Posted on 06/10/2011 7:24:42 AM PDT by Kaslin
And you thought things couldn't get worse on the housing front. The U.S. housing market is in the worst shape since the Great Depression, and now the Obama administration's solution is to impose new rules that would banish 60 percent of current homebuyers from the market.
The proposed Mortgage Qualification Rules are the result of legislation passed in the wake of the financial meltdown to ensure that mortgage-backed securities are based on high-quality loans. But the effect will be to disqualify millions of potential homebuyers.
Earlier this year, the six federal agencies tasked with drafting the rules added a requirement that homebuyers make a 20 percent down payment to qualify for low-interest mortgages. In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income. Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
What does this mean in practical terms? In 2009 (the last year for which we have accurate data), median household income was just under $50,000. Under the proposed new mortgage rules, an average family would be ineligible for a low-interest mortgage if they owed more than $1,500 a month in payments for all their financed debt: mortgage, cars, credit cards, student loans, and anything else bought over time. And the mortgage payment alone could not be higher than $1,166, including escrow for taxes and insurance.
The proposed rules would put an end to the American Dream for much of the middle class. As Urban League president Marc Morial said, "Homeownership, as we know it, could be a thing of the past" if the proposed rules take effect.
But the damage extends beyond depriving individuals of the opportunity to buy a home -- it will ripple throughout the economy. There is no question that the depression in the housing market is costing jobs, and not just the obvious ones in construction. Part of what has made the American economy more resilient than other countries' over the years is the willingness of Americans to pick up and move when jobs in one area disappeared but were available in other places. But the inability of many people to sell homes has reduced American geographic mobility to historic lows.
The consequence is to keep those people who have lost their jobs, but own their homes, from moving to states where jobs are more plentiful. If they can't find a buyer because the government has made it so difficult to qualify for loans, they're better off staying put and collecting unemployment insurance.
There is no question that many Americans have become addicted to debt and live way beyond their means. But one of the best ways of determining whether or not someone can really afford his or her lifestyle is to examine credit history-not simply the level of debt. But these new rules would punish even those borrowers who have never missed a payment and have exemplary credit ratings.
It also treats income as if it is fixed over a borrower's lifetime. A relatively young college graduate may have significant debt from earning that degree, but his or her income is likely to increase substantially over the 30 years of a mortgage, and restricting access to a loan on that basis makes little sense.
And, of course, the obverse is also possible. Incomes fall as well as rise. Just because someone is earning a lot today doesn't mean he or she will be making the same amount next year or the following.
But the real problem with these rules is what they will do to the overall housing market. Without buyers, home prices will continue to plummet. There are already too many unsold houses on the market, about twice the number you'd expect in a healthy environment. And the administration's solution is to drive millions of credit-worthy buyers from being able to purchase them?
These Obama administration rules could turn what increasingly appears to be a double-dip economic recession into a full-scale depression. The president will pay politically for this disastrous policy -- but Americans will pay out of their actual pockets for his folly.
“Why is it a good idea for individuals to go into debt up to their eyeballs just like the government”
Because debt is the basis of the money system, and when “consumers” stop accumulating debt the system is going to collapse.
At the rate of price deterioration, now reaching back to the mid-1990’s, I predict that within five years, we will start seeing the government pushing large, private corporations to start buying up distressed housing developments and leasing them to their employees, most of whose current houses will be underwater/foreclosed. The same will happen with private magnates who will be able to buy developments for pennies on the dollar and, with the blessings of the local municipalities, fill them with formerly-middle-class families who can no longer qualify for mortgages.
Real estate will start looking more like the construct of feudal society instead of private property.
What do you mean by “their likely intrinsic value”?
There are tens or perhaps hundreds of thousands of housing units that will never be sold. Their actual value is zero.
There are millions of units whose nominal value is 20-30% higher than their actual value.
Until the market liquidates these units, and perhaps until units with no value are physically destroyed, this will not improve.
Varney just said the predicition is home prices could drop another 10 to 25 percent.
Problem is, you can take that argument all the way back to the housing boom after WW II. Since we've erased roughly ten years of gains from the real estate market, how far back do you propose that we need to go before there's "fair value"?
This ^^^^
What on earth do you mean by "fair value"?
If there are more sellers than buyers, the prices are too high.
The true value (which is also the "fair value", if there is such a thing) of all housing units currently on the market is far, far below the sum of all the asking prices - or else they would all be sold.
That's not even economics - that's simple English.
Hence the likelihood that they become rental subdivisions owned by corporations and wealthy speculators.
On the other hand, with regard to the notion of destroying empty stock, it might be necessary anyway, if we consider the buildup of something as insidious as mold in a house that remains unoccupied and unventilated for years.
I sympathize with you. We are not homeowners and have never been, even though we could easily afford to own. Up until recently, people always looked at us like we were crazy. Not such a crazy idea anymore.
If the government creates a law that kills a chunk of the demand, that's manipulation, not free market economics. So, "fair value" means what?
The true value (which is also the "fair value", if there is such a thing) of all housing units currently on the market is far, far below the sum of all the asking prices - or else they would all be sold.
Therefore the answer is to destroy empty housing stock and let the banks write them off. What you envision is not a return to "fair value"; what you envision is a runaway freight train plunging off a five-hundred foot bridge into a chasm of no return; because that is what will take place in our economy if values fall much further. You're talking generational disruption of the economy and circumstances that lead to the wrong kind of political instability.
That's not even economics - that's simple English.
If the real estate situation doesn't stabilize soon, the future will involve neither economics nor simple English.
Here is the kicker, we received a call from Wells Fargo last week, asking us if we would like to participate in the HARP program, lowering our interest rate by 1% at absolutely no cost to us. We have excellent credit, no debt besides our mortgage, employed for over 20 years at same employer. This is when I began researching HARP and HAMP. I thought these programs were suppose to help those that were in dire straights. Nope just a way for the banks to make money refinancing no risk loans. The government screws up everything it touches.
Like most of Detroit.
I mean that the number of people normally able to buy, but can't because they're SO far upside down, are taken out of the market, meaning even fewer buyers than would exist in a normal 20% down market (had things never gotten out of hand to start with) would reduce demand, and housing prices, even below a normal, stable level, to well below "100" on that chart that gets posted around here every once in a while that shows home prices adjusted for inflation over the last century.
Something that, to me, sounds very anti-freedom, and almost fascist in it's nature, yet, many Freepers seem to have no problem with this type of system developing...
I believe there truly are some in the conservative movement that secretly hope for such a post-apocolyptic society, for reasons I can’t understand.
It reminds me of the “end-timers” as I call them...people so convinced of their own salvation that they WANT to die and the world to end with them so they can get to heaven.
It sounds like the banks are now the mortgage brokers for the government. Borderline fraud.
Agree wholeheartedly. Plus no change for the banks and the gambling they and others are doing in the ‘derivatives’ market.
This will offically kill what is left of the housing market. Few people would have the $20,000 down needed on a $100,000 home
No it was 10% down prior to 1990.My family has been in real estate sicn ethe late 1960’s nds 10% was the standard with more down you could get better rates but it was not required.
No it was 10% down prior to 1990.My family has been in real estate sine the late 1960’s and 10% was the standard with more % down you could get better rates but it was not required.
Well, I’ve only been a real estate broker, appraiser, mortgage company owner, banker, etc., since the mid ‘70s, and I certainly remember that less-than-20%-down conventional loans were available, but those loans always required private mortgage insurance (PMI) and were actually underwritten (separately) by the PMI companies. FHA loans requiring a minimum 5% down were always available (with serious underwriting and MI built into the rate) as well, of course, 100% VA loans were always available, though never all that popular since back then sellers had to pay the buyer’s closing costs.
The point is that, according to this article, underwriting standards are returning to exactly where they were 20+ years ago (20% down with no PMI, 28/36 ratios, etc.). It is the right thing to do, and it’s disappointing to read somebody like Chavez griping about it.
FRegards,
LH
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