Election Day has come and gone and regardless of who you voted for, there will be consequences on the domestic housing market. This article is courtesy of Jed Kolko, Chief Economist at Trulia.com.
Refinancing, new mortgage regulations, and the mortgage interest deduction all won on Tuesday. But the best shot at more principal reductions might have been lost.
Throughout the 2012 presidential campaign, both candidates were short on specifics about their housing policy, to put it very kindly. They ignored housing in the debates and acted as if the housing crisis were over. Neither their actions nor their policy statements gave a clear idea of what they might do about housing. But what the candidates DIDN’T do or say helps draw out the differences between what housing policy will look like during Obama’s second term and what housing policy would have looked like with a Romney administration. Here’s what Obama’s re-election means for housing:
1. The refinancing push continues. The Obama Administration has made it easier for homeowners to refinance at today’s low mortgage rates and plans to make refinancing available to even more borrowers. Refinancing is economic stimulus since it gives homeowners with mortgages more spending money, but it doesn’t help most people on the verge of losing their homes. Although refinancing has been a priority for Obama, Romney made no mention of refinancing in his housing plan – despite strong support for refinancing from one of his economic advisors.
2. New mortgage regulations are coming. The Consumer Financial Protection Bureau, established by the Dodd-Frank Act, will set new mortgage standards by January 2013. These standards will define which mortgages are judged to be beyond a borrower’s ability to repay and would therefore trigger legal and financial implications for lenders. These standards, yet to be established, will need to strike a delicate balance between protecting consumers from high-risk loans and giving lenders the incentive to expand mortgage credit. Romney blamed Dodd-Frank for holding back mortgage lending, pledging to “repeal and replace” it. But with Obama’s re-election, Dodd-Frank–and the coming mortgage regulations–is a reality.
3. The mortgage interest deduction lives to fight another day.Romney proposed capping overall income tax itemized deductions at $25,000, which would have, in effect, reduced the mortgage interest deduction (which accounts for 35% of the value of total itemized deductions) even for many middle-income taxpayers. Obama, in contrast, is open to cutting the mortgage interest deduction only for the wealthy. Even if deeply cutting deductions finds bipartisan agreement in Congress–and it might–Obama is likely to resist gutting the mortgage interest deduction. Why? The ten states that benefit most from the mortgage-interest-deduction ALL voted for Obama on Tuesday (see table below). The average household in an Obama-voting state claims 66% more for the mortgage interest deduction than the average household in a Romney-voting state. If Obama takes a swing at the mortgage interest deduction, he’ll be hurting his supporters and putting his fellow Democrats in a tough political spot.
|States with the Most Mortgage Interest Deducted Per Household|
|#||State||Average Amount Deducted, $*|
|9||District Of Columbia||$4,581|
|* Average amount of mortgage interest deduction claimed per household. Includes households who do not itemize. National average = $3,343.|
4. A chance for principal reductions may have been lost. In his housing plan, Romney called for more “shared appreciation” loan modifications. This means that a borrower would get a reduction in their unpaid principal balance but would have to share some of the upside with whoever took the hit for the principal reduction if the home’s value appreciates. Shared-appreciation loan modifications reduce a borrower’s incentive to strategically fall behind on their payments in order to get a principal reduction. This “moral hazard” problem was one reason why many Republicans and the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, resisted the Obama Administration’s call for more principal reductions earlier this year. Shared-appreciation loan modifications are an approach to principal reductions that Democrats, Republicans, and even a financial regulator could all learn to love. It would be a shame if this approach to keeping more people in their homes goes down in defeat.
The Federal Housing Administration has agreed to soften the requirements for condo communities to receive certification for federally-insured mortgages. The policy update is a boon for both Phoenix condo buyers and condo sellers.
Buyers will benefit from easier access to mortgage money, while sellers will benefit from a larger potential pool of buyers. It’s worth noting, however, that the certification process is still rigorous and no doubt many property management companies will not take advantage of the opportunity.
The FHA also took measures to limit the liability of condo associations resulting from application requirements, which previously provided for huge fines and even the potential for prison time.
Read the details here.
Investor ownership limit upped, legal liabilities for HOA boards reduced
The Federal Housing Administration has finally done what it promised back in May: published revised rules that could convince condo associations across the country to get certified or re-certified for financing, thereby opening individual unit owners and sellers to low down payment, FHA-insured mortgages once again.
For condo boards, real estate agents and property managers, the long-awaited rule changes announced yesterday should prove to be “excellent news,” that will “help spark home sales and help tens of thousands of condominium associations recover from the housing slump,” according to the Community Associations Institute, the largest U.S. trade group in the field.
Among other changes, the rules eliminate some of the legal liability headaches that caused many condo boards to balk at FHA certifications; raise the permissible investor-ownership limit; and increase the percentage of non-residential, commercial use allowed in an FHA-certified project.
To Christopher Gardner, managing member of FHAProsLLC, a Los Angeles-based firm that assists condo boards with their applications for FHA certifications, the changes “aren’t a home run but maybe a double,” but should still significantly reduce the impediments associations encountered in seeking FHA approvals.
Though FHA attempted to reassure them that it would be rare that the government would seek the maximum penalties in cases of misinformation in applications for certification, those penalties nonetheless were daunting: up to $1 million in fines and 30 years in prison.
Now the certification form asks a single signer representing the association to attest that, to the signer’s knowledge and belief, the information in the application is accurate, has been reviewed by an attorney, and that the project complies with local and state regulations.
The signer also must warrant that he or she has no knowledge of circumstances that might have an adverse impact on the project, including construction defects, “operational issues,” or legal problems. The federal penalties remain, but consultants such as Gardner say the revisions should alleviate “a lot of the fears” boards had with the previous language.
The rule changes published Thursday are “temporary” until FHA replaces them with formal, final regulations that would be preceded by proposed rules giving the industry additional opportunity to seek improvements. The new policies also represent the culmination of lengthy negotiations between FHA and industry groups, including NAR, CAI and consulting and management firms that started last spring.
At a conference held by the Northern Virginia Association of Realtors Thursday, acting FHA commissioner Carol J. Galante said the revisions show “that we listened” to the critiques from the industry, while still protecting the government’s insurance funds.
Under the previous rules, condo associations abandoned FHA in droves, even at significant costs to their own unit owners who suddenly had difficulty selling because FHA financing was no longer available to purchasers.
Only one out of 10 condo associations that would normally qualify for FHA financing currently is certified, according to Gardner, whose firm maintains a massive database of information on condos. HUD confirms that just 2,100 out of a possible 25,000 projects had obtained certifications or recertifications as of late last year.
The human costs of the previous rules were sometime extreme, Gardner says. In one case, an elderly woman who owned a unit in a non-certified community sought to obtain an FHA reverse mortgage in order to help pay the costs of her cancer treatments. The condo board said no — it didn’t want to run the certification gauntlet or take on the legal liabilities.
Among the key changes now in effect:
- The investor ownership limit in existing projects has been raised to 50 percent. Previously there was a 10 percent cap on the number of units owned by any single investment entity. Now the rule states that “any investor/entity (single or multiple owner entities) may own up to 50 percent of the total units…if at least 50 percent of the total units in the project” are owned or under contract for purchase by owner-occupants.
- The percentage of space used for commercial/non-residential purposes in a project is limited to 25 percent, but applicants can request exceptions up to 35 percent and even above in certain mixed-use developments that are still “primarily residential” in character and where the project is “free of adverse conditions to the occupants of the individual condominium units.”
- Condo associations in which as many as 15 percent of unit owners are 60 days delinquent on their condo fees will now be eligible for certification. Under the previous rules, no more than 15 percent could be 30 days late. This was a major issue for many associations since they didn’t track 30-day delinquencies. Industry groups had sought a 90 day delinquency standard.
- Previous confusion over FHA requirements on fidelity bonds for management companies — with coverage that sometimes duplicated what was already maintained by the condo association itself — appears to be resolved. If the association’s fidelity bond policy names the management company as an insured or agent, it should pass muster.
Source: Ken Harney, Inman News
Whenever I talk with homesellers who are in dire straits – without sufficient equity to sell and/or in immediate risk of falling behind on payments – the first thing I advise them to do is consult with their lender(s) to try to structure a loan modification. I encourage them to be honest with their lien holder(s) and let them know, point blank, that they are no longer able to keep up with payments and that, without the bank’s help, foreclosure could eventually become a reality. Only after homeowners explore all of their options will I even take a short sale listing.
No Surprise Here…Mortgage Industry Challenges Fed’s Proposal to Tighten Lending Standards on Exotic Mortgages
The Federal Reserve’s Proposal a few months back to require more stringent verification requirements for new mortgages under so-called ‘exotic’ terms was not surprisingly met with significant resistence by 3 of the leading banking trade groups: the American Banker’s Association, the Mortgage Banker’s Association, and the Independent Community Bankers Association.
The legislation would force lenders to show that sub-prime borrowers are able to afford the loans for which they’re applying. Gee, there’s a novel idea that should have been put in play a long, long time ago.
The groups argue that implementation of the policies would make some creditworthy individuals unable to qualify for financing and would increase the costs of mortgage loans, apparently in the form of administrative overhead and legal costs.
Perhaps another reason for the resistence is the fact that the regulations would require more transparency of formerly ‘hidden’ fees paid to the mortgage broker.
This is sure to be an intersting battle, as influential banking lobby groups try to gain traction at a time when many policymakers and ‘average’ citizens alike place much of the blame for today’s housing market crisis squarely on the mortgage industry.
If the proposal is intelligently designed and implemented so that it doesn’t bog down the system, who can argue with the objectives??