A couple of weeks ago I spent a week in Washington DC at the National Association of REALTORS® MidYear Legislative Meeting. One of the key things I came away from this meeting is how terribly ignorant we really are when it comes to issues affecting us and the business being conducted by our elected officials. I say this because there are critical matters being discussed but most people are woefully uninformed and remain frighteningly ignorant. My fear is that if certain things come to pass without the outcry from the general public up front, afterwards, it might be too late.
What am I talking about? Two things really and they both have handy-dandy ‘code words’ for them – further confusing people and making their eyes glaze over.
One is GSEs and the other is QRMs.
GSEs stand for Government Sponsored Enterprise. In other words – Fannie Mae and Freddie Mac and to an extent FHA. For those who don’t know what Fannie and Freddie are – they represent the primary entities in the secondary mortgage market. What’s that, you say?
Here’s a little abbreviated finance history that is necessary to understand what I am getting at…
Prior to the Great Depression, people buying homes generally took out what were called ‘straight loans’. Straight loans were relatively short-term, interest only loans and at the end of the term, the entire prinicpal balance was due to the lender. During the Great Depression, many lost their homes. Understanding that the way out of the economic rubble of the Great Depression lay partially in housing – the government created the FHA – Federal Housing Administration - and encouraged lenders to make consumer friendly loans including a long-term 30 year amortized loans. Equal payments spread out over 30 years made monthly payments affordable. Lenders were leary of making these loans but the FHA insured the lenders against loss in case of default. So more lenders made these loans and this loan became wildly popular.
This created another problem – one of liquidity. A bank only has so much money. If they made a bunch of 30 year mortgages, all their money was now tied up in these long term loans. How can they remain liquid to keep to flow of money moving in and out of the economy? The government then, created the Federal National Mortgage Association (FNMA or better known as Fannie Mae) and the secondary mortgage market. The secondary mortgage market does not create loans, but rather buys loans from the primary mortgage market and then sells them to investors. So Fannie Mae bought up loans from banks giving banks more money to lend. Fannie in turn essentially sold them to investors. Traditionally speaking, mortgage loans were once considered relatively safe, long term investments. I put it like this: If you purchased a company’s stock, do you know how much return you might make on your investment? No. Stocks are a gamble. It could go up, it could go down. Mortgages had a set amount of return built in – known as the interest rate the borrower was paying.
Eventually, Fannie Mae was privatized into a for-profit, private corporation. In response, Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC) was established to fill the gap and expand the secondary mortgage market. Eventually, it too became privatized. Since Fannie and Freddie were purchasing loans from lenders, they established the guidelines for the type of loans they would purchase. Lenders had to meet these criteria if they expected to sell them in the secondary market, hence the term ‘conforming loan’ which means the loan conforms to Fannie or Freddie’s guidelines.
Beginning in the Clinton Administration (no politics here… just sayin’ is all) the Feds began to put more and more pressure on Fannie and Freddie to loosen up a little – make things a little easier for people to qualify and buy homes. Imagine the government whispering behind their ears saying, ‘Go on, loosen your guidelines – let everyone have a whack at home ownership! It’s good for the economy and good for the public… and don’t worry, we’ve got your back!‘ Then it went too far. Lenders were lending on criteria that if you could fog a mirror and had a decent credit score, you could get a mortgage. Anything in extreme is a bad thing.
Then came the mortgage meltdown. The way things were going was unsustainable.
So now – there is talk in Congress of eliminating GSEs altogether or reducing their role in the system ‘drastically’. When asked how they mean to provide liquidity in the mortgage market, their answer is that the larger banks in the country will step up to the plate in the absence of the GSEs. OK, now can you imagine Bank of America or Well Fargo stepping up to the plate to provide your HomeTown Community Bank liquidity? Can you see such altruistic behavior from the likes of BOA and Wells Fargo? Do you believe a private mega bank will care whether or not a small regional bank survives?
This sort of talk should be freaking out all Americans but the crazy thing is that most Americans are woefully uninformed. In fact, one congressman made a comment regarding support of this notion of eliminating GSEs from his constituents. I believe his constituents have no earthly idea what critical roles the GSEs played historically in getting us out of our last great economic crisis – but also the role they’ve played since. Most American’s have no idea what an FHA loan with a 3% down payment means. Most have no idea the role of the secondary mortgage market or that it exists at all. At best, they only know that Fannie and Freddie were part of the mortgage collapse and had to be ‘bailed out’ by the government. ”Go on, get rid of them! Good riddance!”
What happens when there is no more low down payment loans? What happens when banks, unable to compete against the major mega banks, begin to collapse leaving only a few mega banks remaining and controlling the banking system of this country? When there is no mortgage money for the American people. What happens when the American dream is no longer possible? The majority of the American public sadly will blithely let their elected representatives destroy homebuying in this country without even saying ‘boo’ out of pure ignorance – and only when they are face to face with the consequences will they realize what has happened.
On top of all this, there is also talk of QRMs – Qualified Residential Mortgages - which essentially will set up one cookie cutter loan for everyone. This loan will require a minimum of 20% down in order to get a mortgage. Sounds good you say? Well consider this, the National Association of REALTORS® (NAR)research shows that the average American family will take 14 years to save up enough money to purchase the average American home. While most agree a homebuyer should put downs some sort of financial stake in their home purchase… Think about it… even a $100,000 home will require a $20,000 down payment – not to mention the other costs of closing which could add up to $6000 more on top of that. How many families do you know who has $26,000 lying around without tapping into their 401K?
It’s a slippery slope folks… and we’re heading down with no precautions and with little resistance!
And on a final note: It occurred to me while in DC that while labor unions lobby on behalf their particular unions and their members… and while the auto industry lobbies on behalf of the auto industry. NAR – funded by it’s REALTOR members, lobby not for the best interest of it’s 1.0 million members, but rather on behalf of homeownership and property rights for everyone. We are paying for and lobbying for the American dream!
In fact, during this real estate downturn, many members have criticized NAR for not doing enough for the struggling members of our association – which is another conversation altogether. But keep in mind that there is no other body fighting for the rights of homeownership out there… except NAR… and I think it’s sad that we have to go this alone and all property owners and potential property owners in this country along with all the other peripheral industries who work with and rely on real estate – all benefit from the efforts of a few.
I didn’t mean this to be some sort of commercial for NAR – in fact, I’m a little ticked with them right now and it has to do with that other conversation I mentioned above… but personal grudges aside, I do firmly believe in what I do and ultimately the efforts of NAR in fighting to maintain homeownership rights in this country and protecting the public’s best interest… even if they don’t know what that is…
