Category: Real Estate

To understand Fannie Mae and its “sister company” Freddie Mac takes a lesson in politics. There is a fierce political battle going on about how to regulate government sponsored entities like Fannie and Freddie. In general, Democrats support the companies taking on a larger role in the mortgage market. They support the companies' affordable housing missions and want them to help low income borrowers. Republican generally want a smaller role for the firms and worry about the risk to taxpayers that could come with letting the firms grow their portfolios. Obviously, it’s in Fannie Mae’s best financial interest for the housing market to stabilize. But the current volatility can work to the company's political advantage, as there seems to be more need than ever for it to “work.”

Unlike most cities in the country, the Manhattan real estate market was not initially touched by the subprime mortgage mess. In fact, as I report in our "A Tale of 5 Cities" series, up until recently there was little evidence of problems with subprime mortgages or foreclosures in Manhattan…and the real estate market here charged ahead much like it had in recent years.

The simple reason is that Manhattan is not a subprime mortgage market. In other words, people who can only obtain subprime loans don’t and can’t buy in NYC (at least not in Manhattan). That’s because the majority or homes sold in Manhattan are co-op apartments. And, co-op boards, which must approve all buyers, did a far better job vetting the finances of prospective co-op shareholders than banks typically did. On average, people buying Manhattan apartments put down 35 percent of the purchase price….and finance the remaining 65 percent. Simply put, if you need a subprime loan, you most likely won’t be buying a home in Manhattan.

Perhaps no real estate market in the U.S. will have as much trouble recovering from the current housing crisis as Southeast Michigan. Unlike a lot of areas, Detroit's housing market didn't become overheated by subprime mortgages. Rather, it is a region that has been on the decline for decades.

Detroit has yet to really recover from the race riots of the 1960s. Demographics reflect that. Detroit's population peaked in 1950 with about 1.8 million residents. By 1980 there were about 1.2 million people. Today there are only about 870,000.

Economics are another problem. Southeast Michigan has lost about 300,000 manufacturing jobs over the past few years. The auto industry accounts for about half of those losses. Those jobs won't be coming back, so the region is struggling along with other rust-belt communities to find new ones.

When real estate was booming, the mantra of people in the business of selling homes was that the DC market was “recession resistant.” The theory went that since the federal government is here, house prices would stabilize or continue to rise. While it is true that the DC economy is buoyed by the government’s presence, the region is not immune from the unwinding of real estate speculation and tightening of lending standards.

Prices are still falling in the most distant suburbs. This lower end of the housing market is where the subprime lending standards took their heaviest toll. There is still land to develop in these suburbs, which has also added to the supply of homes. When I asked John McClain of GMU’s Center for Regional Analysis if the problems were from overbuilding, he described it as “overbought.” There was a time when builders couldn’t keep up with buyer demand. Prices escalated as a result. But that’s over. Buyers backed out as lending standards tightened and prices stopped rising.

I learned about the AmeriDream and Nehemiah programs while reporting a story about lenders tightening housing standards. Lenders have defined some of the Washington, DC area as a “declining market;” which in some cases means buyers have to put down 20% or more to get a loan. I asked a realtor if these tighter lending standards were pushing buyers out of the market. I was surprised when she told me that FHA qualified buyers could still get 100% financing through AmeriDream and Nehemiah. She told me a lot of sellers were eager to have an offer from an FHA qualified buyer because they didn’t have to worry about the lender changing the standards or the buyer having the down payment.

There’s plenty of blame to go around for the housing boom/bust. The toxic brew of high leverage, lack of transparency, and abuse of off-balance-sheet accounting that helped fuel increasingly risky lending is at the heart of the credit crisis. But less appreciated are the tax changes that encouraged risky borrowing and speculative purchases.

Before 1997, any gain on the sale of a principal residence could be rolled over tax free to another home of equal or greater value within two years of the sale. People over 55 could take a one-time tax exemption of up to $125,000 if they had lived in their home more than three years. But when Congress passed and President Clinton signed the Taxpayer Relief Act, those restrictions were relaxed. We saw this kick in after the stock market bubble burst and investors put their money in the “real estate market.”

Another more recent tax change is also having consequences in today’s down market.

As a mother of two, I can find parallels between the housing mess and parenting. It’s fun to let the kids stay up late, make a mess, and have a good time. But the price is paid the next day. If the party goes on too long, someone is bound to get hurt.

That’s what happened in the mortgage market. Rising home prices disguised bad decisions by borrowers and lenders. But everyone seemed to be having a good time, getting a home of their dreams or a hefty bonus. Seems to me the regulators are like the mothers who let the party go on too long. Unfortunately, a lot of people are getting hurt by the lax approach that took hold when everyone was having fun.

I have gotten calls from people who are struggling to pay their mortgages, keep their homes, and avoid foreclosure. As a reporter, I can tell people’s stories, keep the issue in the spotlight, and broadcast information to people about their options. Unfortunately, I can’t “fix” people’s problems. But from the reporting I’ve done, I can tell you what I know. With home prices falling, it is certainly in lenders best interest to work out a loan. So the first option is to make contact with your lender. Lenders are in the business of making loans, not modifying bad ones, so it may be a frustrating process, but they are the ones who can change the loan, so it may be worth the effort. Document each contact, who you spoke with, what time, and what the response was.

The HopeNow alliance is the industry’s voluntary effort to work out troubled loans, so another choice is to visit http://www.hopenow.com/ or call 1-888-995-hope. Mortgage counselors may be able to help you understand your options and even make contact with the lender on your behalf.

The Senate compromise on housing includes tax credits for people who purchase new or foreclosed homes. The idea is to kick-start the housing market and get buyers “off the fence.” The National Association of Home Builders supports this approach.

But is this the best way to use tax dollars? Housing economist Thomas Lawler calls it, “one of the worst ideas out there.” While it may aide some buyers, it won’t address the fundamental problem in the market. Foreclosures are rising because people took out mortgages they now can’t afford to pay back. He says it doesn’t make any sense to subsidize people who can afford to make a purchase. “What this means if you aren’t buying a home, you’re paying for someone else who is.”

A lot of effort has been made trying to encourage lenders to work out bad loans. It seems simple enough. Housing prices are falling. Lenders will lose money in foreclosure, so why not modify the loans and create a win-win for both borrower and lender? One thing that’s complicating loan modifications are the problems with 80/20 loans.

These so-called piggy back loans were common for no money down, no documentation subprime loans. One lender made a home loan for 80% of the homes’ value, another lender made a loan for the remaining 20%. With home prices in some parts of the country down, those 20% second loans are worthless. The holder of the 80% loan may be willing to change the terms of a loan to keep people in their homes, but the lender who now has a worthless loan may not be so quick to give up.