Okay – it’s time for a look our country’s current political and economic environment, anticipating how they are going to affect YOU as a landlord, tenant, or homeowner in the very near future. It’s a shaky situation that was touched briefly on previously with an article regarding the way Fannie Mae and Freddie Mac operate to facilitate home purchases in this country. However, legislation may be underway that could significantly alter the way Fannie and Freddie conduct business and the way mortgages are issued to individuals. There are three proposed courses of action – I will review each of them with you, and enlighten you on how they will likely effect the real estate market and, more specifically, the renters market.
As of now, the minimum down payment on a home mortgage hovers around 3% – insanely low. As a result, home ownership in this country has risen to an astounding 70%!!! Hold the phone Misure Home Owner – you know it; I know it; we all know it – 70% of the country cannot afford to own a home; matter of fact, Congress knows it too. The frivolous lending, borrowing, and purchasing of homes with inauspicious mortgage terms has created and economic climate worthy of, at the very least, temporary change.
First, Loan Modification as a solution to the current housing problem is a theoretical approach that drags with it a long line of assumptions necessary to make the plan work. Essentially, the plan aims at restructuring distressed mortgages to keep borrowers in their homes while subsequently ending the progressive drop in home values. In order to make this possible, the modified loans must be supremely constructed – already 53% of modified loans have gone bad. The plan assumes that borrowers will continue to make monthly payments even as prices drop, and the govt. gives incentives to loan services to reduce payments, making the maximum payment allowed no more than 31% of the borrowers gross income. This could effectively drop interest rates to 0%, and loan terms could be extended to 40 years.
The government intends to provide financial incentive to loan services for each modified loan – encouraging the activity in loan modification; however, as these modifications apply only to home owners incurring “serious hardships” and not investors, collecting the necessary documentation that constitutes residency and hardship from homeowners while filtering through for adequate candidates is an insurmountable obstacle. Furthermore, the modified loan must represent a better Net Present Value than a non-modified loan. This means that the cash flows generated from the modified loan must be calculated to be more valuable than those cash flows of the non-modified loans. To say the least, these calculations incur a number of assumptions themselves. Lastly, the plan will attempt to eradicate home equity loans; How? Nobody knows. In all, financial service industries do not have the capacity to handle the number of people looking to modify loans – it would take too much work, money, labor, and expertise that simply doesn’t exist. This is no more than a political ploy to make the government seem proactive in “changing” the way housing is currently approached; it will not happen. The overall process is far too complicated and slow to actually work. BUT, conversation surrounding the matter will retard the resurgence of the housing market and likely spurn continued foreclosures on distressed properties, driving more Americans toward rentals.
Next on the list of possible solutions is returning to the good ole days when a homeowner really owned a home – or at least 20% of it. Down Payment Adjustment from the meek 3% to a requirement of 20% down will send home ownership plummeting. No longer will 70% of Americans own a home, and the rental market will BOOM, as to what degree, I am unsure, but I will guarantee a major surge in residential-rental demand, as most Americans will not take a reduction in lifestyle (by moving to a smaller home), and they will rent in a home deemed fit for their lifestyles. Furthermore, Fannie Mae and Freddie Mac will surge as every asset on the balance sheet will be powerful and, more importantly, safe. The banking system will stabilize, not seeing as many ups and downs, thanks to the added degree of certainty on defaults (or lack thereof). Regardless, if 20% becomes the minimum down payment – landlords prepare, and tenants expect to pay higher rent as the supply of renters will drastically increase.
Finally, we have the simple, most realistic situation in that we (The United States of America) allow homes to foreclose naturally. In addition, our secondary market mortgage re-purchasers/re-packagers (Fannie Mae and Freddie Mac) will continue to dump off poor assets to the government and private agencies. By allowing the bad situations to fizzle and restart from the ground up, all of America can start with a clean balance sheet. Fannie Mae and Freddie Mac can begin repurchasing mortgages, providing the money necessary to purchase homes (clearly on stricter terms), and the home sales, while not quite as easy to accomplish as before, will begin to climb once again. Regardless of the chosen route of “correction,” the housing market will be driven towards rent – to what degree is yet to be determined. Tenants, acknowledge the inevitable increase in rental rates in the coming years (lock yourself in); landlords, pay attention to the surge in renters sprinting over the horizon, and strategize accordingly. Anticipate, be weary, and be rewarded. Head my advice landlords, tenants, and investors – be prepared.
The Rent Lobster