More Housing Changes on the Horizon

I recently met Dr. Lawrence Yun, the Chief Economist and Senior Vice President of Research for the National Association of Realtors. I was excited to hear what he had to say about the real estate market today, and what some of the trends were showing.

Dr. Yun creates NAR's real estate market forecasts and participates in many economic forecasting panels, including those for Harvard University. When asked how the market is doing in general, Dr. Yun responded, “Well, figures are up and that’s a good sign. If one looks at the trend line, it’s been mostly moving up. Because of this, the current pending contract activity is at a 5-year high if one does not count the spiking period of activity during the homebuyer’s tax credit. It is looking like a very fine, genuine recovery.”

I asked Dr. Yun why he thought the real estate market was beginning to improve.

“Job creation and jobs are coming around much more robustly," he said. "Rent increases, as well as high affordability conditions have also led to an improved market.”

Dr. Yun did still share some concerns when it comes to the improvement of real estate.

“We still have some headwinds related to the credit underwriting standards. If the market experienced less stringent underwriting, then there would be an average of 15% more improvement," he said. "Banks are sitting on huge cash reserves, but they are not circulating that money into the economy.”

Dr. Yun also mentioned that banks continue to make changes to the mortgage market which makes it much more difficult for buyers to purchase. For instance, Bank of America recently announced that they would cut off Fannie Mae from loans starting this month, except for modifications and some refinancing- all this over a dispute over who should bear the costs for defective mortgages. Instead, BoA will sell new loans to Freddie Mac, the other U.S.-controlled mortgage-finance firm.

Also joining the mortgage difficulty bandwagon is Chase. They have recently changed their mortgages requirements. For buyers who have a loan-to-value ratio greater than 80%, a 740 or better Fico score is required. For buyers who do not have a 740 credit score, then a 20% down payment is required. 

Bottom line is, if buyers have anything below a 740 credit score, Chase will not allow a 5%, 10%  or 15% down payment.  

According to Veronica Franciosa, mortgage banker at Luxury Mortgage, “This contradicts all of the Obama speeches. He can propose all types of programs, however it is each individual bank that makes the final decision on how they are going to lend and to whom.  The banks do not have to participate in any proposed program or follow the proposed guidelines.”

Luckily, mortgage brokers do not have the same requirements, and have access to many programs where they do not have to rely only on one bank and their guidelines. 

Franciosa goes on to say, “We still have the FHA program, but the FHA PMI rates are going up to 1.75% on the upfront premium and 1.25% on the monthly.  They are making it harder for the first time homebuyer.”

While the market is currently improving, Dr. Yun mentions there are other wrenches which are ready to be thrown into the growth cycle. “Congress wants to require 20% downpayment minimums for government backed mortgage approvals. If that happens, the entire real estate industry will crash again. Everything will be at a standstill. And, market forces of higher inflation and a high budget deficit could very well lead to higher mortgages rates.”

The National Association of Realtors continues it talks with Congress to ward off any minimum downpayment requirement, as it would be a terrible blow to the industry.

In other news, President Obama announced on Tuesday, March 6, a new mortgage relief policy for those with government-insured loans. This includes members of the military and veterans. These initiatives are the latest attempt to help borrowers struggling to pay their mortgages.

Currently, those with mortgages insured by the Federal Housing Administration who attempt to refinance experience high fees. FHA borrowers who want to refinance must pay a fee of 1.15 percent of their balance every year. Officials say those fees make refinancing unappealing to many borrowers. The new plan will reduce that charge to 0.55 percent- typically saving an FHA borrower who refinances more than $1,000 a year from the changes.

For service members and veterans, Obama says major lenders will review foreclosures or denials of lower interest rates. If wrongly foreclosed upon, service members will be paid their lost equity and receive additional compensation.

The efforts Obama is announcing do not require congressional approval and are limited in comparison with the vast expansion of government assistance to homeowners that he asked Congress to approve last month. That $5 billion to $10 billion plan would make it easier for more borrowers with burdensome mortgages to refinance their loans.

Past government initiatives aimed at the troubled housing market have fallen far short of expectations. The Obama administration’s signature foreclosure-prevention program, the $29 billion Home Affordable Modification Program, was started to help those with heavy debt loads avoid losing their homes. But it has failed to help more than half of the 1.7 million troubled homeowners who have applied to lower their mortgage payments on a permanent basis.

A separate plan, the Home Affordable Refinance Program, which allows borrowers with loans backed by Fannie Mae and Freddie Mac to refinance at lower rates, has helped about 1 million homeowners, well short of the 4 million to 5 million the administration had expected.