Another Bubble on the Way?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
http://www.latimes.com/business/la-fi-fannie-fredd...
Read this article! Looks like Freddie/Fannie will be lowering down payment requirements as well as required Credit scores.
Great idea morons, let's give more credit to unworthy borrowers and not open it up to the worthy borrowers with proven track records, case in point, us pro RE investors! Unbelievable. I guess they will never learn their lesson of less than 8 years ago.
Look at it this way...in about 5 or 6 years we should all be able to pick up dirt cheap properties on the MLS again!
Here we go again,
Get you Crash Helmets!!!!!!!!
Look at it this way...in about 5 or 6 years we should all be able to pick up dirt cheap properties on the MLS again!
Look at it this way...in about 5 or 6 years we should all be able to pick up dirt cheap properties on the MLS again!
Well, that is certainly the play, of course if your dollar dips dramatically and interest rates climb aggressively, you both lose your buying power and those to sell to. This goes much deeper than just what you mention.
Love to get deep on this and hear from the powers on BP.
@J Scott @Dion DePaoli @Jon Holdman @Karen Margrave
We're knee deep in research for our January market update on this very topic. I've been hard pressed to find an economist that's negative on the California economy for 2015. The big difference with the new 97% program, as it's currently being presented, is that the borrowers will have to fully qualify. I'm assuming under the same guidelines that QRM requires. Yeah, we'll see if that lasts. Remember that the best performing loan program, even through the downturn, was the nothing down VA program. It's about qualifying and not lending money to anyone with a pulse. Maybe they could stay out of trouble that way.
Many of the building projects in Riverside just broke ground or won't until 2015. The building industry has been DEAD since 2008 out here so it's going to be weird to see what that looks like for an economic engine locally. I don't know enough about how long that would take to show up on a chart. Then again, builders are not building until a home is sold. No more building out a tract hoping for them all to sell. Not sure if they are doing it that way in Irvine and San Diego where I know there's some tracts going in. The fact that building is occurring seems positive.
I am set to attend the California Association of Realtor Economic Summit in November. Looks super nerdy and the line up is all academia economists for the most part. I'll report back.
I was at an event with Bruce Norris, Christopher Thornberg, John Husing, and an economist from Wells Fargo in May I believe. All thought 2014 was a bit of a dud but didn't see a huge reason why the Inland Empire region would experience a negative 2015.
I purchased a rental in Riverside early this year and prices have still gone up. The price point was under $300k and inventory for the area is still tight. My brother, however, said there's a pocket in Corona that he watches where inventory was back up to 5 months and prices had dropped. That area is all over the $400k mark.
I'm curious to see if they revise HUD funding guidelines. Riverside and San Diego County both got 30% slashed with OC and LA only got 10%. I think I heard CAR is fighting for the return to previous levels. No we have quantitative easing that just ended completely. I'm not going to pretend I know what that will look like. I do know there's a lot of money looking for return. I know Dad thinks these hedge funds would put their money to work faster going after the private market. Far more demand. We'll see!
I sure wish they would have gotten creative. I recently emailed the City of Riverside's Community Director about an idea of a nothing down program for graduating university students. In Riverside, we have four colleges but many graduates leave for better jobs along the coast. What if there was a nothing down program for students with a good business idea? In exchange for getting them into an affordable home with nothing down, the graduate would commit five years to working on building the business in the city. Granted the would need to have a solid business plan and idea. If they moved before, they would have to pay back the down payment assistance.
When you plant roots for that long, you're more likely to stay. In this scenario, students would be locking in their payment and would be more likely to take better care of the property. (I live in an area with a lot of student renters)
Imagine if graduating students in the Inland Empire back in 2009 were offered such a program! Not only would the city stopped the brain drain, we would have had almost 30-somethings with a home, fixed living expenses, and equity in their home to invest back in their business.
Yes indeed, I totally agree this could lead to another bubble. Of course, the question to ask in the immediate term is has the bubble even started inflating yet?
Anyone has any sense if we are currently in a bubble market? Right now, OC real estate is over priced by an estimated 15%, a little expensive but certainly not bubble territory.
Right now I'm seeing a lot of homes with equity hitting the market. Properties that were bought in the 2009-2012 period. Interesting how people see equity and pull the trigger to sell. The market has cooled off and I see a lot of price reductions and more inventory on the market.
Price reductions because they were dreaming for a high number or real comps coming in lower. I see the down arrow all over the MLS but the listing price that some people had stuff listed at were almost offensive. I don't think some Realtors are dong a good job telling their buyers what's up. Creating a bidding war is a far better strategy than a reverse auction (in my opinion).
@Aaron Norris Yes exactly. Agents are definitely playing a role.
If you want my actual option, it's that there should be no federally insured mortgages and the Fed should stop artificially suppressing interest rates. Banks should be free to assess the credit worthiness of individual borrowers, without the specter of federally insured mortgages. If that were the case, we would have a lot less situations where people are in homes they clearly can't afford.
Somewhere along the way, the federal government determined home ownership to be a right. It isn't. It's a privilege. It has to be earned. Is saving 20% for a down payment painful? You bet it is. But, once you get there, you can probably afford the house.
Yes, I agree...a bad decision. Banks rarely learn their lesson, unless forced to. They're like sheep following the herd. It will increase competition and demand for properties, but should help drive prices up for us buy and hold investors.
I hate to burst your bubble, but prices in CA do go down and the markets are cyclical (see chart below). Based on this analysis, LA was predicted to be at a peak in last June. You watching days on market, construction, vacancy rates? Any declining trends?
What's unclear is what the impact of the tech industry will be on the real estate cycle for markets that are heavily tech focused (SF, Silicon Valley, to less extent LA)...
@Account Closed for the big flips. :) I like my boring single family rentals in the IE.
Thanks @Aaron Norris
How the tech industry I think is impacting the cycle is it's stretching it out a bit, so the peak should last longer, but we will eventually see the market soften. I'm pretty well-connected in the tech space and we're seeing lots of engineers moving from Europe, Asia, and South America to start their tech companies in Silicon Valley (to access talent and capital). So, it's unclear how stretched out the cycle will get, but I would be a more than a little nervous buying in CA right now. I would likely wait for the next drop and scoop up deals at that time. I'm currently buying in markets that are still in the expansion phase.
@Account Closed I completely agree. I am not sure if it is Silicon Valley as much as it is Silicon Beach! Venice and Santa Monica are home to over 500 tech start ups. Being a techie in the BI field, I gladly welcome it. I've noticed the push around the time Google was moving in to Venice. I'm glad I have a front row seat to see how it plays out.
Will this mean that a lot of those sub $100k homes will be snapped up by low income buyers and therefore taking them away from investors who already dabble in that price range?
It could...although I view that as unlikely. Most of the folks that are currently renting houses in this same price point are doing so because they don't have the proper resources (income, credit, etc) to qualify, and even with the lowered requirements, still won't be able to buy.
Something else we may see is a jump in low-income properties being built-kinda like what we saw in the Desert Valley (Victorville) before the crash.
@Will Barnard I tend to be the guy in the room standing by myself telling everyone to put the pitch forks down and go home, Frankenstein's monster is no threat.
It usually cracks me up when folks pick on Fannie/Freddie/Ginnie in the mortgage market. Those three with Fannie Mae leading the pack are the three single best mortgage investors in the entire world. (read that sentence again) Fannie Mae has been investing in mortgages since 1938. Right now Fannie has paid uncle sam over $120 Billion under conservator-ship. A cash generating machine. Mind you, Fannie Mae alone covers about $4 Trillion in the mortgage market. Freddie is in the $3 Trillion. These guys are not players they are market makers. Their size alone should really allow us to realize they actually do a pretty darn good job but we can look at some other details.
First it is important to put reduced down payments into proper context. Flex 97 is a mortgage product that rolled out in the late 1980's. The program offered a 3% down payment to folks with good credit but lacked sufficient down payments. That program lead us to many well loved and often miss-quoted loan programs such as My Community programs meant to incentive police, firefighters and teachers to take up home ownership. My Community loan products were often what layman referred to as the "First Time Home Buyer" programs. The program which allowed for reduced down payments for all borrowers not just those who were purchasing their first home. A little sales tactic mortgage brokers and loan officers never corrected the public on as it helped spawn sales I suppose.
Often times, if you went with the story from the mob the agencies are monsters of deceit, lies, over extended risk and poor lending decisions. Coming right out of the crash the default rates for these giants were a whopping 3.7%. Now their default rates are under 3%. Not sure what to make of that number? Well, the broader mortgage market estimated default rate was closer to 30%. Ten times that of Fannie and Freddie. If we measure effective lending guidelines by the default ratio and these guys are less than 5%, I would hope most understand that is doing stellar. Mind you if you do not think that, default is a constant in the industry there is no zero and these GSE's have been good stewards and engineers managing that number to a very low impact over a very long time with all sorts of economic pressure and events around the world taking place for over 80 years. If a private company could boast such a track record they would be considered a gold standard but I digress.
As far as the side stool argument goes of good ole tax payer dollars 'paying' for the two to make their mortgages with the guarantees. Well, the guarantee cost referred to as their 'g-fee' on their financial reports comes in at 0.57%. It is passed through unto the borrower at a cost that is close to one half of one point of interest. Not a bad fee base paid by the borrower to offset the credit risk. That said, the narrative would have us thinking that frims are mailing tax payer dollars to borrowers so they can shop on Amzaon.com. It is not really the case. With a default rate less than 5% and a economic structuring on trillions of dollars of around 0.56%, I would say they have a good handle being able to finance the potential demands of the programs they produce.
In fact, the rules that REI folks run around quoting, searching for and actually working with on a daily basis are bi-products of the two mortgage giants. They literally have created standards that are industry normal. They do this because they have such a long and rich set of data to make decisions on and from, which they have been doing quite well for decades. The two firms literally wrote the book on mortgage investing.
The public gives the two firms a bad rap. Its unfair and unfounded. The run up to the crash was not a Fannie/Freddie made situation. In fact the exact opposite. The vacation from the standards the two GSE's gave us allowed the crash. Fannie has a DTI ratio of 34%. Sub Prime lending said it was cool to go to 50%. In fact, where the heck do you think we pulled the data from to make the Qualified Mortgage Rule (QM) and Ability to Repay Rule (ATR)? A DTI no higher than 43%. Yea - you guessed it. The GSE's.
The general estimate right now for non-GSE loans is about 10%. In other words only 10% of the loans originated right now in the market are portfolio. 90% of the loans made in today's market are agency destine loans.
Now, an important detail this article dances around and most of the public does not fully understand is how the mechanics of the GSE's actually work. A Borrower does not borrower from Fannie/Freddie/Ginnie directly. A lender writes the loan using the underwriting guidelines issued from the agency. Only very large lenders can actually sell to the agencies. The acting lender creates "overlays" on top of the guides issued by these firms. An overlay is where the lending banker increases the minimal standard to the guideline in order to avoid a put-back of the loan or re-purchase of the loan. For instance Fannie will take a 620 credit score but many banks will not lend under 640 to avoid the -possible put-back or re-purchase if for some reason the credit score drops during the selling cycle.
The story and commentary here speaks to the wide concern that Lenders are not lending. Well, they are not lending as much as they could. The general idea behind that is the financial fears stemming from re-purchase and put back requirements. All of that is very true. The average credit score in the US is 720 and the average agency loan credit score is 760. Far above the minimal score allowed of 620. In a similar correlation the mean down payment on Fannie Mae's portfolio is 24.88% - a far cry from 5% or 3%. A bubble you say? Yea....NO. Not one caused by them anyway.
We can go burn down the castle based on our misplaced fears however once the castle is gone with only ashes remaining we will realize it was actually all of the non-agency loan programs that eroded the mortgage market thus leading us into the mortgage melt-down. To the FM/FM demonizer I say you should go look at what the mortgage market looked like before Fannie Mae even existed. Home ownership was reserved for the wealthy with an ownership rate below 40% for the nation. Now we enjoy home ownership at around 62%. Pre GSE, it was so bad it hurt the economy and stalled recovery from the crash of 1929. The crash and failing recovery caused around 1,000 foreclosures per day from lack of mortgage market liquidity. It was not until we introduced VA loans that home ownership rates rose above 50%, another great program which enjoys a very small default ratio.
The talking point which has no factual basis that federal incentives into home ownership were the driving forces into our 2007 crash are simply not true. In fact, it is quite the opposite. What lead us into the bubble was again, the vacation of the guidelines issued for decades successfully by the GSE's. In fact, the GSE actually issued for a short time their version of sub-prime loans which had a funny name to them like prime less or not quite prime or something like that. THOSE loans had a default rate in line with the entire GSE portfolio - far, far below the actual sub-prime lenders. I would point to that and simply say, they seem to have gotten it right. Again, all this contrary to public belief.
As an interesting aside, REI folks are always running around trying to find ways around the guidelines of the agencies. Loan unit max numbers, guides on income and assets and let's not forget property standards amongst other things. Here on BP those have to be up in the top 5% of question types. Folks trying, pretty hard, to circumvent the standard guides - so then I would ask, who is the real culprit, the guy who sets the standard based on empirical data over decades or the folks who try and get around the guides?
As REI you want these guys to stick around. You want more Borrowers in their programs. Frankly they are better at mortgages than anyone on this planet. Period. Anyone who tells you otherwise likely does not fully understand their own concern for the agencies. The general ideas these firms support, which is creating environments which encourage properly priced home ownership financing brings stability to communities and the market. I would argue you want these agency's around. The stability we seek in our communities has been a model these firms have developed and successfully worked with for very long time and through thick and thin, high rates and low rates, good economies and bad economies and they have frankly done a darn good job at it.
This is a response I wrote the other day when this topic came up previously. fannie-mae-will-buy-97-ltv-mortgages
This is plain and simple government interference into the market. The President made absolutely sure that the person he picked as the chairman of the FHFA, long time Dem Congressman Mel Watt, would loosen up Fannie's and Freddie's lending standards. Something that the previous chairman flatly refused to do FOR OBVIOUS REASONS!
So now we have Mel Watt taking the place of longtime Dem operative Jim Johnson, the former Fannie CEO who loosened up lending standards back in the 1990s.
As in the 1990s the banks thus far are refusing to go along so I'm sure there will be some lawsuits which force the banks to loosen their overlays. I wonder if there will be a new HUD secretary, like Andrew Cuomo, HUD head 1997-2001, who brags about forcing Fannie and Freddie to buy subprime mortgages like Cuomo did. That act of unbelievable stupidity certainly didn't hurt his political career since he is now Governor of NY.
It saddens me to think of all of the people who will be hurt by this move. I wish everyone could own their own home, but as even Barney Frank said 'government subsidies should be focused on affordable rental housing, not in pushing low income people into owning homes that they can't afford.'
Bottomline-it will take time, but this will be a tragic move on the government's part.
@Dion DePaoli Great post and I agree with you 100%.
Freddie and Fannie underwriting guidelines moved the minimum credits scores down from 660 to 620 but the average guarantee loan credit score per the article is 742 which is still considered "excellent". So the average guarantee loan credit score now moves down to what...700? Yes more are going to qualify but it still not like the lending days prior to 2008.
Also lenders find that people are more willing to walk away from an investment home more than their primary home.
An observation on your system is that it is, as Hattie points out, fatally flawed. When I talk about the USA RE market to international investors I call it systemic financial irresponsibility. Outside of communist nations America is the only country that allows owners and banks to lose money over and over again in real estate. The fruit of that is a complete disregard for the responsibility that should come with a mortgage and home ownership.
I have never seen anything like it in any other country. You would be far healthier with no government involvement in mortgages and home ownership. Of course that will never happen but how you got to where you are in a western democracy is quite incredible.
Well said @Will Barnard .
Freddie/Fannie, which is an appendage of the Federal Government, are morons by design. The government creates the problem, in this case the 'housing bubble' of 2007-08, lowers standards for 'all unqualified, but breathing buyers to get in' through the Carter ERA with the "Community Re-investment Act of 1977" and the claims to 'fix' the problem with more regulations later i.e.- the monstrosity of Dodd-Frank regulations that it is packed with.
The masterminds in government create regulations to manage 'we the people' more and do not fix any issues the bill was intended to solve. As they say, learn history as it tends to be repeated. Be cautious, as this is all too familiar.