Real Estate Article

Housing Finance – The Government vs. the Private Sector

Diana Hill
Professional Real Estate Investor Instructor

In March, the Obama Administration cut FHA refinancing fees hoping to help 3 million homeowners. Here is how the program will work: effective June 11, 2012 qualifying borrowers (borrowers with existing FHA insured mortgages signed on or before May 21, 2009) can refinance and reduce mortgage insurance cost.  Mortgage insurance will be reduced to .01 percent of the loan; down from 1 percent.

The refinancing lender (under this program) is not required to verify the homeowner’s income, employment or credit score. Yes, we are back to “no doc” or “NINJA” (no income, no job or assets) loans.  On top of that, no appraisal is required, so the homeowner can be underwater and still get refinanced.

According to the FHA, there are currently 3.4 million households with loans endorsed on or before May 31, 2009 that are paying more than five percent interest.  This program would allow many to get refinanced and could save these borrowers an estimated $3,000 a year.

But where is the money to pay for this program coming from? New borrowers getting FHA insured loans and existing loans over $625,500.  FHA is increasing its upfront premiums on most new loans by 75 basis points to 1.75 percent and will raise annual premiums 10 to 35 basis points on mortgages greater than $625,500.

Now let’s look at how private industry is trying to create housing finance reform.  NAHB (National Association of Home Builders) has announced a new framework for reforming the housing finance system.

NAHB Chairman Barry Rutenberg says “our plan seeks to overhaul the housing finance system to ensure that housing credit is available and affordable in the future and is delivered through a competitive, efficient, sound, safe and stable system.”

The NAHB plan will be a departure from Freddie Mac and Fannie Mae, the big GE (government enterprises).  It will focus on private mortgage companies that would be governed by prudent underwriting standards and have adequate oversight.

The government would still have a role under this new plan, they would guarantee the privately funded insurance.

Here is an outline of the NAHB program:

  • Restart a carefully regulated fully private mortgage-backed securities system.  NASASAHB believes reforms are needed in the system for rating mortgage-backed securities and is supporting the development of new securities ratings agencies that would use criteria developed by securities investors to assure objective evaluations and avoid conflicts of interest.
  • Continue the role of federal government housing agencies.  The housing finance support role of the Department of Housing and Urban Development, Federal Housing Administration, the Department of Veteran’s Affairs, the Department of Agriculture and the Government National Mortgage Association would be preserved.
  • Enhance the position of state and local housing finance agencies (HFAs) as a source of housing funds.  The HFAs should have a more prominent housing finance role through the development of original programs for new homes and multifamily rental units involving partnering with federal and private providers of housing capital.
  • Expand the role of the Federal Home Loan Banks (FHL Banks) in the housing finance system.  The FHL Banks should continue their current activities to serve as an ongoing liquidity source for institutions providing housing credit.  Existing programs, such as the FHL Banks’s mortgage purchases programs, should be enhanced by allowing the banks to move beyond portfolio purchases to securitization.
  • Repair flaws that produced the housing boom and bust.  It is extremely important to continue and complete steps to close the gaps in standards and oversight that allowed and facilitated the improper and illegal activities in financial and mortgage markets.  This should be done by undertaking a series of comprehensive reforms to ensure sound mortgage products and prudent underwriting; requiring sound mortgage securities structures and full transparency for investors; and imposing adequate oversight on previously unregulated segments of the mortgage and financial markets.

There is an Online Professional Real Estate Investor Course starting May 9, 2012.  Contact your education counselor for more information.

Great Fortune

Diana Hill

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.