The Government Housing Finance Cartel – FNMA, FHLMC and FHA - want Stable to Slightly Rising Prices, So Be It!
I have argued in prior posts that the Government has created a Housing Cartel which controls the rate at which foreclosed or seriously delinquent homes are liquidated and the requirements to receive a government loan to buy your home. The major banks, which now are the main originators of government mortgages (read virtually all mortgages), are under the government’s regulatory thumb and move not a muscle unless they get the word from the White House that they are “free to move about the office.”
Buying a home is really tough, unless you pay cash. I have had numerous conversations with traditional Mortgage Brokers describing the odd behaviors of Underwriters at banks originating government mortgages. Home loans are declined for truly lame, capricious and simply arbitrary reasons, notwithstanding the borrowers’ overall financial health. Normally, a home mortgage stands on three legs, Income and liquidity, Loan-to-Value and Credit. Particular strength in one would historically compensate for some weakness in one of the others. Now, however, not only are square pegs that fit the particular square hole all that need apply, but the peg needs to be perfectly aligned with the hole.
Our Fix and Flip investors worry most about the buyer’s actual approval for their mortgage. The unwillingness of the underwriter to stamp the file, “Approved,” represents the greatest threat to the success of their project and investment.
With the Cartel controlling the supply of existing homes on the market by virtue of controlling the listing and sale of foreclosed properties and the rate that short-sales are approved, plus the Cartel controlling the number of mortgage applications that are approved (not to mention interest rates and other loan terms) and the pace at which they move to the closing table, the downside in the current market is limited. Keep in mind, too, that the upside will be limited, too, by the Cartel’s vast supply of homes from which its inventory will come over the coming years. Keep in mind, too, that Cartel’s historically have had little success in maintaining their power over market prices and have ALWAYS received a rude shock from true market forces, destroying their market power or dramatically reducing their market influence. I cannot predict whether that rude shock will lead to higher or lower prices for housing.
The implications are pretty straight forward for all types of buyers:
· Fix and Flip investors need to be disciplined about the price they pay and the extent of improvements they make to any investment house, to assure a reasonable profit margin.
· Fix and Hold investors need to be disciplined about their price and improvements, too, but very sensitive to the local economy and its ability to sustain the investment with solid positive cash flow through rents, believing that the resale market will likely be limited for years.
· Primary residential buyers should buy reasonably confident in the fact that the Cartel is doing everything it can to sustain the market prices at current level and encourage slightly rising prices, however, qualification will be horrific for 95% of buyers using long term financing.
Our Loan Fund makes “hard money” loans from 6 to 60 months to businesses and investors for business purposes. We make loans traditional banks refuse to make secured by real estate of all types. Our borrowers more often than not will use us many times during their efforts to earn a living and reinvigorate the local economy.
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