The MBA release of the weekly application survey on Aug. 1 demonstrated that the refinance juggernaut continues unabated. Refinances increased to 81% of total applications from the previous week to its highest level since late January. There is broad understanding that refinancing at lower rates provides additional cash in the consumer’s pocket.
One significant advantage that is less understood is the increasing percentage of refinancing where the homeowners are opting for shorter term, 15- and 20-year mortgages. Almost 30% of all refinances are shorter amortization products, up from just 5% in 2007. This is very good news because it means homeowners will be building equity at a much faster rate than if they opted for 30-year mortgages.
Faster equity build is particularly useful when utilized in areas that still suffer from significant negative equity. The Federal Housing Finance Agency in the Home Affordable Refinance Program recognized the value of shorter amortizing mortgages and facilitated that market by reducing loan level fees on shorter amortizing mortgages.
There’s no question that refinancing activity is positive for the individual and the overall economy; the problem, where is the purchase market? At rates around 4% it is almost unimaginable that there is not a more robust purchase market. It is far too simplistic and wrong to ascribe the weak purchase market exclusively to anemic job creation. Why is it so critical to understand and remove the barriers to kick-start the purchase market? Simply put, because it will drive economic growth. According to the National Association of Realtors, for each home sale, $58,000 is pumped into the economy, and for every two homes sold the Realtors estimate it generates one additional job.
Clearly, regulatory uncertainty is a heavy weight on the purchase market and the overall financial market. Until there is resolution, hopefully a sensible one, on three major regulatory initiatives—qualified mortgages, the risk weighting as a part of Basel lll and qualified residential mortgages—lenders, insurers, investors and most importantly consumers will not fully understand the cost or the ability to achieve homeownership. While this regulatory spaghetti will take awhile to untangle, this is not a permission slip to take no action to improve the purchase market and increase economic growth and jobs. Here are three areas beyond the overall regulatory uncertainty that are constricting the purchase market:
• Correct appraisals guidance in bifurcated markets. In neighborhoods that have real estate impacted by both traditional buyer-seller purchases intertwined with investor activity, getting a correct value can be difficult. While there is always figure-pointing, right now the market requires both a sophisticated appraiser and clear guidance and consistent implementation on how these neighborhoods get appraised so that purchases do not fail because of a faulty appraisal.
• The fees that the GSEs should be charging have been a constant source of debate since they were placed in conservatorship four years ago. Clearly the fees charged leading into the financial crisis were inadequate and needed to be adjusted. That adjustment has largely taken place through a series of pricing moves the GSEs have undertaken over the past several years. In fact, GSE pricing is now substantially higher than it was in 2007 and some are beginning to question if it is excessive in light of the current high-quality mortgage market. However, the Federal Housing Finance Agency is actually considering more increases. The issue with this approach is that there continues to be no private securitization market returning to replace the GSEs; therefore, the FHFA must increase pricing to "squeeze in" private capital. In fact, the lack of a private market is a symptom of two government actions that must be reversed if there is to be any hope of private capital returning to the mortgage finance market. First, GSE and FHA loan limits must be reduced to allow for private capital to compete as the exclusive funding source for mortgages. Second, the securitization market must be supported rather than discouraged by the various regulatory agencies charged with overseeing the market. There have been a series of hostile regulatory actions by the FDIC, SEC and others that significantly increase the cost of securitization. Most disturbingly, the lack of any clarity as noted previously around the securitization rules promulgated by the Dodd-Frank legislation (risk retention, QM and QRM) have proven to be a significant regulatory burden for any fledgling reboot of the securitization market.
• Restore predictability to the mortgage market. While qualified mortgage standards when finalized will set the underwriting box, the chill in the purchase market will remain until there is resolution on issues that include predictable repurchase standards and an understanding of what will trigger enforcement actions by FHA. The slew of litigations based on FHA handbooks, even where correct, has brought overwhelming risk aversion to the marketplace, resulting in an overly tight market. How long will lenders and the marketplace be in the penalty box?
In the joint Treasury and Housing and Urban Development white paper, “Reforming America’s Housing Finance Markets,” one of the recommendations is a task force to explore ways in which their housing finance programs can be better coordinated. Let me suggest initiating such a task force now to begin to resolve issues such as appraisal, buybacks pricing and hostile regulation to securitization, which are inhibiting the current purchase market.
Traditionally, in an election year the candidates would argue that these issues need to be resolved to promote the dream of homeownership, but this year, regrettably, neither campaign is talking about the value of home ownership. So in the alternative, let’s fix some of the problems facing the purchase market to drive economic growth and jobs. Certainly there is no shortage of discussion by both candidates about jobs and the economy.