Lennox's Real Estate Blog

sharing my passion for real estate

New Solutions for America’s Housing Crisis

with 4 comments

I’ve recently had the honor of participating in the New Solutions for America’s Housing Crisis conference back in Washington, DC.  The conference was co-hosted by E21 and the Progressive Policy Institute, two economic policy organizations looking for resolutions to get America out of our current fiscal turmoil.   In attendance were strategic business leaders from the real estate and mortgage industries as well as key federal government policy makers.

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 2nd 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

Written by Lennox

October 18, 2011 at 2:07 pm

4 Responses

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  1. Well stated, Lennox. I would add one other opportunity. If community land trusts could purchase some of the bank-owned properties we could have a conduit to providing affordable home ownership opportunities not only today, but into the future. That often requires a public-private partnership, however, and with the pressure on local government budgets as severe as on the states and Federal budgets, it will be difficult to accomplish unless charitible foundations can be convinced this is an endeavor worthy of some of their resources.

    Glenn Crellin

    October 18, 2011 at 2:19 pm

  2. As a Realtor, in MO, I see so many people having to look for alternative financing. They usually have the income, but credit score has been effected by something in some way. I don’t care for FICO, I feel it takes away from the person, maybe they do have a good job/pay and are stable….but let that number move down and oh no, the world is going to end! Credit scores/systems remind me of school grades and those I feel are a total mess in their own right,I never have believed in grades per si. We’re all human and regardless of what some think, not every single person can fit into every single box. So, I do agree on the actual legit rent to own program, I think that’s a terrrific idea. Jobs really are the main priority, without them people can’t buy ANYTHING!

    Connie

    October 22, 2011 at 9:21 pm

  3. Thanks Lennox for this information. If you ever watch ted.com, watch “the 6 killer apps of prosperity.” It will cement your view of home/land ownership.

    Liz

    November 14, 2011 at 3:48 pm

  4. Home lender accountability strategy

    A home that has been foreclosed upon, where title reverts to the lien holder should not be allowed to be sold at a discount by any institution that is publicly held or that has received a government bailout. This practice has artificially depressed home prices for all Americans. If the Home is sold at a discount below what is owed on it, the balance should stay with the title of the property as a second encumbrance that cannot be extinguished by sale of the first trust deed.

    Instituting this practice would immediately firm up housing prices. The foreclosed homes could still be sold to new owners with a low and affordable first trust deed. As part of this discount they would have to acknowledge the “permanent” second trust deed (Hereafter referred to as the PSTD) as an encumbrance to the property. This would keep new owners from pulling equity loans against the property until the PSTD was paid off while allowing the properties to be occupied, preventing vandalism and lack of maintenance damage.
    The PSTD would allow for the creation of a new and tradable bond or note for the financial markets. It will eventually have to be paid upon sale of the home for an amount that exceeds the first note.
    Example:
    First note of $100,000
    PSTD of $100,000
    Sale price of $125,000
    Costs of sale $16,000
    Money paid to holder of PTSD $9000
    PTSD reduced to $91,000
    The free market would find a value to this PSTD by competing with existing single family homes where there is no default.
    Why would someone buy a home with this kind of encumbrance? Because they could get the home for a price under market value with a payment they can afford. Remember they would not be making payments on the PSTD. The goal would be to have low income families owning these homes and reduce the impact of investors buying them at a tax subsidized discount and then renting them to these same families.
    With this plan in place the artificial repression of home values would quickly be resolved. Homeowners who are current on their mortgages would be able to compete with the bank owned properties allowing them to be, once again, mobile in their homeownership. This mobility would allow renewed economic vigor buy enabling workers to sell without taking a loss and move to new job opportunities.
    Banking would benefit by the creation of a new market that right now is only accounted for as losses from selling properties for less than what they are owed. They will probably still have some loss due to the interest free nature of the PSTD. Some loss over time would be better than a complete loss immediately.
    The premise of this idea is to hold the financial markets responsible for their own bad calls. The American public should not be penalized for their decisions. Why should a whole neighborhood have to compete with a handful of foreclosed properties that can be sold at extreme discounts by banks because the citizens have been forced to underwrite their losses?

    John

    December 14, 2011 at 12:09 pm


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