'Horrible' Financing Changes Feared Amid Housing Recovery
Iowa experts worry that looming federal changes could make buying a home more difficult, especially for young buyers, and possibly trip up the housing market’s recovery.
A quarterly report this month shows that Iowa’s falling foreclosure rate is nearing pre-recession levels, and real estate groups in Des Moines and Iowa say homebuying is gaining strength.
“I don’t think anyone thinks we’re totally out of this, but we’re getting closer,” said Les Sulgrove, a past president of the Des Moines Area Association of Realtors. The metro area is on pace to sell more than 10,000 homes this year, a benchmark the region last hit in 2007.
“We’re hoping the government doesn’t do anything to mess this up,” he said.
President Barack Obama has joined a chorus of congressional leaders who want to wind down Freddie Mac and Fannie Mae, the government-backed housing groups that taxpayers were forced to bail out in 2008 to the tune of nearly $200 billion.
But phasing out Freddie Mac and Fannie Mae also could end most 30-year mortgages, loans that have made buying a home affordable for millions of Americans.
“That could be a horrible mistake for the housing market,” said Dan Vessely, president of Iowa Bankers Mortgage Corp., a group that provides mortgage services to the state’s community bankers. “We need to transform Freddie and Fannie so that 30-year mortgages still exist at competitive rates.”
Despite the bailout, Freddie and Fannie have played a pivotal role in making homebuying affordable, experts say.
Freddie Mac and Fannie Mae purchase mortgages from lenders; the loans are then packaged as bonds and sold to investors. That makes more money available for future home purchases.
That process, though, played a major role in the financial crisis, as investors discovered toxic subprime loans behind the mortgage-backed securities. That’s led to a call to end Fannie and Freddie.
U.S. House Republicans propose replacing them with a nonprofit, utility-like group that investors would use to securitize mortgages, without a government guarantee. Senate leaders propose providing a government guarantee for mortgage-backed securities through a new agency modeled after the Federal Deposit Insurance Corp.
The Senate proposal would shift more responsibility for possible losses to the private sector, with the new federal agency assuming less.
“The extreme of the proposals—moving to privatization—means most lenders will shy away from 30-year mortgages,” said John Gallo, a University of Iowa finance lecturer. “If I’m a lender, I do a 30-year mortgage because I know there’s a safety net behind me. If there’s no safety net, I will tend to avoid as much risk as possible.”
Lenders would be more likely to move to “shorter 15-year mortgages,” said Gallo, who believes that Freddie and Fannie could be rolled into one smaller group to provide a secondary market for mortgages. “Payments will be higher and there will be less affordablity.”
Fewer home purchases means fewer consumers buying furniture, appliances, and electronics, Gallo said. “It has a huge economic impact,” one that could hit before the five-year phase-out of Freddie and Fannie, he said.
The Neighborhood Finance Corp., a Des Moines nonprofit lender, expects to sell $20 million in home mortgages to Fannie Mae this year, money that gets pumped back into Des Moines metro-area homebuying, said Holly Olson, the group’s president.
“If I make a $100,000 loan to you, I can go to Fannie Mae and demonstrate that it was a good loan and sell it for $100,000 and make another $100,000 loan,” said Olson, whose group works with the city and other groups to revitalize older neighborhoods. In addition to loans, NFC provides grants that must be used to repair aging homes.
“Without that secondary market, I’m simply waiting for you to repay your 30-year loan,” Olson said.
Without a government-backed guarantee for mortgages, the National Association of Realtors said, credit score requirements will climb even higher, along with down-payment requirements.
Homebuyers without a large down payment would “be stuck with an adjustable-rate mortgage in an environment with rising interest rates from the historic low rates we’ve seen,” an association spokesman said. “Every five years, someone from Iowa would have to requalify for a mortgage that would increase his payment.”
That news arrives as the state and nation are working to put record levels of foreclosure behind them.
The Iowa Bankers Mortgage Corp. said the state’s foreclosure rate was 2.31 percent in the second quarter. Before the recession, Iowa was around 2 percent.
The city’s and state’s rising median sale prices indicate foreclosures are returning to more historic levels, said Sulgrove, the Des Moines real estate agent. Foreclosures typically are sold at a discount.
Sulgrove said bank-owned homes, a result of foreclosures, declined from 6 percent of the homes on the market in January to 4.5 percent in July.
Tom Miller, the state’s attorney general, said the state’s mortgage hot line continues to get calls, but the volume has declined. Counselors are also able to help a higher percentage of people who call.
Iowans are still running into job losses, divorces, medical expenses, and other problems that can cause them to fall behind in paying their mortgages, he said.
But Miller believes that the national mortgage settlement between five large lenders and the states and the federal government is resulting in loans being modified with lower interest rates or with principal reductions to better match a home’s real value.
The loans that didn’t include those fixes are resulting in “re-defaulting” by some Iowans, said Miller, who led the nation’s attorneys general in reaching that settlement in 2012.
“The settlement has been much more successful than we envisioned,” Miller said. “We thought nationwide it would provide benefits of about $34 billion to homeowners, but it’s been over $50 billion.
“In Iowa, we thought it would be $12 million to $15 million, and it’s $36 million,” he said. “It has helped a lot of homeowners.”
Miller pointed out that some significant reforms have been put in place, such as creation of the Consumer Financial Protection Bureau, but other action is still under way, such as the government’s lawsuit against credit agency Standard & Poor’s.
“Like most Americans, I’m troubled by the extent of liability of the federal government with Fannie and Freddie, as they are currently constructed,” Miller said. “I think some change is necessary.”