A Housing Recovery for the Ten Percent

Let’s look at the report’s findings for the first quarter of 2013:

So what does it all mean?  First, the housing recovery is being driven by a small percentage of borrowers with the best credit and most household income.  This is hardly a sustainable, long-term approach to recovery. Second, homes are still to expensive for most Americans.  The twenty percent down payment for conventional purchase loans, along with the very low debt to income ratio’s, is proof that this is true.  Smaller loans are required to meet those debt to income ratio’s of 21% (full mortgage payment divided by gross monthly income) and 33% (full mortgage payment and all credit bureau debts divided by gross monthly income).  Lest we forget, a down payment does not include closing costs which will add another six to ten percent to out-of-pocket expenses.Even FHA loans, which appear to offer an easier road, are restrictive with credit scores over a hundred points higher than normal.  Moreover, these loans carry two types of mortgage insurance, up front which adds to the balance of the loan, and monthly (for 30 year loans) which increases the payment.  The slightly higher debt to income ratio’s only partially compensates.  Borrowers still need to have a lot of family income to get a FHA loan.My main concern is that these super tight underwriting standards make boom and bust cycles for housing more likely, not less.  Home prices increase since supply and demand is being manipulated.  Then when homeowners think the market is rebounding they put their house on the market only to find a lack of buyers.  Banks respond by loosening underwriting standards and borrowers start buying homes they truly can’t afford.  It is a very fine line that once crossed spells disaster.  Plus each successive housing bust is magnified by complex, and largely unregulated, investments associated with mortgage-backed securities and interest rates.But what about those new regulations that the Consumer Bureau just handed down.  Aren’t they suppose to head off future boom and bust cycles?  Perhaps, but I doubt it.  While I applaud their effort and intent, a qualified residential mortgage fails to get at the core of what is wrong with housing.  Moreover, Dodd-Frank failed to substantially address risky derivative-type investments.  Nothing is in place to prevent banks from betting for and against (shorting) mortgage-backed securities.  We are stuck in a horrible rut.

A new model for housing that includes loans based on net income and greater asset requirements; whose term is income driven, easier to retire and modify; a bank-borrower reassessment of risk assessment; and greater financial regulation is desperately needed.  Borrowers require education on finances as well as the entire mortgage lending process.  More regulations, whose aim is to protect consumers, will never trump a more informed borrower.

If the status quo prevails, each housing recovery will benefit only the few and put the rest of us on the verge of financial disaster.