Quick T.R.I.D. Update

A few months ago, major changes took place in the lending world.  These changes, referred to as T.R.I.D. (TILA-RESPA Integrated Disclosure, for those curious), ignited a lot of fear and uncertainty in the real estate environment.  How would lenders react and adapt to the changes?  Would closings go smoothly after changing the forms that had been in place for 20-something years?  What would the new rules mean for REALTORs and their clients?  A lot of questions were raised, and nobody really knew what to expect.

Well, we are a few months into T.R.I.D and we have (at least a little bit) of clarity.  I obviously don't get to see the behind-the-scenes at mortgage companies, but my impression thus far is that most companies were well prepared for the changes and the transition has been mostly smooth!  Of the closings I've had since T.R.I.D. took effect (using multiple mortgage companies) there have been no noticeable issues and each file has closed on time!  And some mortgage companies have backed-off of their requests for REALTORs to write purchase agreements with 60 day closings.  I've had multiple transactions that closed in 45 days, which was (kind of) the standard prior to T.R.I.D. taking effect.  I think it's safe to say at this point that the fears about T.R.I.D. were just a tad overblown.

Something to ponder for the future, however - with major changes, there are inevitably going to be minor tweaks and changes that take place over time.  I have not heard of anything specific at this point, but it would not surprise me to see things change and improve over time.  It is hard to say how any of these changes might effect things going forward.

If you have specific T.R.I.D. or mortgage-related questions, reach out to me and I'll put you in touch with a loan officer!

Will the Feds Finally Raise Interest Rates?

Time to get a little wonky, guys!

This Thursday marks the beginning of a very important Federal Reserve Open Market Committee (FOMC) 2-day meeting.  What is at stake is something that's been discussed for a couple of years now - will the Federal Reserve finally raise the overnight rate?  The overnight rate is the interest rate at which banks can borrow money from the Federal Reserve, and has not been raised in over 9 years.  This overnight rate has huge implications on the U.S. and global economies, and will directly affect mortgage rates.

As I already mentioned, analysts and bankers have been anticipating a raise in the overnight rate for at least a couple of years, and yet it has not happened.  REALTORs and loan officers have been on pins and needles, worried that an uptick in rates would derail a housing market that has improved markedly since the collapse in 2007.

This is the Fed's last meeting of 2015, and whatever they decide to do will certainly be an indication of what they plan on doing in 2016.  We all know that mortgage interest rates at 4% is not sustainable long-term, and it's just a matter of time before the Fed's start to "correct" what has been the status-quo for nearly a decade.

I think the key takeway is that even if the FOMC decides to raise rates on Thursday/Friday, they will almost certainly go about doing so in a cautious and conservative manner.  So barring something economically catastrophic, we should continue to see VERY affordable mortgage rates for the time being. 

Romney, Obama, and Housing

With the Presidential election just a couple months away, lets take a quick look at what each candidates housing policies are.

Barack Obama (D) - With President Obama, we actually have a track record to look at.  Unfortunately for the President, his housing policies have done very little to fix the problems facing the market.  Through a variety of different programs (HARP, HARP II, etc..) Obama has primarily focused on helping underwater homeowners refinance in an attempt to keep them in their homes.  These various programs have had some success, but most analysts agree that they haven't done nearly enough.

Interestingly, President Obama's re-election website does not list any housing policies.  He has posted his policy positions on a variety of other issues, but housing is notably absent.  Unfortunately for the market, the President doesn't seem to have much of a vision, and if he does he isn't exactly waving it around for the public to see.

Mitt Romney (R) - Mitt Romney has not been President, so we don't have a track record to analyze.  However, his website does lay out his policy vision on housing.  You can find that information here.  The core of Romney's housing plan is to reform Fannie Mae and Freddie Mac, the two government-sponsored enterprises.  The website doesn't provide any specifics as to what constitutes "reform", so it is unclear what exactly he means.  He also mentions that he plans to roll back most or all of the new rules and reforms instituted under President Obama.  Mitt Romney certainly deserves credit for outlining and providing a housing policy, but the lack of specifics is certainly frustrating.

Conclusion:  So what does this all mean?  From a "big picture" perspective, neither candidate seems willing to address the substantive issues in the housing market.  Although the market has recovered significantly in recent years, there are certainly underlying issues that need to be tackled.  Personally, I'd like to see something from the following list implemented:

-One year moratorium on all foreclosures sales.
-Streamlining of the short sale process with basic rules set by the federal government.
-Slight loosening of underwriting standards on Freddie and Fannie loans.
-Streamlined re-financing of any underwater homeowner who is current on payments.

I could continue this list, but these are four ideas that would drastically help the market, and neither candidate is willing to go there.

At the end of the day, the pundits say this election will be about the economy but the candidates refuse to discuss one of the central tenants of the economy.  It's frustrating as a real estate agent, and it has to be even more frustrating for those that bore the brunt of the housing market.

Analyzing My 2012 Real Estate Predictions

WOW!  It's been a while since I posted here.  It's amazing how easy it is to let things like a blog go unnoticed when you are busy!  However, no excuses - I promise to update this blog on a more regular basis going forward.

I want to write a follow-up post to an article I wrote at the beginning of the year.  The purpose of the first article was to form some predictions for the real estate market in 2012.  We've been through a tumultuous few years, and I was worried that my predictions might end up wildly inaccurate.  However, I actually haven't done so bad!  Let's take a look more closely:

1.  Interest rates will remain at historic lows.

Fixed-rate 30-year mortgage rates, 1/1/12 to present

Not only have interest rate remained at historic lows, they have actually fallen over the course of this year.  With the Federal Reserve keeping their overnight interest rate at essentially 0%, mortgage rates have continued to fall, even with growing demand for mortgage purchases and refinances.  So overall, I would say that my prediction has been quite accurate!  The chart on the left depicts the interest rate on 30-year fixed mortgages, courtesy of Freddie Mac.


2.  Market inventory will continue to fall.
My prediction regarding inventory was right on the money as well.  At the beginning of the year, there were 22,793 homes for sale in the Twin Cities region.  The most recent numbers we have show that there are currently 17,461 homes on the market.   This rapid drop in inventory is pretty closely correlated with my next prediction.

3.  Prices will be flat or slightly higher.
Unlike the last two predictions, which were fairly easy to measure and analyze, this prediction is a bit more nuanced.  In some areas, we have already seen prices increase since the start of the year.  In these same areas, prices have actually been increasing for the better part of a year.  However, there are still some areas that are battling high distressed sales, which has kept prices either flat or slightly falling.  Overall, I'm going to rate this one a wash. 

4.  Foreclosure rates will fall in 2012.
This may be my most off-base prediction of the four I made.  By most measures, foreclosure rates have actualy increased in 2012.  Many analysts assign blame to banks ramping up foreclosure operations after finally settling a massive lawsuit brought by the Department of Justice.  According to Daily Finance Online, foreclosure notices are up 6% compared to the beginning of 2012.  For now, I will rate my prediction as a fail.  However, it will be interesting to watch how the foreclosure rate changes over the next few months.  The "shadow" foreclosure market has been the elephant-in-the-room for some time, and real estate professionals are watching very carefully moving forward. 

Conclusion:  At the end of the day, I didn't do too bad!  Overall, the market has continued many of the trends we've seen over the last year.  Watch back for more predictions!
  

To Help or Not to Help?

Via the opinion section of the New York Times:

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

There is little doubt that the housing bubble, followed by the housing bust, has left millions of Americans with huge debt on an asset that will never be worth what they paid for it.  As homeowners scrimp every last dollar to pay their mortgage, less money is spent in other areas that boost the economy, such as personal investing or consumer spending.

But I think this situation gets to the heart of the larger debate we are having in this country about the role the government should play during economic recessions.  A stronger effort to reduce mortgage principle balances would undoubtedly give the economy a jolt, but some view any intervention by the government as a distortion in the market and an unscrupulous use of taxpayer dollars.  Others argue that the "free market" got us into this situation, and that we are letting our fellow citizens and the larger economy down by refusing to address the root of our economic woes.

Keeping FHA Financially Viable

HUD Logo

The Department of Housing and Urban Development (HUD) and the Federal Housing Adminstration (FHA) recently announced that the annual mortgage insurance premium paid by FHA mortgage borrowers would increase a quarter point (.25%).  Rightfully so, many people are upset - this will surely lead to a slight increase in the amount of money it costs to obtain a loan.   But compared to the alternative (higher down payments, higher closing costs, more restrictive income requirements, lower caps on eligible home values, etc..), I actually think this was a fair move.

FHA has been instrumental in providing loans to lower income borrowers who could never afford a 20% downpayment.  In the past 4 years, since the meltdown of the mortgage industry and the collapse of the housing market, FHA has buoyed a highly unstable market.  It has also allowed first time home buyers to take advantage of drastically reduced property/home values and the Federal First Time Home Buyer Tax Credit.  I think the decision was made for two reasons:  The first was to ensure that FHA remained financially viable into the future.  The second, I'm sure, was to start easing some of the risk of mortgage lending back into the private sector.

I'm not going to wade too far into the technicalities of obtaining a loan or the precise economic effects of this particular decision by FHA, but I think the big point here is that FHA will remain financially viable in the near-to-mid term, and it also keep open a window of opportunity for potential home buyers everywhere.  Like everything in life, the decision is relative and must be compared to the alternatives.  In this instance, I think they made a decent choice.

The Sacred Cow of Real Estate

With the nation's finances in dire shape, elected officials will have to make tough choices in the coming years.  Federal spending is at its second highest nominal dollar amount (2009 being the highest) in the face of two wars and the "Great Recession," tax revenues have plummeted as a result of massive tax cuts and a sluggish economy, and the gap between the two continues to escalate.

These are the kind of tough choices that make politicians wince.  But unfortunately, we've got into this mess and something needs to be done to get out of it.

Numerous deficit-reduction proposals have begun emerging and the Mortgage Interest Tax Deduction, long-held as the "sacred cow" of real estate investing, is increasingly coming under the chopping block.  With home ownership a central theme to the American dream, I felt it would be a good idea to investigate these potential changes and how they might affect homeowners. 

First, it is important to note that of all the advanced economies in the world, only 4 allow personal debt interest to be deducted from their taxable income.  These countries are:

1)  The United States
2)  Sweden
3)  Switzerland
4)  The Netherlands

Perhaps homeowners in the United States have taken for granted their ability to write off mortgage interest.  As you can see, very few countries have laws that allow such a practice.

There are some important rules that govern that ability of homeowners to write-off mortgage interest.  First, mortgage interest deductions are only allowed on primary and second-homes.  Investment properties are not often allowed the deduction.  Also, only the interest paid on the first $1 million of debt is permitted.  These might seem like strict rules, but the reality is that very few Americans own multiple homes, and even fewer have over $1 million in mortgage-related debt.

Currently, the mortgage interest deduction is one of the largest subsidies operated by the federal government.  On average, the federal government spends about $100 billion annually to continue the subsidy.  But does it that important?  Does the mortgage interest deduction really improve the level of homeownership in the United States?

Politically, yes, it does.  Defending the mortgage interest deduction has become commonplace for legislators.  Can you imagine what the FOX News' and the MSNBC's of the world would have to say about a politician that "supports taking more money away from you"?  Of course not, because legislators from both parties have been more than reluctant to call for anything other than a continuation of the status quo.

The real question becomes, who does the mortgage interest deduction benefit most and is it achieving its stated goal of preserving and increasing the level of American homeownership?

Although politicians say one thing, economists (you know, the ones who actually analyze the data and attempt to give unbiased, logic-based conclusions/recommendations!) are almost united in their opposition to the full subsidy.  As it turns out the data shows that, although the interest deduction appears to be a good deal for everybody, the winners are those at the very top of the income distribution.  And those at the bottom rungs of income?  They see the least of the benefits.  In fact, in some areas with particularly strong land-use regulations (think urban areas) the mortgage interest deduction actually HURTS homeownership, particularly among lower-income individuals.

So what should be done?  It seems both legislatively unfeasible and economically irresponsible to do away with the entire deduction.  It has become a way of life for Americans and a major disruption would undoubtedly do more harm than good.  I think an effective compromise would be to roll back some of the subsides for the highest-earners (those that need the deduction least) and use the saved revenues to encourage broader home-ownership for lower-income levels.  These incentives could be something similar to the $8,000 First Time Home Buyer's tax credit of 2008/2009, or they could be in the form of down-payment assistance.  Regardless of the form the incentives take, a well-targeted program would benefit those at the bottom and would start to bring the housing market back to rosier days.