A foundation or a farce?
There is a lot of news coming out as of late from the Federal Reserve. The news I'm talking about isn't regarding QE2 or raising interest rates. The fed is in discussions about regulatory provisions from the Dodd-Frank Act (Link). These provisions are a beast at over 450 pages. The Wall Street Journal's Alan Zibel wraps it up pretty succinctly in this post on April 18th. Most notably, the standards for home loans – conventional and "non-standard" – are clearly fleshed out and easy to understand.
As of the writing of this post on April 19th, these are only proposals (here are the highlights). However, I think this an important step in helping to reconstruct a housing market that did its best, for the better part of the last decade, to run amok all the way over the cliff. Transitioning from a "no holds barred" mortgage origination paradigm to structured, concise guidelines will be a boon for just about everyone. Banks and lending institutions will have clear standards to abide by, mortgage backed securities (MBS) buyers will breathe a little easier, and, most importantly, the general public will be more secure in their future efforts to buy a home.
Reviewing the newly proposed rules, there are few interesting nuggets. The first is the need to "consider and verify" such basics as employment status, debt to income ratio, credit status, and "income or assets used to determinate ability to repay." The fact that this has to be spelled out in black and white is almost mind numbing. A "qualified mortgage," which has yet to have its down payment ratio defined, would not include loans with negative amortization, interest only payments, terms longer than thirty years, or balloon payments. In addition, there is a cap on fees and total points limited to 3%. Lastly, for many of those potentially damaging adjustable rate mortgages and other "nonstandard" loans, creditors have the option to refinance them into a "standard" loan if they meet that respective criteria.
With the impending end of Fannie and Freddie now in the foreseeable future, having clear and logical rules for "vanilla" mortgages and existing exotic loans will be a confidence booster for the consumer. Moreover, the ability to roll those exotic loans over into conventional loans with a fixed rate will help promote the recovery of the market.
These proposals, coupled with clear risk-retention rules (currently TBA), will provide a solid foundation for reliable housing growth and, more importantly, economic prosperity. There remains, however, one question that looms ominous in my mind: Will the banking/private lenders fight this regulation? Hopefully, after this last disaster’s destruction of billions of dollars of home value, the industry can recognize the sensibility of this proposal.
-The Inside Associate
Tuesday, April 19, 2011
Thursday, April 7, 2011
American dream on life support?
If you live in a house right now in suburbia look around and thank your lucky stars. If you live in an apartment take a look a round, I hope you like what you see because you might be there for a while. There are signs from the government, lending institutions, and municipalities that the status quo in buying a home is here to stay.
As we speak Congress is debating the standards that lenders need to play by. These risk retention standards are going to play a major role in how lenders decide to lend to prospective homeowners. The culture in home lending has had a paradigm shift since the early 2000's. Prospects now need a near flawless credit record, 20% down payment, and viable income ratios. In the "good ol days" with nearly nothing down and some paperwork, BAM here's your new home.
Large institutions and multifamily REITs definitely see the writing on the wall. With the impending demolition of Fannie and Freddie, multifamily has cornered a whole segment of the industry. College students transitioning to the work force, aspiring "YUPies" who haven't yet saved 20 %, and just about any other young people that don't have great credit. Multifamily REIT's across the country have buckled down on expenses and now are looking at serious growth as reflected in large stock price increases since 2008. My own employer's who for the sake of this blog we will call "Davidson" recently made major acquisitions in a high profile area looking to cash in. Furthermore, A developer from Urban Housing Group, just yesterday (April 7th 2011) walked into my office to discuss the state of the market. We were discussing the new Class A development they are breaking ground on in July.
The groundwork is laid. A much higher bar to clear to acquire a home loan, a serious demand for space in Multifamily with new college graduates every year adding to the demand. Demand price increases from a burgeoning clientele base will erode the saving power of renters. Gradual macroeconomic inflation increases will also slowly deteriorate the buying power of renters and other prospective buyers. I believe this all culminates in the creation of a new semi permanent renting class, who may not ever have the ability to have the white picket fence.
Who are the primary first time home buyers? A lot of the time they are young married couples. Over two thirds of first time home buyers were under the age of 35 and a house hold size on average of 2.7 people, according to the NAHB. The median income of first time home buyers is $ 67 K. In addition, as of the writing of the NAHB article in 2008, barely over a third of first time home buyers (FTB) had the "conventional" 20 % down payment. So for over 50 % of FTB's, they were either given some kind of leniency or possibly were part of a program that was willing to work with them. Now, we are looking at a future home market where that "assistance" or leniency will be rare or non-existent.
This may seem trivial, "a few more renters is okay". It won't be just few it will probably be a majority of the 18-34 age demographic. The "after shock " of creating this renter class will be a major blow to suburbia, if not the death knell. Since late 2006, we've all heard of entire unfinished subdivisions all across America. We've all heard of someone who's lost a home to foreclosure or has bought a foreclosure recently.
My outlook for the future in a macroeconomic perspective is rather gloomy. The growth of suburbia which boomed through the 80's, 90's and the last decade will come to a very slow crawl. Housing growth was a major economic driver of that time period. For a lot of municipalities, that growth meant blue collar jobs from construction, varying forms of corporate investment to meet the needs of new homeowners, and an increase of the tax base. With new home starts expected to remain at minimal levels, the overall health of the economy will be suspect. The birth and growth of the "renter class" will be a huge windfall for some, but for the rest us it is a reminder the US has seen better days.
As we speak Congress is debating the standards that lenders need to play by. These risk retention standards are going to play a major role in how lenders decide to lend to prospective homeowners. The culture in home lending has had a paradigm shift since the early 2000's. Prospects now need a near flawless credit record, 20% down payment, and viable income ratios. In the "good ol days" with nearly nothing down and some paperwork, BAM here's your new home.
Large institutions and multifamily REITs definitely see the writing on the wall. With the impending demolition of Fannie and Freddie, multifamily has cornered a whole segment of the industry. College students transitioning to the work force, aspiring "YUPies" who haven't yet saved 20 %, and just about any other young people that don't have great credit. Multifamily REIT's across the country have buckled down on expenses and now are looking at serious growth as reflected in large stock price increases since 2008. My own employer's who for the sake of this blog we will call "Davidson" recently made major acquisitions in a high profile area looking to cash in. Furthermore, A developer from Urban Housing Group, just yesterday (April 7th 2011) walked into my office to discuss the state of the market. We were discussing the new Class A development they are breaking ground on in July.
The groundwork is laid. A much higher bar to clear to acquire a home loan, a serious demand for space in Multifamily with new college graduates every year adding to the demand. Demand price increases from a burgeoning clientele base will erode the saving power of renters. Gradual macroeconomic inflation increases will also slowly deteriorate the buying power of renters and other prospective buyers. I believe this all culminates in the creation of a new semi permanent renting class, who may not ever have the ability to have the white picket fence.
Who are the primary first time home buyers? A lot of the time they are young married couples. Over two thirds of first time home buyers were under the age of 35 and a house hold size on average of 2.7 people, according to the NAHB. The median income of first time home buyers is $ 67 K. In addition, as of the writing of the NAHB article in 2008, barely over a third of first time home buyers (FTB) had the "conventional" 20 % down payment. So for over 50 % of FTB's, they were either given some kind of leniency or possibly were part of a program that was willing to work with them. Now, we are looking at a future home market where that "assistance" or leniency will be rare or non-existent.
This may seem trivial, "a few more renters is okay". It won't be just few it will probably be a majority of the 18-34 age demographic. The "after shock " of creating this renter class will be a major blow to suburbia, if not the death knell. Since late 2006, we've all heard of entire unfinished subdivisions all across America. We've all heard of someone who's lost a home to foreclosure or has bought a foreclosure recently.
My outlook for the future in a macroeconomic perspective is rather gloomy. The growth of suburbia which boomed through the 80's, 90's and the last decade will come to a very slow crawl. Housing growth was a major economic driver of that time period. For a lot of municipalities, that growth meant blue collar jobs from construction, varying forms of corporate investment to meet the needs of new homeowners, and an increase of the tax base. With new home starts expected to remain at minimal levels, the overall health of the economy will be suspect. The birth and growth of the "renter class" will be a huge windfall for some, but for the rest us it is a reminder the US has seen better days.
Subscribe to:
Posts (Atom)