Posts Tagged ‘Federal Housing Administration’

Jafer Hasnain: The Housing Crisis: Where Do We Stand?

Tuesday, March 6th, 2012

With home sales increasing in six of the last nine months and prices still 30 percent below the peak, the housing market is quite confounding.  That’s the opinion of Jafer Hasnain, Principal and co-founder of Lifeline Assets, a private equity firm that invests in single-family homes.

In a recent interview for the Alter NOW Podcasts, Hasnain said that the nation has 10 million homes whose mortgages are seriously delinquent or even in foreclosure.  According to Hasnain, this is the shadow inventory, which consists of mortgages that are either 90 days late, in foreclosure or bank owned.  If you look at the next four or five years, that number will add up to between six to 10 to maybe 11 million homes.

When asked why President Obama’s Home Affordable Modification Plan (HAMP) didn’t work as intended – a program meant to help five million homeowners that saw only 800,000 sign up – Hasnain quoted the truism “The road to hell is paved with good intentions.”  As Hasnain sees it, the obstruction was in HAMP’s implementation.  Although HAMP brought down interest rates to as low as two percent, the real problem for many is that they had lost so much equity, participation simply was not worthwhile.  Because HAMP had no impact on the principal owed, homeowners still owed the same amount of money – which typically was significantly more than the house was worth in today’s market.  Many concluded that it made more sense to let the bank foreclose – a process that takes 700 or more days – live in the house for free, save money so they ultimately could pay the bank a fraction of what they really owed.

Hasnain pointed out that approximately half of all existing mortgages could no be re-underwritten today because of stricter lending standards.  In other words, half of all mortgages are potentially distressed, a fact that distresses Hasnain.  “That reflects society, and that reflects the potential to really crimp consumer spending.  I think housing is the number one, two and three issue right now.”  Part of the trauma is caused because, at one time, most people were convinced that they could always rely on the value of their home.  In the last few years, that balloon has been deflated to the point where we are now witnessing a failure in confidence.  This is a fairly unique problem that most people have never faced, one that calls for creative solutions — whether they come from the government or the private sector.

To listen to Jafer Hasnain’s full interview on where we currently stand on the housing crisis, click here for the podcast.


Government Wants to Sell Foreclosed Properties in Bulk as Rentals

Tuesday, January 24th, 2012

The Obama administration plans to work closely with federal regulators, Fannie Mae and Freddie Mac to start a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There currently are approximately 250,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are expected.  Last year’s foreclosure processing delays created an enormous backlog of properties yet to be processed and are just now being restarted. One of the program’s initiatives is for the federal government to mitigate and manage new foreclosures.  Late-stage delinquencies still number close to two million, according to a report from Lending Processing Services (LPS).  Foreclosure starts are double foreclosure sales and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the 1st quarter of 2011, appears to have halted,” according to LPS.

“I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale,” said Laurie Goodman of Amherst Securities. “But that means they have to build out a rental organization; it means they build out a management company, because if you’re accumulating a hundred homes in Dallas that’s very different than running a multifamily building.”

This is good advice. The recession began with housing, and is one of the main things holding back the recovery.   The most recent unemployment numbers — which showed that non-farm payrolls grew by 200,000 in December, and the jobless rate declined to 8.5 percent from 8.7 percent  — join other cautious signs of an improving economy, although the housing situation is worsening.  There’s still a serious risk it might put a halt to and not just delay expansion.

“Foreclosed homes are a complex problem. We need some creative thinking and new processes to solve the problem of so many distressed homeowners.  I would love to see the market handle it on its own but what makes sense for a single home is likely to destroy confidence in the housing market in aggregate,” said Jafer Hasnain, Partner at Lifeline Assets.  “Housing distress needs a Michael Dell to think about streamlining process details, and a Steve Jobs to make it elegant and human.”

House prices fell again in October, according to the S&P/Case-Shiller index.  The pipeline of delinquencies and future foreclosures is full, which continues to dim the prospects of a quick recovery.  Efforts so far, such as the Home Affordable Modification Program (HAMP), have helped, but less than hoped.

According to the Federal Reserve, there are no simple answers, but it makes several suggestions that Congress should examine.  One is to encourage conversions from owner-occupied to rental because that market has strengthened in recent months: Rents have risen and vacancies have declined.  A faster conversion rate would hold down rents and ease the pressure of unsold homes on house prices. Fannie, Freddie and the Federal Housing Administration account for about 50 percent of the inventory of foreclosed properties.  Many of these are viable as rentals.  A government-sponsored foreclosure-to-rental program to clear away regulatory hurdles would make a big difference.

A second suggestion is to encourage refinancings.  The administration tweaked the existing HAMP program in October, easing some of the earlier restrictions on eligibility.  Even more could be done, according to the Fed.  One possibility involves the fees that lenders pay to Fannie and Freddie for assuming new risks when loans to distressed borrowers are refinanced. These charges could be cut or eliminated, even though Congress just voted to increase them to help pay for the payroll-tax extension.

Some institutional investors have shown interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing.  That has been one of the biggest barriers to deals already in the works between hedge funds and the major banks.  There is plenty of cash to buy properties, but creating a management structure for the rentals is costly, and some investors are finding the math doesn’t add up to make it worth their while.

Larger investors want to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets. That’s why the government is looking to test several different approaches.  Fannie Mae did a $50 million sale in June, although that was on the small side. Officials are evaluating what larger asset sales would look like.

“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize (home) prices.”

Many Americans Spend Half of Their Income on Housing

Wednesday, May 25th, 2011

American renters who pay more than 50 percent of their income on housing has peaked at the highest level in 50 years, according to a report from the Harvard Joint Center for Housing Studies. Approximately 26 percent of renters – that’s more than 10 million people – are spending more than 50 percent of their pre-tax income on rent and utilities because salaries have fallen significantly amid rising rents.  An analysis conducted by the Washington Post found that rents in the nation’s capital, for example, had risen 22 percent in 2009 over the past 10 years.

“It’s a real squeeze for the lower-income and moderate-income families, and we’re even starting to see it affecting middle-income families, too,” according to Erick Belsky, managing director of Harvard’s Joint Center for Housing Studies.  “The prospects for improvement any time soon are dim.”  In other words, finding an affordable house or apartment to rent can be difficult.

When the economy went south in 2008, developers stopped building new apartments at a time when foreclosures were pushing many Americans into the rental market.  Because supply and demand were at odds with each other, rental rates climbed and are expected to remain high for the foreseeable future.  “In real terms, it means more people have less money to spend on household necessities such as food, healthcare, or savings,” Belsky, said.  Households that spend half or more of their income on rent also spend almost 40 percent less on food and more than 50 percent less on healthcare than households with more affordable rent.  “In the last decade, rental housing affordability problems went through the roof,” Belsky said.  “And these affordability problems are marching up the income scale.”

The report notes that – in a perfect world – renters should not have to pay more than 30 percent of their income on housing.  Over the last 10 years, low-income renters have experienced difficulty staying within that limit.  In 2009, 7.5 percent of moderate-income renters had to spend more than 50 percent of their salaries on rent, double the number reported in 2001.

According to the report, 28.6 percent of metropolitan Chicago renters are severely burdened by their rental costs.  Ten years ago, only 20.4 percent of area renters paid that high a percentage of their incomes.

With the number of renters growing, the Low Income Housing Coalition says it’s time for policymakers to put more money into rental assistance and affordable housing.  Throughout the housing crisis and recession, lawmakers have placed resources primarily on helping troubled homeowners avoid foreclosure; but approximately 40 percent of foreclosures also displace renter households.  The coalition has asked Congress to fund the National Housing Trust Fund, which creates a permanent funding source to construct, renovate and preserve 1.5 million units of rental housing for low-income families over the next 10 years.  Although the trust fund legislation passed in 2008, Congress hasn’t funded it because of the economic downturn.  The fund will not increase government spending or taxes because it was designed to be funded through contributions from Fannie Mae, Freddie Mac and the Federal Housing Administration.

Sheila Crowley, the president of the coalition, said now was the time to act.  “Providing $1 billion for the National Housing Trust Fund will help address the growing shortage of affordable housing, which is one of the most serious economic problems facing the country,” she said.  Crowley expects the House of Representatives to begin debating the Section 8 Voucher Reform Act, which passed the House Financial Services Committee last summer.  “We are very much hoping that the Senate will take it up as well,” she said.  The bill would provide rent subsidies for 150,000 low-income families, , and the coalition is seeking another 2 million Section 8 housing vouchers over the next decade, doubling the current number.

White House Pushes Fannie and Freddie to Make More Mortgage Modifications

Monday, December 20th, 2010

White House Pushes Fannie and Freddie to Make More Mortgage Modifications

The Obama administration is leaning on mortgage giants Fannie Mae and Freddie Mac to write down underwater loans and make life easier for homeowners who are at risk of default and may see their personal finances deteriorate.  The Federal Housing Finance Agency (FHFA) wants Fannie and Freddie to join a Federal Housing Authority (FHA) program that allows banks and other creditors, which agree to write down mortgages, to transfer the reduced loans to the FHA.

According to government estimates, between 500,000 and 1.5 million homeowners have the potential to benefit from the program.  This is a fraction of the 11 million homeowners who were underwater as of June 30, according to CoreLogic, Inc.  To put that number into perspective, approximately 23 percent of all American households with a mortgage are underwater.  According to the mortgage industry, the FHA program will be of minor benefit to the housing market unless Fannie and Freddie participate.  In its first three months, the program accepted 61 applications and modified three loans.

David Stevens, the FHA’s commissioner, said resistance by lenders has been frustrating.  Obama administration officials have given lenders “a responsible way to address borrowers with negative equity and if institutions are blatantly refusing” to participate, then that is “short-sighted.”  “Letting the status quo continue is going to be much more expensive than people think,” said Kenneth Rosen, a professor of economics and real estate at the University of California at Berkeley.  “We’ve got a downward spiral in housing here, and they’d better break the back of this with some shock and awe.”

Fannie and Freddie have been reluctant to reduce mortgage principal, primarily for the reason that it limits their opportunity to recover losses.  According to the Office of the Comptroller of the Currency, Fannie and Freddie have reduced only 10 of the 120,000 loans modified during the 2nd quarter of 2010.  “We have historically counted on the fact that the vast majority of borrowers – even borrowers who are underwater – continue making their payments,” said Don Bisenius, a Freddie Mac executive vice president.

Government Investigating Possible Law Violations in Foreclosure Crisis

Thursday, November 11th, 2010

 Feds are investigating foreclosure irregularities, searching for possible law violations.  The Department of Justice has opened an investigation to determine whether banks and other financial institutions broke federal law by using deceptive court documents to foreclose on homes.  Although the investigation is just underway, it will probe whether companies deceived federal housing agencies like Fannie Mae and Freddie Mac, which currently insure a large percentage of American homes.  The investigation will also examine whether firms committed wire or mail fraud in filing false documents.

The probe is intended to send the message that banks will be held accountable for illegal foreclosures.  President Barack Obama’s Financial Fraud Enforcement Task Force is also taking a look at the foreclosure mess.  “In more than 25 years dealing with major financial crisis issues, I have never seen this many agencies focused on a single issue,” said Andrew Sandler, an attorney who specializes in government investigations.  “We are beginning to see signs of extensive governmental investigation that may also have criminal law implications.”

With reports that big banks filed court documents without proper review, federal investigators want to know if similar paperwork was submitted to housing agencies to collect insurance payouts.  Bank employees have admitted to signing documents without reading them.  If similar filings occurred at the governmental agencies, that action could constitute a violation of United States law.  Although the investigation so far has no specific target, it could center on banks, independent mortgage servicers, law firms and other companies involved in the foreclosure process.  Shaun Donovan, Department of Housing and Urban Development Secretary, is working with other regulators to assure that all foreclosures are legal.  “We are working closely with others in the administration, as well as independent regulators and law enforcement agencies, in insuring that no one loses their home as a result of a mistake or criminal behavior,” Donovan said.

Robert Knakal on the Bulls vs. the Bears – Who Do You Trust?

Monday, October 18th, 2010

Robert Knakal discusses whether the bulls or bears are right about the economy. Who’s right about the state of the economy and commercial real estate – the bulls or the bears?  Robert Knakal, chairman of New York-based Massey Knakal Realty Services, weighs both sides to help us cut through the mixed messages.

In a recent interview for the Alter NOW Podcasts, Knakal noted that the bulls like to cite the best back-to-back GDP growth since 2003 – 5.9 percent in the 4th quarter of 2009 and 3.2 percent in the 1st quarter of 2010.  Bears, on the other hand, believe that weak consumer spending will cause the GDP to grow at an anemic two to three percent for the rest of the year.  Knakal views this is an interesting dynamic because of the growing number of economists who back the bears’ position – numbers that are well below the trend coming out of a recessionary period.

Knakal, a graduate of the Wharton School of Business, also writes StreetWise, a nationally syndicated real estate industry blog, is concerned that many loans made by community and regional banks are five-year loans, which will mature in 2011 and 2012.  These loans raise the loudest alarms, because many are still performing thanks to very advantageous interest rates – possibly in the form of interest-only loans or with interest reserves that are carrying the property.  When these loans – which now could have an interest rate as low as two percent – mature, it will be renewed at a 5 ½ or six percent interest rate that will require a de-leveraging process.  Some $10 billion banks are carrying half of all their commercial real estate exposure in Small Business Administration (SBA) loans.

Despite the bears’ lack of confidence in the commercial real estate markets, capital is available to credit-worthy users chasing high-credit projects.  The amount of available private equity is currently estimated at approximately $173 billion.  Public REITs raised more in common stock offerings in 2009 than they did in the previous nine years.  Non-public REITs are expected to raise $10 billion this year.  Sovereign wealth funds are said to have access to an astonishing $3.5 trillion.  What Knakal cautions us to recognize is that these often represent the same pools of equity and to draw the distinction between capital that has been promised and that which is actually available.

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Obama Administration Sets Its Sights on Housing Reform

Tuesday, September 14th, 2010

Obama administration turns to reforming the root of the financial crisis – the housing market.  The Obama administration – fresh from its financial regulation reform legislative victory – is not resting on its laurels.  Next on the busy agenda is reforming the American housing market, which is viewed by many as the root of the financial crisis. In a response to collapsing housing prices and waves of foreclosures, the administration it looking at overhauling the government’s housing policy, although the specifics of the proposed legislation are still under discussion.

The new approach could include bigger downpayments and higher interest rates, as well as more barriers to lower-income people purchasing houses they cannot afford.  The goal is to create a more stable housing market that puts fewer taxpayer dollars on the line and lessens the risk that owners will be unable to pay their mortgages.  Reform also could bring changes to the financial markets as investors are forced to find new investment vehicles if the government removes incentives for putting their money in the mortgage market.  Since the financial crisis began in 2008, the federal government has spent hundreds of billions of dollars to keep housing afloat and assure that borrowers can get loans – and much of that money will never be recovered.  Since the federal government seized Fannie Mae and Freddie Mac, the two mortgage giants and the Federal Housing Administration have more or less been the sole sources of backing for new mortgages for nearly two years.

The Treasury Department’s new Office of Capital Markets and Housing Reform is studying options and has decided that federal policy should highlight “sustainable homeownership” rather than merely growing the rate of ownership.  According to Vincent O’Donnell of the Local Initiatives Support Corporation, “My impression is that the administration at pretty much every level is serious about a balanced policy.  Their purpose is to make more workable rental housing programs.”

Obama Administration Rolls Out New Program to Help Underwater Homeowners

Monday, April 5th, 2010

A new FHA initiative could help between three and four million distressed homeowners.  The Obama administration has announced a new initiative to assist troubled homeowners by helping them refinance with government-backed mortgages that cut monthly payments.  The program would also temporarily reduce payments for unemployed borrowers who are actively job hunting.  The government is encouraging lenders to write down the value of loans for borrowers participating in modification programs.  Officials expect this and other in-place federal programs to help between three and four million distressed homeowners over the next several years.  A Treasury Department statement said the initiatives are designed to “balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone.”

The thrust of the new initiative, which likely will cause some controversy, is that the government – through the Federal Housing Administration (FHA) – will help owners who are underwater or owe more than their house is worth to refinance.  Estimates are that 11 million households or 20 percent of all mortgage-holders, are underwater.  Many of these homeowners refinanced during the housing boom and took cash, putting them at risk when prices fell.  The homeowners will have to eat some of their losses, but will be in better shape than families who had no option but foreclosure.  By insuring the new loan against the risk of default, the FHA gives the borrower a good reason to make payments instead of abandoning the house.

The program’s success depends on investors’ eagerness to participate.  Over the last three years, the FHA has expanded its mortgage guarantee program to help homeowners cope with the housing crisis.  Today, the FHA guarantees more than six million borrowers, many of whom made small downpayments and currently are underwater.  Approximately $14 billion in TARP funds will fund the project.

Ginnie Mae Taking the Lead on Backing New Mortgages

Tuesday, May 26th, 2009

At a time when the CMBS market has contracted by 60 percent, a story that hasn’t gotten much attention is that fact that one slice of the securitized real estate market is doing phenomenally well.

Ginnie Mae (the Government National Mortgage Association) has provided $124.18 billion of liquidity to the secondary mortgage-backed securities market during the first four months of 2009.  $34.5 billion of that was issued during April alone.  By contrast, the government agency provided just $58 billion during the same time frame of 2008.h_sold1

Ginnie Mae helps American families own homes by securing government-insured loans to the Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture’s Rural Development Program and the Department of Housing and Urban Development’s Office of Public and Indian Housing.

“We are stable, secure and steadily growing,” said Joseph Murin, Ginnie Mae’s president.  “Our issuance growth represents the trust that our issuers and investors continue to have in Ginnie Mae securities.  Providing a secure secondary market outlet for government-backed loans is absolutely critical as the economy continues to stabilize.”

Rebuilding the mortgage market is likely to start at the conservative end with investors looking for T-bill-type places for their money.  Ginnie Mae has become the blue chip of real estate securities.  We have to get over being a society of instant gratification because normality will return – in the words of Ginnie Mae’s Murin, “one deal at a time.”