself.

Excess works both ways and systemic impacts occur on either side.

QRM – Progress on a rule with good intentions but potentially very bad outcomes

QRM Progress

By Brian Collins
FEB 3, 2012 5:17pm ET
QRM: It May Be Back to Square One

By Brian Collins
FEB 3, 2012 5:17pm ET
Federal banking agencies seem to be making little progress in promulgating regulations that will set the ground rules for a revival of the private label MBS market.

The Dodd-Frank reform bill passed in 2010 created two inter-related rules to regulate mortgage lending. One sets an “ability to repay” standard for lenders, and the other determines which “qualified residential mortgages” are exempt from risk retention.

Six regulatory agencies working on the QRM rule issued a proposed rule in March 2011, but the measure immediately ran into a buzzsaw of criticism because it would require MBS issuers to retain 5% of the credit risk if the underlying loans don’t have a downpayment of at least 20%.

The Mortgage Bankers Association, and National Association of Realtors are only two of the many groups that want the regulators to withdraw the QRM proposal and return to the drawing board.The current QRM proposal will restrict access to credit for working class borrowers, including teachers, policemen and firefighters, unless the 20% downpayment requirement is eliminated, MBA chief executive David Stevens told a meeting of U.S. Mayors in late January. The downpayment restriction is “a direct attack on first-time homebuyers, African-American borrowers and Latinos,” Stevens said.

Some industry officials estimate the markup on a non-QRM loan would be 300 bps higher than a QRM loan. (The Dodd-Frank Act exempts Fannie Mae, Freddie Mac and Federal Housing Administration from the QRM rule.)

In early December, acting Comptroller of the Currency John Walsh told a Senate panel the regulators are still “grappling” with a set of issues related to the QRM rule. Nearly two months later, comptroller Walsh told an American Securitization Forum conference the regulators are still weighing several issues, including drafting a new proposal instead of issuing a final rule.

Sources told National Mortgage News the regulators are going to pull the QRM proposal and issue a new proposed rule for public comment.

“There are signs the QRM rule may go back to the drawing board,” Stevens told reporters last week.

Meanwhile, the Consumer Financial Protection Bureau is working on the “ability to repay” standard which is called the “Qualified Mortgage” or QM rule.

The Federal Reserve Board issued a QM proposal last spring before the CFPB was up and running. Now the CFPB has assumed sole jurisdiction over the QM rule, which will determine the kind of loans (and loan features) lenders can offer without facing potential legal liability of up to $100,000 per loan.

The rule likely will eliminate no-documentation, stated-income, non-amortizing loans, option ARMs and balloons from the marketplace.

The CFPB is working toward finalizing the QM rule during the second quarter. The QM establishes the outer boundary of lending standards while the QRM rule determines which QM loans are exempt from risk retention.

In other words, Comptroller Walsh and his fellow regulators need to have the QM rule in front of them before they can finalize the QRM rule.

However, CFPB director Richard Cordray and his staff still need to make key decisions regarding lender liability.

MBA, the American Bankers Associations and other groups are calling for a safe harbor provision that will shield lenders from lawsuits if they fully comply with QM rule. “Without a safe harbor, no lender will go anywhere near the line that is established in the QM rule,” Stevens said.

The Fed’s QM proposal included a “rebuttable presumption” alternative that is not as airtight and would make lending more risky.

Last week, CFPB director Cordray told the Senate Banking Committee that he is considering this issue. “I don’t have an outcome for you today,” Cordray testified. He noted that most lending institutions would like a safe harbor so the rule does not create litigation risk and uncertainties. “Others have taken a different point of view,” he added.

The consumer bureau director noted that the QM rule “intersects” with the QRM rule. Other regulators are waiting to see what language he comes up with. “We know we need to move it along,” Cordray said.


Freddie ‘betting” against consumers – Really?


The latest flurry of stories about Freddie Mac and their use of interest rate floaters is one example of how very technical aspects of the mortgage backed securities market can be used to create greater turmoil unnecessarily. The story below gives further detail of the accusations, but let me try to explain how inverse rate floaters are not only common practice, but without them, mortgage rates on 30 year fixed rate mortgages would likely be higher.

Many investors have interest in owning government guaranteed securities, but due to charter restrictions or other investment management restrictions, are not investing in long term instruments. As a result, mortgage backed securities will often be structured into two pieces. One is a short term, variable interest, piece often tied to LIBOR for these investors. The GSEs then have to find investors for the remainder of the interest rate strip. Here’s an example: Suppose it’s a 4% fixed rate and the primary investor wants to buy a mortgage security (due to the guarantee) but can only go short term. The rate they may be paid for their short term investment may be, say, 1%. The other 3% then will be sold to another investor who is willing to invest for the difference in term.

This second piece is structured into something called an inverse floater. These will be sold to any number of investors and sometimes the GSEs will by them. There is nothing sinister here, it’s simply the only way to get investors to buy mortgage backed securities. While many investors may want to buy only government guaranteed bonds such as Treasuries, GNMA, of Freddie/Fannie MBS, most do not want to lock up their funds into a long term investment for 30 years. This “structuring” keeps money flowing into mortgages but, more importantly, keeps 30 year fixed rate mortgage product avaliable for consumers to buy homes.

Look, I am not defending the GSEs here, just telling the facts about this latest accusation related to a practice that all GSE’s do and have done for years to keep liquidity coming into the mortgage market. Without this practice rates would simply be higher due to lack of buyers for the mortgage bonds.


Report: Freddie Mac bets against homeowner refinancings

NPR and ProPublica investigation shines light on investment practices

By Inman News, Monday, January 30, 2012.

Inman News®

<img title=”Freddie Mac headquarters image via Shutterstock.com.” src=”http://www.inman.com/files/imagecache/article-photo/files/imagefield/shutterstock_15108172.jpg&#8221; alt=”Freddie Mac headquarters image via Shutterstock.com.” />Freddie Mac headquarters image via Shutterstock.com.

In 2010 and 2011, mortgage giant Freddie Mac invested billions of dollars on bets that homeowners with high-interest mortgages would not be able to refinance at today’s lower interest rates, according to a joint investigation conducted by NPR and ProPublica, a nonprofit, independent news agency.

While legal, the bets appear to be in direct conflict with the taxpayer-backed company’s public mission, as stated on its website, “to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing,” the news agencies said, noting that refinancing terms have been getting more restrictive of late and include higher fees and new rules that prevent some homeowners from taking advantage of historically low interest rates.

Freddie Mac is regulated by the Federal Housing Finance Agency (FHFA). Officials at both Freddie Mac and FHFA repeatedly declined to comment on the specific transactions, the news agencies said, though Freddie Mac did say that its employees who make investment decisions are “walled off” from those who determine the terms under which homeowners can get loans.

And in a written statement, Freddie Mac said it “is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates,” noting that it refinanced loans for hundreds of thousands of borrowers in 2011, according to the news agencies’ report.

HousingWire writer Jacob Gaffney accused NPR and ProPublic of conducting a “witch hunt” of Freddie Mac……..read rest of story in link

Latest announcement on HAMP expansion

The expansion of HAMP to pay more for principal write down and to specifically pay the GSE’s may actually move that needle (The story below gives some greater detail). The latest announcement still makes principal write down optional, and does not add more to the budget as this change repurposes already accounted for TARP funds, but the added incentive and expanded use may motivate more activity in the program.

The subject of principal write down provokes much debate amongst stakeholders with some against based on moral hazard, fairness, and role of government concerns. Others feel that the housing market and the economy cannot get back on track without more use of principal write downs. Experts like Laurie Goodman of Amherst Securities and Mark Zandi of Moody’s have been vocal about the need for principal write down especially in states that are severely underwater such as Nevada and Florida.

Regardless of view, we now will see if this motivates the GSE’s to participate. Remember, it remains voluntary and so far FHFA has said that they will not allow the GSE’s to participate in principal write down programs offered by the administration.

Obama administration expands foreclosure prevention program

By Les Christie @CNNMoney January 27, 2012: 7:56 PM ET

NEW YORK (CNNMoney) — The Obama administration is taking another swing at improving its main foreclosure prevention program.
The administration said it was expanding eligibility for its Home Affordable Modification Program, known as HAMP, to borrowers with higher debt loads and tripling the incentives it pays banks that reduce principal on loans.
The administration also said it would offer incentives to Fannie Mae and Freddie Mac to reduce principal on loans. Previously, the government had only offered incentives to private lenders and banks. The program was also extended to December 2013. It was initially set to expire at the end of this year.
The changes were announced in a joint press conference held by Housing and Urban Development Secretary Shaun Donovan, Assistant Treasury Secretary Tim Massad, and White House National Economic Council Director Gene Sperling on Friday afternoon.
Originally designed to help some 4 million mortgage borrowers when it was first introduced in February, 2009, HAMP has helped fewer than 1 million homeowners.
Has Obama’s housing policy failed?
With these changes, HAMP is turning into an “all of the above strategy to help responsible homeowners lower their costs and stay in their homes,” said Gene Sperling, the Director of the National Economic Council, who also took part in the press conference.
Here’s a rundown of the new changes:
Expansion of eligibility: HAMP was designed to bring the debt ratio of mortgage borrowers down to 31% of their incomes. Those whose mortgage payments were already below that level had been ineligible for a modification. They may qualify now. The new guidelines will allow for a more flexible approach that takes other debt into account when calculating debt-to-income ratios.
Extension of eligibility to owners of rentals properties: The old HAMP rules applied solely to owner-occupied homes but now those who own rental properties may also qualify for a HAMP modification.
Triple balance-reduction incentives: The new HAMP will pay between 18 cents and 63 cents for every dollar that lenders take off the mortgage principal, up from between 6 cents and 21 cents.
Pay Fannie and Freddie the same incentives: Currently, Fannie Mae and Freddie Mac do not offer principal reduction plans as part of their HAMP modifications. To encourage this assistance, Treasury said it will pay the same principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.
While the new changes could greatly expand the number of homeowners that receive help from HAMP, it could invite controversy. Subsidizing real estate investors with taxpayer money in a time of rising rents doesn’t makes much sense to Anthony Sanders, a real estate professor at George Mason University, for example.

Yet, HUD Secretary Shaun Donovan said that it doesn’t matter whether the house next door to you is occupied by a tenant or an owner.
“If the house goes vacant, the value of your house goes down $5,000 or $10,000 that day,” he said. “These are major problems for homeowners.”
Following the press conference, the Federal Housing Finance Agency, which oversees Fannie and Freddie, issued a statement that said it would consider the changes to the HAMP program.
However, it noted that an analysis it recently conducted found “that principal forgiveness did not provide benefits that were greater than principal forbearance,” signaling that the housing authority may not support reducing the principal on loans as a way to help homeowners.
No new funds need be allocated for HAMP’s expansion. Since less than $10 billion of the $29 billion set aside for the program has been spent so far, said Timothy Massad, Assistant Secretary for Financial Stability at the Treasury Department. The administration would not hazard a guess at how many more borrowers the expanded program would help.
Foreclosures: America’s hardest hit neighborhoods
The changes in HAMP do not take effect until the end of April, but a Treasury spokeswoman said any struggling homeowners should reach out and seek foreclosure prevention counseling immediately. That way, they can learn their options, which could include trying to hold on until the new HAMP is ready.
Find homes for sale

First Published: January 27, 2012: 5:10 PM ET

Department of Justice and HUD announce details of new task force

Subject: Attorney General Holder announces Interagency RMBS fraud working group

Here are remarks by AG Holder announcing the RMBS Fraud working group mentioned in the President’s State of the Union speech….

Good morning.  Today, I’m pleased to join with so many key partners – including Director of Enforcement for the U.S. Securities and Exchange Commission, Robert Khuzami; Secretary for the U.S. Department of Housing and Urban Development, Shaun Donovan; Attorney General for the State of New York, Eric Schneiderman; United States Attorney for the District of Colorado, John Walsh; Assistant Attorney General for the Justice Department’s Civil Division, Tony West; and other critical leaders – in announcing an important step forward in investigating the financial misconduct – and, specifically, misconduct in the market for mortgage-backed securities – that contributed to our nation’s recent economic crisis.

Along with Lanny Breuer, Assistant Attorney General for the Criminal Division – who, unfortunately, is traveling today and could not be here – the team standing with me will be leading a new initiative: the Residential Mortgage-Backed Securities Working Group, which will operate as part of the Financial Fraud Enforcement Task Force.  This Working Group brings together a variety of federal, state, and local partners – including HUD, the FBI, IRS, Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, and Federal Housing Finance Agency Office of Inspector General.  These, and many other, Task Force members have been conducting investigations into the residential mortgage-backed securities market – as well as related aspects of the housing market – for some time.  And they’ve seen firsthand how massive failures in this market were a driving force behind the nationwide housing collapse that has had devastating effects for investors, consumers, and entire communities.

Beginning with its first full meeting – which will take place immediately after this press conference – the Working Group will streamline and strengthen current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.  I am confident that this new effort will improve our ability to ensure justice for victims; help restore faith in our financial markets and institutions; and allow us to answer the call that President Obama issued earlier this week, in his State of the Union address.

On Tuesday night, the President referenced this initiative, asking us to, “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.”

That is precisely what we intend to do.  And the good news is that we aren’t starting from scratch.

Over the past three years, we have been aggressively investigating the causes of the financial crisis.  And we have learned that much of the conduct that led to the crisis was – as the President has said – unethical, and, in many instances, extremely reckless.  We also have learned that behavior that is unethical or reckless may not necessarily be criminal.  When we find evidence of criminal wrongdoing, we bring criminal prosecutions.  When we don’t, we endeavor to use other tools available to us – such as civil sanctions – to seek justice.  My number one to commitment to the American people is that we will continue to devote significant resources to combating financial fraud and be as aggressive and creative as we can be in holding accountable those who, in violating the law, contributed to the financial crisis.

For example, in just the last six months, the Department has achieved prison sentences of 60, 45, 30, and 20 years in a variety of financial fraud cases charging securities fraud, bank fraud, and investment fraud.   And, just last month, I announced the largest fair lending settlement in history, resolving allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against minority borrowers from 2004 through 2008.

With this new Working Group, we will marshal our civil and criminal capabilities to build on these efforts – by focusing on abuses in the residential-mortgage backed securities market.  I am pleased to report that this Working Group has considerable Department resources behind it as it builds on activities that have been underway through the broader Task Force.  Currently, 15 attorneys, investigators, and analysts – here at Main Justice and throughout our U.S. Attorneys’ Offices – are supporting the investigative efforts that this Working Group will be focusing on going forward.  And the FBI has assigned 10 agents and analysts to work with the group immediately.  In the coming weeks, another 30 attorneys, investigators, and support staff from U.S. Attorneys’ Offices will join the Group’s work.

We are wasting no time in aggressively pursuing any and all leads.  In fact, as part our current investigations, the Department recently issued civil subpoenas focusing on issues related to the market for residential mortgage-backed securities to 11 different financial institutions – and you can expect more to follow.

Of course, I can’t go into detail about our existing investigations.  But I can tell you that significant efforts are moving forward, by both federal and state authorities.  And I can assure you that, if we uncover evidence of fraud or other illegal conduct, we will bring the appropriate criminal or civil charges.

I’m also pleased to report that these teams will be able to hit the ground running.  Already, the Working Group’s co-chairs have met to discuss the structure of our investigative efforts, how teams should and will be organized, and how information can be shared more effectively.

With this focus on collaboration – and by bringing our government’s full enforcement resources to bear – I have no doubt that we will improve our ability to recover losses, to prevent fraud, to bring abuses to light, and to hold those who violate the law accountable.  That’s what the challenge before us demands.  And that’s what the American people deserve.

I want to thank all of our Working Group members for their participation – and their dedication to this effort.  And, now, I’d like to turn things over to one of the leaders of this important work – Director Robert Khuzami.