Thursday, September 9, 2010

The End of Life as We Know it?

A scary article on AOL today details the reasons that writer Rob Hahn believes thirty year fixed rate mortgages (and 10 and 15 and 20) could be about to become as extinct as the dinosaur.  Hahn's basis for his argument is the Treasury summit on finance conducted last month and some of the findings coming out of it.  If his premise is correct, it will radically reshape the society in terms of home ownership and expectations.

Of course the point of the summit was to look for new solutions to the continuing problem of Fannie Mae and Freddie Mac.  Both agencies are now functioning like lenders who are going out of business.  In my twelve years as a mortgage broker, I have learned to identify the warning signs that a lender who appears to be fine is about to close their doors without warning--they start turning down good loans.  Private lenders do that months before they announce their closure to clear their portfolios, but it appears to me that this is what Fannie and Freddie are now doing to reduce their own portfolios.  That growing restriction of credit is what is currently killing the housing industry.

But  according to Hahn, the problem will only get worse.  He predicts that Fannie and Freddie will both be nationalized.  Of course, Barney Frank has said publicly that a private/public hybrid does not work, but he also advocated for a new agency which would have new guidelines and no private ownership.  Hahn seems to believe that the agencies will survive, but no longer as profitable entities.  As wholly owned government agencies, they will simply seek to further the goals of the administration rather than to make money.  And one of those goals appears clearly to be to transform the US from a nation where home ownership is the American dream to a nation where we are content as renters.  All of the initiatives that we have seen have been towards postponing foreclosures through all kinds of artificial means--something akin to keeping a comatose person alive on life supports.  But at the same time we see a real move to make purchases increasingly more difficult, and we also see a media push to encourage renting as a prudent alternative to buying a home.

Hahn believes that the new and improved government-owned Fannie and Freddie will concentrate on loans for apartments and multifamily units rather than single family homes.  According to an article in Housing Wire published August 18, the day after the Treasury Finance Summit,  the summit extolled the virtues of a society in which Fannie and Freddie would invest heavily in rental space.  According to the article, one of the participants in the summit was Alan Boyce, CEO of Absalon, which is a venture of George Soros, who touted the virtues of Danish society, where many renters are assisted by the government and the taxes are extremely high.   As Fannie and Freddie invest more in multi family, apartment housing, they can offer better rates and terms than private companies, and they can, as a result, acquire much of the apartment industry as collateral.   We can also look for more focus on renting as a preferred lifestyle through media outlets and through government information programs.

So how does this impact on the thirty year fixed rate mortgage?  Hahn believes that as Fannie and Freddie assume their new roles in apartment finance, they will ease out of the single family mortgage market.  This will result in banks and private investment firms having to decide whether they want to make loans on houses and at what terms.  Bill Gross of Pimco, who was also at the housing finance summit, made the statement that if his firm were going to loan on single family mortgages, he would want to see 30% down and an adjustable rate mortgage for a 10 or 15 year term.  So all mortgage financing will become very much like hard money lending today.

Interestingly, Fannie Mae was started during the Great Depression, along with FHA, to make it possible for Americans to own homes without depending on the local banks for a source of capital.  Because the banks could sell the loans, they did not have to loan just the amount of money that they had on reserve at any one time.  This system, which is unlike any other system in the world, has made possible the highest rate of home ownership in the world.  Why we would now want to model ourselves after Denmark and transform from a nation of homeowners to a nation of renters is incomprehensible to me.

When my parents bought their first home in the late 1960's, they used my father's VA loan to get the house.  At that time, borrowers who did not have VA had to put 20% on the house.  My mother describes that many Americans saved money until their late thirties to buy their first home.  The difference between then and now--my parents' first home, which they purchased brand new from a builder with a great floor plan and a nice neighborhood, cost $16,000.  The average price of a home today is $204,000.   A $61,200 down payment is beyond the capacity of many Americans to save, so renting will become the only option.  Home ownership will go from being the American dream to being an unattainable fantasy for many working families.  That doesn't sound like progress to me.

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