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FHFA on RE Market - "No Upside"
Patrick Lawler, Chief Economist at the Federal Housing and Finance
Agency spoke to the House Sub-Committee on Capital Markets the other day
(pdf Link). He said some interesting things. My conclusions after reading it are:
-If you own a home, you are screwed. Values are not going to recover anytime soon.
-If you are trying to sell a home, you are screwed. The number of
qualified buyers and the availability of mortgage money are going to
fall.
-If you are trying to buy a home, you are screwed. To get a mortgage
you can afford is going to get harder to find in the near future.
Part of the Dodd Frank FinReg Bill was to require mortgage originators/syndicates to retain 5% of the risk. This is the “skin in the game”
concept. It makes perfect sense. It is designed to minimize the amount
of stinky mortgages that can be originated. It’s hard to argue with the
intent of this rule. But there will be consequences.
Dodd-Frank defined what a good mortgage should look like. They call it Qualified Residential Mortgage (“QRM”). There are stiff hurdles to this definition. EVERY other mortgage (None-QRM) are subject to the risk retention rules. QRM loans are not subject to the new rules.
So what constitutes a QRM? Like I said, its stiff:
*Minimum 20% down.
*Mortgage Insurance can’t be used to make up for the shortfall of real equity by the buyer.
*Owner occupied only.
*Mortgage debt service to income no greater than 28%.
*No prior defaults, judgments or BKs need apply. You have to have a long-term clean financial record.
*Only straight 30-year mortgages meet the QRM definition. No balloon payments, no interest only, no negative amortization.
In my opinion, if these standards were in existence starting around 2000
we would never have had the blowup in real estate that nearly killed
us. There would have been no funny money mortgages. There would not have
been the insane run-up in prices. Therefore the proposed new rules
would significantly reduce the risk of another blowout in mortgage land.
But talk about taking the punchbowl away. How many legitimate (qualified) buyers are left standing when the new rules are applied? The answer is very few.
This chart shows the percentage of loans that were originated in the past that met the new standards of QRM.
Note in this chart that the average number of loans that met the QRM
standards from 1997-2003 was only 20%. When you look at the number for
2007 (11%!!) you understand why we had a crisis. Fully 89% of all mortgage written were, well, junk.
For me, the most significant number is the 35% for 2009. There was a
substantial tightening of mortgage standards, but the amount of “bad” versus “good” was still 2 to 1. As the new retention rules take hold the availability of Non QRM will dry up.
What are the prospects for a potential buyer to get a Non QRM loan? In my opinion it will be slim. If it's available at all, it will be expensive.
Mr. Lawler points to the fact that Jumbo mortgages (loans that are too
large for Fannie or Freddie to purchase) are today available at a cost
of about 60 basis points over Non Jumbos. But Jumbos are high quality
loans. There is significant equity and stable borrowers behind them.
Therefore the pricing for a Non QRM that is smaller than a Jumbo has to
be greater than the Jumbo by a significant margin.
If the cost of a new QRM is X% then the Non-QRM pricing will be at least
100bp over QRM levels. This suggests that Non-QRM will have a yield 150
– 200 over ten-year treasuries. I will leave it to the reader to plug
in an estimate for the 10-year over time. Today it is only 4.4%, meaning
that mortgage costs for the vast majority of borrowers would be 6.4%.
Get the 10-year to a more reasonable 5% and mortgages will cost 7% for
the average borrower.
Does it matter if the borrowing cost for 60-70% of all potential buyers is 1% higher? Is that a big deal? You bet it is. Does this mean that residential real estate has to collapse? No, but you would also have to conclude that there is very little upside to home ownership. There goes the American dream.
Note:
Dodd-Frank defines QRM and also Non QRM. It also establishes “None
Qualified”. These are true junk mortgages. No Docs, Liars, No equity
etc. These types of loans would not be eligible for syndication or
Agency purchase, period. This, of course, would be a very good thing.
There should be no tolerance for these types of loans. Right?
Well this chart shows just how many loans would have been deemed
Non-Qualified (junk) from 1997 through 2009. This chart staggers me. In
2006 38% of all mortgages were just junk. What were those lenders
thinking of? Greed comes to mind.
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Ghostface is right - just because prior year originations do not conform to QRM standards doesnt mean the borrowers couldn't - only that they didn't. Some folks chose to get Pay Option ARMs or other 'exotic" loans because the banks were pushing those products so borrower had every incentive to hit them even if they could have gotten a plain old 80%LTV 30 yr fixed loan. In my experience the one unintended consequence has been the stranding of some good borrowers in exotic loans. Consider the guy who took out the POA or the COFI floater because he wanted to minimize his payments. Once his loan is out of the initial period he might want to refi into a traditional loan, a QRM. But if he needs more than $420k he's screwed. Why? If he can fully doc that he complies with strict QRM underwriting on a loan of $650 or $700k, why not let him refi out? For the time being, he's stuffed into the jumbo market, by definition, NON-QRM. Punished for doing nothing wrong.
A reasonable discussion of the way forward has got to be more nuanced and realistic. The charts as presented are alarmist and misleading and pretty much worthless.
Does anyone think this Dodd Frank stuff will still be standing after a few years of buyers and sellers working with agreements for deed and lease options? Real estate lawyers will be making all the fees that use to go to banks and all sorts of other intermediaries. The banking industry will run screaming to Congress so that they can get fully back in the game. And they will be writing paper in just as crack addled a fashion as they did before.
Long term this is good. It will bring home prices down. Like student loans, 30 year mortgages attacked the problem of people not buying a home by giving those people money. What did that do? drove up demand and price. To put people in homes, bring the price down without giving people money. Attack it from the other side and make homes cheaper. Homes should be bought with cash or owner financed. Buy directly from the builder or owner with negotiated finacing. 30 year mortgages will turn into 5 and 10 yr payment plans really fast.
Cant work? People buy $60k cars on 5 year loans all the time. Get house prices where they belong and people will find ways to buy. Get out of the 30yr. mortgage mind set. It has killed us.
This new QRM rule only applies to anything outside VA, FHA and Fannie and Freddie, but when you consider they fund 92% of the loans on the market right now this new QRM really does not apply. But it wont stop the stupid Fucking Real Estate agents from fear mongering folks into a new purchase..but now before the world ends.
"How many legitimate (qualified) buyers are left standing when the new rules are applied? The answer is very few."
Bruce - So what?! The people & institutions who are potential buyers of mortgages demand bullet-proof underwriting now. The events of 2002-2006 are simply shocking in the level of fraud. To that end : (1) John & Amy Average need to save for a few years to get a down payment. Boo Hoo. (2) Prices will fall to meet the new underwriting. Boo Hoo.
It's too late to change the events of 2002-2006 now. This is an obvious, and completely expected result.
"How many legitimate (qualified) buyers are left standing when the new rules are applied? The answer is very few."
Bruce - So what?! The people & institutions who are potential buyers of mortgages demand bullet-proof underwriting now. The events of 2002-2006 are simply shocking in the level of fraud. To that end : (1) John & Amy Average need to save for a few years to get a down payment. Boo Hoo. (2) Prices will fall to meet the new underwriting. Boo Hoo.
It's too late to change the events of 2002-2006 now. This is an obvious, and completely expected result.
"Get the government out of the way and let markets set the prices"
And when did this happen in our lifetime?
Two percent over 10 year treasuries for a thirty year term is cheap money, particularly if there are issues over the amount of equity, ability to repay, or creditworthiness.
House prices are cheap in the USA, as is credit. There is also an expectation that increasingly large houses should be affordable at quite a low proportion of income, despite the fact that for twenty plus years a single median income is not sufficient to raise a family and more than one income is required.
On that basis is saving a reasonable deposit in percentage terms so onerous? So it takes two or three years of dual income. Big deal. If you can't make that commitment how can you make all the rest?
One perhaps could distinguish between first home buyers and others as having some extra difficulty but on average people change houses something like every seven years and generally one could expect an improvement in their finances over time.
Potential landlords paying market rates? What else would you expect?
Maybe housing will be seen more realistically and not overbuilt. Sorry I see that as an improvement not a reason for bleating that things change.
Sweet Jesus. 7% is a fine interest rate for a 30 year fixed rate, if the house is correctly priced. It's called free markets. Is the buyer better off with a high house price/low interest rate or a low house price/market interest rate if the monthly nut is the same? Be careful. The initial cash flow is the same, but if your EVER want to refinance or sell, the low price saves your ass!
Dodd and Frank are two of my least favorite thugs, but as Bruce says, it's hard to argue with sound underwriting principles. About damn time. Get the government out of the way and let markets set the prices.
I don't politically adhere to what is happening but you need to invest to reality not ideology. And the reality of the past several years is that governments will create every legislation possible to save their banks. Japan, Europe, China and the US-tell me one incident where the big banks had to take their fair share of loses?
People that understood this dynamic did well in the past 2 years on their investments where as those that thought the free market was going to correct things were left out on one of the biggest relation booms of the century.
As long as any part of a market is free, enormous pressures build on those who want to dictate economic policy by government decree. What Bruce, and Reggie are pointing out today is additional pressures for rising rates. Rising rates will rip the bankers a new one, for the same reasons the S&L industry imploded, inverse yield curves.
You seem to believe the bad behavior of the last two or three years is destiny. I don't. That's why there are markets.
Wake me up when anything from the Dodd Frank reform bill is actually implemented.
Does anyone honestly think that the US government can tighten the screws on the housing/banking industry and not splinter the whole economy?
The banks are still deleveraging and they are going to need the GSEs to keep the market liquid for several years.
When all high risk mortgage credit risks has been safely transferred from the banks to the government/Fed, then you will see the banks lobby for “sound” mortgage lending practices.
Bruce,
If you are right then the only way to fight the Fed and central bankers is to own property After all, it is pretty clear that they actually WANT deflation in RE so that they can buy all public real property and place it in the possession of the Central Govt. who along with the Fed and and IMF manipulation easily transforms our country into the most modern utopian Marxist regime in history.
So what are you saying, let real estate fall and sell it all to the central bankers for nothing? How fucking stupid are you. Are you really a shill for the banks? You really think that you are one of TPTB? Perhaps you should do a piece on the wealth illusion all Americans are currently under. Time for a little self reflection dude. I used to read you stuff, guess I need to stop.
You must have lost your ass... I believe he is saying we aren't near the bottom yet, which I beleive as well. Just like a stock that is still overpriced. I was thinking about buying in 2008 but mkt kept looking worse and worse, so I'm still waiting... PM's have done me quite well since then.
The only thing I'm questioning now is... A) do I try to buy a house while there's still money to be had and rates are low OR B) wait for housing to tank more and then put way more down (especially as my PM's skyrocket) and the rates will not affect me nearly as much, plus I can pay off my house faster as I'll have a much smaller mtg... thoughts anyone?
Likewise, PMs and metals have been a great. Cashed out half my paper gold holdings in November and bought more arable land for pennies on the dollar.
Still have physical and probably too many silver contracts. Timing is everything. I sold my property in California in 2001 and my estate in Georgia (and Utah - winter play home) have not lost any value. So, quite the opposite.
You are asking the right question though. It is pretty clear that TPTB are looking to deflate real estate in their quest for a one world/new world order.
Timing is always key. Once the herd is dead, we just need to stay ahead of the bankers. You know the old saying, "I don't need to be faster than the bear, just faster than you."
Thanks. Honestly, this Bubble was a 'once in a lifetime bubble" that real estate will never see again. In fact, RE is cyclical and runs in 10-12 year cycles. EZ Credit accentuates and/or distorts htis so we had an Uber Bubble and now we are going to have an Uber Correction down for 10-12 years imho.
Good, those of us with buying power have some time to pick up some real estate on the cheap for future operations.
But anyone looking for "deals" better remember - location, location, location. I know several markets that are way up. and haven't been affected. For example, go try and buy property on the slopes at Deer Valley. This article is stupid, the first time Bruce let me down.
Looks like Bruce is fishing for some equity to pick up on the cheap. Too bad, I thought he wasn't a shill for TPTB. Guess I was wrong.
Bullshit. Everyone is screwed. At least if you have a home, especially one with arable land and like-minded neighbors, at least you have a home and some equity as well as a chance to survive.
Ask yourself, what is the alternative. Paying someone else so that you can maintain their equity? I have several rentals, just like debt, this article ignores everyone else on the other side of that trade. What a fucking idiot, but I see many sheeple lapping it up. Good, I have been turning your rent into even more buying power for years. What's up? The rent motherfucker! People will always take up space and hence pay rent in one form or another. Ask yourself, what side of that trade do you want to be on. Yeah, if people didn't have to EAT food prices would drop too. This article is a joke.
You own rentals? Did you finance this? Don't expect to do so in the future as cheap as you have in the past.
By definition you are not a QRM. If another 200bp of debt service were put on top of your expenses would you still be raking it in? Or would the properties just drop in value?
I have been approached by folks who are in dire straights about sharecropping. From a financial perspective, can you comment on this?
"Did you finance this?" - No, good point. Properties are in a college town and parents of all my tenants are on the hook should their offspring not pay up. Values have held since 2004.
The arable land I am currently leasing to a company growing soybeans, peanuts, and caring for my existing pecan trees. Apparently nuts are very expensive in Asia.
Beans, peanuts and pecans?? You're in Georgia my friend. The residential RE slump in Georgia was one of the worst in the country. Nevada, Cali, Fl. and then good old Georgia. There is no upside in G. Admit it.
Farmland on the other hand; that's worth holding on to....
Farmland on the other hand; that's worth holding on to....
+1
You sound like a retard, LOP.
You go on and call Bruce, idiot, etc. in many posts and when he responds, you say "ahh, good p o i n t... hmm duhh" and you did not even take into account his scenario where 2% increase in interest rates will decimate your rental properties price.
Properties are in a college town and parents of all my tenants are on the hook should their offspring not pay up. Values have held since 2004
Private equity has been moving into this space aggressively over the past few years. (pardon the pun) Institutional ownership does support your thesis on values.... at least till parents can't afford to send their kids to college anymore. :)
Just more sharecroppers.
Rent is up?
Perhaps you have heard of the law of supply and demand?
Sure, if the banks can afford to keep houses off the market they can keep supply up, but eventually you need someone to live in that house, otherwise it collapses.
Never been a better time to rent... Or live in a camper in the woods.
"Or live in a camper in the woods."
Where you gonna park it? By all means, move right into that camper or shanty town. It makes it that much easier for the new world army of the central bankers to target you for extermination. On my land I will put you to work. Sharecropping! Bring it.
I rent a condo on the Wailea Blue golf course in Maui, Hi. I pay $1500 a month rent (actually half of that as I have a roommate). The cost of this unit if I was to buy it would be double that ($3000 minimum) plus over $600 a month in HOA dues. Sorry, your math doesn't work from where I sit.
Pretty clear renting out here in Paradise is MUCH cheaper than owning.
Outstanding piece, Bruce.
Well done, as usual.
as soon as prices get back to pre-1980 levels, there can be stability and growth once again.
sadly, a lot of this stuff was build in places that are destined to become ghost towns. it doesn't matter that the 'cost to replace' exceeds the market price. no demand = no demand. so there are plenty of homes that bankers think are worth $300K that are actually worth zero - and probably have a negative value.
These comparisons between "what would qualify today vs what was originated in the past" are always pure bunk. I should know, I have created some in the past.
Many people "took the easy road" because they could and it was costless. For example, my last mortgage was stated income, because it was easy and didn't cost any extra. But I could have fully documented my income, no problem. So I was part of the 90% who wouldn't qualify, but could have easily become part of the 10% who did.
government bozos can't help but be countercyclical.
They opened up the liquidity spigots on the way up in real estate.
Now they are trying to shut off liquidity in a real estate bear market.
Fucking stupid faggot jerkwad. And Barney is not that great either.
Housing is the primary store of wealth for the majority of American households. That being the case, wealth on a per capita basis should continue to decline for the forseeable future. American prosperity is going down a notch or two, boiled-frog style.
"No prior defaults, judgments or BKs need apply. You have to have a long-term clean financial record."
This is a real problem given the number of foreclosures and short sales over the past three years. Given that these are the very people who need to buy a house even if not the McMansion or speculative investment they may have bought during the 'bubble' years.
The irony is that they may very well be able to afford the house they lost at the price the bank had to sell it for after the default.
Kind of harsh to punish people because a bank gave them a $300,000 mortgage on a $150,000 house when it was the bank's own hokey appraisal and dodgy mortgage that enabled the deal to happen.
This is a real problem to all the smart asses that sent jingle mail in to their mortgage service companies. Thought they were being really financially trendy/savvy. They just F-ed themselves for at least 7 years... or who knows how much longer with this legislation. You reap what you sow.
Junk away friend. I have more respect for the person that tried to re-modify the loan than the person who just walks away from a debt. Not EVERYONE was bamboozled by a predatory loan/lender... if you were a yuppie real estate magnate-wannabe and you took on too much debt then decided to mail back sets of keys in envelopes, you deserve every bad mark on your credit record that you get.
I'm tried of people negating the fact that people made the choice to buy houses they could not afford. What dumbshit buys a $500k house with nothing down when he makes $40k a year. I mean common, take some god damn responsibility. When people say that, they are basically saying "I was to stupid to understand basic math"... I think most Americans (I am an American btw) are to dumb to understand anything financial nor how to balance a check book. FROM THE TOP (GOVERNMENT) DOWN!
Hawk, let me get this straight. You fully understand all the language on loan documents? All of it?
Sorry you don't, the robosigners don't, most lawyers don't and the CEOs of the lenders still don't.
The point is nearly no one understands a mortgage, especially a first time buyer. Most first time buyers don't have a law degree and were sold on prices always go up because that's about all they and their parents saw.
They don't read zerohedge and get educated, they got educated on tv from Sienfeld, Fraizer, american idol and the apprentice.
These shows didn't show people unemployed, the house maintence required, the time it takes to clean a house, etc.
Even I was caught off guard and would have never dreamed of seeing +50% of America not working, all these foreclosures for this long, sharp increases in food and gas, etc.
Hawk you have to realize that the banks keep getting bailed out over and over again and many people feel that there's no sense in fighting a losing battle, many more have become unemployed and have 24 or more years left on their fixed mortgage, have been thrown under the bus by sneaky credit card terms that give you no escape but default after a legal never used change of terms that burns a borrower for life or default, etc. There's too many bank scams to name and the banks knew full well what was happening as they bet against the investors they sold the loans to.
People are uneducated period. Colleges do even teach someone to balance a checkbook, how to buy a home, how to keep from being robbed by car loans, student loans, and credit cards. They did sign the dotted line, but that's because we were taught to trust people, not discriminate, don't be paraniod or you look like a nut, trust the advertisements, indulged yourself because you deserve it (as millions of ads cross our eyes before adulthood telling us this as well.
Hawk, if you continue to carry an attitude like this there may be some day, no rather how prepared you feel you are, that you will be in a similar situation financially as you could be legally robbed by a contract or government change in policy, illeagally blackmailed by others since you have something and act like you're better than everyone, etc. Guess what the poor say to seeing you blackmailed, "Fool should have never showed off what he has and shouldn't have acted better than us, he's not."
Don't think that you're the smart one, someday someone will outsmart you when your guard isn't available. Good luck finding much help then. Most your so-called friends will magically say they can't help or disappear before you know it. You'll hear from maybe one person, if you're blessed, what the friends you thought you had that still think the way you did are saying about you. They will say exactly what you're saying now.
I hope you take this to heart, it usually happens to the best of us a couple times in life via divorce, robbery, betrayal, etc.
I know, most have been done to me, now I'm a lot more cautious with what I say to others about others.
You rank up there with the best of them...spoken (and spelled) like a true dumbshit! It is the lenders responsibility to it's investors to make smart and safe loans. Oops! I guess they forgot that point! Most banks that make bad loans go out of business, but Chase, BofA, Citi and Wells were so big that they got billions and a hall pass from the taxpayers, courtesy of Timmeh and the Bernank. Do your homework before you pop off next time dipshit.
Borrowers sign notes that are enforceable regardless of whether or not the lender processed the mortgage paperwork properly, whether or not they showed an abundance of caution in underwriting, whether or not they vetted all application material. If you sign a loan doc and receive the proceeds you are responsible. Its that simple, you cant really escape blame because you did business with a scumbag like Mozilo. The banks did escape proper punishment, no doubt about that, but what has that got to do with personal responsibility? Because Timmy blinked and bailed out Jamie and the boys that means every person who bought too much house gets a freebie?
Time to get comfortable with your level of existance today and not worry about the neighbors McMansion. There is a world of RE hurt that has to be gone through and no one is wanting to get wet in the bath has to take place. Don't look for a major retrenchment until the fiscal baby falls out of the basket and sends shock waves through all the markets
...as IYR pushes with wreckless abandon toward a new 52 week high and the REITs just go up, up, and up.
It's not just the homeowners who are screwed, there was an entire industry in America built around home ownership; contractors, real estate salespeople, mortgage brokers, etc. With that entire industry sinking, those people need to find another line of work. The problem is that those skills are not exactly transferable or relevant to what little job openings exist today.
What has been missed is the economic trickle from home sales and refinances that reduce housing expenses by $250 a month
Subprime mortgages did not create the house of cards...
Subprime Mortgages simply exposed the house of cards
AAA Bond Ratings on 500 FICO's?
Unbacked Credit Default Swaps?
Excessive Leverage?
The economy will not come back until housing does...
Until then a vast majority of the currently employed will join the real estate professionals
The Pain Train is coming and it is not for the weak at heart
Right now, at a minimum, it's a $4 trillion problem...that's how far homes in America are underwater (and they are sinking more daily). That's how much excessive debt is in just the housing market (there is the commercial real estate market, credit cards, student loans...) Banks made huge profits lending way too much of other peoples money to unqualified borrowers...I'll bet Jamie Dimon wouldn't loan a cent of his fortune to a subprime borrower, but he was happy to loan your money...Now millions of hard working people, through no fault of their own, are unemployed, losing their life's savings and their homes...yet the big banks get bigger and fatter off the tax payers dole. Pigs get fat and hogs get slaughtered; let's go butcher some hawgs!
Party's over? I think someone will figure something out. America needs to party.
hamburger flippers, banquet waiters, home health aids, ebay junk sellers,....
Pole dancer, street whore, oxycodone dealer, vacant house stripper/appliance thief, these are the new careers opening up in Florida.
The St. Pete Times even featured a day work position for guys. They got $50 to endure a 12 minute beating by a scantily clad dominatrix. No acting skills necessary because the beating was for real.