Housing affordability is the best it's been in eight years, and mortgage rates remain under 4.5 percent, yet hopes have withered that a recovery in the housing market will take shape next year. Instead, there are expectations that the nation's homeownership rate, which at 65.9 percent in June was at its lowest level in 13 years, will continue to fall, and not just because of Wall Street fluctuations, soured consumer confidence and a still-suffering labor market.
The housing market has its own issues and is undergoing a sea change in how it functions. The transition, experts say, will be difficult. "From here forward, we're going to have increasing head winds," said Sam Khater, senior economist at CoreLogic, a real estate analytics firm. Qualified residential mortgages New lending rules on the horizon and hotly debated in Washington won't affect today's buyers. But they will put homeownership out of reach for some consumers in years ahead — and make it a more expensive proposition for others. Rules were proposed in the spring for qualified residential mortgages, or QRMs, as part of the Dodd-Frank Act's credit risk retention provisions.
The intent is to force lenders to have more "skin" in the game for mortgages they write and sell to the secondary market. As currently proposed, lenders that resell mortgages would have to retain reserves equivalent to 5 percent of the loan unless it is considered among the safest of mortgages. To meet that QRM standard, a borrower would have to make a 20 percent down payment. Mortgage debt could not be more than 28 percent of a borrower's gross monthly income. Total debt, including the mortgage, could be no more than 36 percent. To qualify for a QRM in a refinancing, existing homeowners would have to have at least 25 percent equity in their home. Exemptions apply. Chief among them is that mortgages with Fannie Mae and Freddie Mac would be exempt from the rules so long as they are under federal government control. Mortgages secured by the Federal Housing Administration and the Veterans Administration also would be exempt.
So why the worry at a time when the government backs more than 90 percent of mortgages and there essentially is no private secondary market since the collapse of the subprime mortgage market? Because the Obama administration's goal is to lessen the federal government's role in the mortgage market and shift home-lending back to the private sector. The comment period on the rules ended Aug. 1, but there is no clear sign of when final rules will be announced. "We have this amorphous blob of definition going on out there now," said Keith Gumbinger, vice president of HSH Associates, a publisher of financial information. "We don't know what the standard is going to be, and with a new standard coming into the marketplace, what will the reaction be. It's a factor hindering the recovery.
The market remains fully in upheaval with very little clarity." If adopted as-is, the rules may mean a very small pool of buyers qualify for the lowest mortgage rates. Other borrowers would have to obtain non-QRM loans, and they're likely to pay higher interest rates and fees as lenders pass along the costs associated with holding a 5 percent stake in their loan. Estimates of those extra costs have varied, but JPMorgan Chase has said the interest rates on non-QRM loans could be as much as 3 percentage points higher.
"I don't think anybody is advocating for 100 percent (loan-to-value) loans," said Charles Bachtell, general counsel at Guaranteed Rate, a Chicago-based mortgage company. "The problem comes when you start drawing hard lines. Any requirement of more than 5 percent (down payment) starts becoming a concern because too many qualified borrowers would be eliminated from the purchase market. And just because someone has less than 25 percent equity in the home, they should not be excluded from refinancing into a loan with the lowest rate." Mortgage originators worry that restrictions would further crimp an already difficult lending environment and unfairly discriminate against first-time and lower-income homebuyers. A CoreLogic study of mortgage loans that originated in 2010 showed 31 percent of borrowers made down payments of 15 percent of less.
Only 7.5 percent of borrowers made down payments of 15 to 20 percent. FHA limits The federal government's efforts to revamp housing policy will take a baby step forward Oct. 1 at the Federal Housing Administration. That's the day that FHA loan limits, currently set at 125 percent of its calculation of local median home prices, will drop in 669 of the 3,334 counties and county equivalents that are eligible for FHA-insured mortgages. In the six counties that make up the Chicago area, the change means the current maximum FHA loan amount of $410,000 will decrease about 10.8 percent, to $365,700. The government based the size of the cut here on a median Chicago-area home price of $318,000. FHA-backed mortgages have become the loan of choice for many consumers because of the low 3.5 percent down payment requirement.
The product's market share grew exponentially as the credit markets seized up, and the agency now guarantees almost one in three mortgages for single-family homes. The decline in the maximum loan amount will result in downward pressure on home prices, industry watchers say, but some question whether the limits needed to be as high as they were. In 2008, Congress temporarily boosted the limits to prop up homebuying during the recession. "Given the decline in home prices, do you still need $410,000?" asked Gumbinger, HSH Associates. "If home prices are down 30 percent from peak and FHA is down 10 percent, do you still need those limits?"
With the ceiling lowered, FHA buyers will need to either find less expensive homes or will have to increase their down payments. A buyer who settles on a home priced at $410,000, for example, and applies for an FHA-insured loan would have to put down $14,350 and would borrow $395,650. But after Sept. 30, the FHA would only back $365,700 of the loan amount, meaning that the borrower would have to make a down payment of $44,300. In effect, the attraction of FHA's low down payment disappeared for that homeowner. FHA refinancings also will be affected. Mabel Guzman, president of the Chicago Board of Realtors, worries about the effect of the lower limit in neighborhoods where price declines have sold. In the last few years, condominium buildings in overbuilt cities like Chicago practically lined up at the FHA's front door to secure FHA approval as a way to entice buyers. Since Jan. 1, 2009, 973 condo projects in Chicago, from three-flats to high-rises with hundreds of units, have secured FHA approval. "It will really impact the condo market in Chicago," Guzman said. "You're giving buyers limited options, and it will be more difficult to sell" because the pool of potential buyers in the $350,000 to $450,000 range will shrink.
Is there any upside?
Borrowers in the Chicago area won't experience the double-whammy being felt elsewhere. In high-cost areas of the nation, the conforming loan limits on mortgages backed by Fannie Mae and Freddie Mac, which were temporarily raised three years ago, will be cut. In the Chicago area, the maximum size of those loans will remain $417,000. Foreclosures Five years into the housing crisis, foreclosure activity shows little sign of slowing down. That's more bad news for neighborhood property values and homeowners who are looking to refinance or sell their homes because values, and their home equity, continue to drop. Certainly in Cook County, the state's most populous county, foreclosures show no signs of easing. While mediation programs and modification efforts have helped some financially struggling families save their homes, the overall number of foreclosure cases is on the upswing. For the first six months of the year, 26,681 initial filings of foreclosure were recorded in Cook County, an increase of almost 5 percent from the first half of 2010. Cook County Circuit Court is projecting that foreclosure filings this year will rise more than 7 percent, to more than 53,000 cases.
Meanwhile, multistate investigations that began last fall into foreclosure processes led first to temporary foreclosure moratoriums and now to slower movement of cases through overworked court systems in judicial states like Illinois. According to RealtyTrac, it takes an average of 504 days to close a foreclosure case in Illinois. Cook County expects to complete 35,282 cases this year, about the same as last year. But some of the cases that Judge Moshe Jacobius, presiding judge of the court's Chancery Division, is seeing are foreclosure actions initiated against homeowners who have lost their jobs. With no steady income stream, their chances of receiving a loan modification are slim, which will mean an additional supply of vacant foreclosed homes. Hope Now, an alliance of mortgage servicers, investors and counselors, reported last week that mortgage modifications nationally dropped 42 percent in the year's first half. Some 2.7 million homeowners were 60 days or more delinquent on their home loans as of June. Some of those properties are considered shadow inventory and are likely to become bank-owned and eventually back on the market. Nationally, only 30 percent of distressed properties have been sold, according to John Burns Real Estate Consulting. Along with an overall lackluster economy, foreclosures are going to continue to be the most significant head wind affecting the housing market, said Greg McBride, senior financial analyst at Bankrate.com.
"The time that it's taking to turn over distressed properties is stretching on longer and longer," he said. "There are a lot of people who are listed as homeowners who haven't made mortgage payments in years." Also, not all modifications that are made permanent will stick, and some homes still fall into foreclosure. In its report last month on its Home Affordable Modification Program, the Treasury Department said of all loan modifications made permanent, 10.5 percent were at least 60 days delinquent six months after modification and 15.8 percent redefaulted after nine months. "We're just pushing those problems down the road," said Khater, of CoreLogic. S
tatewide, more than 5,700 homeowners went into foreclosure last month, and another 3,000 homes were repossessed by lenders, RealtyTrac reported last week. Not all these properties are coming to market immediately, and there is anecdotal evidence that lenders are holding back properties because they don't want to flood the market. They also don't want to have to take substantial write-downs at one time for properties held in their own portfolios. Last week, the Obama administration asked for input on potentially selling Fannie Mae-, Freddie Mac- and FHA-backed foreclosures in bulk to investors who in turn would turn the properties into rental units.
The plan has generated mixed reactions. The continuing foreclosure problem, experts say, means a recovery of home prices is further out than once anticipated and is likely to cause trepidation among consumers who figured they'd sit out 2011's housing market but hoped to jump into it in 2012 when the environment was better. "I would argue that feeling was a mirage," Khater said.
This story was first published on August 17, 2011 by the Chicago Tribune.