The purpose of the conference was to discuss real solutions to the housing crisis and its effect on the economy.  When you consider the various construction trades, the manufacturers of building materials and appliances and the service industries that support home owners, the housing sector is responsible for 20% of the US GDP.

We know the problems.  Nearly 30% of homeowners have homes mortgaged for more than they are valued.  Those that need to sell have only the option of short selling or foreclosing.  There is a huge backlog of bank owned properties, estimated near 1.5 million homes.  The consumer confidence index is very low, around 45. An index of 90 is considered healthy.  Appraisals are coming in low because short sales and foreclosures are dragging home values down.  Elevated lending standards for government programs are making it difficult for responsible buyers to get loans.  And government conversations about reductions in the mortgage interest deduction and increasing the minimum down payment to 20% for a non-conforming home loan are contributing to the stall in the market place. The real question is what are the solutions?

What we need is a straight-forward US policy on housing.  The benefits of home ownership are substantial.  Housing is the cornerstone to building a solid middle class, stable families and strong communities.  I agree strongly with Senator Jeff Merkley of Oregon who led the opening remarks at the New Solutions for America’s Housing Crisis conference.  He feels that homeownership is one of the primary pathways into the middle class.  I also believe that the ability to own a home has been a key part of American success and our economic strength.

Here is what I took from the debate that resonated during the conference:

• We need leadership that understands the distinctions between the current situation and what we need the outcome to be.
• Housing is the way out of a recession.  It has proven to be so historically, and it will most likely be the way out this time as well.  Too many people think housing is not the answer to our economic recovery.  We need to show them that it is, indeed the solution.
• We have a window of opportunity right now to jumpstart the US economy and create jobs.  Historically low interest rates combined with lower home prices have made the housing affordability index favorable.  We should be capitalizing on this opportunity to get people into homes with great interest rates before they change.
• We can stabilize home values by helping first time home buyers and investors absorb the flow of short sales and foreclosures.  These two buying groups tend to focus on the affordable range of housing were the majority of the troubled homes exist.  Increasing the sales activity in this sector will create a need for new construction which will create jobs.
• Major housing indices are back in historical alignment and are favorable in many market areas – specifically the Home Pricing Index, the ratio of home financial debt service to household income, the ratio of home price to household income, and the buy vs. rent analysis. 

We have to consider that home ownership is a reflection of our culture.  It’s the American Dream.  We take pride in ownership and that contributes to the development of strong communities.  Home ownership is a dominant factor in creating and holding together a strong middle class which makes us different from any other culture worldwide.   We should do what we can to keep the US Housing Market healthy and sustainable.

So what are the housing solutions for America?  Based on what was discussed by the panel at the E21 and Progressive Policy Institute conference, here is what I think we need to do:

• Find a way to keep financially troubled homeowners in their homes.  We should encourage banks to work with programs like the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP) to help homeowners refinance or modify their underwater loans.  We must decrease the flow of new short sales and foreclosure homes entering the marketing place.
• Lower the credit score requirement for Fannie Mae and Freddie Mac.  The National Association of REALTORS® estimates that if the credit score requirement was moved down to 720 from 762 housing sales would increase 15-20%. There is buyer demand for homes.  We are just making is difficult for them to purchase.  We should also reinstate high balance loan limits and standard loan limits for a minimum of three years. 
• Extend the USDA’s Section 502 Direct Loan Program with repayable down payment assistance to credit worthy, qualified first time home buyers in “all market areas” for a minimum of three years.
• Create a housing down payment voucher program for lower-income buyers willing to invest in foreclosed homes; or create a rent to own program.
• We should encourage investors to help soak up the flood of foreclosure homes by expanding the FHA 203K loan program to them and shortening depreciation schedules on their investments.

 As we decrease the short sale and foreclosures on the market housing will stabilize.  But there other things we could be do to help create a sustainable market.  I would:

• Change the scope of Government Sponsored Enterprises (GSE) like Fannie Mae and Freddie Mac so they only accepted standard qualifying loan products.
• End the conversation of eliminating the Mortgage Interest Deduction (MID).  It’s only giving prospective home buyers a reason not to invest, specifically in the high-end and 2^nd home markets.
• Find a way to settlement with the state Attorney General’s regarding their foreclosure law suits with the banks.  Individually there are just too many potential suits which could go on for years to come.  We should consolidate the suits in the interest of quickly stabilizing the housing market and the economy.
• Get rid of credit score overlays.  Banks should be willing to accept FHA requirements for FHA loan programs and not impose their own set of requirements on these types of loans.  Doing so only makes it harder for borrowers to get loans.

The simple answers are that we need to keep homeowners in their homes, release pent-up buyer demand and encourage residential investment to reduce the volume of short sales and foreclosure homes on the market, and create a sustainable housing market place.  Without focused leadership and a strong US Housing Policy our trouble in the housing sector will only continue and drag down any type of real economic stability in America. 

Sincerely,

J. Lennox Scott

Single-Family Inventory Levels Very Low Close To Job Centers

The psychology of the residential real estate market in King County is shifting in a more positive direction; the roller coaster has started to level out with single-family home inventory levels decreasing and prices stabilizing under $750,000 in markets close to the job centers in Seattle and Bellevue. Simultaneously there’s a pool of buyers that are motivated to take advantage of low interest rates and increased affordability. As a result, when well positioned homes in the aforementioned areas come onto the market, there is an immediate spike in buyer activity. This back log of buyers has already seen the existing available inventory, so they’re excited to see new properties as soon as they hit the market. This provides those listings with instant exposure to eager buyers.  

What we need in King County are more single family homes close to the job centers, in good condition, and priced to sell. The pool of interested buyers is out there, but many would-be sellers are apprehensive, so inventory is limited. This is understandable given the state of the economy in recent times, but experts all around the country are starting to point to positive indicators that some markets are in recovery mode. Consumer confidence is rebounding which is one of the leading indicators of recovery. Furthermore, King County has recently reported lower unemployment rates than the national average. In the Seattle/Bellevue area we are very fortunate to have businesses that continue to be strong sources of employment. Companies like Microsoft, Amazon.com, Google, Boeing, Starbucks, and our ever growing Bio-Tech industry are helping the Puget Sound area weather the economic storm.

Well positioned homeowners who are weighing their options about selling should consider the conditions in which they will buy their next home. Interest rates have been under 5% for the last several months, but many economists expect them to rise over the coming year – and this can have a substantial financial impact on a seller’s subsequent home purchase. That’s because an increase of just one-half point can diminish their purchasing power by five percent or more. Furthermore, recent market activity shows that homes close to the job centers in Seattle and Bellevue that are in good condition and priced correctly are selling in a timely manner – and some are even getting multiple offers.

As always, thanks for reading.

Lennox

Sales remained sluggish, but as the year progressed, inventory levels began to lower. By the end of 2010 the three-county area of King, Snohomish, and Pierce reported about six months of inventory, which is a positive indicator (based on pending sales). November, December, and January experienced a mini-surge of sales by buyers who made their move when interest rates showed some upward movement. This activity didn’t cause prices to rise, but it’s a positive sign nonetheless. (A market with a supply of approximately six months is considered balanced, favoring neither buyers nor sellers.) We finished the year slightly worse for wear, but with optimism for 2011.

We are heading into 2011 with higher consumer confidence and continued near-historic-low interest rates. Interest rates are expected to rise slowly in the coming months and land somewhere around 5.6% by year’s end. Unemployment is predicted to remain above eight percent through 2012; the unemployment rate in Seattle peaked in March 2010 at 9.5% and is now at 8.8%.

Economists are predicting that home prices in our area will continue to see moderate declines before they begin trending up; however many local markets are already starting to stabilize. Distressed properties continue to pull down the median home price because these homes typically sell for 20 to 30 percent less than normal sales. But recent reports indicate that we are working our way through the distressed inventory and these listings are expected to gradually represent a smaller percentage of the total sales in our area. It may take a little longer in areas like Pierce and Snohomish Counties because the percentage of foreclosure sales is higher in those areas. 

There are still some unknowns that could have significant impact on the housing market, such as whether or not the Federal Government decides to reduce its involvement in home financing. This could mean a reduced role for Fannie and Freddie Mac and the loss of high-balance loan limits, both of which would be detrimental to the housing economy. Higher insurance fees on FHA mortgages and a possible increase in minimum down payments for FHA could also have a significant impact on many home buyers. As such, buyers in the “grey zone”, those who are trying to time the market, should strongly consider their options. What we know today is interest rates are very low, home affordability is peaking, and homes in the lower and mid price ranges are selling quickly when they’re priced right.

Housing is a long-term investment for most home owners and the greater Puget Sound area is repeatedly picked as one that is best positioned for recovery. It won’t happen overnight, but I feel confident that the future looks bright.

As always, thanks for reading.

Lennox

The mid-term elections are finally over so it’s time to re-focus on the economy and housing market. In my travels around the country everyone wants to know what I think it will take to get the housing market moving again. The answer is simple: first time homebuyers.

Sales Activity Pyramid – Built On First Time Buyers
If you think of the housing market in terms of a pyramid, the base is made up of “more affordable” housing which is usually represented by first time buyers; in a healthy market, this accounts for about 40% of all home sales. The middle of the pyramid represents mid-priced homes and primarily repeat buyers. The top of the pyramid represents the smallest number of buyers and the most expensive part of the housing market. As first time home buyer activity increases at the base it sets off a chain reaction of sales up the price points. It is this process that drives and sustains a healthy housing market (see chart).

Federal Home Buyer Tax Credit – Why It Worked
The Federal Home Buyer Tax Credit was successful in part because it helped generate more first time buyers by providing them with a compelling call to action. Five months prior to the start of the housing tax credit, there were about 1.5 million first time homebuyers which represented about 32% of all home sales. After the tax credit’s February 2009 launch, the number of first time buyers went up to 2.4 million and continued to rise through October 2009 to 3.3 million. This represents 49% of all home purchases. Between November 2009 and April 2010 when the tax credit was extended, there were between 2.3 and 2.8 million first time buyers (44%). Following May of this year, we were back down to 1.5 million (32% of home buyers)*.  


* Stats provided by National Association of REALTORS

The Solution – Continued Support From The Federal Government
So, how do we regenerate the first time buyer pool? As many of you know, I’ve been saying for years that I believe that the Federal Government should develop a down payment assistance program for first time buyers in urban markets similar to those of the USDA and VA. That’s because more than 30% of first time buyers have all of the qualifications to get into a home with the exception of a down payment (qualified means they have a stable job, a healthy credit score, and their debt-to-household income ratio is in alignment). That’s where down payment assistance comes in. By creating a fiscally responsible, self-funded down payment assistance program we could attract the number of qualified first time buyers that are needed to sustain a healthy housing market. Because as stated earlier, an increase in first time buyers leads to additional sales in the mid and upper price ranges. But in order to make this happen we need the continued support of the Federal Government.

To read more about my proposal for housing sustainability, entitled “The Great Foundation For American Housing”, click here: http://photos.realestateadmin.com/imageurl/CMS/106/HousingSustainabilityPlan_LennoxScott_June2010.pdf

As always, thanks for reading.

Lennox

As always, thanks for reading,

Lennox

The meeting was arranged by Sen. Patty Murray’s office for the purpose of discussing the systemic problems facing the housing market and ideas to stimulate recovery. The meeting was also attended by Travis Lumpkin, Sen. Murray’s legislative assistant on housing issues. We discussed the concept of an urban down payment assistance program similar to the USDA’s program which currently helps households purchase homes in rural areas with no required down payment (more details about the program can be found in this previous blog).

Secretary Donovan and Commissioner Stevens acknowledged that one of the biggest challenges facing qualified first time buyers is not affordability, but rather having the down payment. We also discussed the importance of State Housing Finance Agencies and the need to renew high balance loan limits – which Secretary Donovan stated HUD has just come out in support of. The maximum $729,750 loan limit for Fannie Mae, Freddie Mac, and Federal Housing Administration-backed loans in high-cost areas will expire at yearend unless policymakers act.

Without an extension, the maximum loan limit would drop back to $625,500 on Jan. 1, which would cause a significant drag on the fragile market. According to NAR’s deputy chief lobbyist Jamie Gregory, Sen. Murray, chair of the Housing and Urban Development Appropriations subcommittee, has inserted language into a HUD appropriations bill to extend the current limits.

This meeting could not have happened without the direct support of Sen. Murray and her staff and I am very thankful to them for providing me with this unique opportunity. Sen. Murray continues to be an advocate for housing and she is one of the few in Congress that understands housing issues. It is my opinion that losing her presence in the Senate would be a huge loss to our industry.

On the flight back to Seattle I reflected on the significance of this meeting and any results that may come from it. Then I decided that the ultimate outcome would be if President Obama turned to Secretary Donovan during a Cabinet meeting and asked him what his plan is for re-establishing a healthy housing market, and Secretary Donovan responds with “down payment assistance for urban markets”.

As always, thanks for reading.

Lennox

Rural Development’s interim systems enhancements will be complete on September 8, 2010, at which time the Agency will begin obligating Section 502 Single Family Housing Guaranteed Loans. See the link to the notice below for more details.

Single Family Housing Guaranteed Loan Program

Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility: Applicants for loans may have an income of up to 115% of the median income for the area. Area income limits for this program are here. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories. Approved lenders under the Single Family Housing Guaranteed Loan program include:

• Any State housing agency;
• Lenders approved by:
  • HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities;
  • the U.S. Veterans Administration as a qualified mortgagee;
  • Fannie Mae for participation in family mortgage loans;
  • Freddie Mac for participation in family mortgage loans;
• Any FCS (Farm Credit System) institution with direct lending authority;
• Any lender participating in other USDA Rural Development and/or Farm Service Agency guaranteed loan programs.

Terms: Loans are for 30 years. The promissory note interest rate is set by the lender. There is no required down payment. The lender must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

Standards: Under the Section 502 program, housing must be modest in size, design, and cost. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. New Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards. Existing manufactured housing will not be guaranteed unless it is already financed with an HCFP direct or guaranteed loan or it is Real Estate Owned (REO) formerly secured by an HCFP direct or guaranteed loan.

Approval: Rural Development officials have the authority to approve most Section 502 loan guarantee requests.

For more information contact your lender – or visit www.responsemortgage.com to connect with someone from our mortgage partner.

I couldn’t agree more.

But before I go into why I support this legislation, I’d like to provide a little background on the USDA’s Single-Family Housing Guaranteed Loan Program and why I believe it can serve as a successful model for a much needed urban down-payment assistance program.

According to Wikipedia, the United States Department of Agriculture was established by President Abraham Lincoln on May 15, 1862 in order to help out the United States economy. Through Federal funding, its purpose was the collection of agricultural statistics and other agricultural purposes; President Lincoln called it the “people’s department.” For many years, the Department of Agriculture was crucial to providing concerned persons with the assistance they needed to make it through difficult periods, such as the Great Depression; this included loans for rural landowners.

Fast forward 148 years and what we have now is a robust program that in 2009 provided over 140,000 loans and $16.6 billion in grants to achieve homeownership and improve housing in rural areas. They also funded $11.2 billion for direct and guaranteed single-family housing loans to provide additional credit for affordable home loans. USDA loans used to be considered “farmers’ loans” but that is no longer the case. Rural America is home to about 50 million people, but only 6.5 percent of the rural work-force is directly employed in farm production. This means that USDA must support not only the farms, but also the communities that surround and support them.

In 2009, the USDA enacted changes that provided assistance to millions of homebuyers who did not have the down-payment funds required by conventional loan programs. USDA loans currently stand alone as the only zero-money-down program available to borrowers who have not served in the military. And like their conventional counterparts, the USDA program adheres to strict underwriting standards, assessing each borrower’s credit, income, and cash flow. As a result, the agency’s portfolio of loans has a low default and delinquency rate of 1.72% (compared to a 2%- 5% default rate for conventional loans and 15% for subprime).

Earlier this year, the USDA exhausted its $13.1 billion funding, leaving many qualified homebuyers with few-to-no financing options and putting a squeeze on our nation’s economy. Thankfully, the Federal Government recognized this fact and responded by passing legislation that increases the Rural Housing Service (RHS) commitment authority allowing guaranteed loans. The RHS is expected to announce new guidelines shortly after the president signs the bill; one anticipated change is a higher “guarantee fee” of 3.5% that can be folded into the mortgage and will enable the program to be self-sufficient.  

Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. I would argue that by creating a program similar to the USDA’s for city dwellers, there is the potential to bring in hundreds of thousands of homebuyers annually and billions of dollars in state and local taxes every year, as well as higher Federal Income Tax revenue (click here to read a detailed analysis).

The success of the USDA’s Single-Family Housing Guaranteed Loan Program proves that alternatives to conventional loan products can be successful and result in responsible, long-term homeownership with low delinquency rates.  Now is the time to expand the market and create a down payment assistance program for urban homebuyers who face similar challenges to their rural counterparts. Perhaps it could be called the United States Down Payment Assistance program—or USDPA. Has a certain ring to it, doesn’t it?

As always, thanks for reading.

Lennox

Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. What I would like to address today is some of the feedback that I’ve received from those who question the national down payment assistance program and suggest that it will put us right back where we were with the mortgage crisis.

There is a misconception that first time buyers who have “skin in the game”, meaning cash for a down payment, are less likely to default on a home loan than those without. The truth of the matter is that for decades the USDA has offered programs with 100% financing and the default rate on those loans is only 1.7%. The VA has a similar zero-down program and their default rate is 2.5%. FHA loans require a 3.5% down payment and their default rate is under 4%. According to the National Association of REALTORS, conventional loans, which require a 20% down payment, have between a 2% and 5% default rate depending on the specific loan type. The foreclosure rates tied to the subprime meltdown are nearly 15%.

Some first time homebuyers have saved the money needed for a down payment; others are fortunate enough to have family that is willing to gift them the funds. In both cases, most buyers are left with little savings following their home purchase; thus the emphasis on ensuring that buyers are well qualified. First time buyers that need down payment assistance are no different with the exception that over a 15 year period they will repay the DPA along with their mortgage. As such, those using down payment assistance typically purchase slightly less home than their counterparts in order to compensate for the DPA effect on financial ratios. The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

One of the main arguments that I have heard in opposition to a national down payment assistance program is that it will lead to higher foreclosures because it does not require “skin in the game,” as mentioned earlier. I think that the USDA program alone proves that even with 100% financing, responsible, qualified homebuyers who use down payment assistance are no more likely to default on their mortgage than those who use conventional loan products. In fact, according to national statistics, in some cases they are less likely to do so.

It’s important for people to enter into homeownership with a clear understanding of the financial responsibilities that accompany this kind of purchase. Unlike the time of subprime mortgages, buyers need to be responsible, have stable employment, good credit, and a healthy debt-to-income ratio. Foreclosure rates go down even more if first time homebuyers have taken a course that educates them about the responsibilities of home ownership.

As I’ve said before, my proposal for a national down payment assistance program is not about getting people into homeownership at any cost. It’s about providing opportunities and educating people about the possibilities that exist for those who are qualified and considering buying a home for the first time.

As always, thanks for reading,

Lennox

Click here to read a White Paper that outlines the benefits of an effective DPA Program.

Thanks for reading,

Lennox