Smart Real Estate News & Commentary by Chris McLaughlin August 2, 2011
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NAR – 20% downpayment and stringent regulations unfair
A proposed rule by federal regulators to impose a minimum 20% down payment, stringent debt-to-income ratio requirements and rigid credit standards will deny millions of Americans access to safe, low-cost mortgages, according to the National Association of Realtors (NAR). In a comment letter, NAR expressed dissatisfaction over the unduly narrow definition of qualified residential mortgages (QRM) that would be exempt from risk retention requirements. Non-QRM mortgages will have higher interest rates and fees, making home ownership more expensive or unattainable for many of today’s aspiring home owners. NAR urged regulators to withdraw the proposed risk retention rule and go back to the drawing board.
NAR criticized the proposed rule’s 20% minimum down payment requirement, saying it ignores strong evidence that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk. The low foreclosure rate among Federal Housing Administration and Veterans Administration loans, which have the lowest down payment requirements and relatively low default rates, is further evidence that the key to safe lending is sound underwriting and documentation rather than high down payments. Based on NAR estimates, it would take more than a decade for a family with a median household income to save enough for a 20% down payment. A 10% down payment would take a family more than eight years to save. The impact on minority and first-time home buyers would be even worse, said Phipps.
The comment letter offered a number of suggestions to regulators. Considering the significantly higher mortgage rates and fees for non-QRM loans, regulators should define QRM to include safe and sound mortgages, coupled with sound underwriting and full documentation of income and assets, and require risk retention only for those mortgages with risky product features like teaser rates and balloon payments, or weak underwriting. NAR also recommends dropping the rule’s debt-to-income ratio requirement because the marginal reduction in defaults is not worth the negative impact on consumers. NAR is also concerned that certain underwriting elements of the risk retention proposal would further reduce access to credit for the commercial and multifamily real estate industry, which could curtail the nation’s economic recovery.
There is broad opposition to the regulators’ proposed QRM rule among banking, housing and consumer advocacy groups, who have joined forces and forged the Coalition for Sensible Housing Policy, which includes 46 organizations and is focused on drawing attention to the proposed regulation.
Consumer spending down
The Commerce Department said consumer spending slipped 0.2%, the first drop since September 2009, after edging up 0.1% in May. Economists polled by Reuters had expected spending, which accounts for about 70% of U.S. economic activity, to rise 0.2%. When adjusted for inflation, spending was flat in June after easing 0.1% the prior month. The decline came even as gasoline prices retreated from their peak just above $4 a gallon in early May and suggested the much-anticipated bounce back growth in the third quarter would lack vigor. Consumer spending barely grew in the second quarter, inching up at an annual rate of only 0.1%—the weakest pace since the end of the 2007-09 recession. Spending increased at a 2.1% rate in the first quarter. The weak spending in June reflected tepid income growth after employment growth ground to a near halt in June, with nonfarm payrolls rising only 18,000. Income ticked up 0.1%, the smallest increase since November, after rising 0.2% in May. Disposable income ticked up 0.1%, also the smallest increase since November. But when adjusted for inflation, disposable income rose 0.3%. With real disposable income outpacing spending, savings rose to $620.6 billion from $581.7 billion in May.
Texas housing market trending at 2009 levels
Real estate markets nationwide reported steep drops after the federal homebuyer tax credit expired last year, but Texas sales continue to track alongside 2009 levels, according to the Texas Quarterly Housing Report. While the Lone Star State’s second-quarter sales fell 12% from a year earlier, Texas’ total sales volume of 58,795 homes was inline with 2009 levels, suggesting the market is maintaining a steady pace with or without federal stimulus. “Texas has dominated national headlines for economic strength, which makes it clear the recovery continues in our state,” said Jim Gaines, an economist with the Real Estate Center at Texas A&M University, which publishes the report. “Given the impact of last year’s tax credits, I’m not surprised to see fewer sales this quarter compared to last year,” Gaines said. “If anything, I’m surprised to see that sales volumes didn’t lag further behind 2010.”
The median sales price in Texas hit $150,400 in the second quarter, up 1% from a year ago. The average price rose 4.6% to $201,288, suggesting strength in the high-end market. In both areas, Texas is an outlier since many other markets have experienced drops in both average and median price. “The increase in the average price of Texas homes indicates more activity among higher priced homes,” Gaines said. “Buyers of higher priced homes have been less impacted by tightened mortgage lending standards and real estate has been an attractive investment vehicle due to instability in other investments, such as securities.”
Debt deal reached
Congressional leaders voiced confidence the Senate will vote today to ratify a U.S. debt- limit compromise that will avert a default even as it defers decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits while slowing economic growth. The House voted 269-161 yesterday to approve the measure, which raises the national debt ceiling enough to fund the government until 2013 and threatens automatic spending cuts to enforce a goal of cutting $2.4 trillion over the next decade. That goal falls short of the long-term deficit savings that President Barack Obama and Republican leaders initially sought. The political obstacles to reaching even the lower target are formidable, though the measure’s sanctions improve prospects “a bit,” said Peter Orszag, Obama’s former budget director. A $917 billion down payment in discretionary spending reductions contained in the measure is back-loaded so more than two-thirds of the cuts come after 2016. The spending reduction next year is $21 billion, less than two-tenths of a percent of U.S. gross domestic product.
Senate holds mortgage hearing
The Senate Banking Committee will hold a hearing Tuesday to develop a new national mortgage servicing standard. In January, federal regulators announced a new initiative to develop a set of servicing standards following weaknesses in the process that arose last year. The industry immediately began pushing for a unified approach, and regulators are at work with the 50 state AGs to align new requirements, especially for servicing nonperforming loans.
Already, Congress is hearing from those who would like to be exempted from guidelines they see as too burdensome, especially for smaller institutions. B. Dan Berger, the executive vice preside of the National Association of Credit Unions, sent a letter to Senate committee leaders Monday asking for an exemption. “In short, credit unions have not participated in the practices that have led to discussions about the worthiness of national mortgage servicing standards and should not be unjustly punished for the shortcomings of institutions that have,” Berger said. “While it is important that the bad actors who failed thousands of their borrowers are held accountable, we would oppose extending any new compliance burden stemming from national mortgage servicing standards onto good actors such as credit unions.”
A review of more roughly 2,800 foreclosure files at the 14 largest mortgage servicers last year led regulators to conclude that although the issues were indeed widespread, the largest institutions showed the most signs of activities such as robo-signing, dual-track foreclosures and unnecessarily delayed modifications. Sen. Olympia Snow (R-Maine) and Sen. Jeff Merkley (D-Ore.) introduced legislation in May that would establish federal standards for mortgage servicers, but it was attached as an amendment to another bill and has yet to make it out of committee. Testifying before the committee Tuesday will be representatives from the Hope Now alliance of industry servicers, investors and counselors and a member of the Independent Community Bankers of America. No one from the major mortgage servicers will be taking questions at the hearing.
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Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
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According to the latest quarterly survey of housing released by The Wall Street Journal, the housing market is recovering at different rates in different parts of the country. Data released by MDA DataQuick shows that home sales in Minneapolis, Southern California and the San Francisco Bay Area rose sharply in June while data from Miller Samuel Inc, shows that there was a drop in home sales in Manhattan, Long Island, N.Y., and Charlotte, N.C., among other areas. A number of factors including unemployment and extent of 
The Government Accountability Office (GAO), in a report released this week, has exhorted the government to implement measures to remove glitches in the $75 billion mortgage modification program. The Obama administration has been criticized for the lack of effectiveness of the program so far. The GAO also said the administration’s estimate of 4 million people benefiting from the program could be an exaggeration. According to the GAO, the Treasury Department expects that servicers covering 90% of the distressed loans will be covered under the program and 65% of eligible borrowers would apply. However, servicers covering only 85% of loans have signed up so far.
With energy prices going up, homeowners are increasingly seeking the assistance of real estate professionals who are specializing in environment friendly buildings. “Many of the consumers that come to me want to know more about energy efficiency, healthy building design, what to look for in a home,” says Michael Kiefer, a real estate broker, who is a specialist in environment friendly buildings. EcoBroker, a company which provides “green designation” for real estate professionals, has trained over 5000 real estate professionals in the U.S. and abroad. The National Association of Realtors (NAR), which launched its Green Designee program last year, says the response to its program has been overwhelming. “All across the country, almost every time the courses being offered have been full,” NAR spokesman Andy Norton said. “And by the end of this year, the National Association is predicting that close to 4,000 realtors will have gone through the course, which is way ahead of the expectation.” Experts say that environmentally friendly homes often cost more than traditional homes, but the additional cost be recovered over time by way of energy efficiency. With homeowners getting more aware of the importance of environmental friendliness, the demand for real estate professionals with green certification is likely to grow in future.
The dismal state of finances in state governments is impacting jobless individuals seeking state assistance. Sixteen states are now paying jobless workers with borrowed cash and there are considerable delays in jobless workers receiving their benefit checks. Workers who wish to file an application for jobless claims are also seeing enormous delays. While the program makes over 80% of initial payments within 3 weeks, which is slightly below federal standard, individual cases which require review are prone to delays. Labor Secretary Hilda Solis said: “Obviously, some of our states were in a pickle. The system wasn’t prepared to deal with the enormity of the calls coming in.”
