The Housing Bubble

A weekend topic starting with CNBC. “When the housing market began its epic and historic free-fall in 2008, mortgage giants Fannie Mae and Freddie Mac faced imminent collapse. The Treasury Department stepped in with a major bailout that July. That turned out to be a vastly profitable move for Uncle Sam. And it has been paying off ever since. ‘The most amazing thing is that the housing market not only survived, but thrived coming out of the crisis,’ said Jaret Seiberg, financial services and housing policy analyst for Cowen Washington Research Group. ‘What the government did actually worked.’”

“But Fannie and Freddie cannot stay in conservatorship forever, and, according to Dave Stevens, have the biggest chance of change with a new FHFA director. Current director Mel Watt’s term ends in January, but he has been mired in personal scandal, with a former employee accusing him of sexual misconduct, so he could leave earlier. ‘One thing that has protected the status quo has been Mel Watt. That is the only thing protecting the current structure of these companies,’ said Stevens, who recently retired as president and CEO of the Mortgage Bankers Association.”

From The Chronicle. “One of the biggest obstacles confronting low- and moderate-income homebuyers is coming up with the 20 percent down payment that many financial advisers recommend they have in the bank prior to entering the housing market. Under Fannie Mae’s Home Ready and Freddie Mac’s Home Possible programs, it might be possible to obtain a mortgage with substantially less cash on hand.”

“While there are some differences in the two programs, Terri Sicilia, vice president of underwriting for Residential Mortgage Services Inc., says they are both ‘beneficial products, especially for borrowers putting less than 20 percent down. These programs offer a lot of flexibility that you don’t have with a traditional 30-year, fixed-rate mortgage,’ Sicilia notes, ’such as reduced PMI [private mortgage insurance] that helps to make the monthly payment lower.’”

“Both the Freddie and Fannie programs compete with the low-down-payment program of The Federal Housing Administration (FHA), which offers loans for as little as 3.5 percent down for buyers with a credit score of 580. A few other features of the Fannie and Freddie programs are: No income limits in underserved areas.”

The Washington Post. “Home prices have been on a tear for most of the past decade. Lately, they have risen at 5 to 6 percent a year — double the rate of personal income growth. The gap between housing and income cannot widen indefinitely. The Minsky bubble psychology has infected government agencies who insure about 80 percent of home-purchase mortgages. Fannie Mae and Freddie Mac, the biggest of these, have loosened standards.”

“With encouragement of their regulator, the Federal Housing Finance Agency, half of first-time home buyers getting mortgages guaranteed by Fannie and Freddie are making down payments of 5 percent or less. Such easy credit is aimed at broadening access for young people, who often lack capital. However, a lesson from 2008 is that if a person cannot afford a home under prudent lending standards, imprudent lending will not help them.”

“The riskiest loans are insured by the Federal Housing Administration, an agency whose mission is to broaden homeownership. (These loans are securitized with a guarantee from a different government sponsor, Ginnie Mae). Somewhat akin to subprime in the 2000s, the FHA sector, by definition the most marginal, has widened. It is now approximately 20 percent of the mortgage market.”

“According to Edward Pinto, co-director of the American Enterprise Institute Center on Housing Markets and Finance, the average market price of FHA-enabled purchases has risen 25 percent in the past five years, yet the dollar amount of the average down payment has fallen. ‘That is not tight credit,’ Pinto says. A study by the New York Fed, in essential agreement, argues that the housing sector ‘remains vulnerable to very severe declines in house prices.’”

The Herald Tribune. “Ed Pinto issued a bleak warning to the U.S. House Committee on Financial Services Thursday about the current state of the housing market. He opened his testimony with this: ‘The last house price boom and subsequent bust was the result of ill-advised and risky government housing policy,’ his statement said. ‘Today we are in the midst of another boom, and, once again, it is the result of ill-advised and risky government housing policy.’”

“One of his specialties focuses on the availability of affordable housing for working-class families. ‘Unfortunately, we are now able to document that we are in the midst of another potentially dangerous buildup of policy-induced housing risk,’ he said. ‘This policy is making entry-level homes less, not more, affordable.’”

“Pinto says the country’s been in a continuous seller’s market since mid-2012 — ‘one even stronger than in the last boom.’ He tracks this back to January 2013 when the Bureau for Consumer Financial Protection promulgated a rule under the authority granted in the Dodd Frank Act. The Qualified Mortgage rule set a maximum debt-to-income ratios of 43 percent but exempted such primary home loan agencies as the FHA and VA.”

“‘Since 2013, about 85 percent of all primary home purchase financing has been guaranteed by these agencies,’ Pinto states, ‘in many cases doubling or more the percentage of their DTI’s greater than 43 percent.’ ‘When mortgage risk expands alongside of home prices, there is little ‘friction’ in mortgage markets to slow the growth of a housing boom,’ he said. ‘This serves to make entry-level housing less, not more, affordable.’”

“‘In conclusion,’ he states, ‘prompt administrative action is advisable now. We are in the midst of a strong home price boom that is unsustainable and fueled by leverage. While we do not know when real house prices will revert to their trend growth path, what is certain is that when such a reversion occurs, low-income and minority home buyers will again be unduly subjected to volatile home prices, loss of equity, and attendant loan defaults. As a nation we can and must do better.’”

From CNN Money. “Fort Myers was the backdrop President Barack Obama used in February 2009 to dramatize the need for his massive stimulus package, when unemployment in the Sun Belt boomtown was 11.7% and climbing. Now, ten years after the depths of the financial crisis, the area has mostly healed. Median single-family home prices in Lee County have more than tripled from the bottom reached in 2011, unemployment is below the national average at 3.2%, and construction is everywhere.”

“But memories of the crash are still fresh. Randy Thibaut runs Land Solutions, a brokerage that helps sell property to developers and that also closely tracks the housing market. He had projected that 2018 would be a cooling off year, in a gradual deceleration that might allow Florida to get off the roller coaster it’s been on for decades. ‘We don’t want another 2004 and 2005. A sustainable market here would be perfect,’ Thibaut says.”

“So far, the issuance of permits to build new houses is again on track this year to exceed the previous year. Construction is accelerating while demand for homes shows signs of slowing down, and Thibaut sees history repeating itself. ‘We are past our cycle,’ Thibaut says. ‘We think we’re in the 15th inning.’”

“Some people who remember the crisis are tapping the brakes, trying to stay away from debt, diversify into multiple sectors, and grow slowly. But Elmer Tabor, a longtime Cape Coral realtor and investor who ran a bank that failed during the mortgage crisis, says he sees newcomers overbuilding like the housing bust never happened.”

“‘The people who went through it are really paying attention and beginning to tighten up and back off,’ Tabor says. ‘We haven’t seen the failures of the companies. But what we are seeing is because of greed, people are doing it again.’”