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Reappraising The Housing Villains

Every summer blockbuster needs a few villains. The U.S. housing finance crisis, now in its third summer season, has had three: lenders, appraisers and speculators.

Lenders gave loans too freely to people who could not repay them, appraisers valued homes at more than their true worth, and speculators were greedy gamblers who used borrowed money to pay sky-high prices, hurting folks who needed affordable homes to live in. That was the story.

The plotline points toward an obvious happy ending. If we make banks less liberal with loans, make appraisers more conservative in their estimates and keep speculators out of the market, we vanquish the bad guys and everyone lives happily ever after. But, as they know in Hollywood, life is not a movie. Now, oversimplification and overcorrection are slowing down the housing market’s recovery.

There are signs that sales and prices are stabilizing, and the Commerce Department reported last week that housing starts had the biggest one-month jump in five years, reaching levels not seen since last autumn. But a private group reported that foreclosures continue to climb, reaching 15% above year-earlier levels. Many foreclosures occur when financially stressed borrowers are unable to sell their property quickly or at a high enough price to satisfy their lenders.

One of the main goals of this year’s economic stimulus plan was to help families move into the homes that were sitting empty after foreclosures. To that end, the government offered an $8,000 tax credit to first-time homebuyers purchasing a principal residence by Dec. 1. However, some people who have the means may not be able to get a mortgage in time to take advantage of the incentive.

The Obama administration is considering a fallback position, The Washington Post reported. It would allow homeowners to stay in their foreclosed homes as renters rather than be forced to move. It is not clear whether many affected homeowners could afford a reasonable rent, or whether lenders would be willing to rent while holding the property in hopes of getting a better price later, instead of dumping the foreclosed homes onto today’s depressed market.

Most buyers need a mortgage, and that has become an obstacle. As Miami Beach mortgage broker Grant Stern told Bloomberg, “Six years ago, standards were pretty permissive, and two years ago all you needed was a pulse. Nowadays, even people who have reserves that equal [the] amount of the loan are getting rejected.” Without mortgages, potential homebuyers instead stay put, and the houses they might have bought stay empty.

Appraisers, lambasted for the allegedly exaggerated figures they gave during the housing bubble, also have reversed course. Now, some homebuyers are finding that, after they agree on a price with a seller, their banks report that the house has been appraised at a lower value. Because banks generally won’t grant a mortgage for more than the appraised price, buyers usually must come up with the difference or call off the purchase.

Appraisers say new regulations, intended to help them give objective, independent assessments, have proved to be a hindrance. The new rules require that on any Fannie Mae or Freddie Mac loan—more than 60% of American home loans—appraisers cannot be hired directly by lenders but must work through third-party appraisal management companies. The appraisal management companies then take a cut of the appraisal fee, leaving some appraisers without enough left to sustain their businesses or themselves.

Bill McEvoy, an appraiser from Schenectady, New York, told the Schenectady Daily Gazette that “It’s hurt our business significantly. They take 30 to 40 percent of the fee — and if you want to have work that’s what you have to live with.”

Speculators took a great deal of the blame for the housing crisis. While pressing for his housing rescue plan in February, President Obama underscored that he would “not help speculators who took risky bets on a rising market and bought homes not to live in but to sell.” Banks began severely limiting the loans they offered for the purchase of houses where the owner would not live.

Now that profit-seeking buyers have been pushed out of the market, there is no one to purchase the many foreclosed homes that have been left untended and have fallen into disrepair. Seeing the tracts of forsaken houses in need of restoration, some analysts have started calling speculators a nicer name, ‘investors’, and saying that they will be essential in the recuperation of the housing industry. Amy Bonitatibus, a spokeswoman for Fannie Mae, told Bloomberg that “Bona fide, experienced investors bringing significant equity to the table will play a key role in the housing recovery.” But they won’t be able to play that role until they can get the credit necessary to make purchases.

Swinging from one extreme to another will not help us get the housing market back on track. The market will recover—markets always do—but it will do so faster if we leave the good guy, bad guy labels to Hollywood and look for solutions that work instead of solutions that punish.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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