Monday Morning Cup of Coffee: What will the end of Fannie and Freddie look like?

Not even the experts agree

Monday Morning Cup of Coffee takes a look at news across HousingWire’s weekend desk, with more coverage to come on bigger issues.

Last week Ed DeMarco, the former acting director of theFederal Housing Finance Agency, wrote in the Wall Street Journal that in his opinion, it is time to put an end to Fannie Mae and Freddie Mac.

Here’s how that might go down:

One reason for the conservatorships in 2008 was that the country lacked a viable secondary market without them. The common securitization platform introduced by FHFA in 2012 will fix that by creating the operational infrastructure for other firms to issue mortgage-backed securities equivalent to Fannie and Freddie’s. That will enable Congress to end the conservatorships and replace the Fannie-Freddie model.

David Stevens doesn’t agree. He’s president and CEO of the Mortgage Bankers Association, but more than that, he worked as an executive at Freddie and served as the Assistant Secretary of Housing and Federal Housing Commissioner in the midst of the housing crisis. He’s also a veteran of the lending business.
Here’s a little of what he says.

The most important element here is to recognize that conservatorship is not a long term solution, and in the current state may be the riskiest position of all….

The role the GSEs play in supporting an affordable and sustainable housing finance system is absolutely critical to this nation….

Some might argue that this function could be replicated by other parties, private capital alone, or some new model. The fact is we need some form of government entity in the mortgage market.  Investors don’t like uncertainty – this why the vast majority of them will not buy any mortgage security that is not explicitly backed by the US Government.

To read the whole blog which includes his recommendations of what should be done to get the GSEs out of conservatorship — and you should read it — click here.

That’s a view of the GSEs’ future. What about the FHFA’s now? Ed Pinto, co-founder of the American Enterprise Institute’s International Center on Housing Risk, says the FHFA’s new mandates for Fannie and Freddie regarding its affordable housing policy initiatives is doubling down on failure.

“For more than 50 years, U.S. housing policy has relied on looser and looser mortgage lending standards in a misguided effort to promote broader home ownership and accomplish wealth accumulation, particularly for low-income households,” Pinto says.

And for nearly half that time, Fannie Mae and Freddie Mac have been required to meet low-income housing mandates.

“These misguided efforts have achieved neither goal—the U.S. home ownership rate is no higher today than it was in the early 1960s and low-income households (those in the 20th to 40th percentile of the income distribution) had a median net worth of only $22,400 in 2013, the lowest inflation-adjusted amount in any of the Fed surveys dating back to 1989,” Pinto says.

He says that simple economics explains why FHFA’s affordable housing mandates are doomed to failure. Research as far back as the 1950s has shown the liberalization of credit terms creates demand pressure that easily becomes capitalized into higher prices when undertaken in a seller’s market.

“As Einstein noted, insanity is defined as doing the same thing over and over again and expecting a different result,” he says.  “The affordable housing mandates should be abandoned.”

Pinto believes that housing finance needs to focus on the twin goals of sustainable lending and wealth building.

“The new Wealth Building Home Loan that Stephen Oliner and I developed does exactly that.  It offers a safer and more secure path to homeownership and financial security than the slowly amortizing, government guaranteed, 30-year mortgage,” Pinto says.

Speaking of the GSEs, how do things look on the mortgage bond investment side? Things are changing.

“Our neutral for securitized products and agency MBS since early May has been a little painful: spreads have widened more than we expected. Looking back, our mistake was to think that the Fed would have dialed back the tightening rhetoric by now and more forcefully maintained its inflation goals,” says Chris Flanagan at Bank of America/Merrill Lynch. “At this point, with real rates higher, breakevens lower, and securitized products spreads wider, it is too late to capitulate and move to an underweight across the board: the damage is largely done.

At a minimum, Flanagan says in a client note, we are a lot closer to the point where theFederal Reserve will once again have to assert itself on its inflation goals. When, or if, that happens, a sharp reversal in risk assets seems likely.

“The bad news, though, is that more pain on long positions in risk assets is probably needed before the Fed takes that step, which may not happen for another month,” Flanagan says. “For that reason, we move to a tactical underweight in securitized products credit exposed to new issue supply pressure, including CMBS, non-agency MBS, lower-rated CLOs and esoteric ABS. We stay neutral on agency MBS, on-the-run ABS and AAA CLOs, which we think will be somewhat more resilient.”

What happen when a columnist for Tribune puts 25% down on a house, but has $300 in unpaid parking tickets?

He doesn’t qualify for a mortgage, that’s what.

Stephen Moore moans about his frustration here:

My situation was doubly frustrating because I’m making a 25% down payment on the house. Researchers have examined huge samples of the portfolio of defaulted loans during the 2007-09 housing crisis. Virtually all the defaulted loans had low down payments, with many having less than 5% down, thanks to government “affordable housing” mandates.

The problem here is that Moore is sticking with big banks to make this loan. What would be really interesting is if he went to one of the nonbank lenders proliferating in the mortgaeg space right now. Or how about the Bank of Internet, crushing it with purchase mortgage originations lately.

Moore then closes with the aforementioned Pinto study and posits that his tax dollars go to helping lower income families get homes, but do little to help him out. It’s a fair point, sure, but talk to us when you’ve paid your parking tickets, pal.

On Tuesday we’ll hear from the FHFA — not on mandates and conservatorship, but on June’s home prices. Analysts expect the FHFA house price index to post a third straight solid gain of 0.4%. This report has been showing some strength in contrast to S&P/Case-Shiller data, which have been soft.

Simultaneously on Tuesday, we’ll get the Case-Shiller home prices for June. Another month of disappointment is expected for Case-Shiller where the adjusted monthly gain for the 20-city index is seen at only 0.1% in June. This, however, would be an improvement from the 0.2% decline in May and no change in April.

No banks closed the week ending Aug. 21, according to the FDIC.

Fannie Mae economic outlook for the second half of 2015 less upbeat

2Q GDP drop, China drive headwinds but should slow interest rate growth

The first print of second-quarter economic growth was weaker than expected, and its composition presents a less optimistic outlook for the rest of the year, according toFannie Mae’s Economic & Strategic Research Group.

The federal government’s upward revision to first-quarter growth was essentially offset in the second quarter, due in large part to a drop in nonresidential investment in equipment and structures.

Fannie’s researchers say that these factors, coupled with continued headwinds from a strong dollar and renewed declines in crude oil prices, are expected to continue to pose challenges in the current quarter, although consumer and government spending will likely provide support.

Housing is expected to contribute to 2015’s growth, with year-to-date main housing indicators staying well above year-ago levels.

“While consumer spending growth picked up as we expected in the second quarter of this year, other components disappointed,” said Fannie Mae Chief Economist Doug Duncan. “On balance, our full-year growth outlook remains unchanged from the prior forecast at 2.1%.

“We hold by our previous comments that income growth still needs to strengthen, particularly for younger households, in order to drive significant housing growth, but we are nonetheless seeing some positive improvements in the housing sector,” said Duncan.

Home sales have trended up and inventories are lean, supporting strong home-price appreciation, Duncan says.

“That price growth, driven by laggard supply response, helps build equity for existing owners but is a headwind for first-time buyers,” he says.

But given significant uncertainties from Greece and China — as evidenced by the red ink on Wall Street today — along with continued global monetary easing, and an expected slow pace of monetary tightening by the Fed, Duncan says he anticipates mortgage rates to rise only gradually through next year, which should continue to help support mortgage demand.

Home sales reach 8-year highs but what comes next?

Gradually rising rates shouldn’t dampen market

Housing activity has strengthened in recent months, as gains in both new and existing home sales in May pushed total sales up to their highest level in eight years.

Analysts say a combination of job creation growth and an overdue upturn in mortgage lending, along with high levels of consumer confidence should ensure that this strength continues.

But for how long, and what could change it? What’s it mean for the rest of 2015?

“From 5.4 million in 2014, we expect total home sales to average at least 5.7 million this year, before rising to around 6 million by 2017. That would be the strongest performance of home sales in 10 years,” says Ed Stansfield, chief property economist for Capital Economics.

Stansfield says events both domestic and abroad are either good for housing, or won’t have any negative affect.

“The U.S. economy and financial system’s links with Greece are minimal, while exports to the entire EU accounted for just 1.5% of US GDP last year. As a result, further turmoil in the region – even a Greek exit from the euro-zone – is unlikely to throw the economy off course,” Stansfield says. “What’s more, beyond a temporary impact on investor sentiment, the slump in China’s equity market is unlikely to have much effect on the US economy either.”

Indeed, he said, evidence of a second quarter rebound in economic growth is now widespread.

On the issue of the job market, June’s Employment Report looked fairly strong, with non-farm payrolls rising by 223,000 and the unemployment rate falling to 5.3%.

Looking deeper, though, the details were mixed.

There were downward revisions to previous payrolls figures, while the drop in the unemployment rate was largely due to a sizeable decline in the labor force, which shows an underlying weakness.

Then there’s the issue of mortgage rates. Mortgage interest rates have risen steadily in recent months.

At 4.17% on average in June, the MBA’s measure of 30-year fixed mortgage rates was at its highest level since November last year, having increased by around 30 bps in the past two months alone.

But recently, Stansfield noted, Treasury yields have dropped back due to increased safe-haven flows resulting from the crisis in the euro-zone.

“It’s possible that mortgage rates could therefore follow yields lower, at least in the short term,” he said.

Indeed, that’s what happened. Mortgage rates stopped their upward trend and dropped back down due to global uncertainty, the latest Freddie Mac Primary Mortgage Market Survey said.

The 30-year fixed-rate mortgage averaged 4.04% for the week ended July 9, down fromlast week’s average of 4.08%. A year ago, the 30-year FRM averaged 4.15%.

Still, the inevitable rise won’t hit housing too hard, Stansfield argued.

“The 1% point rise in mortgage interest rates will not be enough to cause a significant deterioration in affordability,” he said. “We estimate that the average monthly mortgage payment equates to around 15% of median family income. We expect this to rise to no more than 18% by the end of next year.”

Home purchase applications once again weathered the rise in interest rates by edging up by 1% in June from May’s levels.

“The pace of growth has certainly slowed, and there is still a significant gap between applications and home sales. Nonetheless, the conditions seem to be in place for a more meaningful, sustained upturn,” he said.

For the first time in at least five years, most consumers think that now would be a good time to sell a home, if recent surveys are right.

May home prices nationwide, including distressed sales, increased by 6.3% in May 2015 compared with May 2014, according to the home price report from CoreLogic (CLGX).

This change represents 39 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.7% in May 2015 compared with April 2015.

“Mortgage rates on 30-year fixed-rate loans remained below 4% through May, helping to fuel home-purchase activity,” said Frank Nothaft, chief economist for CoreLogic. “Our homes-for-sale listing data shows that markets with high demand and limited supply, such as San Francisco, are recording double-digit appreciation rates over the past year.”

The surge in the rate of monthly price gains shown by the CoreLogic index at the start of the year always looked odd when the economy contracted in the first quarter and consumer spending was unusually weak, Stansfield said.

Are Millennials sold on using a real estate agent?

Yes, but it’s a close call

Do Millennials, or first-time homebuyers for that matter, want to use a real estate agent? The majority do, but it’s a pretty close call.

This seems to be a reoccurring debate in the market as firms like Zillow (Z) or Redfin start to offer a lot more options in online shopping.

Digital Risk recently conducted a housing survey on Millennials in the housing market, surveying 1,344 Millennials who are between the ages of 18 and 34, distributed nationally by their age, gender and census geography.

The survey asked three telling questions about the role of real estate agents:

  1. Where did you find the home you most recently purchased?
  2. Would you prefer to search for a home through a real estate agent or on your own?
  3. What resources did you find most helpful in your home search?

This first set of charts includes all the responses from Millennials.

Click to enlarge

Digital Risk

Digital Risk

Digital Risk

This second set of charts breaks out respondents who are interested in purchasing a home within the next five years.

Digital Risk

Digital Risk

Digital Risk

Sources: (Digital Risk)

Although the helpfulness and benefit of a real estate agent still wins the majority of these buyers, the gap is narrow.

This article from Yahoo News does a good job explaining the important factors in choosing an agent and lists nine red flags to watch for when choosing one.

Here is just one example of what to watch for: The agent doesn’t know the real estate landscape in your neighborhood.

Finding a neighborhood expert is especially important in areas where moving a block can raise or lower the value of a home by $100,000. An agent who specializes in a neighborhood may also be in touch with buyers who are looking for a home just like yours or sellers who haven’t put their home on the market yet. 

As for why Millennials might not want to use a real estate agent, I think there are cases where it just isn’t necessary.

Before I go on, let me say that I have not purchased a home before, and despite reporting on the housing market daily, there is still a lot I have to learn. I do welcome your advice in the comments. However, I do fit into this survey’s requirements of someone being between the ages of 18 and 34 who wants to buy a home in the next five years.

Right now, it’s a seller’s market in my area and having an agent could make the difference in landing a house or not, especially if they have connections. But what if it was a buyer’s market or I didn’t live in a hot housing metro? Depending on the situation, there is a lot to be gleaned from the Internet. And given the status of the market and my situation, it could persuade someone to not use an agent.

There are a lot of real estate agents who know what they are talking about and have been in business awhile. I simply want to present some reasons for why I see Millennials veering away from that choice.

Look at the facts: We love technology. Approximately 94% of Millennials are active users of online banking, 72% are active users of mobile banking and 92% are active users of social media, an Accenture’s report on the “Digital Disruption in Banking” revealed.

Millennials are changing the face of housing because of what they want and expect.

Yellen reiterates rates likely to increase this year

Will the Fed finally begin normalizing monetary policy?

Federal Reserve Chair Janet Yellen reaffirmed in a speech to The City Club of Cleveland that she still expects it will be appropriate later this year to take the first step to raise the federal funds rate and begin normalizing monetary policy.

“My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting,” Yellen said.

“But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step,” she added.

Back in May, Yellen said in a speech at the Providence Chamber of Commerce in Providence, Rhode Island, that the Fed is seeing widespread economic improvement and expects that improvement to continue. And if the economy improves as expected, she believes it will be “appropriate” for the Fed to raise the Federal Funds Rate this year, which in turn, would affect mortgage interest rates.

Although Yellen noted that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years, there are still a couple factors that could restrain economic growth.

1. First, business owners and managers remain cautious and have not substantially increased their capital expenditures despite the solid fundamentals and brighter prospects for consumer spending. Businesses are holding large amounts of cash on their balance sheets, which may suggest that greater risk aversion is playing a role. Indeed, some economic analysis suggests that uncertainty about the strength of the recovery and about government economic policies could be contributing to the restraint in business investment.

2. A second factor that could restrain economic growth regards housing. While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft. Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing.

So what’s the current status of the Fed?

Looking at the latest minutes from the June meeting of the Federal Open Market Committee, nearly all the committee members and the Federal Reserve are still hesitant to increase the federal funds rate.

Despite signs of economic progress, only one of the 10 FOMC members was ready to increase the federal funds rate during the June meeting.

“The committee concluded that, although it had seen some progress, the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase,” the FOMC minutes stated.

Clear Capital: Housing the second half of 2015 not so hot

Reaffirms this is a “non-growth year”

The housing forecast for the second half of 2015 fails to show any positive data, with trends predicted to go downhill.

According to the latest market report from analytics firm Clear Capital, nationally, the data is more of the same. Data through June looks similar to data through May 2015, with no change in quarterly growth at 0.6% and a slight drop of 0.1% in yearly growth, from 5.3% to 5.2%.

What’s worse is that the best of the year is already past since the spring and summer seasons typically reflect the peak of the housing demand cycle. And 0.6% quarterly growth is a foreboding sign of how the remainder of 2015 may play out, the report explained.

“With a first full look of the spring buying season and six-month update to the forecast, our data through June confirms our initial projection that 2015 would be a non-growth year,” said Alex Villacorta, vice president of research and analytics at Clear Capital.

“In January 2015, we forecasted total 2015 national growth would come in at 1.3%, more than five percentage points from where we ended 2014 at 6.7% national growth. Here we are six months later, and there is very little evidence to change our view that the year will end up with price growth coming in just around the rate of inflation. Our adjusted forecast calls for year-end national growth of 2.6%, falling within our initial projected range of between 1% to 3%,” Villacorta continued.

The numbers don’t look too much better at the regional level, with growth across all regions remaining flat.

Click to enlarge

Clear Capital

(Source: Clear Capital)

In terms of price growth, the West continues to be strongest at 1% quarterly growth, while the Midwest saw an increase in quarterly growth, from 0.1% to 0.3%.

“Along with this flattening across all four regions, distressed saturation fell, as is seasonally expected during the busy buying seasons,” the report said.

The report also gave an update on the tough housing situation going on in San Francisco and San Jose.

The report noted that while San Francisco’s and San Jose’s year-end growth rates are projected to remain positive, at 3.4% and 3.2%, growth for both regions through the second half of 2015 is forecasted to fall into negative territory, at -0.2% and -0.4%.

Why could this become a bigger issue? Well, the bad news comes after the summer buying season and two years of consecutive, yet unsustainable, gains.

“In our June report, we went on record with concern of bubble markets across the U.S. Now San Jose is starting to go the way of San Francisco, at peak levels and now leveling off. Both San Francisco and San Jose have been red hot markets, supported in large part by strong job growth,” said Villacorta.

“The latest numbers reveal, however, that both markets have reached their apex in the most recent upward price swing and are projected to take a slight dip into negative territory through the second half of 2015, by -0.2% and -0.4%. While both markets are projected to have total 2015 yearly growth rates of around 3%, entering winter 2015-2016 on the down side is of great concern. What started as ‘red hot’ at the start of 2014 may end as ‘in the red’ come 2016,” continued Villacorta.

Pending home sales continue momentum in May

Northeast leads as South, Midwest decline

Pending home sales rose less than expected in May but are still at the highest level since 2006.

The National Association of Realtors’ index of pending home sales rose less than expected, by 0.9% to a seasonally-adjusted 112.6.

“The housing market appears to be much improved from the lull across the first three months of the year, with activity picking up markedly. After sideways movement in demand over the past 12-24 months, further improvement in housing will offer welcome support to economic activity,” said Lindsey Piegza, chief economist for Stiffel. “Still, be warned, continued momentum in the housing market is predicated on continued growth in job and income creation. At this point, with earnings growth stagnant at 2% since the end of the recession, consumers continue to face barriers to entry amid an inability to finance a home purchase. In other words, we remain cautiously optimistic.”

The index tracks contract signings, in which a contract has been signed, but not yet closed.

“This is a positive sign that the economy and the housing market are improving,” said Jeff Taylor, managing partner for Digital Risk. “Closed home sales were up in May compared to April by 5.1% — better than expected and an indication that fewer transactions are falling apart due to financing issues.

“On the negative side: month-over-month pending sales rose less than expected in May compared to April — just 0.9% compared to expected 1.1%. This could be an indication that concern over the uptick in interest rates is slowing the housing market. We’ll know if it’s a trend next month.”

Analysts had expected a 1-1.2% increase.

“The steady pace of solid job creation seen now for over a year has given the housing market a boost this spring,” NAR chief economist Lawrence Yun said.

Last week, the association saw a sharp pickup in existing home sales following a decline in April. Sales of new single-family houses in May 2015 were at a seasonally adjusted annual rate of 546,000, which is up 2.2% from April.

“This measure of home sales has been rising steadily since January despite the harsh winter weather. This therefore set up for a solid selling season. The improvement in pending home sales has been supported by a gain in mortgage applications and new home sales,” according to a client note from Bank of America/Merrill Lynch.

“It’s very encouraging to now see a broad based recovery with all four major regions showing solid gains from a year ago and new home sales also coming alive,” Yun said.

Yun does warn that this year’s stronger sales amidst similar housing supply levels from a year ago have caused home prices to rise to an unhealthy and unsustainable pace.

“Housing affordability remains a pressing issue with home-price growth increasing around four times the pace of wages,” Yun said. “Without meaningful gains in new and existing supply, there’s no question the goalpost will move further away for many renters wanting to become homeowners.”

The PHSI in the Northeast increased 6.3% to 93.9 in May, and is now 10.6% above a year ago. In the Midwest the index declined 0.6% to 111.4 in May, but is still 7.8% above May 2014.

Pending home sales in the South decreased 0.8% to an index of 127.8 in May but are still 10.6% above last May. The index in the West rose 2.2% in May to 104.5, and is 13.0% above a year ago.

On Wednesday, July 1, Yun will be sharing his mid-year analysis on the housing market and what to expect for the rest of 2015 in a write-up on NAR Research’s Economists’ Outlook blog.