Many housing proponents claim that the move to dismantle Fannie Mae and Freddie Mac will bring about the end of the 30-year fixed-rate mortgage. Tony Floyd, senior vice president of Prudential Georgia Realty recently shared his thoughts on the issues facing the housing industry, Fannie and Freddie and more.
We have been hosting webinars and writing about this for several months now. As you probably know, the proposed QRM (Qualified Residential Mortgage) legislation imposes a 5% holdback on mortgage servicers plus a minimum down payment of 20% for future mortgages. There is a comment period until August 1st, and then the legislation will start to work through Congress. We would expect some resolution later this year.
At the same time, the Fed is also proposing that banks should maintain higher capital requirements, so there is less chance of a future government bailout. Of course, banks are also some of the main mortgage servicers.
The issues affecting Atlanta real estate appear to be the following:
- Return private investors to buying mortgage securities so the Fed no longer has to be the purchaser that keeps the mortgage market alive. But these investors are worried that the housing market could slide further. That is the real purpose of the 20% down payment. The 80% LTV is still safe as long as values do not drop more than another 20%. We already have sufficient underwriting standards. Another consideration is private mortgage insurance. Some argue that PMI could cover some of these potential losses. Finally, the rate of return is a big deal for investors. The rates have to go higher at some point for private investors to return.
- So how do we create safe loans without further damaging the housing market? As we know from the demise of down payment assistance in October of 2008, most home buyers do not have a 20% down payment. That would kill the new homes market and most first-time buyers. It would also directly impact minorities. We believe that the current underwriting guidelines are sufficient. If the 20% down payment were to go into effect, it would certainly drive down homes values further.
- What should we do for GSE reform and the future of Freddie and Fannie? We spoke to Senator Isakson recently, and he has a proposal to reform Freddie and Fannie plus other agencies to create a consolidated agency that would become private over the course of 10 years. The issue is that Congress and The White House do not want to continue to fund major losses in the current GSEs given the pressures to balance our budget and control the deficit. This is a big political football and we do not see anything major happening here until after the 2012 elections.
- As part of the Tax Reform legislation, one consideration is eliminating the Mortgage Interest Deduction. This is another big political football. We should watch the upcoming battle over the deficit ceiling and the associated terms of any agreement to see how the political wind is blowing. The most likely scenario is that Congress will not have the will to make major changes, and this, too, will be delayed until after the 2012 elections. In reality, most low-income tax payers already pay no taxes. So the MID has no real impact. For higher wage earners, the alternative minimum tax already limits many deductions so the actual impact is smaller than most would think. However, MID is a huge psychological factor. There is already a major debate over the future of home ownership and this would add to that fire. There are numerous academics that believe future workers need to be more mobile and that owning a home is a limiting factor. They cite the current situation where homeowners are upside down and cannot relocate to areas where there are more jobs.
All these issues are related. In the end, we must find a balanced approach. During the boom, mortgage standards were too lax. The 20% down payment would be a killer to the housing market and may drive our economy into another deep recession. If mortgage rates go a little higher, that would be okay. Rates in the last 50 years have averaged around 8%. The market could absorb a slightly higher mortgage rate if that was required to bring back investors to maintain the mortgage market. PMI can also help mitigate some risk and could be part of the cost of the mortgage in certain markets and situations.
Right now, we have an unprecedented situation – low rates and low prices. We keep urging buyers to BUY Atlanta real estate NOW because there is a window of opportunity that is not likely to last.
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