Home Inventory, Interest Rates, and the Future of Fannie and Freddie

Shoot Date: 
Monday, July 29, 2013

Moderator:  US pending home sales data is going to be released today at 10 Eastern.  Economist polled by Down Jones news wise are expecting a modest 0.1% increase in June, this after pending home sales soared 6.7% to hit a 6-year high in May.  Joining us from Fort Lauderdale, Sherry Olefson, author of Foreclosure Nation.  Sherry good morning to you.  Thanks much indeed for joining us.  Have we peaked in this cycle of home loan growth?  

Sherry:  Well, home loans are down now as we know in part because of recent interest rate jumps but also it is a seasonal issue and the biggest issue of course is inventory here in the US.  Expected to be more of a temporary issue though as sellers get off the fence, comfortable with home price increases, and buyers get more comfortable buying.  

Moderator: Yeah.  It is difficult to talk about one market because there are so many different states and so many different areas, but what is your general consensus for what happens.  As we saw that little spike up in [0.01:10.6] mortgage rates as well, does that have a big negative impact or not?  

Sherry:  Well not really because rates are still at historic lows, lower than any time other than in this past decade so we are still doing good as far as interest rates go and of course you still have to live somewhere so it is a matter of renting versus buying.  Again, the biggest problem here in the US is still inventory but we are starting to see some of those foreclosures work through the systems.  Many of the states are changing their foreclosure laws so that we can get more of that inventory out into the street and of course as prices go up Ross, we are seeing investors, the big investors having less and less of an appetite because they are just not getting the returns they had hoped.  We know some of these big funds that were buying homes in order to rent them are finding themselves with lower returns than they expected in large part because they are just not able to turn around these homes as quickly as they hoped.  They cannot renovate them and get them back on the market so their purchases have significantly slowed down.  

Moderator: Yeah although presumably as the prices go up that does help with the foreclosure sales coming back online.  What supply impact does that have?

Sherry: Well it is a big issue.  One of the big issues that have been holding a lot of buyers out of the market in fact has been financing.  About 20% of the folks who were approved during the bubble would not be able to get a loan today but we are starting to see more of what used to be called the subprime lenders entering the market.  In fact, Raj Date who was actually the Assistant Deputy for the Consumer Financial Protection Bureau that helped to write a lot of these new stricter loan laws that qualified mortgage loans and so forth that take effect in January has actually now gone into a business and intends to be offering loans to folks who don’t normally qualify, so that is very encouraging to a lot of Americans who have also sat out of the market because they simply thought they could not get approved.

Moderator:  So if getting a loan is getting tougher, I mean it just all plays into this debate about what the future Fannie and Freddie should be as well.  What sort of guarantees and what sort of market we want.  What do you think should happen?

Sherry:  Well, we’ve got the push and pull.  Basically all of these proposals are very similar, they just vary in how quickly the government should get out of financing and where the government should remain ultimately in financing but the ironic thing is and we’ve got proposals pending in the House and the Senate now that vary on that spectrum of those issues.  The ironic thing is that the change is happening anyway even without government.  So for example, we are seeing the costs on FHA loans going up.  Last month FHA announced that borrowers now have to carry mortgage insurance for almost the full life of the loan and in almost all instances where that only used to apply until the mortgage insurance, until the bar were paid down their equity.  The guarantee fees on Fannie and Freddie loans are going up.  FHA is restricting its reverse mortgages which are mortgages that older Americans generally get for their homes.  So we are seeing the private market getting into financing even more whether or not Congress makes its decisions on these issues or not.

Moderator:  I mean we are getting back to sort of 100% financing coming back.  It is private market getting involved again.

Sherry: The private market is.  That is correct.  And you know there is an interesting turn too now that Fannie and Freddie are making money; remember Fannie Mae made about 17 billion dollars last year and Freddie made about 11 billion dollars, Congress is not so eager to cut off that gravy train because that is revenue the US government can really use and within the last couple of weeks we actually had a lawsuit filed by investors who are objecting now to the fact that the Treasury stepped in and delisted their shares and pretty much forced them out of any profit from these giants and we can expect more lawsuits as the GSE’s continue to make money.  We’ve got hedge funds now lobbying Congress to go back and put Fannie and Freddie in their original condition and make them independent of the conservatorship.  Sometimes you have situations where real life is stranger than fiction and no one could have predicted these things.

Moderator:  Go back to the future.  Okay…Sherry stay there for a second.  We will get your view on this other story as well.   Although Ben Bernanke’s term only ends at the end of January, plenty of speculation on who is going to replace him as Fed Chairman.   Hampton Pierson is in Washington with more.  Good morning Hampton, what’s happening?

Hampton Pierson:  How are you doing Ross? Well it is looking like September is really setting up to be a big month for the Fed in a lot of different ways.  Not only are some economists setting their taper target for September but President Obama saying over the weekend that this is the earliest he can announce a successor for Fed Chairmen Ben Bernanke.   Fed Vice Chairman Janet Yellen, and former Treasury Secretary Larry Summers are emerging as the two front runners if you will.  Now congressional Democrats have been circulating a letter praising Yellen and former Vice Chairman of the Fed Allen Blinder also endorsed Yellen in an op-ed in the Wall Street Journal.  Blinder wrote quoting now, “I cannot say that Janet Yellen is tan and rested, she has been working far too hard for that but she is certainly ready.”  Now one person who did not reveal his preferred choice for the position this weekend was Treasury Secretary Jack Lew.  Take a listen.  “Chairman Bernanke has been an extraordinary and remains an extraordinary Fed Chairman.  I am going to keep private any conversations we are having with the President on the question of when and what kind of succession there should be.”  

Now with the President and Congress facing a September show down over both the budget and the debt ceiling it is highly unlikely we will get an announcement on Ben Bernanke’s successor until October at the earliest.  Ross.  

Moderator:  Alright.  Okay.  Hampton thanks for that.  That’s the latest from Washington.  Sherry you heard Hampton’s report there.  Who would you like it to be?

Sherry:  You know what…it really does not matter because I think the government is going to keep in terms of housing anyway, the government is going to keep the interest rates about where they are for some time and we’ve got a long way to go before interest rates really effect housing affordability.  I mean rates would have to go up 7% at least at this point in order to make housing unaffordable for Americans.  We are still 25% below where the prices were at peak so I don’t see the appointment in terms of housing making a real issue at least for the next 5-6 years in the future in terms of housing at least.  

Moderator: Okay Sherry.  Thanks so much indeed for that.  Good to see you this morning.  Sherry Olefson, author of Foreclosure Nation joining us from Fort Lauderdale. I’m sure the weather is very nice.  

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