The truth about the housing market
In today’s uncertain market, fear runs rampant on both the buying and selling sides of the fence. Many myths need debunking. Here are five untruths held by buyers, and five held by sellers.
Buyer myth No. 1: The longer the house is on the market, the more you can negotiate.
When buyers ask, “How long has this property been on the market?”, they think “six months” means they can negotiate the price down. It more often means the seller is stubbornly holding on to their price.
Buyer myth No. 2: The sellers today are desperate.
Most aren’t. Always ask why the sellers are selling. It’s the key to finding how motivated and anxious they are. “I’m being transferred to Dallas” is a very different answer than “We’d like to find something bigger.” The first homeowner is hot to trot.
Buyer myth No. 3: You can’t buy a home today with less than 20 percent down.
FHA loans require only 3.5 percent down, and you can even ask the seller to pay the closing costs.
Buyer myth No. 4: You need good credit to get a good loan.
Once again, the FHA to the rescue! They’re happy to lend money to buyers with bad credit.
Buyer myth No. 5: You shouldn't buy before prices have bottomed.
You can’t sharpshoot the real estate market. Once you identify the “bottom,” prices have already moved up.
Seller myth No. 1: Now’s the absolute worst time to sell.
Not necessarily. It depends upon where you live. Many of the worst hit markets, like Las Vegas, Phoenix or San Diego, are already beginning to turn around. And if you’re a homeowner who wants to trade up, the loss you’ll take on your current home will be more than offset by the bargain you’ll get on the next one.
Seller myth No. 2: Never respond to a low-ball bid.
All buyers today feel obligated to put in low-ball offers to see if the seller bites. If you respond with a reasonable counter offer, most buyers can be convinced to come up in price and make the deal.
Seller myth No. 3: The first offer is never the best offer.
Most sellers believe that it’s smart to hold out for something better. But four times out of five, the first offer is the best you’ll ever see.
Seller myth No. 4: 'I can always reduce my price later.'
Sellers often price their home high for a few weeks just to test the market. But buyers shop by price bracket and if your house is in the wrong one, you’ll just help sell everyone else’s home while yours sits there overpriced. And reducing your price later in small increments puts you in the position of chasing the tide as it goes out.
Seller myth No. 5: Before you refinance, shop around.
You can if you want, but you’ll usually get the best deal from your current lender. And you’ll be able to negotiate your closing costs.
Source: Barbara Corcoran
MSNBC.com The Today's Show
Monday, January 26, 2009
Wednesday, January 21, 2009
What's Ahead For Mortgages in 2009??
The mess won't be cleaned up soon, so homeowners -- and buyers -- must address key questions about financing, the housing market and 'underwater' loans.
If 2008 was the year of foreclosures and when "underwater" entered every homeowner's lexicon, 2009 will be the year of refinances and mortgage modifications.
In hindsight, the mortgage mess seemed inevitable: Absurdly loose credit from 2002 to 2007 led to a bubble in house prices, scores of subprime lenders went out of business in 2007 as the risks caught up with them, and the misery spread to homeowners in 2008.
As home prices fell, millions of homeowners discovered that they owed more than their houses were worth. They were unable to refinance and unable to sell. Delinquencies (defined as house payments at least 30 days late) soared.
As the recession matures in 2009, more people are going to fall behind on their mortgage payments. At the same time, the federal government will try to hold down mortgage rates. And house prices will continue to fall. These three factors limit the smart moves you can make in 2009 with your mortgage and equity debt.
Buying a house
House prices have been falling in most places. In declining markets, people have trouble deciding whether to buy a house now or wait for prices to fall further. Instead of getting stuck on the buy-or-wait question, smart consumers consider other questions first:
1. Have we put our financial house in order? Not long ago, the best mortgage deals were offered to borrowers with credit scores of 720 or higher. Nowadays, many lenders' thresholds have risen to 740. The necessity of a higher credit score is just one consequence of the mortgage debacle, and lenders have tightened their requirements in other ways, too.
During the boom years, many applicants merely stated their incomes without having to provide documentation. Those days are gone. Low-documentation and no-documentation loans are rare. Expect to provide paycheck stubs or tax returns, or both, to demonstrate that you earn what you say you earn.
The lender will want to see that your expenses are in line with your income. You might have to provide bank statements to show where the money goes. If a big chunk of your monthly income goes toward debts for credit cards, cars and college, the lender might constrain the amount you may borrow.
2. Have we saved enough for a down payment? During the credit and housing boom, people routinely bought houses with no money down. Piggyback loans were the norm as homeowners avoided mortgage insurance. Now, substantial down payments have made a comeback, and so has mortgage insurance.
A few low-down-payment programs are still available, all courtesy of the federal government. The Department of Veterans Affairs guarantees mortgages with no down payment, and so does the Department of Agriculture's Rural Housing Service. There are restrictions on who is eligible for those loans, where the loans are available and for how much.
More people are eligible for Federal Housing Administration-insured mortgages, which require down payments as low as 3.5%.
Outside those federal loan programs, most lenders require significant down payments. The requirements vary by lender, the type of dwelling and where it is. A few creditworthy people might be able to buy houses with 5% down, but a 10% minimum is more common.
Mortgage insurance companies won't insure loans on Florida condominiums, so lenders require down payments of at least 20%. For jumbo mortgages in California, many lenders require 30% down payments.
On top of that, the lender will want to know how you got the down payment money. Is it from personal savings? Was all or part of the money a gift from family? If some of the money was given to you, the lender will want to make sure you have enough savings and income to handle temporary financial setbacks.
3. Is this the right time in our lives? Homebuyers, especially first-timers, should aim to own for the medium to long term. House prices have room to fall further in many -- if not most -- markets, and it could take years for prices to rebound. In short, it's a bad idea to buy a house with the intention of selling it in two or three years. Doing so could be a money-losing proposition, especially after factoring in the costs of real-estate commissions and taxes.
Refinancing the mortgage
Elements within the housing industry flew a trial balloon in December to gauge public support for using the Treasury to cut mortgage rates to 4.5%. There was one catch: The low rates supposedly would be for purchases, not refinances.
Nevertheless, mortgage rates have dropped to levels not seen since the refinancing boom of 2003. The low rates sparked a refi boomlet in late 2008, but lots of homeowners were frozen out because their homes had lost equity.
About two-thirds of homes have mortgages. Of those, an estimated one-sixth are underwater -- in other words, the owner owes more on the mortgage than the house is worth. These borrowers can't refinance unless they have enough money saved to make up the difference -- and then some, because they need a bit of equity, too.
According to First American CoreLogic, almost one-quarter of mortgages nationwide were in the category of "near negative equity" in October. These loans were not underwater (yet), but the owners had 5% equity or less. Such borrowers might have trouble refinancing because of the paucity of their equity.
The squeeze caused by falling home values will have a relatively big effect on homeowners with good credit who got adjustable-rate mortgages sometime in 2004, 2005 or 2006. These are the people who will have an incentive to refinance out of their ARMs and into fixed-rate mortgages (a process that Quicken Loans chief economist Bob Walters calls "dis-ARMing").
Most prime adjustables during the 2004-06 period were 3/1 and 5/1 ARMs. These loans had introductory rates that lasted for three or five years; after that the rates will be reset annually. Dates of that first rate reset peaked last summer, but about half a million prime borrowers will see their first reset in 2009.
Modifying the mortgage
One of the big questions of 2009 -- politically, economically and financially -- will be: How do we mass-modify mortgages to avoid foreclosures? Coming up with an answer won't be easy.
A mortgage modification is an alteration of the details of the existing home loan. Usually, but not always, a modification is done after the borrower has fallen behind on the payments by 90 days or more. In a modification, the borrower keeps the loan -- in other words, it's not a refinance. Modifications are usually done when the house is worth less than the mortgage balance.
There are several ways to modify a mortgage. Sometimes the term is extended -- for example, a 30-year mortgage is turned into a 40-year loan. In other cases, the rate is reduced. Or interest is charged on only some of the loan balance. Occasionally, in what's called a principal reduction, the lender forgives some of the debt so that the borrower no longer owes more than the house is worth.
Modifications traditionally have been done case by case. But skyrocketing demand for mortgage modifications will require companies to apply rules that apply to large swaths of borrowers. The rules will determine who gets a modification and who doesn't. Controversy will result when deserving people don't qualify for modifications, while some undeserving people do.
When the government took over IndyMac, one of the country's largest mortgage servicers, the Federal Deposit Insurance Corp. set up rules designed to encourage mortgage modifications. Since then, the government has required lenders, such as Citigroup, to adopt the FDIC's mortgage modification rules as a condition for receiving federal aid.
It's too early to know how successful the FDIC's mortgage modification plan will be, but overall, modifications haven't worked all that well. According to the Office of the Comptroller of the Currency, more than half of loans modified in the first three months of 2008 had fallen behind on their payments within six months.
FDIC Chairwoman Sheila Bair questioned the comptroller data, saying it failed to distinguish "sustainable modifications versus cosmetic modifications."
Paying home equity debt
Because of declining home values, lenders became reluctant in 2008 to underwrite new home equity loans and home equity lines of credit. That trend is likely to continue through 2009.
In areas where home prices are falling fastest, lenders have been reducing the limits on home equity lines of credit or canceling them outright. The best advice on home equity debt is the most basic: Keep paying the monthly bills if you can.
By: Bankrate.com
If 2008 was the year of foreclosures and when "underwater" entered every homeowner's lexicon, 2009 will be the year of refinances and mortgage modifications.
In hindsight, the mortgage mess seemed inevitable: Absurdly loose credit from 2002 to 2007 led to a bubble in house prices, scores of subprime lenders went out of business in 2007 as the risks caught up with them, and the misery spread to homeowners in 2008.
As home prices fell, millions of homeowners discovered that they owed more than their houses were worth. They were unable to refinance and unable to sell. Delinquencies (defined as house payments at least 30 days late) soared.
As the recession matures in 2009, more people are going to fall behind on their mortgage payments. At the same time, the federal government will try to hold down mortgage rates. And house prices will continue to fall. These three factors limit the smart moves you can make in 2009 with your mortgage and equity debt.
Buying a house
House prices have been falling in most places. In declining markets, people have trouble deciding whether to buy a house now or wait for prices to fall further. Instead of getting stuck on the buy-or-wait question, smart consumers consider other questions first:
1. Have we put our financial house in order? Not long ago, the best mortgage deals were offered to borrowers with credit scores of 720 or higher. Nowadays, many lenders' thresholds have risen to 740. The necessity of a higher credit score is just one consequence of the mortgage debacle, and lenders have tightened their requirements in other ways, too.
During the boom years, many applicants merely stated their incomes without having to provide documentation. Those days are gone. Low-documentation and no-documentation loans are rare. Expect to provide paycheck stubs or tax returns, or both, to demonstrate that you earn what you say you earn.
The lender will want to see that your expenses are in line with your income. You might have to provide bank statements to show where the money goes. If a big chunk of your monthly income goes toward debts for credit cards, cars and college, the lender might constrain the amount you may borrow.
2. Have we saved enough for a down payment? During the credit and housing boom, people routinely bought houses with no money down. Piggyback loans were the norm as homeowners avoided mortgage insurance. Now, substantial down payments have made a comeback, and so has mortgage insurance.
A few low-down-payment programs are still available, all courtesy of the federal government. The Department of Veterans Affairs guarantees mortgages with no down payment, and so does the Department of Agriculture's Rural Housing Service. There are restrictions on who is eligible for those loans, where the loans are available and for how much.
More people are eligible for Federal Housing Administration-insured mortgages, which require down payments as low as 3.5%.
Outside those federal loan programs, most lenders require significant down payments. The requirements vary by lender, the type of dwelling and where it is. A few creditworthy people might be able to buy houses with 5% down, but a 10% minimum is more common.
Mortgage insurance companies won't insure loans on Florida condominiums, so lenders require down payments of at least 20%. For jumbo mortgages in California, many lenders require 30% down payments.
On top of that, the lender will want to know how you got the down payment money. Is it from personal savings? Was all or part of the money a gift from family? If some of the money was given to you, the lender will want to make sure you have enough savings and income to handle temporary financial setbacks.
3. Is this the right time in our lives? Homebuyers, especially first-timers, should aim to own for the medium to long term. House prices have room to fall further in many -- if not most -- markets, and it could take years for prices to rebound. In short, it's a bad idea to buy a house with the intention of selling it in two or three years. Doing so could be a money-losing proposition, especially after factoring in the costs of real-estate commissions and taxes.
Refinancing the mortgage
Elements within the housing industry flew a trial balloon in December to gauge public support for using the Treasury to cut mortgage rates to 4.5%. There was one catch: The low rates supposedly would be for purchases, not refinances.
Nevertheless, mortgage rates have dropped to levels not seen since the refinancing boom of 2003. The low rates sparked a refi boomlet in late 2008, but lots of homeowners were frozen out because their homes had lost equity.
About two-thirds of homes have mortgages. Of those, an estimated one-sixth are underwater -- in other words, the owner owes more on the mortgage than the house is worth. These borrowers can't refinance unless they have enough money saved to make up the difference -- and then some, because they need a bit of equity, too.
According to First American CoreLogic, almost one-quarter of mortgages nationwide were in the category of "near negative equity" in October. These loans were not underwater (yet), but the owners had 5% equity or less. Such borrowers might have trouble refinancing because of the paucity of their equity.
The squeeze caused by falling home values will have a relatively big effect on homeowners with good credit who got adjustable-rate mortgages sometime in 2004, 2005 or 2006. These are the people who will have an incentive to refinance out of their ARMs and into fixed-rate mortgages (a process that Quicken Loans chief economist Bob Walters calls "dis-ARMing").
Most prime adjustables during the 2004-06 period were 3/1 and 5/1 ARMs. These loans had introductory rates that lasted for three or five years; after that the rates will be reset annually. Dates of that first rate reset peaked last summer, but about half a million prime borrowers will see their first reset in 2009.
Modifying the mortgage
One of the big questions of 2009 -- politically, economically and financially -- will be: How do we mass-modify mortgages to avoid foreclosures? Coming up with an answer won't be easy.
A mortgage modification is an alteration of the details of the existing home loan. Usually, but not always, a modification is done after the borrower has fallen behind on the payments by 90 days or more. In a modification, the borrower keeps the loan -- in other words, it's not a refinance. Modifications are usually done when the house is worth less than the mortgage balance.
There are several ways to modify a mortgage. Sometimes the term is extended -- for example, a 30-year mortgage is turned into a 40-year loan. In other cases, the rate is reduced. Or interest is charged on only some of the loan balance. Occasionally, in what's called a principal reduction, the lender forgives some of the debt so that the borrower no longer owes more than the house is worth.
Modifications traditionally have been done case by case. But skyrocketing demand for mortgage modifications will require companies to apply rules that apply to large swaths of borrowers. The rules will determine who gets a modification and who doesn't. Controversy will result when deserving people don't qualify for modifications, while some undeserving people do.
When the government took over IndyMac, one of the country's largest mortgage servicers, the Federal Deposit Insurance Corp. set up rules designed to encourage mortgage modifications. Since then, the government has required lenders, such as Citigroup, to adopt the FDIC's mortgage modification rules as a condition for receiving federal aid.
It's too early to know how successful the FDIC's mortgage modification plan will be, but overall, modifications haven't worked all that well. According to the Office of the Comptroller of the Currency, more than half of loans modified in the first three months of 2008 had fallen behind on their payments within six months.
FDIC Chairwoman Sheila Bair questioned the comptroller data, saying it failed to distinguish "sustainable modifications versus cosmetic modifications."
Paying home equity debt
Because of declining home values, lenders became reluctant in 2008 to underwrite new home equity loans and home equity lines of credit. That trend is likely to continue through 2009.
In areas where home prices are falling fastest, lenders have been reducing the limits on home equity lines of credit or canceling them outright. The best advice on home equity debt is the most basic: Keep paying the monthly bills if you can.
By: Bankrate.com
Monday, January 12, 2009
Power to Modify Mortgages Sits Well With Judges
Federal bankruptcy judges say they are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.
Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms on first mortgages for primary residences for homeowners who have sought protection in a Chapter 13 filing. The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced, is one of several efforts Democrats are pushing to give homeowners relief as they wrestle with increasing debt levels and plummeting home values.
Reuters
Proposed changes to bankruptcy laws could save thousands of homeowners from foreclosure.
Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they haven't been able to modify primary-home mortgages since 1979, when the U.S. bankruptcy code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modification, he said.
Allowing a judge to modify loans gets around the problem that many mortgages have been turned into securities and sold to multiple investors. "The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged," Judge Bufford said. "There's nobody on the lender side to do the deal unless you [get permission] from investors, and that's impossible."
The measure is "a good idea," said Laurel Isicoff, a federal bankruptcy judge in Miami. Financial institutions have gotten help from the government, but the only way to fix the economy is through "a holistic approach" that also "solves the problem of people losing their homes."
Until last week, when Citigroup Inc., one of the nation's largest mortgage lenders, dropped its opposition, the banking industry had long fought modification of first mortgages in bankruptcy, fearing it would encourage more homeowners to file for Chapter 13 and that it would further destabilize the housing market. Representatives of the Mortgage Bankers Association said last week that they were still opposed to cramdowns. But Citigroup's support increases the chances of passing legislation that would allow judges to lower the interest rate, reduce the principal or alter the length of primary mortgages.
Opponents of the proposed law change, including the Securities Industry and Financial Markets Association, say it would have "serious and negative consequences," including increasing mortgage rates for consumers overall because investors who typically buy the loans might deem new mortgage contracts too risky.
A Chapter 13 filing is a plan in which debtors can retain assets and pay back their debt over three to five years. About two-thirds of Chapter 13 filers have a mortgage, but half of them aren't able to keep paying the mortgage as part of their reorganization, judges and lawyers say.
A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because "after foreclosure, families get broken up and lenders hold on to nonperforming assets that they sell at a loss."
Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.
She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the new law, her first mortgage on her home also could be modified.
By: Amir Efrati and Jennifer S. Forsyth of The Wall Street Journal
Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms on first mortgages for primary residences for homeowners who have sought protection in a Chapter 13 filing. The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced, is one of several efforts Democrats are pushing to give homeowners relief as they wrestle with increasing debt levels and plummeting home values.
Reuters
Proposed changes to bankruptcy laws could save thousands of homeowners from foreclosure.
Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they haven't been able to modify primary-home mortgages since 1979, when the U.S. bankruptcy code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modification, he said.
Allowing a judge to modify loans gets around the problem that many mortgages have been turned into securities and sold to multiple investors. "The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged," Judge Bufford said. "There's nobody on the lender side to do the deal unless you [get permission] from investors, and that's impossible."
The measure is "a good idea," said Laurel Isicoff, a federal bankruptcy judge in Miami. Financial institutions have gotten help from the government, but the only way to fix the economy is through "a holistic approach" that also "solves the problem of people losing their homes."
Until last week, when Citigroup Inc., one of the nation's largest mortgage lenders, dropped its opposition, the banking industry had long fought modification of first mortgages in bankruptcy, fearing it would encourage more homeowners to file for Chapter 13 and that it would further destabilize the housing market. Representatives of the Mortgage Bankers Association said last week that they were still opposed to cramdowns. But Citigroup's support increases the chances of passing legislation that would allow judges to lower the interest rate, reduce the principal or alter the length of primary mortgages.
Opponents of the proposed law change, including the Securities Industry and Financial Markets Association, say it would have "serious and negative consequences," including increasing mortgage rates for consumers overall because investors who typically buy the loans might deem new mortgage contracts too risky.
A Chapter 13 filing is a plan in which debtors can retain assets and pay back their debt over three to five years. About two-thirds of Chapter 13 filers have a mortgage, but half of them aren't able to keep paying the mortgage as part of their reorganization, judges and lawyers say.
A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because "after foreclosure, families get broken up and lenders hold on to nonperforming assets that they sell at a loss."
Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.
She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the new law, her first mortgage on her home also could be modified.
By: Amir Efrati and Jennifer S. Forsyth of The Wall Street Journal
Monday, January 5, 2009
Home Ownership Goals Created a House of Cards
Lender guidelines were 'obliterated' in buying frenzy
Government long has promoted home ownership as a means of strengthening communities and building the wealth of its citizens, but the recent housing market collapse has some analysts wondering whether consumers have gotten too much of a good thing.
While federal policies helped tens of thousands of U.S. consumers achieve home ownership during the housing boom, they also opened the door to the widespread use of risky loans, a national credit crunch and a wave of foreclosures.
“Public policy has been used to promote home ownership since the wake of the Great Depression,” said Mark Zandi, chief economist at Moody's Economy.com. “These efforts were overdone this decade during the housing boom and bubble.”
In 2005, the year the San Diego County real estate boom peaked, the home ownership rate in the county was 58.2 percent, according to the U.S. Census Bureau's American Community Survey. By 2007, the rate in the county had fallen to 55.9 percent. That marked a loss of nearly 22,000 owner-occupied residences.
Nationally, the home ownership rate steadily increased from 44 percent to 63 percent between 1940 and 1970, the bureau found. It remained in the mid-60s for more than three decades before rising to 67.3 percent in 2006. In 2007, it declined slightly to 67.2. Zandi expects the rate to continue to slide until it reaches to pre-boom levels.
Veteran lender Bill Dallas, a former board member of the California Mortgage Bankers Association, said government intervention combined with loose loan underwriting standards put many buyers into home loans they couldn't afford. In the buying frenzy that characterized the first half of this decade, guidelines for making sure that borrowers had enough cash in reserve to weather economic storms were “obliterated.”
Adriana Erni, a real estate broker, recently became a renter after losing her University City home to foreclosure. Erni bought her three-bedroom house in 2005, near the height of the surge in prices.
When she and a friend bought the home with an adjustable-rate loan and no money down, she figured they could refinance it before their mortgage payments increased. Instead, she found herself unable to get a new loan when home values dropped. At the same time, her income declined as the real estate market slumped.
Erni sought help from Community HousingWorks, a nonprofit that assists distressed borrowers in negotiating loan modifications. Even with the agency's help, she was unable to stop the foreclosure process. She vacated the home in late November.
Although she feels “crushed and wounded,” Erni hopes to buy another home. For now, she is content to rent.
“You need some time to heal,” she said.
Healing the economy was what U.S. policymakers had in mind when they were looking for ways to boost home ownership in 2001. The nation was in a slump amid the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. To get back on track, then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.
Home ownership became a key driver of the economy. Federal regulators did not intervene when lenders began using subprime, adjustable-rate mortgages to temporarily reduce mortgage payments, allowing more people to qualify for loans.
Thousands of borrowers became homeowners without regard to their creditworthiness or their ability to cope when adjustable mortgages reset at higher rates. Because such loans carry higher fees, lenders made more money.
Attempts to pass federal legislation against predatory lending to protect borrowers from being placed in unnecessarily costly loans were opposed by the Bush administration and members of Congress. They feared that restrictions on lending would slow the rise of home ownership.
Instead, the housing market heated up as lenders and consumers went on an easy-credit bender. Highly leveraged loan products surfaced that had not been widely used since the Great Depression. At the height of the home-buying frenzy, a running joke in the lending industry was that anyone who could fog a mirror could get a loan.
In mid-2002, President Bush urged lenders to add 5.5 million minority homeowners by the end of the decade. In the years that followed, San Diego County neighborhoods with large minority populations would be hard-hit by foreclosures resulting from risky subprime loans.
Government-sponsored mortgage giants Fannie Mae and Freddie Mac ensured that funds were consistently available to lending institutions. Under pressure from the Bush administration, Fannie Mae and Freddie Mac increased their funding of mortgage loans to lower-income borrowers.
If government and lenders pushed hard for increased home ownership, it was with good intentions, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
“You definitely had, for generations, presidents from both parties and congressmen from both sides really pushing home ownership, with Fannie and Freddie and every way they could, and with good reason,” Hobbs said. “It is the best way that individuals acquire wealth. There was a consensus from consumer groups to mortgage bankers to government that more needed to be done to create home ownership.”
Not everyone bought into the idea that owning is preferable to renting. Some contrarian economists held that people could build more wealth by renting and investing the money that would have gone into down payments and home maintenance.
They pointed out that home prices fluctuate. People who buy at the peak of a fevered market run the risk of losing wealth during a speculative price bubble.
“What is wrong with renting?” asked economist Christopher Thornberg of Beacon Economics. “I am so tired of hearing that owning a home is the height of being an American.”
While government played a strong role in triggering the current credit crisis, others share the blame, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a research group in Washington, D.C. Real estate speculators and consumers were eager to take advantage of low interest rates.
One of the first national voices to warn that the rising home ownership rate was based on unsustainable debt was Nicolas P. Retsinas, the head of Harvard University's Joint Center for Housing Studies. Retsinas recalled that the marketing of risky loans to consumers was aggressive.
“At one point, there were 250,000 people working for mortgage brokerages in the U.S.,” he said. “Their compensation was based on transactions. And they were all selling. Were risks understated? Yes.”
Lenders were feeding Wall Street investors' growing appetite for securities backed by subprime loans.
Rob Katz, president of the Del Mar DataTrac software firm in San Diego, recalls meeting with his company president in 1999 when he was a technology officer at a mortgage firm in Northern California. Katz was told that the company was going to begin making loans for 107 percent of a home's value without verifying income. When Katz protested, he was assured that the loans would quickly be sold to mortgage investors, who would take the hit if they failed.
Many lenders have been forced out of business since the end of the housing boom. Most analysts say that chastened financial institutions won't loosen their purse strings and allow another big surge in home ownership.
While he applauds the newfound restraint, Retsinas worries that tight credit will prevent low-and moderate-income households from achieving home ownership, particularly in high-cost markets such as San Diego County.
Although there was much abuse of adjustable subprime loans, they were a home ownership lifeline for many buyers.
“The question going forward is, what is going to replace subprime lending?” Retsinas said. “There are always going to be people who do not make a lot of money. Should they be shut out? I think we can find a way to develop mortgage products that are reasonable, that are transparent, where everyone knows the risks involved. That will be a challenge, because we just shut the spigot tight.”
By Emmet Pierce (Contact) Union-Tribune Staff Writer
Government long has promoted home ownership as a means of strengthening communities and building the wealth of its citizens, but the recent housing market collapse has some analysts wondering whether consumers have gotten too much of a good thing.
While federal policies helped tens of thousands of U.S. consumers achieve home ownership during the housing boom, they also opened the door to the widespread use of risky loans, a national credit crunch and a wave of foreclosures.
“Public policy has been used to promote home ownership since the wake of the Great Depression,” said Mark Zandi, chief economist at Moody's Economy.com. “These efforts were overdone this decade during the housing boom and bubble.”
In 2005, the year the San Diego County real estate boom peaked, the home ownership rate in the county was 58.2 percent, according to the U.S. Census Bureau's American Community Survey. By 2007, the rate in the county had fallen to 55.9 percent. That marked a loss of nearly 22,000 owner-occupied residences.
Nationally, the home ownership rate steadily increased from 44 percent to 63 percent between 1940 and 1970, the bureau found. It remained in the mid-60s for more than three decades before rising to 67.3 percent in 2006. In 2007, it declined slightly to 67.2. Zandi expects the rate to continue to slide until it reaches to pre-boom levels.
Veteran lender Bill Dallas, a former board member of the California Mortgage Bankers Association, said government intervention combined with loose loan underwriting standards put many buyers into home loans they couldn't afford. In the buying frenzy that characterized the first half of this decade, guidelines for making sure that borrowers had enough cash in reserve to weather economic storms were “obliterated.”
Adriana Erni, a real estate broker, recently became a renter after losing her University City home to foreclosure. Erni bought her three-bedroom house in 2005, near the height of the surge in prices.
When she and a friend bought the home with an adjustable-rate loan and no money down, she figured they could refinance it before their mortgage payments increased. Instead, she found herself unable to get a new loan when home values dropped. At the same time, her income declined as the real estate market slumped.
Erni sought help from Community HousingWorks, a nonprofit that assists distressed borrowers in negotiating loan modifications. Even with the agency's help, she was unable to stop the foreclosure process. She vacated the home in late November.
Although she feels “crushed and wounded,” Erni hopes to buy another home. For now, she is content to rent.
“You need some time to heal,” she said.
Healing the economy was what U.S. policymakers had in mind when they were looking for ways to boost home ownership in 2001. The nation was in a slump amid the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. To get back on track, then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.
Home ownership became a key driver of the economy. Federal regulators did not intervene when lenders began using subprime, adjustable-rate mortgages to temporarily reduce mortgage payments, allowing more people to qualify for loans.
Thousands of borrowers became homeowners without regard to their creditworthiness or their ability to cope when adjustable mortgages reset at higher rates. Because such loans carry higher fees, lenders made more money.
Attempts to pass federal legislation against predatory lending to protect borrowers from being placed in unnecessarily costly loans were opposed by the Bush administration and members of Congress. They feared that restrictions on lending would slow the rise of home ownership.
Instead, the housing market heated up as lenders and consumers went on an easy-credit bender. Highly leveraged loan products surfaced that had not been widely used since the Great Depression. At the height of the home-buying frenzy, a running joke in the lending industry was that anyone who could fog a mirror could get a loan.
In mid-2002, President Bush urged lenders to add 5.5 million minority homeowners by the end of the decade. In the years that followed, San Diego County neighborhoods with large minority populations would be hard-hit by foreclosures resulting from risky subprime loans.
Government-sponsored mortgage giants Fannie Mae and Freddie Mac ensured that funds were consistently available to lending institutions. Under pressure from the Bush administration, Fannie Mae and Freddie Mac increased their funding of mortgage loans to lower-income borrowers.
If government and lenders pushed hard for increased home ownership, it was with good intentions, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
“You definitely had, for generations, presidents from both parties and congressmen from both sides really pushing home ownership, with Fannie and Freddie and every way they could, and with good reason,” Hobbs said. “It is the best way that individuals acquire wealth. There was a consensus from consumer groups to mortgage bankers to government that more needed to be done to create home ownership.”
Not everyone bought into the idea that owning is preferable to renting. Some contrarian economists held that people could build more wealth by renting and investing the money that would have gone into down payments and home maintenance.
They pointed out that home prices fluctuate. People who buy at the peak of a fevered market run the risk of losing wealth during a speculative price bubble.
“What is wrong with renting?” asked economist Christopher Thornberg of Beacon Economics. “I am so tired of hearing that owning a home is the height of being an American.”
While government played a strong role in triggering the current credit crisis, others share the blame, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a research group in Washington, D.C. Real estate speculators and consumers were eager to take advantage of low interest rates.
One of the first national voices to warn that the rising home ownership rate was based on unsustainable debt was Nicolas P. Retsinas, the head of Harvard University's Joint Center for Housing Studies. Retsinas recalled that the marketing of risky loans to consumers was aggressive.
“At one point, there were 250,000 people working for mortgage brokerages in the U.S.,” he said. “Their compensation was based on transactions. And they were all selling. Were risks understated? Yes.”
Lenders were feeding Wall Street investors' growing appetite for securities backed by subprime loans.
Rob Katz, president of the Del Mar DataTrac software firm in San Diego, recalls meeting with his company president in 1999 when he was a technology officer at a mortgage firm in Northern California. Katz was told that the company was going to begin making loans for 107 percent of a home's value without verifying income. When Katz protested, he was assured that the loans would quickly be sold to mortgage investors, who would take the hit if they failed.
Many lenders have been forced out of business since the end of the housing boom. Most analysts say that chastened financial institutions won't loosen their purse strings and allow another big surge in home ownership.
While he applauds the newfound restraint, Retsinas worries that tight credit will prevent low-and moderate-income households from achieving home ownership, particularly in high-cost markets such as San Diego County.
Although there was much abuse of adjustable subprime loans, they were a home ownership lifeline for many buyers.
“The question going forward is, what is going to replace subprime lending?” Retsinas said. “There are always going to be people who do not make a lot of money. Should they be shut out? I think we can find a way to develop mortgage products that are reasonable, that are transparent, where everyone knows the risks involved. That will be a challenge, because we just shut the spigot tight.”
By Emmet Pierce (Contact) Union-Tribune Staff Writer
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