5 Reasons to Loosen Rules for Investors & Underwater Owners

A plan to jump-start housing
By Jack Guttentag
Inman News™

Share This Editor's note: This is the third in a three-part series.

Previous articles in this series argued that, absent a liberalization of Fannie Mae and Freddie Mac lending terms, a second round of home-price declines was very likely. Renewed price declines would have a devastating effect on homeowners and the economy, and would also increase Fannie and Freddie losses on both old and new loans.

This makes the liberalization of lending terms a requirement of responsible conservatorship.

The changes needed include a rollback of risk-based price adjustments to where they were before the financial crisis, and relaxation of misguided underwriting rules.

Previous articles focused on the need to modify rigid affordability rules, eliminate income documentation requirements for sterling borrowers, and eliminate the requirement for property appraisals on purchase transactions. This article identifies a few more.

Liberalize lending terms and remove restrictions on loans to investors

Investors buy houses to resell or to rent rather than to occupy. During the go-go years, investors bought houses to resell at a profit, and in the current depressed market they are buying houses either to sell or to rent until the market improves.

Laurie Goodman has shown how important investors are to restoring a supply-and-demand balance in the current market. The problem is that there are fewer investor loans now, when we need them, than there were before the crisis -- when we didn't need them.

The major barrier to additional home purchases by investors is the onerous rules imposed on investor loans by Fannie Mae and Freddie Mac. In September 2006, Fannie Mae charged 1.5 to 2.5 points extra if the borrower was an investor rather than an occupant, and investor loans could be up to 90 percent of property value. Today, the price increment is 1.75 to 3.75 points, and the maximum loan is 85 percent of property value.

Fannie and Freddie also limit the number of loans that any one investor can have to four, with up to 10 allowed under more restrictive lending terms. This restriction has the effect of limiting the home investor market to small players.

The higher prices, lower maximum loan-to-value ratios, and limits on the number of loans an investor can have are all counterproductive in the current environment. Investor activity would be stimulated if 90 percent loans were available at a 1 point price increment and limits on loan numbers were eliminated. When home prices start rising by more than 3 percent a year, the old rules could be reimposed.

Eliminate LTV and appraisal requirements on HARP loans

The Home Affordable Refinance Program (HARP) was designed to make refinance possible for underwater borrowers who are current on their payments and whose loans are owned by Fannie or Freddie. A major problem with the program is a maximum loan-to-value ratio (LTV) of 125 percent, which cuts out a sizable segment of the potential market for no good reason.

I can see why the agencies might have limited the program to borrowers with LTVs above 125 percent. The net loss to the agencies from refinancing is lower for high-LTV loans than for lower-LTV loans because high-LTV loans are more likely to default and lower interest rates will prevent some of these defaults.

The loss to the agencies from refinancing underwater mortgages is the interest loss on loans that would have remained in good standing had the refinance not occurred. This loss is not related to the LTV. The benefit to the agencies is the loss avoided on loans that would have defaulted but don't because of the rate reduction. This benefit is larger for higher-LTV loans, which are more likely to default.

By scrapping the LTV maximum in the HARP program, the agencies would also be eliminating the need for appraisals, which would simplify the program and expedite the implementation.

Concluding comment

There are many more changes in Fannie and Freddie rules that would help to generate increased housing demand, but my internal editor says that more examples are not needed. The overriding need is recognition by the agencies and its conservator that assets are not conserved by acting as if Fannie and Freddie are small lenders with no power to affect the market.

These entities are a major part of the market, and their assets are best conserved by policies that convert the currently anemic market into a healthy one. Once that principle is accepted, I will be happy to flesh out the list, and so will many others.

The author, Jack Jack Guttentag, is professor of finance emeritus at the Wharton School of the University of Pennsylvania.

As you may have heard, the real estate industry received a big win today when President Obama signed two important pieces of legislation into law.

The first one extends the closing deadline for the homebuyer tax credit until September 30, 2010, for any transactions that had ratified contracts in place as of April 30, 2010, but have not yet closed. Previous blog was about the Senate approval...Now that the President has signed it is official naitionally. Real estate agents working with buyers who fit into this category, please let them know about the extended deadline.

In addition, the National Flood Insurance Program, which provides flood insurance to homeowners in participating communities in flood-prone areas who could not otherwise obtain coverage due to cost or ineligibility, was also extended until September 30, 2010. As a result, buyers in these areas can now obtain mortgages and transactions can move forward. This bill is retroactive and covers the lapse period from June 1, 2010, to the date of enactment of the extension.

If you or anyone you know is interested in purchasing real estate, please:
Contact Clara at 856-264-1058

FREE: Find home values in your neighborhood...Click on Home Values link

HAPPY NEW YEAR

2009 went by too fast..and I am looking forward to a FABULOUS 2010.

Thank you to all my clients, associates and friends.

I am looking forward to 2010 and helping at least 100 people purchase or sell their property!

Peace and Love
Clara
I turn real estate dreams into reality - One home at a time!

Contact me for your next real estate transaction

Tax Credit Deadline Fast Approaching

The combination of the $8,000 tax credit and affordable home prices has created one of the best times in recent memory for first-time buyers to purchase a home. Yet, those who want to take advantage of the tax credit have virtually no time left to spare.


It's now-or-never for first-time buyers, who must get under contract quickly in order to close in time to meet the Nov. 30 deadline for the $8,000 tax credit.

Call Clara today at 856-264-1058 for more information.

Also be sure to check the value of homes in your area...

Click on the link to your right.