Housing Recovery Faces Serious Risk, Rentals Thrive [ANALYSIS]

Updated on

The Real Estate market is more likely to take a second dip in the year to come – rather than continue its “steady recovery” – which will carry serious ramifications. On the other hand Rent/ Rental Management will be a safe bet. Housing Recovery faces risks not just from higher mortgage rates.

Housing Recovery Faces Serious Risk, Rentals Thrive [ANALYSIS]

Housing Recovery  Circumstances Leading to the Original Dip

  1. On Feb. 4, the U.S. government filed civil charges against McGraw Hill Financial Inc (NYSE:MHFI)’s Standard & Poor’s Ratings Services, alleging that it improperly gave high ratings to mortgage debt that later plunged in value and helped fuel the 2008 financial crisis. – Wash. Post


  1. New York Attorney General Eric Schneiderman filed a civil complaint against the Swiss bank in November, alleging it misled investors about the quality of the mortgage securities the bank sold from 2006 to 2007. – Bloomberg


  1. In October 2012, federal prosecutors accused Bank of America of selling Fannie Mae and Freddie Mac thousands of shoddy mortgages that caused more than $1 billion in losses.


  1. In October 2012, Manhattan federal prosecutors accused Wells Fargo & Co (NYSE:WFC) of reckless and fraudulent lending practices that cost the government hundreds of millions of dollars in insurance claims when those loans went bad.


  1. In May 2012, Wells Fargo & Co (NYSE:WFC)  agreed to pay $6.5 million to settle Securities and Exchange Commission charges that it sold troubled mortgage securities without disclosing the risks to customers.


  1. In October, New York Attorney General Eric Schneiderman filed a civil lawsuit against JPMorgan Chase & Co (NYSE:JPM), alleging widespread fraud in the way that mortgages were packaged and sold to investors leading up to the financial crisis.


  1. In August 2012, Citigroup Inc (NYSE:C) agreed to pay $590 million to settle a class-action lawsuit brought by investors alleging that the New York bank failed to disclose its exposure to toxic subprime mortgage debt.


  1. Not to mention a series of cases for wrongful foreclosure and lender  discrimination targeting Black and Hispanic groups.


Current Development in the Banking Industry

*Fear driven Response by Government


  1. CFPB releases new mortgage rules in bid to reduce risky lending


  1. The government is establishing new rules for mortgages that will make it harder for some borrowers to qualify but that are designed to prevent the kind of risky lending that nearly caused the housing market to collapse during the financial crisis. ( a response to aforementioned practices which inflated the initial real-estate bubble to critical mass )
  1. One of the primary restrictions: To obtain a qualified mortgage, a borrower cannot have a debt burden that amounts to more than 43 percent of income. That may make it more difficult for people with lower incomes to qualify. …  Certain exceptions could be key in allowing marginally qualified borrowers to meet the tighter guidelines, said David Stevens, chief executive of the Mortgage Bankers Association. … Lenders are under no obligation to issue only qualified mortgages; they just have to verify that borrowers have the ability to make their loan payments.
  1. If the banks follow qualified-mortgage standards, banks will receive a massive benefit: They will be all but protected from many homeowner lawsuits.


  1. Upfront fees, often used to give loan officers and brokers an incentive to make more loans, would be capped, while mortgages that allow interest-only payments or that are longer than 30 years would be excluded. Other exotic types of mortgages, where larger-than-usual payments are pushed to the end of a loan term, would also be prohibited, except in rural or underserved areas.


  1. In other words, the government is going to force lenders to stick to rules they liked before the government forced them to stop using them.


  1. Now the government is intervening once again, in order to prevent lenders from doing what the government pressured them to do over a ten-year period, in order to avoid another collapse.  This isn’t a bad idea, conceptually, but I have a better proposal.  Why not just get government out of the lending business and let the people whose capital is at risk decide how to invest it and lend it?  Had we done that from the beginning, we never would have have the bubble in the first place.


  1. President Obama is calling for private capital to take the lead role in the nation’s mortgage market with the U.S. government continuing to provide a backstop only against catastrophic risk.


  1. “I believe that our housing system should operate where there’s a limited government role and private lending should be the backbone of the housing market”


  1. As he has in the past, Obama blamed “recklessness” on the part of lenders and borrowers for the housing bubble and subsequent collapse of the market as the nation fell into the deepest recession since the 1930s. Now, he said, the market is healing, with prices rising and foreclosures declining.


  • So months later the White House policy seems to be promoting the private sector controlling the lending – sounds great right? This too is only good on paper… lets examine rising prices and foreclosures declining.


  • The price rise is completely artificial – the inventory is being choked at present and  for the longterm the crisis resulted in a serious lack of contractors which will seriously postpone any hopes of a new boom:


  • skilled workers have left the industry as a result of the economic downturn, an aging workforce and an insufficient pipeline of younger workers, according to the new study released at the AIA 2012 National Convention and Design Exposition this week in Washington, DC. The study shows that 69% of architect, engineer, and contractor (AEC) professionals expect skilled workforce shortages in next three years; 32% of AEC are concerned about a shortage of specialty trade contractors by 2014; 49% of the general contractors are concerned about finding skilled craft workers by 2017, and 37% of architect and engineering firms are concerned about finding experienced workers. Skilled green workers are in even more demand; 86% of architects and engineers and 91% of contractors are finding too few green skilled employees.


  • In other words even as we rebound and begin to build more – we will be seriously short on expert labor – which too will drive up prices significantly making buying a new home less of a possibility for most.


  • Duality of the president – first he laid out for limited government intervention – now:


Obama backs 30-year mortgage – More Private Funding


PHOENIX, Ariz. – Aug. 7, 2013 – President Barack Obama made a speech in Phoenix, Ariz., yesterday and outlined his vision for government-owned Fannie Mae and Freddie Mac, which collectively back about half of all U.S. mortgages. In his speech, Obama recommended an end to government ownership and a return to more private funding of mortgages.


Collectively called government-sponsored enterprises (GSEs), Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) do not directly make home loans. Instead, they buy mortgages from primary lenders and pool them into investment funds. That system makes it easier for local lenders to offer mortgages and helps keep the home finance system running smoothly.


  1. Prices rose 7.3 percent in the year through May, according to the Federal Housing Finance Agency. The number of homes for sale fell 5 percent to 1.74 million in January from the year-earlier period, the fewest since December 1999, according to the National Association of Realtors.


  1. Coinciding with all of these developments – the interest rates are on the rise – also slowing down borrowing.


  1. Mortgage rates in the U.S. rose for the first time in three weeks, resuming an upward climb that has begun to affect home sales.The average rate for a 30-year fixed mortgage increased to 4.39 percent in the week ended today from 4.31 percent, McLean, Virginia-based Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) said in a statement. The

Leave a Comment