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.

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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.

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