Real Estate Toronto Canada

It’s the end of the year, so it is appropriate to look back at where we were and what has happen over the course of the year. The newspapers and magazines are filled with these reflections – the top 10 lists of music, movies and such. Another end of year tradition is to name a man, or person, of the year. This has been a long, strange year in the mortgage and real estate market so I’m going to combine the list of what factors drove the market this year with my nomination for the man of the year in the mortgage and real estate market:

Thank you, Uncle Sam

There’s no doubt in my mind that Uncle Sam was the man of the year. The real estate  and mortgage market, as well as the economy in general, have all been been driven by government involvement this year to an unprecedented degree. Look back to the beginning of this year and the mood was dark and fearful and the economy was still in freefall Unemployment is still high and foreclosures continue to be a huge problem. But the mood now is at least cautiously optimistic. Without the government stepping in, in countless ways, real estate sales would be much lower, and mortgages, if you could even get one, would be a whole lot more expensive. The real estate market collapsed due to poor loans and easy credit when the economy was booming, and with free enterprise out of the picture, the Feds were the only ones left with any money to spend. The jury is still out as to whether this approach will work in the long run, or even if it was the right approach, but for this year at least, Uncle Sam saved the market. But the government involvement went much deeper than that. The whole fabric of the real estate and mortgage industry is now shaped by the decisions the Federal Government has made over the last year.

Here are some ways that the Government changed the playing field:

Fannie Mae and Freddie Mac are still standing – Fannie and Freddie determine (mostly) what happens in the real estate market. Fannie and Freddie (mostly) set the guidelines for both borrower and  and property qualification, These big GSEs (Government Sponsored Enterprises) were completely taken over by the government a little over a year ago. So it is now Uncle Sam who is making all the rules and determining who can buy and what can be sold. Without Uncle’s backing, these enterprises would be bust, and the housing market dead. But even as the government opens the spigot and increases the backing to the GSEs, they are still tightening the guidelines. The problem is that they are working with two competing missions. As lenders, they need to worry about defaults and bad loans which hurt their bottom. As the government (the big picture) they need to get the economy going again and we can’t truly stabilize the economy until the housing market is under control. Fannie and Freddie are still doing loans, but they are only taking the best loans. Anything that doesn’t fit into the box gets pushed over to FHA.

FHA increases market share – Over the last 2 years FHA went from a small sliver of the mortgage lending market to about 40% of the mortgages originated. FHA has grown because it is doing all the things that Fannie and Freddie won’t do anymore (low down payments, less than perfect credit, easier condo approvals). If FHA hadn’t stepped up and increased their lending, a good portion of the first time home buyers, the most active segment of the market, would still be renting. FHA’s mission has always been to make affordable mortgages so more low and moderate income home buyers could make the step into home ownership. Now that they have raised their loan limits (up to $410,000 for single family homes in the Chicago area) FHA is the first choice for many buyers who would traditionally buy with a conventional mortgage. But FHA is having the same problems as Fannie and Freddie. As long as the economy is soft and unemployment is high, loan defaults will be a problem. FHA is now under pressure to tighten their guidelines and shore up the bottom line.

FED goes to extraordinary measures to keep rates low – Toward the end of last year mortgage rates were in the 6% range. Mortgage rates this year hit their all time lows and have spent the entire year between the high 4s and the low 5s. So, why were rates so low? Uncle Sam again. The federal Reserve Board (the Fed) went on a huge spending spree to bring more liquidity to the market, and one of their big spending programs was a program to buy mortgage backed securities. Mortgage backed securities are bundles of mortgages, and they in large part determine what consumers will pay for mortgage interest rates. The Fed committed 1.25 trillion dollars to this program, and they have now spent about a trillion. The program runs through the first quarter of this year. There is no doubt that the Fed’s action kept rates much lower than they would have been otherwise, and any home owner who refinanced into a lower rate this year, or who bought a home with a phenomenal interest rate, should say thanks to Uncle Sam.

First time home buyer tax credit – As part of the stimulus bill at the beginning of the year, when the economy was at its darkest, the government reformulated the first time home buyers credit. With an $8,000 incentive for buying a new home, first time home buyers were the big force in the housing market. This didn’t lead to many move up buyers, as the first time home buyers concentrated on foreclosures and short sales. The home buyers tax credit has now been extended for contracts put together by April 30th (you have up to the end of June to close) and move up buyers are now eligible, too. Once this runs its course we’ll see if this was a real boost to the market or just a way to get buyers who would have bought anyways to commit sooner, but again, this made a big difference this year.

More regulations and restrictions – The pendulum theory is in play here. When things go to far in one direction you can bet that they will swing too far back in the other direction. A few years back there was almost no regulations on the mortgage industry – we weren’t even required to be licensed until a few years back. This obviously led to abuses, and with the mortgage market at the center of the economic melt down, more regulation was needed. But much of the regulations that came out were aimed against products that were no longer available. Most of the abusive loan officers and companies have already failed or left the business, so some of this is a matter of closing the door after the horses have already escaped. Other regulations, like the HVCC appraisal guidelines, actually made it more expensive for consumers to get a mortgage. Getting a mortgage is usually the biggest financial transaction most of us will ever make, so we do need strong consumer protections in place. There is a lot more regulation and new changes coming in the mortgage industry, my hope is that they get the mix right so that it actually helps the consumer.

Made the big banks bigger – The banks that were too big to fail are now much bigger. When Uncle came in with their TARP funds and rescued the big banks, the law of unintended consequences went into effect. The big banks were a big part of our economic collapse. The big banks were the ones who loosened their loan standards and came up with all the toxic loan products (no income, no assets required) which expanded the housing bubble. Now, with government backing, these banks have increased their market share. Four banks, Chase, Bank of America, Wells Fargo and Citigroup, now make up over 50% of all the loans originated. They are still only lending for loans which they can sell back to the government (Fannie, Freddie and FHA) and their margins are higher than ever. This situation is bad for competition and bad for the consumer, but I don’t expect this to change any time soon.

This is just the tip of the iceberg in the government intervention. Uncle Sam was also pushing hard to stop foreclosures (without much success) by getting homeowners to modify their mortgages, and propping up the economy in a multitude of ways. The economy is still fragile, and it is much harder to get a mortgage now than it used to be. But there is no doubt that without government intervention the situation would be much more grim. That’s why Uncle Sam is my man of the year.

Stay tuned in the next few days for my predictions of what i see happening in the mortgage and real estate market over the next year.

Peter Thompson 630-479-6424                   Chicago FHA mortgage

Chicago Illinois Mortgage Rates                   First time home buyer loans

Chicago Area Mortgage Company