The scheduled reduction in the “conforming loan limit,” determining the maximum size of mortgages Fannie Mae and Freddie Mac can purchase from originating lenders, won’t have nearly the devastating impact on borrowers and the housing market that industry executives and consumer advocates have predicted.
In fact, a Federal Reserve study has found that only 1.3 percent of the home purchase and refinance loans eligible for purchase last year would be disqualified under the lower limits that took effect October 1. An additional 2.1 percent of the 2010 purchase mortgages would be ineligible for FHA-insured loans, which are also governed by the secondary market loan limits.
Congress temporarily increased the secondary market caps in 2008 in an effort to bolster the struggling housing market, setting the purchase limit for a conforming loan at $729,750. The expiration of that temporary measure pushed the maximum loan size back from 125 percent to 115 percent of an area’s median home prices – $625,500 in the nation’s most expensive housing markets. Loans above that cap are classified as “jumbo” mortgages, carrying a higher rate.
The Fed study found that 2.1 percent of the purchase loans and 2.4 percent of the refinance loans affected by the FHA changes were in areas where the Fannie/Freddie limits were unchanged, giving those FHA borrowers another financing option. Only 1.3 percent of the purchase loans and the same percentage of the refinances would not be eligible for either FHA or GSE financing. Although those percentages seem small, the study notes, had these loans been pushed into the jumbo market in 2010, the national home purchase jumbo market would have increased by 50 percent and the jumbo refi market would have increased by 63 percent .
“These numbers are substantial,” the study acknowledges, “and suggest that at least some of these loans would not have been originated or would have been originated only at higher prices.”
The Fed analysis of the lower conforming loan limits (see above) was part of a broader analysis of the 2010 Home Mortgage Disclosure Act data, which yielded additional insights about the impact of the housing market downturn. Not surprisingly, loan origination activity was less than robust last year. The HMDA data covered fewer than 8 million loans compared with 9 million in 2009 – a 9 percent year-over-year decline and a 62 percent decline from the 2006 mortgage lending peak.
Falling home prices and stricter underwriting combined to cripple refinancing activity. Absent those problems, the Fed’s HMDA analysis suggests, lenders would have approved another 2.3 million refi applications on top of the 4.5 million they originated. Other highlights from the Fed’s analysis:
- The percentage of loans originated to low- and moderate-income borrowers declined between 2006 and 2009, but the decline was steepest in the refinance category; the hare of home purchase originations actually increased significantly through the first half of 2010, but then decline dramatically when the first time home buyer tax credit program expired.
- As in the past, Black and Hispanic borrowers received a disproportionately larger share of high-priced mortgages – 6.0 percent and 7.1 percent, respectively, compared with 3.3 percent for Whites. But controlling for lender and borrower characteristics reduces the white-minority disparity to only 0.5 percentage points.
- Denial rates for White borrowers compared with Blacks and Hispanics remained essentially unchanged last year at 12.3 percent for Whites compared with 30.9 percent for Blacks and 22.9 percent for Hispanics. But when additional borrower and lender characteristics are factored in, the disparity has been shrinking in recent years, according to the Fed analysis – falling from 10.8 percentage points in 2008 to 9.2 percentage points in 2010. But that trend “appears to stem more from changes in the composition of the applicant pool over time than from changes in the way lenders act on specific applications,” the report suggests.
A DIFFERENT VIEW
Excessive regulation is discouraging lending, killing jobs and generally hamstringing the economic recovery. That’s the gist of the argument financial institutions have mounted in their effort to overturn the bevy of rules, regulations and restrictions mandated by the Dodd-Frank Financial Reform legislation. And the cry has been taken up, loudly, by Republicans on the presidential campaign trail. The law, designed to prevent a repeat of the 2008 financial market meltdown, “has created such uncertainty that the bankers, instead of making loans, [have] pulled back,” Mitt Romney, the current frontrunner in the bid for the Republican Presidential nomination, has said repeatedly. “We have to end it [Dodd-Frank] now, Texas Governor Rick Perry, has agreed.
But several studies have questioned the premise that Dodd-Frank specifically and over-regulation generally are hampering the recovery by making it impossible for businesses to grow and for lenders to lend. The most recent study to challenge that view comes from economists at the International Monetary Fund, who contend that the problem is not over-regulation but overly lax regulation, which, they argue, “contributed disproportionately” to the housing market meltdown and the continuing foreclosure crisis resulting from it.
The economists, Jihad Dagher and Ning Fu, see a direct correlation between the mortgage boom-bust cycle and the growth of thinly regulated non-bank mortgage companies. Originations by those lenders increased from 31 percent of the total in 2003 to 60 percent in 2007, and their increasing market share “is a strong predictor of the increase in foreclosure rates between 2005 and 2007,” the economists report in their working paper, “What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis.”
Operating outside of the regulatory framework that constrained depository institutions, Dagher and Fu suggest, the independents increased their market share “by originating increasingly risky loans,” contributing to an industry-wide reduction in lending standards. On the down side of the boom-bust cycle, the authors note, foreclosures have been highest in markets where the independents were most active. Their conclusion:
“Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.”
Can simply talking about a recession create one? Some analysts think that’s possible. The continuing drumbeat of bad economic news, they suggest (USA Today tallied 1,900 references to a “double-dip recession” in U.S. publications in July and August alone) is undermining the confidence of consumers, investors, and business executives, discouraging spending and business expansion, which, in turn, is hampering economic growth, creating a vicious and self-perpetuating economic cycle.
“All the negativity puts a chilling effect on risk-taking and prompts investors, consumers and businesses to play defense. The potential fallout,” a USA Today article explains: “Austerity replaces spending. Hoarding cash trumps longer-term investing. Businesses spend less on future initiatives and hire fewer workers, [creating] a negative feedback loop that could cause worries about recession to turn into a self-fulfilling prophecy.”
Bankrate.com’s September Financial Security Index indicated that 40 percent of consumers had reduced their spending in the previous 60 days. With consumers accounting for 70 percent of the nation’s economic output, “any sort of cutback can ripple through the economy very quickly,” Greg McBride, Bankrate’s senior financial analyst, told Reuters recently. “Obviously, if this reduction in consumer spending continues, the U.S. economy will slide back into recession,” he warned.
Some analysts see a “disconnect” between the grim mood reflected in confidence surveys, and the more nuanced, mixed messages reflected in the economic data. One recent example: Bloomberg’s “Comfort Index” fell to its second lowest level ever two weeks ago, even though a revised economic report indicated that the economy grew faster in the second quarter than initially estimated.
“We are in the middle of a mania of pessimism,” James Paulsen, chief investment strategist at Wells Capital Management, told USA Today. The country, in his view, is suffering from “Armageddon hypochondria.”
If lack of confidence is impeding growth, a confidence rebound — which could be triggered by a few stronger-than-predicted rather than weaker-than-expected reports in key sectors – presumably could reverse the trend. “If people just start feeling better, look out,” Paulsen said. Of course, the reverse also applies – if people don’t start feeling better, look out for that, too.
If you’re looking for optimists, you’ll find them today at gatherings of rental housing executives. “The percentage of renters is on the rise, the number of households is increasing, and more Americans are downsizing, all of which point in a single direction: rents are on the rise,” Brian Davis, president of ezLandlordForms, wrote in a guest commentary for Inman News.
Davis cited statistics from Reis, Inc. indicating that rental vacancy rates declined to 6.2 percent in the first quarter of this year from 8 percent a year ago, allowing landlords to begin raising rents; 75 of the 82 metropolitan areas Reis tracks recorded year-over-year rent increases between early 2010 and early 2011. Separately, the apartment market research firm Axiometrics predicts that rents will rise by almost 6 percent this year – the largest annual jump since 2005.
“The bottom line is, the rental industry is on the rise,” Davis wrote, “and some real estate experts believe its growth will accelerate rapidly over the next three to five years.”
Investors share his bullish outlook. More than 40 percent of the senior level industry executives responding to an August survey by Apartment Finance Today said they are actively seeking to acquire multifamily projects and 36.5 percent said they anticipate developing more projects this year.
“What the data—and interviews with active players in the industry—indicate is that multifamily firms are feeding their growing appetites for new construction and acquisitions more aggressively than at any point since the Great Recession,” the industry publication, Multifamily Executive, reported.
Pent-up demand, a scarcity of new product after several years of anemic construction activity, the unwinding of households that combined during the depths of the recession (roommates tripling and quadrupling up, adult children moving in with their parents) and a continuing “reticence” on the part of prospective homebuyers to make a purchase commitment will make the current year “the beginning of a boom time for multifamily property investors and operators,” the magazine predicts.