OT - Mortgage question
- Thread starter FQDawg
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I’d say it’s not an apples to apples comparison.
People don’t need college. It’s a very nice to have and as a country we are better off with people getting more educated. However, survival is not dependent on having a college degree. So the demand of a college degree is going to go up as student loans increase the availability or supply. I agree with you on that.
The demand for housing is unchanged regardless if people rent or own homes. People need a place to live. So, the supply has to be met by someone. Either the government does that with public housing or the private sector builds rental properties. But I guess I don’t understand how making mortgages less available we would lower home prices (I also don’t know how that’s a great thing - I enjoy my home going up in value). Again, demand does not change, so someone is going to meet that need and provide supply. It just won’t be your average Joe anymore.
Private equity groups have already started gobbling up as many single family homes as they can. This is already going on. It’s certainly not going to stop if the average American can’t get a mortgage.
Demand for housing absolutely goes up if the government throws a bunch of money in the pot for housing only.
You don’t NEED to own a house. You NEED shelter. You can have shelter without owning a house.
I certainly think owning is better than renting but I KNOW part of the reason housing is so expensive is bc of the money made available for housing.
If I’m an investor and I see the government about to throw a ton of money into helping people buy homes, I’m going to buy a bunch and then Jack up the price.
That’s what investors do.
I was referring to that particular list, not in general. I don't think there's much of a relationship at all, or at least not one that isn't dwarfed by other factors.
When you restrict supply and subsidize demand, you get elevated prices.
People like having home prices rise after they've bought, but it doesn't do much except make themselves feel better unless they're willing to downsize or do a reverse mortgage. On the flip side, it makes it much harder for people that don't already own to make ends meet.
Private equity groups are buying up homes because the hurdles different governments put up for building homes in desirable areas and homes are pretty easy to leverage up against. The primary issue is the restriction on building, but if it werent' for the federal government subsidizing supply (I think the low downpayment subsidies are probably the more impactful policy here), they probably wouldn't feel good about housing giving an above average return.
I didn’t say people need to own a house. I said people need housing. Housing costs money regardless if someone is buying it or renting it. So the demand to be housed (and I mean have a shelter) does not change, regardless of the method that need is being met (rent or own).
I’m just using round numbers here… but if we have to house 100 people and only 30 of those people can afford to buy a house and the other 70 have to rent, why is it cheaper to build because more people can’t buy? If 70 could buy and 30 needed to rent is it cheaper to build the 100 units?
The cost to build isn’t exactly the problem. Housing can be built for a lot less than what it sells for in a lot of cases.
As someone who has worked on four different university campuses in four different states over the last 25 years (both public and private), I can say that you have the college part backwards. One of the main drivers of the rising cost of higher education is that there is less government money for public universities on a relative basis than there used to be.
I heard a university president give a talk recently where he explained how state funding has changed over the last 30-40 years. The relatively short version is that states used to provide universities enough funding to cover something like 75% of the cost to educate and house a student, leaving the university to cover the remaining 25%, which they did primarily through charging tuition and room/board with some additional fundraising. Those aren't exact numbers (mostly because funding levels vary by state) but they're reasonable placeholders for this discussion.
Funding levels have gone down on a relative basis over time and now states only cover about 25% of the cost to educate a student so the university has to cover the remaining 75%. That is one of the main reasons why tuition, fees, etc... have gone up and why there has been an increased focus on fundraising at most universities over the last 25 or so years. That rise in tuition costs that students have to cover is also what has led to more and more students taking out larger and larger student loans (but that's a whole 'nother discussion).
Now, that is obviously a high level view of things and there are other things to consider. One being the fact that more students go to college now than went 30-40-50 years ago. More students means you need things like more dorms and more classroom space and more cafeteria space. Plus more faculty and more staff who also need office space. All of which cost money.
So, simply saying that college is more expensive because of "more government money" is not at all accurate.
What restrictions and hurdles are there that the government is imposing? The main hurdles I see for home builders is banks aren’t financing developments the way they were before the Great Recession. I see that everyday. The equity that a developer has to put in a development is 30 to 40% now vs 10 to 15% pre recession. That’s causing the slowing in housing development
Government secured student loan debt has absolutely increased the demand for college.
If it cost x and I can sell for y or z, I’m going to sell for whichever is higher between y and z. Anyone would.
you can sell for higher when money is abundant.
Do that for long enough and the actual costs will go up as well.
Costs go up. More government money. Rinse. Repeat.
Depends on where you are. The worst places basically give anybody with a pulse a quasi veto by having endless opportunities to object. Even in places that officially have reasonable regulations around building, there is often a palm greasing tax.
Tried to help a city one time that claimed to want to grow and needed affordable housing (not subsidized housing mind you, but just housing that was something close to the cost of land plus the cost of construction). The solution was to allow third party code inspection and permitting. There were well capitalized developers wanting to come in and build, they just needed to be able to get answers and not have the city come back and change their mind after the fact and the city seemed to be unwilling to invest money hiring competent people for those processes. But the developers were willing to foot the bill to pay for competent people and roll that in to their development costs because there was that much money to be made based on market prices. But of course the incompetence of the code, zoning, and permitting was not a bug, it was a feature. The locally connected developers didn't have to deal with waiting on responses and didn't have to deal with the city constantly changing their mind and/or contradicting themselves. They were able to make huge profits because they didn't have to worry about an extra 6 months on a single home or god knows how long on a reasonable sized development.
There is no doubt I’ve seen some places that do make it difficult. I will say though they are typically around more commercial development. But the housing/residential development I see is largely in the southeast. I see commercial nationwide. And states out west (California and Oregon in particular) are not easy to develop in.
I understand that for lots of things. Like I understand your point on student loans and agree. But I don’t understand how making people renters rather than home owners reduces the price. Maybe where we are getting sideways is in what we are describing. I’m talking about housing as a single family home, a condo, a townhome, an apartment… anything that someone calls a home. Maybe you’re literally just talking about buying a single family home.
My point is, demand for housing is not changing. So regardless of how a property is used (rental or being sold to an owner) the housing would still need to be built. If you need 100 places for people to live then you gotta build 100 places and it really does not matter the end result of the property, the demand and costs to build those 100 units won’t change.
I’ll let you have the last word here. I’m tired of talking about it. We either are misunderstanding each other or have vastly different views on supply and demand (maybe both). My last word on this… if you are enjoying a mortgage with a term longer than 5 or 7 years, you are benefiting from the government being involved in a mortgage. I’m not a fan of government involvement in most things. But FHA has largely been a good thing and it’s largely been self funded. It did need a bailout after the recession but I believe that money was returned to the tax payers. Lots of people that ordinarily would be renters are now home owners because of FHA and that’s a good thing in my opinion.
In the case of higher ed, it's generally the other way around. Basically, the message to students over the last 30-40 years (primarily from employers) has increasingly been that they need a college degree to get a "good job." That lead to increased university enrollment at the same time that states were cutting funding. That raised tuition costs, which led to an increase in students seeking out federal student loans. But that federal funding hasn't kept pace with rising tuition (see point three in the second example and point two in the third example) so it can't be what's driving enrollment demand.
I'm happy to bombard you with links again but, as it's Friday, I'll just post a couple of quotes from a few studies (you know I love studies):
You're largely not making renters homeowners. You are taking people that can already buy homes and giving them extra purchasing power. The supply for homes is relatively inelastic, so it doesn't bring much more supply online, it just makes homes more expensive.
There are tons of employers out there who need skilled labor that doesn’t include a college degree.
And lots of those jobs pay way more than what many college graduates make.
Totally agree on both points. I'd argue that the message of "everyone needs to go to college" over the last few decades hasn't necessarily been the best approach. Hopefully that's changing. But it's also a separate discussion than the one about government funding (or lack thereof) in higher ed.
Somebody explain all this "government help" in mortgage lending. I know government plays a pivotal role in underwriting guidelines but isn't the funding thru private sector investing? The homeowner pays PMI that covers a default. VA loans are guaranteed by the government however and I know our treasury had to open the checkbook for the '07 debacle.
In an extremely odd circumstance, I was hanging out with one of my old neighbors in TX last night and he was recently promoted to the executive suite at Mr Cooper. He was bìtching about spending $18k on sod after a $14k septic installation. You're probably going to get some new fees to pay for his new turd garden.***
I used them for my mortgage a few years ago and it was perfectly fine. I liked having a big company service it with all the online tools so I could see what's what. I hated the rinky dink credit union I had before where everything was snail mail and phone calls.
You’re right on FHA and VA. I believe USDA loans work very similar to FHA and also have a government guarantee.
Fannie Mae and Freddie Mac are both government sponsored entities. They were both created by Congress and then became private companies and are now under a government conservatorship. These 2 entities purchase mortgages from banks. This returns the capital to the bank and in theory allows them to make more mortgages. They don’t have a government guarantee but the vast majority of mortgages that aren’t FHA, VA or USDA are sold to Fannie or Freddie before they are even originated. So the originating bank does not care they don’t have a guarantee because they are off the balance sheet within days of being originated. Fannie and Freddie largely bundle these mortgages up and sell mortgage backed securities. I believe in normal times, the government does not buy these mortgage backed securities but does in crisis times. They were buying a ton during Covid, which ensured Fannie and Freddie were able to continue to buy mortgages.
According to bank rate, Freddie and Fannie ultimately purchase about 70% of all mortgages in the US.
But since FHA is insured by PMI, why would the government hafta guarantee foreclosures? And isn't it the norm the private sector ultimately ends up buying all mortgages? Other than U/W Guidelines I don't see the government involved to any significant degree. Also banks are not totally off the hook on foreclosures. That's why many have what's known as "Overlays" that are specific bank guidelines that are stricter than governments. In other words "Yea, they may buy this loan but there's just some risk there we don't like." So they turn down an immediate profit to protect their portfolio long term. There's a reason banks took a bath in '07. The biggest lie was "Banks made loans they knew the borrower couldn't pay back." The foreclosures didn't happen because they couldn't pay. They walked away cuz their value plummeted and were way upside down. Many who had no decline in income lived in their homes rent free for 2-3 years saying either modify or come kick us out.
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I’m not entirely sure what the collection process is like of one is going bad. I know on the commercial side you have SBA loans but that guarantee a portion of the loan like 70% or something and the bank holds the rest of the risk. Could be something like that on government back mortgages, I can’t say for certain. My understanding is whoever owns the serving, sometimes the originating bank, does have an obligation to make an attempt to collect payments. But I don’t think they share in any loss related to a foreclosure, but I could be 100% wrong about that.
In terms of what you mention about private industry buying the majority of mortgages, that is Fannie Mae and Freddie Mac. They are private companies, you can go buy stock in them right now. But they are government sponsored entities. The government is going to ensure their survival because the mortgage industry depends on it. So, it is true the private industry buys most mortgages, but that is obviously with shades of grey. I think during good and normal times the government does not have to support Fannie and Freddie all that much. But they were buying like $40 billion a month in mortgage back securities from Fannie and Freddie during Covid.
The Great Recession was certainly started by bad mortgages, at least in part. But most banks didn’t take huge losses directly from mortgages still on their books, there was certainly some of that but largely banks took their lumps from commercial real estate loans. Fannie and Freddie had much looser underwriting standards, largely because they needed to keep creating and selling mortgage backed securities to keep revenue coming in. These bonds were sold as investment grade and low risk, so they were bought by everyone. The banks that took losses on residential mortgages were largely due to tied to investments they had in mortgage backed securities. As defaults started to happen, the bonds failed and essentially tanked the mortgage market and in turn home values. This caused big issues in the stock market.
The losses that banks largely took were due to loan made on commercial real estate (offices, retail centers, hotels, second homes etc). You’re right a lot of people walked away from these loans because of declining values. The Florida panhandle was damn near the epicenter of the real estate crash. I saw loans there that were originated and supported by an appraisal only to have an updated appraisal show a 60% decline or worse in value. A lot of people did walk away because of values but a lot of commercial real estate pain was caused by legitimate vacancies in offices or retail centers. Small business like restaurants were failing like crazy. Bigger companies were laying off employees and shrinking leased space.
There was also **** like credit default swaps that damn near bankrupted a company like AIG. The credit default swap was essentially insurance on the mortgage back security. So when the mortgage back security went belly up the credit default swap paid whoever was the beneficiary. That’s where the real shady **** happened with Wall Street banks. You had banks like Bank of America selling mortgage back securities to customers and then buying credit default swaps on that same mortgage back security because they knew it was full of crap loans.
You should read The Big Short. It’s a good book and explains a lot of what caused the Great Recession.
Does it mention how we were doing 100% LTV no down payment loans on say a $300K house that had sold for say $200K 3 yrs or so prior? That's my opinion on why things 17'd up based on my experience doing modifications for a while.
Oh yeah it mentions that and you’re definitely right that was part of the issue. I can’t say for certain on the residential side but I’m pretty sure there are programs again that allow 100% LTV. I understand allowing a low down payment in some instances but you need to have some equity in your home.
But on the commercial side, the LTV requirements have been changed radically from pre recession and honestly I have not seen banks give in on that. For a new commercial project it’s pretty common to see the developer have to put in equity of 40 and 50%. Now there still will be people walk away from properties but it’ll be much harder when you have 50% equity in a deal. But just a few weeks ago, the largest hotel in San Francisco handed JP Morgan the keys. It’s a was a $700 million loan.
Thanks cuz I know Absolute Dick about commercial
Thanks cuz I know Absolute Dick about commercial lending but based on what's been happening in San Francisco I'd be leery of investing a dime there these days. 40-50% down? I had no idea it was that risky and can't fathom how a bank takes a bath on a deal like that.
You are actually doing both. The difference is that by subsidizing to provide lower rates / lesser down payments, you make the financial benefit to the renter who otherwise couldn’t afford a house specific to homebuying only. 100% of that old renter money goes into the housing market. By contrast, those who could maybe already afford to buy without the subsidized rates or down payments would indeed have more purchasing power. However, they may elect to use that purchasing power outside of the housing market and still settle for a modest home, or they could splurge for the most house they could afford with the rate and terms. Or anything in between.
You aren’t just making housing more expensive by default. The degree to which housing prices increase relative to added money supply or subsidy is directly to related to how many well-off homebuyers elect to use that added purchasing power for the house itself as opposed to other endeavors (stock market, vacations, vehicles, what have you), and how much they elect to use.
Renting is also far, far more expensive than owning a similar property over the long haul. The classic quandry is whether or not it is worth the added flexibility and predictibility of renting vs. the more lucrative but inflexible prospect of homeowning. So it could be certainly argued that if subsidies and government backed mortgages are able to convert, say, 30% of renters into owners, while the same subsidies only raise home prices by 10%, then its a huge net benefit to all because you lower the required investment of all individuals into any given level of house, and free up that money to circulate into many other goods and services. These are example figures of course….the actual ones I’m sure are far more difficult to derive. But that’s generally the idea.
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I said largely. And it’s largely because of the relatively inelasticity of housing. People are largely bidding on the same housing stock. And it’s the people on the margin bidding against investors that probably cause the biggest percentage increase. With a down payment requirement, housing prices on the lower end stock will stay close to something that is justified by rents. When you have lower quality credit risks get to do 3%, then the ability to save stops being a constraint
Housing is largely a positional good, partly because of school districts, sometimes because of other location specific amenities. So, yes, housing specific subsidies do tend to primarily drive up housing. Relatively few people are buying less house than they can afford and levering up to the max to use that leverage to invest in stocks or just consumption. They are mostly buying the nicest house they can swing the payment for until you get fairly high up the income scale. A house unfortunately is still the largest percentage of most peoples net worth.
This is another reason you see subsidies driving up housing prices rather than making housing cheaper. Everybody is convinced renting is a bad deal, which more or less makes it true because of appreciation. As long as people are willing to lever to the max to not “throw money away on rent”, modest wage gains will produce outsized increases in home prices.
I live in a small town in south Mississippi that has 3 small banks doing business in town. Moved home from Texas in 2000 and got ready to build a house. We had to wait until we sold our house in Texas as I didn’t want to pay 2 mortgages at once. Once we sold the house in Texas I went to one of the local banks (Trustmark) to secure the funding. It was very easy and painless and we got started building the house. I owned the property where we were building and I had about 25% to put down on it as well. We got it built (took about 10 months to complete it) and signed the papers. Well, we rolled along for several years with no problems. I started seeing my credit score going down so I checked to see what the 17 was going on as we always pay everything on time. When I checked it told me that I was being reported for late payments on my mortgage for like 7 months in a row. My wife always pays our mortgage payment at the local Trustmark Bank between the first and third of every month. She gets a receipt stamped “paid” with the date and the time of each payment made-and my wife always puts these receipts in a file folder. Never fails. Our house payment is due on the 15th of every month, so she gets it paid before the third. We started getting these nasty phone calls from Trustmark telling us that they “need a mortgage payment from us” after the 15th of the month. Started happening every month. I would tell these people repeatedly that the mortgage had been paid, but they basically told me that I was full of shat. These people who called me were holed up in a building on Ellis Avenue in Jackson surrounded by a 10 foot chain link fence with concertina wire around the top. This was required because these people called people and harassed them 24/7. I reached the point that I would dog-cuss these people any time they called. I finally had enough of the BS and I called a man named Frank Day at Trustmark-he wouldn’t take my calls but I continued to leave him nasty messages to the point that he finally called me. I’m done with those Trustmark c-suckers. Within about a week, I got letters from the Big 3 credit reporting agencies telling me that the late mortgage payments had been removed and my credit score increased by 200 points.
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