By Brian L. Trotier, J.D.*
With the overall economy improving and with unemployment dropping back to more manageable levels, it was only a matter of time before the residential real estate industry (builders, bankers, mortgage lenders, Fannie Mae, Freddie Mac and Wall Street) and its lobbying groups and trade associations popped up and asked for Congress and federal regulators to reduce or end many of the restrictions placed on the industry after it gorged itself on the U.S. economy and left the table with only crumbs and broken dishes for the rest of us. That time is now and no industry is more skillful at using confusing or even meaningless statistics sprinkled with patriotism to chip away at even the staunchest opposition.
Here are just a few examples of how this massive PR and lobbying machine works:
· Last October, the Mortgage Bankers Association (MBA) printed an article pointing out that the U.S. ranks 34th in the world in homeownership and urging the new housing policy team to work diligently to “correct” the dysfunctional system that allowed the U.S. to fall behind such powerhouses as Bulgaria, Slovenia, and (gasp) Latvia. The real estate industry applauded loudly and was simply ecstatic shortly thereafter when some mortgage lending programs dropped the down payment requirement to 3%.
· In December, the American Enterprise Institute (AEI) published a white paper on the National Mortgage Risk Index and how it works. One of the more interesting points in the paper was when the definition of first-time homebuyer was explained. Not surprisingly, this phrase no longer means someone who has never owned a home before. According to Freddie Mac, a first-time buyer is someone who is an individual (or one of a group of individuals) who is purchasing a home, plans to use it as a primary residence, and has had no ownership interest in a residential property for the past three years.
· Then in February of this year, the MBA published an article titled “The Wealth Builder Home Loan” wherein a “new” loan concept created by (surprise) the AEI’s International Center on Housing Risk was dissected and discussed. This allegedly “new” loan concept was what we have always called a 15-year self-amortizing loan. However, the AEI has used statistical evidence to re-purpose the 15-year loan to give the appearance this is a new concept. Specifically, the AEI pointed out: (a) default rates are lower with 15-year fully amortized loans; and (b) 15-year loans pay down more principal in the early years, thus reducing the chance of a loss if a default occurs.
· In April, the National Association of Home Builders (NAHB) jumped on the bandwagon, but with a somewhat odd twist. The NAHB is urging Congress and regulatory officials to address the “improper appraisal practices, shortage of experienced appraisers, and inadequate oversight of the appraisal system…” Apparently the NAHB has been asleep for the past 7+ years when the rest of the real estate industry was skinning appraisers alive and blaming them for everything except the disappearance of Jimmy Hoffa.
· Recently, the NAHB fired another salvo aimed at mortgage lenders and appraisers to get Congress to require both groups to accurately account for the savings in operating costs that come from using green features like energy efficient construction materials and methods. This makes sense when looking at the borrower’s ability to repay a loan – if you pay lower utility costs you have more disposable income to use to pay a larger mortgage. However, it’s on the valuation issue that this premise falls apart. It may take another generation or two before there will be enough sale data to prove that a buyer will agree to pay incrementally more for a home with solar panels and drought resistant landscaping than for one without.
Since we’ve already entered a new Presidential election cycle and anyone running for any federal office will need money and lots of it, it will be interesting to see how far the candidates and political parties go to appease the real estate industry. For the sake of the American people, let’s hope nobody forgets what happened in 2007-2008. It would be a shame if we ever have to repeat that debacle.
*The author, Brian L. Trotier, is a former practicing attorney who represented builders, banks, and trade associations. Mr. Trotier is now living in the San Diego area and serves as the EVP/COO of ALIA, FREA, and NDC Data.
For a more in-depth look at the real estate crisis, what caused it, and why it could happen again, please consider reading Hidden in Plain Sight by Peter J. Wallison. Here is a link to a short Q&A with Peter about the book.