June 16, 2016
Who are Fannie and Freddie?
Realtor.com quoted me in What Is Fannie Mae? And Freddie Mac, for That Matter? It opens,
Whether you are shopping for a mortgage or just occasionally read financial news stories, you’ve probably heard of Fannie Mae. But what is Fannie Mae, anyway? And for that matter, what about her buddy Freddie Mac? While they may sound like a Nashville singer and standup comic, respectively, they aren’t actual people. Rather, they’re oddly cute nicknames for major forces in the mortgage market.
Fannie Mae stands for the Federal National Mortgage Association, or FNMA (FNMA becomes Fannie Mae, get it?). Fannie’s brother organization is Freddie Mac, aka the Federal Home Loan Mortgage Corporation, or FHLMC. In a nutshell, these two government-sponsored enterprises—hybrids of government agencies and private corporations—help thousands of Americans get loans for homes, so it pays to familiarize yourself with what they do in more detail.
How Fannie and Freddie help homeowners
Fannie Mae was born in 1938, during the height of the Great Depression, when about 25% of Americans were defaulting on their mortgages. As part of the New Deal, the federal government created Fannie (followed by Freddie in 1970) to stimulate the housing market by making mortgages more accessible to lower-income borrowers who might not qualify otherwise. So how do they do that, exactly?
For starters, Fannie and Freddie don’t actually make loans—which is why you may have only heard about them in vague terms, since you wouldn’t approach them directly for a mortgage. Instead, these organizations purchase other lenders’ loans on the secondary market, package them (into mortgage-backed securities), and sell them to investors such as hedge funds.
By buying up banks’ loans, Fannie and Freddie essentially flood those companies with cash, which they can then turn around and lend to more home buyers. This, in turn, helps more buyers get homes who might not qualify otherwise.
“They are the behemoths of the housing finance sector, owning or guaranteeing nearly half of all the residential mortgages in the United States,” says David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.
June 16, 2016 | Permalink | No Comments
June 15, 2016
Risks and Rewards of Downsizing
The Deseret News quoted me in Why The Young and Old Are Embracing The Rewards of Downsizing. It reads, in part,
Not very long ago, living with less implied money problems or a lack of professional success.
No longer. From younger and middle-aged professionals to retirees, more people are embracing the rewards of “downsizing” — a term that can mean anything from ridding yourself of unnecessary possessions to opting for a less spacious home.
“Downsizing your home can make sense,” said artist and designer Pablo Solomon. “You can save on energy costs, insurance, taxes and upkeep.”
But don’t cart stuff out to the dumpster or plant the “for sale” sign in the front yard just yet. First, consider the varied ways that downsizing can streamline your life.
Home, sweet (downsized) home
One of the most ready targets for would-be downsizers is their home. Perhaps they’ve recently retired and want to retire extensive upkeep responsibilities as well. By contrast, younger people might embrace the greater simplicity that can come from a home that better matches their lifestyle.
But downsizing is not the remedy for other issues, Solomon said, that need a different — and sometimes less costly — approach: “Don’t downsize to be part of a trend or fad or to escape depression or make a ‘statement,’” he said.
Approach downsizing your home as you would any sort of housing decision. Consider space, amenities and any associated costs — only from a particularly budget-conscious perspective.
“Think about the long-term needs you will have for the next 20 to 30 years. Don’t select a place to live temporarily — the costs of moving are high and the cost of buying and selling homes is also high,” said Linda P. Jones, host of the “Be Wealthy & Smart” podcast. “Think before you make a decision and be sure about the move you are making so you won’t have to do it again.”
Another way to approach downsizing a home is what Jodi Holzband of the self-storage search website Sparefoot referred to as “rightsizing” — beginning with basic living requirements and, from there, thoughtfully adding on those features that are of genuine importance.
“Focus first on your needs — essential living items like your bed, clothing and toiletries,” she said. “Then focus on what you love or value — the touchstones of life such as pictures, memorabilia from home, vacation souvenirs, high school pennants and varsity jackets. Look to the space you have and limit what you take in this second category based on space.”
Lastly, don’t ignore possible tax consequences of moving into a smaller space. For instance, retirees who have owned a home for a long time may have acccumulated a great deal of equity. As David Reiss, a professor of law at Brooklyn Law School, noted, capital gains that exceed a certain amount (generally, $250,000 for one person, $500,000 for a married couple) are taxable. Check with a tax professional to gauge your situation.
June 15, 2016 | Permalink | No Comments
June 14, 2016
Student Debt And Homeownership
The National Association of Realtors, along with SALT, a consumer literacy program provided by American Student Assistance, released the results from a joint survey about student debt and homeownership. They found that “Seventy-one percent of non-homeowners repaying their student loans on time believe their debt is stymieing their ability to purchase a home . . ..” They have also produced a cool infographic to illustrate their main points:
- Nearly a third of current homeowners (31 percent) in the survey said student debt is postponing plans to sell their home and purchase a new one.
- A little over a majority of those polled (52 percent) expect to be delayed by more than five years from purchasing a home because of repaying their student debt. One in five anticipates being held back three to five years as well as over 60 percent of baby boomers. Not surprisingly, those with higher amounts of student loan debt and those with lower incomes expect to be delayed the longest.
- Mirroring other recent data on young Americans being more likely to live with their parents than in any other living situations, almost half (46 percent) of young millennials polled currently live with family (both paying and not paying rent).
- 42 percent of respondents indicated student debt delayed their decision to move out of their family member’s home after college.
I am not convinced that SALT President John Zurick is right when he says, “It is imperative to the nation’s economy that we find immediate and practical solutions to financially empower the 43 million Americans with student debt.” I think SALT and NAR are also overselling their findings somewhat in their press release headline, New Evidence Links Student Debt with Inability to Purchase a Home, because the survey reports subjective beliefs and does not offer any kind of baseline from which we can measure this current snapshot of consumer sentiment.
That being said, there has been a lot of concern about the relationship between student debt and household composition recently. It is certainly worth trying to understand the relationship between all different forms of debt and how they expand and limit choices available to households. And whatever the limitations of this NAR/SALT study, I have no doubt that the system for financing higher education needs an overhaul for its own sake as well as for the impacts it has on other choices that households make.
June 14, 2016 | Permalink | No Comments
June 10, 2016
The High Cost of Living in NOLA
Occupy.com quoted me in For Struggling Renters in New Orleans, Hope May Be Coming A Bit Late. It opens,
Twenty-four-year old Stuart Marino is a finance major at University of New Orleans with $8,000 in student loan debt and 33 credit hours until graduation. But the alternative to obtaining that diploma is worse. As statistics show, those not having a college degree are much more likely to remain poor. Marino was not fortunate enough to have been born a decade earlier. Then, tuition at UNO was half of what it is now. During Republican Governor Bobby Jindal’s term, from 2007 to 2015, tuition at Louisiana public colleges skyrocketed due to massive budget cuts.
Despite having a job, Marino says he spends more than 30 percent of his income on rent and utilities. He would not be able to cover the cost of a $1,000 medical emergency. Indeed, he has delayed getting his car fixed, something vital to reaching his job and school.
“Fixing my car would be something I would be doing with that $700,” he said, referring to the monthly rent.
Marino’s story personifies what many people here and nationwide have experienced over the last decade as rents in cities and even in urban areas of less than 1 million have soared, exacerbating income inequality while disproportionately affecting racial minorities, the less educated and millennials.
In the last year alone, rents in the U.S. have increased 3 percent, according to Apartment List. In New York City and San Francisco, the median rent has climbed to $4,500 and higher. The cost of living in these cities can be understood as the price, however astronomical, of living in one of the country’s major economic centers, where industries like finance and tech pay high salaries.
But in smaller cities such as Miami and New Orleans, both of which count on tourism as a major source of revenue, more than a third of residents devote 50 percent of their monthly income to rent and utilities, according to Make Room, a campaign by the non-profit Enterprises Inc. that aims to create more affordable housing.
Factor in stagnant wages, a low supply of multi-unit housing, and higher credit requirements post-Recession, and the number of Americans paying 30 percent or more of their gross income on rent and utilities has risen by 22 percent in the past decade. This goes against what financial experts recommend: that people spend no more than 30 percent on basic monthly costs in order to have a cushion in case of catastrophic events like a job loss or a medical emergency.
Working harder is, in most cases, not an option. According to last month’s Bureau of Labor Statistics report, the number of Americans involuntarily working part-time has reached 6 million, and is showing “little movement since November.”
The Housing Crisis in New Orleans
New Orleans has undergone many changes since Hurricane Katrina devastated the city in August 2005. And not all of them have been positive. Sociological studies show that renters are more likely to remain displaced than homeowners. In areas of the city like the Lower 9th Ward, where most residents rented, fewer have returned since Katrina than in neighborhoods where home ownership was predominant – even including those areas that flooded. For those who have returned with few economic resources, many face a long wait for housing; according to the Housing Authority of New Orleans, in September 2015 more than 13,000 people, disproportionally African-American, were still waiting for housing vouchers.
Changing the current housing reality is akin to shoring up the foundation of a home; it can be done, but not easily. “Fundamentally, building housing is costly,” David Reiss, a professor at Brooklyn Law School and an expert in real estate and community development, told Occupy.com.
A free market economy incentivizes people to invest in something only in exchange for profit. That leaves the job of providing affordable housing up to government, but municipalities have moved away from programs establishing dense urban public housing.
Reiss pointed out that vertical expansion could alleviate high rents in urban areas. But many residents, particularly those in historic neighborhoods, don’t want to see large buildings built in their neighborhoods; it’s a NIMBY, or “not in my backyard,” conundrum.
June 10, 2016 | Permalink | No Comments
June 9, 2016
Building Emergency Funds
MainStreet.com quoted me in Here’s How to Build a Sturdy Household ‘Cash Crisis’ Fund. It reads, in part,
Americans aren’t big on emergency savings funds: only four in ten U.S. adults have one, according to a 2015 study by Bankrate.
But if your Jeep Cherokee needs $1,000 worth of transmission work, or you need to cover a $6,500 health care plan deductible in a medical emergency, a household rainy day fund may be one of the best insurance policies you’ll ever own.
Before we get on the path to starting a savings fund quickly and effectively, understand first that an emergency fund and a rainy day fund are two different animals. A rainy day fund is smaller in size than an emergency fund: whereas $1,000 might form a good rainy fund, a decent-sized emergency fund should have between $3,000 and $10,000 in cash.
The key to building both, however, is similar – just get started.
“Jump start an emergency fund with a windfall like a tax refund, profit sharing check, stock sale, or an inheritance,” says Sharon Marchisello, author of the book Live Cheaply, Be Happy, Grow Wealthy.
* * *
Once you have accumulated a decent-sized emergency fund, don’t take the experience for granted.
Building the perfect emergency fund calls one part diligence, one part creativity, and one part patience. Put all three together and sleep easier at night as your safety net fund grows accordingly.
June 9, 2016 | Permalink | No Comments
June 8, 2016
What If . . . Fannie and Freddie Imploded?
So, I was spending some quality time with the Federal Housing Finance Agency Office of the Inspector General’s most recent Semiannual Report to the Congress. The Federal Housing Finance Agency (FHFA) is the regulator of Fannie and Freddie as well as their conservator. Essentially, the FHFA calls all of the shots for the two companies.
It got me to wondering, does the Office of the Inspector General really have a handle on whether Fannie and Freddie are in good shape or not? The report opens with a Snapshot of OIG Accomplishments. The Snapshot contains the following categories:
- OIG Investigations Monetary Results
- Judicial Actions
- Hotline Contacts
- Audit and Evaluation Reports Issued
- White Papers Issued
- Office of Compliance and Special Projects Reports Issued
- Nonmonetary Recommendations Made
- Regulations Reviewed
- Responses to Requests Under the Freedom of Information Act
As I read through the report, I had the distinct feeling that I had got lost among the trees of bureaucratic oversight and had lost sight of the contours of the Frannie forest.
I want to know one thing — are the two companies solvent and will they be solvent for the foreseeable future? The OIG’s Snapshot is pretty backward facing and focuses on a lot of pretty minor issues, like counting hotline contacts, instead of focusing on the fundamentals.
I know, I know — if we can measure something, then we want to share it with the world, but the Snapshot actually decreases my faith that OIG and FHFA are taking care of the entire forest and not just a few of the trees they were able to measure.
That being said, the report does get to some of the important issues later on. It acknowledges that
Since September 2008, FHFA has administered two conservatorships of unprecedented scope and undeterminable duration. Under HERA,the Agency’s actions as conservator are not subject to judicial review or intervention, nor are they subject to procedural safeguards that are ordinarily applicable to regulatory activities such as rulemaking. As conservator of the Enterprises, FHFA exercises control over trillions of dollars in assets and billions of dollars in revenue, and makes business and policy decisions that influence and impact the entire mortgage finance industry. For reasons of efficiency, concordant goals with the Enterprises, and operational savings, FHFA has determined to delegate revocable authority for general corporate governance and day-to-day matters to the Enterprises’ boards of directors and executive management. (10)
The OIG clearly understands what is at stake in the conservatorships. But as I read the remainder of the report, I did not see sufficient emphasis on the range of risks that Fannie and Freddie face, such as hedging risk and operational risk. Hopefully, someone at the FHFA is paying sufficient attention to the range of risks the two companies face. If not, we can expect a new type of crisis down the pike.
June 8, 2016 | Permalink | No Comments
June 13, 2016
Mortgage Market Overview
By David Reiss
The Urban Institute’s Housing Finance Policy Center issued its May 2016 Housing Finance at a Glance Chartbook. This monthly report is invaluable for those of us who follow the mortgage market closely. The mortgage market changes so quickly and so much that what one thinks is the case is often no longer the case a few months later. This month’s report has new features, including Housing Credit Availability Index and first-time homebuyer share charts. Here are some of the key findings of the May report:
It is worth wrapping your head around the size of this market. Total American wealth is about $88 trillion, so household equity of $13 trillion is about 15 percent of the total. With debt and mortgages at $10 trillion, the aggregate debt-to-equity ratio is nearly 45%.
This private-label securitization total is a pale shadow of the height of the market in 2007, back to the levels seen in 1999-2000. It is unclear when and how this market will recover — and the extent to which it should recover, given its past excesses
The federal government, through Fannie Mae, Freddie Mac and Ginnie Mae, is insuring 69 percent of originations. Hard for me to think this is good for the mortgage market in the long term. There is no reason that the private sector could not take on a bigger share of the market in a responsible way.
It is pretty extraordinary to see the extent to which ARMs change in popularity over time, although it makes a lot of sense. When interest rates are high and prices are high, more people prefer ARMs and when they are low they prefer FRMs.
It is hard to pinpoint the right level of credit availability, particularly with reports of 1% down payment mortgage programs making the news recently. But it does seem like credit can be loosened some more without veering into bubble territory.
Hard to keep up with all of the changes in the mortgage market, but this chartbook sure does help.
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June 13, 2016 | Permalink | No Comments