Understanding the Mortgage Credit Crunch
Building Industry Assn., Desert Chapter
By Fred Bell
By now I think we all know that the credit crunch is for real and is creating turmoil in the housing industry. It has unsettled the confidence of investors on Wall Street and consumers on Main Street. Market analysts and the media have piled on, sounding a death knell for the housing industry. Tag lines insinuating that there's no mortgage money, foreclosure rates are skyrocketing nationwide and home values are in a free-fall with no bottom in sight abound.
I'll set the record straight in a moment, but first I want to show why there is light at the end of the tunnel. Housing has always been a cyclical business and the industry worked its way through tough times before. The right policy decisions can get us through this period as well. The leadership at the Building Industry Association is acutely aware of the breadth and increasing depth of the problems in the mortgage markets. We have turned the focus of civic leaders to stabilizing housing in order to avert a full-fledged economic recession.
Results have been seen on several fronts: The Fed has cut interest rates six times since September -- a cumulative total of 3 percent -- to stabilize financial markets and increase liquidity in the credit markets. The central bank has also taken unprecedented action to make funds available for investment banks squeezed for credit. The President has signed into law a bill to eliminate taxes on forgiven mortgage debt. The House and Senate have each passed FHA reform, and we are hopeful that it will soon be enacted. The Administration has implemented "Hope Now," an initiative intended to prevent foreclosures. Federal regulators are providing FHA, Fannie Mae, Freddie Mac and the Federal Home Loan Banks more flexibility to address the subprime crisis. Congress has approved an economic stimulus package that will temporarily raise the FHA loan limit and the conforming loan limit for Fannie Mae and Freddie Mac through year-end. Locally, we have seen cities taking action to reduce the carrying costs of excessive building fees.
Congress and our State and local leaders need to go beyond the stimulus package to jump-start the housing market and keep the economy moving forward. Here's what lawmakers need to do: Provide tax credits and other incentives to stimulate home sales and help reduce the inventory of unsold homes. Adopt comprehensive reform legislation for Fannie Mae and Freddie Mac to enable these financial institutions to provide badly needed liquidity to the mortgage market. Modernize FHA to assist first-time and moderate-income home buyers. Expand the mortgage revenue bond program to help strapped borrowers refinance existing mortgages. Allow businesses to carry back net operating losses for five years to save jobs and help them weather the economic storm an allow withdrawals from IRAs for the purchase of a first home. Taking these actions will pay huge dividends for housing and the entire economy.
What the media is not reporting is that there is no credit crunch for qualified buyers taking out conventional loans for under $417,000. This is where the bulk of all home loans are made. The reason why this market continues to operate normally is because loans up to this amount can be purchased by Fannie Mae and Freddie Mac have the implicit guarantee of the federal government. While underwriting standards may have tightened for all loans, credit-worthy home buyers should have no problems finding conventional, conforming mortgages at very attractive rates. Getting the word out that mortgage money is available at very attractive rates is vital to boosting consumer confidence.
Foreclosures are high but limited in scope. A close examination of the facts shows that for a VAST MAJORITY of the country, there is no foreclosure crisis. While foreclosure rates have increased this year, almost all American home owners are making their mortgage payments on time. It's also important to note that a high percentage of foreclosed loans to date have been among speculators or investors who were looking for quick profits and just walked away from their investments when the housing market cooled.
As for the myth that home values around the country are in a free-fall, let's stick to the facts. Karl Case, who distributes the monthly S&P/Case-Shiller Home Price Index along with Robert Shiller, was recently quoted in National Mortgage News as saying: "There's no question there's no (housing) bubble in 43 states. Case added that home prices have remained relatively flat in most places, even though some of the larger markets are struggling. Nearly all the markets that posted the largest average decline in home prices during the past year have appreciated in value by more than 80 percent since January 2000, according to the latest S&P/Case-Shiller home price statistics. It makes sense that the most super-heated housing markets are now experiencing the most serious market corrections.
There is absolutely no question that over time, home values will stabilize and then move upward with the next recovery. To argue that home values will continue to decline and never recover, one would have to make a convincing case that it will cost less to build a new home five years from now than it does today. That's not going to happen. Despite today's housing slowdown, the price of building materials continues to go up due to worldwide demand and upward pressure on commodity prices. Look at population and household growth; the increasing scarcity of available land. The costs of getting land entitled will continue to go up because of more and more restrictions and fees being added by local governments. Over time, all these factors will continue to drive up the cost of housing.
With home builders appropriately cutting back on new supply to meet current market conditions, they are offering great incentives to boost sales. This is a boon to home buyers. But six months or a year from now, as the supply-demand equation rebalances, builders may stop offering these incentives. When it comes right down to it, Americans have only two options. They can rent a home or they can buy a home. Most people prefer to own the place where they live and raise their family. For credit-worthy buyers, the option to purchase is still very viable and makes a great deal of sense.
June 2008 Issue