Editorial

Editorial

Follow-Up on Editorial: Do We Still Need Fannie Mae and Freddie Mac?

In my Editorial in the Fall 2010 online issue of Real Estate Valuation Magazine, I addressed the issue of whether we still need Fannie Mae and Freddie Mac. I offered some solutions as to what I felt would be a prudent solution to Fannie and Freddie's future.

This week, President Obama released the Administration’s plan for dealing with Freddie and Fannie in the context of the entire home mortgage market, entitled “Reforming America’s Housing Finance Market – A Report to Congress, February 2011."

Some of the report's major recommendations include:

  • Winding down Fannie and Freddie to a revised role in the mortgage market
  • Implementing immediate improvements to mortgage servicing and foreclosure processing by establishing national standards for both activities
  • Setting goals and targets to reduce the FHA's role in new mortgage production.
  • Reducing conforming loan limits.
  • Reducing the portfolio size of mortgages held by government housing finance agencies.
  • Increasing the required down payment to a minimum of 10% over a phase-in period.
  • Raising insurance premiums for government guarantees on mortgage products.
  • Returning FHA to its traditional role as the target lender of affordable mortgages.
  • Using the Consumer Financial Protection Bureau (CFPB) to empower consumers to make better informed decisions and avoid unfair lending practices.
  • Reforming the securitization market for home financing by increasing its regulation and monitoring.
  • Reforming servicing compensation and mortgages to eliminate the differences between first and second mortgages.
  • Revising goals and practices for how affordable housing and rentals will be supported by the government.

This is an overview of the Administration’s plan, which must be passed by Congress before it can be implemented. It affects the well being of some of the most powerful corporations and other interests in the country, represented by very powerful lobbies. In addition, the views of the political parties are very far apart on what needs to be done. This plan is just the first step in what is going to be a long and hard battle in Congress.

The entire Obama proposal (31 pages), which is summarized in this article, can be downloaded by clicking here.

My editorial containing some different ideas about what should be done is available in the Fall 2010 REV Magazine, downloadable at: http://www.revmag.com/downloads

HSH
askhenryharrison@revmag.com

Editorial

Are the Big Banks REALLY Too Big to Be Allowed to Fail?

The public relations firms of the big banks in the United States and England are busily grinding out PR releases, trying to convince us that they are critical to reducing unemployment and jump starting our economy. It reminds me of the old joke about the person who murdered his parents telling the judge to show mercy because he is an orphan!

There are many institutions who shared in the creation of the economic mess we are now in, that directly affects appraisers and impacts the future of our profession. My nomination for the top of the list of miscreants are the "big banks." Admittedly, they had lots of company in enabling the housing market implosion, but without their profligate involvement, the subprime mess might have been avoided. The resulting foreclosures and the continuing slow recovery, as well as the malignant unemployment problem, are directly linked to their greed and disregard of everyone’s economic well being — except their own, of course... Read More...

Editorial

Editorial: Inflation is Coming, Inflation is Coming!

It is my opinion that we are going to have some inflation in the United States shortly, and that this will be a good thing for the economy — and especially good for real estate.

I believe inflation is the inevitable result of the monetary and fiscal policies of the past year and those projected for 2011. Budget deficits have been growing dramatically, in absolute terms and as a percentage of GDP, and for the most part up to now they have not been financed with newly printed money. Instead, the deficit has been financed primarily with Treasury Bonds sold to foreign investors (China being by far the largest).

By announcing its plan to inject $ 600 billion into the economy by buying up Treasury Bonds to support the recovery and boost prices, the Federal Reserve Bank has unleashed a near-certain inflation. Fed Chairman Ben Bernanke has reiterated that the Fed is prepared to buy even more Treasury bonds over the next eight months, to continue the "economic easing" he began last month.

The simple fact is that this amounts to the Fed printing $600 billion dollars of paper money. Anyone who has taken an economics course knows that printing paper money causes inflation. That said, a modest inflation should be welcomed by those in the real estate industry.

“...a modest inflation should be welcomed
by those in the real estate industry."



A reasonable rate of inflation is good for real estate. The magic of real estate has historically been that you could invest in real estate (a home or investment property) with a small down payment, and borrow the balance with a long-term mortgage. Wise investors know that the mortgage must be at a fixed interest rate. Then, if inflation occurs (as it has for many decades), the investment appreciates in value.

Here is an example of how the magic of real estate investments works when there is a reasonable amount of inflation. Say the purchase price of a property is $300,000. The buyer puts down 10% of the purchase price, or $30,000. They get a mortgage on the remaining $270,000. In this example, the cash investment was $30,000. If there is an inflation of 3% a year, in just 5 years the property will be worth $345,000 ($300,000 x 115%) and the investor will have made $45,000 -- a 150% return on their initial $30,000 investment.

Of course this example is an over simplification, as it does not consider many other factors that may affect the value of the property, but it does explain why real estate has been a great investment when a small but reliable rate of inflation is operating in the economy.

Psychologically, moderate inflation stimulates spending, and lowers the real cost of paying off long term debt (you can pay off your mortgage using inflated dollars which are of lower value).

A nicely timed moderate inflation is, in my opinion, what will get us out of this slump! Hats off to Ben. I think he's made the right decision at the right time.