What Will Boost Real Estate?

Never in my 30 years as a mortgage banker did I think I would see interest rates this low -- as low as during Harry Truman's presidency. Yet very few homeowners are able to take advantage of those rates, which have dropped more than 2 percent since 1997, the beginning of the market crash. And we know why, whether it was the loss of a job, health insurance, or equity in their home with housing values down as much as 50 percent in some states.

This is while the foreclosure backlog is so great it could take more than 60 years in some states to work through,according to New York Times reporter David Streitfeld. So when two presidents -- President Obama in his new jobs plan and former President Clinton on the Sunday TV talk shows touting his Clinton Global Initiative -- say that real estate has to recover for our economy to recover, it should take precedence in discussions on how to boost economy growth.

And there are concrete steps we can take now to cure much of the housing malaise of vacant homes and deteriorating neighborhoods. Obama's inclusion of $15 billion in his new jobs plan to rehabilitate depressed neighborhoods is one such. But much more can be done if he can convince Fannie Mae and Freddie Mac to cooperate in loosening some of their almost draconian qualification requirements for both purchase and refinance transactions made more restrictive after the housing crash.

Credit scores, for instance, do not have to be 680 or better, if there are other so-called compensating factors, such as long term employment, or good assets. Or, the almost set-in-stone 45 percent maximum overall debt-to-income ratio could be more flexible with good job security and assets.

And much more can also be done with HARP, the Housing Affordable Refinance Program that was touted to help millions of homeowners, but has helped just 838,000 to date. Hence President Obama's pronouncement that loan modifications would be allowed for "responsible applicants" can mean that compensating factors should be considered when qualifying borrowers.

But there is another restriction keeping many homeowners from refinancing or buying -- the declining equity in their current home. Whereas just 10 years ago average equity was 61 percent, it is now just 38.6 percent, according to the Federal Reserve's latest Flow of Funds report. If Fannie and Freddie would qualify someone with good credit and assets that is, say, 50 percent underwater, the case in many neighborhoods, then they should be allowed a haircut -- meaning a reduction in their principal balance -- that would enable them to refinance at today's record low rates with a new loan that brought it back to 100 percent of current value. The 30-year conforming fixed rate today is hovering at 4 percent.

What is holding Freddie and Fannie back from offering this now, which could in fact refinance an additional 2.9 million homes without significantly increasing tax payers' liability, according to a recent CBO report? Once again, it seems to be Republicans' opposition to any more government liabilities, and the fact that an independent agency, the Federal Housing Finance Authority is Fannie and Freddie's administrator, charged with limiting their losses now that they are government-owned.

But the CBO study showed that it could save homeowners about $7.4 billion in just the first year and help about 111,000 homeowners avoid default with just a net cost of $600 million. What's not to like about this program?

Harlan Green © 2011

New Obama refi plan could get help from Fed

Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market.

The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac.

A new Fed program “would complement the goals of the administration in helping the housing market,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

Dudley, speaking in New York on the economy, said that the continued weakness in housing was “a serious impediment to a stronger economic recovery. . . . Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures. But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption.”

Noting that the Fed last month decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general -- including mortgage rates -- Dudley said in response to audience questions that the Fed “potentially could move to do more in that direction.”

Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings.

On Friday, Fed Vice Chairwoman Janet Yellen said that another large bond-buying program “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

The average 30-year mortgage rate fell to a generational low of 3.94% in the first week of October, but has since edged up a bit, to 4.11% last week, according to Freddie Mac.

Long-term Treasury bond yields have risen since late September as worries about another U.S. recession have faded, eroding some of the “haven” demand for government bonds. That has helped to put upward pressure on mortgage rates.

The Fed bought $1.25 trillion of mortgage-backed bonds in 2009 and 2010, but it has allowed that portfolio to decline to $860 billion as securities have matured.

Yellen and Dudley are allies of Fed Chairman Ben S. Bernanke. But they face opposition from some Fed officials who believe the central bank already has done enough to boost the economy.

- Tom Petruno