The New York Time's Gretchen Morgenson offered up some excellent points regarding the apparent shift in U.S. housing policy away from home ownership. Our thanks to her for the heads up.
While Congress toiled on the financial overhaul last spring, precious little was said about Fannie Mae and Freddie Mac, the mortgage finance companies that collapsed spectacularly two years ago.
Indeed, these wards of the state got just two mentions in the 1,500-page law known as Dodd-Frank: first, when it ordered the Treasury to produce a study on ending the taxpayer-owned status of the companies and, second, in a “sense of the Congress” passage stating that efforts to improve the nation’s mortgage credit system “would be incomplete without enactment of meaningful structural reforms” of Fannie and Freddie.
With midterm elections near, though, there will be talk aplenty about dealing with the companies precisely because Dodd-Frank didn’t address them. Unfortunately, if past is prologue, this talk is likely to be more political than practical.
Fannie and Freddie amplified the housing boom by buying mortgages from lenders, allowing them to originate even more loans. They grew into behemoths because they lobbied aggressively and played the Washington political game to a T. But after both companies bought boatloads of risky mortgages, they required a federal rescue.
The Treasury’s study on Fannie, Freddie and housing finance must be delivered to Congress by the end of January 2011. In a speech last week, Timothy F. Geithner, the Treasury secretary, told a New York audience that resolving the companies isn’t “rocket science.”
But attaining genuine remedies for our housing finance system could actually be harder than rocket science. That’s because it would require an honest dialogue about the role the federal government should play in housing. It also requires a candid conversation about whether promoting homeownership through tax policy and other federal efforts remains a good idea, given the economic disaster we’ve just lived through.
Alas, honest dialogues on third-rail topics like housing have proved to be a bridge too far for many in Washington. So, what we may hear instead about Fannie and Freddie before the elections is a lot of sound and fury signifying a stealthy return to the status quo.
This would be unfortunate, not only because the financial crisis presents a rare opportunity to reassess the supposed benefits of homeownership but also because there was a lot not to like about the way these companies operated and the ways their friends in Congress enabled that behavior.
Outwardly, Fannie and Freddie wrapped themselves in the American flag and the dream of homeownership. But internally, they were relentless in their pursuit of profits from partners in the mortgage boom. One of their biggest and most steadfast collaborators was Countrywide, the subprime lending machine run by Angelo R. Mozilo.
Countrywide was the biggest supplier of loans to Fannie during the mania; in 2004, it sold 26 percent of the loans Fannie bought. Three years later, it was selling 28 percent. What Countrywide got out of the relationship was clear — a buyer for its dubious loans. Now the taxpayer is on the hook for those losses.
An internal Fannie document from 2004 obtained by The New York Times sheds light on this question. A “Customer Engagement Plan” for Countrywide, it shows how assiduously Fannie pursued Mr. Mozilo and 14 of his lieutenants to make sure the company continued to shovel loans its way.
Nine bullet points fall under the heading “Fannie Mae’s Top Strategic Business Objectives With Lender.” The first: “Deepen relationship at all levels throughout CHL and Fannie Mae to foster alignment and collaboration between our companies at every opportunity.” (CHL refers to Countrywide Home Loans.) No. 2: “Create barriers to exit partnership.” Next: “Disciplined Risk/Servicing Management” and “Achieve Fannie Mae Profitability Goals.”
(Later in 2004, by the way, the Securities and Exchange Commission found that Fannie had used improper accounting and ordered it to restate its earnings for the previous four years. Some $6.3 billion in profit was wiped out.)
The engagement plan also recommends ways that Fannie executives should mingle with Countrywide’s top management, because “fostering more direct senior level engagements with key influencers throughout their organization will be beneficial in ensuring strategic alignment and building organizational loyalty.”
Recommendations included conferring with Mr. Mozilo at Habitat for Humanity golf tournaments and Mortgage Bankers Association conventions. Franklin D. Raines, then Fannie’s C.E.O., and Daniel H. Mudd, then its chief operating officer, were advised to see Mr. Mozilo twice a year. “We will be successful when Angelo influences the industry or his organization on our behalf,” the document says. Mr. Raines didn’t respond to e-mails requesting comment last Friday; he left Fannie in December 2004.
The memo advised pursuing other Countrywide executives: “Deep Rapport” should be the goal with David E. Sambol, the lender’s president, but because he did not “heavily attend outside events” Fannie executives should “look for opportunities for meetings” at Countrywide headquarters.
“We will be successful if we can foster ongoing communication channels that allow us to understand and leverage Sambol’s priorities and demonstrate our commitment to making him successful,” the memo stated. Mr. Sambol and Mr. Mozilo could not be reached for comment.
For his part, Mr. Mudd, now the chief executive of the Fortress Investment Group, said Fannie’s courting of Countrywide was not unusual. “We tried to build a program that was based on having multiple strong relationships with our main customers,” he said. “You want to be sure that the first call is not the last call, that a customer is not doing business with you anymore.”
But Representative Darrell Issa, a California Republican and ranking member on the House Committee on Oversight and Government Reform, says he has concerns about such mating dances.
“Lost in the debate over how best to legislate the aftermath of the financial crisis has been the necessity to conduct an inward examination of the too-cozy relationship between government enterprises and private industry,” Mr. Issa said. “The true nature of this strategic partnership between Countrywide and Fannie-Freddie should be exposed so we can measure the extent to which it fostered the conditions leading to the financial meltdown.”
Understanding how these companies operated is crucial if we want to avoid repeating the mistakes of our recent past. So, when you hear about Fannie and Freddie reform this fall, remember that we still don’t know the half of it.
Monday, August 9, 2010
Wednesday, July 28, 2010
Rent Is No Longer A "Four Letter Word"
A recent San Francisco Chronicle "On The Block" blog post by "Jenny P" noted that the Obama Administration is backing off on the nation's historic posture of promoting home ownership.
"In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you wanted to go," said Raphael Bostic, a senior official in the Department of Housing and Urban Development. "You're not going to hear us say that anymore."
The post also noted that NPR recently talked about the apparent shift in policy:
"Nicolas Retsinas, the director of Harvard's Joint Center for Housing Studies, says "rent" is no longer a "four-letter word." "In the past, you rented if you didn't make enough money," he says. "You rented if you weren't ambitious. You rented if you weren't smart enough. But as it turns out, as we look at recent years, renting turned out to be a pretty smart thing to do."
At the American Tenants Association we have always believed that rent never was a "four letter" word. The millions of homeowners underwater on their mortgages or with homes at half their purchase price would probably tend to agree.
"In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you wanted to go," said Raphael Bostic, a senior official in the Department of Housing and Urban Development. "You're not going to hear us say that anymore."
The post also noted that NPR recently talked about the apparent shift in policy:
"Nicolas Retsinas, the director of Harvard's Joint Center for Housing Studies, says "rent" is no longer a "four-letter word." "In the past, you rented if you didn't make enough money," he says. "You rented if you weren't ambitious. You rented if you weren't smart enough. But as it turns out, as we look at recent years, renting turned out to be a pretty smart thing to do."
At the American Tenants Association we have always believed that rent never was a "four letter" word. The millions of homeowners underwater on their mortgages or with homes at half their purchase price would probably tend to agree.
Friday, July 23, 2010
Rentals Are Cutting Edge Solution
Rentals are a cutting edge solution for one Bakersfield, California builder according to the Wall Street Journal's Dawn Wotapka. Maybe this is an idea that will catch on and help turn around the single family housing industry.
The housing crash has forced a California land developer to don a different hat: Landlord.
Five years ago, Steve Lantz teamed with other investors to buy a 30-acre tract at Silverado Ranch in South Bakersfield, Calif. for about $1.8 million. They planned to quickly flip the site for a hefty profit, standard practice at the time. But, then the housing crash hit - striking Bakersfield particularly hard, depressing prices and fueling a foreclosure crisis.
Mr. Lantz, who owns a commercial-development firm, found himself stuck with land he couldn’t sell, so he made the unusual choice to build 53 homes. Instead of selling them, he’s waiting out the downturn by renting them for between $1,150 and $1,350 per month.
Construction financing wasn’t available–most lenders are hesitant to fund any new residential projects–so Mr. Lantz and his partners are paying about $85,000 to build each unit. Half the homes are done and construction should be finished this fall, reports trade publication builderonline.com.
The finished units are rented and there’s a waiting list. Things have gone so well, Mr. Lantz says, he might might stick with the month-to-month solution. “The cash flow is so good,” Mr. Lantz tells us. “We haven’t have had one late rental payment, knock on wood.”
As we’ve written before, more Americans burned by the housing market are foregoing the “American dream” of ownership and becoming renters by choice. And, given all those foreclosures, the Bakersfield region has plenty of families seeking shelter. Silverado Ranch, which offers one-year leases and doesn’t take pets, has a waiting list.
Cynthia Martinez is one of the lucky ones. She and her family moved into a four-bedroom home in March after losing their home. “Our old house was right down the street, so we knew the neighborhood,” Ms. Martinez told the Bakersfield newspaper. Plus, “we have granite countertops and landscaping and good blinds, not the cheap ones you usually see in rentals.”
Even better: The rent comes in $1,200 less than the mortgage at her previous home.
Explains Mr. Lantz: “It’s a cutting-edge solution.”
The housing crash has forced a California land developer to don a different hat: Landlord.
Five years ago, Steve Lantz teamed with other investors to buy a 30-acre tract at Silverado Ranch in South Bakersfield, Calif. for about $1.8 million. They planned to quickly flip the site for a hefty profit, standard practice at the time. But, then the housing crash hit - striking Bakersfield particularly hard, depressing prices and fueling a foreclosure crisis.
Mr. Lantz, who owns a commercial-development firm, found himself stuck with land he couldn’t sell, so he made the unusual choice to build 53 homes. Instead of selling them, he’s waiting out the downturn by renting them for between $1,150 and $1,350 per month.
Construction financing wasn’t available–most lenders are hesitant to fund any new residential projects–so Mr. Lantz and his partners are paying about $85,000 to build each unit. Half the homes are done and construction should be finished this fall, reports trade publication builderonline.com.
The finished units are rented and there’s a waiting list. Things have gone so well, Mr. Lantz says, he might might stick with the month-to-month solution. “The cash flow is so good,” Mr. Lantz tells us. “We haven’t have had one late rental payment, knock on wood.”
As we’ve written before, more Americans burned by the housing market are foregoing the “American dream” of ownership and becoming renters by choice. And, given all those foreclosures, the Bakersfield region has plenty of families seeking shelter. Silverado Ranch, which offers one-year leases and doesn’t take pets, has a waiting list.
Cynthia Martinez is one of the lucky ones. She and her family moved into a four-bedroom home in March after losing their home. “Our old house was right down the street, so we knew the neighborhood,” Ms. Martinez told the Bakersfield newspaper. Plus, “we have granite countertops and landscaping and good blinds, not the cheap ones you usually see in rentals.”
Even better: The rent comes in $1,200 less than the mortgage at her previous home.
Explains Mr. Lantz: “It’s a cutting-edge solution.”
Sunday, July 11, 2010
Homeownership -- Milestone or Millstone?
Jon Maddux, the CEO of strategic default consultant YouWalkAway.com, had this to say about the disadvantages of homeownership:
It seems that to many, their home has become a millstone that is pulling them deeper and deeper underwater. With no end in site. What once was felt to be a milestone, the luster of homeownership is eroding and causing many to re-think that goal in life. In fact, if you type in the word homeownership into google, the fourth suggestion is “homeownership is overrated”. On June 7th, the Wall Street Journal had an article with that title and sub title of “Today’s economy requires a more mobile workforce. “ Here is an excerpt from the article:
Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors. As we expected, the rates of homeownership are greatest where housing prices are lowest. But cities with high levels of homeownership—in the range of 75%, like Detroit, St. Louis and Pittsburgh—had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can’t sell, unable to move on to new centers of opportunity.
Another article from the same google search on Portfolio.com shouts “Homeownership Makes You Fat and Unhappy” there was a pretty interesting study they did of 809 women in Columbus, Ohio, in 2005 — before the property bubble burst:
An interesting portrait of homeowners emerges from my analysis. I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people. The results are robust after controlling for reported financial stress.
Now, I have experienced happiness from homeownership so I know it’s not all true, but you have to wonder, is that american dream really the dream we should all have? Should it be the dream of our future children and something we feel is a milestone?
This Boston Globe article last year that said
But a growing chorus of economists and housing experts say that this mind-set needs fundamental reform. Owning a home is not right for everyone, they say: In some ways it’s overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be.
Patrick.net has a great section on why you may not want to buy a home and it states among many other
reasons:
Because it’s still much cheaper to rent than to own the same size and quality house, in the same school district. On the coasts, annual rents are 3% of purchase price while mortgage rates are 6%, so it costs twice
as much to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in the richer neighborhoods, but it does make sense to buy in some relatively poor neighborhoods where prices have already fallen into line with salaries and rents.
Bottom Line
Homeownership shouldn’t necessarily be a milestone. It’s ultimately different for each individual and depends on the type of life you want. Homeownership has also changed over the last several decades. Our parents generation used to keep the same job all the way till retirement and that was a good reason to buy a house and set down roots. Today with technology, things are changing so rapidly. People are changing jobs and career paths more often. Homeonership drastically changed when lenders loosened their credit guidelines and started to allow people to buy homes with no money down. ”Easy come, easy go.” The older generation considered homeownership a milestone because they had to put a good chunk of money down. 20% or more in many cases. With the birth of zero down zero income loans, homeownership became so easy to attain that it lost it’s prestige.
Jon Maddux, CEO
www.YouWalkAway.com
It seems that to many, their home has become a millstone that is pulling them deeper and deeper underwater. With no end in site. What once was felt to be a milestone, the luster of homeownership is eroding and causing many to re-think that goal in life. In fact, if you type in the word homeownership into google, the fourth suggestion is “homeownership is overrated”. On June 7th, the Wall Street Journal had an article with that title and sub title of “Today’s economy requires a more mobile workforce. “ Here is an excerpt from the article:
Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors. As we expected, the rates of homeownership are greatest where housing prices are lowest. But cities with high levels of homeownership—in the range of 75%, like Detroit, St. Louis and Pittsburgh—had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can’t sell, unable to move on to new centers of opportunity.
Another article from the same google search on Portfolio.com shouts “Homeownership Makes You Fat and Unhappy” there was a pretty interesting study they did of 809 women in Columbus, Ohio, in 2005 — before the property bubble burst:
An interesting portrait of homeowners emerges from my analysis. I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people. The results are robust after controlling for reported financial stress.
Now, I have experienced happiness from homeownership so I know it’s not all true, but you have to wonder, is that american dream really the dream we should all have? Should it be the dream of our future children and something we feel is a milestone?
This Boston Globe article last year that said
But a growing chorus of economists and housing experts say that this mind-set needs fundamental reform. Owning a home is not right for everyone, they say: In some ways it’s overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be.
Patrick.net has a great section on why you may not want to buy a home and it states among many other
reasons:
Because it’s still much cheaper to rent than to own the same size and quality house, in the same school district. On the coasts, annual rents are 3% of purchase price while mortgage rates are 6%, so it costs twice
as much to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in the richer neighborhoods, but it does make sense to buy in some relatively poor neighborhoods where prices have already fallen into line with salaries and rents.
Bottom Line
Homeownership shouldn’t necessarily be a milestone. It’s ultimately different for each individual and depends on the type of life you want. Homeownership has also changed over the last several decades. Our parents generation used to keep the same job all the way till retirement and that was a good reason to buy a house and set down roots. Today with technology, things are changing so rapidly. People are changing jobs and career paths more often. Homeonership drastically changed when lenders loosened their credit guidelines and started to allow people to buy homes with no money down. ”Easy come, easy go.” The older generation considered homeownership a milestone because they had to put a good chunk of money down. 20% or more in many cases. With the birth of zero down zero income loans, homeownership became so easy to attain that it lost it’s prestige.
Jon Maddux, CEO
www.YouWalkAway.com
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