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