In light of today’s landmark robo-signing settlement, Trulia’s Chief Economist takes a deeper dive into what really matters.
The robo-signing settlement is the latest – and potentially the largest – piece in the U.S. housing policy puzzle. Even though it’s partly punishment for banks’ wrongdoing, it is also another answer by the government to the question of how it can help the housing market.
Our own housing policy survey last December showed strong bipartisan support for two key elements of the robo-signing settlement: refinancing by underwater homeowners (82% of Democrats, 69% of Republicans), and loan modifications to reduce principal balances (74% of Democrats, 61% of Republicans).
With the robo-signing settlement, as with any housing policy, I look at three questions:
1) Is it big or small? Relative to other housing policies, it’s big. It calls for much more money for loan modifications than HAMP has cost so far, and it could mean money or relief for close to two million current and former homeowners. HAMP and HARP have each helped roughly one million homeowners so far. But relative to the housing crisis, it’s small. The loan modifications could yield tens of billions in principal reductions for one million homeowners – but that’s a sliver compared with the 11 million homeowners today who are over $700 billion underwater. And the cash compensation of $1,500-$2,000 for up to a million people who lost their homes will hardly make them whole.
2) Who pays? Usually it’s good politics to keep quiet about who pays for housing policy, but not with the robo-signing settlement. It’s good politics for the government and the attorneys-general for everyone to know that the banks are paying for their robo-signing sins. In contrast, most housing policy announcements hide – or at least don’t broadcast – who is paying, whether it’s investors who implicitly bear the cost of refinancing or taxpayers who implicitly bear the cost of many other policies.
3) Does it reward risk-taking or bad behavior? Delinquency is a disqualification for refinancing but is almost a requirement for getting a principal reduction. The largest piece of the robo-signing settlement is for principal reduction for borrowers who are “either delinquent or at imminent risk of default.” This is opposite of the refinancing rules laid out in HARP and the State of the Union address, which require borrowers to be current on their payments because that shows they’re “responsible.” So much for a coherent message from the government to homeowners about moral hazard. This issue could be fuel for election debates on housing policy: Republicans are much more bothered by rewarding bad behavior than Democrats are. In our December survey of consumers, 61% of Democrats agreed that “helping people keep their homes is the right policy even if it helps some undeserving homeowners,” but only 38% of Republicans agreed.
Before we welcome in the New Year, Trulia’s Chief Economist looks back at 5 events that really mattered for housing in 2011 – and beyond.
Government, the mortgage industry and forces of nature all shook the housing market in 2011. They had both an immediate impact and slow-burning effects, setting the stage for a bumpy 2012 with more foreclosures, political battles and local market risks.
1) Robo-Signing Reverberations
The “robo-signing” scandal – where banks were accused of approving foreclosures with incomplete or incorrect documentation – exploded in October 2010, but where are we now? Banks want a settlement in order to avoid costly, drawn-out lawsuits. One is shaping up that could reduce loan balances or interest rates for current homeowners, give payments to people who lost their homes and establish new mortgage servicing standards for the future.
Even if you think there’s money coming to you because you lost your home, don’t start spending against your settlement windfall just yet. One estimate from the Wall Street Journal is for a settlement of $25 billion if all states participate. Another report from TIME says that will translate into $1,500-$2,000 for households who were mistreated in the foreclosure process. A couple thousand dollars will give people some breathing room, but it won’t change anyone’s financial lives. And, be patient: it could be months before a deal is reached, an administrator is in place and the details are finalized.
Until that’s all figured out, here’s the immediate drama: who’s in and who’s out? Some states might hold out for a better deal or decide to sue these mortgage servicers directly, as Massachusetts has. California was the first and most vocal state to back out, and New York, Delaware, and Nevada have spoken out, too.
What Really Mattered: The threat of robo-signing lawsuits made banks gun-shy about pursuing foreclosures in 2011, which left many homes stuck in the foreclosure process. But once a settlement is reached, we’ll see a rush of foreclosures in 2012.
2) The Debt Ceiling and the Budget Deficit
The federal government is running a deficit — it is spending more than it collects in taxes and other revenue – so it borrows to cover the gap by issuing debt. When there’s a deficit, we add to the pile of debt. To shrink this pile, the government needs to collect more than it spends (or, if you prefer, spend less than it collects) and use the surplus to reduce the debt.
In August, the government played a game of chicken over whether to raise the debt ceiling – which is really just a formality acknowledging that the deficit requires issuing debt to keep the government going. However, the right way to deal with the debt is to reduce the deficit – not by fighting over the debt ceiling.
Long before the debt ceiling debate and Standard & Poor’s federal credit-rating downgrade, we all knew that the federal budget was in bad shape. The debt ceiling debate rattled the markets and consumer confidence temporarily but interest rates stayed low. The important effect was that Congress created a bipartisan supercommittee to tackle the deficit – but it couldn’t reach agreement by its November deadline.
What Really Mattered: The deficit-reduction supercommittee teased us with some policy proposals that will surely rear their heads again. One idea that both Republicans and Democrats didn’t totally disagree about was reducing the mortgage interest and other tax deductions. If and when that happens, high-income homeowners with mortgages would pay a lot more in taxes.
3) The Expansion of HARP
In October, the Federal Housing Finance Agency (FHFA) said seriously underwater homeowners will be able to refinance through the Home Affordable Refinance Program (HARP). Originally, refinancing under HARP required a loan-to-value of less than 125% — that is, you couldn’t be more than 25% underwater – but that rule goes away for fixed-rate mortgages. But there’s a catch! Loans must be guaranteed by Fannie Mae or Freddie Mac, and – more importantly – borrowers must be current on their payments and must not have missed a payment in the last 6 months.
What Really Mattered: Some seriously underwater borrowers who fell behind on their payments in hopes of negotiating a loan modification are now kicking themselves because those missed payments make them ineligible to refinance. But those who can and do refinance will have lower monthly payments and extra money to spend — which will help stimulate the economy.
4) Natural Disasters Cause Insurance Disaster?
In 2011, several tornados, floodings and a hurricane temporarily halted what little construction there was to begin with, but this was just a short-term slowdown. The bigger long-term effect was the near-collapse of the federal government’s National Flood Insurance Program (NFIP). Still struggling financially under debt amassed after Hurricane Katrina, the NFIP’s insurance premiums don’t fully cover insurance claims when disaster strikes. August’s Hurricane Irene and its flood damage returned this problem to center-stage.
What Really Mattered: In flood-prone areas, you can’t get a mortgage if you don’t have flood insurance. Without NFIP, housing markets in these areas would skid to a stop. Could the program actually expire? It could, but as part of last week’s payroll tax agreement, the program got a last-minute extension until May 2012. No doubt, the political fight over this program’s long-term future will continue in into next year.
5) Lowering the Conforming Loan Limit
Starting in October, the government lowered the upper limit for loans backed by Fannie Mae or Freddie Mac or insured by the Federal Housing Administration (FHA) from $729,750 to $625,500. Why? Government agencies now back or insure most loans, but it’s time to make the housing market less dependent on the feds. Lowering loan limits is one step in that direction; however, the real estate industry has urged the government to push the loan limits back up. And you know what? They scored a half-win in November, raising the loan limit back up for FHA loans but not for Fannie and Freddie.
What Really Mattered: Mortgage lenders are willing to charge lower rates for loans that are backed by Fannie or Freddie; with a lower conforming loan limit, a small number of loans that used to qualify for federal backing no longer do. As a result, homes that are now on the wrong side of the conforming loan limit will see fewer potential buyers and lower sales prices. This will matter more in California, New York, and other high-cost areas.
As we wrap up 2011, Trulia’s Chief Economist looks ahead at what’s in store for the battered housing market and which cities have a big reason to celebrate the New Year.
My crystal ball is never as crystal-clear as I’d like, but I do think that we can expect a gradual economic recovery to move the housing market a few steps back toward normal in 2012. Even so, we still have a long ways to go. As we exit 2011, prices still not have rebounded after their huge declines, inventories are still well above normal, and the foreclosure rate is still far higher than before the bubble. Even the best possible 2012 won’t get us halfway back toward normal.
Before getting into the predictions, let me be upfront about what I’m assuming. After 14 months of job gains, I expect the economy to continue its slow but determined recovery. I don’t do my own macroeconomic forecasts, but every single one of the fifty-ish economic forecasters surveyed by the Wall Street Journal expects the economy to grow throughout 2012, and that makes sense to me. Of course, any unexpected severe political or financial crisis could tip us back into recession, and then all bets are off. Here’s to hoping that doesn’t happen.
My five predictions for housing in 2012:
1) Delinquencies will go down, but foreclosures will go up. Fewer borrowers will fall behind on their payments next year, thanks to the strengthening economy and refinancings. The share of delinquent borrowers is already down more than a quarter from the peak a couple of years ago. But many borrowers who fell behind on their payments during the housing crisis are still in limbo: last year’s robo-signing controversy threw a wrench in the gears of the foreclosure process. That means that some delinquent loans haven’t yet entered the foreclosure process, and even fewer moved all the way through foreclosure — especially in Florida and other states where foreclosures require a longer legal process. Once a settlement is reached with banks over robo-signing in those states, we’ll see a new wave of foreclosures and foreclosure sales that’s long overdue. It’s a necessary step in getting the housing market back to normal even though it will be painful for people who lose their homes — and will rattle American’s confidence in the housing recovery.
2) Rents will rise – which is a bad thing. With fewer people buying homes and more people losing their homes to foreclosures, the rental market is only going to get tighter especially in older, dense cities like New York, Washington DC and San Francisco. High rents will hold back economic growth if businesses can’t pay workers enough to have a roof over their heads. Squeezed city-dwellers won’t get relief until late 2012: that’s when a wave of new multi-unit construction projects that started late this year will be completed and available for rent. To tackle growth-killing high living costs in the priciest cities head on, local governments need to get rid of height restrictions and arduous permitting processes, which hold back urban construction and push development to the suburbs.
3) Mortgage rates will inch up – which will probably be a good thing. A stronger economy will push Treasury bonds and mortgage rates up because inflation becomes more likely and investors demand higher rates to hold bonds. The Fed’s “Operation Twist” will prevent rates from rising too much, but other forces could push rates up higher or, alternatively, send them falling. If investors think the U.S. government will have trouble paying its debt – which they might if the government can’t agree to raise the debt ceiling or narrow the deficit — they’ll demand higher rates because of that risk; but global economic uncertainty – even here at home — could lower American interest rates if investors think American bonds are safe relative to other investments. Got whiplash yet? You’re forgiven. Lots of factors can push rates up or down. For the housing market, which direction rates go is less important than why. Gradual economic recovery is good news for the housing market even if it means higher mortgage rates – that’s what I think will win out next year. We’ll have higher rates for a reason we can cheer.
4) Government will sit on its hands. In election years, politicians don’t take risks: they’re more talk and less action, so don’t expect any bold housing policy reforms next year. What’s more, with the housing market now recovering, we’re not in enough of a crisis to force political opponents together. The time has passed for bold government action on housing. We’ll look back wistfully on the modest policy wins of 2011: borrowers who’ve kept up their payments can now refinance under the expanded HARP program, and the government is planning ways to sell or rent out vacant homes it owns (which will probably be announced in early 2012). But these targeted policies won’t move the needle on national foreclosures, sales or prices.
5) Smart cities are hot. In 2012, the local housing markets that will enjoy rising prices, new construction or both, are those that start the year with stronger job growth and fewer empty homes holding back the market. Based on these factors, along with other leading indicators, here are my top five cities to watch:
—Austin, TX, and Houston, TX. The bloom’s not off the yellow rose of Texas. Steady job growth and a construction revival make Austin and Houston two of my five cities to watch. Texas isn’t hung over from the housing boom like the other big states of the South and West, so there’s little to hold back growth. Honorable mention to Fort Worth and San Antonio.
—San Jose, CA. Wasn’t California at the center of the foreclosure crisis? Didn’t prices there fall more than everywhere else in the country? Yup. But there’s no such thing as the California housing market: California is almost as diverse as the U.S. Even though prices plummeted and foreclosures skyrocketed in inland California, the coast is another world. San Jose’s perennially tight housing market makes it faster to bounce back. The San Jose market –which includes most of Silicon Valley – has rapid job growth and the lowest vacancy rate in the country.
—Suburbs of Boston, MA. This Cambridge-Newton-Framingham market just west of Boston has a strong jobs engine and, like most of New England, missed the worst of the housing bubble. Honorable mention goes to Worcester, one step further west, and Boston’s northern suburbs around Peabody. These areas all benefit from offering more bang for the buck than crowded, expensive Boston: this is because most people looking to move are searching in more suburban or smaller areas than where they live now.
—Rochester, NY. That’s my hometown, and knowing what’s happened to Kodak and other pillars of the local economy, I was surprised when Rochester scored on the top 5 list. (I applied the same formula to all cities and did not have my thumb on the scale.) Prices – which fell little during the boom – are stable, and the economy has weathered blow after blow and is expanding.
What do these markets have in common? Three – Austin, San Jose, and the area west of Boston – are technology centers. In those three metros, as well as in Rochester, a center of high-skill manufacturing industries, education levels are well above the national average. As the recovery proceeds, smart cities are leading the way. During the housing boom, the go-go cities tended to be lower-skill, lower-education metros. But in 2012, smart is hot: it’ll be the revenge of the nerds.
Links to Trulia Insights blog posts:
Renting out REO properties would be a drop in the bucket – it wouldn’t clear much of the housing inventory and wouldn’t ease rising urban rents, but it would help shore up neighborhoods where housing prices took the biggest slide, and that makes it worthwhile.
The Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, is considering proposals for selling government-owned homes to investors, who would then turnaround and sell or rent them out. (The official request for policy ideas is here.) It’s hoped that this move would help government agencies earn some much-needed revenue, boost neighborhood home values by getting buyers or renters into vacant homes and ease tight rental markets by expanding the supply of rental housing.
Even though Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are national agencies, housing markets are local, which means that the vacant, foreclosed properties they own are concentrated in regions that were hit hardest by the housing crisis. Among larger metro areas, these agencies own the most foreclosed property – known as REO (real estate owned) – in Las Vegas and Atlanta, after adjusting for metro area size. Several metros in Arizona, Michigan and California are also among the top 20 metros where the government owns a lot of homes.
|Metro area||Government-owned REO for sale per 10,000 housing units|
|Las Vegas-Paradise, NV||28.9|
|Atlanta-Sandy Springs-Marietta, GA||22.6|
|Lake Havasu City-Kingman, AZ||20.9|
|Riverside-San Bernardino-Ontario, CA||16.3|
|Warren-Troy-Farmington Hills, MI||15.4|
|Lansing-East Lansing, MI||14.9|
|Boise City-Nampa, ID||14.5|
|Cape Coral-Fort Myers, FL||13.4|
NOTE: Top larger metros (100,000 housing units or more), ranked by government REO per ten-thousand housing units. Includes all homes owned by Fannie Mae, Freddie Mac and FHA that have been through the foreclosure process and are being marketed for sale, as reported by the U.S. Department of Housing and Urban Development (HUD).
Generally, places that suffered most during the housing bust from severely falling home prices and high mortgage delinquency rates now have the highest concentration of these vacant, foreclosed government-owned homes. The big exception is Florida. While the Sunshine State experienced big price declines and lots of defaults, surprisingly few of the homes lost there have made it through the foreclosure process and can be put back on the market. Why is that? It’s because the foreclosure process in Florida takes a lot longer than in most other states. As a result, many of the Florida homes that the government and banks plan to put on the market someday are trapped in a slow limbo today.
Would selling these government homes to investors help neighborhoods? Yes. Vacant, foreclosed homes drag down the value of neighboring properties, so getting those homes occupied would help stabilize neighborhoods. A push to rent or sell these homes can and would help neighborhood home prices in areas where the government owns a lot of the homes – but such a policy wouldn’t do as much good for hard-hit Florida where the government has less REO to sell. The map shows where the government owns the most REO ready to sell (relative to total housing units) – and where getting those homes occupied could help local markets the most. The Southwest, inland California, northern Georgia and southeastern Michigan stand to gain the most from selling or renting out government REO.
But if you don’t live in a neighborhood with lots of homes that the government can sell or rent, then REO policies wouldn’t do you much good. Renting out these government-owned homes wouldn’t ease pressure on tightening urban rental markets. Renters typically live in bigger, denser cities, which are not where most of the government-owned homes are. In fact the typical location of a government-owned home is in a neighborhood with fewer renters, higher rental vacancies and where homes are more spread out. (FYI, this description is based on the housing characteristics of zip codes where these government REOs are located.) In short: you’d benefit if you live near government-owned vacant homes that get occupied, or if you’re looking to rent in neighborhoods where lots of overbuilding led to lots of foreclosures, but most people facing tight rental markets live far from these clusters of REO properties. Renting out government-owned homes wouldn’t give renters more options in most neighborhoods, which means that those same government-owned homes might have a tough time finding tenants.
And even if the government sold all its REO to investors and those investors were able to find buyers or renters immediately, it would make only a small dent in the overhang of empty homes from the housing boom. Of all the REO homes currently owned by Fannie Mae, Freddie Mac and FHA, fewer than 100,000 units are currently listed for sale. (In total, including those not yet being marketed for sale, these agencies own over 200,000 homes.) There are over 3 million total homes on the market, plus millions more of “shadow inventory” – homes in default or foreclosure that aren’t on the market but are likely to be in the future. Getting people in 100,000 government-owned homes still leaves a lot of housing supply that will take years for the market to absorb.
So is this policy a misstep? No. It would help some of the most struggling neighborhoods in the country by getting vacant homes occupied. It leaves lots of big problems unsolved, but no one housing policy will fix what ails every local housing market. And, remember, housing is local, so the housing market is not just the federal government’s problem: state and local governments need to act, too. Florida loses out on the benefits of REO sales because its foreclosure process takes so long. Cities with tight rental markets need to boost supply by undoing regulations that make construction expensive or impossible. Just because one policy wouldn’t fix everything is no reason not to do it, but we can’t stop there.0 comments
The good, the bad and the ugly on the federal government’s ReFi Plan, and where are home prices heading as of now?
This week’s big news was the plan to expand refinancing eligibility. I’m devoting this week’s post to explaining which problems this plan will and won’t solve, and which other policies being kicked around might solve the problems that easier refinancing won’t. But first, a quick look at the latest home price numbers.
Home Prices Up and Down Depending on Where You Live
Two different home price indexes reported this week that prices have fallen nationally about 4% this year up to August 2011. But prices were relatively stable over the last three months after slipping earlier this year, with Case-Shiller reporting a -0.3% drop and the Federal Housing Finance Agency (FHFA) reporting a +0.6% bump. Nationally, this is a sign that prices might finally be leveling out, which could be the cue that everyone’s been waiting for – the cue for builders to start planning to build single family homes and for banks and home sellers that it’s time to start putting more of their vacant or distressed properties on the market. As always, location matters: this past summer, prices went up the most in Detroit, followed by Chicago, Washington DC, Minneapolis and Boston. So what’s going on here? Well, Detroit’s price rise is a bounceback from the big price decline during the recession – the largest drop among big metros outside the Sunbelt. The other cities’ price increases were helped by a combinationrelatively low vacancy rates and stable job growth. In Atlanta, where jobs are disappearing, home prices fell most, followed by Phoenix, where there are still a ton of vacant homes. Sellers in those cities hoping to unload will have to wait.
The Federal Government’s Re-Fi Plan: The Good, The Bad and The Ugly
Now on to politics and policy. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, announced an expansion in refinancing eligibility through the Home Affordable Refinance Program (HARP). The official notice is here.
So here’s what’s new: some people who are seriously underwater are now eligible to refinance their First: what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT, your loan must be owned or guaranteed by mortgages.
First:what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT: your loan must be owned or guaranteed by Fannie Mae or Freddie Mac and you need to be current on your mortgage payments, have no late payments in the last six months, and no more than one late payment in the last twelve months. That’s a big “but” and will disqualify many people who want to refinance, but those who do qualify might save a lot. A rough rule-of-thumb is that lowering your mortgage rate by a point will lower your monthly payment by around 10%, but the effect on your payment depends on the details of your loan.
Next:what does it mean for the economy and the housing market? Since borrowers have to be current on their payments to qualify, lots of people on the verge of losing their homeswon’t be helped. And, a lower mortgage rate doesn’t mean a lower loan principal balance right away (even though some borrowers might use the lower rates to shorten their loan and start paying down) – so really underwater borrowers will stay really underwater and still at risk of default and foreclosure. And of course easing refinancing doesn’t help people buy homes because you need to own a home already in order to refinance. So what will this plan do? Stimulate the economy – somewhat. Qualifying borrowers will have lower monthly mortgage payments and therefore more money in their pockets to spend on other things. Who pays for this? Investors in mortgages or mortgage-backed securities – which includes government agencies – who will receive reduced mortgage payments from borrowers. On balance, it’s stimulus because the borrowers will increase their spending more than the investors will decrease theirs. In short, the refinancing expansion is an economic stimulus that avoids the messy politics of trying to get Congress to approve more stimulus plans.
Since the ReFi plan leaves many problems unsolved, debate is brewing on other housing policies. No formal proposals in these areas have come out yet, so treat this as a viewer’s guide to what might be coming next from Washington on housing policy. Grab your beer and chips, and here we go:
1) Principal reductions: The most direct way to prevent future defaults and foreclosures is to reduce mortgage principal balances – in order to get underwater borrowers closer to air. These proposals typically call for the government or whoever the mortgage-holder is to absorb the cost of the reduction. But there’s no free lunch for the borrower.Economist Marty Feldstein proposed that borrowers could have principal reductions in exchange for the lender having “recourse” – which means that a borrower who defaults after a principal reduction could lose not only their house but other assets. Earlier principal reduction proposals called for borrowers who benefited to share any future increases in home value with the government or whoever absorbed the cost of the loan reduction.
2) Renting vacant, foreclosed properties: Bank and government agencies own vacant properties, which aren’t earning them any money – and vacant properties pull down neighboring home values, too. At the same time, as fewer people want to own their own homes, the demand for rentals is rising, leading to lower rental vacancies and sky-high rents. This “plan” aims to kill all birds with one stone, and give owners of vacant properties – or investors who would buy them – incentives to rent them out? Sounds great in theory. Could work in practice if the investors can spruce up these homes and manage them as rentals. The hitch is that lots of the vacant, foreclosed homes are in the outer suburbs (or what you could call, the middle of nowhere), where so much construction during the housing boom took place, but the tight rental markets tend to be in big, dense cities. If we could only figure out how to take a vacant, foreclosed single-family home in Modesto and rent it out as a one-bedroom apartment in San Francisco ….
3) The mortgage interest deduction – just about every economist wants to tackle this, but just about no politician does (can we say, election suicide?). The two hotly debated questions are (1) if the government is going to spend $100 billion annually to support homeownership, is the mortgage interest deduction, as it’s currently designed, the right way to do it? and (2) should the government spend $100 billion annually to help people buy homes in the first place? This is a big, messy question that affects tens of millions of homeowners and all taxpayers. I’ll take this on in a future week.
3) Do we need Fannie Mae and Freddie Mac? – do these institutions help keep mortgage rates low and expand homeownership, or do they deserve blame for the housing mess we’re in? Politicians will ramp up this debate as the housing market moves out of intensive care and can begin to walk on its own with less government support. This, too, I’ll take up in a future week.