Dear Governor Romney,
As the election approaches next week, I feel compelled as a twenty year veteran of the housing industry to offer some perspective from the frontline of the battle to restore integrity to American home ownership. Many colleagues, home owning consumers, and economists seem to agree on one fact about the economic climate we currently live in: This started with housing, and it will end with housing.
I have read your plan to end the housing crisis, and I certainly applaud your desire to “facilitate foreclosure alternatives for those who cannot afford to pay their mortgage”. I hope that if elected you will support the initiatives that are working, such as HARP 2.0. Families have benefited from being able to save $200 to $400/month as they finally take advantage of low interest rates after watching their homes drop in price up to 50% the last five years. Several of them told me point blank at closing had they not been able to get some payment relief on such a large declining value asset, they would have simply defaulted. The next step is to allow people who do not fit into the Fannie Mae and Freddie Mac loan pools to take advantage of the HARP 2.0 flexibilities so that even more American homeowners can get payment relief. This will provide a rational alternative to rationally defaulting, keeping additional homes from being added to the shadows of foreclosed inventory.
I am concerned about media reports indicating that your administration would target the mortgage interest deduction for elimination. This topic has come up with several of my clients, and with my CPA, and although researchers may think the consequence on prices would be marginal, I can tell you that the psychological blow to an already fragile home owning psyche could be fatal to any fledgling housing recovery that might be under way. Your opponent in the White House has wisely decided to protect the MID for the foreseeable future.
You have also indicated a desire to reform Fannie Mae and Freddie Mac, but it concerns me that your campaign website indicates that these “government-sponsored” companies were at the center of the housing crisis. Granted, they have provided the most financing resources for more American homeowners, but their role in the crisis is perhaps not quite as onerous as the media headlines advertise. The truth is, the free market failed to regulate itself and rode the speculative boom right off the cliff. Like you, I believe that a free market works, but only if everyone participating is educated to understand how it works, and the inherent dangers of following the herd during an economic boom of any kind.
I know you have a great deal of business experience and have run several extremely successful companies, employing thousands of people. I am sure you have teams of researchers that analyze the investment value of every company you have been involved with. How do you analyze the investment value of real estate? When the boom started, I was reading the “The Intelligent Investor”. It defines an investment operation as “one which, upon thorough analysis promises safety of principal and an adequate return.” There is no other asset class I am aware of where investors (homeowners) borrower 96.5% of the investment of an asset that is valued based on a 90 day period of time (this assumes an FHA mortgage, which is the most common purchase loan. This is puzzling, considering the much advertised “affordability index assumes a 20% down payment).
Is there a fundamental flaw in how we purchase homes? With your business experience and expertise, I hope that a thoughtful analysis of this issue will arise. Otherwise I fear that we are only taking more water in the underwater housing ship with every new leverage home that is purchased. Most home owners finance 96.5% of the purchase price of their first homes. The house is then valued based on price data of other homes sold in a 90 day period of time. This assumes an FHA mortgage, which is the most common purchase loan. 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 real estate 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, and jeopardizes the safety of their principal, not to mention making an adequate return highly unlikely. They are underwater from a resale perspective the minute they get their keys. Add the Case Shiller declines in value for homes purchased from 2009 to 2012, and it appears we keep doing the same thing, but expecting different results.
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.”
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, the year before your opponent took office, a Presidential Financial Literacy study presented by a bipartisan group of concerned advocates, business professionals and politicians revealed some startling test results. Forty-thousand high school students given a basic financial literacy test received a grade of 53%.
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. This should be a role that is taken on by the housing industry itself. The housing industry’s mission should be to protect consumers by financially educating them as early in life as possible. While the CFPB expends energy on how loan officers are compensated by mortgage banks, focus is taken off of educating consumers about poor real estate investment decisions as they begin to be solicited by new loan providers that do not fall under the umbrella of CFBP’s jurisdiction.
It is already beginning as subprime and its even more expensive cousin “hard money” makes its way into the fringes of mortgage lending as an alternative to the complex “guilty until proven innocent” loan process many borrowers face. If the focus does not shift to how to protect and educate against this growing problem quickly, financial predators will have a field day targeting the massive population of consumers who had their credit damaged by prior foreclosures, short sales, etc.
I hope that if you are elected, these issues will be brought to the forefront of the housing recovery dialogue.
Dennis “Frank” Ceizyk Jr