The Only Thing You Can Say is, "Really!"

Roger Schlesinger

3/4/2009 11:49:53 AM

 

The best way to cure a sick economy is to tax those who create the jobs. Really!

Cutting taxes costs the government money. Really!

Deficits are reduced in a high tax environment. Really!

Now that you have an idea of what this is all about, you might be surprised at what you might learn.

1. Fannie Mae and Freddie Mac own the most mortgage loans in the nation. They are the premiere lender of conforming loans up to $417,000. It is a given that a large amount of borrowers have houses that are worth less than the mortgages on them and therefore are considered "underwater". The other given is that these underwater borrowers have either adjustable-rate loans that are going to adjust higher, or they simply have higher interest rate fixed loans at this time. They cannot refinance because they do not have enough equity in their houses. We can currently make conforming loans up to 90% and FHA loans up to 95%, both with a required payment for mortgage insurance. If the new rate of these loans is low enough, it doesn't matter that mortgage insurance is required because the borrower can still save a substantial amount of money.

The government has implemented a new bailout plan for those who do not have the ability to refinance and who have stayed with their current mortgage, even though they did not have any equity in their homes. That has made them eligible for the bailout refinance, but only up to 105% of the value of their house. It is common sense that those who are without equity will reach the point, if they are straining to make the payment, where they will give up and move on.

Therefore, it is in the best interest of Fannie Mae, Freddie Mac and the whole country, to help those borrowers who have "played by the rules". In case you are not convinced, consider the fact that if Fannie Mae or Freddie Mac do not lower the rate and leave the borrower in a tenuous position, they are only endangering themselves because they still own the loan. When the borrower gives up and walks away, Fannie Mae and Freddie Mac will be the losers.

Therefore, as long as we are bending over backward to help those who didn't or couldn't play by the rules, and didn't or couldn't find a way to make their payments, why are we restricting those who did by setting a limit on the loan to value? This, unfortunately, is what the government considers help. Really!

As long as we are talking about the problem, what about those who took out their loan, qualifying without tax returns (self employed) and have made their payments diligently? They aren't "underwater", they have good credit scores, and they even have some money in the bank. They are just forced to pay higher rates because the rules of the game have been changed in the middle of the game (December 15, 2008). These people aren't allowed to be helped. Really! Again, if they don't catch a break, their loans are still owned by Fannie Mae and Freddie Mac. I, myself, would think Fannie and Freddie would be better off by offering them a lower rate.

2. The goal of the government is to help turn the housing market around with friendly encouragement to those who lend and those who buy and sell. Nobody can encourage like the government and it should be used to get real estate moving in the right direction once again. This would put equity back in the pockets of the homeowners and increase the value of "toxic loans", which would lead to "loan to values" decreasing. Lenders would see their income increase, spurring more hiring, and homeowners would probably start spending again.

Those hypotheses make sense, but what is actually happening doesn't make sense. Every time a loan is originated, it must have an appraisal, even if it is a new home. To decide on the value of a house, an appraiser must identify comps, recent sales of houses in the subject house's neighborhood of similar age, size and utility. The appraisers would compile the data and arrive at a "fair market value" for the subject property. As reasonable a process as could have been devised, this process has now been amended.

Appraisers in "declining" markets, as designated by the lenders, must now time weight the comps and adjust them downward to reflect the market. If a comp sold 4 months ago, it must be reduced by the amount of the decline reported in the area over the last 4 months. This supposedly gives the lender the current value of the house under review. An example would be a house that sold in November for $300,000 being adjusted down to $288,000. Think about this rule: if you have to adjust down the comps, which sold at a price certain, in order to reflect the falling market, how can you ever stop the market from going down until you reach zero? Could this be another ingenious way for lenders to not lend?

3. I have heard no end of comments that the housing prices are still too high and that they need to come down to a level where people can afford them. Many believe that you shouldn't buy a house unless you have 20% down, which on the average house price of $174,000 would be over $34,000. I dare say that this can't happen as the average American does not have anywhere near $34,000 in available cash to buy a house. But that isn't enough money anyway. Fannie Mae and Freddie Mac charge certain fees in order to acquire a loan from them. If your credit score is 699, you will be charged 1.5% with 20% down to get the loan. That would be $2,250 on a $150,000 loan. If your score is 659, you will pay 3 points (%), which is $4,500. It doesn't make sense, but that is the good news. It appears in April these fees are increasing. Really! (For those who don't know, Fannie and Freddie are owned by the government). As an aside, didn't the government used to be us?

You have now viewed a bit of the "good news" that the government has sent us to help turn the real estate market around, and hopefully the economy as well. The cost for the real estate approach is $75 billion, which, compared to the rest of the money to help other sectors, is really minimal. We have given AIG twice that amount, and so far, with not so good results. I have my opinion on the money we are going to spend on the real estate side, but more important than my opinion is your opinion. Is it yea, nay or perhaps another way?