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2014: issue 5
The Economy Freddie Mac: Only 2 in 5 Housing Markets are Improving Freddie Mac's new Multi-Indicator Market Index (MiMi) continues to show a weak housing market overall. The national MiMi value is flat compared to last month and has improved only slightly year-over- year. MiMi monitors and measures the stability of the nation's housing market, as well as the housing markets of all 50 states, the District of Columbia, and the top 50 metro markets. MiMi combines proprietary Freddie Mac data with current local market data to assess where each single-family housing market is relative to its own long-term stable range by looking at home purchase applications, paymentto-income ratios, proportion of on time mortgage payments in each market, and the local employment picture. These indicators are combined into a composite MiMi value for each market. The MiMi value ranges between -12 and 12 and helps determine if a housing market is Weak, In Range, or Elevated relative to its own stable range of housing activity and whether the market is trending toward or away from that range A market can fall outside its stable range by being too weak to generate enough demand for a wellbalanced housing market or by overheating to an unsustainable level of activity. The MiMi for March stands at -3.06 point, a 0.03 point improvement from February. The three month trend for March is +0.05. That value must move
Get ready for the subprime mortgage crack-up 2.0
By Edward J. Pinto | Real Clear Markets In 1991 community advocate Gail Cincotta, in testimony before the Senate Banking committee stated: "Lenders will respond to the most conservative standards unless [the GSEs] are aggressive and convincing in their efforts to expand historically narrow underwriting." The next year Congress imposed affordable housing mandates on Fannie Mae and Freddie Mac. Over the next 15 years the Department of Housing and Urban Development (HUD) forced the abandonment of traditional underwriting standards, which led to an
by at least one-tenth of a point or the associated directional trend for that market's three month period is considered flat. On a year-over-year basis, the U.S. housing market has improved by 0.66 points. The nation's all-time MiMi low of 4.49 was in November 2010 when the housing market was at its weakest. Most of the states and metro areas are called "weak and flat" or "weak and declining" in the MiMi narrative. Ten of the 50 states and the District of Columbia are in their stable range as are four of the 50 metro areas. The top five states are North Dakota, Wyoming, the District of Columbia, Alaska, and Louisiana, all unchanged from last month and the four metros are San Antonio, New Orleans, Austin, and Houston. The states that were most improved from February to March were Ohio, Rhode Island, Illinois, Texas, and South Carolina while those that improved the most from March 2013 were Florida, Nevada, South Carolina, California, and Texas. Improved metros on a monthover-month basis were Cincinnati, Columbus, Houston, Riverside, and San Antonio while year over year they were Miami, Orlando, Las Vegas, Tampa, and Riverside. Freddie Mac notes that most of the markets that are improving or in a stable range are areas currently in the midst of an energy boom. Overall, in March, 13 of the 50 states plus the District of Columbia are
improving based on their three month trend, and 20 of the 50 metros show an improving trend. Freddie Mac Chief Economist Frank Nothaft said, "Less than half of the housing markets MiMi covers are showing an improving trend, whereas at this same time last year more than 90 percent of these same markets were headed in the right direction. We're hopeful that many of these markets that have stalled will start moving again now that mortgage rates have eased over the
past month and the spring home buying season is upon us. House price gains are a double-edged sword at this stage of the recovery. They help those hard-hit markets where prices are still low and many homeowners are underwater, but in areas where supply is constrained, they're creating an imbalance and pricing out many first-time homebuyers." The National Mimi and interactive indices for each of the states and metro areas can be accessed at http://www.freddiemac.com/mimi/.
accumulation of an unprecedented number of weak and risky non-traditional mortgages. The collapse of housing and mortgage markets, and the ensuing Great Recession, may be directly traced to those events in the early-1990s. Earlier this month the following headline appeared in the Wall Street Journal: "U.S. Backs Off Tight Mortgage Rules: In Reversal, Administration [HUD/FHA] and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery." Clearly memories as to the causes of the recent housing market collapse are short. Indeed, political pressures are once again increasing on the private sector to degrade sound lending practices. The headline refers to two policy statements made May 13, one by Mel Watt, director of the Federal Housing Finance Agency (FHFA), and the other by Shaun Donovan, secretary of HUD. The FHFA is the regulator of Fannie Mae and Freddie Mac, which along with the Federal Housing Administration (FHA) are responsible for guaranteeing about 75 percent of all mortgage credit in the United States. Watt announced a course reversal from his predecessor Edward DeMarco. One of his most significant moves was the alignment of FHFA's policies -- with respect to discouraging private sector discretion in adhering to strong underwriting standards -- with those of
the FHA. Watt warned lenders and private mortgage insurers that "credit overlays result in the rejection of many loans that would otherwise meet [Fannie Mae and Freddie Mac] credit standards." This echoes FHA Commissioner Carol Galante's 2013 statement: "[L]ender overlays are damaging the recovery by limiting access to creditworthy borrowers." The parallels to Cincotta's statement are unmistakable: regulators must convince lenders and private mortgage insurers to stop utilizing more conservative standards than allowed by government agencies. Why do policymakers want to force the private sector to originate easy credit loans? First is the desire to use easy credit to juice an anemic economic recovery. Yet we have already had 6 years of the lowest interest rates in generations, combined with already loose lending standards. The result has been increasing home prices in concert with stagnant incomes, leading to reduced affordability, particularly in places like California. Second is to expand access to "creditworthy borrowers." This statement is duplicitous. The real goal is to get the private sector to originate more loans to sub-prime borrowers with credit scores below 660 or pre-tax debt-to-income ratios above 43 percent, and to nonprime loans to borrowers with tiny down payments. This is a continuation of a fifty-
plus years housing policy based on using ever greater leverage in a futile attempt to expand homeownership by helping unqualified borrowers buy homes. This leverage has taken the form of reduced down payments, higher debt ratios, extending loan terms to 30 years, and credit to those with impaired credit histories. This policy failure is evidenced by a stagnant homeownership rate which today stands at 62 percent (excludes owners with seriously delinquent loans), the same rate as in 1960. Yes, the rate did hit 69 percent in 2004, but that was thanks to the loose lending standards resulting from Congress' following Gail Cincotta's prescription. Contrast 1940 to 1960, a period during which the home ownership rate rose dramatically for both blacks and whites. Why? Precisely because home lending until 1960 was not highly leveraged, making it low risk to homebuyers and lenders alike. The cautionary remarks of Watt's predecessor, Ed DeMarco, also made on May 13, are pertinent: "[d]o not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency. A government effort to assist families with limited resources and poor credit history to take on increased leverage seems a curious public policy." American Enterprise Institute (AEI) resident fellow Edward Pinto is the codirector of AEI's International Center on Housing Risk.
Freddie Mac Chief Economist Frank Nothaft said, "Less than half of the housing markets MiMi covers are showing an improving trend, whereas at this same time last year more than 90 percent of these same markets were headed in the right direction. We're hopeful that many of these markets that have stalled will start moving again now that mortgage rates have eased over the past month and the spring home buying season is upon us. House price gains are a doubleedged sword at this stage of the recovery.