FNMA – This is the first installment in a 3 part series where we are going to delve into some of the causes and effects which led to the great mortgage meltdown and the resulting real estate recession.  We have broken down the 3 parts in this series into yesterday, today and tomorrow.  Basically where we’ve been, where we are and where we might be going.

In this first installment we are going to look into what caused the Mortgage Market Meltdown. FNMA

In the years from 1997 to 2006 the price of the average American house increased by over 124%.  This rise in the value of people’s homes led to the highest increase in net worth of American households over an equivalent time period in American history.  The equity in people’s homes quickly became their major net worth component.  During this time many homeowners made the decision to refinance their homes and pull cash out by increasing the balance of their mortgages.  They used the money obtained from their homes for just about any purpose.  Lifestyle spending was the predominant use of the money from their homes.

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The US Mortgage Market: A look back at the past (Part 1)

The US Mortgage Market: A look back at the past (Part 1)

 

This is the first installment in a 3 part series where we are going to delve into some of the causes and effects which led to the great mortgage meltdown and the resulting real estate recession.  We have broken down the 3 parts in this series into yesterday, today and tomorrow.  Basically where we’ve been, where we are and where we might be going.

In this first installment we are going to look into what caused the Mortgage Market Meltdown.

In the years from 1997 to 2006 the price of the average American house increased by over 124%.  This rise in the value of people’s homes led to the highest increase in net worth of American households over an equivalent time period in American history.  The equity in people’s homes quickly became their major net worth component.  During this time many homeowners made the decision to refinance their homes and pull cash out by increasing the balance of their mortgages.  They used the money obtained from their homes for just about any purpose.  Lifestyle spending was the predominant use of the money from their homes.

Easy credit and the belief that home prices would continue to go up was driving real estate prices higher each month.  The California real estate market was acting very much like the Wild West.  No one thought about consequences and the potential risks they were taking. The thought by many homeowners that home prices would never go down was the word on the street.   During this period the motto was “just about anything goes” and just about everyone got a loan.  If you had a pulse and fogged a mirror then you could get a loan.  If you had bad credit, no problem, there was a loan program for you.  No income, no worry there was a loan for your situation too.  No questions about credit, income or where the borrowers got the down payment.

In 2006 at the height of the real estate market the estimated value of residential real estate in the United States according to the Federal Reserve Board was over 24 trillion dollars.  Written out it looks like this: $24,000,000,000,000.

Loans such as Stated Income and No Doc programs ran rampant.  The acronyms such as SISA, (stated income, stated assets) or NINA (no income, no assets) were available up until 2007.  A new segment of the real estate market was born during this time which became known as the Sub-Prime Market.  These were loans programs that had additional reductions in both credit and income requirements allowing for borrowers to get approved when even FNMA & FHLMC were not willing to lend.

The following loan programs were being advertised and offered by banks and mortgage lenders all across the country:

  • Bad credit loans
  • Poor credit Loans
  • No credit loans

Borrowers who where currently in bankruptcy at the time their loan applications were submitted were also able to get approved.  The only requirements were that they had to dismiss their bankruptcies prior to signing their loan documents.  People in bankruptcy are prevented from signing contracts as any agreements they sign would be void.  So you can say that the banks did have standards, they didn’t want any void loan documents.

Borrowers were granted loans by the big banks and other institutional lenders due to pressure to lend to everyone with the goal of home ownership for everyone.  FNMA (Federal national Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation) which combined purchase the majority of loans funded in this county greatly relaxed their loan purchase standards.

The affects of people that never qualified or should not have been granted financing caused a supply/demand imbalance resulting in pent up demand that led to increase in real estate prices.  When the monthly mortgage payments became too difficult for those granted financing many of their homes fell onto foreclosure.  This situation in the real estate market started the downward slide and led to the worst recession since The Great Depression of 1929.

By 2004 the Federal Bureau of Investigation (FBI) had warned that an “epidemic” in mortgage fraud was taking placed in the mortgage industry at a level never seen before.  This situation was able to be perpetrated due to the relaxed lending underwriting standards.

During 2007 mortgage lenders were forced to initiate foreclosure proceedings on 1.3 million properties.  This was a 79% increase over the foreclosures that were initiated in 2006.  By 2008 over 9% of all mortgages in the country were in some stage of foreclosure.

Just about every bank, mortgage company, credit union and any other real estate lender lost vast sums of money from borrowers defaulting and from the losses from foreclosing on numerous properties.

By 2008 banks and just about every other lender including private lenders suffered substantial losses never before seen in our country.  Many lenders pulled out of the lending business and the ones that were left became very conservative in their lending practices where just about no one could get a loan.

The two major players in the secondary mortgage market are FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation) revised their lending standards.  The two mortgage buyers comprise over ¾ of all residential mortgages annually.  These 2 entitles do not make loans directly to borrowers wishing to purchase or refinance their homes.  What FNMA & FHLMC does is buy loans that are made by banks and financial institutions thus providing them additional capital to allow them to lend to the next borrower who walks in the door.

The way that FNMA & FHLMC controls the mortgage market is through Seller Servicer Agreements that are entered into between each institution that is approved to sell loans to the respective agencies.  The 2 agencies have underwriting guidelines and requirements as to what loan products they will purchase.  So as such the originating banks and institutions adjusted their lending policies to coincide with the loan quality they are able to sell to FNMA & FHLMC.

So when FNMA & FHLMC lowered their underwriting standards and requirement in and around 2003 the banks and financial institutions went along with the reduced, underwriting standards and purchase requirements.  In addition pressure was put on the lending community through the Community Reinvestment Act (CRA).  Another government law that has unlimited power over those regulated.

Part way into the mortgage loan melt down FNMA & FHLMC tightened up their lending standards.  The pendulum swung the other way and the underwriting lending standards were brought to a level where if anyone did want to get a real estate loan were not able to get approved.

The news on the street was property values were dropping, no one wanted to purchase and for the few that did couldn’t get financing.  So what little demand existed went to near zero causing the real estate market into free fall.

An additional negative impact on the mortgage market was from the effect caused by those who either could not afford to purchase or those who could barely afford to purchase but who had the intention to hold onto the properties just long enough to sell for a nice profit.  Well many of these people were left holding the bag when values started to drop at rate where they were just not able to sell prior to their mortgage balances exceeding their property value.  The result was that selling became impossible.

Many of these people also became victims to the mortgage melt down defaulting on their mortgages, going into foreclosure and ultimately losing their homes and having to relocate.  The negative effect on their credit was to be felt for many years.

The Federal government the party who is so often looked at to come and save the day held hearings and set up investigative boards in an attempt to determine what and who caused the mortgage meltdown.  Many programs designed to bail out the banks were put into operation and billions of taxpayers’ dollars were transferred to banks and institutions to shore up their financial situation in an attempt to prevent a run on the banks and further financial calamity.  The government involvement and participation can be argued made the overall situation worse or at least allowed the real estate recession to continue on longer than if things had worked themselves out without government involvement.

In addition to the billions in losses suffered by homeowners and the additional monies lost or squandered by the government led to the largest private and public sector losses in the history of our country.

As an additional insult to injury the state and national economic recession led to a substantial increase in the unemployment rate which let to additional job losses and resulted in additional foreclosures.

In an attempt to find blame citizens and elected politicians rallied around the idea that it was the lending community that was to blame due to their reckless lending policies.  Just about never was the cause of the mortgage melt down thought to be from the irresponsible behavior of the borrowers or from political pressure imposed upon banks and lending institutions.

New regulatory agencies and government bodies were enacted by congress along with billions in expense of operating the new government agencies to oversee the mortgage market.  The changes in the regulatory policies has led to substantial additional costs and reporting requirements for banks and real lending institutions.

In part 2 we will look further into the regulatory changes and the point where the market turned around.

US Home Buyers 2013

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US Home Buyers 2013: Competing Against Multiple Offers

What a difference a year makes. Just a little over a year ago property owners were hard pressed to find buyers to step up and purchase their properties when they made the decision to sell.

Like many other things in life, what is good on one side just might not be as good on the other. What we mean here is if people who currently own real estate make the decision to sell, it’s a good time since sellers will most likely receive multiple offers and should get a good price for the properties they’re selling.

But if the decision is not to leave town or become a renter then the lucky sellers who were so popular with all the buyers must now join the same group of buyers when a property is found that they want to purchase. The chances of having to compete against multiple offers is a real possibly.

Many buyers are aware of this multiple offer situation and often, in an attempt to be the winning bidder, will make an offer to purchase that just might be more than they really wanted to offer – the motivating factor being that they are so tired of walking away as a losing bidder.

Some of the people that work at our company have been involved in multiple bidding situations. Some were great decisions where they benefited from buying a property where the property continued to go up in value, but there are a couple of other people that paid too much when they purchased, since they were the last person to buy just before prices started coming down.

People who invest in the stock market have become very familiar with price fluctuations. Real estate is just like any other commodity on the stock market where the laws of supply and demand dictate prices. Many potential buyers often get caught up in the frenzy of the moment in an attempt to be the winning bidder and put a stop to the difficult task of searching for another property. Sometimes they end up paying too much.

More Buyers than Sellers

According Lawrence Yun, Chief Economist for the National Association of Realtors (NAR), the number of available homes for sale has reached a low that has not been seen since 1999. The percentage of buyers in the market to purchase is up over 40% from year ago. Currently the supply/demand ratio is out of balance. The market now can only be described as a seller’s market.

Many sellers are purposely pricing their homes at prices low enough to prompt buyers to make multiple offers in an attempt to be the winning bidder. The sellers usually benefit from multiple offers from buyers. There are those that believe that low balling the asking price is a manipulative act by sellers and causes buyers to enter into a situation of one upping each other in an attempt to out-maneuver each other with no knowledge as to what actual prices the sellers really want for their homes.

It is so important to take into consideration comparative property sales when making an offer for a near identical property. In addition, the location and condition of the property to be purchased must be taken into consideration when making purchase offers. A bad location will, in most instances, not get better over time and properties that need repairs will cost buyers additional money following the close of escrow. This will actually add to the acquisition price of the properties.

The forces that are currently driving the recent rise in prices and the corresponding increase in buyer’s offers are due to several factors, including:

  • Ultra low interest rates on mortgages
  • Low available of real estate on the market
  • High rental rates
  • Increase in consumer confidence
  • Fear of missing the real estate boat

 

The following 2 charts were compiled by the federal governmental department known as the Federal Housing Finance Agency (FHFA). For some reason this agency has little name recognition but plays a very large role in governing the extension of credit in our country. The Federal Housing Finance Agency is the regulatory body that regulates both FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation). Combined, these two quasi-governmental sponsored entities (GSE) play a part in over 75% of all residential mortgages made in our country annually. The data provided in the past by FHFA has been reliable and as such we are happy to provide the information. We thank the FHFA for allowing us to re-publish the following data.

National Home Price Recovery Strong; Regions Mixed

U.S. house prices rose 0.7 percent from January to February according to data released this morning by the Federal Housing Finance Agency (FHFA). FHFA said this was the fifth consecutive time its seasonally adjusted Home Price Index (HPI) had risen more than a half-point from one month to the next. Monthly prices have not declined since January 2012.

House prices have now increased 7.1 percent over the last 12 months to a level last seen in October 2004. The HPI is now 12.5 percent below the peak it reached in April 2007.

All divisions reported price increases for the previous 12 months but ranging from 1.9 percent in the Middle Atlantic to 14.0 percent in the Mountain division (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico) and 15.3 percent in the Pacific region (Hawaii, Alaska, Washington, Oregon, and California.)

FHFA uses the purchase prices of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac to calculate the monthly index.

As can be seen from the 2 charts real estate prices are going back up.

It has been a long time since the possibility existed where it could cost less to own rather than rent due to record low mortgage interest rates.

With the increase in home prices, sellers who might have not considered selling just might be swayed into putting their properties on the market which should lead to a balancing of the supply/demand ratio. There has been an increase in construction of residential properties and their arrival soon on the market should help further to level out the supply imbalance.

Buyers should consult their real estate brokers or agents to get complete information of all comparative properties when determining a sale price for their homes. Buyers need to make certain that the price offered is not at a price that can be considered “overpaying for the neighborhood.”

Buyers should never lose sight that just a number of years ago billions of dollars were lost by buyers paying too much and when prices fell they ended up owing more than their houses were worth. This situation can have devastating financial consequences.

If a property has been located and it’s apparent there will be or currently are multiple offers then buyers need to do their homework and decide on the highest price they are willing to offer. Make the offer and if it the price offered is not as high as others then stop and look elsewhere for a property to purchase.

Don’t get caught up in the frenzy of the moment and get carried away. Do your homework, take your time and be persistent. The right property awaits you.