Saturday, June 25, 2011

Proposed Housing Changes Especially Harmful to NoMi

Post by the Hawthorne Hawkman, photo from Johnny Northside.

Proposed changes to home mortgage guidelines could have far-reaching and unintended effects on the housing market in north Minneapolis and communities across the country.  Qualified Residential Mortgages, which have not gone into effect yet, would require lenders to adhere to certain standards when securitizing mortgages for the secondary market.  There are a bevy of such possible new rules, but the most controversial of them would require homeowners to come up with 20% down in order to qualify for market interest rates.

David Stephens, president of the Mortgage Bankers' Association, said the rules "could lead to 'long-term rental entrapment' for 'large numbers' of Americans who would need at least a decade to save for a 20 percent down payment."  According to the Heritage Foundation, only 16 percent of homebuyers in 2010 would have qualified for a mortgage if they had to come up with a 20% down payment.  Contrast that with the American Dream Survey by Trulia, where 47% of renters who plan on buying a home in the next two years say that CURRENT down payment issues are the primary barrier keeping them from buying sooner.

Locally, Alex Stenback of Behind the Mortgage writes that we can have a relatively accessible housing market with easier access to loans based on credit, down payment, and other factors; or we can have a relatively risk-free housing market with higher credit, down payment, and interest rate standards.  We can't have both.

In my corner of NoMi, a 20% down payment requirement would mean...

...a housing market that further stagnates.  The median sale price in Hawthorne hovered in the $50,000 range in 2010.  So far in 2011 it's at $30,000, although several pending transactions at higher amounts are expected to bump that higher, and I believe that we'll see 2011 end with prices near 2010 levels.  The current median list price in Hawthorne is $65,000.

So in order to qualify for a decent mortgage in Hawthorne, home buyers would need between $10,000 and $13,000 down, plus closing costs.  Who's buying these kinds of homes in NoMi with that much down?  Government and non-profit entities and landlords/speculators, that's who.  Even though we're FINALLY getting new owner-occupants coming into our neighborhood on an increasing level, the proposed regulations would effectively kill that momentum.

When I tried explaining this to Representative Ellison's office (one of the few times I've disagreed with his positions on such issues), the response was twofold:  down payment assistance programs could offset the new rules, and banks want to make money so they'll figure out a way to lend in poorer neighborhoods.  My response was that 1) the assistance programs were created to have an impact on the current market conditions (and are finally doing that on measurable levels), and 2) banks generally DON'T make money on a $50,000 loan in Hawthorne.  Furthermore, the applicants seeking such loans are often more challenged and so are the properties.  The ratio of high workloads vs. low payouts is discouraging enough to mortgage originators already without new rules making that worse.  On top of discouraging buyers from looking at housing in challenged neighborhoods, these proposed changes could make lenders less willing to take such risks.

My last conversation with Kris Nelson revolved around housing and foreclosure trends in north Minneapolis.  New studies are expected to show that the foreclosures we are seeing now are tied more to joblessness and income issues and less connected to subprime or unnecessarily risky loan origination.  Foreclosures are no longer the result of bad risks, but rather the poor state of the economy.  And yet our government is trying to eliminate risk.

Further adding to the irony is that if these changes are implemented, the move will drive people to seek...wait for it...government-backed loans that do not have the same down payment requirements.  And according to several bankers I've spoken with, the federal government is already concerned that it carries a disproportionate level of loans currently being originated.

So please contact your Senators and Representatives in Congress and tell them that the 20% down requirement will cause far more harm than good, and that it should not be implemented.

(Blogging from San Diego, CA)

17 comments:

  1. Investors have had to come up with 20% for the past 2.5 years and the world didn't end. I don't see why owner occupants shouldn't be held to the same standard. It would keep people from walking away when their "investment" goes south. There is also nothing wrong with renting long term. Look how many people who were better renters but bought homes now are out of those homes. Those who rent have more freedom and less risk in their lives allowing them to focus on the more important things in life.

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  2. I agree that there is nothing wrong with renting for the long term.

    Why shouldn't owner-occupants be held to the same standards as investors? Because owner-occupants are a lower risk.

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  3. As we saw in the past three years. Owner occupants are every bit as much a risk as investors.

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  4. Care to back that statement up, anonymous? Or go ahead and see what the Minneapolis Fed has to say about the issue.

    Granted, this is in Cuyahoga County, but the study would appear to be more similar to the Minneapolis/St. Paul metro area than, say, examining the housing booms and busts in places like Nevada or California. (Although one could argue that in many of those such places, a primary factor was FRAUD, and not down payment.)

    Furthermore, Roberta Englund, who I would say knows more about north Minneapolis than I ever will, has said on numerous occasions that as much as 70% of the foreclosures in NoMi are non-owner-occupied. Obviously that's shifting as the economy affects more people, but the number has been proven at least somewhat accurate in foreclosure prevention doorknocks.

    Now, on to that Fed study:

    In spite of the fact that many non-owner-occupants had, on paper, lower risk factors (such as higher credit scores, more income, more assets, and a lower purchase price),

    "The Cuyahoga data confirm some of the patterns found at the national level by Robinson and Todd. These data also reveal details not covered by Robinson and Todd’s data. They show that, at least in Cuyahoga County, non-local lenders disproportionately made risky mortgages to non-occupant borrowers and that a large fraction of these mortgages ended up in foreclosure."

    Still, the non-owner-occupants sought out or were given higher-priced mortgages from out-of-state institutions when purchasing in predominantly lower-income areas.

    "Twenty-eight percent of the 2005–2006 home purchase and refinance mortgages to non-occupant owners in Cuyahoga County had a foreclosure notice filed on their mortgage by April 30, 2008, compared to just 9 percent for owner-occupied mortgages. Even when the overall results are broken down into smaller groups to control for factors such as income, the race or ethnicity of the borrower, or neighborhood housing values, the foreclosure rate on mortgages to non-occupants is at least two times greater than the corresponding rate for owner-occupied mortgages."

    You know what, anonymous? I'm only halfway through the report, and already I think I've made my point.

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  5. Are you seriously trying to refute your general paint all investors black argument with data from OHIO???? Look at your own community and the news. What did we see, owner occupant and ACORN demonstrations from homeowners who saw their payments adjust and either walked away or sat in the home rent free until the sheriff made them go. These were typically persons who never should have been homeowners in the first place and then were put in the painful position of losing their home because their payments adjusted beyond their means. Both investor and owner occupied properties now sit empty in North Minneapolis. I don't know about Cuyahoga County OHIO but in NOMI there are plenty of foreclosures from all parties.

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  6. Yes.

    And you, anonymous, are putting words in my mouth. My argument is not whether owner-occupants are blameless. I've long maintained that we need investors, landlords, speculators, and good flippers as part of a healthy housing market in NoMi. The problem is that investors and flippers and slumlords have been a disproportionate part of the foreclosure problem in NoMi. And that in general non-owner-occupied loans pose a greater risk than owner-occupied loans.

    There is always a risk that people will walk away from their homes, especially in a down market. I contend that risk is greater for non-owner-occupied borrowers and therefore owner-occupied borrowers deserve mortgages on better terms.

    I was part of many of those ACORN demonstrations and even spoke at an press release of one of their last studies showing racial disparities in the mortgage market. Many of the low-income people who received subprime mortgages would have qualified for a prime mortgage at the time of origination. We could get into the details of that study, but it's quite a different matter than what we're discussing here. But the connection with that study and our discussion is that the problem with those mortgages wasn't a low down payment (or wasn't JUST a low down payment) but instead an adjustable rate that became unsustainable no matter how much equity one had.

    Back in my office I've got a 120-page report compiled by various departments of the Federal Reserve across the country. The overwhelming conclusion of that report was that loans to low- and moderate-income borrowers (primarily owner-occupants) were largely not the cause of the foreclosure crisis.

    And once again, I further contend that the proposal to require 20% down will result in fewer owner-occupants buying homes in NoMi - the very kind of buyers who pose less of a risk to lenders and tend to be more committed to the neighborhoods where they live. When it comes to the balance between reducing risk and allowing access to credit, the pendulum is swinging too far towards the reduction of risk. That's going to harm my neighborhood.

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  7. Re Anon 3:22 - Interesting that this person cites information relating to adjustable rate mortages as support for their argument that owner occupants are as great a risk as investors for foreclosure. ARMs are a separate issue from the down payment issue.

    As to the 20% down issue, I don't understand why anyone would be required to do that when private mortage insurance is available for those who don't have 20% down. The down payment requirement is IMO, a straw man in the foreclosure prevention debate. My first mortage was a non-securitized, fixed-rate, 30-year mortage with 10% down. I had private mortage insurance on the loan until the value of the house compared with the balance on the loan showed there was 20% equity, at which time the PMI was discontinued, and my total house payment actually dropped. PMI solved the down payment issue and didn't kill me with an adjustable interest rate.

    As to ARMs, they are typically extended to owner occupants who have generally non-optimal credit AND who lack a down payment. That is a bad combination, and people in that situation should be encouraged to wait and stabilize their finances before considering home ownership.

    The point of the original post is that there are people who have good credit and could qualify for a loan except that they are concerned about the down payment. This may indicate that banks are already implementing the 20% down requirment without government policy to back it up. Again, since private mortage insurance is available, why do this to someone who has good credit but does not have 20% down?

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  8. It has been documented that owner occupied housing is better taken care of, retains property values, and sustains a better quality of life for the community. Regardless, it only takes a few problem properties to drag down a neighborhood.

    If all landowners were held to the same degree of responsibility for property upkeep, maintenance, and tenant behavior; it wouldn't make any difference who owned the home next door.

    Perhaps we should be focusing on rules and regulations that hold all parties more accountable for being good neighbors rather than worrying how these homes are financed ?

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  9. The government should not be involved with the loan process period except to prevent people from getting ripped off. The reason the housing market is such a mess is because Fannie and Freddie took all of the risk out of of making mortgages. It is time for the government to stop guaranteeing loans, the government is not a bank. The debt the government has clearly indicates it shouldn't be lending money or guaranteeing loans. We wouldn't be in the mess we are currently in, if it wasn't for the government.

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  10. I think the government should seize any foreclosed homes in NOMI and provide them to anyone who has been displaced by the tornado.

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  11. When Bill Clinton the sex fiend left office we had a 160 billion dollar surplus. When Bush the drunk left office we were left with a mess that the next ten governments will not be able to fix. What that lush did to this country is something no other lush should be allowed to do and that is to finish any given bottle in one sitting. So, anonymous 1:55,(anonameass is not the case here) let us agree on the fact that government in, and, of itself, is necessary,just ask a Somalian person-friend if you know one and they will tell you likewise. With that said, any country where one political party has bizarre, deer in the headlights looking unqualified females representing them as their best and brightest that they have to offer, are hellbent on running this country just like the drunken male sot that fucked us like the two-bit crack whore that he was and still is...oh, they all belong to the same group, you say? When we get an Amy Klobuchar or a Debbie Wasserman-Schultz or a Michelle Obama like type of thinker then i will step up and second the motion on qualified females because men have proven that they can't keep their dicks in their pants much less run a country except into the ground. This does not include our current president who, in my estimation, is overqualified.If this election is stolen like the one in 2000, it will be the only way they can unseat Barack Obama. No drama,vote Obama. It took me all night to think of that one.Good Day.

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  12. Yes, Bush and congress spent like drunken sailors for eight years but the very brief and much touted surplus under Clinton was primarily due to the dot.com boom and the resulting spike in stock and stock option capital gains taxes. Look at the capital gains taxes the feds (and California) received in 1999 and early 2000. Once the boom went bust, the nation (and California) were back to yawning deficits. By the way, Obama's budgets and actual spending make all preceding administrations and look frugal. The federal government comprising a steady 18-20% of the economy since WWII and now we're at 24-25%, and it'll probably get worse for a decade or more. That's a 20% increase in spending and with a $14T economy, the bloat is absurd. We're all doomed. When the checks run out and the North Side dependents riot, you can thank Obama and the Democrats.

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  13. P.S. There is at least one thing the Canadian and European welfare states get right -- 20% to 40% down payments for housing. And the percentage of home ownership is not much different in those countries than in the U.S. Approximately 60% of people are fit to be homeowners, the others rent because they want to or rent because they can't afford a house. We need to stop pushing homes on people who can't afford them. We tried that and it ended in a worldwide near collapse. The US taxpayer simply cannot afford to support these schemes.

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  14. I do not understand why, in order to keep the quality of the housing stock consistantly up to code, we should have all properties inspected, both owner occupant and rentals.

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  15. Agreed. It would be reasonable to have all properties inspected and brought to code every 2-5 years. The cost could be added as an assesment if the owner does not make the repairs on their own. Neighborhoods need to look more uniform and all houses in general good state of repair.

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  16. Quite a few threads to respond to.

    First, here is another analysis that QRM standards would unnecessarily and disproportionately affect communities of color.

    The degree to which Fannie and Freddie were responsible for the mortgage meltdown is debatable as well. Yes, there were mandates or incentives to increase the volume of home loans, but many of the mortgages that kicked off the foreclosure crisis were not covered by Fannie or Freddie. And many of the borrowers in THOSE mortgages qualified for something better. I don't agree with the statement that the government shouldn't be involved PERIOD, but I do think the quasi private/public makeup of Fannie and Freddie is problematic.

    And again, the irony here is that tighter underwriting guidelines will drive people to FHA financing, and thus increase the role of government in mortgage origination.

    The ideas that we just turn over foreclosed properties to tornado victims and that we somehow magically bring every property up to code every five years sound really great in fantasyland, but aren't realistic when they meet reality.

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  17. Republicans run this fucking country into the ground and they take all of the first thirty days to chant the mantra that it is Obama's fault. Record profits for the oil companies and they still want subsidies and will tell you right to your face that you are nothing but an imbecilic ,poor piece of shit and we are going to fuck you in the mouth. The insurance companies run our health care as a for profit industry and tell us to go to hell while they fuck us in the mouth. Rich folks cant give up another thousand dollars a year because we all know that 999,000 doesn't go as far as 1,000,000 does. Sally needs the latest i-pod or she's threatening to take out the whole fucking family..or something. Raise up,all rich bitches, and help the rest of us get by on your fucking dime since that is the way it is being portrayed. At the expense of the elderly, the handicapped. the children and the other truly vulnerable and not the lazy fucking males and females who like to mooch. Yes, mooches come in all pigmentations and backgrounds but what is happening with society today is nothing but a virtual raping of the middle class and the onset of the 21st century money grab extravaganza while keeping the masses at each others respective throats and the vulnerable without a fucking pot to piss in or a window to throw it out. Stay tuned and have a happy 4th even though the republicans shut the government down because they think they are, as a whole if you get my drift, better than us and the top 7,000 plus millionaires shouldn't have to pay their fair share for fear that a poor family might be able to eat some scraps tonight.The republicans want to do to us what Wisconsin did to their people and that is to tell them to fuck off, you do not matter and if you are poor, minority ,handicapped or down on your luck NATURALLY, kiss our ass and rot to fucking death. Yes folks, the rich, racist element is fighting every minute of the day to keep all of what they have and make sure you do not get any remnants of whatever vomit and human waste that is left behind. Wake the fuck up. Good Evening.

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