Tag Archives: mortgages

Looking at how consumers are the major beneficiaries of fixed-rate mortgages

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The historical development of the fixed-rate mortgage, usually 30 years in the United States, helped contribute to the post-World War II suburbanization boom in the United States. Several scholars take a look at who exactly benefits from the fixed-rate mortgage (FRM):

The FRM clearly occupies a central role in the U.S. housing finance system. It has been the dominant instrument since the Great Depression and currently accounts for more than 90 percent of mortgage originations. The FRM is regarded as a consumer-friendly instrument, which is one reason why it enjoys enduring popularity. But the instrument can cause problems for both current and prospective borrowers. And part of its popularity is due to government support as well as past regulatory favoritism. The FRM is heavily subsidized through the securitization activities of Fannie Mae and Freddie Mac. These subsidies, which lower the relative cost of the instrument, are an important factor in its popularity. The FRM also imposes costs on the mortgage industry and on investors in mortgage securities—costs that are likely to rise as the economy recovers. Importantly, the FRM is a onesided design. Consumers, particularly those who utilize the prepayment option, benefit while investors and taxpayers bear the cost.

The PDF file linked to from this document has a lot of interesting information. A few thoughts about this:

1. The fixed-rate mortgage came about because of particular historical conditions and interests. Prior to World War II, other kinds of mortgages were sold.

2. The fixed-rate mortgage is not as common in lot of other countries around the world. There are other ways the mortgage market could be set up.

3. The authors suggest that the FRM is the primary mortgage instrument in this country because of governmental approval. Here are the final two sentences in the conclusion of the PDF:

There is nothing so special about housing finance that necessitates the government absorbing the credit risk of the vast majority of the mortgage market or underwriting the interest-rate risk of the that market. Two episodes with massive taxpayer loss should convince us of that fact.

But I think this may be overlooking the cultural and symbolic value Americans place on owning a home. While this scheme may put taxpayers on the hook, Americans also value homeownership, particularly as a lynchpin of the American Dream. Most (if not all) presidents since Calvin Coolidge have pushed policies that would boost the homeownership rate. From FHA and VA loans to Fannie Mae and Freddie Mac, the government has poured billions into homeownership. So while consumers might benefit from this setup, would we be willing as a nation to push for different types of mortgages that might make it more difficult for Americans to purchase a home?

Might the 30-year mortgage disappear?

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An article suggests that the 30 year mortgage might “fade away.” As both Republicans and Democrats think about eliminating Fannie Mae and Freddie Mac, it is unclear whether a purely private mortgage industry would retain features like a 30-year payment period:

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans…

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

The issue of a 30-year mortgage would be up for debate within a broader restructuring of an important industry. Both organizations, Fannie Mae founded in 1938 and Freddie Mac created in 1970,  were intended to help Americans become homeowners. Fannie Mae, along with several other government programs, particularly helped to boost homeownership rates after World War II. During this postwar housing boom, government programs helped lower down payments and lengthened the years in a mortgage. If I remember correctly, mortgages prior to this postwar period were 15 or 20 years at most, required much larger down payments, and were available from mortgage lenders or savings and loans associations.

Where this article needs to go next is to ask whether this means fewer Americans will have access to mortgages and homeownership. If the industry is indeed restructured in the coming years, will the homeownership rate continue to drop? If politicians from both sides of the aisle are interested eliminating Fannie Mae and Freddie Mac, does this mean the federal government is pulling away from more explicit endorsements of homeownership? It is intriguing to note that all of this might take place because of a large economic crisis (though both of these programs have had their critics for decades) while Fannie Mae was instituted in response to an earlier crisis.

Discussing the mortgage interest deduction and how pricy (and large) a McMansion is

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One common use of the term McMansion is simply a large home. In this blog post about the mortgage interest deduction, the writer contrasts the price of McMansions to more normal-sized homes:

That means average homeowners with modest Capes and fixer-uppers are helping subsidize others stretching to keep up with the Jones and their million-dollar McMansions.

The measuring stick of a McMansion in this post is how large the mortgage is:

A close look at the interest rate deduction reveals much of its benefits go to homeowners with mortgages far larger than most in the middle of the housing pack. Check out this Forbes piece, which nicely lays out the argument for taking away this perk from the homeowners with outsized mortgages – incredibly the limit is currently $1 million…

The president’s deficit commission recommended capping the deduction’s use at $500,000 in mortgage debt, down from $1 million now, while nixing its use for vacation homes and converting what’s left to a 12.5 percent tax credit.

OK, I vote for keeping it simple and just lowering the mortgage cap to $500,000 or $600,000, while making second homes ineligible as well.

So a McMansion here would start with homes that cost $500,000 to $600,000. In most suburban communities, this buys a large home. In denser areas, not necessarily. What about older homes that cost this much – are these McMansions? It wouldn’t take too much searching online of real estate listings to translate these prices into square footage in particular areas.

Overall, this use of the term McMansion seems to refer to any large house beyond “modest Capes and fixer-uppers.” This use of the term seems quite vague: a McMansion is any (presumably larger) house above a certain price point.

Housing prices dropping in places where it wasn’t supposed to keep dropping (like Seattle)

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It has been well-documented that the housing crisis has had a strong effect on places like Las Vegas and much of Florida. But this report suggests the drop in housing prices has spread to places once thought to be immune to these drops, such as Seattle:

Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.

CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable.

In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.”

A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off. Those who must sell close their eyes and hope for the best.

It doesn’t sound good for sellers in a lot of places.

It would be interesting to know more about why certain cities were thought to be immune. I can think of a few explanations off the top of my head: certain markets didn’t experience a big boom in prices in the 1990s-2000s so there wasn’t much room for prices to drop; certain areas attract jobs and employees so there will be more people always look for housing; and certain didn’t experience building booms so there isn’t a glut of houses or units to be sold. Does one of these explanations fit Seattle?

Let’s hope the “new normal” in housing doesn’t look like Merced County, CA

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A USA Today article about the “new normal” in US housing uses Merced County, California as its main example. The situation there is not good:

The median home price, $116,000, is down 68% from its peak in 2006. Three of five homeowners with a mortgage here owe more on their loans than their houses are worth, compared with about one in five nationally.

While the situation is particularly dire in Merced County, it is also not great in a number of other places:

Nationwide, home prices are down 30% from their 2006 peak. Moody’s Analytics economist Celia Chen says national home prices will regain that ground by 2021.

Some areas will take far longer. In 22 U.S. metropolitan regions, most in California and Florida, home prices won’t return to their 2006 peaks before 2030, Chen estimates. That includes such cities as Miami, Detroit, Phoenix, Las Vegas and Riverside, Calif.

And a USA Today chart shows the counties with the most mortgages underwater: Clark County, Nevada (where Las Vegas is located) is at the top with 71.1% of mortgages underwater. Overall, there are 17 counties over 50% and the top 30 on the chart are all over 46%.

This is a long-term issue for these places, particularly if housing values for the whole country aren’t expected to reach the 2006 peak until at least 2021.

Another possible consequence of the foreclosure crises: a lack of trust of financial institutions

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In recent decades, a number of sociologists have written about a necessary feature of human interaction: trust between the individuals or groups involved. Two sociologists discuss this in the Huffington Post:

While also feeling shame and embarrassment, even personal failure, for having allowed themselves to be taken in, these families are also aware of the exploitation they have experienced at the hands of their “trusted” financial advisors. That mistrust threatens the recovery some believe has begun in recent months.

As the British sociologist Anthony Giddens has noted, in complex societies where each individual cannot become expert in all the institutional contexts in which they must operate, trust is essential for people to negotiate the various realms, including financial institutions, in which they operate. People must feel secure in the trust networks they establish in order to survive and prosper, and for society itself to advance.

In a series of in-depth interviews nationwide with 22 adults who are at risk of foreclosure (they were either behind in their mortgage payments at some point in the past two years or, in two instances, had already lost their homes due to foreclosure) all respondents expressed both anger and personal responsibility. The interviews lasted between 30 and 90 minutes. In no question with any respondent was the word “trust” used. But in every case but one, the respondents explicitly referred to the mistrust they now have for anyone associated with the mortgage lending industry in particular or financial services generally.

From this short excerpt, it is hard to get an idea of how representative these 22 respondents are and how we can know whether their opinions reflect those of Americans at large. But if this is generalizable information, it suggests it could take a long for customers to approach the mortgage industry in the same way. At the same time, many Americans don’t really have many other options when shopping for a home: a mortgage is a necessity. So how could the mortgage industry once again gain the trust of consumers – special programs, special efforts, more government regulation?

According to the postscript at the end of the article, a longer argument from these two sociologists will be published soon in Social Science Quarterly.

Deciding whether to buy or rent

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One of the New York Times blogs discusses whether residents should buy or own. The decision could be based on a ratio for metropolitan areas that gives some indication of whether owning or renting is a better choice:

A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years.

While the metropolitan average is 15.1, 17 metro areas have ratings over 20 (led by East Bay, CA, Honolulu, HI, San Jose, CA, San Francisco, CA, and Seattle) and 14 metro areas have ratings below 15 (with the five lowest being Pittsburgh, PA, Cleveland, OH, Detroit, MI, Phoenix, AZ, and Dallas – Fort Worth, TX).

The blog writer come to this conclusion about the data: “It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets.”

While this may be true, what is even more remarkable is that homeownership is still such a widespread goal. If this measure is reliable and valid (meaning that it is consistent and it really tells us something about buying vs. owning), then homeownership might never really be about an economic improvement over renting. Rather, Americans have made owning a home an important cultural value and then use economic rationales to justify their decisions.

What exactly is it that appeals to people about owning their home? They get to make their own decisions, they don’t have to pay a landlord or wait for them to take care of repairs, they get some separation from their neighbors, and overall, they feel like they have made it on their own. If renting was a cheaper option but people could still afford to buy a home, how many Americans would decide to rent?

How winning on minor technicalities can lead to a 25 year foreclosure battle

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As lenders have recently had to slow down the foreclosure process because of running into trouble for not properly following procedures, the Wall Street Journal reports on another cautionary tale: one woman in Florida has stretched out her foreclosure for 25 years, not making a payment since 1985. According to the story, this has happened because the woman has been able to make successful arguments in the courts:

She has managed to stave off the banks partly because several courts have recognized that some of her legal arguments have some merit—however minor. Two foreclosure actions against her, for example, were thrown out because her lender sat on its hands too long after filing a case and lost its window to foreclose.

Ms. Campbell, who is handling her case these days without a lawyer, has learned how to work the ropes of the legal system so well that she has met every attempt by a lender to repossess her home with multiple appeals and counteractions, burying the plaintiffs facing her under piles of paperwork.

She offers no apologies for not paying her mortgage for 25 years, saying that when a foreclosure is in dispute, borrowers are entitled to stop making payments until the courts resolve the matter.

“This is every lender’s nightmare,” says Robert Summers, a Stuart, Fla., real-estate lawyer who represents Commercial Services of Perry, an Iowa-based buyer of distressed debt that currently owns Ms. Campbell’s mortgage and has been trying to foreclose. “Someone defending a foreclosure action can raise defenses that are baseless, but are obstacles for the foreclosing lender,” he says, calling the system “an unfair burden” for lenders.

I don’t know if the system is “unfair” for lenders but it is remarkable that the woman is openly guilty about not making a payment and yet is still able to win in court. Could lenders be this bad on following procedures? Or is the law really this in favor of people who haven’t made mortgage payments?

Prolonged housing issues: one-third of Chicago homes underwater

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The housing crisis of recent years is not just about foreclosures. The loss in housing value across the board means that many homeowners with mortgages owe more on those mortgages than their house is worth. This is a common occurence in the Chicago region where new data suggests one-third of homes are underwater, a rate almost ten percent higher than the national average:

Some 32.9 percent of all local single-family detached homes with mortgages were underwater in September, meaning the homeowners owed more on the loans than the properties are worth, according to new data from realty Web site Zillow.com. That compares with 30.9 percent in June and 27.2 percent in September 2009. The report does not include data on condominiums.

Nationally, 23.2 percent of homes have negative equity.

“Negative equity is going to continue to cast a pall over the housing market for the next several years,” said Stan Humphries, Zillow’s chief economist. “All these people are trapped in their homes and can’t move onto another one and it’s throwing off more foreclosures. For people who are not going to move anytime soon, it is much more of an academic issue. For people who need to move or who encounter an economic issue, it’s a material issue.”

I haven’t seen too many people speculating about the social consequences of this. Americans in the last 60 years have been fairly mobile people but these sorts of mortgage situations limits that. This may have consequences for job markets; even if there are jobs available elsewhere, fewer people are then able to pick up relatively quickly and move. On the other hand, it may lead to increased “feelings or perceptions of neighborhood” as more residents have to stay put longer than they would have even just five years ago.

The latest foreclosure chapter: lawyers and “robo-signers”

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The Wall Street Journal suggests that one particular lawsuit, begun in 2004, helped bring to light the most recent issue in the American foreclosure saga: the use of “robo-signers” by lending firms. Because of these practices, a number of banks have had to suspend foreclosure proceedings to examine the paperwork more closely:

Lillian and Robert Jackson stopped paying on their home in Jacksonville, Fla., in 2004 when business dropped off at their cleaning company. Eviction might have seemed inevitable when they faced a foreclosure hearing two years later.

But their lawyer, James Kowalksi, had the idea of taking a deposition from the signer of the mortgage papers. When a document processor for GMAC Mortgage admitted she routinely signed such papers without being familiar with details of the loans, she was tagged as one of a species now known as robo-signers.

It was a first step in the growth of a legal sub-specialty called foreclosure defense that has sown confusion and turmoil in the housing market. Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing. In the 23 states where foreclosures entail a court hearing, the bank may be ordered to pay the homeowner’s legal bill if a lawyer can convince a judge that the bank has submitted false documents, such as affidavits saying employees personally reviewed the details of loans when they didn’t.

Ultimately, lenders argue that this sort of legal proceeding doesn’t keep the resident in their home; they still should be evicted from their homes for failing to pay because this is just a paperwork issue. What remains to be seen is if there is some sort of “smoking gun” case where the bank proceeded with foreclosure when it should not have.

But in the mean time, it appears that there are a number of lawyers who see an opportunity here. And in the court of public opinion, revelations like this don’t help the public image of the lenders.