As I’m sure my industry-savvy readers — that would be you — know by now, President Obama sat down with Spencer Rascoff, CEO of Zillow, for a half hour interview in which the President answered questions that Zillow gathered from social media. The video is embedded above.
Thing is, if we’re going to understand where President Obama and the Administration are likely to head, we’re also going to want to check out his speech in Phoenix earlier in the week. The full video is here:
Furthermore, the White House has put out a simplified vision of Obama Administration’s plan for housing. The relevant link is here: http://www.whitehouse.gov/share/protecting-homeownership.
Between these three pieces of information, we could tease out what might be the Administration plan for housing going forward. Or, I could be smoking the good stuff and be totally wrong.
(By the way, I’m not really all that interested in the whole NAR vs. Zillow pillow fight going on right now in social media. That’s strictly inside baseball stuff that won’t have much of an impact on Big Important Things going down now.)
Obama Before Zillow: White House Talking Points
The stop at Zillow that has real estate insiders so abuzz was actually the last and least revealing of Obama’s Tour de Housing. I actually think his speech in Phoenix is far more revealing both of the plan and the overall philosophy of President Obama and his Administration.
It’s well worth your time to watch all 30 minutes or so of his Phoenix speech, and President Obama hit all of the points listed on the White House website. I’ve taken the trouble of listing the talking points from the White House infographic, with my snark added:
- Help responsible families refinance. (HARP 3 4TW!)
- Cut red tape for mortgages. (CFPB needs more staff to help cut the red tape resulting from HUD, IRS, Treasury, and other departments.)
- Increase home values through immigration reform. (Amnesty now!)
- Create & preserve affordable rental housing. (Renter Nation. Far more on this below.)
- Put private capital at the center of the mortgage system. (Kill Fannie & Freddie!)
- End Fannie and Freddie’s failed business model. (Kill Fannie & Freddie!)
- Protect the 30 year and other safe mortgages. (Please?)
- Support affordability and access to homeownership. (FHA needs more money.)
- Finalize simplified mortgage forms. (CFPB needs more staff!)
- Increase lender transparency and accountability. (Moar regulations, 4TW!)
- Align lender and borrower interests. (Mirabile dictu!)
- Level the playing field for community-based banks. (No idea what this means.)
Such bland generalizations explain nothing, of course. So we turn to President Obama’s speech in Phoenix for some depth.
Obama Before Zillow: The Phoenix Speech
Speaking in front of a friendly, enthusiastic crowd in Phoenix in something that looked more like a campaign rally than a pronouncement of policy, President Obama nonetheless pronounced policy and gave us a few things to chew on.
Here are the main points I took away from it, most of it explaining the bullet points on the infographic above.
“Protecting responsible homeowners” appears to be nothing more than pushing to expand HARP to everyone, regardless of whether the mortgage in question is Fannie or Freddie or not. Check out this post by Dan Green, one of the smartest mortgage guys writing about mortgage, if you want a briefing on HARP, HARP 2.0, and Harp 3 (which is what Obama is now pushing).
But given the heavy emphasis on “responsible” and “responsibility”, I’d imagine that the Administration wouldn’t propose helping anyone who isn’t paying their underwater mortgages on time (and has been for the past six months). So if you have been paying your mortgage on time, despite the fact that you’re underwater… and you have some non-Fannie/Freddie loan, I suppose this program could help. It’s only “up to $3,000” a year though, so we’ll see how many people are jumping up and down for HARP For Everybody.
On the whole, that entire proposal felt like Kung Fu Pander 3 which may or may not pass. It wouldn’t change the industry that much, however.
Neither, I think, would amnesty for illegal immigrants, aka, “fixing our broken immigration system”, which President Obama keeps throwing into the housing discussion. Sure, I suppose millions of people coming out of the shadows could boost home purchases, but given the economics of most illegal immigrants, I wonder if it wouldn’t simply boost rentals.
Likewise his idea to somehow get federal funding to pay construction workers in hard hit areas like Phoenix and Las Vegas to tear down foreclosures or renovate them.
The three substantial proposals, I thought, involved the Three F’s (Fannie, Freddie, and FHA) and One R (Rentals).
Kill Fannie & Freddie
On Fannie and Freddie, President Obama used the words “failed business model” time and again. The rhetoric frankly made him sound like some Tea Partier: private gain and public risk, heads we win, tails you lose. Listening to him speak, one would never have imagined that a few years ago, when he was a senator, Obama was the third highest recipient of political contributions from Fannie and Freddie, behind only Chris Dodd and John Kerry.
So the message is clear. If Fannie and Freddie have lost Obama, they’ve lost everybody. The Republicans have been gunning for those two for years now, and at this point, Fannie and Freddie likely have no friends in Washington.
Question is what replaces them. President Obama basically adopted the recommendations of the Bipartisan Policy Center’s Housing Commission. Yep, this would be the same BPC commission which includes Richard Smith of Realogy and Frank Keating of the American Bankers Association. Big heavy hitters.
In February of this year, BPC published a report entitled Housing America’s Future. It reads eerily like a blueprint of the Obama housing plan.
On GSE’s, here’s what the BPC suggested:
The commission proposes to replace the GSEs with an independent, wholly owned government corporation— the “Public Guarantor”—that would provide a limited catastrophic government guarantee for both the single-family and rental markets.
In the new system, the limited catastrophic guarantee of the Public Guarantor would only be triggered after all private capital ahead of it has been exhausted. The government would be in the fourth-loss position behind (1) borrowers and their home equity; (2) private credit enhancers; and (3) the corporate resources of the issuers and servicers.
This is more or less exactly what President Obama is suggesting today.
Keep this in mind, that the BPC white paper reads like the blueprint for the Obama housing plan. We’ll return to that shortly.
Strengthen the FHA
The other substantive proposal, while lacking in all manner of specifics, was to strengthen the FHA. He told stories about his grandparents using FHA loans to buy their first home, and praised the FHA loan to the skies for providing a way for “middle class” families (in quotes because that term is one of the hardest to define in the English language) to buy their own homes.
That’s welcome news for the real estate industry, given that FHA has been making a whole lot of noises about wanting to get the hell out of insuring some 40% of residential mortgages (as it did in 2010). Plus, a lot of smart people think the FHA is basically insolvent and in need of a bailout without big changes.
The BPC report, by the way, doesn’t directly address the FHA so it is unclear what may be meant by “strengthen the FHA”. But here’s one economist, Prof. Anthony Sanders of George Mason University, testifying before Congress on what they ought to do with the FHA. His summary:
The FHA’s low down payment, low FICO score policies with a 100% guarantee encourages risk taking by working class households when there is a viable alternative: renting. But simple adjustments to FHA’s policies of 1) FICO score floor of 660, 2) minimum down payment of 5%, 3) lower loan limit to $625,000 and eventually to $350,000 (or less), and 4) lower the insurance coverage to 80%.
I think this is probably the rough framework of any actual plan that gets passed with respect to the FHA. I say this because the FHA itself wants to return to its core mission of providing housing opportunities to lower-income working families, not be financing $700,000 houses in Southern California beach towns.
But in terms of deconstructing Obama, listen carefully to the words and phrases he uses (at about the 24:30 mark:
Families who are working to climb their way into the middle class, we’ve got to do what we can to make housing affordable. And that means we’ve got to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents to buy a home, and it preserves those rungs on the ladder of opportunity.
He clearly identifies the FHA with working families, not the middle class. They’re aspiring to be middle class, after all. So my read is that any “strengthening” of the FHA will focus on the lower end, rather than the high and middle.
And that concern with housing affordability, with the working class families, continues with his focus on rentals.
Here’s President Obama in Phoenix on the subject of rentals (around 19:00 mark):
Step five: We should make sure families that don’t want to buy a home or can’t yet afford to buy one still have a decent place to rent. (Applause.) It’s important for us to encourage homeownership, but a lot of people rent and there’s nothing wrong with renting. And we got to make sure that we are creating affordable opportunities when it comes to rental properties. In the run-up to the crisis, banks and governments too often made everybody feel like they had to own a home, even if they weren’t ready and didn’t have the payments. That’s a mistake we should not repeat. Instead, let’s invest in affordable rental housing. Let’s bring together cities and states to address local barriers that drive up rents for working families.
What’s fascinating about this is that I’ve been tracking Renter Nation developments for almost three years now. In September of 2010, I wrote:
[Look] at PETRA (Preservation, Enhancement, and Transformation of Rental Assistance Act of 2010) and the related HUD initiative, TRA (Transforming Rental Assistance). There are lots and lots of details here, but the essential mechanics are as follows:
- Expand private financing of public housing.
- Expand public payments to private landlords (the basic feature of property-based contracts of Section 8 housing).
- Finance the building of new multifamily units as a mixed public-private development.
I speculated that Fannie/Freddie would go away and be replaced by an explicitly governmental entity that would then start to purchase commercial multifamily mortgages while scaling back on residential mortgage purchases.
Well, read the BPC Housing Commission report quoted above, with particular attention to “and rental markets”. The new “Public Guarantor” entity will be a major player in multifamily development and financing, even as it scales back on the residential side to the fourth loss position.
Eerie, eh? But there’s more.
Moments from the Zillow Sit-Down
To be fair, President Obama did a very good job with Spencer. He came off very personable, very smart, and on the whole avoided the partisan jabs that he’s sometimes wont to try, and in fact did in Phoenix. There was nothing new specific, as I’m sure the questions were vetted ahead of time by the White House PR team and Zillow’s PR team as well.
But there were some amusing moments.
For example, in talking about his push for HARP 3, Obama tries to tell Spencer (and us) that he and Michelle would benefit from refinancing their home in Chicago, which they bought “several years ago”. Heh. You know, I’m thinking that the Obamas — and people like them — hardly need a government program to refinance their mortgage. I know he was trying to be folksy and connect with average Americans, but it does sort of suggest who the target is for HARP 3.
Another amusing moment, at least for me, was when President Obama started talking about household formation, in response to a question about what he/government can do about young families locked out of housing market because prices have skyrocketed. Well, regular readers already know my views on household formation. Unless we’re talking about a huge increase in multiple-household creation transactions, this “pent-up demand” business seems more like wishful thinking than analysis.
An important moment, or series of moments, was how many times President Obama mentioned getting “more resources” out of Congress, and in one instance, he named the reason: to construct more affordable housing, especially for young people like Jacob, for whom renting is the best option. He mentioned rentals and renting a few more times, even in response to a softball question from a teacher about how she needs to get paid more and have more job security.
In a few instances, it appeared that President Obama contradicted his words from Phoenix. Spencer mentioned how institutional investors are buying up thousands of houses out of foreclosure, and then renting them, in some cases to the former homeowners, to let them stay in their own homes. President Obama suggested that’s a great thing, and how it’s smart free market economics: buy low, sell high. Yet, in Phoenix, he specifically said that homeownership should be a symbol of responsibility, not of speculation. But what else are these Wall Street hedge funds doing except speculating?
Finally, from the Zillow session, President Obama spoke about his longterm vision in which:
Government can step in to make sure there’s still a 30 year mortgage available, and to make sure that homes that are not too upscale are available for young families, for veterans, and for folks who may have some limited means but have saved and scraped and are ready to go out there and buy.
He then mentioned that the loan limits were raised during the recession, but that we’re still scaling them back. That has to be a reference to the FHA loans. It couldn’t possibly be anything else.
What Was Left Unsaid…
You know what three words President Obama never uttered in Phoenix? “Mortgage interest deduction.”
He did, however, mention needing more resources for affordable housing and for rentals a whole bunch.
Now, since it appears that the Bipartisan Policy Center wrote the blueprint for the Obama housing plan, what did the BPC recommend vis-a-vis the mortgage interest deduction?
The commission supports the continuation of tax incentives for homeownership, but as part of the ongoing debate over tax reform and budget priorities, the commission also recommends consideration of modifications to these incentives to allow for increased support for affordable rental housing.
That sound you heard was the sound of hundreds of NAR government affairs people rending their clothes in Washington DC and in Chicago.
“My Highest Priority”
The thing that ties all of these general statements and specific proposals together, the key that decodes the thinking of the Obama administration on housing, actually comes early on in his Phoenix speech. You might say it’s the cornerstone of the Obama economic program, and therefore, of his housing program. I’ve embedded the video again below for your convenience, at the 5:22 mark:
Listen to what he says there:
Because even before the crisis hit, we have lived through a decade where a few at the top were doing better and better but most families were working harder and harder just to get by. And reversing this trend should be, must be, Washington’s highest priority. It’s my highest priority. [Emphasis mine, obviously]
If there is a more obvious play for economic populism, I’m not sure what it would look like. But I believe that President Obama is honest and fervent about this. I truly believe him when he says that closing the gap between the rich and the poor is his highest priority.
In that context, what can we expect over the next couple of years from the Obama administration?
1. Kiss the Mortgage Interest Deduction Goodbye
At a minimum, we’re talking about a significant cap. Currently, the limit is $1 million in purchase loans, and $100,000 in home equity loans. I’d expect to see that first number much lower, perhaps closer to the $215,000 national median home price. I wouldn’t be surprised to see home equity loans not deductible at all, and of course, second homes and vacation homes are kaput.
That’s just for starters. Over time, especially as the political power of the renters who benefit from the diversion of money from the MID to building/subsidizing rental housing grows, I think we can expect to see the MID phased out completely to free up even more billions for renters.
2. Decrease in the FHA Loan Limits
As President Obama said time and again, the FHA is for young families and “folks who may have some limited means but have saved and scraped”. It isn’t for $700,000 condos in San Diego. So at the same time that the government can “strengthen” the FHA by injecting more funding into the program, I’d expect the FHA loan limits to be curtailed significantly, closer to the national median home price of about $215,000.
3. Massive Efforts in Rentals
No one knows the specific mechanisms for how the Administration will do this, but using HUD’s TRA and PETRA programs seems most likely. Increasing Section 8 funding also seems likely. And if Fannie and Freddie are indeed replaced by the Public Guarantor, I’d expect to see major government role in buying/insuring commercial multifamily mortgages and building loans. Funding for this push into rentals will come from the mortgage interest deduction, from limits on FHA, and from scaling back support for the GSE’s over the next few years on the way to phase-out.
4. Oh Yeah, HARP Forever
And since he’s mentioned it again and again and again, yeah, I’d expect to see a big push for HARP 3/4/5/6/forever to enable anyone to refinance his mortgage pretty much at any time, and for the government to insure such refinances or subsidize them in some way, or what-have-you. $3,000 per household in savings has to come from somewhere, and the banks aren’t exactly thrilled to take that hit — especially the ones who are barely hanging on to solvency as it is.
A Few Concluding Questions and Thoughts
So that’s my best guess at deconstructing Obama. I could be dead wrong, of course, and politics is an uncertain thing in the best of times. But I think I’m right on this one, given his track record, his own words, and the influence of the BPC these days.
One question I do have, however, is that the President said time and again that government can protect and preserve the 30-year mortgage. The Public Guarantor will do this, I suppose, even though it wants to take the fourth loss position.
My question is, How? Smart finance people like Bill Gross of PIMCO have flatly said that they would never loan out their own money for thirty years on a fixed rate, given the inflation risk alone. So we’re going to encourage banks and investors to take more risk by having the government take less risk on those 30-year bonds, and we’re going to do it while keeping rates low? I’m just wondering how that magic will happen.
The other question, the other major hole in his speeches and conversation, has to do with the QRM rule currently making its way through the labyrinth of regulators. President Obama didn’t mention that at all, but if the QRM happens the way it has been proposed in the past, we’re looking at 20-30% down payment becoming the norm in everything except FHA loans (which, as we’ve seen, will be limited).
At last… a parting thought.
If NAR loses on MID, loses on FHA, loses on QRM, and Fannie/Freddie go away… does that mean the mighty once-all-powerful housing lobby is done for? Or are these mere temporary setbacks caused more by the macroeconomic picture than by any loss of power?
Your thoughts and comments, as always, are welcome.
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