Obsession to Halt Mortgage Fraud Is Hampering a Housing Recovery

Between insanely rigid loan underwriting requirements that have knocked many would be purchasers out of the housing market, utterly ineffective homeowner assistance programs, and restrictions on loans and/or the number of properties owned by legitimate real estate investors, the government regulatory bodies have almost guaranteed that the U.S. housing market will remain in a free fall - wiping out more and more homeowners' equity in the process and setting the stage for more homeowners contemplating simply walking away from their underwater properties. For anyone in the real estate industry, the sources of the problems seem so obvious, yet no one in Washington seems to have figured it our or much less even seem to care about the ongoing financial carnage in the housing market. It drives me to distraction. An op=ed piece in the Atlanta Journal-Constitution looks at the ongoing idiocy in the area of real estate investors. Here are some highlights:
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Roughly three in 10 homes in the United States are now worth less than the mortgages on those homes. There is a continuing cycle of homeowners walking away from their mortgages, driving down home prices and causing other homeowners to abandon their mortgages.
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There are potential fixes to housing that do not require new federal stimulus measures but merely require that present programs, policies and attitudes be tweaked. The sledgehammer we have been taking to the housing market to prevent mortgage fraud needs to be replaced with a scalpel because the former approach is depressing the recovery of the housing market.
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First, in combating mortgage fraud, a bias has developed in federal loan programs against investors that must be eliminated. Under the federal Home Affordable Foreclosure Alternative, investors must hold their newly purchased homes for six months before they can be resold. Fannie Mae will not permit investors to receive additional financing once they have purchased 10 homes. Lenders and private mortgage insurers will not finance or insure buyers who want to pay more for a house than what the investor paid in the previous three to six months.
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Rather than looking at investors as vultures or potential mortgage fraudsters, an attitudinal shift needs to occur where they are embraced as the potential saviors of the housing market that they are. Until investors start making money in housing, and lots of it, there will be no recovery in the housing market. This will only occur when disincentives to invest are eliminated. Like in any other market, when fear is replaced with greed, housing inventory will decline, prices will rise and a sense of urgency to buy will be restored to the market.
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While mortgage fraud is a legitimate concern, it should be addressed through closer scrutiny of borrowers rather than by imposing a brake on the rise of home prices.
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Second, let’s make it easier for defaulting homeowners to remain in their homes as renters. Now, defaulting homeowners may not remain in their homes after they have been sold to a third party in a short sale transaction or conveyed back to the lender through a deed in lieu of foreclosure. . . . . .encouraging defaulting owners to remain in place as tenants will prevent the community destabilization that will inevitably occur if millions of former homeowners are otherwise displaced from their homes.
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Third, let’s eliminate the governmental bias against condominiums and accord them the same status as single-family homes. At present, FNMA will effectively not buy mortgages in complexes where more than 15 percent of the owners are delinquent in paying their association fees or where more than 49 percent of the units are leased. Reaching these limits is, therefore, a financial death sentence for existing condominium communities, depressing prices further in these communities.
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Fourth, loosen up on appraisal standards. Every Realtor still in the business will tell you that he or she has worked on countless bona fide real estate transactions that fell apart because an appraiser said that the sales price was too high. In markets where prices are falling and there are few or no comparable home sales, or the comparables are mostly foreclosures, good (and valuable) homes end up getting clobbered by low appraisals. However, the current appraisal system artificially depresses market prices by not allowing for the natural rise of home prices absent a comparable home sale.
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The foregoing are common sense and realistic ways of ending the housing market free fall. I see the problems described in the article virtually every day. When is some one in Washington going to open their eyes?