NIFE

Home Owner Affordability and Stability Plan

Download NIFE - hasp q&a

The new program begins March 4th, this top Q&A helps to answer many of the questions, including the Moral Hazards of rewarding only those who aren't/can't make payments.

One key relief in the new plan provides a way for people who can't refinance because of lower value to refinance a Fannie Mae or Freddie Mac loan after March 4th if the combined first and second mortgages do not exceed 105% of the house value on a primary residence.  This makes way for those who have low/no equity to lock in possible 37 year low interest rates. 

To find out if you can refinance, contact your lender after March 4th.

*thanks to John Thompson for this post.

How Could Freddie / Fannie Change Impact You?

Fannie / Freddie -

When your body has a blood clot, you can die.  When the financial system has a blood clot, the results are not that different.  If you interrupt any part of an ecosystem, the entire system is impacted.  Wall St. was the nation's largest lender, and then there was Fannie / Freddie.  We could call them the functioning dysfunctional siblings that controlled the door to much of the Wall St. lending flow.  The largest highway to Wall St. with an impressive 50x leverage of their financial assets.  So what happens when this source of funds can't sell to Wall St.?  The ecosystem is further impacted.  Imagine that in your favorite fishing pond, there are no more minnows.  How long would it take for that pond to die?  Not the pond itself, but the functional pond as a place for fishing.

Things start to stop, and no matter how good a fisherman you are, if someone takes your fish (access to money), the sport loses its luster - the really great fishermen(women) are hard to tell from the really poor ones, because everyone looks the same out on there sitting in their boat waiting for something to happen.

What this could mean for you?

This overdue action by the Government could very well mean that the housing recovery, which is likely years away, could be accelerating for the lenders, related institutions, Realtors, and financial advisors.

We should see now and in the remaining course of this year:

Lower interest rates on mortgages this year, increased refinancings and probably one last chance to lock in low long term interest rates for the years to come - once the crisis is over we could see rates turning upwards, but we've now got a nice window to increase refinance and purchase traffic in the near future.

One of the bigger fears is that an industry refinance movement can't be handled because of the dramatic reduction in lending personnel and infrastructure in the US.  Those who have stayed int he boat weathering this storm stand to gain as lower rates and fewer competitors create new opportunities.  Expect to also find yourself lending to many different parties, it may be more difficult to find one or two sources to fund your loan volume.

Lower overall fees will make housing more affordable, but watch as they start restricting future broad lending to a lower range of lending, which may then decentralize jumbo and higher loan amount lending as we know it today to more regional banks and savings and loans.

The combination of these two means a possible 1/2% real drop in interest rates and up to another 1/2% real drop in interest rates when fees and higher guarantees added by Fannie and Freddie are dropped now that the government is engaged.  The direction will move from their corporate profitability goals to a more important (election year) national housing recovery focus - an improvement for the consumer.

Why?  If the average house price [Download averagehouseprice.pdf] in the US in 2007 was $313,600, then 1% drop in real interest rates would yield an interest payment reduction of ( $209 a month before taxes ) based on an 80% LTV purchase.  That really helps when you have properties decreasing in value, and the cost of ownership financing going down, you'll start to see more minnows in the fishing pond, and that feeds the fish who have been starving over the last 9 months waiting for their next meal to swim by... get back in the boat now and make sure you have both individual lines and a few nets in the water.

Prepay or Invest?

In the span of two months, both Money Magazine and Consumer Reports have issued the question - "Should you prepay your mortgage, or invest?"  It is interesting that both magazines would ask the same question, and more interesting still that both would come to the same conclusion.  We've been asking that question a long time and believe it is still a key question worth asking.  Wile we can't say they did an exhaustive study here, their overall approach was sound. 

In our Borrow Smart approach, we don't believe there is a one size fits all.  Market Risk and Discipline Risk must be considered for the 'individual' borrower.  The math itself is pretty simple.  Historically over any extended period of time, it has been much more beneficial to invest excess cash flow than it would be to prepay the mortgage, but this is based on average market returns and average costs of borrowing - the longer your time horizon the more likely you are to be average in those respects.

There are of course many other facts to consider, but at a minimum I wanted to make you aware of these  these two articles and how they approached their recommendation to invest, instead of repaying over time.

Consumer Reports - Download crprepayinvest.pdf

Money Magazine - Download moneyprepayinvest.pdf

Will We Repeat Our Mistakes?

We have to continue to wonder how the psychological impact of the housing market will impact the economy.  When you look at real wealth, it is slowly decreasing.  What has the greater impact for most people, loss of wealth or loss of cash flow?

We think about consumer confidence as something we can measure on the whole, but like the saying 'all real estate is local', all 'consumer confidence is personal.'  What really strikes at the heart of the consumer is cash flow, with wealth a more distant second.  Most consumers make their most important decisions based on short term cash flow considerations, and less often do they think in terms of long term wealth.  If their house loses $50,000 in value, that is a real impact to their wealth that is fundamentally more painful that a loss of $500 a month from an ARM reset, but if you look to your personal confidence, most will agree that $500 a month has a far greater impact on your outlook, spending, and general willingness to take action.  The FED is worried about consumer confidence because worried consumer reduce spending, and that creates new pressures on our economy.

Much of our wealth, and our cash flow of the recent years has come from Mortgage Equity Withdrawals (MEW), and in the last measured third quarter of 2007 there was a 55% drop in loans that removed equity at the closing (meaning cash out loans), and for many even with the lowered federal interest rates we'll see some increase in housing payments, meaning less disposable income.

Consumers tend to remove equity from their house in one of two ways: selling the house or refinancing the house.  Selling the house has been tracked most often to higher savings - the lump sum can be positioned in what is a one time decision for the client, whereas cash out and home equity lines take greater discipline and financial stewardship, these smaller lump sums are more quickly consumed for goods versus savings.  As house prices drop, real estate sales have slowed this exchange of wealth from capital gains of real estate appreciation.  Stricter lending guidelines have made it more difficult for consumers to reposition wealth already in the house, putting greater pressure on spending behavior.

We are seeing is signs of life in the mortgage refinance side of the housing equation.  Consumers see news on the lower interest rates from the Fed.  The MBA refinancing index moved back above 4000 for the first time since March of 2004... that's a 20% jump in applications, and in just 5 weeks we see a doubling of prior loan activity.  We again may see some behavioral shifts in the way the consumer views savings that comes from cash flow, cash out, or property sales as they need to think about their own liquidity.

The main reason the Fed needs to lower rates (as the real impact on housing may not help the economy for some time), is the consumers increasing reliance on credit card debts (rising) and mortgage lending (decreasing)... as mortgages tighten, consumers fall back on credit and that creates a debt sprial that can be devastating... this is again a problem of behavior (overspending), or too much month at the end of their money.

Many believe 2010 is when we can expect to see housing back in full swing again, but right now there is a real opportunity to capitalize on current rate trends, and congressional politics.  To imagine that I might refinance a $700k mortgage to an FHA loan, or that the government may offer tax free bonds for pools of bail out money to consumers, is pretty hard to imagine... but they are trying to avoid a bigger calamity, and many believe interest rates have no where to go but down for the next 6 months - making the 5,000 ARM resets per day all the more exciting for you and your consumer as LIBOR and PRIME become more and more attractive, and we set ourselves up again for consumers refinancing into short term lower interest rates... When will the Fed be able to tighten again if we bail ourselves out with cheap money?  This time around, let's see if we can save more, spend less, and better manage our own liquidity.

Largest Expense is Still Housing

Based on the new Consumer Expenditure Survey, housing’s share of average spending increased over a full percentage point from 32.7% to 33.8%, making it the continued king of cash flow consideration for the average consumer.

Not only is it the largest expense, but in prior consumer surveys the consumer feels they have the least 'control' over their housing related expenses.  Energy costs, property taxes, home owners insurance, mortgage interest, all tend to create a feeling that housing expenses are totally outside their control... which is an accurate statement for most house owners.  Their options are to sell the house and rent, or to consider more closely monitoring their housing related expenses, controlling the things they can control, letting the rest go.  That's a form of liability management, just helping people consider what they can, and clarifying for them what they can't.

One interesting consideration of the CES study is the expenses are considered interest only for all expenses, so principal does not show up as an expense to the consumer, yet they do feel it in their overall cash flow.  As you can see from the chart, the level of pain is relatively higher for the lower income earners, but still makes up over 30% for the high income earner.  This trend is actually pushing home ownership rates in the US down, and putting more pressure on rents, as the median rent in the US jumped 6% in 2006 after stay relatively flat for many years.  If that increases, selling and renting becomes less attractive as well.

When you consider the emotional impact of the lost equity, you can see why consumers want more guidance if their real wealth declines, even if it is simply letting them know that things will be ok.  The forthcoming mortgage resets in the first quarter of this year will continue to put upward pressure on housing related expenses and further challenge savings ability of the typical consumer.