Thursday, November 17, 2011

Lunch with Ben Bernanke and the Future of Housing Finance

Last week I wrote about eating lunch with Federal Reserve Chairman Ben Bernanke, who was in El Paso on Thursday, November 10, to greet returning troops and Fort Bliss and to participate in a town hall on the military base.  As an added part of his trip, he had a private lunch with a dozen or so business people from El Paso.  The purpose of the luncheon was to allow Bernanke to hear from the business community about our concerns and the factors which are affecting our ability to grow and to hire others.

As I explained last week, we each had two minutes to speak about whatever topic we wished.  After we had each made our statement, Bernanke made a general statement addressing some of the concerns raised (for specific points from that discussion, see Part I of this blog). Cindy Ramos-Davidson, CEO of the El Paso Hispanic Chamber of Commerce, who had actually coordinated the event,  then allowed some of the business owners to ask follow up questions.  One of the businessmen asked a question about what Bernanke believes will be the future of Fannie Mae and Freddie Mac.  These huge bloated corporations which have been in conservatorship since September of 2008 have cost taxpayers hundreds of billions of dollars so far.  And with huge bonuses for the executives of the corporations making news this week, today seemed to be  a perfect time to examine Bernanke's answer.

In brief, Bernanke responded that there is a lot of talk of privatizing Fannie Mae and Freddie Mac.  If they were privatized, the government might offer some sort of insurance to back the mortgages.  This would restore their status very much to the pre-2008, pre-conservatorship arrangement that existed for many years.  Under that system, Fannie Mae and Freddie Mac were both largely private corporations with the U.S. government owning a minority interest in both.  The issue with this was that most investors bought the mortgages Fannie and Freddie securitized with the implicit understanding that the mortgages were backed fully by the US government.  And when gross mismanagement drove both corporations into bankruptcy, the U.S. taxpayer had to pick up the tab.

Most conservatives favor privatization today.  I am included in that number.  In my opinion, the insurance backing the mortgages should be private as well.  In my experience, people watch their own money more carefully then they watch their neighbor's, and they certainly watch their own money much more carefully than they watch the taxpayers'.  As long as the shadow of the Treasury Department and a possible bailout loom over Fannie and Freddie, the entities will never have incentive to behave responsibly.

Having said that, every housing professional knows that Fannie Mae and Freddie Mac are an indispensable part of the U.S. housing finance process.  That leads me to Bernanke's second comment.  He indicated that Fannie and Freddie might be done away with completely in favor of a system of mortgage lending that more closely resembles Canada and Europe, where nothing similar to Fannie and Freddie exist and the banks finance mortgages through the sale of bonds.  He added that Canada and Europe have home ownership rates similar to the U.S. and implied that since their system works well for them, it could work well for us too.

As a thirteen and a half year mortgage veteran, I was very intrigued.  I decided to check out the facts about housing finance in Canada and Western Europe--for the purposes of this discussion I looked at the United Kingdom, France, and Germany and Switzerland to see how their systems of mortgage finance compare with ours.

To set the baseline for comparisons, according to the U.S. census bureau current U.S. homeownership rates are at about 66% which is down from close to 70% during the height of the boom. Not surprisingly, the median average home price varies by region.  According to the National Association of Realtors, in August of 2011, the median home price in the North East was $244,100, in the Midwest it was $141,700, in the South $151,000, and in the West $189,400.  Our most popular mortgage product is the thirty-year fixed rate mortgage with the interest rate fixed for the entire term of the loan--I saw statistics indicating that 9 out of 10 homeowners have a thirty-year fixed rate mortgage. These conventional conforming mortgage products have no prepayment penalty. While this product is criticized by some who say it is outdated because Americans no longer stay in their homes thirty years, it has remained a safe, secure form of financing. Currently about 5.82% of U.S. homeowners are 60 days or more past due on their mortgage loans--which means that over 94% of U.S. homeowners are making their mortgage payments on time.


I started with our neighbor to the north as I expected that it would probably be most similar to the U.S. in terms of lifestyle of the residents including home ownership rates.  About 60% of Canadians own their own homes.  In the 35-44 age group, 58.2% are homeowners.  Conventional mortgages typically require 25% down, but mortgages of over 80% of the sales price or appraised value are available with insurance provided by the Canada Mortgage & Housing Corporation.  I saw one website that claims that GE Capital provides private mortgage insurance financing as well, but the Canadian Department of Finance website states that the Canadian government backs all mortgages over 80%.  A typical mortgage in Canada is fixed for 5 years with an amortization of 25 years.  After the fixed period ends, the rate becomes variable.  Interestingly, all Canadian mortgages appear to have prepayment penalties.  Royal Bank's website is advertising mortgages fixed for 4, 5 and 7 year terms at special pricing of 5% interest fixed for seven years. 

Property in Canada is more expensive than the United States.  Wallet Pop says that prices have increased approximately 7.7% since 2010; the average cost of a home in Vancouver is now $517,000, and in August of this year the average home price in Canada was $349,916.  According to Realty Times, residents of British Columbia need to earn $157,000 to be able to qualify for an average home.  This locks out young couples and first time homebuyers, who are now being encouraged to "rent to own" and to go to builders who specialize in assisting first time buyer.  Wallet Pop recommends that young buyers try Daniels First Home--a builder of condominiums and town homes.  Their website advertises that potential buyers can move into their new condos, which start at $199,000, by making deposit payments until they can qualify for financing. 


Next, we hop across the pond to the UK.  The mortgage system in the UK also provides amortizations of up to 25 years.  The website of one UK mortgage broker advises that mortgages are typically fixed for 2, 3, and 5 years; right now the rates are fairly comparable among those three terms as the Bank of England has kept rates low to shore up the economy.  It is possible to fix a rate for the entire term of the loan, but the interest rate becomes higher as the term is fixed for longer periods, making this virtually impossible for many borrowers.  After the fixed rate term ends, homeowners pay the Standard Variable Rate, which is 1-2% higher than the Bank of England base rate.  Some borrowers also take advantage of capped rate mortgages which are linked to the Standard Variable Rate but which "cap" the interest rate for a period of time.  Fixed rate mortgages cost the borrower an additional fee which has risen sharply in the last few years, making these mortgages initially much more expensive than Variable Rate mortgages.

Although interest rates are low, qualifying for a mortgage is very difficult, particularly for first-time homebuyers.  The National Housing Federation has a report from Oxford Economics showing that, on the averag,e first-time homebuyers need to put down almost 30% of the sales price in order to purchase and they can borrow only about 2.8% of their income. (Financial Times August 30, 2011).

Homeownership rates have been as high as 72% in the UK (2001), but right now homeownership is on the decline. Current homeownership rates are at 67% and that number is expected to drop to 64% by 2021.  In London, 6 out of 10 Londoners are expected to be renters by 2021.  The average house price in Greater London is 440,230 pounds (approximately $880,460 USD).  A detached home in London (what we would think of as a regular single family residence) costs 810,234 pounds  ($1,620,000 USD approx.)  For Londoners, this means that the average Londoner would need to triple his current salary in order to be able to buy the average home.   Only 4 London burroughs have an average house price of 250,000 pounds ($500,000 USD). This has created a huge housing problem.  According to Kate Dodsworth, Assistant Director of the National Housing Federation, "London has become unaffordable for ordinary, hardworking (people) who have no real chance of buying their own house."  David Orr, chief executive of the National Housing Federation adds, "Homeownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy."  Currently 800,000 Londoners are on the social housing waiting list and 200,000 are living in over-crowded conditions.  Private rents have increased 30% since 2008.


Any plan to utilize the strategies of Western Europe should include a discussion of France.  The Wall Street Journal On-Line reports that homeownership in France is about 57%.  Required downpayments range from 50% to 10%--French taxpayers can borrow up to 100% of the sales price.  However, Banque de France sets very strict underwriting requirements for mortgages.  The mortgage company qualifies the prospective borrower using 1/3 of his gross income.  Therefore a borrower making $100,000 a year would be qualified on $33,333 of that income.  From that amount, the lender subtracts all taxes, debts and the proposed mortgage payment.  French banks also require that borrowers over 55 submit to a health exam and purchase life insurance to pay off the mortgage upon their deaths.  Because of the difficulty in obtaining a French mortgage, most of the mortgage sites I consulted recommend that would-be buyers from the U.S. and UK might want to get mortgages in their own countries against their own homes and pay cash in France.

Housing is very expensive in France, particularly in Paris.  According to France Today's website, the average price of an apartment in Paris at the end of last year was euros 7000 (approximately $9561.00 USD) per square meter (which is approximately 11 square feet)  That works out to about $868.27 per square foot. According to the Paris Chamber of Notaires, none of the 20 districts of Paris reported prices under euros 5000 ($6829 USD) per square meter.   This would make the low-end pricing $620.81 per square foot for an apartment in Paris.  Since several sites that I consulted last night indicate that the average wage in France is $42,390.00  and French mortgages require the lender to qualify the borrower on 1/3 of his income, I strongly suspect that the majority of the 57% of French who own their properties probably are living in homes that their families have owned for a long time and that these rates are not the result of new purchases.

As an interesting aside, I learned in researching this piece that France's VAT tax is included in the real estate commission and virtually all services.  One ex-pat wrote about her experiences buying radiators in France and said that she paid a professional to install the radiators rather than doing the installation herself because the 19% VAT tax is reduced to a little over 5% if the installation is purchased at the time as the service.  The net effect is that it is cheaper to hire laborers than it is to do the work yourself.  Also, virtually everything in France requires a license, including television sets.  When a individual purchases a television set, the seller is required to report the sale to the French government who then requires that the new owner purchase a license in order to be able to watch television.


Germany actually has the second largest mortgage market in Europe, just behind the UK.  Sixty percent of new loans originated from 2003-2008 had fixed rates of 5 years or more.  In September of 2010, the average price of an existing home in Germany was euro 265,500 ($398,250.00 USD); the average price of a new home was euro 232,500 ($348,750 USD) and the average price of an apartment was euro 140,000 ($210,000 USD).  According to WSJ On-line, approximately 46% of Germans own their own home.

WSJ On-line cites Swiss homeownership at 37%.  I was unable to find out much about their mechanisms of financing mortgages, but I did determine that in Switzerland the government discourages homeownership by taxing homes both as income and as assets.  The majority of Swiss prefer to rent.

In Summary

While it is fine to say that Europe and Canada enjoy the same rate of homeownership as the U.S. the statistics don't bear that out.  Where mortgage financing is difficult to obtain, buyers cannot buy their homes and sellers cannot sell.  The ultimate effect is that rents become very expensive and properties are soon priced out of the reach of average people.  Home ownership becomes a privilege of the wealthy rather than a goal to which all citizens can aspire. 

So the question is, do we want to import Europe's system of housing and housing finance to the U.S? What do you think?

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at

Thursday, November 10, 2011

Lunch with Ben Bernanke Part I

I had lunch today with Federal Reserve Chairman Ben Bernanke.  No, that's not a joke or a metaphor.  Bernanke was here in El Paso, Texas to greet returning troops from Iraq--the first time in history that a Federal Reserve chair had ever visited a military base--and as part of his visit, the Dallas Federal Reserve had coordinated with the local Federal Reserve board to arrange for Bernanke to have a private roundtable luncheon with invited guests from the El Paso Hispanic Chamber of Commerce.  That luncheon was made possible in part because our CEO, Cindy Ramos-Davidson, is also the President-Elect for the local Federal Reserve board.

I had known about this luncheon for a couple of months, and I have to admit I had very mixed feelings about it. As the 2011 Chairwoman of the Board for the El Paso Hispanic Chamber of Commerce, I had already been informed that my attendance was not optional, and I do appreciate that this is a once in a lifetime opportunity to eat lunch with one of the most powerful men in the world.  On the other hand, as a mortgage broker of 13 and a half years who has seen my business die this year because of Dodd Frank and specifically because of the implementation of the Federal Reserve Rule on loan originator compensation--a rule which discriminates heavily against small businesses and in favor of major banks--I found it difficult to sit down and eat with the man who is at least partially responsible.  At best, he would ignore my comments on this matter completely and at worst he might secretly get some joy from seeing one small business person who lost her business because of his rule.

Only fifteen people were invited to this luncheon and the guest list had to be cleared by the Federal Reserve.  The Fed wanted to see a mix of business people from small, medium, and large businesses. They wanted to see a mix of industries and ownership to include minority and women-owned. No banks were allowed to attend; this was strictly a forum for small business people--as far as I know, the only one of its kind.

What was interesting to me as we got closer to the event was that although there was quite a lot of excitement from the invited guests, there is also a lot of anger toward Bernanke from both very left-leaning members of our organization and very right-leaning ones.  Even Bernanke's visit to Fort Bliss this morning to greet the returning troops drew a lot suspicion in the local media that he was only here as a response to Governor Perry's very open attacks against him.

The stated purpose of the luncheon was for us to get 2 minutes each to address Bernanke and tell him our concerns as small business people.  The Federal Reserve, Cindy told us, is turning its attention to job creation, and in order to accomplish that, they need to hear from small business people about what is keeping businesses from growing and hiring.

All of the businessmen and women in the room had carefully considered their remarks--most had written them down.  And over and over, they repeated the same basic concerns--lack of access to capital is hurting small businesses.  The excuse that these men and women get when the bank refuses their loans or cuts their lines of credit is that new regulations keep them from lending. (The regulations are, of course, the more than 500 new regulations that are part of the massive Dodd Frank bill.)  The small business owners also voiced their concerns over the general state of the economy and the presence of massive regulation in every area of business which discriminates against all forms of small business in favor of big corporations.

I spoke last.  I had thought a lot about what I wanted to say, and when my turn came I spoke in two minutes about the impact that the Federal Reserve rule on loan originator compensation had caused my business.  In thirteen and a half years, this has been the worst year I have ever had.  The rule does not allow me to lower my rates to compete with banks or other lenders that are exempt from its most binding restrictions.  I reminded Mr. Bernanke that 5 years ago there were 53,000 mortgage broker firms in the U.S. employing approximately 418,000 people.  Today, in Texas, a state which at one time had over 30,0000 licensees, there are about 1,200 licensed mortgage originators.  The only solution to the problems in the housing market is to dismantle the regulations.

Bernanke did not address my remarks at all, except to say that we would not want to return to the conditions present five years ago.  But he did remind all of us that the Federal Reserve sets monetary policy--it does not make laws.  Without saying it outright, he also reminded us that Dodd Frank is a bill passed by Congress.  The Federal Reserve is merely enforcing what has already been written into law.

He also made his case for quantitative easing, which I found interesting.  According to Bernanke, QE 1 and QE2 have not cost the tax payers a single dollar.  He stated that the Federal Reserve has actually paid the Treasury $125 billion for the bonds it has purchased, thereby reducing the deficit $125 billion.  When the economy gets better, the Fed will simply sell off the bonds it has purchased. 

Bernanke stated that in 2009, when the first quantitative easing took place, the lower interest rates did improve the housing market as people refinanced and purchased homes.  Today, housing prices are down 30% and interest rates are at all-time lows, but the effect on the housing market is very slight.  What is the difference? Aside from the first time homebuyer tax credits that were in place in 2009, which provided an artificial housing stimulus, the primary difference between 2009 and today is regulation. Bernanke himself admitted that a lot of potential candidates no longer qualify, and this is a huge problem.  However, what he did not say is that the primary reason that homeowners no longer qualify is the strict underwriting standards imposed by Dodd Frank.  When standards for underwriting and qualifying borrowers become codified into federal law, there is very little room for common-sense underwriting.  At the end of the day, that means that more borrowers cannot purchase or refinance homes.

In response to the complaints that small business owners can't get loans, Bernanke told us that many banks have a lot of excess funds right now which are on deposit at the Federal Reserve. He said that he hears these same complaints all over the country, and he has instructed employees of the Federal Reserve to work with banks to encourage them to loan money to small businesses. What he did not say is that new FDIC regulations determine the fees that banks have to pay to the FDIC based on their loan portfolio rather than the amount of their deposits, which was formerly the criteria for assessing fees.  And federal requirements governing reserves for banks require that banks hold much more money in reserve against future disasters.  The end result of these regulations is that banks have a lot of incentive to take in deposits and very little to loan out the money. In light of this, Bernanke's advice to business owners in the room who can't get loans, "If your bank says they can't loan you money because of regulations, press them on that," sounds much less practical.  After all, the bank does not need a specific book and page regulation to deny your loan if they have been incentivized by the government to hang on to their money.

What were my impressions?  Bernanke is a very quiet man, which I knew from seeing his press conference which he gave this summer.  Do I think that he regrets his policies?  Not a bit.  But do I believe that it would make any difference if he did?  Not really.  Most of what the Federal Reserve is implementing and will continue to implement is the provisions of the Dodd Frank Bill.  Dodd Frank is a massive framework on which regulators and agencies can hang new rules without ever going back to Congress.  But it was Congress that passed this monstrosity in the first place. Without a full repeal of this destructive piece of legislation, no amount of quantitative easing, or round tables with business people, or positive thoughts for the future is going to make any difference in the financial sector of this country. 

We talk a lot about jobs and housing.  Hundreds of thousands of jobs have been lost in the financial sector alone since 2008.  Tens of thousands of small businesses have been forced to close their doors.  Now we are starting to see massive layoffs from the major banking entities and investment houses.  No part of the financial world is safe.  And as the financial world goes, so goes the rest of the country.

Next week:  Bernanke's predictions for the future of Fannie Mae and Freddie Mac.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at

Monday, October 31, 2011

Do You Want to See Something Really Scary?:

Do you remember Twilight Zone--The Movie? I did not see it--my mother was extremely strict and never allowed us to watch horror movies or even light comedy containing anything that smacked of the occult. But I remember my father coming back from a trip and telling us that he had been driving with his nephew on a dark, wood-lined road when his nephew told about the scene from Twilight Zone where a set of characters are in a car at night trying to scare each other. Finally, one of them says to the driver of the car, "Do you want to see something really scary?" When his friend agrees, he turns his face away, and when he turns back he has become a monster who kills the young man who is driving.

If Hollywood were making that movie today, rather than having the actor turn into a monster,  the director could have just had him go apply for a mortgage loan.  When he saw the list of conditions, the low appraised value of the property, and the length of time that it takes to get financing today, he would die of a massive fear-induced heart attack.

Sound like an exaggeration.  It isn't.  After 13 and a half years in mortgage lending, I have never seen housing finance even close to as bad as it is today.  Consider these real life Tales from the File Cabinet:

1. A pediatrician who wants to refinance her custom built home but cannot because her 685 credit score does not qualify her for 90% financing she needs in order to be able to pay off the existing note.  Her income is over a quarter of a million dollars annually and she has virtually no debt, but last year she had a small collection (under $60.00) with the U.S. Post office,  and that is keeping her credit score artificially low.  Since El Paso does not qualify for expanded conforming loan amounts, she cannot get an agency loan.

2. A self-employed business man with a credit score of 734 who filed and paid taxes on over $250,000, and qualifies under the existing HARP guidelines but is having difficulty getting a mortgage loan because his company's K1s report non-allowable losses for the current tax year.  The losses are non-allowable so he cannot write them off his 2010 taxes, but the underwriters want to subtract them from his income anyway, which means that he does not qualify.

3. A salaried borrower in Austin, Texas making over $150,000 a year in salaries and commissions who cannot get financing because even though the home he moved into in Austin, Texas has previously been used as a rental property and filed that way on his taxes, he does not currently have a tenant in the house, so Fannie Mae will not allow him to use a lease to offset the payment unless he can demonstrate 30% equity in the property--which he does not have in this current climate of depreciating values.

After using the enhancements to HARP for media coverage last week, this week even the Obama Administration is admitting that the new enhancements to the program will allow only modest gains for refinancing. In reality, because of extremely stringent guidelines even borrowers with good credit, beautiful properties, and high incomes cannot get loans.  These are people who want to refinance so that they can save hundreds of dollars a month on their mortgages, or because they want to shorten the term to a 15 year loan, ultimately saving them hundreds of thousands of dollars, or who would like to be able to take advantage of low interest rates and low housing prices to buy a new primary residence.  All have long credit histories which demonstrate both an ability and a willingness to pay.  And all have excellent documentable incomes.  But in the current environment, they are shut out of financing by guidelines so strict that they are geared to ensure that virtually no one get a mortgage loan.  That's pretty scary.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen.  For more information, visit her website at or like her on Facebook at

Thursday, October 27, 2011

So You Want to Refinance?

The biggest news in housing this week was the announcement of President Obama's executive order to revamp the Making Home Affordable Program (HARP) to make mortgage refinancing more accessible to millions more Americans. Making Home Affordable has been widely criticized as a failure since the original program had targeted about 5 million potential homeowners but was actually able to refinance less than 1 million into new lower interest rate mortgages. But this week in Las Vegas, Obama announced his new fixes to HARP to make the program easier for Americans to refinance their underwater mortgages into new, lower fixed rate mortgages.

Critics of the president's executive order say that ultimately the decision to refinance these underwater mortgages will further damage the credit system by making taxpayers responsible for homes without enough equity. That is really a bogus argument because the only loans being refinanced through HARP are loans which are currently owned by Fannie and Freddie (and these are currently being supported by tax payers). Proponents say that the new program will free up consumer funds which can be pumped back into the economy to stimulate consumer spending--with some estimates at over $20 billion in funds. That, too, is bogus, for several reasons.

The first and most important reason that both the critics and proponents of the new plan are wrong is that the new and improved HARP is not going to work any better than the original. In fact, it will be plagued by many of the same problems that kept the original program from working.

The original Making Home Affordable Program allowed homeowners to refinance homes at up to 125% of their appraised value. When the new adjustments to HARP were announced, many journalists and industry experts began announcing that the new program does not utilize appraisals. That is not true. If there is not a good automated valuation model for the property, an appraisal will be required. Borrowers refinancing into fixed rate loans will not have to consider the property's value, but those refinancing into an ARM will be limited to 105% of the value of their home.

But the excitement over basically discarding property values implies that being underwater in a home is the only issue that keeps homeowners from being able to refinance when in fact there are a host of other reasons that HARP failed the first time and will fail again:

PROBLEM 1: The new Making Home Affordable Program is limited to homeowners with less than 20% equity in their mortgage. FHFA says that this program is reserved for those who "really need it." As with the original program, the current mortgage must be with either Fannie Mae or Freddie Mac and must have been originated prior to May 31, 2009. The issue here is that many Americans who have less than 20% equity in their homes have loans with private mortgage insurance on them. As FHFA's announcement states, participation in HARP is voluntary, so mortgage insurance companies and lenders voluntarily decide to participate in the program. In the original HARP program, MI companies would reissue the MI certificates on the properties only if the loan stayed with the current mortgage holder. Unless  FHFA has figured out a way to change this, that means that anyone with a mortgage with mortgage insurance whose current servicer does not participate in the new enhanced program can't refinance through HARP Phase II. And those whose servicers do participate can refinance only under the guidelines offered by their servicers.

PROBLEM 2: Many borrowers who are underwater in their homes are underwater because they have a first and a second mortgage. Under HARP, a second mortgage cannot be refinanced along with the first. That means that the second mortgage must be re-subordinated to the first mortgage in order for the borrower to be able to take advantage of the lower interest rates. And not all second mortgage holders will do that. For example, a borrower recently called me about refinancing his investment property. At the time that he purchased the home, it was his primary residence, and he had a first and a second lien. Last year, he tried to refinance through Chase, who approved him for the loan but told him that the second lien would have to be re-subordinated in order for him to close. The problem is that the second lien holder, GMAC, will not re-subordinate the second lien because the house is now an investment property and without that re-subordination, he cannot get the loan. I have seen variations on this problem several times in the last few years.

PROBLEM 3: In Texas, properties qualify under HARP for refinance but they cannot be refinanced because at one time the owners took equity loans against the houses. In Texas, our state law says that once a home has had an equity loan against it, the provision of the home equity law always apply, which means that the homeowner must always maintain 20% equity in the property. So a homeowner cannot legally refinance an underwater property with a home equity loan against it no matter what kind of program FHFA and the President develop.

Besides equity in the properties, there are many issues that have kept borrowers from refinancing over the past few years. One of the most important is income. Over the last two years, income standards have tightened incredibly. HARP does waive lender warranties to Fannie Mae and Freddie Mac, and HARP promised relaxed underwriting guidelines, but the FHFA announcement does not make clear exactly how those guidelines will be relaxed. What we do know is that the Dodd Frank bill's defense to foreclosure provisions call for all loans to have income verified fully. Borrowers whose income is improperly underwritten can use poor underwriting as a defense to foreclosure for their mortgage loan. As a result, lenders are being incredibly strict about underwriting income.

As an example, I am working on a file for a hospital employee who has been on his job for thirteen years. This man has excellent credit and has decided to refinance his home from a thirty year note to a fifteen year note. He qualifies under the current HARP guidelines. I calculated his income using his year to date income based on his pay stub and determined that he fell just under the lender's 45% debt to income ratio guideline. But when I sent in the file, the underwriter informed me that he could not qualify for a 15 year loan--he would have to refinance at 20 years. When I questioned her about the income, she said that she has a worksheet she has to use, and she calculated the income at $300.00 a month less than my calculations.

HARP has published guidelines, but lenders have their own overlays which often exceed those guidelines to make sure that they are originating quality loans. Being able to refinance is about much more than having a decent credit score or sufficient equity in your home. It is about getting the underwriter to agree that you make enough money to pay the loan back based on an ever tightening set of underwriting standards regarding income. Income qualifications have kept a lot of borrowers from qualifying to refinance under the current guidelines, and unless HARP specifically issues an income waiver--which would be completely contrary to all of the provisions of Dodd Frank--many borrowers are going to continue to find themselves locked out of an opportunity to refinance.

PROBLEM 4: While it is makes a great soundbite to go to Las Vegas and announce that borrowers will be able to refinance in the parts of the country that have been hardest hit by the economic downturns, the reality is quite a lot different. As with the current HARP program, only borrowers who currently have loans with Fannie Mae and Freddie Mac qualify to refinance under the program. That means that borrowers with exotic mortgage products such as negative amortization cannot use this new program. People who had jumbo loans--which until a few years ago was everyone financing over $417,000, do not qualify. And consumers who financed into subprime loans do not qualify. While the Fannie/Freddie portfolio does cover a lot of consumers, it also misses a lot. In the years between 2003-2008, Fannie and Freddie's market share had shrunk significantly since they could not effectively compete with many of the other products on the market. So in Arizona, California, Nevada and Florida, where many people are underwater on their mortgages, many borrowers who would qualify are in the wrong type of mortgage to be able to get the loans.

As I said at the beginning of this post, critics are saying that the enhancements to HARP will cause Fannie and Freddie to take on the responsibility of underwater mortgages.  In fact, FHFA's goal is to encourage borrowers to refinance into shorter term mortgages so that they can recover equity faster.  If the program were successful and it worked as FHFA hopes, this would in fact cause many of these mortgages to recover equity and to in fact be paid off in fifteen years.  And this is probably the basis for the billions of dollars in savings that the White House and FHFA tout that HARP Phase II will give to consumers.   As a loan originator for over thirteen years, I can tell you that the savings of going from a thirty year to a fifteen year mortgage is huge over the life of the loan--depending on the size and interest rate of the current mortgage, it can amount to hundreds of thousands of dollars.  However, the economic impact of that savings will not be felt in the general economy for fifteen years when the houses are paid off.  If consumers were to follow the FHFA's proposals to refinance their homes into shorter loans, they would actually see an increase (albeit a small one) in their monthly payments in the immediate future, which would lead to less disposable income in the short term.  Of course, if consumers stay in their homes and pay them off, fifteen years from now they will not have house payments so then they could increase their spending, but that won't help the economy now.

In the short term, this program will provide fees and income for mortgage lenders and great video opporunities for the president.  University of Virginia professor Larry Sabato told CBS this week that people need to see the President on television "trying to solve problems."  HARP II creates sound bites, but beyond that it is not going to do much more than its predecessor about changing the fate of homeowners or the current housing situation in the U.S. either for better or for worse. At the end of the day, HARP II will produce very little change and more hype than hope.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information visit her website at

Thursday, October 20, 2011

Too Much Information

Last year I wrote a blog about a practice that FICO had just rolled out to help banks determine the credit worthiness of their clientele based not only on their history of paying their bills, but on other factors as well.  

At that time, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--had announced a new system marketed to banks to track depositor behavior. The then new system assigns each bank client a score based on deposit and withdrawal activity. Presumably, checks for non-sufficient funds and returned checks count against the borrower's score. The scoring system alerts the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job. Using up the savings may also signal financial difficulties. And that can be the bank's cue to cut off credit.

In addition to tracking bank information, credit bureaus are also using income estimates to determine potential debt to income ratio. Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines. Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is. His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.

The banks are also tracking the consumer's home's value.  A WSJ article from 2010 tells of Ken Lin, who had a very good credit score but was denied for a credit card. He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage. 
The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income. Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.

For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives.  And as a result, many Americans have tried hard to maintain their credit through the tough times of the past two years, knowing that a poor credit score has long on-going consequences. 

Now, as experts speculate about whether we are officially headed back into another recession, FICO has introduced yet another new set of perimeters for credit reports. On October 10, 2011, they announced a new initiative through CoreLogic which will provide lenders with still more info on prospective borrowers.

The new credit scoring models will include previously excluded items such as child support payments.  Right now, child support shows up on credit reports only if it goes into collection.  Regular payments do not appear on a credit report.  The system will also score apartment rentals and applications to payday lenders.

In FICO's press release about the new system, VP of scoring and analytics Greg Pelling said that, "Lenders today need as much actionable consumer information as possible so that they can safely grow origination volumes and avoid future losses."  And indeed, some analysts are saying that the new information will help people with thin credit files get approved for credit more easily because the models will allow lending institutions to take into consideration payment histories that currently do not report. This can mean that borrowers who have paid all of their bills on time but not utilized much "traditional" credit can have an easier time being approved.

But for most Americans, increased scrutiny into their financial lives is going to increasingly limit access to credit.  People who are struggling financially--particularly small business owners who are living on credit cards while trying to keep their businesses open--have increasingly seen their access to credit and capital cut off on the last few months.  Cutting off credit to people who are struggling may be a prudent move for a financial institution, but for the small business owner or the family trying to make ends meet, not being able to get credit in tough times may mean the difference between weathering the current financial storm and drowning.  At a time when falling home values and stringent underwriting guidelines are causing many otherwise qualified Americans to be locked out of the ability to refinance their homes to take advantage of historically low rates and lower their payments, should we really be adding in another level of scrutiny to make it still harder for people to qualify for loans?  As we continue to scrutinize every aspect of potential borrowers' financial lives, we can find more and more reasons to deny more and more people access to loans that could dramatically improve their financial situations.

It will be interesting to see how FICO compiles and processes the information obtained.  For example, traditional credit reports report borrowers who have been late 30 days on a payment as delinquent.  However, apartments and other housing rental agencies tend to consider payments made after 15 days delinquent.  Will FICO report delinquent payments on accounts not past due 30 days if that is how the reporting organization listed them? 

All of this new access to info just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, loss of one of the household incomes, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history.  It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at


Monday, October 3, 2011

The Occupation

We are now in the third week of the Occupy Wall Street protests, as thousands gather in New York and elsewhere around the country, to protest Wall Street, corporate greed, and capitalism.  Over the weekend 700 protesters were arrested for blocking the Brooklyn Bridge, but the arrests and the protests have brought increased attention to a group whose primary goal is to "demolish capitalism" and the free market system.

The Occupy Wall Street protesters have been joined by Susan Sarandon, Michael Moore and other leftist activists who support the assertion that Wall Street has too much influence over the world. (Of course, no one is going to stage an Occupy Hollywood protest to point out the fact that actors are notoriously over-paid and that Hollywood exercises undue influence over the world, but I digress.)  Billionaire George Soros has also signified his support and sympathy for the movement.

Interestingly, beyond the destruction of capitalism, Occupy Wall Street does not seem to have any clear goals, except perhaps to set up a counter movement to the Tea Parties which will promote socialism and  organized labor. The protesters want to replace the free market system with a new system in which presumably the government will be the only entity with undue influence.

Since promoting "freedom" is a goal of Occupy Wall Street, a blogger sympathetic to the cause asked fifteen of the protesters to define freedom.  I have excerpted some of the real answers to the question of "What does freedom mean to you?"  For a complete list of the answers, see  I found these definitions truly enlightening:

"Freedom is bound up with the idea of possibilities.  The idea of limitless possibilities is the ideal of limitless freedom...But we still live in a state of unfreedom...The goal of history and transforming society must be to make these possibilities available to everyone."

"Revolution means freedom from necessity."

"Freedom means living my life however I want to...The ability to do what I want with my life, without the confines of debt, without the confines of politics, without the confines of anything else."

"Being able to have enough activities, friends and the social basis of self respect..."

"Freedom means freedom from necessity."

"I think freedom is your ability to carry out what you want to do...If you are always working for a boss, you don't have freedom either. Freedom is always that you're emancipated from your physical necessities and your mental baggage."

"Freedom means the ability to speak your mind, to live your life free of worrying about how you'll pay your next bill or whether you'll have a roof over your head."

And the media is wondering that these people don't appear to have a clear-cut objective for the protest!  The Occupy Wall Street protests is spreading to cities as far from New York as Albuquerque, New Mexico, and the protesters are reportedly going to New York from across the nation to take part.  This week, protests are expected to include representatives from The Teamsters Union.

Unfortunately, the above quotes about freedom represent current attitudes about freedom for many Americans.  (And while some of the protesters quoted here are students who are not yet twenty years old, others are grandparents, so this is a fair cross-sampling of ages.)

None of these definitions of freedom includes personal responsibility or risk taking.  But in reality, no one can ever experience freedom without taking responsibility for his or her own life. When we take responsibility for our lives, we take risks and we incur debt.  But in doing so, we make both good decisions and bad ones, and we earn the right to chart our own course in life.  When we live in an entitlement society where the government meets our needs and provides all of our necessities, the government also determines how much we can have, where we can live and what we can achieve. 

The protesters who are standing outside in New York protesting capitalism are asking that the free markets be replaced by a cradle-to-grave entitlement society where they will not have student loans, or debts, or jobs they hate, or responsibility.  They are also asking for a society in which they will never experience success or aspire to truly improve themselves. If their dream of "freedom" is achieved, they will live in a society where a massive government becomes the source of everything. As Dwight Eisenhower said, "Every step we take towards making the State our Caretaker of our lives, by that much we move toward making the State our Master."

For more by Alexandra Swann, visit her website at

Wednesday, September 21, 2011

Making Not Working Pay

A little over a month  ago, the regional director of the SBA called for a roundtable discussion with the El Paso Hispanic Chamber of Commerce and area businesses.  In my current role as chairperson, I attended.  We were told that The White House was asking for this meeting in order to get feedback from the local business community about their needs.

As the round table discussion started, I saw that the room contained a good representation of local businesses, many of whom contract to perform various services for the federal government.  We also had a local city councilwoman in attendance to represent the city of El Paso.

The SBA director kicked off the discussion by getting some feedback on how waiting times at the international bridges were affecting local businesses. (Since many businesses here do business on both sides of the border, excessive waiting times are always and issue.)  Then she came to what appeared to be the real theme of her visit, "Tell me how immigration policies  and problems with immigration are affecting your businesses."

The business owners at the table, who were predominately Hispanic, sat quietly without commenting.  The regional director prodded us. "Let me tell you how this works. Everyone will speak.  The President really wants to know how we can help your businesses. You can speak now or I can call on you.  Now tell me how you are being impacted by immigration."

One of the participants spoke up.  "I do have an issue, but it's not really about immigration."  She nodded at him to continue.  This man owns a landscaping business and has a contract to perform services for the federal government.  As part of his contract, when the government agency contacts him to perform landscaping services, he has about a week to get a crew together to do the job.  His issue:  the trained workers he has relied on to do the landscaping work will not take the jobs because they are collecting unemployment and don't see the need to go to work as long as they have their unemployment checks.

Immediately, it was as though a flood gate had opened.  One after the other, business owners around the table began to echo this problem.  They can't get workers to take the jobs that are available; people coming in for interviews are coming in only to satisfy the conditions of continuing to draw their unemployment.  What the business people at the table most wanted the SBA to know is that extending unemployment indefinitely keeps people from taking jobs that they could take and would take if they were not drawing unemployment.

The councilwoman now spoke up.  She explained that it is not that the unemployed don't want to take these jobs--they can't afford to.  She cited the case of a man in her district who is making $10.00 an hour on unemployment with no federal withholding.  He cannot afford to take a job paying $7.00 an hour with withholding. If the landscaper wants to woo workers who are currently drawing unemployment, he needs to raise the wages he is paying enough that his workers are taking home $10.00 after taxes.  Then, workers will be interested.  The landscaper replied that he cannot afford to pay that much for workers.

This impromptu discussion about unemployment and the administration's policies towards unemployment highlighted the huge disconnect between the federal government and the business community, and it is particularly relevant in light of the provisions of the American Jobs Act, proposed by the president.  The American Jobs Act seeks to extend unemployment benefits for an additional year (though not longer than 99 weeks) and to make discrimination against the long term unemployed illegal.  An unemployed person who interviews for a job could sue for discrimination and file a complaint with EEOC if he does not get hired.  But the bill overlooks the realities that the dynamic of unemployment benefits creates for both workers and business owners.

I experienced this personally 14 years ago when I worked briefly for a national employment agency before starting my own business. Unemployment has always been about 2% higher in El Paso than in the rest of the nation, so we saw a great many unemployed people come through our doors.  And since we offered temporary jobs as well as permanent jobs, I worked with many repeat employees.

The common theme among the temporaries was that as long as they were receiving their unemployment checks, they could be more selective about where they worked.  So while I had certain candidates who called me every day asking for work, when I would find a position for them they typically found some sort of a problem with the position that made it unacceptable.  The location was too far away--"I'm not going to use up my gas and wear out my tires going all the way out there;"  the supervisor was unpleasant, or "My uenemployment benefits are more than that job pays."  I often tried to explain that while the unemployment benefits might indeed be initially higher than the pay, unemployment ends.  A job might lead to wage increases, promotions, or an opportunity for a better job.  Unemployment insurance leads to none of these.  But most of the people I met had their minds made up--they were not going to work for less money than they could get for staying home.  As they declined work, their skills grew more outdated, and their job prospects continued to drop. What seemed to be a good short term decision to turn down work turned into a cycle that made it hard for these people to go back to work when they finally had to do so.

Over the weekend I was reminded of one of Obama's first stimulus programs, Making Work Pay.  Making Work Pay is a tax credit that was built into the American Recovery and Reinvestment Act of 2009, which entitles eligible Americans to a tax refund.  What struck me over the weekend was how ludicrous the name of this program really is.  After all, making work pay is a function of a free market system.  Making work pay is what every entrepreneur with any sort of a skill does when he or she decides to take that skill and invest his or her time, money and lifeblood in a business.  Making Work Pay is the motivation behind business ownership, business growth, and business success.  Every profitable business starts when someone looks in the mirror and says, "This is what I know how to do.  How can I get paid more do it?"  It is not a function of any government and certainly not one that is as anti-business as this one.

This distinction is especially important as we are looking at Stimulus 2--The American Jobs Act.  The American Jobs Act promises to help both small businesses and the unemployed.  But in reality, it just creates more incentives and more penalties.  How many small businesses want to risk a run-in with the EEOC or a possible lawsuit by interviewing an unemployed person who may not get the job?  It is easier just to never call those candidates in at all.  How many unemployed people who are netting $10.00 an hour for 99 weeks want to get up early and work all day in the sun doing landscaping for $7.00 before taxes?  Probably not many.  No matter how many jobs are available, if the private employers cannot compete with the unemployment benefits, they are not going to find willing workers. 

Mike Rowe (of Dirty Jobs fame) was on Fox and Friends yesterday morning talking about vocational training. According to Rowe there are over 740,000 jobs currently available in construction and manufacturing which cannot be filled because workers do not have the necessary skills to do these jobs.  His point was that we need to close the skills gap in America by redefining what we consider to be a good job.  While I have no way to verify Rowe's figures, I do wonder how many of those jobs might be filled by a person currently on unemployment if he or she were not incentivized not to work?

To bring back American jobs, we need an environment that is friendly to business rather than contentious.  And we need to reward work and initiative rather than choosing as a society to make not working pay.

Alexandra Swann is a small business owner and the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen. For more information, visit her website at

Friday, September 9, 2011

The New Normal

Last night President Obama gave his jobs speech on behalf of his American Jobs Act, which is basically a larger version of the American Recovery Act.  Amazingly, the White House is proposing the same basic ideas they have been working on for three years--payroll tax breaks for businesses that hire new employees, more unemployment benefits, and more government spending for "shovel ready jobs."  We are told that creating jobs has to be the primary goal of our government and that no issue is more important.

But behind the scenes, if you look and listen very closely, you can hear a different message coming from the media and the ideologues who support the White House.  This message is more subtle but very pervasive, and I believe that this is going to be the real campaign message of the Obama Administration in 2012.  Put simply, this message is as follows:  The recession is permanent.  Housing is going to stay depressed.  Business is going to stay depressed. Unemployment is going to stay high.  Nothing is going to get better--ever.

We are beginning to hear the words "permanent recession" as part of the media's vocabulary.  Take for instance a Washington Post article published on August 31 and reprinted in several publications since that time.  It tells the story of house painter German Morales whose business has been all but shut down by the housing crisis and the economic troubles plaguing the country.  Post reporter Michael Williamson tells us that Morales registered his painting company in December of 2007.  As the recession deepened, he lost his home to foreclosure but he kept busy during 2008 and 2009 doing whatever work came his way.  "But lately," Williamson writes of Morales, "his job has been defined by what he can't fix, the mess he thinks is well beyond fixing....last month, when stock prices tanked and sales of new homes fell for the third straight month, Morales sat down with his wife and two sons to discuss their finances. 'I'm sorry,' he told them, 'but this is the way it is going to be--job to job, week to week. It's not getting  better.'  He is one of the millions for whom the recession has become permanent, no longer a crisis to endure so much as a reality to accept."

Wow!  What a concept.  The recession is a reality to accept rather than a problem that needs fixing.  Williamson's article details the devastating consequences of the housing meltdown to Morales and his family, but nowhere in his article does he mention the cause of the drop off in new home sales--increasingly tightening regulations which make it virtually impossible for many Americans to qualify to purchase homes.  As guidelines continue to tighten, of course, sales are going to continue to drop off and values are going to continue to plummet.

I see this new approach to the economy in the media and in the comments of people who post on this blog. So many of the comments that I received on Suze Orman and strategic default chastise me for encouraging people to stay in their homes and make the payments if they can afford to do so. Overwhelmingly, readers who comment make the argument that housing will never recover.  The economy will never get better. Homeowners have no choice but to walk away from their homes because housing in America will never again increase in value.

I find it amazing and ironic that the Administration that sold this country on hope and change is now delivering a new message, "The situation is hopeless; nothing is ever going to change.  Get used to it."

Unfortunately, this new message of hopelessness will probably have almost as much appeal as the original hope and change message had.  Hopelessness takes away personal responsibility.  If a mess is so big that it cannot be fixed, than I as an individual have no responsibility to attempt to make anything better in my own little corner of the world. I am a victim of a system that is bigger than I am.  I have been swallowed up and destroyed by forces I cannot control.  I cannot make anything better; therefore, I don't even need to try.

People who embrace the "it's hopeless" approach to the recession are partially right--by embracing hopelessness and fatalism they are sentencing themselves to a lifetime of financial problems.  As people succumb to hopelessness, they lose the will to seek out better options with better outcomes.

The truth is that our economy is being held captive by ridiculous regulations which are binding business, lending, and growth.  If we don't get rid of the root cause of the current housing crisis--absurd regulations and guidelines which have been implemented over the last three years--the housing sector will not improve.  If we sue the banks into bankruptcy, as Maxine Waters seems to favor, lending will dry up completely which means that we will have no capital for growth or expansion.  If we allow the EPA to continue to regulate us until middle class Americans can scarcely afford light bulbs, we are literally turning out the lights on the free- est, most enterprising society which has ever existed.

If Obama were serious about economic recovery and job creation, he would take out a pen and start repealing repressive regulations today, and we would see major improvement before the next election. But, instead, he has assured us that the regulation is here to stay.  And as long as he has business and entrepreneurship bound and gagged in a corner, our economy is not going to rebound.

Personally, I believe that life is about choices and that our outcomes are determined by the choices we make, both individually and corporately.  I was very inspired by Governor Rick Perry's speech when he announced his candidacy for President last month:

It’s time for America to believe again. It’s time to believe that the promise of our future is far greater than even our best days behind us. It’s time to believe again in the potential of private enterprise, set free from the shackles of overbearing federal government. And it’s time to truly restore our standing in the world, and renew our faith in freedom as the best hope for peace in this world that’s beset with strife.
The change we seek will never emanate out of Washington, D.C. It will come from the windswept prairies of Middle America, the farms and factories across this great land, from the hearts and minds of the goodhearted Americans who will accept not a future that is less than our past, patriots – patriots who will not be consigned to a fate of less freedom in exchange for more government. 
We do not have to accept our current circumstances. We will change them. We are Americans. That’s what we do. We roll up our sleeves. We go to work. We fix things.

 What we as Americans choose to believe over the next fourteen months is going to determine our futures, not only for the next four years but for many decades beyond.  I choose to believe that real hope for this country begins when we change the occupants of 1600 Pennsylvania Avenue and bring in a President who will stand for individual freedom and opportunity and limited government.  When we have a man in place who believes whole heartedly in these principles, we can begin to rebuild our economy one business and one job at a time.
For more by Alexandra Swann, visit her website at

Wednesday, August 17, 2011

The Heist

Last week, the Obama Administration announced its newest plan to deal with the sagging housing market.  The White House wants to convert the foreclosed homes owed by Fannie Mae, Freddie Mac and HUD into rental properties.  Proponents of the idea say that clearing these properties out of inventory will actually help the housing market since the discounted prices of foreclosures are forcing down the prices of resales and of housing in general. 

Regular readers of this blog know that I have been saying from the beginning that the Administration's plan is to convert our country from a nation of homeowners to a nation of renters, but this new announcement from the White House is such an open and blatant expression of this policy that even I was surprised. Because of robo-signing scandals, many foreclosure proceedings have been put on hold, but as soon as the attorneys-general in many states have an opportunity to review the paperwork and clear the properties for foreclosure, many more properties will join their ranks.  At the end of June, Fannie Mae, Freddie Mac, and FHA owned about 250,000 foreclosed homes, but, according to Barclays, about 830,000 additional homes are in some stage of foreclosure.  So within a few months, just over 1,000,000 homes owned by the federal government will be in foreclosure.

And there will be plenty of tenants.  According to the Huffington Post, since 2008 approximately 3,000,000 Americans have become renters, with another 3,000,000 expected to join their ranks by 2015.

The federal government is actually fielding two proposals right now.  The first is to sell hundreds or thousands of foreclosed homes in bundles to private investors who will agree to rent them out.  Reportedly this is the proposal that HUD prefers. 

The second proposal is for a public private partnership between Fannie Mae and Freddie Mac and a group of private investors who will create a joint venture with a pool of rental homes.  A national property management company will be retained to handle the nuts and bolts of renting the properties, dealing with tenants, and collecting payments.  Private investors will be responsible for rehabbing and maintaining the properties, and the rents and profits from the ultimate sale will be shared with Fannie and Freddie.  This is considerably more socialistic than the first proposal, but whichever proposal is ultimately implemented, this whole concept really stinks.

Why?  Because without a lack-luster economy and excessively high unemployment fueled by job-killing policies, many of these homes would not be in foreclosure in the first place.  And without the onerous provisions of the Dodd Frank bill which set federal underwriting guidelines, discriminate against small business providers of mortgage credit, and create qualified residential mortgage standards which shut a majority of Americans out of the mortgage market, the homes that are in foreclosure would be sold to private citizens wanting to purchase a home.  At a time of historically low interest rates and amazingly low housing prices, Americans are choosing not to purchase homes because they can't qualify for financing--not because they no longer believe in the value of homeownership.

And now the same government that created the problem in the first place is giving us the "solution".  If you think this through, what the government is doing with housing really amounts to one of the largest transfers of wealth in the history of our nation.  Over one million single family residences will be sold to investors, hedge funds, Wall Street, and corporate raiders.  Earlier this week, Warren Buffett made a public statement that he supports the White House's plan for higher taxes on the rich, saying that it is time that he and his top tier buddies started paying their share.  The timing made me wonder if this man, who has made billions profiting on the misfortunes of others, is now poised to profit once again by purchasing America's housing inventory at pennies on the dollar.

When the real estate market comes back, and it definitely will, these investors will have purchased these homes at rock bottom prices.  If current housing regulations remain in place and homeownership remains beyond the reach of middle-class Americans, the investors who own these properties can rake in huge profits as landlords.  If Dodd-Frank is repealed in a few years and Americans again start purchasing homes, the corporate investors can sell off their inventory at a healthy profit.  Either way, they win.

And either way, the American homeowner loses.  Right now, many Americans don't see the value of keeping their homes.  Financial experts such as Suze Orman are encouraging U.S. homeowners to walk away from their homes in a "strategic default."  From reading the comments that I receive on my post, "Suze Orman is Wrong--Don't Walk Away," I see that many advocates of strategic default believe that by abandoning a home, the homeowner is some how "sticking it" to the bank.  In reality, the banks are going to be just fine.  When they sell these homes in packages for the balances owed, they will recover their losses.  The investors they sell them to will make a fortune.  But many of the homeowners who have lost their homes--either through misfortune, or unemployment, or personal choice--will never be able to purchase another home again.  They will be renting for the rest of their lives, having lost or abandoned their biggest asset.

If the housing crisis of 2011 were a movie, the hero would uncover and expose this shameful scheme and save the day. But in the real story, there is no hero to ride to the rescue.  We just have to sit by and watch while the federal government accomplishes one of the greatest heists in history.

For more by Alexandra Swann, visit her website at

Friday, August 12, 2011

Why Rick Perry is My Choice for 2012

As a small business person who is openly not a fan of the current administration, I get asked a lot who I would like to see for president in 2012. Since the last election I have had only one answer--"Rick Perry." And today, as we appear to be one day away from his official announcement of his candidacy for the Presidency, I thought I would do well to repost my reasons for stating why he is the best candidate I have seen or heard so far.

Let me say first that although Perry has become the longest-serving governor in the illustrious history of the state of Texas, I have never voted for him. The reason for that is that while I work and own property in Texas, I am a resident of the neighboring state of New Mexico and, therefore, ineligible to vote in Texas elections. But since my company is a Texas corporation, my office is in Texas and the majority of the work that I do is in Texas, I follow the elections and politics and the laws of Texas with great interest.

I was born in El Paso, Texas at Southwestern General Hospital. My parents moved out of the state when I was seven years old because they wanted to homeschool me, and in the 1970's homeschooling was illegal in Texas. So I am really a Texas ex-pat, driven from the state of my birth at a young age because of onerous regulations which prevented parents from choosing the type of education they believed was best for their own families.

When I opened my business in 1998, I opened my office in El Paso, Texas but I got my first license in New Mexico. As a business owner in both states, I came to see the difference that effective government makes in the health and well being of a state. New Mexico is a beautiful state geographically, but it is a very poor state. The state income tax discourages many people from moving there and causes professional people to move out. The various taxes on businesses discourage industry and innovation.

Texas, on the other hand, has a tax structure which encourages growth. The state has no income tax. The various state departments work with the businesses to promote growth and cooperation. Texas's pro-business stance is a primary reason that over 40% of the new jobs created nationwide in the last two years have been created in Texas. The city of Houston now boasts that it leads the country in one way UHAUL rentals to the city.

My own experience as a business owner has been primarily with the Texas Savings and Mortgage Lending Department which regulates small mortgage brokerages like mine. Texas introduced licensure for its mortgage brokers in 1999, and I received my first license in the state January 3, 2000. The Savings and Mortgage Lending Department was our regulator. Since prior to the licensing law for mortgage brokers, the Savings and Mortgage Lending Department regulated savings and loans, and there were only a handful of these left in the state by the year 2000, the state of Texas made the Department of Savings and Mortgage Lending responsible for regulating the mortgage brokers. But the Department had to be self-sustaining. That meant that all of the fees to run the Department and pay the staff had to come from the brokers and small entities the Department regulated. This was a wonderful system, since each year the Department had to plan its budget based on the amount of money it could charge the small businesses it regulated. If the Department charged too little, it could not meet budget. If they charged too much, they might close a lot of us down which would result in declining revenues for them. Their survival as an agency was tied to our survival as businesses--if we died, they died.

That philosophy is a key reason that Texas is a lead job generator--the state and its governor treats business not as an evil combatant, or even merely a necessary evil, but rather as a partner with mutual interests. In spite of all of the rhetoric we have heard from Washington in the last two years, the government does not create jobs. The only jobs that the federal government has the ability to create are jobs for federal employees, and these positions must be supported through tax dollars. Likewise, the state government does not create jobs except for state agencies. The role of any effective government is to foster an environment where the private sector, large and small, can grow, thrive and create jobs and opportunities. Too much regulation kills incentive and opportunity. No regulation at all creates an environment where criminals flourish and then leads to job killing regulation to cover the mistakes made by a complete lack of oversight in the beginning.

Rick Perry seems to understand this principle. Yes, there are other fine conservatives who have already announced their intentions to run. I watched part of the GOP debate last night with interest and I heard some strong, well-spoken contenders in the GOP field. Most of them have good ideas, and several have clearly demonstrated a commitment to principles. But Perry has a depth of experience as the governor of a state with an economy bigger than many small countries that I just don't see in any of the others. And he really gets the concept of the true relationship between business and government. Business is not the enemy and opponent of the government--it is a partner and necessary ally. We create the jobs, the tax base, and the growth that keeps the economy vibrant. When we die, everything dies.

As governor of the only state that had a brief stint as an independent republic, Perry also gets the concept of personal freedom. We, the taxpayers of Texas, are adults who are capable of making our own decisions about the most important aspects of our lives. We are capable of deciding what type of health care we should have and how we should pay for it. We don't want to be micro-managed; we want to be free to work, to create, to prosper, to help our state and our nation prosper. We know that we can't do that with a massive bureaucracy hanging over our heads, whether that bureaucracy governs us in the form of Department of Health and Human Services, or the Consumer Financial Protection Bureau.

Rick Perry is a straight talking, action-oriented governor. Those characteristics may be off putting for people outside of Texas who may consider him brash and over confident. But for me his straight talk is a breath of fresh air. We already have an "elegant president" who is a masterful speaker and a great campaigner. Perry is not elegant--he is way too rugged. But much of the U.S. is also rugged--this is a vast country with many people who still have big dreams and big goals and big plans. It needs a president who will allow us to nurture our dreams rather than a runaway freight train of a government that crushes our initiative under the weight of massive rules.

As I await his announcement tomorrow, I am hoping that Americans will take time to get to know Perry better. He would bring a new attitude, a respect for the Constitution, and a sense of personal responsibility to Washington that is sorely lacking now.

For related posts visit

Wednesday, August 10, 2011

It's the End of the World as We Know It

I chose the title of the REM 80's song "It's the end of the world as we know it," because this past weekend as I was watching all of the fallout from our first-ever credit downgrade, the chorus to this ridiculous song kept running through my head.  But if the title sounds flippant, the reality of our situation is more serious.  For the housing industry, this really is the end of the world as we have known it.

Not only did Standard and Poors downgrade the US credit rating from Triple AAA to AA+, they also downgraded the rating of Fannie Mae and Freddie Mac.  The downgrade sends a powerful message reiterating what we have known for some time--Fannie Mae and Freddie Mac are probably not much longer for this world.  And although Fannie and Freddie are about to go away, at this point we still don't know whether their replacements will be completely private, as conservatives want, or completely public, as Barney Frank has indicated that he wants.  All we know is that government conservatorship of two giant agencies which have gobbled up hundreds of billions of tax dollars in just under three years is going to have to end.

The downgrade was not all that happened last week. The comment period for the FDIC's qualified residential mortgage proposal ended August 1.  A similar proposal by the Federal Reserve ended its comment period a few weeks ago, so now the future of housing is back in the hands of government employees who appear to be determined to drive the final nails into the housing market's coffin.  The new proposed guidelines require a 20% down payment for a purchase, 25% equity for a refinance and 30% equity for a cash-out refinance. The borrower's debt to income ratio cannot exceed 28% for his housing ratio to his income and 36% for his total debts to his gross income. These ratios do not have compensating factors--allowing, for example, high cash reserves to be used to offset a higher ratio. As an additional blow, any borrower with a 60 day delinquency on his credit report will not qualify for a QRM.

Using these guidelines, only 20% of the loans sold to Fannie and Freddie over the last 10 years would have met the criteria of a QRM. The Federal Housing Finance Authority found that less than one-third of loans sold to Fannie and Freddie in 2009 would have met the QRM guidelines, and 2009 was one of the strictest underwriting years on record.

Any loan not meeting the QRM guidelines will be subject to 5% risk retention by the originator. That means that to originate at $200,000 loan, the originator would have to be able to retain $10,000 of that loan for the life the loan. (Risk retention guidelines implemented by Dodd Frank state clearly that the retained portion cannot be sold off separately.) Those dollar amounts will add up fast, so the risk retention guidelines will ultimately exclude a lot of smaller originators from originating anything except a QRM.  And since the FDIC has stated plainly that QRMs are meant to be only a very small slice of the housing market, this means that most residential mortgage lending will by necessity be done by the major banking giants--Wells Fargo, BofA, Chase, and Citi.

The qualified residential mortgages are mandated by the Dodd Frank bill, but the requirement for homebuyers to have 20% equity in their homes is based on a misguided notion by many in government, including former FDIC chair Sheila Bair, that at one time all Americans had to put down a 20% down payment to buy a home.  In interviews that she gave to Fox Business on this issue, Bair said smugly that 20% down payments had worked for this country in the past, and she believed that this was a good model going forward.  What Bair does not say is that the default rate for 30 year fixed rate mortgages has been less than 1% regardless of the size of the downpayment.  Careful underwriting and fixed rate mortgage notes are much better indicators of whether a mortgage will perform than whether the homebuyer puts down a substantial amount of money at closing.

The truth is that our housing market has never relied on 20% down payments as the standard.  For some research supporting this, see the post that I wrote a few months ago entitled, "The Myth of the 20% Down Payment."  Our housing market has been built and has thrived on a variety of credit products that allowed borrowers to make substantially smaller down payments to qualify for home ownership.  So if we want to look at how the 20% down payment model works, we cannot look at our own, pre-1990s past.

However, we can look at the experiences of Hong Kong.  An AOL real estate story by Ann Brenoff posted June 14, 2011, states that when Hong Kong recently implemented a 20% down payment requirement for foreign buyers, sales at 10 of the nation's largest residential developments fell 60% the following week.  In Hong Kong, the government implemented the measure specifically to slow home purchases and stop inflation of home values.  In our country, rising home values is hardly a problem--2011 is seeing property values fall again all over the country as potential buyers either do not qualify or choose to purchase lower-priced foreclosures and short sales.  And as more and more Americans choose strategic default and walk away from homes that they could actually afford, we will have an increasing number of foreclosures which will continue to force home prices down.  No, what we need is certainly not a slower housing market.

When I tell people that at the end of the year when the QRM guidelines go into effect, potential homeowners who want the best rate will have to put 20% down, have no more than a 36% debt to income ratio and be current within 30 days on their obligations, they are shocked. After all, a $200,000 home would require $40,000 down payment plus closing costs, putting it well out of the range of many young American families. When I tell them that those who cannot qualify will go into a loan where the lender maintains 5% of the risk--which will probably be mainly one of the major banking entities--Wells Fargo, Chase or BofA--and that these loans are expected to cost 3 times as much as a "qualified residential mortgage" they are even more shocked. FHA has always been a popular product for young families nationwide, and especially in lower income communities such as El Paso, even though our community FHA loan limit is capped at around $275,000. But now that FHA has a mandate to reduce its lending presence to between 10 -15% of mortgage loans, most Americans are going to be left out of homeownership permanently.

In response to the stock market problems and Bernanke's promise to keep interest rates low for the next two years, mortgage rates right now are at record lows.  I feel very confident in predicting that this window of opportunity to refinance or purchase at low interest rates is the last one that we will see in a very long time.  If you are thinking about buying a house or refinancing your house, now is the time if you qualify.  After the qualified residential mortgages become the new standard for residential lending in a few months, the real estate market as it has traditionally existed in the US really will have come to an end.

For books by Alexandra Swann visit her website at