By Ken Trepeta
All indications are that the challenges for the mortgage and housing markets will continue.
The problem is not merely the media shorthand “subprime meltdown” though that continues to be a factor. In addition to the evaporation of subprime capital, the tightening in jumbo and ALT-A markets is continuing to dampen the ability of people to obtain mortgages and purchase homes. In the case of the jumbo markets, the difficulty in securitizing these mortgages and the increase in risk premiums/spreads with conventional loans has made these products unattractive, scarce, or unaffordable. In the case of ALT-A and specifically low-documentation and no-documentation loans, tightening standards and greater interest rate spreads have reduced the ability of consumers to obtain these loans or refinance into similar products at lower rates.
The mortgage market has changed and many of the old standards should and will never come back. However, it is imperative that measures be taken to restore faith in securitized mortgages and to provide mortgage products that are accessible to more consumers. The good news is that government can play a productive role.
FHA Modernization
Both the House and Senate passed versions of FHA modernization last year thanks to the leadership of people such as House Financial Services Committee Chairman Barney Frank (D-MA). It is imperative that they finish the job and get a bill to the President. An FHA modernization bill that increases the loan limit to $417,000 (or more if Chairman Frank’s version prevails) will fill a significant gap left by the disappearance of the subprime market. Not everyone will benefit, but the door of homeownership will be reopened to hundreds of thousands of potential homeowners. Furthermore, coupled with a retuning of the FHA Secure refinance program, the higher loan limit will enable significant numbers to refinance out of costly subprime and other products into more cost effective and safer FHA insured loans. Congress needs to put aside trivial differences and enact the reforms that a strong bipartisan majority support and that President Bush has long advocated.
GSE Loan LimitsAnother measure that would help consumers is increasing the GSE loan limits. Since the GSE’s and their securities are viewed as more secure than other mortgage backed securities due to the government sponsored nature of Fannie Mae and Freddie Mac, increasing the GSE loan limits would make larger loans more affordable for consumers and more easily securitized, removing pressure on the private markets where there is limited capital to finance jumbo loans. NAR estimates that increasing the GSE loan limit to $625,000 would yield 330,000 additional home purchases in the first year by making mortgages more available and affordable to those who don’t qualify or can’t afford a jumbo loan under the current rate structure. That would increase sales by almost 7%, a dramatic counter to current market trends. Congress has been debating GSE reform for years now and both sides are close. Part of that reform should include an increase in the loan limits as well as an enhanced regulator to ensure the GSE’s maintain their financial credibility and can safely perform the role for which they were created. Congress, after enacting FHA modernization, should turn quickly to getting the job done on GSEs.
Other Measures
Another action that has not received as much press attention but would restore faith in mortgage backed securities would be greater oversight of the securities ratings agencies. The collapse of the secondary market for private mortgage-backed securities owes significantly to the total loss of faith in rating these securities. Securities regulators need to take a serious look at this process and mandate reforms to ensure that ratings accurately reflect the risks and value of these securities. Only then will investors have the confidence to purchase these securities at competitive prices that allow for reasonable rates of return.
The Fed is already playing many roles in resetting standards for mortgage lending. Perhaps their biggest role is in creating an interest rate climate that provides incentives for consumers to buy homes and for those with costly mortgages to refinance to mortgages with more favorable rates. The Fed must balance a number of factors in making its rate decisions including the overall health of the economy and the level of inflation. It is clear the Fed is being diligent but it is also being responsive. Reduced interest rates, coupled with the legislative changes above are an invaluable elixir for a sick mortgage and housing market.
While we cannot and should not return to the days and policies that led to this crisis, we must press our elected officials to make changes to improve the current situation and create a climate for recovery. The reforms outlined above will have both short-term and long-term positive effects on the mortgage and housing markets and most importantly, help consumers who want to purchase a home and those who want to stay in the homes they purchased over the last few years and are finding it hard to do so now. It is important for everyone who has an interest in homeownership to urge their elected officials to act now.
Kenneth R. Trepeta Esq. is the director of NAR Real Estate Services.
For more information, please e-mail him at ktrepeta@realtors.org.
