Wednesday, March 27, 2013

New Foreclosure Prevention Tool for Fannie and Freddie Loans

by Ethan Handelman, National Housing Conference

FHFA announced today its new Streamlined Modification Initiative to enable quicker and simpler loan modifications for borrowers who have not otherwise responded to loan modification options and are more than 90 days delinquent. As such, it could become an important tool for foreclosure prevention by intervening early in the delinquency process.

The program appears designed to provide a simple, standardized modification program for delinquent borrowers that eliminates the paperwork around documenting need. As described by FHFA, the program complements other options (such as HAMP) rather than replaces them.

What’s new and different about this initiative?
  • Servicers must reach out to all eligible borrowers. Beginning July 1, “servicers must identify eligible borrowers who are 90 days to 24 months delinquent and send them an offer letter that states the terms of the modification,” according to the FAQ released by FHFA. The burden is on the mortgage servicers to initiate the modification. The primary qualifications are that the loan is 90 days to 24 months delinquent, has loan-to-value ratio greater than 80% based on current market value, and a first-lien mortgage more than 12 months old that has no more than one modification. FHFA also refers to “existing proprietary screening measures to prevent strategic defaulters from taking advantage of a Streamlined Modification,” but has not made details of that screening available.
  • Only required response from borrower is to make the new, lower, payment. There is no requirement to separately document need or qualification, or indeed to respond other than by making the payment. A borrower may be eligible for better terms through, for instance, a HAMP modification that does require more documentation and interaction with the servicer.
  • Conversion from trial to permanent after three payments. If the borrower makes the modified payment for three months, the servicer will invite them to make the modification permanent. If they miss a payment, they are still eligible for other modification options.
The program would begin July 1 and run through August 1, 2015, but as of this writing it is unclear when servicers are expected to begin outreach to borrowers.

Resources to learn more:

Tuesday, March 26, 2013

The accounting change that can attract more capital to affordable housing is closer to approval

by Ron Diner, Raymond James Tax Credit Funds, Inc.

NHC invites guest blog posters to write on important housing topics. The views expressed by guest posters do not necessarily reflect those of NHC or its members.

In January, I wrote on the simple accounting change that could attract more investment to affordable housing: moving the cost and benefits of the Housing Credit to the same side of the tax line. Just two months later, that long-awaited change is looking closer to becoming a reality.

The Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) discussed the matter in a March 14 meeting, The EITF reached a consensus-for-exposure to allow public companies to report both the costs and benefits of the Low Income Housing Tax Credits on the tax line, essentially agreeing with the June 2012 white paper prepared by the Raymond James-led task force comprising syndicators, investors and others. (The paper was prepared by Mike Beck of CohnReznick and Bentley Stanton ofNovogradac & Company.)

Although we are not over the goal line, it would seem that we are close. Based on the comments at the meeting and the overall direction the EITF seems to be heading, this is a very positive development. The proposed change would allow what is called “effective yield accounting” without a guarantee requirement, which would ensure that both the deductions and the tax credits generated by federal income tax credit investments are recorded below the line as part of a company’s income tax expense. It would enhance the accounting for affordable housing investments, eliminate a concern of both current and prospective investors and almost certainly increase the flow of capital to affordable housing.

The revised criteria to apply the effective yield method, subject to certain edits (which are not anticipated to be material), generally would require that:
(a) It is probable that the tax credits allocable to the investor will be available

(b) The investor does not participate in the operation of the investment, and substantially all of the projected benefits are from the tax credits and other tax benefits;

(c) The investor's expected return is positive, based solely on the cash flows from the tax credit and other tax benefits; and

(d) The investor holds a limited interest (LLP or LLC) in the affordable housing project for both legal and tax purposes, and the investor's liability is limited to its capital investment.
The proposed guidance is expected to be applied retrospectively, with early adoption permitted. (For LIHTCs that do not meet the criteria, the investment would be accounted for as either an equity investment or cost-method investment.)

The next step is that EITF staff will create and publish an exposure draft for public comment. The exposure draft is expected in mid-April.

Based on the discussion in the meeting, application of the proposed consensus would be limited to LIHTC programs. However, the exposure document will solicit feedback through comment letters about whether other tax credit programs may also meet the proposed criteria to apply the effective yield method.

After public comment is gathered, the EITF will hold another meeting to discuss that feedback and consider additional modifications to the proposal. Once the process has been completed, the EITF will finalize its recommendations and submit them to the FASB for final approval. In the best-case scenario, a final rule would be adopted in mid-September.

Ronald Diner is Executive Chairman at Raymond James Tax Credit Funds, based in St. Petersburg, Florida. Raymond James has been sponsoring affordable housing since 1969, and has raised more than $4 billion in equity for more than 1,300 properties across the country since the inception of the Tax Credit program in 1986.

Thursday, March 21, 2013

Senate Banking Committee hears the need for mortgage finance reform

by Ethan Handelman, National Housing Conference

I had the privilege on Tuesday of watching the Senate Banking, Housing and Urban Affairs Committee’s hearing, “Bipartisan Solutions for Housing Finance Reform?” The question mark in the title shouldn’t distract from the clear message of the hearing, that mortgage finance reform is overdue and that our guiding principles for it must span the partisan divide. Former HUD Secretary and Senator Mel Martinez testified in his role as a co-chair of the Bipartisan Policy Center’s Housing Commission to share their bipartisan blueprint for a mortgage finance system that puts private capital ahead of a limited government role to support both homeownership and rental housing. Janneke Ratcliffe of the UNC Center for Community Capital and the Center for American Progress reinforced the importance of a government role in housing finance to ensure that all in America have access to affordable housing and offered the detailed proposal crafted by CAP’s Mortgage Finance Working Group (in which NHC participates). Peter Wallison of the American Enterprise Institute was a lone voice calling for no governmental role at all in the mortgage finance system.

CAP's Janneke Ratcliffe testifies at the hearing.
Full video of the hearing is available, so I’ll stick to a few highlights:

  • Why do we need a government guarantee? Senator Crapo (R-ID) asked the panelists specifically what market functions require a government guarantee? Martinez noted two: the 30-year fixed rate mortgage, which demands more and longer-term capital than private sources will provide without a guarantee, and the To Be Announced (TBA) market, which reduces borrowing costs and allows buyers to lock-in rates before closing. Ratcliffe agreed and noted also that most other industrial countries have government guarantees in some form, often indirectly through the banking sector. Wallison decried government intervention as a source of instability. 
  • Does the private sector price mortgage risk correctly? After much discussion during the hearing of whether government can price mortgage risk effectively, Senator Warren (D-MA), put Wallison on the spot, asking whether there were any examples from history in which the private sector handling of mortgage risk survived a crisis without government intervention. As contrasting examples, she cited failures in the early 1900s, 1920s, and the recent experience of private-label securities. Wallison did not cite any specific examples but pointed to Fannie Mae and Freddie Mac as examples of government failure. 
  • Should the government use Fannie Mae and Freddie Mac guarantee fee revenue for other purposes? Panelists all agreed that attempts to use the guarantee fee to fund non-housing purposes were counterproductive. Ratcliffe added that funding the National Housing Trust Fund and Capital Magnet Fund, as Congress enacted in 2008, would be a constructive use. Several members of the committee have introduced a bipartisan bill to block just such redirection of the guarantee fees.

Thursday, March 14, 2013

A bipartisan jumpstart to mortgage finance reform

by Ethan Handelman, National Housing Conference

It’s past time for our new Congress to take reform of the mortgage finance system, particularly the role of Fannie Mae and Freddie Mac. Inaction means:

  • Homebuyers, especially first-time and low-wealth homebuyers, struggle to obtain financing 
  • Multifamily housing producers lack clarity about future availability of capital 
  • Fannie Mae and Freddie Mac operate without a long-term plan while in-house expertise migrates elsewhere 
  • Private capital remains mostly on the sidelines, waiting for clarity before reentering the market 
  • Government-backed sources dominate the market under the triage structures erected during the financial crisis 

Four senators have just introduced the Jumpstart GSE Reform Act to
move Congress in the right direction. Senators Elizabeth Warren (MA), Bob Corker (TN), David Vitter (LA) and Mark Warner (VA) have sponsored the bipartisan measure to prohibit Congress from using the GSE’s guarantee fees as a revenue source. The guarantee fees charged by Fannie and Freddie have been an all-too tempting target, but using them to fund other initiatives only harms still-recovering housing markets and makes it even harder to complete GSE reform by creating budgetary consequences to restructuring. The bill also would prohibit the Treasury Secretary from disposing of the government’s senior preferred stock in Fannie and Freddie without new legislative authority.

This is the second bipartisan prod on mortgage finance reform this month—the Bipartisan Policy Center’s Housing Commission released a report in February explaining a proposal for an explicit, limited government role implemented by a public guarantor that would replace many of the functions currently handled by Fannie Mae and Freddie Mac. NHC welcomed the BPC report and the renewed focus it brings to the critical issue of mortgage finance reform. Housing challenges cut across partisan, geographic, and economic divisions in this country. Lawmakers and housing experts are reaching across the aisle to chart a path forward. It is time for action on mortgage finance reform.

Wednesday, March 13, 2013

Does the housing market recovery mean greater affordability?

by Janet Viveiros, Center for Housing Policy

When I compare news headlines on the housing market from the last few months to those I read in the beginning of the Great Recession, I am encouraged by glimmers of good news. Even the use of the term “recovery” indicates there is cause for hope. However, the results of a fall 2012 survey I recently read on Long Island residents’ opinions on the local economy and housing post-recession, by Stony Brook University’s Center for Survey Research, gave me pause.

Housing starts are up, but enough to meet demand?
Similar to many places around the country, home values in Long Island steadily decreased during the housing crisis. But as home prices dropped, so did incomes, creating major affordability challenges for homeowners. Long Island renters, like renters across the country, also face declining incomes but without the relief of decreasing housing costs as rents have risen steadily during the housing crisis. It is no surprise that 39 percent of Long Islanders surveyed reported that they spend more than 35 percent of their income on housing costs (30 percent or less of total income is considered affordable). Nearly 6 in 10 Long Islanders surveyed indicated that they were struggling to pay their rent or mortgage. This is up from the 2010 survey of Long Islanders when 5 in 10 of the survey respondents reported having difficulty affording their housing costs. More households in Long Island, like many regions around the country, are struggling with housing costs even as the national housing market begins to see improvements.

This survey is a reminder that, while the housing crisis clearly contributed to worsening housing affordability around the country, improvements in the housing market do not necessarily translate to improved housing affordability. As a matter of fact, in many high-priced markets, a property value recovery coupled with stagnant wage growth and an inadequate supply of new housing has actually hurt affordability. There is still a great deal of work to be done to ensure that all households have access to adequate and affordable housing.

I am encouraged by the conversations surrounding the release of the Bipartisan Policy Center’s Housing Commission report and its recommended reforms to better meet the housing needs of all Americans, particularly seniors and low- and moderate-income families. Hopefully these conversations will lead to action in order to better address issues of housing affordability.

Monday, March 11, 2013

Coalition briefs Congress on QRM

by Ethan Handelman, National Housing Conference

I led a panel today to brief Congressional staff on how the qualified residential mortgage (QRM) rule can align with the qualified mortgage (QM) rule to encourage safe mortgages that are accessible to borrowers of low and moderate income and also perform well for investors. Several other members of the Coalition for Sensible Housing Policy joined me:

  • Ken Fears, Senior Economist and the Manager, Regional Economics and Mortgage Finance for the Research Division of the National Association of REALTORS
  • Kenneth W. Edwards, Policy Counsel for the Center for Responsible Lending
  • Michael Fratantoni, Vice President of Single-Family Research and Policy Development for the Mortgage Bankers Association
  • Julia Gordon, Director of Housing Finance and Policy at the Center for American Progress

Those who have been following NHC’s work on the QRM won’t be surprised by the content of the presentation. QRM shouldn’t require high downpayments or restrictive debt-to-income ratios. Indeed, the best move for regulators would be to use the recently adopted QM rule as the standard for QRM.

Tuesday, March 5, 2013

Tight budget? Think preservation

by Maya Brennan, Center for Housing Policy

The housing industry needs to think about low-cost ways to deliver affordable housing. Recent posts here and on the @the Horizon blog highlight ways to get more years of affordability from a multifamily rental property with little to no additional money, and I would encourage you to read those posts and join the discussion.

But let’s be honest. With sequestration here, we also need to answer the pressing question: How can we reduce the costs of developing affordable housing today? One answer may be preservation.

A new analysis (released by the Center for Housing Policy in partnership with the Compass Group and Summit Consulting) compares the costs of producing affordable multifamily rental housing using either acquisition-rehabilitation or new construction. When both are options, which can produce units at a lower cost?

To get all of the properties on a level playing field, we looked at the combined cost of developing and maintaining the properties over a full 50-year lifecycle. This meant adjusting the total development costs to include enough initial reserve funding to cover the expected costs of major system replacements over the years. We also tried to level the playing field by looking at just the properties financed using Low-Income Housing Tax Credits (231 of them) and controlling for a variety of other factors that might influence costs (location, project size, average unit size, etc.).

After waving a magic wand of statistics, we have results. [Note: For the stats-minded, the magic wand is really an OLS regression. See the working paper and its tables and references.]

Looking at our sample, per-units costs were significantly lower for acquisition-rehab properties. New construction added about $40,000 to $71,000 to the per-unit cost of developing and maintaining affordable rental properties for a full 50-year lifecycle. That’s 25 to 45 percent higher than the costs of acquisition-rehab.

If these results reflect the broader universe of affordable multifamily rental housing, I know which development approach I’d opt for when cost is the deciding factor.

I don’t mean to suggest that the housing industry completely move away from new construction. Holding down costs, although incredibly important in tight economic times, is not the only (or even the best) way to choose a development approach. For example, acquisition-rehab is not going to work if affordable housing is needed in an area with no suitable properties to acquire. Or maybe a development plan involves modern features that the available properties can’t accommodate. The desire for specific neighborhood features (proximity to jobs, transit, high-performing schools), incentives tied to available funding, developers’ specialties, an organizational mission…These can all be legitimate reasons to pursue a specific development approach even if the costs are higher. But isn’t it always useful to know the costs and make an informed choice?