Archive

Posts Tagged ‘Housing Crisis’

The Son of the Housing Bubble: First-Time Homebuyers Tax Credit

April 19, 2012 1 comment


Co-director, CEPR
author, ‘The End of Loser Liberalism: Making Markets Progressive’
Posted: 04/18/2012 9:04 pm

It’s often said that the difference between the powerful and the powerless is that the powerful get to walk away from their mistakes while the powerless suffer the consequences. The first-time homebuyers’ tax credit provides an excellent example of the privilege of the powerful.

The first-time homebuyers tax credit was added to President Obama’s original 2009 stimulus package. It was introduced by Senator Johnny Isakson, a Republican from Georgia, but the proposal quickly gained support from both parties. The bill gave a tax credit equal to 10 percent of a home’s purchase price, up to $8,000, to first time buyers or people who had not owned a home for more than three years. To qualify for the credit, buyers had to close on their purchase by the end of November, 2009, however the credit was extended to buyers who signed a contract by the end of April, 2010.

The ostensible intention of the bill was to stabilize the housing market. At least initially it had this effect. There was a spike in home purchases that showed up clearly in the data by June of 2009. House prices, which had been falling at a rate of close to 2.0 percent a month stabilized and actually began to rise by the late summer of 2009, as buyers tried to close on a house before the deadline for the initial credit. There was a further rise in prices around the end of the extended credit in the spring of 2010.

However once the credit ended, prices resumed their fall. By the end of 2011 they were 8.4 percent below the tax credit induced peak in the spring of 2010. Adjusting for inflation, the decline was more than 12.0 percent.

The problem was that the credit did not lead more people to buy homes, it just caused people who would have bought homes in the second half of 2010 or 2011 to buy their homes earlier. This meant that the price decline that was in process in 2007-2009 was just delayed for a bit more than a year by the tax credit.

This delay allowed homeowners to sell their homes for higher prices than would otherwise have been the case. It also allowed lenders to get back more money on loans that might have otherwise ended with short sales or even defaults. The losers were the people who paid too much for homes, persuaded to get into the market by the tax credit.

This was the same story as the in the original bubble, but then the pushers were the subprime peddlers. In this case the pusher was Congress with its first-time buyer credit.

According to my calculations, the temporary reversal of the price decline transferred between $200 and $350 billion (in 2009 dollars) from buyers to sellers and lenders. Another $15-25 billion went from homebuyers to builders selling new homes for higher prices than would otherwise have been possible.

While this might look like bad policy on its face, it gets worse. The tax credit had the biggest impact on the bottom end of the market, both because this is where first-time buyers are most likely to be buying homes and also an $8,000 credit will have much more impact in the market for $100,000 homes than the market for $500,000 homes.

The price of houses in the bottom third of the market rose substantially in response to the credit, only to plunge later. To take some of the most extreme cases, in Chicago prices of bottom tier homes fell by close to 30 percent from June 2010 to December of 2011, leading to a lose of $50,000 for a buyer at the cutoff of the bottom tier of the market. The drop in Minneapolis was more than 20 percent or more than $30,000. First-time buyers in Atlanta got the biggest hit. House prices for homes in the bottom tier have fallen by close to 50 percent since June of 2010. That is a loss of $70,000 for a house at the cutoff of the bottom tier.

Many of the 11 million underwater homeowners in the country can blame the incentives created by the first-time homebuyers credit for their plight. This was really bad policy, which should have been apparent at the time. Unfortunately, it is only the victims who are suffering, not the promulgators of the policy. Welcome to Washington.

Follow Dean Baker on Twitter: www.twitter.com/DeanBaker13

 

Advertisements

Negative equity is disproportionately concentrated in the Chicago region’s communities of color, Woodstock Institute report shows

March 23, 2012 Leave a comment

Tom Feltner | Vice President
Woodstock Institute

Homeowners with mortgages in African American communities more than twice as likely to be underwater as homeowners in white communities

CHICAGO–Negative equity is disproportionately concentrated in the Chicago region’s African American, Latino, and majority minority neighborhoods, a new report from Woodstock Institute found. The report also found that borrowers in communities of color have much less equity on average than do borrowers in predominantly white communities.

View the full report here:  http://bit.ly/strugglingtostayafloat

Join us for a telephone briefing Tuesday March 27 at 10am CT:  http://stayingafloat.eventbrite.com/

The report, “Struggling to Stay Afloat:  Negative Equity in Communities of Color in the Chicago Six County Region,” used data from a major provider of mortgage and home value data to examine patterns of underwater homes in communities of various racial and ethnic compositions in the Chicago six county region in 2011. It found that:

  • Nearly one in four residential properties in the Chicago six county region is underwater, with just under $25 billion of negative equity. The average underwater property has 31.8 percent more outstanding mortgage debt than the property is worth.
  • Borrowers in communities of color are much more likely to be underwater than are borrowers in white communities.
  • Borrowers in communities of color are more than twice as likely as are borrowers in white communities to have little to no equity in their homes. In highly African American communities in the Chicago six county region, 40.5 percent of borrowers are underwater, while another 5.4 percent are nearly underwater. Similarly, 40.3 percent of properties are underwater in predominantly Latino communities and 5.3 percent are nearly underwater. In contrast, only 16.7 percent of properties in predominantly white communities are underwater, with another 4.4 percent nearly underwater.
  • Almost three times as many properties in communities of color are severely underwater compared to properties in white communities. In predominantly African American communities, 30.1 percent of properties have loan-to-value (LTV) ratios—a comparison of outstanding mortgage debt to home value—exceeding 110 percent, while that figure is 30 percent in predominantly Latino communities. In contrast, just 10.1 percent of the properties in predominantly white communities have LTVs exceeding 110 percent.
  • Borrowers in communities of color have much less equity in their homes than do borrowers in white communities, resulting in a significant wealth gap.
  •  Only about one-third of homeowners in communities of color have significant equity in their homes. In predominantly African American communities, 34.5 percent of borrowers have more than 25 percent equity in their homes, while 33.1 percent of borrowers in Latino communities have more than 25 percent equity in their homes. Fifty-five percent of borrowers in predominantly white communities have more than 25 percent equity.
  • Borrowers in communities of color have much higher average loan-to-value ratios than do borrowers in predominantly white communities. The average LTV ratio is 92.1 in predominantly African American communities and 87.4 in Latino communities, compared with an average LTV ratio of 67.7 in predominantly white communities.

Negative equity contributes to community decline by potentially leading to increased foreclosure activity, threatening the success of foreclosure prevention programs, and draining neighborhood wealth. In addition, the destruction of assets caused by negative home equity may disproportionately threaten the economic security of people of color because home equity is a larger proportion of their net worth than it is for white people.

View the full report here:  http://bit.ly/strugglingtostayafloat

The report concluded with a number of policy recommendations to reduce the negative impacts of concentrated negative equity, including:

  • Servicers should use principal reduction as a foreclosure prevention tool more broadly.
  • The Federal Housing Finance Authority should permit loans backed by Fannie Mae and Freddie Mac to be eligible for principal reductions.
  • Servicers should streamline processes for short sales.

Tom Feltner | Vice President

Woodstock Institute

29 E Madison Suite 1710 | Chicago, Illinois 60602

T 312/368-0310 x2028  | F 312/368-0316 | M 312/927-0391

www.woodstockinst.org | tfeltner@woodstockinst.org | @tfeltner

States with highest foreclosure rates shift

February 17, 2012 Leave a comment
Foreclosure Today
Posted 02/17/2012
There has been a shift in states with the highest foreclosure rates. About a month ago, Nevada took the number one spot followed by Arizona, California, Georgia and Utah according to RealtyTrac. Now that the settlement is in place there are hopes of improvement among the rates but in the meantime, the rate of those in mortgage default and in need of help with foreclosure continues to shift and increase. The following stats were reported in an article on Yahoo! Real Estate.
1. Florida—
2011 foreclosure rate: 11.9%
December, 2011 unemployment: 9.9% (6th highest)
Home price change (2006Q3-2011Q3): -49% (3rd largest decline)
Processing period: 135 days

2. New Jersey—

2011 foreclosure rate: 6.4%
December, 2011 unemployment: 9% (13th highest)
Home price change (2006Q3-2011Q3): -22.6% (14th largest decline)
Processing period: 270 days

3. Illinois—

2011 foreclosure rate: 5.4%
December, 2011 unemployment: 9.8% (7th highest)
Home price change (2006Q3-2011Q3): -29% (7th largest decline)
Processing period: 300 days

4. Nevada—

2011 foreclosure rate: 5.3%
December, 2011 unemployment: 12.6% (the highest)
Home price change (2006Q3-2011Q3): -59.3% (the largest decline)
Processing period: 116 days

5. New York—

2011 foreclosure rate: 4.6%
December, 2011 unemployment: 8% (23rd highest)
Home price change (2006Q3-2011Q3): -13.6% (23rd largest decline)
Processing period: 445 days

Is There a Wikipedia to Go Dark for Homeowners?

February 7, 2012 Leave a comment
English: Foreclosure Sign, Mortgage Crisis


Senior Fellow at the Center for American Progress
Posted: 02/ 6/2012 5:44 pm

When Congress was on the brink of pushing through legislation that Internet advocates opposed, over four million online signatures were gathered quickly. Congress relented.

Today, millions of American households are poised to benefit directly from the opportunity to reduce mortgage payments, avoid foreclosure, build up some savings, or have a few thousand dollars to spend a little more freely. Yet while even conservative economists believe that easier refinancings will boost the economy and help millions more families — a major part of Congress is ready to say a big, “No, let’s not even try.”

Not a day elapsed after President Obama outlined a more ambitious set of proposals to let average families take advantage of the same low interest rates that have benefited upper income households and large corporations before Speaker Boehner among others declared the idea dead on arrival.

“All [the refinancing plan] does is delay the clearing of the market,” Speaker Boehner told reporters. “As soon as the market clears and we understand where the prices really are — [that] will be the most important thing we can do in order to improve home values around the country.”

Saying millions of families should wait until the “market clears” is the modern equivalent of “let them eat cake.” Clearing the market is an economist’s term for letting the tidal wave of foreclosures continue. But unchecked foreclosures drag down everyone’s home values, let vacant homes pile up in neighborhoods, and force families to choose between struggling to make needlessly high mortgage payments or become another default statistic with ruined credit.

It is time to ask lenders and investors to shoulder some of the burden, and Congress should be taking the lead on this, not finding objections. As my colleagues at the Center for American Progress and I explain in detail, the principles of accountability to avoid more foreclosures — especially for families who haven’t missed payments — is at the core of the administration’s expanded proposal for making refinancing easier.

Families with mortgages, however, are not an easily organized constituency. Unlike the protesters most engaged in social media who were the bulwark of those moved to criticize SOPA and PIPA, borrowers are not necessarily the internet generation nor an easily reached interest group.

But given the politics of “embrace the opposite of what Obama proposes,” homeowners struggling to keep making payments could use a Wiki dark day of their own. And so could the tens of millions of others who live next door, as no neighborhood really wants another foreclosure.

Low Mortgage Rates — Finally Having Impact on Housing Market?

January 25, 2012 Leave a comment

CIN Alert for January 24, 2012

Vicky and Joe had always dreamed of buying a nice neat home in a Northern city suburb. That dream came true in 1972 when they purchased a Cape Cod style three bedroom home for $45,000 with a 30-year fixed-rate mortgage of 7.5%.

Joe remembers telling Vicky at the time that they would never see rates that low again, and over most of the next 40 years he was right.

However, something quite unusual has happened during the past several years: mortgage rates have plummeted to new record low levels, most recently 3.88 %. Of course, Joe and Vicky, now retired, don’t need the low rates anymore, but for many others – including their kids and grandkids — those rates seem very inviting.

Inviting they may be, but the low rates have not thus far been able to trigger a strong stimulation of the US housing market as (sad to say) relatively few people qualified for the lower rates. High unemployment and small wage gains have made it harder for many people to qualify. Other would-be borrowers didn’t want to sink money into a home that they fear could lose value over the next few years.

However, new statistics just released would seem to indicate that things are beginning to change. Perhaps there is good news coming over the horizon.

“Existing home sales rose for the third consecutive month in December, according to data released Friday by the National Association of Realtors, which touts the upswing as a sign of recovery in the national housing market.

“Sales of existing homes rose to a seasonally adjusted rate of 4.42 million during the final month of the year, marking a 5% increase over the downwardly revised 4.39 million homes sold in November and a 4 percent increase over the 4.25 million homes sold in October.

“The number of homes sold in December 2011 also marked a 3.6 percent increase over the 4.45 million homes sold during the same month one year ago. “The pattern of home sales in recent months demonstrates a market in recovery,” NAR chief economist Lawrence Yun said in a statement. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.” (Source: The Washington Post)

Builders are hopeful that the low rates will boost sales even more as the year progresses. In fact, low mortgage rates were cited as a key reason the National Association of Home Builders survey of builder sentiment rose in December to its highest level in more than a year.
Mortgage rates are one of the major issues your CIN editors monitor and report on regularly in our Housing Section, which is designed to provide information to prospective homebuyers, their counselors and advisors, lenders, developers, and others focused on the critical issues surrounding housing.

These include aspects of arranging financing and other details of the purchasing process, such as obtaining a fair appraisal of the value of the intended home. We also present information on various bank mortgage lending programs and mortgage banking programs to help borrowers understand the process they are entering as they select a home for purchase. Here’s a sample of some articles recently included in CIN’s Housing Section:

One million homeowners may get mortgage writedowns: U.S.
(Source: Reuters) About one million American homeowners would get write downs in the size of their mortgages under a proposed deal with banks over shady foreclosure practices. The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.

Do FHA Mortgage Borrowers Still Face Credit Score Layering?
(Source: Our Broker.com) More than a year has passed since HUD announced that it would investigate 22 lenders on possible ‘Layering’, the addition of requirements on top of FHA standards. The investigations are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African-Americans and Latinos with credit scores as high as 640.

WSJ: Home Equity Squeeze Sparks Reverse Mortgage Revival
(Source: Reverse Mortgage Daily) The real-estate crunch left most home values with much to be desired, prompting a revival in reverse mortgages. Although the number of reverse mortgage endorsements has decreased compared to its peak a few years ago, lending has been picking up, with MetLife Bank’s 2011 reverse originations increasing by 171% compared to the previous year.

Confidence Among U.S. Homebuilders Climbs to Highest Since 2007
(Source: Bloomberg) Confidence among U.S. homebuilders rose in January to the highest level in more than four years as sales and buyer traffic improved. The National Association of Home Builders/Wells Fargo sentiment gauge increased to 25 this month, exceeding the median forecast of economists surveyed by Bloomberg News and reaching the highest level since June 2007.

Feds investigating possible fraud at GE’s former subprime unit
(Source: i watch news) Federal authorities are investigating possible fraud at General Electric Co.’s former subprime mortgage arm amid increased public pressure to hold Wall Street accountable for its role in the financial crisis.

Mortgage, foreclosure issues top AG’s complaint list for the first time
(Source: Boston.com) Complaints about mortgage, loan modification and foreclosure issues soared in 2011 and were the biggest source of problems for consumers who asked the Massachusetts State Attorney General’s office for help.

COMMENTARY:
Why Falling Home Ownership Is a Good Thing
(Source: The Motley Fool) Commentator Dan Caplinger opines that falling levels of home ownership may not be such a bad thing, since for many, owning a home never made financial sense and avoiding the burden of having so much debt on one’s biggest asset can make financial life a lot easier.

80 Percent Of Homeowners Behind On Mortgage Ineligible For Loan Modification Program

January 11, 2012 Leave a comment
First Posted: 1/9/12 06:34 PM ET
Updated: 1/10/12 10:57 AM ET

Less than 20 percent of homeowners who theoretically qualify for a government mortgage modification are actually eligible, according to data released Monday by the Treasury Department.

Although roughly 4.6 million U.S. homeowners have missed at least two mortgage payments — making them technically eligible for Making Home Affordable, the federal government’s flagship homeowner assistance program — a whopping 80 percent of those borrowers cannot be helped by the program. According to the Treasury report, just 900,000 homeowners actually qualify for a loan modification under Making Home Affordable.

Dean Baker, an economist and co-director of the Center for Economic and Policy Research, said that fact reflects the program’s low goals. “If 900,000 are eligible, and this is your main program for helping underwater borrowers, and we know that not all 900,000 can be helped, this doesn’t look very ambitious,” he said.

The numbers reinforce just how far short the program, initiated by President Barack Obama with much fanfare in early 2009, has fallen short of its goals and fuel critics’ assertions that the program is largely ineffective. “This program, in its design, is set up to help a very small portion of people,” said Baker.

(Under Making Home Affordable, homeowners who aren’t yet delinquent in mortgage payments but are at risk of imminent default might also qualify for loan modifications. The Treasury data did not include that population.)

Borrowers are locked out of the federal program for a myriad of reasons, including the kind of loan they have and the property at issue. Not covered by the program: rental properties, “manufactured” homes, homes with Federal Housing Administration loans, and homes with Department of Veteran Affairs loans.

Many borrowers can’t get help because their monthly mortgage payment is deemed affordable, irrespective of whether it actually is for the borrower. The idea behind the loan modification program is to make the monthly mortgage payment more affordable, defined as a payment that is less than 31 percent of the borrower’s total monthly debt payments (think car payments, student loans, credit cards, etc.). One-third of homeowners who would otherwise qualify are ineligible because they already have a mortgage payment that meets this criteria, according to the Treasury report.

Borrowers who have abandoned their property are also ineligible, the assumption being that they are not committed to their home.

“If you look at the large number of vacant properties, I think that speaks to the fact that, in many cases, the borrowers were reached too late in the game,” said Baker. “The borrower assumed they’d lose their home so they walked away. You could say those people aren’t eligible, but they might have been if we’d reached them earlier.”

Source: Treasury Department report.

%d bloggers like this: