Annual insurance premiums going up again in 2013
BY INMAN NEWS, FRIDAY, NOVEMBER 16, 2012.
A fund used to support the Federal Housing Administration’s single-family mortgage and reverse mortgage insurance programs ended fiscal year 2012 with a $16.3 billion deficit, according to an annual report submitted to Congress today.
The shortfall raises the specter that the agency will require a taxpayer bailout next year for the first time in its 78-year history.
In order to avoid a bailout, FHA will raise annual insurance premiums, sign off on more short sales, streamline sales of foreclosed properties, offer “deeper levels” of payment relief through its loss mitigation program, expand sales of delinquent loans, and, for new loans, reverse a policy instituted in 2011 that canceled required premium payments after loans reached 78 percent of their original value.
Next year, FHA plans to raise the annual insurance premium paid by borrowers on an FHA loan by 10 basis points, or 0.1 percent, which is expected to add $13 a month to the average borrower’s monthly payments.
The agency has also vowed to expand its sales of delinquent loans under its Distressed Asset Stabilization Program, committing to sell at least 10,000 such loans per quarter over the next year. Because such sales require investor purchasers to delay foreclosures for a minimum of six months, they represent an opportunity for borrowers to possibly avoid foreclosure while reducing FHA’s costs, according to the U.S. Department of Housing and Urban Development (HUD), of which FHA is a part.
The FHA has been hard-hit by defaults from housing bubble-era loans made from 2005 and 2008, with future losses estimated at $70 billion for loans made in 2007, 2008 and 2009 alone.
The agency has taken steps to strengthen its capital reserves in recent years, including raising mortgage insurance premiums three times in 2010 and again earlier this year. The agency has also tightened credit standards and prohibited seller funding of buyer down payments, a practice the agency now estimates will cost it more than $15 billion on loans issued before 2009.
“While the loans made during this administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously,” said FHA Acting Commissioner Carol Galante in a statement.
“We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”
In today’s report, the FHA said its capital reserve ratio, which measures reserves in excess of what’s needed to cover projected losses over the next 30 years, had dropped to -1.44 percent from an already slim 0.24 percent in 2011. Congress requires the agency to maintain a 2 percent ratio — a mandate the FHA now projects it will meet in 2017, up from 2014 in last year’s projections.
HUD said this year’s deficit “does not mean FHA has insufficient cash to pay insurance claims, a current operating deficit, or will need to immediately draw funds from the Treasury.” The deficit, calculated by an independent actuary, also does not take into account an estimated $11 billion in capital accumulation expected by the end of fiscal year 2013.
“Coupled with the $11 billion in additional capital from expected new insurance guarantee volumes in fiscal year 2013, we believe it is possible to return the (fund’s) capital ratio to a positive level within the year, and reduce the likelihood that FHA will need to call upon the Treasury for any special assistance this fiscal year,” wrote HUD Secretary Shaun Donovan in the report.
Whether FHA actually ends up needing a bailout will be determined not by this report, but by a valuation of the fund made for the president’s budget proposal for fiscal year 2014 to be released in February. A final decision on whether to draw funds for FHA from the U.S. Treasury will be made in September.
This year’s report projections are less sanguine than last year’s because of changes in its economic modeling, lower interest rates that have spurred refinancings and yielded lower premiums, and lower expectations for home prices, which turned around later than projected this year. Appreciation estimates do not include home price improvements since June.
The Center for American Progress (CAP), which describes itself as a nonpartisan research and educational institute, said today’s news was “almost inevitable” after the FHA stepped in after the housing bubble burst and private capital fled the housing market.
“By living up to its congressional mandate to provide support to the housing market in hard times, the Federal Housing Administration not only funded home loans for 7 million families, but prevented even more catastrophic home price declines,” said Julia Gordon, CAP’s director of housing finance and policy, in a statement. “Such declines could have cost 3 million additional jobs and sent our economy spiraling into a double-dip recession.”
Gordon noted that FHA still has more than $30 billion to settle claims, but federal budgeting rules require the agency to hold enough capital to cover all claims over the next 30 years.
Debra Still, chairman of the Mortgage Bankers Association, agreed that FHA plays a crucial role in today’s market, particularly since the agency is nearly the sole backer of credit for first-time buyers with less than 20 percent down payments.
“These buyers are a necessary support for the housing market. While there is near-unanimous agreement that FHA’s role in the single-family housing market today is too large, we must remember that the housing market would be far worse off, today and in the future, without FHA,” Still said in a statement.
She added that MBA stands ready to work with policymakers to protect the fund and enable FHA to continue to perform its mission in the single-family market. She cautioned, however, that “ensuring the right balance” in forthcoming regulations defining rules for a qualified mortgage (QM) and a qualified residential mortgage (QRM) were important for future credit availability.
QM would establish standards for borrowers’ “ability to pay” the mortgages they seek, while QRM would establish certain baseline standards for safe underwriting and require lenders to retain a 5 percent minimum ongoing stake in any loans they originate that don’t meet QRM requirements.
“For example, a final QM rule could drive an even higher share of the single-family market to FHA if it is not carefully crafted to protect consumers while ensuring the availability of credit from private sources,” Still said.
“More broadly, the best medicine for FHA is a steadily growing housing market with stable home price appreciation, a less likely outcome if the rules cause lenders to increase cost or tighten qualification requirements for borrowers.”
The regulations are under the aegis of the Consumer Financial Protection Bureau (CFPB), which postponed action on both rules in June after protests from Realtors, builders, banks, unions and consumer groups. Under Dodd-Frank, the CFPB is required to issue the qualified mortgage rule by Jan. 21, 2013.
The FHA has repeatedly said it will not require a taxpayer bailout. The National Association of Realtors has supported that stance, and urged Congress not to take steps that might discourage homebuyers, such as raising FHA minimum down payment requirements.
Earlier this year, the FHA got some breathing room after receiving a one-time payment of almost $1 billion from a $25 billion national mortgage settlement with the nation’s five biggest loan servicers.
The government has since sued one of the loan servicers, Wells Fargo, for “hundreds of millions of dollars” due to alleged “reckless origination and underwriting of its retail FHA loans over the course of more than four years, from May 2001 through October 2005.” The bank claims that the lawsuit violates the terms of the $25 billion settlement and has asked a federal judge to throw the case out.
ORLANDO (November 9, 2012) – The housing market recovery should continue through the coming years, assuming there are no further limitations on the availability of mortgage credit or a “fiscal cliff,” according to forecast presentations at a residential forum here at the 2012 Realtors® Conference and Expo.
Lawrence Yun, chief economist of the National Association of Realtors®, said the housing market clearly turned around in 2012. “Existing-home sales, new-home sales and housing starts are all recording notable gains this year in contrast with suppressed activity in the previous four years, and all of the major home price measures are showing sustained increases,” he said.
“Disruption from Sandy likely will be temporary, notably in New Jersey and New York, but the market is likely to pick up speed within a few months with the need to build new homes in damaged areas,” Yun added.
Yun sees no threatening signs for inflation in 2013, but projects it to be in the range of 4 to 6 percent by 2015. “The huge federal budget deficit is likely to push up borrowing costs and raise inflation well above 2 percent,” he said.
Rising rents, quantitative easing (the printing of money), federal spending outpacing revenue, and a national debt equal to roughly 10 percent of Gross Domestic Product are all raising inflationary pressures.
Mortgage interest rates are forecast to gradually rise and to average 4.0 percent next year, and 4.6 percent in 2014 from the inflationary pressure.
With rising demand and an ongoing decline in housing inventory, Yun expects meaningfully higher home prices. The national median existing-home price should rise 6.0 percent to $176,100 for all of 2012, and increase another 5.1 percent next year to $185,200; comparable gains are seen in 2014.
“Real estate will be a hedge against inflation, with values rising 15 percent cumulatively over the next three years, also meaning there will be fewer upside-down home owners,” Yun said. “Today is a perfect opportunity for moderate-income renters to become successful home owners, but stringent mortgage credit conditions are holding them back.”
Existing-home sales this year are forecast to rise 9.0 percent to 4.64 million, followed by an 8.7 percent increase to 5.05 million in 2013; a total of about 5.3 million are seen in 2014.
New-home sales are expected to increase to 368,000 this year from a record low 301,000 in 2011, and grow strongly to 575,000 in 2013. Housing starts are forecast to rise to 776,000 in 2012 from 612,000 last year, and reach 1.13 million next year.
“The growth in new construction sounds very impressive, and it does mark a genuine recovery, but it must be kept in mind that the anticipated volume remains below long-term underlying demand,” Yun said. “Unless building activity returns to normal levels in the next couple years, housing shortages could cause home prices to accelerate, and the movement of home prices will be closely tied to the level of housing starts.”
“Home sales and construction activity depend on steady job growth, which we are seeing, but thus far we’ve only regained half of the jobs lost during the recession,” Yun said.
Yun projects growth in Gross Domestic Product to be 2.1 percent this year and 2.5 percent in 2013. The unemployment rate is showing slow, steady progress and is expected to decline to about 7.6 percent around the end of 2013. “Of course these projections assume Congress will largely avoid the ‘fiscal cliff’ scenario,” Yun said. “While we’re hopeful that something can be accomplished, the alternative would be a likely recession, so automatic spending cuts and tax increases need to be addressed quickly.”
Regardless, Yun said that four years from now there will be an even greater disparity in wealth distribution. “People who purchased homes at low prices in the past couple years, including many investors, can expect healthy growth in home equity over the next four years, while renters who were unable to get into the market will be in a weaker position because they are unable to accumulate wealth,” he said. “Not only will renters miss out on the price gains, but they’ll also face rents rising at faster rates.”
Also speaking was Mark Vitner, managing director and senior economist at Wells Fargo, who said the fiscal cliff is the biggest situation that needs to be addressed. “Beyond concerns about the fiscal cliff, the economic improvement seems to be broadening,” he said.
“Housing will strengthen in 2013 even if the economy weakens because there is a demand for more construction, and the demand for apartments is rising at a faster rate than the need for more single-family homes,” Vitner said. “Unfortunately, apartment construction is focused on about 15 submarkets, so additions to supply will be uneven.
Even with declining market shares of foreclosures and short sales, Vitner said they will continue. “Distressed homes right now are like an after-Christmas sale – most of the best stuff has been picked over, but make no mistake they’ll be with us for a while.”
Yun projects the market share of distressed sales will decline from about 25 percent in 2012 to 8 percent in 2014.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
“Wake up and smell the coffee,” writes Michael Corbett, Trulia’s real estate expert and and host of NBC’s “Extra’s Mansions & Millionaires!” in his book Before you Buy! The Homebuyer’s Handbook for Today’s Market.
He’s talking about big chains such as Starbucks and Whole Foods. If you see them opening in a new neighborhood, it’s a sign that the neighborhood is up-and-coming, and therefore a smart real estate bet.
One of the best ways to stretch your buying dollar is to find a neighborhood that is in transition. Called fringe or transitional neighborhoods, they are typically close to major metropolitan areas and were once neglected and less desirable. Is there a trendy restaurant where a tattoo parlor used to be?
These neighborhoods are now beginning to enjoy a new life and your goal is the find them.
Has a Starbucks just opened on the corner or maybe a Whole Foods Market? These are all good signs that a neighborhood is on the upswing. You can bet that big chains like Starbucks spend a lot of money and time analyzing neighborhood potential before they open up a new store. So go ahead, tap into their market research and be their neighbor.
As a first-time real estate buyer, you probably have no idea how the overall purchasing process works or how to make sure you’re making a smart decision to purchase. And you’ll probably be very surprised to learn how much work it really is just to buy a home. To get you started in the right direction, and this is just a start, here are a few tips that you should consider.
Get lender-qualified and find a good real estate agent
To start off, you should get qualified by a lender to see what price range you can realistically afford and interview some real estate agents to find the right person to represent you in your transaction.
Once you’re qualified and have your price range estimate in hand, you’ll be able to spend your time shopping in neighborhoods that you can afford. But remember: Just because the bank says you can qualify for a certain amount, that doesn’t mean you should spend that amount. Make sure you can actually afford the monthly payment, along with all your other bills.
For real estate sales professionals, you should get referrals for a full-time agent or broker who sells at least five or more properties per year and is well-educated on the process and location where you plan to live. You should call references, check that the agent’s state sales license is up to date and interview them to make sure you’ll be comfortable working with them.
Make sure you plan to be a long-term owner
Once you know your price range and have looked at some properties, it’s time to make sure that you believe you can find a property that you will own for a minimum of five years. If your price range doesn’t match where you want to live, you’d be better off staying a renter and saving some additional money until you can afford where you want to live. This is because an owner really doesn’t earn any equity, on average, in a property for at least five years. That’s the general breakeven point, and you really need to shoot for longer than that as an ownership strategy. The truth is, long-term real estate ownership can be a great way to earn wealth, but short-term ownership usually will diminish your wealth.
Buying property is probably the most complex, riskiest and expensive thing you will ever do. Do your homework: Talk to real estate owners, go to first-time buyer seminars, check out online material and read some books to learn what to avoid in the buying process. The more you educate yourself, the better the chances that when things go wrong — and they will go wrong — they will only be minor issues, not major headaches.
Find a nice affordable property
The real gems in real estate are the nice, decent shape, moderately priced, boring houses, town homes and condominiums that are within your budget. Most buyers stretch to purchase the most expensive property they can afford. What if you lose your job? How about saving some of your money for retirement? You want your home to be an asset you can afford, not a liability that leaves you with no additional funds over the cost of homeownership. Also, skip the fixers, prize properties or anything that sounds too good to be true: Those always end up having issues, and owners realize, after the fact, that the deal they thought they were getting really was just too good to be true!
Take your time
Realistically it should take you six months or longer to buy a nice quality property that will add to your long-term wealth. Make sure you have a full understanding of what the marketplace has to offer in your price range and that you know what you’re doing.
Those are a few tips to get you started in the right direction. Real estate is buyer beware, so try to make sure you’re one of the buyers who is “aware” of how to make quality wealth-building real estate decisions. Down the road you’ll pat yourself on the back when things work out well.
Perhaps the most bullish indicator for U.S. housing is Warren Buffett.
The legendary investor has been buying up real-estate brokerages around the country as he bets on a housing turnaround. Now, he is partnering with Brookfield Asset Management, a Canadian real-estate investor, to more than double the size of his brokerage business.
Bloomberg Businessweek’s Noah Buhayar has the details:
Berkshire’s HomeServices of America Inc. unit will be the majority owner of the venture to manage a U.S. residential real-estate affiliate network, according to a statement on the new company’s website. The firms plan to offer a new franchise brand, Berkshire Hathaway Home Services, starting next year. Brookfield’s network has operated under the Prudential Real Estate and Real Living Real Estate brands.
Berkshire’s managers have been positioning the firm to benefit as the U.S. home market recovers from its worst slump in seven decades. The Omaha, Nebraska-based company has bought a brickmaker, won the loan portfolio of bankrupt mortgage lender Residential Capital LLC at auction and built its HomeServices unit by agreeing to acquire real-estate brokerages in states including Oregon and Connecticut.
The press release says the brokerages that will make up the new company did a combined $72 billion in sales in 2011. That’s more than twice the $32 billion in sales that Berkshire did in 2011 without the new brokerages.
More from the release:
The combined networks of more than 53,000 Prudential Real Estate and Real Living Real Estate agents generated in excess of $72 billion in residential real estate sales volume in 2011, and operate across more than 1,700 U.S. locations.
“Berkshire Hathaway HomeServices is a new franchise brand built upon the financial strength and leadership of Brookfield and HomeServices,” said Warren Buffett, chairman and CEO of Berkshire Hathaway Inc. “I am confident that these partners will deliver value to the residential real estate industry, and I am pleased to have Berkshire Hathaway be a part of the new brand.” … “The strength of the Berkshire Hathaway name, coupled with the operational excellence of HomeServices and the franchising experience of Brookfield, positions Berkshire Hathaway HomeServices® as a leading real estate franchise in the U.S., building on our traditions of exceptional client service and innovation. Brookfield is excited to be a partner in creating a home for the best real estate brokers and agents in the country,” said Bruce Flatt, Brookfield Asset Management CEO.
Buffett has been public about his bullish housing call for a while as he’s built his residential real-estate brokerage business, but this is a big addition.