Who should control Fannie Mae and Freddie Mac? October, 2003 By Jim Woodard A new proposal by the Bush Administration has sparked a sharp controversy within the real estate industry. Seldom has there been such disagreement between the nation’s leading associations. The proposal would move oversight control of Fannie Mae and Freddie Mac, the nation’s two largest suppliers of mortgage funds, from the Department of Housing and Urban Development (HUD) to the Treasury Dept. This would include new program approval authority. To illustrate the difference of opinion on this action, here’s what John Courson, chairman of the Mortgage Bankers Association said in a press release – “MBA supports the administration’s proposal that the Department of the Treasury be given responsibility for safety and soundness regulation of Fannie Mae and Freddie Mac, and that Treasury should have approval authority over their programs and activities to ensure they are consistent with prudent financial management and sound business operation. Our members provide financing directly to borrowers in the primary mortgage market, and are keenly interested in maintaining the safety and soundness of the nation’s real estate finance system.” Here’s what Kent Conine, president of the National Association of Home Builders said about the proposal – “Moving program approval authority for Fannie Mae and Freddie Mac to the Treasury constitutes an attack on the mission of HUD by disrupting the capacity of the two giant mortgage lenders to provide the liquidity and stability needed to keep mortgage credit available at the lowest possible cost to home owners and rental housing providers. HUD’s ability to improve housing opportunities for working families would be severely undermined if Congress were to agree to the Bush Administration plan.” * * * Terror Check of mortgage borrowers implemented Under a provision of the USA Patriot Act, taking effect this week (October 1), lenders must request proof of name, address, date of birth, and Social Security number from people who apply for a mortgage or a home equity line of credit -- even those who have been long-time customers. Lenders are also asked to check mortgage applicants' names against a federal list of terror suspects, report any suspicious individuals or business activities to the feds, and document the steps they take to check out customers. The new law requires lenders to diligently verify identities because the federal government wants to crack down on identity theft and money laundering related to terrorism. Financial institutions had several months to prepare for the terror-checking procedures, but industry reports indicate that some lenders are still training employees and installing monitoring software. * * * What Bubble? Some people are still waiting for the burst of the home value bubble. With mortgage interest rates floating up and down these days, they think the stage is set for a major slide downward of values. That’s very unlikely, according to most real estate industry analysts. The housing market might become somewhat sluggish when interest rates rise, but a crash is a long-shot, according to a recent report on www.RealEstateJounral.com , the Wall Street Journal’s guide to property. “Higher interest rates may put a crimp in the explosive growth in housing, but they are also a reflection of economic recovery,” the report stated. “Growth in the housing market, both from new home sales and higher home prices, has helped underpin growth amid slower activity elsewhere in the economy.” * * * Federal spending impacts mortgage interest rates The interest rate consumers pay on a new mortgage loan, and therefore amount of their monthly payments, is directly affected by economic events – like the recent request by the president for $87 billion to support the post-war military presence in Iraq. First, a little background information for consumers on what determines mortgage rate changes. When a person borrows money from a mortgage lender, he must sign a promissory note promising to repay the loan, and a mortgage note (or deed of trust) serves as collateral for the loan. The bearer of the note (lender) has a legal claim to the property until the mortgage loan is either paid or refinanced. When the lender firm has loaned out all its available funds, it will often raise additional money by selling groups of these notes (mortgage loans) to investors. These investors are referred to as “the secondary market” in the mortgage industry. In order to attract individual investors, secondary market firms must be competitive with similar investment markets. Since a mortgage loan is a long term debt, the Treasury bond market is used as a benchmark for determining appropriate value. Inflation is the primary factor that affects the Treasury bond market and interest rate levels. Treasury bond investors don’t like inflation because it eats away at the value of their investments. When the economy slows down, the threat of inflation is subdued and investors become more comfortable investing in long term debt. So the Treasury bond market rallies (bond prices increase) on weak economic news. When the Treasury bond moves higher an investor is forced to pay more for this investment, so its yield (return on investment) to the investor declines. This usually pushes up mortgage interest rates. Relating this background to our current situation, the president’s request for $87 billion to pay for post-war activities would increase the federal deficit substantially. This would worry those sensitive investors and send Treasury bond rates higher, along with mortgage rates. Some of today’s leading economists are expressing concern that this huge allocation of federal funds could drive interest rates upward by raising borrowing costs for the private sector. The senior economist for the National Association of Realtors, for example, believes it would send mortgage rates up by as much as one full percentage point next year – increasing the payment on a $150,000 loan by an extra $100 per month. * * * Much variety in current mortgage plan offerings Like other sectors of the real estate market, mortgage plans are constantly changing and evolving. In today’s market, there’s a special mortgage available for almost every conceivable situation. And new plans are being continually developed. For example, teachers are often the beneficiaries of special regional or state programs, allowing many of them to qualify for low-interest, low down payment mortgage loans who would not otherwise be able to do so. Such a plan was recently announced in the San Francisco Bay Area. The “Extra Credit Teacher Home Purchase Program” objective is to retain experienced teachers – a high priority endeavor also here in Ventura County. It’s a real challenge in both areas where the median home price is approaching half a million dollars. At this writing, 16 teachers have benefited from the program with loans totally $4.2 million in the Bay Area. Qualified teachers can get a low-interest first mortgage covering 97 percent of a home’s purchase price. The program is administered by the California Housing Finance Agency. This agency has $24 million set aside specifically to help teachers raise a down payment. That’s often the primary obstacle to home ownership. Similar assistance programs are being considered and launched in other states, in the interests of attracting and retaining teachers. Another recent development in the mortgage field is the introduction of the “portable mortgage.” This is a loan that can be transferred from one home to another. The portable loan (sometimes called Mortgage on the Move) is targeted at home buyers who plan to sell their house within a few years to buy another. In these cases, the home buyer is usually best served with an adjustable-rate mortgage, taking advantage of the lower interest rate. Borrowers who want to transfer their mortgage to a more expensive home can either pay the difference in cash or get a second mortgage. If they move to a less expensive home, they can pull the difference out in cash. The loan balance is paid off over the remaining term. A small but increasing number of mortgage lenders offer portable mortgages. Many are reluctant to do so because these loans cannot yet be sold to the secondary market. The lenders have to keep the loans on their own books instead of bundling them together and selling them to investors. * * * Demand up for remodeling project financing One of the most dramatically growing phases of today’s real estate market is the remodeling of homes and major home improvement projects. There’s a growing demand for mortgages to generate funding for such projects. These are often a cash-out refinance loans or a second mortgage loan. During the second quarter of this year there have been more home remodeling projects underway than at any time in the past two years, according to a report from the National Association of Home Builders. And the remodeling business is expected to continue on its upward growth trend for at least the remainder of this year. “Surging home sales, steadily rising home values, and a low-interest-rate environment all contribute to the pickup in remodeling,” said Mike Weiss, chairman of NAHB’s Remodelers Council. “Also, signs of an improving economy and rejuvenating consumer confidence mean the future is looking even brighter for the remodeling industry.” NAHB recently conducted a survey of about 550 professional remodelers, asking about their current and projected business. The results indicated substantial gains in the number of projects this year, and future expectations are now greater than they have been for years. “The current remodeling trend is quite remarkable,” said David Seiders, NAHB chief economist. “Remodelers are registering significantly more calls for bids and commitments for work over the next three months. And there’s more backlogs of jobs in the pipeline than there have been since at least the beginning of last year. That’s a good basis for an optimistic outlook.” | 
