Dear President Obama,
As the election approaches next week, I feel compelled as a twenty veteran of the housing industry to write a letter that speaks to the fundamental truth of the current state of our economy. This started with housing, and it will end with housing. I hope to offer some perspective from someone on the frontline of the battle to restore some integrity to home ownership.
Things certainly got off to a rough start with the modification programs. I volunteered at several housing foreclosure prevention workshops where distressed homeowners recounted how they were told to stop making their payments in order to qualify for the low rates being advertised by these fledgling efforts to modify home loans. Although some of these borrowers achieved success in receiving modifications, all of them did so at the expense of their consumer credit scores. Any borrowing in the future will require they pay much higher interest rates for several years into the future.
I would give your administration high scores for the HARP 2.0 programs that are now allowing thousands, if not millions of severely underwater homeowners to take advantage of the current low rates, and at least reduce the debt burden of keeping an asset that is worth so much less than the current loan balance. I attend all my closings, and the look of relief on the faces of families saving $2400 to $4800/year after making payments on homes that have lost 10, 20, 30 even up to 60% of their value from just five years ago keeps me hopeful that rational defaults will not be as big of an issue as they were before this program was implemented. For the first time since the meltdown of the housing market began, I see flashes of hope among current homeowners.
But there is a large shadow lurking.
First, your opponent seems to have some desire to eliminate the mortgage interest deduction, and I am happy to see that you don’t share that viewpoint. Although I can appreciate the need to generate more tax revenue to support the needs of a growing population, with trillions of home equity wiped in less than five years, now is not the time to remove any benefits that are left for current and aspiring home owners.
Hyper regulation is another serious threat. Subprime and exotic loan programs most commonly cited as the major contributors to the meltdown do not exist anymore. Yet the current regulatory focus continues to be on compensation for originators who for the most part are only offering the safest, most fully documented loan products in nearly forty years.
What is the investment value of real estate? I know you have a great deal of respect for Warren Buffet. He provided the foreword in the bible of value investing, “The Intelligent Investor”, which defines an investment operation is “one which, upon thorough analysis promises safety of principal and an adequate return.” Most home owners borrow 96.5% of the investment of their homes, based on looking at the price of other homes in a 90 day period of time. This assumes an FHA mortgage, which is the most common purchase loan. This has always puzzled me, considering the much advertised “housing affordability index” assumes a 20% down payment. Upon more “thorough analysis”, it doesn’t appear that this is conducive to keeping the investment promise of safety of principal and an adequate return.
It generally is accepted that the seller of a house pays 6% in commissions. Half of that goes to the realtor that sells the home, and the other half that finds the buyer for the home. The problem? If the most common down payment new homebuyers make is 3.5%, then as soon as they buy they house, assuming the “investment” value definition, they are unable to recoup their cost if a resale is required in a short time. They are underwater from a resale perspective the minute they get those keys. Add to that declines in value for homes purchased from 2009 to 2012, and it appears we keep doing the same thing, but expecting different results. Your administration has suggested a higher down payment and as wildly unpopular as I know this will be within the housing community, I agree with you. A 6% down payment would at least allow new homeowners to be at breakeven if an emergency like a sudden job change (not that unlikely in the current economy) becomes a reality.
Finally, a point I have not heard brought up at any point during this election season. Financial literacy in this country is woefully inadequate. In 2008, a year before you took office, a Presidential Financial Literacy study presented by a bipartisan group of concerned advocates, business professionals and politicians revealed some startling deficiencies. Forty-thousand high school students given a basic financial literacy test received a grade of 53%. Nothing on these tests involved anything as complex as determining debt ratios (confirm this from the test), and they failed. The recommendation of the study? Implement financial literacy in the school systems from K-12. To date, this recommendation has not been implemented.
While I applaud the intent of the Dodd Frank regulation, and believe there is merit to having an agency like the Consumer Finance Protection Bureau created, the focus on banks still doesn’t educate current and future consumers. The CFPB’s mission should be to protect consumers by educating them. Focusing so much energy on how loan officers are compensated by mortgage banks take energy away from working with consumers who will undoubtedly be solicited by new financial loan providers that do not fall under the umbrella of CFBP’s jurisdiction.
It is already beginning as subprime makes its way into the fringes of mortgage lending as an “easy” alternative to the complex guilty until proven innocent loan process many borrowers face. If consumers aren’t educated to identify these programs as predatory, and instead are focused on whether Lender A is offering a fixed rate that is .25% less than the lender B, the predators will have a field day with the massive population of consumers who had their credit damaged by prior foreclosures, short sales, etc. None of the regulatory systems in place speak to the flawed system of investment valuation we have for real estate. House prices had no historical precedent for rising 80% in 9 years. But if homeowning consumers don’t recognize the realities of historical house appreciation, they will fall victim to hard money and subprime financing again as the media advertises for the fifth year in a row that we are “at the bottom.”
I hope that if you are re-elected, these issues will be brought to the forefront of the housing recovery dialogue.
Dennis “Frank” Ceizyk Jr