Will Fannie/Freddie Reform Lead to Lower Home Values, More Foreclosures?
Everybody has been talking about the Obama Administration's proposal for the future of housing finance. While the deliberate upon focuses on the virtues or drawbacks of the options laid out in the proposal, fewer population seem to be discussing the impact that the plan could have on home values, home equity, and foreclosures. The proposed reforms lay out three basic options for housing finance reform. In brief, they are:
Will Fannie/Freddie Reform Lead to Lower Home Values, More Foreclosures?
* selection one - a privatized housing finance ideas where the government insures a minuscule estimate of mortgage loans, specifically Fha, Va, and Usda loans.
* selection two - similar to selection 1, except that there would be a ideas whereby the government guaranteed more loans in specific urgency situations.
* selection three - privatized ideas where the government would furnish mortgage aid for the Fha, Usda, and Va for low and medium-income borrowers.
All of the options in the proposal depend upon inexpressive investors to step in for the government when hold for the housing market is scaled back. Presumably these inexpressive investors would query a higher return on their money than the government does. This begs the question: are there truly inexpressive investors who are willing to step up in the absence of the government, and at what rate will they be willing to lend? It is truly hard to say for sure, but one can rest assured that mortgage rates would growth under any of the options outlined in the Treasury's White Sheet.
Generally speaking, there is an inverse connection in the middle of mortgage rates and home prices. As mortgage rates increase, home prices tend to decrease. There is primary discrepancy on how greatly rising rates will impact home values, but it is ordinarily acceptable that there is some correlation there. Mortgage rates have already risen substantially in the last few months, likely due to the rising stock market and what appears to be rising inflation. Last fall, the average rate on a 30 year fixed rate mortgage was 4.17 percent, as of last week it increased to 5.05 percent. We are looking the ensue of rising rates in the Mortgage Bankers Association's Weekly Mortgage Applications surveys.
The growth in rates has caused a steep decline in applications for new mortgages, especially mortgage refinancing. Less applications collate to less query for homes in the near future, which would indicate prolonged weakness in the housing market. The huge furnish of unsold homes in this country, coupled with the lack of query for homes shifts the balance on the furnish and query curves to a lower price point. Nearly every major home price index is reflecting this to some extent or another, CoreLogic has seen home price declines for five consecutive months, Zillow predicts that home values will continue to fall through 2011, and the S&P Case-Shiller Home Price Index reported that home prices are broadly declining, and a housing market double-dip could be confirmed in the spring.
Yet an additional one factor could have an impact on home values going forward: the new risk-retention requirements due to the Dodd-Frank reforms will cause lenders to hold capital reserves equal to 5 percent of all but the safest loans they originate (these safe loans would be deemed "qualified residential mortgages", or Qrms). The definition of what constitutes a Qrm have yet to be determined, but it seems that these loans will likely wish down-payments of at least 20 percent. Any non-Qrm loan is going to have an increased mortgage rate to compensate the lender for the supplementary risk. This will serve to drive up rates for some population even further, which will sell out the pool of possible home-buyers.
So what we have right now is a housing market where prices are declining. New risk retention rules and reduction in government hold for the market will cause rates to rise, putting more downward pressure on home prices. Already 27 percent of homeowners with mortgages have negative home equity. supplementary price declines will drive this estimate up even further, which will in turn cause more and more homeowners to default on their mortgages. Increases in defaults and foreclosures will drag down home prices even further.
While the housing finance model is in desperate need of reform, we need to be sure that any changes are implemented wisely, with an eye on both short and long term ramifications. Saving of the housing sector is vitally prominent to the cheaper as a whole, and the housing sector is presently on life support- removing the hold too early could truly kill the patient.
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