Sunday, February 13, 2011

Obama proposals on mortgages worry real estate pros | McClatchy

Obama proposals on mortgages worry real estate pros | McClatchy: "MIAMI — Mortgage rates could rise and the federal government would play a much smaller role in the housing market, according to proposals outlined in a much-anticipated report released Friday by the U.S. Treasury Department.

In South Florida, foreign investors and all-cash buyers have played a disproportionate role in the housing market in the past year, as a tight credit market, high unemployment and a foreclosure crisis have turned traditional home buyers into a minority.
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And elsewhere around the country, other unconventional, all-cash buyers such as newly-formed real estate syndicates are buying up many properties. They are purchasing blocks of condo units and taking over associations. This is creating some interesting situations for the remaining owners who actually live there.

Aside from those problems, consider how disrupted the housing market still remains, going on five years after prices began to tank and three years after the economic crash began. Housing prices are still falling. Mortgage rates are rising. Banks are reluctant to lend, despite having been given access to virtually free money from the Fed. New housing starts are near historic lows around the country. Unprecedented numbers of owners are underwater on their mortgages. Sales of foreclosed properties make up the bulk of the market in many places, and there are many more foreclosures to come this year. The real estate development industry is in disarray. There are zombie HOA subdivisions and condo buildings, unfinished and largely empty, all over the nation. Untold (because there are no public records) thousands of condo associations and HOAs around the country are failing. Local governments still haven't awakened to the reality that mandating CID housing is a bad idea and no doubt plan on continuing to do it when they can.

I am not opposed in principle to re-privatizing Fannie and Freddie in some fashion. I see how it would limit taxpayer exposure to loss from bad mortgages, which is a good thing. But I don't see how it will fix the horrific situation of the housing market, and it could very well make things worse if it causes mortgage interest rates to spike, which I think it will.

And consider recent history. From 1995 to 2008, the relationship between public and private entities in real estate is exactly what crashed the housing market and the economy.
Now, what exactly do the Obama people want Fannie and Freddie to do? What do they want private corporations to do? How are they going to get them to do it? What is the model? They don't know. They have three different proposals, all of them equally vague.

I see only a few certainties:

1. As it stands, the taxpayers still will have to bail out Fannie and Freddie to the tune of at least $150 billion, on top of all the other bailouts we are responsible for (and will spend a generation or two paying off). Depending on how long this redesign takes (and I think it will be much longer than the 5-7 years they are talking about), that amount could grow enormously.

2. If private banks and mortgage companies are going to be operating with less of a federal safety net, they will raise mortgage interest rates and other charges. This is inevitable.

3. This is a long-term policy. It will take many years for risk-averse private lending institutions to get into the business of buying mortgages from the initial lenders and doing all the other insurance and securitizing and off-loading things that Fannie and Freddie do.

4. Therefore, the policy will not be coherent. It will eventually be taken over by Republicans, who will want to push it in different directions than the Democrats. It will end up being a huge political football. This is an $11 trillion dollar market.

5. And all of that means there will be many unintended consequences, and we are headed into a Brave New World in which the federal role in the housing market is being completely reconsidered.

3 comments:

Fred Pilot said...

2. If private banks and mortgage companies are going to be operating with less of a federal safety net, they will raise mortgage interest rates and other charges. This is inevitable.

3. This is a long-term policy. It will take many years for risk-averse private lending institutions to get into the business of buying mortgages from the initial lenders and doing all the other insurance and securitizing and off-loading things that Fannie and Freddie do.
---------------------------This is ultimately about returning to realistic mortgage underwriting standards. We can't have a market as big as residential mortgage segment essentially operating without underwriting standards and then proceed to take down the entire economy with it when it becomes clear the mortgages it generates are worthless.

In addition, a return to prudent underwriting is critical for the survival of the secondary mortgage market since the value of its mortgage securities is only as good as the front end Main Street underwriting by primary lenders.

Anonymous said...

"Untold (because there are no public records) thousands of condo associations and HOAs around the country are failing."

Thank goodness!

"I am not opposed in principle to re-privatizing Fannie and Freddie in some fashion. I see how it would limit taxpayer exposure to loss from bad mortgages, which is a good thing."

How can it limit taxpayer exposure when the unwritten rule is that the government will step in to bail out every time? Consider the current fiasco.

Evan McKenzie said...

I'd say there's no point in re-privatizing Fannie Mae unless it means the end of the unwritten rule.