Fannie Mae National Housing Survey

The following is from the Fact Sheet regarding Fannie Mae's National Housing Survey. It provides interesting information about the public's feelings of the housing and rental markets.

Fannie Mae National Housing Survey Key Findings
The Fannie Mae National Housing Survey polled homeowners and renters between June 2010 and July 2010 to assess their confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system, and overall confidence in the economy. Findings were compared to a similar survey conducted by Fannie Mae from December 2009 to January 2010 and released in April 2010, and a similar survey conducted in 2003. A news release on the new survey can be found at http://www.fanniemae.com/newsreleases/2010/5155.jhtml.
SURVEY FINDINGS
Housing and the Economy
Eighty-two percent of respondents consider homeownership important to the economy, up two points from January.

Only 30 percent think that the economy is on the right track (compared to 31 percent in January), but 44 percent expect their personal financial situation to improve in the next year.

Delinquent borrowers (57 percent) remain more optimistic about the future than the general population, but they are less confident than they were in January (63 percent).

Seventy percent of respondents think it is a good time to buy a house, up six points from January. This is also four points higher than the 2003 survey – well before home prices peaked – when 66 percent said it was a good time.

More than one in three (36 percent) think now is a very good time to buy a house.

But 83 percent said they believe that it is a bad time to sell a house.

More than three-quarters (78 percent) think home prices will stay the same or go up over the next year, up five points from January, with an average price increase of 0.9 percent.

This includes 31 percent who think prices will increase and 47 percent who feel prices will remain about the same. This is a notable shift from January 2010, when these numbers were 37 percent and 36 percent, respectively.

Eighty-five percent of Americans think home rental prices will stay the same or go up over the next year – 39 percent expect them to go up and 46 percent expect them to stay the same.

Almost half of renters (46 percent) expect rental prices to increase, and respondents expect rental prices to increase by 3.6 percent, on average.

Copyright© 2010 by Fannie Mae Release Date: September 16, 2010 1

Desirability of Homeownership
Sixty-seven percent of respondents said they believe buying a home is a safe investment. However, this is down three points from January and 16 percentage points from the 2003 survey – the largest drop by far among all investment types tracked since then.

This compares to 76 percent who think putting money into a bank account (money market or savings account) is safe, up from 74 percent in January.

In contrast, only 15 percent believe buying stocks is a safe investment, down from 17 percent in January.

Eighty-four percent of consumers believe owning makes more sense than renting, down one point from January.

Among renters, 69 percent believe owning makes more sense, down from 75 percent in January.

Sixty-three percent of all survey respondents would likely buy instead of rent if they were to move, down two points from January.

Respondents cite non-financial reasons such as safety (78 percent) and quality of local schools (79 percent) as driving factors in wanting to own a home, ahead of economic considerations.

Seventy-four percent say they prefer a traditional, fixed-rate mortgage with predictable payments over a floating-rate loan.

Renters’ Views on Renting and Homeownership
The number of Americans who say they would likely rent their next home increased from 30 percent in January to 33 percent in July.

Sixty percent of those who currently rent said they would continue renting rather than buy a house if they were to move, up six points from January.

Forty-four percent of delinquent borrowers said they would rent instead of buy, up from 40 percent in January.

Among renters who would rent rather than buy if they were going to move, 63 percent said they plan to buy a home at some point in the future, down four points from January.

Twenty-one percent of renters said they have decided to delay their home purchasing plans over the past year, compared to 23 percent in January.

Eighty percent of renters believe that they would have to make a financial sacrifice to own a home. Fifty-five percent said it would require “a great deal” of sacrifice, and 25 percent said it would require “some” sacrifice.

State of Consumer Household Finances
Nearly six in ten Americans (58 percent) say their monthly household income has remained about the same compared to a year ago, while 46 percent of delinquent borrowers said their income has declined significantly. Just 19 percent of the general population said their income increased significantly.

Thirty-one percent of all respondents said their monthly expenses are significantly higher than they were 12 months ago, 18 points higher than those who said their expenses declined significantly.

Thirty-three percent of the general population are “stressed” about their ability to make payments on their debts. Forty-three percent of renters and 81 percent of delinquent borrowers say they are stressed – while 53 percent of delinquent borrowers say they are “very stressed.”

Twenty-two percent of mortgage borrowers said they have reduced their mortgage debt significantly over the last year. However, 30 percent of delinquent borrowers have significantly increased mortgage debt during the same period, almost three times as high as non-delinquent mortgage borrowers.

Twenty-one percent of the general population has reduced non-mortgage debt significantly over the last year.

Twenty-seven percent of mortgage borrowers have reduced such debt significantly over the last year, while only 19 percent of delinquent borrowers have done so.

However, non-mortgage debt has increased for 26 percent of delinquent borrowers.

Challenges Facing Homeowners
Fifty-four percent of respondents believe it would be difficult for them to get a home loan today, down from 60 percent in January. However, more than seven in ten (71 percent) think it will be harder for the next generation, up from 68 percent in January.

Survey respondents who said it would not be very easy to get a home loan cited their income (19 percent), poor credit (16 percent), uncertainty about having enough for a down payment (16 percent) and job security (15 percent) as the top obstacles.

The majority (77 percent) of respondents expressed some degree of confidence that they would receive the information they need to choose the right loan if they bought or refinanced a home today, down one point since January. However, only 48 percent said they are “very confident” (compared to 47 percent in January).

Diverging Views on Homeownership Among Borrower Sub-groups
Mortgage borrowers (74 percent) and underwater borrowers (69 percent) are more likely to say owning a home is a safe investment than delinquent borrowers (57 percent) and renters (54 percent). However, this measure has fallen among all sub-groups since January, with delinquent borrowers and renters showing the largest declines, down eight and seven points, respectively.

Mortgage borrowers (83 percent) and underwater borrowers (77 percent) said they are more likely to buy in the future than rent – both groups increased two points from January. The number of renters (37 percent) and delinquent borrowers (52 percent) who said they are more likely to buy in the future declined by seven and four points from January, respectively.

Attitudes about Delinquency
Nearly two in ten consumers (19 percent) know someone who has strategically defaulted, or stopped making their mortgage payments even when they could afford to make them.

Delinquent mortgage borrowers and those in the general mortgage borrower population both are more likely to have seriously considered stopping their mortgage payments if they know someone who has already defaulted – almost twice as likely among delinquent borrowers (40 percent among those who know a defaulter versus 21 percent among those who do not) and more than three times as likely among mortgage borrowers in general (7percent versus 2 percent, respectively).

Eighty-five percent of Americans do not believe it is acceptable for people to stop making payments on an underwater mortgage, while 10 percent believe it is acceptable (up two points since January).

But 19 percent of delinquent borrowers think it is acceptable to walk away from a mortgage (down one point since January).

When asked if financial distress makes stopping payments acceptable, 17 percent of all respondents said yes (up two points since January).

But 38 percent of delinquent borrowers think financial distress makes stopping payments acceptable, compared to 39 percent in January.

KEY FINDINGS AMONG MINORITY GROUPS
Hispanic Housing Attitudes
Thirty-six percent of Hispanics believe the economy is on the right track, up three points from January. In comparison, 30 percent of the general population believes the economy is on the right track.

Fifty-eight percent of Hispanics expect their financial situation to get better over the next year, 14 points higher than the general population.

However, 59 percent of Hispanics view a home as a safe investment, down from 64 percent in January. This compares to 67 percent of the general population.

A large majority (70 percent) of Hispanics cite the perception that a home is a good retirement investment as a major reason to buy, compared to 58 percent of the general population.

Even more Hispanics (76 percent) said that owning a home is a good way to build up wealth that can be passed along to their families, compared to 58 percent of the general population.

Fifty-one percent of Hispanics think that owning a home is a symbol of one’s success or achievement, and cite it as a major reason to buy, compared to 31 percent of the general population.

Seventy-two percent of Hispanics think that obtaining a home mortgage today would be difficult, but this is down four points since January.

African-American Housing Attitudes
Almost one out of every two African-Americans (48 percent) thinks the U.S. economy is on the right track, compared to just 30 percent of the general population.

Seventy-one percent of African-Americans expect their personal finances to get better over the next year, compared to 44 percent of the general population.

Fifty-nine percent of African-Americans view a home as a safe investment, down from 63 percent in January and compared to 67 percent of the general population.

Sixty-two percent of African-Americans cite the perception that a home is a good retirement investment, and cite it as a major reason to buy, compared to 58 percent of the general population.

Even more African-Americans (75 percent) said that owning a home is a good way to build up wealth that can be passed along to their families, compared to 58 percent of the general population.

Forty-four percent of African-Americans think that owning a home is a symbol of one’s success or achievement, and cite it as a major reason to buy, compared to 31 percent of the general population.

Sixty-five percent of African-Americans think that obtaining a home mortgage today would be difficult, down eight points since January.

METHODOLOGY
From June 12, 2010 – July 14, 2010, 3,399 telephone interviews with Americans age 18 and older were conducted by Penn Schoen Berland. This included a random sample of 3,001 members of the general population, including 870 homeowners, 1,020 mortgage borrowers, 900 renters, and 289 underwater borrowers (those who report owing at least 5% more on their mortgage than their home is worth). The overall margin of error for the general population sample is +/- 1.79% and larger for sub-groups.
An additional oversample of 398 random national delinquent borrowers was also polled. The margin of error for the delinquent borrower oversample is +/- 4.91% and larger for sub-groups. Delinquency was defined as not having made a mortgage payment in the past 60 or more days.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.
For more information, visit http://www.fanniemae.com/about/housing-survey-091610.html

Taking Advantage of Low Rates

Unless you live in a cave (no mortgage on that cave), you have heard everywhere that rates are at historic lows. "Lowest Rates in 50 years... 100 years ... since the birth of Christ!" Yes, we all know that rates are really, really low. So what does that do for you?

If you don't already own a home, then it means this will probably be the best home-buying opportunity of your life. Not only have home prices been reduced by 50% (more or less) in the past few years, but the financing rates are lower than anything your parents or grandparents ever witnessed.

Consider this example. A $200,000 home loan may carry a rate today of 4.375% on a 30 year fixed (4.488% APR). A principal & interest payment in this example is $998.57 per month. This same loan with a 7% rate (an fairly average historical rate) carries a monthly payment of $1330.60. That is a 33% increase in payment when the rate is 2.625% higher.
If you or someone you know is in a position to purchase their first home, please call me.

Now, for those of you that already own a home, the obvious way to take advantage of low rates is to refinance. There are three basic strategies to refinancing.

• Lower the monthly payment & improve cash flow.
• Reduce the term on the loan (e.g. 15 year loan)
• Take cash out to pay off other debt or make a large purchase
  

I like to work with my clients to come up with the best strategy that fits their needs. Sometimes their best strategy is to not refinance, and I will often tell clients that. Please contact me to discuss your opportunities.

HOMEOWNERS' REBELLION: COULD 62 MILLION HOMES BE FORECLOSURE-PROOF?

Having been in mortgage lending for 18 plus years, I am familiar with MERS as just a piece of the mortgage business. For those that don't know, MERS is the Mortgage Electronic Registry System which allows for the easy transfer of a mortgage from one party to the next. For example, ABC Mortgage Co funds a mortgage for a homeowner, they can easily sell it to XYZ Investor without recording new assignments with the local recorders office.

Unfortunately for mortgage companies, this has created some legal issues as judges deal with foreclosure proceedings. The problem according to MERS opponents is that it is not clear legally who holds the mortgage. Therefore it is not clear who can foreclose.

HOMEOWNERS' REBELLION: COULD 62 MILLION HOMES BE FORECLOSURE-PROOF?

Taxpayers Supporting Freddie's Gambling Addiction

Caution: This will make you angry.

Yesterday it was reported that Freddie Mac lost $4.7 billion in the second quarter and needs another $1.8 billion injection from the government to keep operating. We expect Freddie and Fannie to be losing money due to all of the mortgage defaults that are still taking place. But let's dig a little deeper into the losses.

Buried in the report are the details of the losses for the 2nd quarter (which are actually improved from the first quarter) and you will see the following:

• net interest income of $4.1 billion
• minus credit losses of $5 billion
  
• minus derivative losses of $3.8 billion
• Net Loss = $4.7 billion
  

How did Freddie lose so much in derivatives? They made massive bets on rising interest rates and lost billions as rates fell from April 1 through June 30. We the taxpayers continue to fund their losses every quarter and gives them $$$ to play the interest rate market and lose more $$$.

If they were a public (or private) company they would be out of business. But now they are in control of the federal government and go to the casino with an unlimited piggy bank, thanks to the American Taxpayer and our elected officials who allow it to continue.

Warning: Trial Loan Modifications can be Hazardous

The failure of the government's loan modification program, Home Affordable, has made a lot of news lately. Only a fraction of the anticipated number of homeowners have truly benefited from the program. Why do so many people start the mortgage modification process and end up getting denied or canceled? What are the hazards of getting involved in a trial modification?

Trial Modifications
About a year ago, under tremendous pressure from the government and consumer groups, home loan servicers (primarily the big banks) started using trial modifications in order to get more homeowners started in the loan modification process. Because of the mammoth volume of requests for modifications (Bank of America was receiving over 80,000 calls a day at the peak) servicers started homeowners on trial modifications, or temporary modifications, while they began processing and underwriting the homeowners qualifications for a permanent modification.

Often times the processing time to determine if a homeowner takes many months, up to a year. Meanwhile the homeowner continues to make trial modification payments at an amount lower than the payment on their mortgage note. The homeowner assumes if they make their trial payment on time, they will be approved for the permanent modification. They don't realize that homeowners are often denied a permanent modification regardless if they make all of their trial payments on time. Most of the time the reasons for denying a modification relate to the borrower making too much, or too little income.

Something has been happening as they have been making those lower, trial payments. The homeowner has been accumulating a past due balance for the difference between the note payment and the trial payment. The longer the trial period, the bigger that past due balance becomes.

Putting Homeowners in a Hole
Take the example of Stacey. She started a trial modification with Wells Fargo in August of 2009. She was told it would be a three month trial. She made all three months on time, but Wells Fargo was behind, presumably dealing with hundreds of thousands of other homeowners. So Stacey continued to make the trial payments as directed by Wells Fargo. Finally in July of 2010 she received notice that her modification request was declined because she didn't make enough money. We'll ignore the point at this time that Wells Fargo did not calculate her income correctly. So they sent her a letter letting her know she has to start making her note payment again. They also mentioned in the letter that Stacey had to immediately pay the past due balance of over $8,000. "Past due? But I made all of my payments on time," Stacey thought. Yes, but now she owes the difference between the trial modification payments and her note payments over the past 11 months. And she owes it now. According to the letter she must pay it now or face foreclosure.

Be Careful with Trial Modifications
The servicers need to be aware of the hole they are putting homeowners in when they start them on a trial modification. Likewise, homeowners that are on trial modifications need to take advantage of the lower payment and save some money each month so that if their request for modification is denied, they can pay the past due balance.

Immigration Policy & Real Estate

Nothing has been in the news more in Arizona recently than SB1070. In case you have been living in a cave, I am referring to an immigration enforcement law recently passed in Arizona that goes into effect on July 29. The law requires local law enforcement authorities to question individuals who have been stopped for an infraction and are suspected of being in the country illegally to show identification authorizing them to be in the country. This article will not debate the politics, the effectiveness, or the constitutionality of the law. My interest is in how the law will affect (or not affect) real estate in Arizona. So I will let others argue whether the law is racist and unconstitutional, or whether it is simply the state trying to enforce what the feds have failed to enforce.

What Drives Real Estate Growth?
Growth in real estate, whether in the form of increased home sales or rising values, necessitates a growing population. Arizona real estate has benefitted over several decades from the domestic migration from colder U.S. climates to the Sunbelt. That growth led to spectacular new home starts and rising home values from the early nineties through 2006. The overall economy sailed on a wind driven much by the real estate market.

A great deal of that growth took place beginning in 2000. From 2000 to 2007 the illegal immigrant population in Arizona is estimated to have grown by 70% according to a study by the Department of Homeland Security, while nationally that figure was only 37%. Illegal immigrants have to live somewhere, so they must also contribute to the real estate market. Many rent homes or apartments, which drove up rents and consequently increased property values. Many also purchased homes and even obtained mortgages with falsified identification. While illegal immigrants can’t claim to be the primary source for the rise (and eventual fall) of the real estate market, their impact shouldn’t be ignored.

This impact is more apparent in neighborhoods that are primarily Latino like the Maryvale neighborhood of west Phoenix and Glendale. Many illegal residence simply abandoned homes that they rented or had purchased when they made a decision to leave Arizona.

Why Are Illegal Immigrants Leaving?
Immigrants have been leaving Arizona for a couple of years. It started well before SB1070 was signed into law. In fact that law isn’t scheduled to go into effect until later this month. In 2008 about 100,000 illegal immigrants (18%) left Arizona according to DHS. If most of the illegal immigrants came across the border for higher paying jobs, it only makes sense that they leave when those jobs are no longer available.

The decline of a real estate and construction dependent economy began in late 2006, and was free-falling into 2007 and 2008. The result, the jobs held by many illegal immigrants simply vanished. Compounding the issue was another law that was passed in 2007, the Legal Arizona Workers Act. This law focused on employers that were hiring illegal workers. It placed very stiff penalties, including the loss of a business license, for those employers that knowingly hired illegal workers. While very few companies have been prosecuted under the law, it appears that employers have decided not to take the risk of losing their business.

One would think that Arizona’s dependence on real estate would result in a higher unemployment rate than the rest of the nation. Instead Arizona has been at or below the national unemployment rate in this recession. In fact the Phoenix metro area had 8.7% unemployment in May while the U.S. unemployment rate was a full point higher at 9.7%. I can only speculate that is because the Arizona workforce has shrunk as illegal immigrants choose to leave as their jobs disappeared.

SB 1070’s Impact
The most recent immigration legislation in Arizona does not appear to contribute to any population increase, nor is it designed to. It is designed to do exactly the opposite, at least in the short term. Proponents believe it will lower entitlements, thereby lowering government spending and keep tax rates low. That should provide a fertile ground for business growth and population, a longer term view.

The national and international attention for Arizona and this debate is extraordinary. The attention however has been mostly negative. The opponents of the law focus on racism to make the debate appear Anglo versus Latino. Not a good image for Arizona. Proponents of the law focus on the problems and crime associated with illegal immigration: drug and human smuggling, kidnapping, and executions. Also not a good image for Arizona. This recent immigration debate is not helping the cause to persuade people to move to Arizona.

Conclusion
In the short term it appears that SB1017 is hurting our real estate market. Immigrants that haven’t already left may choose to, creating more vacancies. In addition, a poor image of Arizona is being portrayed by both sides of the debate.

The long term consequences depend on what happens next. We will have to wait and see if Congress will pass any meaningful legislation for immigration reform. The law also faces court challenges including a suit from the U.S. Department of Justice. Interestingly, in this lawsuit my federal tax dollars will be applied to the plaintiff side while my state tax dollars will contribute to the defense.

How can immigration policy help the Arizona real estate market? Real estate growth needs population growth. Therfore it can be positively impacted by policy that allows for an increase in LEGAL immigration, specifically legal immigration from Mexico.

Oh Canada! Let's Not Get Carried Away

A couple of weeks ago an article in the Wall Street Journal compared Canada's mortgage market to the U.S. The point of the article was that home loans for our neighbors to the north are more conservative than in the U.S. which is why they did not experience the bursting of the housing bubble.

The same conclusion was reached by reporters on CNBC this morning as they praised Canada's home loan system for a variety of reasons (CLICK HERE for a link to the story). Why do people believe Canada is superior to the U.S. when it comes to mortgage lending?

The Numbers

While 9.5% of U.S. homeowners were 3 months or more delinquent as of March, in Canada the ratio is only 0.44%. The latter number is superior, but not surprising when in is noted that subprime lending hardly even existed in Canada. Even though it was (and still is) tougher to qualify for a mortgage in Canada, the homeownership rate is roughly the same as ours, 68%.

The Lenders

Who is doing the lending in Canada makes a difference. In the U.S. most mortgages are originated by mortgage bankers, securitized and sold on the secondary market. Government guarantees on most mortgages add to the liquidity of our markets. In Canada most home loans are originated by banks and kept in the banks' portfolios. The bank makes the loan and retains the risk. Therefore the banks are very cautious about the loans they will approve.

The conclusion one may take from the story is that traditional bank lending is good, and securitization of mortgages is bad. That is an under-informed conclusion.

Consequences

Another important factor is that all of Canada's home loans are recourse loans. This means that in the event of a default, the borrower is accountable to the bank for any losses incurred as a result of the default. In the U.S. laws related to recourse vary by state. For example in Arizona, the lender may only sue the borrower for a deficiency in a select set of circumstances.

Since Canadians know they are on the hook if they default, they are more apt to find a way to make their payments on time.

Other Side of the Coin

So are Canadian mortgages better than U.S. mortgages in every way? Absolutely not. There is a major downside that was not even mentioned in the CNBC story - There are no fixed rate home loans in Canada.

With all of the negative talk about the securitization of mortgages, it is often overlooked that with securitization comes fixed rates. With fixed rates comes stability and financial security for a homeowner.

Banks do not like to lend fixed rates with their portfolio. Why? Because 30 years (and even 15 years) is a long time, and they don't want to be committed to earning a fixed level of interest over that long period of time. A bank's cost of funds (the rate paid on deposits) will vary over time, so the revenue they earn (rate earned on loans) must also vary. That is why bank portfolio loans are almost always carry adjustable rates.

Risk of the Canadian System

Therefore in Canada, since banks provide most of the home loans with their own funds, the most common loan program is a 5 year adjustable rate mortgage (ARM). ARMs are great when rates are as low as they are today. My ARM is under 3%, so my payment is relatively low. But what will happen when rates increase? Mortgage payments in Canada will increase and I suspect more Canadian homeowners will find it difficult to make their payments.

Yes, Canada is better today based on their low level of defaults, but I suspect their mortgage issues may be masked by low rates.