TR-HNR-April-2019

APRIL 2019 VOL 13 ISSUE 4 THINKREALTY.COM/HNR

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GSE Reform: Housing Finance Savior or Looming Disaster?

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MY TAKE Gathering Risks Make 2019 A Challenging Year for Mortgage Lenders 16 SPOTLIGHT Maryland Still an Attractive Place to Invest 20

BIG DATA SANDBOX Buy or Rent? That is the Question 27 DATA IN ACTION Rental Markets with the Most Upside 34

Contents

The battle for Fannie Mae and Freddie Mac – so-called government- sponsored enterprises or GSEs – involves two hugely profitable companies and what will become of them. They were open and functioning even during the worst moments of the mortgage meltdown. And yet, somehow, they are still in government hands after more than a decade as a federal conservatorship. The trillion-dollar question is what’s next for Fannie Mae, Freddie Mac, and the mortgage marketplace? 04 FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER? 2019 is set to be a year of significant uncertainty in the housing market, writes Tendayi Kapfidze, chief economist at LendingTree. Macro factors in the overall economy and in the housing sector both have a broad range of possible endpoints, among the widest since the housing bubble burst. For mortgage lenders, this means it’s a particularly perilous time to be in business and will require some dexterity and foresight to make it through. 16 MY TAKE: GATHERING RISKS MAKE 2019 A CHALLENGING YEAR FOR MORTGAGE LENDERS Maryland’s close proximity to the nation’s capitol has a definite upside – not only for the well to do, but for real estate investors. Housing News Report highlights four Maryland markets that show good promise for investing: Anne Arundel, Baltimore, Montgomery and Prince George’s counties. 20 SPOTLIGHT: MARYLAND STILL AN ATTRACTIVE PLACE TO INVEST

FEATURED ARTICLE

F annie Mae and Freddie Mac are in play and with them the financial heart of the real estate marketplace. As they evolve – if they evolve – transactions worth trillions of dollars are at stake as well as billions of dollars in poten- tial profits. The battle for Fannie Mae and Freddie Mac – so-called govern- ment-sponsored enterprises or GSEs – involves two hugely prof- itable companies and what will become of them. They were open and functioning even during the worst moments of the mortgage meltdown. And yet, somehow, they are still in government hands after more than a decade as a federal conservatorship. The trillion-dollar question is what’s next for Fannie Mae, Freddie Mac, and the mort- gage marketplace? The Government Accountability Office has identified at least 14 GSE reform plans introduced on Capi- tol Hill to revamp Fannie Mae and Freddie Mac, plans announced pri- GSE Reform: Housing Finance Savior or Looming Disaster? BY PETER G. MILLER, STAFF WRITER

or to this year. Now there’s a 15th, a February proposal announced by Sen. Mike Crapo (R-ID), chairman of the Senate Banking Committee. After 14 times at bat, will the 15th congressional reform plan find enough support for enactment? Might the country adopt a proposal from the Ex- ecutive Branch or maybe a plan from outside Washington? Or – just maybe – will Fannie Mae and Freddie Mac con- tinue as they are, cash cows controlled by the government that mean billions of dollars in additional revenues for the Treasury Department? THE SECONDARYMARKET Fannie Mae and Freddie Mac now dominate the secondary market, the electronic arena where lend- ers and investors buy and sell mortgage loans. The GSEs buy mortgages from loan originators, package them together to create mortgage-backed securities (MBS), guarantee them, and then raise money through sales to investors. The secondary mortgage system offers several big benefits. First, it brings vast amounts of capital into the mortgage mar- ketplace. Not just cash from US investors but cash from sources worldwide. More cash (supply) means lower mortgage rates. Second, because of the secondary market, lenders never run out of funds. If a lender has $50 million set aside for mortgage lending, and if the typical loan amount is $200,000, the lender has the capacity to origi- nate 250 mortgages. Borrower #251 – no matter how well qualified – is out of luck because the lender has no more money to lend. Alternative- ly, through the secondary market, the lender sells its mortgages, takes in new cash, and then has the ability to make additional loans. Mortgage-backed securities,

according to the Financial Industry Regulatory Authority (FINRA), “are bonds secured by home and other real estate loans. They are creat- ed when a number of these loans, usually with similar characteristics, are pooled together. For instance, a bank offering home mortgages might round up $10 million worth of such mortgages. That pool is then sold to a federal government agency like Ginnie Mae or a govern- ment-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac, or to a securities firm to be used as the collateral for the new MBS.” So far, it might seem as though MBSs are being created and sold back and forth just like other bonds but that’s hardly the case. Mort- gage-backed securities are very differ- ent from the typical bond – and they’re also at the heart of the GSE debate. PREPAYMENT PENALTIES With the typical bond we have an amount borrowed and annual or semi-annual interest payments. The principal is returned when the bond matures. With MBS the fea- tures are entirely different. Instead of interest-only payments, investors with pass-through MBS receive a monthly return which in- cludes both interest and principal. The monthly payment may vary up or down depending on borrow- er performance. For instance, if a mortgage is refinanced, both the principal and interest payments for that loan go away. If interest levels for adjustable-rate mortgages (ARMs) go up, then MBS investors can see bigger monthly payments. “Prepayment risk, the hallmark characteristic of MBS, results from homeowners’ option to prepay their mortgage loans when it becomes advantageous to do so,” according to the Vanguard Group, manager

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FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?

of $4.9 trillion in global assets. “The risk to MBS investors lies in the fact that exact prepayment amounts are not known in advance; risks are furthermore associated with both increases and decreases in interest rates.” Lenders historically have sought to discourage refinancing and cur- tailments with prepayment penal- ties, sometimes very stiff penalties. Prior to the mortgage meltdown, Maine reported that, “prepayment penalties can be very expensive. For example, a typical prepayment penalty applies for the first five years of a loan and equals 5 per- cent of the loan’s balance. A lender enforcing such a clause would add $5,000 to the payoff amount owed by a consumer refinancing a $100,000 loan.” Some prepayment penalties went further. Before the meltdown there were “soft” and “hard” prepayment penalties. A “soft” prepayment pen- alty applied only to refinancing or curtailments. A “hard” prepayment penalty went into effect even in the case of a home sale, essentially forcing people to stay in place. The prepayment penalties of the time greatly worsened the mortgage crisis. A borrower could not refi- nance into a better loan because the soft penalty due at closing could be overwhelming – say $15,000 for a $300,000 mortgage. A hard penalty could prevent borrowers from mov- ing to get a better job or purchasing a home with lower costs. Prepayment penalties are now both rare and regulated. With mortgages backed by the VA and FHA – and with financing that meets Fannie Mae and Freddie Mac stan- dards – they are simply not allowed. Prepayment penalties are also not allowed with non-QM financing. In practice, the only place to find prepayment penalties today is with portfolio loans that meet QM stan-

Because the credit risk protection from mortgage insurance attaches on the very first day the loan is originated, it travels with the loan wherever it goes, whether onto a lender’s balance sheet, to an investor, or into a securitization pool. As such, private MI is one of the only forms of credit enhancement that is compatible with a number of different housing finance reform proposals, including a proposal that relies on Ginnie Mae, a cooperative model or otherwise.” sales price or the appraised value, whichever is less. Increasingly, ap- praisals are being replaced through the use of automated valuation models (AVMs). Last year, govern- ment regulators proposed raising the minimum threshold for resi- dential appraisals from $250,000 to $400,000. If approved, the new standard is expected to exempt 214,000 homes from appraisal requirement. Appraisals — inde- pendent valuations which include a physical examination inside the property — reduce risk by ensuring the property exists and has a given market worth. Fourth, real estate cash pric- es in most areas have increased over time if only as a by-product LINDSEY JOHNSON

dards. With such financing, the pre- payment penalty can equal as much as 2 percent of the outstanding loan balance prepaid during the first two years of the loan, 1 percent of the out- standing loan balance prepaid during the third year of the loan, and nothing thereafter. RISK & GUARANTEES “MBS,” explains FINRA, “car- ry the guarantee of the issuing organization to pay interest and principal payments on their mort- gage-backed securities. While Ginnie Mae's guarantee is backed by the ‘full faith and credit’ of the U.S. government, those issued by GSEs are not.”

ments can be forced to buy back mortgages. Also, under the False Claims Act, the Justice Depart- ment can go after lenders for tre- ble damages and other penalties if they can prove that FHA-insured mortgages were improperly origi- nated or underwritten. While bor- rowers routinely complain about excessive mortgage paperwork, lenders have strong incentives to play strictly by the rules and docu- ment every borrower claim. Second, the borrower is expected to put down 20 percent of the pur- chase price. Buyers who purchase for less will need some form of third-party backing such as FHA, VA, or private mortgage insurance (MI) to reduce lender and investor risk.

If the MBS originated by Fannie Mae and Freddie Mac are not gov- ernment guaranteed, then how are investors protected in the event of delinquencies and foreclosures? The answer is complicated. In basic terms, a mortgage is secured by the credit standing of the bor- rower, the underlying value of the property, and a series of guaran- tees which emerge as the financing is originated and sold. From the investor perspective, lender to follow the Ability-to-Re- pay rule and verify the ability of the borrower to handle the debt. Lenders who sell loans that do not meet program or investor require- the risk-reducers include: First, the obligation of the

Lindsey Johnson, president of U.S. Mortgage Insurers (USMI), told Housing News Report , “be- cause the credit risk protection from mortgage insurance attaches on the very first day the loan is originated, it travels with the loan wherever it goes, whether onto a lender’s balance sheet, to an in- vestor, or into a securitization pool. As such, private MI is one of the only forms of credit enhancement that is compatible with a number of different housing finance reform proposals, including a proposal that relies on Ginnie Mae, a coop- erative model or otherwise.” Third, the value of the proper- ty used to create a mortgage is determined on the basis of the

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FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?

HISTORICAL U.S. MEDIAN HOME PRICES

2010 peak. The catch, of course, is that broad national housing trends may not reflect local markets. Todd Teta, ATTOM Data Solution’s Chief Product Officer, explained that while foreclosure filings were widely down, there “was also some evi- dence of distress gradually return- ing to the housing market in 2018, with foreclosure starts increasing from the previous year in more than one-third of all state and local housing markets. “Some of that distress was driven by natural disasters, most nota- bly in Houston, where foreclosure starts increased 61 percent,” Teta continued. “But natural disasters do not explain the increase in markets such as Detroit, Minneap- olis-St. Paul, Milwaukee and Austin – all of which posted double-digit

percentage increases in foreclo- sure starts in 2018."

MEDIAN HOME PRICE

ANNUAL HOME PRICE APPRECIATION

Some of that distress was driven by natural disasters, most notably in Houston, where foreclosure starts increased 61 percent. But natural disasters do not explain the increase in markets such as Detroit, Minneapolis-St. Paul, Milwaukee and Austin – all of which posted double- digit percentage increases in foreclosure starts in 2018.”

12.5%

FULL FAITH & CREDIT Prior to the mortgage meltdown, Fannie Mae and Freddie Mac each had a $2.25 billion line of credit with the Treasury. Such lines of credit – tiny in the context of the $5 trillion in debt they owned or guar- anteed before the housing crisis – were seen as an unstated signal to the investment community that Fannie Mae and Freddie Mac were secure places where money could be safely stashed. In addition, with implied federal backing, Fannie Mae and Freddie Mac had lower borrowing costs, much to their advantage and the benefit of consumers. “We estimate that Freddie Mac

10%

8.4%

$300,000

6.6% 7.1%

6.7%

5.6%

5.5%

$250,000

2.3%

$200,000

-1.8%

-3.1%

-5%

$150,000

$248,000

-6.3%

$235,000

$225,000

$219,500

$218,000

$220,000

$206,000

$190,000

$190,319

$180,000

$163,000

-10%

$100,000

$160,000

$150,000

-12.7%

TODD TETA

-14.4%

-15%

$50,000

-20%

$ 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

DISTRESSED SALES DROP TO 11-YEAR LOW

TOTAL DISTRESSED SALES

DISTRESSED SALES SHARE OF TOTAL SALES

of inflation. ATTOM Data Solutions reported that median home prices for 2018 reached $248,000, up 5.5 percent from last year. The 2018 price increase represented the 7th consecutive annual home price appreciation. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 5.2 per- cent annual gain in November 2018. As cash prices rise, borrowers who face financial difficulties are in- creasingly able to sell their homes, fully repay their loans, and avoid foreclosure. Rising prices make it possible for borrowers to avoid damning financial dings while inves- tors are fully repaid. (Alternatively, inflation erodes buying power and that’s an investor concern.) The protective benefits associat- ed with rising prices can be readily seen with foreclosure numbers.

1,400,000

45%

40%

38.7%

38.6%

1,200,000

36.9%

35%

32.8%

1,000,000

30%

29.3%

24.7%

800,000

25%

21.0%

17.8%

20%

600,000

15.5%

15%

14.0%

12.5%

400,000

12.4%

7.8%

10%

6.6%

200,000

ATTOM Data Solutions reported that foreclosure filings for 2018 — default notices, scheduled

auctions and bank repossessions — were down 8 percent from 2017 and reduced 78 percent from the

- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?

and Fannie Mae generate inter- est-cost savings for American con- sumers ranging from at least $8.4 billion to $23.5 billion per year,” said Freddie Mac in 2008. “In con- trast, we estimate that the value Freddie Mac and Fannie Mae indi- rectly receive from federal spon- sorship in the form of their funding advantage ranges from $2.3 billion to $7.0 billion annually.” Implied government backing for the GSEs created a huge market- place advantage. It allowed them to borrow at a lower cost than sec- ondary-market competitors. Lower GSE costs, in turn, tamped down mortgage rates. However, would the government lend each GSE even more than $2.25 billion in the event of a financial emergency? Until 2008 the question of further government support was a gray area, a source of debate among investors. “After the financial crisis,” ex-

plained USMI President Johnson, “there is bipartisan support against having an implicit government guaranty as we have seen in the past. The ‘implied’ guaranty was one of the biggest flaws within the housing finance system pre-crisis – allowing the pre-crisis GSEs to, what has been referred to over the last several years – ‘privatize gains and socialize losses.’” THE MORTGAGE MELTDOWN Under the Home Ownership and Equity Protection Act of 1994 (HO- EPA), Congress gave the Federal Reserve the right to prohibit "unfair and deceptive acts or practices" for any mortgage product. Instead, the Fed created a regulatory environ- ment after 2000 which allowed lenders to offer a variety of “af- fordability” and “nontraditional” mortgage products, including inter-

est-only mortgages, option ARMs, and excess equity mortgages – say 125 percent LTV financing. Underwriting was not a problem. Lenders could and did accept stated income loan applications (the bor- rower could estimate their income) as well as no-doc, low-doc, and NINJA (no income, no job, no asset) mortgage applications. With incom- plete information, such applications could not be properly underwritten. “American consumers,” then said Federal Reserve Chairman Alan Greenspan in 2004, “might benefit if lenders provided greater mortgage product alternatives to the tradi- tional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.” Greenspan felt it was safe for

lenders to offer non-traditional mortgage products because he expected them to act in their own self-interest, to limit risk even as they sought to maximize profits. He was wrong. “Those of us who have looked to the self-interest of lending insti- tutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told Congress in 2008. To get the market back on track, the Federal Reserve came out with new mortgage requirements in June 2008, a reflection of how lax mort- gage lending had become. Lenders would now be “prohibited from coercing a real estate appraiser to misstate a home's value.” Also, when making higher-priced mort- gage loans, lenders were banned “from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.” Department report, the housing meltdown resulted in $19.2 trillion in lost household wealth. ATTOM Data Solutions said there were “2,824,674 U.S. properties receiv- ing a foreclosure filing — default notices, scheduled foreclosure auctions and bank repossessions — in 2009, a 21 percent increase in total properties from 2008 and a 120 percent increase in total properties from 2007.” That’s a lot of foreclosures. Did Fannie Mae and Freddie Mac have the resources to pay investors in the face of mammoth market disruptions? RESERVES It’s a normal requirement for insurance and guarantee programs to have reserves, enough to assure claims can be paid in tough times. How much should be held in re- But the damage was done. According to a 2012 Treasury

U.S. YEAR-END FORECLOSURE HISTORY

U.S. PROPERTIES WITH FORECLOSURE FILINGS

ANNUAL PERCENTAGE CHANGE

$3,500,000

79% 81%

0.8

$3,000,000

0.6

$2,500,000

For FY 2018, the FHA Mutual Mortgage Insurance Fund had a capital ratio of 2.76 percent.

0.4

35%

$2,000,000

21%

0.2

$1,500,000

In the third quarter, the FDIC’s Deposit Insurance Fund reserve ratio reached 1.36 percent.

-3%

-18%

-8%

-14%

$1,000,000

-27%

-0.2

In 2017 Uncle Sam canceled $16 billion in debt owed to the Treasury by the National Flood Insurance Program (NFIP). The program is set to expire on May 31st, but without the NFIP, mortgaged properties in every state will be without required flood insurance coverage. The result is that Congress is virtually certain to approve a program extension.

-26%

$500,000

-0.4

-0.6

$0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?

USMI reform means a system that works for borrowers, lenders, and other stakeholders as well as enough time and flexibility to ensure a stable transition. She added that “many of the recent legislative proposals seem to understand this risk and allow for measurable benchmarks to occur before major transitions are made. We believe the plan should be flexible to allow it to move faster or slower depending on the benchmarks met and to ensure minimal disruption.” Second, GSE shareholder claims must be resolved otherwise a future court decision could re-open reform efforts. Third, the fate of Fannie Mae and Freddie Mac must be determined. “More than a decade has passed since the federal government as- sumed control of Fannie Mae and Freddie Mac. While the housing USMI believes that transition risk is one of the most difficult components to get right within any housing finance reform plan. USMI has stated as one of our principles of housing finance reform, that ‘reform should utilize the part so the system that work for borrowers, lenders, and other participants while allowing for sufficient time and flexibility to ensure a stable transition.’”

serve is a debatable question. Today the Fannie Mae and Freddie Mac reserves are limited to $3 bil- lion each, reserves designed to sup- port some $5.4 trillion in mortgage securities they own or guarantee. The GSE reserve limitations were created in 2012 under a “full income sweep of all future Fannie Mae and Freddie Mac earnings.” Every dime in GSE profits above the reserve re- quirement will go to the government. The sweep, said the Treasury, was designed to make sure “every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.” Will $6 billion be enough to support Fannie Mae and Freddie Mac guar- antees if markets turn down? If not, will the government step in? Or, is the sweep a de facto recognition that Fannie Mae and Freddie Mac assets are so extensive that no future federal bailout will be needed? In which case, was a bailout needed in the first place? The Treasury advanced $191 bil- lion to Freddie Mac and Fannie Mae according to ProPublica. Not only did Fannie Mae and Freddie Mac re- pay their federal advances, they have also evolved into major — if invol- untary — financial supporters of the government. Fannie Mae received $120 billion in advances and has paid back almost $172 billion to the Trea- sury, meaning the government has received $51.9 billion in profits. The story with Freddie Mac is much the same: it received $71.6 billion from the Treasury and has paid back $114 billion, leaving a $42.3 billion profit for the Feds. Congress certainly took notice of GSE revenues. Under the Temporary COULD THE GSES HAVE SURVIVED THE MORTGAGE MELTDOWNWITHOUT FEDERAL ASSISTANCE?

The Conservatorship was created as an emergency, short term means of restoring Fannie and Freddie to a ‘sound and solvent’ condition and returning the GSEs to shareholders. It should have never lasted ten years. The law should have been followed.”

TIM PAGLIARA

returning the GSEs to shareholders,” said Tim Pagliara, executive director of Investors Unite, a coalition of pri- vate-sector GSE investors. “It should have never lasted ten years. The law should have been followed.” “The GSEs were not in the dire straits officials feared at the height of the financial crisis in 2008,” Pagliara added. “Within a few years they reversed the non-cash charges put upon them and were profitable enough to pay back taxpayers for the infusion of cash plus interest.” SHAREHOLDERS While billions of GSE dollars were being sent to the Treasury, Fannie Mae and Freddie Mac shareholders got nothing. The natural result was court actions against the govern- ment, claiming that shareholders had been denied the “just compen- sation” required by the Constitution’s “takings clause.” The potential outcome of the shareholder action is a great un- known. If successful would it derail reform plans? Would it require a huge federal pay-out? If the odds of a shareholder vic- tory seem long, take a look at the Supreme Court’s Winstar decision. Savings and loan (S&L) sharehold- ers sued the government for stock losses after the government forced the sale of local S&Ls. The Court sided with S&L shareholders and the

government was forced to pay out more than $20 billion. With the GSEs the stakes are far larger. The government has already taken more than $90 billion in profits from Fannie Mae and Freddie Mac. They continue to exist as active, prof- it-making companies. A government loss in court could reduce or end GSE payments to the Treasury at a time when the deficit is soaring. WHAT HAPPENS NEXT? More than a decade after the con- servancy was established it’s unclear what happens next. At this writing there is the Crapo plan, a just-an- nounced proposal by the National Association of Realtors (NAR), and potentially additional plans by other stakeholders. It has been report- ed that the Administration is also working on a proposal. All plans, regardless of their source, will need to address several basic issues. First, the secondary market must continue. A secondary-market interruption would be catastrophic, stopping sales, lowering values, re- ducing tax collections, and damaging housing markets across the country. USMI believes that transition risk is one of the most difficult components to get right within any housing finance reform plan,” said Lindsey Johnson, president of the association for private insurance providers. She explained that to

Payroll Tax Cut Continuation Act of 2011, it established a new charge of 10 basis points for loans purchased by Fannie Mae and Freddie Mac for most of 2012. This money was add- ed to the general funds collected by the government. It was, very simply, a new and additional tax on mort- gage borrowers. THE PIVOTAL YEAR For Fannie Mae and Freddie Mac, the time of reckoning was mid-2008. The vast increase in foreclosure filings raised the obvious question: Would the GSEs be able to make good on promises to pay investors? To reassure the public, on July 10th, 2008, GSE regulator James B. Lock- hart, director of the Office of Fed- eral Housing Enterprise Oversight (OFHEO), stated that the GSEs were “adequately capitalized, holding cap- ital well in excess of the OFHEO-di- rected requirement, which exceeds

the statutory minimums. They have large liquidity portfolios, access to the debt market, and more than $1.5 trillion in unpledged assets." Less than two months later, on September 7th, the government placed Fannie Mae and Freddie Mac into a conservancy. Treasury Secretary Henry Paulson explained, “these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital re- quirements are thin and poorly defined as compared to other institutions.” Thin and poorly defined? What happened to the “large liquidity portfolios, access to the debt mar- ket, and more than $1.5 trillion in unpledged assets” from just a few weeks earlier? “The Conservatorship was created as an emergency, short term means of restoring Fannie and Freddie to a ‘sound and solvent’ condition and

LINDSEY JOHNSON

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market today is in a significantly better state than it was before the fi- nancial crisis, NAR continues to urge policymakers to address challenges that could arise in future economic downturns,” said NAR Senior Vice President of Government Affairs Shannon McGahn. Will Fannie Mae and Freddie Mac be woven into Ginnie Mae? Can they be privatized? Will they be replaced with new firms from the private sector? As The New York Times reported in 2015, “from their September 2008 bailout until the present day, these government-sponsored enterpris- es, or GSEs — which guarantee 80 percent of mortgages nationwide — have faced demands from their overseers that were far more dra- conian than anything asked of the big banks also rescued during the financial crisis. “These demands have helped open the door to an attempted Wall Street takeover of the companies’ assets and future profits.” Bigger profits, however, do not necessarily mean lower mortgage rates. William Frey, in his 2011 book, Too Big To Fail, estimated that pri- vatizing the secondary market could result in a 1 percent mortgage rate jump. NAR, in its proposal, states, “under a fully private structure, results would likely to be far worse, with no guarantee that the mortgage market would continue to function, recalling the collapse of the sub- prime and Alt-A markets.” “We can’t say for sure,” said Pagliara with Investors Unite, “but if the home loan market was pri- vatized, new players would make decisions on a purely economic basis. Fannie and Freddie serve the broader societal goal of preserving liquidity, stability, and accessibility of home ownership to average people. A secondary market dominated by private players would probably make it harder for average people to get a

More than a decade has passed since the federal government assumed control of Fannie Mae and Freddie Mac. While the housing market today is in a significantly better state than it was before the financial crisis, NAR continues to urge policymakers to address challenges that could arise in future economic downturns.”

SHANNON MCGAHN

Some very large institutional investors are salivating at the chance to buy newly issued Fannie Mae/Freddie Mac common, should the Treasury Department decide to exercise its option and sell its 79.9 percent stake in the two (very profitable) mortgage giants to the public. Who are these institutional investors? Just go down the list of the nation’s largest institutional investors that like triple-A credits…” INSIDE MORTGAGE FINANCE profitable) mortgage giants to the public. Who are these institutional investors? Just go down the list of the nation’s largest institutional investors that like triple-A credits…” Sixth, until 2021 the GSEs are not covered by the general require- ment from the Consumer Financial Protection Bureau (CFPB) to offer

loan. This could exert upward pres- sure on rates and limit who could qualify for a loan. Again, remember the banks pulled back from securi- tizing mortgages at the first sign of trouble before the crisis in 2008. This might have been a sound business decision for an individual bank, but it was unsound as a national policy for maintaining stability and liquidity in the mortgage market.” Fourth, the secondary market is designed both to reduce investor risk and assure the lowest possi- ble mortgage rates. A new system must continue such goals. Federal regulation and oversight will be required, as will preservation of the 30-year mortgage – or at least 30- year payment schedules. Fifth, the disposition of federal financial interests must be settled. Is it entitled to further GSE profits? Can the federal government sell its war- rants in the open market, perhaps collecting several hundred billion dollars? Or, will it decide to defer any GSE changes and simply collect massive dividends each quarter? “Some very large institutional investors,” Inside Mortgage Finance reported in February, “are salivating at the chance to buy newly-issued Fannie Mae/Freddie Mac common, should the Treasury Department decide to exercise its option and sell its 79.9 percent stake in the two (very

can be accomplished while still respecting the rights of the share- holders Investors Unite represents. Winston Churchill once said, “you can count on Americans to do the right thing after they have tried ev- erything else.” After ten years it is time to do the right thing: respect shareholder rights and strengthen home ownership and the mortgage market that supports it for genera- tions to come.” Peter G. Miller is a nationally-syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.

ensure that the guarantors could continue operating and, crucially, to maintain confidence in the mort- gage debt markets.” The Crapo proposal would have Ginnie Mae “provide a catastrophic government guarantee at the security level to cover tail-end risk, backed by the full faith and credit of the United States.” In either case, government guarantees will remain. “A stable mortgage market is in everyone’s best interests,” Pagli- ara, with Investors Unite, told the Housing News Report. “GSE reform does not have to reinvent the wheel. Modernization, improving the secondary mortgage market, and more clearly defining the role of government in home finance

qualified mortgages with a debt-to- income (DTI) ratio of 43 percent or less. This exemption is known as the CFPB patch. According to the American Bank- er, “unless the patch is extended or the CFPB eases underwriting requirements for all loans, nearly a third of loans backed by the GSEs could face new legal liability. Other government-backed loans such as those insured by the Federal Hous- ing Administration have a similar exemption.” Seventh, the federal government — whether desired or not — must continue as the mortgage guaran- tor of last resort. As the NAR pro- posal explains, “the U.S. Treasury backstop would provide liquidity to

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lenders became increasingly vocal about their business challenges. In Fannie Mae's Mortgage Lender Sen- timent Survey for Q4 2018, the share of lenders citing competition from other lenders as a key business challenge was 74%, up from just 39% two years prior. The heightened competition drove the net percent- age of lenders expecting profits to increase to its lowest point since the survey began in 2014. Only 11% of lenders expected profits to increase, while 45% expected a decrease — for a net rating of negative 34%. This number is likely to continue to deteriorate in 2019. Let's look at some likely causes. From an overall macroeconom- ic perspective, the U.S. economy is almost certain to slow in 2019. Growth in 2018 was largely driven by one-time factors, including the tax cuts and the less-talked-about fiscal stimulus. The effects of these policies are diminishing, and slow growth is baked into the cake. Out-

side of the U.S., there is weakening in Europe and China, which has slowed to its weakest growth in 28 years. Paradoxically, this weaken- ing macroeconomic backdrop could provide some support to the mort- gage industry as rates are unlikely to rise meaningfully. However, should the slowdown turn into something more severe and increase the risk (or the fear of) recession, lower rates may not be sufficient to generate activity in the housing market. In either case, it is unlikely rates would fall enough to trigger a significant refinancing boom. From an industry perspective, there are three potential issues that are both risks and opportu- nities. The first is the increased digitization of the mortgage ap- plication process. While this is an unambiguous good from an overall industry perspective, it does create challenges for individual players because of the significant Invest- ments that are required to create

MY TAKE

Gathering Risks Make 2019 a Challenging Year for Mortgage Lenders

HISTORICAL U.S. MEDIAN HOME PRICES

$300,000

$250,000

$200,000

BY TENDAYI KAPFIDZE

2 019 is set to be a year of signif- icant uncertainty in the hous- ing market. Macro factors in the overall economy and in the housing sector both have a broad range of possible endpoints, among the wid- est since the housing bubble burst. For mortgage lenders, this means it’s a particularly perilous time to be in business and will require some dexterity and foresight to

$150,000

make it through. Home sales slowed meaningfully in 2018 as housing affordability took a dive to its lowest level in 10 years. The accumulated increase in home prices over the past six years more than tripled the amount households gained in income. This was already pushing many potential buyers out of the market, particularly at the lower end where inventory chal-

lenges exacerbated the situation. But the run up in mortgage rates for most of the year was the final nail in the coffin for many prospec- tive buyers — and home sales took a tumble. These higher mortgage rates also took a toll on refinanc- ing, meaning mortgage lenders fell prey to the even sharper decline in mortgage volume As mortgage originations slowed,

$100,000

$50,000

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MY TAKE: GATHERING RISKS MAKE 2019 A CHALLENGING YEAR FOR MORTGAGE LENDERS

uct, there is an excellent oppor- tunity to gain market share in an industry where many players will be at risk of exiting. The affordability challenge that we mentioned earlier cre- ates the second industry-specific risk — and opportunity. In or- der to improve access and gain share, more lenders are offering non-Qualified Mortgages. Inside Mortgage Finance reports that non-QM loans increased 24% from the previous year through the first three quarters of 2018. This makes it a growing product in a shrinking market, even though non-QM loans still make up less than 3% of orig- inations. Lenders with the ca- pability to offer non-QM

passage are slim given the divided Congress, and any changes would occur over several years. However, it is a risk factor that lenders need to be wary of. For lenders who find themselves on the margin because of macroeconomic factors, technol- ogy factors or product factors, the prospect of major investments on the horizon to comply with what- ever changes GSE reform bring could be the straw that breaks the camel's back. Thus, uncertainty in 2019 is par- ticularly high for mortgage lenders. Measures of macroeconomic policy uncertainty are extremely high, with some even higher than they were during the financial crisis. This makes it more difficult for central banks to cal-

a digital process that delights customers. Some effects of the broader digitization of financial services have revealed themselves early in the year. The announced merger between BB&T and Sun- Trust Banks has as one of the pri- mary motivators, cited by the CEOs of both banks, the need to invest aggressively in technology in order to compete. Mortgage lenders, particularly those with a monoline business, will face a particular challenge of having to make significant Invest- ments at a time when profitability and revenues are in decline or stagnant. Those that do not have the capacity to invest in technol- ogy will either have to merge to increase scale, or they may find themselves unable to continue in the business. Customers are increasingly revealing their pref- erence for the digital product. At LendingTree, our new mortgage experience that eschews phone calls is selected by borrowers at a rate of 4 to 1. For lenders that can successfully create a digital prod- Growth in 2018 was largely driven by one-time factors, including the tax cuts and the less- talked-about fiscal stimulus. The effects of these policies are diminishing, and slow growth is baked into the cake.

loans will be able to mitigate some loss

ibrate monetary poli- cy and could curtail overall business investment and expansion plans and have a negative effect on consumer sentiment. LendingTree will continue to evolve to provide

of revenue and volume in their standard prod- ucts. While

consumer demand is expected to

decline across all mortgages, Fannie Mae's

Mortgage Lender Sentiment Survey expects demand for non-GSE eligible mortgages to weaken the least, and the MBS market is getting prepared for more Non-QM issuance. Beyond borrowers with less than stellar credit, these loans target self-em- ployed, high-net-worth and inves- tor borrowers. Third, GSE reform may finally get its time in the sun in 2019. The change in leadership at the FHA increases the odds of reform. Industry players such as the Mort- gage Bankers Association and the National Association of Realtors are putting forward their propos- als on how the GSE should be reformed. We believe the odds of

the best experience for both consumers and lenders. Whether that’s adopt- ing digital experiences to align with shifting consumer behavior or re- fining our matchmaking algorithm to connect borrowers with the right loan and lender as guidelines change, LendingTree will continue to be an industry leader.

Tendayi Kapfidze is Chief Economist at LendingTree, leading the company’s analysis of the

U.S. economy with a focus on housing and mortgage market trends. Learn more about LendingTree at lendingtree.com.

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YEAR-END MEDIAN HOME SALES FOR MARYLAND

MEDIAN HOME PRICE

ANNUAL HOME PRICE APPRECIATION

10.0%

$300,000

9.1%

8.0%

$250,000

6.0%

5.9%

4.4%

4.0%

4.2%

$200,000

2.6%

2.0%

1.3%

$279,000

0.4%

0.0%

$150,000

$278,000

$261,000

$256,300

$254,753

$250,000

-2.0%

$230,000

$235,000

$231,000 $234,000 $240,000

$220,000

$217,000

$100,000

$205,000

-4.0%

-6.4%

-6.0%

$50,000

-6.8%

-8.1%

-8.0%

-8.3%

-10.0%

$ 2005 2006 2007 2008 2009 2010 2011

2012 2013 2014 2015 2016 2017 2018

Maryland Still An Attractive Place to Invest MARKET SPOTLIGHT BY JOEL CONE, STAFF WRITER

Irani is projecting job growth for the state this year with the number of jobs making an about face, going negative starting in 2020. Over the next three years, he is projecting the largest annual average job growth to be in the health care and social assistance sector with the largest losses to come in the government sector during that time period. Although the job mix might be changing somewhat over the next few years, in any event the demand for housing will continue to exist. With higher interest rates, the threshold to enter home ownership will tighten even more giving investors more opportunity in the state. According to the Maryland REALTORS, the number of existing homes in active inventory was up between December 2017 and 2018, with a commensurate rise in months of inventory from 3.4 months to 3.8 months during the same time period. New housing is on the upswing as well. In its Febru- ary 2019 report, the Federal Reserve Bank of Richmond reported that Maryland issued 1,271 new residential permits in October 2018, a 17.2 percent monthly decline but up 38.5 from October 2017. For year-end 2018, ATTOM Data Solutions reported median home sales prices increased 4.4 percent from the year before to $261,000, up 13.5 percent over the previous five year period but still 6 percent below its 2007 peak.

live in Maryland and commute to DC is actually larger than the number of workers who both live and work in DC,” he added. When it comes to jobs statewide, Irani showed in his 2018 Economic Outlook Forum presentation that as of September 2018 the government sector led the state in total number of jobs followed by health care, retail, professional services and hospitality. Although when it came to current job openings as of October 2018, computer and mathematical occupations led the way, followed by health care practitioners and technical occu- pations and management occupations. The largest contributor to migration into Maryland from a domestic source is the District of Columbia,” Irani explained. “In 2017 more than twice as many people

I t’s the home to millionaires and billionaires, even though it slipped out of the top ranking for the most millionaires per capita nationwide in 2018. Its close proximity to the nation’s capitol has a definite upside not only for the well-to-do, but there are a lot of positives for real estate investors as well. For one, population numbers spiked in Maryland at the end of the Great Recession and remain positive, although at a slow and steady year-over-year pace for the past three years, according to Dr. Daraius Irani, Vice President, Strategic Partnerships and Applied Research at Towson University who also serves as chief economist for the school’s Regional Economic Studies Institute. Net migration has been a mixed bag, according to numbers gleaned from the American Community Survey 2017 one-year estimates, Irani noted. While more people moved out of the state than into the state, international migration has more than made up for the net loss.

“The largest contributor to migration into Maryland from a domestic source is the District of Columbia,” Irani explained. “In 2017 more than twice as many peo- ple migrated from DC to Maryland as migrated in the other direction.” Along with population numbers, jobs are a major factor for investors looking for paying tenants and positive cash flow from their investment properties. With an unemployment rate of 3.9 percent for Decem- ber 2018, the future of job growth in Maryland overall is relatively stable. “Regardless of future job growth in Maryland as a whole, the job market around DC should remain rela- tively healthy. This is good news for parts of Maryland considering that Maryland is currently the number one choice of residence for people who work in DC,” Irani said. “According to the 2011-2015 American Community Survey Commuting Flows, the number of workers who

migrated from DC to Maryland as migrated in the other direction.”

DARAIUS IRANI

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MARKET SPOTLIGHT: MARYLAND STILL AN ATTRACTIVE PLACE TO INVEST

Flips accounted for only 6 percent of all home sales in the third quarter of 2018, down 10.6 percent from the same quarter of the year before. The total number of distressed sales statewide – REO sales, short sales and third-party foreclosure auction sales combined – fell 51 percent between 2017 and last year. While the number of flipped and distressed properties were lower statewide in 2018, Maryland still experienced the third highest foreclosure rate in the country at one in every 116 housing units with a foreclosure filing last year. Plus, as of the fourth quarter of 2018, ATTOM reported that 11 percent of Maryland homeowners were seriously underwater while 18.3 percent were equity-rich. Still, for seasoned investors who know where to look, and how to analyze a market, foreclosure activity and homeowners seriously underwater present good poten- tial opportunities to expand their portfolio. However, for new investors or investors new to the area, hooking up with boots-on-the-ground from a local veteran can help avoid the pitfalls of spending too much money and losing their investment. Based on the analysis of data provided by ATTOM, along with input from local experts, Housing News Report determined four counties show good promise for investing in Maryland – Anne Arundel, Baltimore, Mont- gomery, and Prince George’s counties. A BAYSIDE CAPITOL INVESTMENT For investors seeking potential locations with sound economic activity in Maryland, Anne Arundel County is a good fit. With a population of more than 550,000 people, and a forecast unemployment rate of 3.4 percent for 2018, the county is situated along the Chesapeake Bay. Its county seat, Annapolis, also happens to be the state capitol and the home of the United States Naval Academy. Investors did well there in 2018. Flipping properties in Anne Arundel was profitable. In the third quarter alone, investors flipped 102 properties, accounting for 4.4 percent of all total home sales in the county. While that was down 12 percent from the third quarter of 2017, flippers made a gross return on investment of 61.7 percent with an average of 170 days to flip, down from the year before. Two-thirds of the flipped properties were purchased with cash at a median purchase price of $186,000, according to ATTOM. One in every 139 properties in Anne Arundel County had a foreclosure filing in 2018, totaling 1,574 properties with foreclosure filings, down 5.29 percent from the pre- vious year. The county ended 2018 with a median sales price of $328,000, a 6 percent increase from 2017. Anne Arundel County ended 2018 with 19.5 percent of its

homeowners in an equity rich position in the fourth quar- ter, down slightly from the same quarter the year before. For the quarter 7.6 percent of county homeowners were still seriously underwater, down 8.4 percent a year ago. ATTOM’s rental affordability report, which incorporat- ed fair market rent data for 2019 from the U.S. De- partment of Housing and Urban Development, reported that the average rent for a three-bedroom, single-fam- ily home in Anne Arundel County for 2019 is $1,870 a month, a three percent increase from 2018. The affordability to rent a home in the county this year is 38.6 percent of the average wage, while the percent of wages to buy a home in the county with three percent down was 51.3 percent last year. Baltimore City is the largest independent city in the country, but it is not a part of Baltimore County. Known for its high crime rate, the Baltimore area is home to more than 1.4 million between the city and county com- bined. For investors, the difference between the two is the price point of entry. “For me, I’m looking in Baltimore County. It’s a little more expensive but I’m hoping to find properties that pay the expenses,” said realtor and investor Patrick Cozado with Leigh Allen Investments. “I invest in real estate for passive income. I’m typically looking for lon- ger term cash flow opportunities.” IT’S A CITYAND IT’S A COUNTY… BUT NOT TOGETHER

ment of 142.3 percent with an average of 205 days to flip, while flippers in the county saw a 87.9 percent gross return on investment with an average of 204 days to flip. In the city, 65.6 percent of the properties flipped were purchased all-cash, while 57 percent in the county were purchased that way. The median purchase price for a flipped property in Baltimore City was $63,500 in the third quarter and $125,000 in Baltimore County, accord- ing to ATTOM. One in every 80 properties in Baltimore City had a foreclosure filing in 2018, while one in every 112 proper- ties in Baltimore County had a foreclosure filing during the year. The median sales price in the city was $103,000 in 2018, down 6 percent from 2017 compared to $225,000 in the county where the price was up 5 percent from the year before. For the fourth quarter of 2018, a total 21.3 percent of homeowners in Baltimore City were seriously under- water while 16 percent were equity-rich. In Baltimore County 10.8 percent of homeowners were seriously underwater while 177 percent were equity-rich. According to HUD, the average rent for a three-bed- room, single-family home in both Baltimore City and county for 2019 is $1,870 a month, a three percent increase from 2018.

There’s a lot of foreclosure inventory from what I understand in Baltimore City. What that means is that active investors, flippers and people who come in and buy distressed assets and fix up and sell, they come in and create value. It’s a fertile market for investors. And they have a higher than average renter pool.”

MARCO SANTARELLI

distressed assets and fix up and sell, they come in and create value,” he said. “It’s a fertile market for investors. And they have a higher than average renter pool.” Baltimore City had 262 home flips in the third quarter of 2018 accounting for 9.3 percent of total home sales, while Baltimore County had 221 flips for the period, accounting for 8.6 percent of total home sales. Flippers in the city made a gross return on invest-

MEDIAN HOME PRICE COMPARISON

BALTIMORE

BALTIMORE CITY

$250,000

I invest in real estate for passive income. I’m typically looking for longer term cash flow opportunities.”

$225,000

$215,000

$205,000

$199,900

$199,500

$200,000

$198,000

$190,000

PATRICK COZADO

$150,000

$110,000

$103,000

$102,000

$100,000

$96,335

Marco Santorelli, realtor and investor with Norada Real Estate Investments in Laguna Niguel, California, who specializes in selling turnkey properties sees Bal- timore as a “good second tier market” and is looking to enter the market. “There’s a lot of foreclosure inventory from what I un- derstand in Baltimore City. What that means is that ac- tive investors, flippers, and people who come in and buy

$90,000

$88,079

$50,000

2012

2013

2014

2015

2016

2017

2018

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