The collapse in housing and the 33 percent plunge in house prices since 2006 are favoring renting over homeownership. This trend will dominate the housing market for the next four or five years, and put additional pressure on a weak economy.
Policy makers in Washington continue to have a soft spot for homeownership. Many recent government actions can be viewed as attempts to keep people in their homes, even owners who clearly can’t afford them. In addition to specific plans such as the Home Affordable Modification Program, or HAMP, and the Home Affordable Refinance Program, or HARP, the Obama administration is trying to revive the moribund housing sector by encouraging mortgage lenders and servicers to refinance loans at lower rates.
This reduces interest income for banks, which are now compelled by the Dodd-Frank law to retain 5 percent of the credit risk on lower-quality residential mortgages that are securitized and sold to others. Furthermore, banks are reluctant to refinance loans that Fannie Mae and Freddie Mac (NMCMFUS) then guarantee and put back to the lenders if they find any defects. The White House plan is a tough sell.
Refinancing Woes
As banks deleverage and mortgage activities increasingly involve unwanted loans, the ability to deal with refinancing has diminished. Four banks now control more than 60 percent of the mortgage market, and many mortgage servicers have reduced staff or been slow to gear up to handle delinquent mortgages and refinancings. Except for those who qualify for HARP, refinancing is highly unlikely for 8 million owners who are underwater — owing more than the value of their homes — because new terms are treated as new loans. Those who have positive home equity face dramatically tightened lending standards, a clogged refinancing system and new fees that can wipe out the savings from refinancing.
Almost 90 percent of mortgages today are only originated because of guarantees from Freddie Mac, Fannie Mae and the Federal Housing Authority, and all three have raised their fees substantially. As a result, many of the 20 million borrowers who could cut their mortgage rates by more than one percentage point through refinancing are unable to benefit.
– Second Mortgages: Refinancing underwater borrowers is tough when they have second mortgages that also have to be renegotiated, or if mortgage insurers have to agree to the new loans. Many borrowers can’t qualify for refinancing because of tightened lending standards. Fannie, Freddie and the FHA have strengthened their requirements because of pressure from the administration to avoid more losses on bad mortgages. High credit scores are needed to refinance outside HARP, along with two years of tax returns, proof of income and recent evidence of assets such as retirement and brokerage accounts.
During the housing boom, appraisals for house purchases were generous. (And why not? Everyone was certain that house prices would rise indefinitely.) Cooperating appraisers were often recommended by real-estate brokers and mortgage lenders who wanted the deals to go through. After the house-price collapse, however, appraisals became very conservative, as lenders pressured appraisers to make low estimates.
