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Freddie Mac CEO: Home Price Drops Only 1/3 Done

Wednesday, March 12, 2008 | 03:18 PM

source: Bloomberg

It's only one man's opinion, but Freddie Mac Chief Executive Office Richard Syron had some rather astounding comments to analysts today:

- HOME PRICE DROPS "ONLY" ONE THIRD DONE
- WE'RE IN A 100-YEAR STORM IN HOUSING
- US IS IN WORST HOUSING MARKET IN A CENTURY
- APARTMENT'S ROLE IN HOUSING TO BE "MUCH BIGGER"

The most controversial thing Syron was picked up in a Bloomberg report: Federal Rules Let Too Many Poor People Buy Houses, Syron Says.

That is rather inartfully expressed. What I think (or at least hope) he meant was that too many people -- Home owners formerly known as renters -- bought houses they simply could not afford.

Here's the excerpt:

"Freddie Mac Chief Executive Office Richard Syron said he's urging changes in federal rules that enabled too many low- and moderate-income Americans to buy houses they can't afford.

It's "perverse'' that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged "to put people into homes that they end up losing,'' Syron said at a meeting with analysts and investors in New York.

Syron said in an interview that officials at the Department of Housing and Urban Development seem receptive to his suggestions that they change the affordable-housing goals for his McLean, Virginia-based company and Washington-based Fannie Mae.

The goals, which were last updated in 2005, require that a certain amount of the housing units that Fannie Mae and Freddie Mac finance through their overall business and certain sub- segments meet affordable-housing needs."

Hmmm, maybe he and I are referring to different things after all!

Source:
Federal Rules Let Too Many Poor People Buy Houses, Syron Says
Jody Shenn
Bloomberg, March 12 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRGiT9IV3UC0

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Comments

Bob Shiller's chart of 116 years of US home values pretty much confirms all this.

Bottom = 2013.

Posted by: Pool Shark | Mar 12, 2008 3:24:30 PM

BR, remind Jody next time you see her that this title is accurate only if by "poor" she means "Americans."

It really frosts me to see the non-stop avoidance of this economic fact. Even if the families in question have two sustainable incomes, they were pushed into a home they couldn't afford... and they wouldn't have defaulted had they stuck to 36% DTI!

Posted by: Unsympathetic | Mar 12, 2008 3:37:50 PM

Well, there are lots of empty affordable houses now, especially in Detroit. More to come all across the country.

Posted by: Lars | Mar 12, 2008 3:44:28 PM

Now foreigners will have something tangible to buy with all those extra dollars. Time to set up that international real estate business...

Posted by: Camille | Mar 12, 2008 3:49:14 PM

This is huge. So much depends on price and the MBS the Fed is taking in is right in the midst of another 2/3rds drop in values.

Posted by: Stuart | Mar 12, 2008 3:57:29 PM

Boy, I can't believe the Great Spitzer Schadenfreude Bounce of 2008 was so short-lived. Certainly there has to be more juice in it than what we've seen today.

Posted by: bluestatedon | Mar 12, 2008 4:00:02 PM

too many people -- Home owners formerly known as renters -- bought houses they simply could not afford

yea but

it gave loggers and miners, building material factories, construction crews, banks, mortgage companies, real estate agents, tax appraisers

a reason to GO TO WORK

Posted by: Greg0658 | Mar 12, 2008 4:00:33 PM

Actually, I found the "inartfully" expressed thought to be refreshingly candid. I think artful finance is what got us here. Enough with it.

Posted by: dukeb | Mar 12, 2008 4:00:39 PM

A return to underwriting standards of old will truly kill the housing market. Imagine, a borrower needing good credit AND 20% down. How many first time buyers have $50,000 available for a down payment? Frankly, I'm excited about the possibility of cheap housing again.

Posted by: Mike M | Mar 12, 2008 4:09:05 PM

Syron says: put your hands on your head, put your hands on your hips...

Syron says: put your hands on your wallet

Posted by: Darkness | Mar 12, 2008 4:10:45 PM

Interesting, more headaches coming (?):

“Insured depositors are the wards of FDIC. Before August, FDIC would have had significant priority on the assets of a failed bank, selling off that bank’s assets to pay insured depositors. Unsecured commercial paper holders, bond investors, stockholders, and other creditors could only take what was left. The exodus of debt investors from the funding of mortgage originators like Countrywide and their replacement by FHL Banks at the head of the queue fundamentally changes this order. FDIC now only gets its pickings after the FHL Banks and the additional $200 billion in financing they have provided. This makes it more likely that, in the case of multiple bank failures, FDIC will not get a large enough slice of the pie to pay off insured depositors.”

http://www.mises.org/story/2772

Posted by: Jay | Mar 12, 2008 4:13:58 PM

I don't buy his argument that Freddie and Fannie had too much exposure to these low income loan programs in the past. Most of Freddie/Fannies exposure comes from prime loans which were a much easier target for fraud and broker abuse. These low-income programs were typically full doc and DTI could never go above 40-42% which in the scheme of things wasn't that bad, prime could easily go up to 50% or higher. Also remember that most of these low-income loans had loan limits based on the geographical area and the median house price in that area which were set by Fannie and Freddie. These values were typically on the low end of the actual values in the market. For example, California was topped out around $330k and Texas maybe $150k.
So these loans were typically better documented and the loan exposure itself was less since the homes being bought were typically small loan values (less then $150k)
I suspect this is an attempt to get congress to change their requirements as with the looming recession their fear is that these will be the first mortgages to be hit hard(er). Its not that they are bad loans when they are made, these people did qualify , its that when the shit hits the fan they are not going have the reserves to keep the payments going if they lose a job. In a capital flow sense, this would just be another burden to the already hardpressed freddie and fannie.
Whether or not this is the real reason, who knows but I smell something fishy and I think its just a diversionary tactic to cover a bigger problem... perhaps maybe flaws with their risk assessment and desktop underwriting program...

Posted by: Franks | Mar 12, 2008 4:17:35 PM

I want a bloomberg terminal :( How can I get one? :P

Posted by: Dave | Mar 12, 2008 4:20:07 PM

one thing I know.
third party financing of product prices like that which has occurred in both home and health provider markets (via health insurance) insurance leads to wildly growing prices in those sectors.(it's happened in the car market as well as financing has gotten ridiculous there as well.)

The housing sector has now reached the point of collapse trigger and soon the health provider pmarket will too as no one can afford health insurance either - therefore health insurance and then provider markets will collapse - the big health companies dependent on ridiculous compensation for health costs will collapse and - welcome back to the $20 house call by a nice doctor who actually cared about your health.

Frankly if we made health insurance and home financing and car financing illegal we would have realistically priced products in those areas and we would have scalable homes. You would build your home the old fashion way - one room at a time as you needed to expand.

You would have health care that used methods that were effective AND cheap rather than have the deck stacked toward the most profitable but not necessarily most effective methods like today.

And you wouldn't pay $5000 for a car paint job on a new car.

www.vivzizi.com

Posted by: george Watson | Mar 12, 2008 4:24:05 PM

Just cough up $25,000 a year, Dave.

Posted by: Mike M | Mar 12, 2008 4:24:09 PM

A side effect is that the lower income folks newly owning their homes are likely most vulnerable to job loss.

As renters, they'd be better able to move to find a new job, but now they're stuck with a house.

Posted by: Estragon | Mar 12, 2008 4:28:38 PM

Nah -- its about $1600/mo

Only $18k!

Posted by: Barry Ritholtz | Mar 12, 2008 4:38:24 PM

Yes, but:

Stocks Fall a Day After Huge Rally- AP

Wall Street's euphoria over a $200 billion plan from the Federal Reserve turned to caution Wednesday, leading stocks to retreat a day after their biggest rally in more than five years.

So there.

Posted by: Douglas Watts | Mar 12, 2008 4:40:55 PM

Bull, Bears, and Stags, Stockmarketeers, are a bunch of animals.

Posted by: Old Ari | Mar 12, 2008 5:09:48 PM

"require that a certain amount of the housing units that Fannie Mae and Freddie Mac finance through their overall business and certain sub- segments meet affordable-housing needs."

That's true. What's the definition of a "housing unit"? If it includes multi-family structures and it was targeted at the people who most needed its affordability wouldn't that satisy thier requirement. Why make riskier single party home loans to those who for whatever reason, appear less likely to be good for it?

Posted by: Pat G. | Mar 12, 2008 5:11:29 PM

APARTMENT'S ROLE IN HOUSING TO BE "MUCH BIGGER" -what does this mean? Can you expand on this point?

Posted by: Terry Sanford | Mar 12, 2008 5:23:48 PM

1600/mth? Thats a mortgage on 250,000 or a mortgage on 2 closets in NYC

Posted by: UrbanDigs | Mar 12, 2008 5:25:05 PM

OFF TOPIC

Check this out Barry.....

Spitzer at his new job.... Very Funny....

http://www.comedycentral.com/motherload/?lnk=v&ml_video=86026

Best Regards,

Econolicious

Posted by: ECONOMISTA NON GRATA | Mar 12, 2008 5:38:23 PM

As I was watching so many really huge houses being built in recent years, it seemed ironic that what was intended to be so opulent would eventually wind up being lived in by much larger numbers of much less wealthy people.
I had no idea that that would come so soon but the logic is very strong.

Posted by: Jessica | Mar 12, 2008 5:50:04 PM

It looks like Mr. Syron has sobered up. Where was this caution during the go-go housing binge days? These are new data points? It's obvious that market losses lead to some self-regulation. Alas, Uncle Ben believes that propping up asset prices, and their peddlers, is the Fed's new mandate.

Posted by: njdoc | Mar 12, 2008 5:55:28 PM

You know for all that expense for the Bloomberg terminal it seems the presentation graphics should look like they are more modern than the early 90s. I know it is about the data feed, but sheesh.

Posted by: Red Pill | Mar 12, 2008 5:56:14 PM

george, get rid of student loans also. another vastly overpriced item because no longer what it costs but how much per month.

Posted by: rexl | Mar 12, 2008 5:58:49 PM

BR, Why do you always cherry pick only negative news and an opinion of one CEO?

You forgot to report today’s Capital One report about credit card delinquencies declining?

What it does not fit into your bearish propaganda?

Posted by: Bearish Stink | Mar 12, 2008 6:09:19 PM

Syron is obviously one of those pessimistic naysaying doomsters. Cinefoz says that housing is going to normalize in the next couple of months.

Now who you gonna believe....Syron, who is a fraud and a crook, or cinefoz, who has bought every bottom and sold every top?

P.S.: I know that the Fed can make all the bullets they want, including bullets that don't even exist in this world, but if housing is only 1/3 down the rabbit hole...I'm not sure the Fed is gonna save this pig...

Posted by: Mr. Obvious | Mar 12, 2008 6:10:49 PM

Well we're down 27% here in San Diego so houses should be selling at 19% of their peak values! Rad! Unless you own one.

Posted by: KirkH | Mar 12, 2008 6:19:59 PM

Saw your article "Latest Bank Headache: Home Equity Loans" posted on the Silver Bear. Your pieces seem to be getting wider publication.

Posted by: Pat G. | Mar 12, 2008 6:25:41 PM

it is such bullsh** to repeatedly blame the housing mess on 'the poor'. i know dozens of middleclass people that over bought. couples making $300k buying $1.5mil homes with zero down. they are hurting big time.

the media acts like welfare mothers caused this................

Posted by: spiny mcdob | Mar 12, 2008 6:27:14 PM

I saw a dude on Bloomberg TV yesterday; he is some sort of housing market guru with perfect record.

He said that the housing market is bottoming according to his research and data. He said that everyone is missing that the rate or the number (I am not sure) of houses entering the market has significantly decelerated.

Did anybody see it?

Posted by: You and Me | Mar 12, 2008 6:42:58 PM

I've mentioned this before, but there is huge untapped demand for the Brazillian-style one-room starter shanty.

Running water optional upgrade.

Posted by: Winston Munn | Mar 12, 2008 6:49:50 PM

He said that everyone is missing that the rate or the number (I am not sure) of houses entering the market has significantly decelerated.

Incorrect. The number has risen, as all inventory numbers due to seasonality.

My advice is for him to update his numbers and learn seasonal trends. So much for being a "guru".

Posted by: ac | Mar 12, 2008 7:22:10 PM

>You know for all that expense for the Bloomberg terminal it seems the presentation graphics should look like they are more modern than the early 90s. I know it is about the data feed, but sheesh.

90s? My mac in 1984 was black on white. Maybe amber screen just screams "Bloomberg" like a certain overused plaid screams "Burberry".

Posted by: Darkness | Mar 12, 2008 7:54:32 PM

So, federal rules made them back sub-prime mortgages? We need to waterboard this guy.

"Their Congressional charters require each corporation to achieve public purposes that include providing stability and liquidity in the secondary mortgage market, providing secondary market assistance relating to mortgages for low- and moderate-income families, and promoting access to mortgage credit throughout the Nation, including underserved areas."

Helping to fuel a housing bubble seems not to fit with "stability" and keeping housing affordable for "low- and moderate-income families".

Also, saying housing prices need to drop significantly does not seem very productive.
I would think those who securitized loans on these properties would want to help stabilize it. All regions did not bubble to the same extent, those most affected seem to be places where we had significant number of illegal immigrants like California, Florida, Nevada, Arizona.

This is the untold story but is being hushed up.

http://abclocal.go.com/kfsn/story?section=local&id=3649553

http://money.cnn.com/2005/08/08/news/economy/illegal_immigrants/

I mean, we now offer social security benefits to legal and illegal immigrants from Mexico who work only 18 months (Americans required to work 40 quarters before being eligible), so why not sub-primes.

http://www.numbersusa.com/hottopic/totalization.htm

http://www.foxnews.com/story/0,2933,79013,00.html

Posted by: pft | Mar 12, 2008 8:46:26 PM

Quote: "Home Price Drops Only 1/3 Done"

Does this mean when they are totally done that our goose will be cooked?

Posted by: Winston Munn | Mar 12, 2008 8:52:01 PM

You and Me - thats because all the inventory is either on market or in foreclosure already.

Posted by: UrbanDigs | Mar 12, 2008 9:20:40 PM

Once again the responsible are penalized for the sins of the irreponsible. BOHICA!

Posted by: rockitz | Mar 12, 2008 9:24:40 PM

You can thank the liberals and activists for this. Forcing banks to lend in low income areas and put people who should be renting in new homes. What is all of the compassion about keeping people in their homes. These people do not own their homes, they are just glorified renters that will own in 25 years when their mortgage is paid off. So they have to give up the home they cannot afford and move into an apartment somewhere. Liberals act like those losing the homes they cannot afford are victims and will be forced with no place to live and this is tragic and must be stopped. What a joke.

Posted by: Eric | Mar 12, 2008 9:50:45 PM

APARTMENT'S ROLE IN HOUSING TO BE "MUCH BIGGER"

He's an optimist. I suspect that tent's role in housing will be much bigger than apartments.

(No, don't rush out and buy tent manufacturers. They'll be manufactured at prison camps in China that will undercut the regular tent manufacturers at prison camps in Indonesia.)

Posted by: Steven | Mar 12, 2008 10:24:50 PM

This might be a good time to rent then sublet apartments. Or build new apartments. I see on the horizon, a new bubble forming :)

Posted by: Rock | Mar 12, 2008 10:29:22 PM

Eric wrote: You can thank the liberals and activists for this. Forcing banks to lend in low income areas and put people who should be renting in new homes.
----------
OH PLEASE.....Both parties are to blame, for chrissakes. I heard Bush say over and over and over and over and over and over again that he wanted America to be an ''ownership society.'' Or perhaps you have eviscerated that from your memory? Blame Bush first, for pretty much everything as far as I'm concerned. After all, it's been the Republicans entirely in charge for 6 years from 2001-2007.

I'm sick and tired of Republicans blaming Democrats and Democrats blaming Republicans. They both suck !! Take some responsibility, especially you Republicans who have had all the power !!! The country goes down the tubes and all the partisans can do is blame the other side. Will some centrist with some brains step up to the plate and take charge please? No one in sight yet. No wonder the dollar is dogmeat.

Posted by: Todd | Mar 12, 2008 10:47:44 PM

And here's more for you Eric. Time to step up and take responsibility for the Republican plan that set this nightmare in motion:

http://www.heritage.org/Research/Budget/wm529.cfm

July 7, 2004
Congress's Risky Zero Down Payment Plan Will Undermine FHA's Soundness and Discourage Self-Reliance
by Ronald D. Utt, Ph.D.
WebMemo #529

The Zero Down Payment Act of 2004, introduced by Rep. Pat Tiberi (R-OH), would require the Federal Housing Administration (FHA) to offer federally insured mortgage loans to certain eligible households to buy a house without a down payment. Although the bill could lead to a very modest increase in the homeownership rate, it would do so by exposing the FHA—and ultimately taxpayers—to major losses stemming from high default rates, as evidence from similar FHA programs shows. The Congressional Budget Office estimates that the new program would cost the government $618 million from 2006 through 2009.

In addition, the bill would continue the process, begun last year with the enactment of the American Dream Down Payment Act[1], of undermining financial self-reliance among middle class families.

Risky Incentives

The Zero Down Payment Act (H.R. 3755) would require the FHA to allow eligible first-time homebuyers and “displaced homemakers” to buy a house without having to provide a down payment. Under this plan, buyers would be able to borrow more than 100 percent of the purchase price of the house, and the FHA would insure the lender up to the full amount of the loan in the event of borrower default and foreclosure.

These mortgages are risky because of the absence of an owner-provided down payment requiring some personal sacrifice to accumulate. Without a financial stake in the house, subsidized buyers have less incentive to be responsible owners. Such owners see themselves as little different from renters and often act accordingly. Indeed, one financial analyst contends, “A home without equity is just a rental with debt.”

Advocates for the bill contend that the absence of the money to provide the required down payment deters many otherwise eligible households from becoming homeowners. Current rules for most FHA loans—and common practice for most conventional lending—require the borrower to provide a down payment of between 3 to 5 percent as an equity cushion against potential loan loss through default. Under FHA’s most popular program, the required down payment is three percent of the purchase price. With today’s median-priced existing home selling for $183,600, half the homes for sale in America can be purchased with standard FHA financing for a down payment of $5,490 or less.

Although FHA’s required down payment is 3 percent of the house’s value, borrowers are permitted to finance all their closing costs through the mortgage, including FHA’s upfront insurance premium. The consequence of these added costs is that the mortgage amount often exceeds 97 percent of the house’s value. Similar cost shifting privileges will be available to borrowers under the Zero Down Payment program, meaning that these FHA loans will be insured for more than 100 percent of the purchase price of the house. As a result, FHA’s insurance exposure will exceed the value of the collateral by several thousand dollars on such loans.

Poor Performance and Worse

Evidence, including several reports from the HUD Inspector General, suggests that no-down-payment mortgages have significantly higher default rates than those where borrowers were required to use their own funds for a down payment.

Recent performance shows that all types of FHA mortgages suffer from higher default rates than other mortgage loans. During the first quarter of 2004, conventional mortgages experienced a default rate of 2.25 percent, meaning that payments due on 2.25 percent of these mortgages were past due by 30 days or more. In contrast, FHA mortgages experienced a default rate of 11.66 percent in that same quarter, nearly five times greater. Disturbingly, the default rate on FHA loans also exceeded the default rate of conventional loans rated as “sub-prime,” defined as a loan made to a borrower with a below average credit record.

Reflecting a long-term deterioration in FHA loan performance, FHA’s most recent default rate of nearly 12 percent compares poorly to the 1998 default rate of 8.5 percent and the 1980 default rate of 6.6 percent. In contrast, over that same period default rates on VA mortgages increased from 5.3 percent to 7.4 percent, while conventional mortgage default rates actually fell slightly, from 3.1 percent in 1980 to 2.25 percent in early 2004. These contrary performance measures suggest that the rising default problem is unique to the FHA, whose underwriting standards were significantly liberalized during the Clinton Administration, and not related to any economy-wide problems that would have affected all borrowers.

As evidence from existing “no down payment” FHA programs reveals, lowering the down payment to zero and insuring mortgages with negative equity will lead to even higher default rates than those typical of traditional FHA programs. In March 2000, the HUD Inspector General reviewed the performance of several special “down payment assistance” programs in which FHA participated in partnership with not-for-profit organizations that provided prospective borrowers with a gift of cash to cover the down payment. The best known of the nonprofit partnerships is the Nehemiah program that operates in four cities.

In its analysis of these programs, the Inspector General reported, “Empirical information developed during the review shows higher default rates for loans involving down payment assistance gifts provided by nonprofit organizations than for other FHA loans.” A follow-up report released in September 2002 was even more critical, noting, “The defaults on these 2,261 loans have risen dramatically and, as of February 15, 2001, the default rate increased to 19.39 percent compared to a 9.7 percent default rate for FHA loans without Nehemiah assistance in the same four cities.”

Such problems have characterized other HUD no-down-payment mortgage programs in the past, most notably the infamous Section 235 program of the late 1960s. Among the many financial disasters that have befallen HUD over the years, the Section 235 program was one of the worst. Exceptionally high default rates, property abandonment, and costly foreclosures led to budget outlays well in excess of the amount of subsidies provided to buyers. These losses were largely a consequence of foreclosures that amounted to less than the dollar amount of the outstanding mortgages. Since FHA insured these mortgages—as it will do under the new programs—the federal government was ultimately responsible for these losses.

The Section 235 program was such a disaster that it was canceled in the mid-1970s by a bipartisan majority in Congress, and by 1979, 18 percent of the program’s mortgages had been foreclosed. The painful lessons of the experience were so enduring that no president or congress since has seriously contemplated the creation of a similar program, until now.

Conclusion

Although homeownership is, without doubt, a valuable policy goal, policies to promote it should create opportunity and encourage individuals to save, not seek handouts. By contrast, the American Dream Down Payment Act and the Zero Down Payment Act reject these approaches and instead foster the kind of dependency that characterized the failed programs of President Lyndon Johnson’s Great Society, inlcuding the disastrous Section 235.

For that reason, Congress should be skeptical of such proposals. A better course would be to focus on the growing obstacles to ownership created by the extreme land-use restrictions that are increasingly common in many communities. As studies by a number of researchers reveal, minorities and others with moderate incomes are being excluded from homeownership by these restrictions and regulations.

And at a time when the U.S. homeownership rate is the highest in history and several federal home-loan programs for lower-income and savings-impaired families already exist, the Zero Down Payment Act would be a waste of public resources.

Ronald D. Utt, Ph.D., is Herbert and Joyce Morgan Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Posted by: Todd | Mar 12, 2008 11:27:26 PM

All these "pro-housing" laws require education and infrastructure to administer them, which is why they actually RAISE the cost of building housing and hence make housing less affordable to the poor -- and everyone else.

This is one area where we need SMALLer government.

Posted by: wunsacon | Mar 13, 2008 12:19:40 AM

Really people without basic knowledge are investing in realestates and getting lose due lack of buyers for the houses. And this are left idea of know use. So government take some action.

Posted by: buy houses | Mar 31, 2008 5:47:15 PM