San Diego’s housing market should be able to weather the unwinding of Fannie Mae and Freddie Mac — when the time comes, local experts said.
President Barack Obama endorsed a reduced government role in the nation’s mortgage market, allowing private capital to take a lead role, he said in a speech in early August.
“Our housing system should operate where there’s a limited government role and private lending should be the backbone of the housing market,” Obama said Aug. 6.
A reduced government role would shift risk from taxpayers to borrowers, probably increasing the cost of mortgages and leading to increased interest rates.
Mark Riedy, executive director of the University of San Diego’s Burnham-Moores Center for Real Estate, said the ultimate impact on a 30-year fixed-rate loan would likely be half of 1 percent, which is “not the end of the world.”
The private sector has picked up much of what Fannie Mae and Freddie Mac were initially needed for, Riedy said, and would pick up most of the slack if it were wound down.
“I don’t think it’s going to hurt the housing market too much — people do adjust,” Riedy said.
He added that he’s empathetic to the problem, but there are alternatives to buying more than what’s needed. “There are alternatives to not being able to pay half a percentage more.”
Fannie Mae and Freddie Mac were rescued by the government when housing prices tanked and foreclosures skyrocketed. Riedy said this created an unfair advantage against competing investors, who disappear when they fail.
There are different options for handling Fannie Mae and Freddie Mac, and Riedy said it will be another three to five years before any decisions are made.
Fannie Mae and Freddie Mac began turning a profit, taking the pressure off Congress to make a decision. They became profitable because business turned around and foreclosures have been processed through the system.
One option is to completely unwind both companies and solely rely on private investors for loans, said Kurt Wannebo, CEO of San Diego Real Estate & Investments.
It will be more expensive for those investors to get capital, and that extra cost will be passed to consumers in the form of higher interest rates, he said.
Wannebo said there also will likely be increased government regulation — which will also cost money, and that will be passed to consumers in the form of fees or increased rates — and there was a brief mention of the creation of an insurance program.
“No matter what happens, it is inevitably probably going to lead to higher interest rates,” Wannebo said.
If it were Riedy’s choice, he said he would limit activities to mortgages for low and moderate income families, and create a more consistent presence in the guaranteeing or acquisition of multifamily mortgages by lenders.
Fannie Mae and Freddie Mac were originally created to support low- and moderate-income families, and expanded into higher income or subprime loans, which is what got them into trouble, Riedy said.
In San Diego, Wannebo said private investors are already returning to the lending space, and they’ve approached him offering stated-income loans and loans requiring only 5 or 10 percent down.
“I’ve heard about lenders willing to do second loans on a purchase right off the bat to allow for those 5 to 10 percent downs. So they’re already coming back, regardless of whether Fannie comes or goes,” Wannebo said. “And inevitably what that will probably lead to is a cyclical situation once again where people who might not be able to afford certain properties are stretching themselves and putting themselves into properties once again. It’s shocked me how quickly they’ve come back into the market.”
San Diego has a higher median home price than other areas, and many years ago those prices were above the conforming limits of Fannie Mae and Freddie Mac, Wannebo said.
Private investors had to come in and provide “crazy loans,” he said.
At one time only 20 percent of loans were purchased by Fannie Mae and Freddie Mac in San Diego.
Since the market shifted and median prices have come down, and about 60 to 75 percent of loans are being purchased by Fannie Mae and Freddie Mac, Wannebo said.
Most of the loans Fannie Mae and Freddie Mac deal in are not directly through the consumer, but are sold and packaged as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, and are not put in their portfolio, Riedy said.
“They’re not the big portfolio lenders anyway,” Riedy said.
Wannebo said private investors are less willing than Fannie Mae and Freddie Mac to take on the risk of long-term loans.
“We could see the end of the 30-year mortgages and start seeing more short-term loans,” Wannebo said.
If there weren’t as much money available going forward, housing prices wouldn’t continue to increase as rapidly as in the past, Riedy said, which is “probably not a bad thing.”
He added that the winding down of Fannie Mae and Freddie Mac “will tamp down some cyclicality in housing prices.”
Leslie Appleton-Young, vice president and chief economist at the California Association of Realtors, said at a recent presentation that more than 80 percent of loans originated today are bought by Fannie Mae and Freddie Mac.
“You can’t go cold turkey unless you want to go cold turkey and see interest rates increase 300 basis points,” Appleton-Young said, adding that she was speaking for the Realtor party and, “we are here to help you be as successful as possible, and obviously an affordable flow of capital into the market is very important.”
Wannebo said Fannie Mae and Freddie Mac have returned to good underwriting guidelines and are slightly more conservative, which has allowed them to become profitable and start repaying some of their loans to the Treasury.
“It’s a political hot potato right now,” Wannebo said, referring to Fannie Mae and Freddie Mac. “Our county is built on capitalism. When you have the government owning the largest resource of loans out there, it goes against our philosophy, per se.”
Wannebo said he thinks Fannie Mae and Freddie Mac are necessary, but doesn’t think they need to be owned by the government.
“If the government gets rid of them, I feel that somebody else needs to come in in the same capacity and run them in the same manner that they are now — and not be influenced by political sources to give out creative loans for the sole purpose of getting everyone into a home and winning political points,” Wannebo said.
“Whether it’s owned by the government or not is arbitrary to me, but the existence of it being there and being able to borrow from the Treasury, from the government, at low rates, to turn around and offer low rates to consumers with responsible guidelines, is a necessity,” he said.
Wannebo said Fannie Mae and Freddie Mac are giving consumers the opportunity to get low interest rates with correctly underwritten loans.
“The low interest rates we have right now are obviously due to quantitative easing, and that can’t last forever,” Wannebo said. “And once that does ease up, interest rates will go up in and of themselves.”
Unwinding Fannie Mae and Freddie Mac while also tapering quantitative easing create a “double whammy,” Wannebo said.
“You’re going to be taking away the very cheap money at the same time that you’re bringing in private investors,” Wannebo said. “Each of those things on their own is going to bring up interest rates. Put them together at the same time, and you could see a significant price jump.”
Riedy said he expects quantitative easing will resolve itself before decisions are made regarding Fannie Mae and Freddie Mac.
“They’re not going to turn off the spigot entirely. Over time, they’ll reduce purchases of long-term bonds, but may also decrease sales of short-term securities,” Riedy said.
Wannebo said the effect of a 1 percent increase has already been witnessed, and that was just a result of a discussion about tapering.
“We’ve seen buyers who were in the market psychologically take a step back and have to reassess whether or not they want to keep looking and still buy, regardless of the fact that it is still low. And you see the purchasing power of buyers being reduced,” Wannebo said.
He said if a buyer qualifies for $1 million and interest rates are raised by 1 point, that equates to about a $50,000 reduction in what he or she can afford.
“Raising interest rates is not a bad thing,” Wannebo said. “We are at historically low interest rates, artificially. This isn’t normal. This isn’t the way it’s supposed to be. It’s only because of quantitative easing that we’re at this ridiculously low amount. And so, incrementally increasing them, things will still continue on — maybe at a little bit slower pace — but we’ve been there before.”
“Our market especially in San Diego went ballistic when we were in the 5 to 7 percent range,” he said. “But hitting someone, hitting homeowners with a drastic one-time thing, it does put pause. It’s not a bad thing, it’s just needs to be done in an incremental matter and in a responsible fashion.”
Increasing interest rates could affect those homeowners who purchased at a 3 percent rate and are trying to sell to buyers who will have to pay a higher rate, Wannebo said.
“If someone buys their home at a 3 percent interest rate at $1 million, and 5 years later they want to sell it, but all of those buyers are going to have a 6-7-8-9-10 interest rate, it’s going to reduce their purchase power substantially,” Wannebo said. “And prices are going to essentially stay flat lined for a long period of time. And it’s going to take a really, really, really long time for some of these people to be able to sell their house for more than what they bought it for.”
-- Bloomberg contributed to this article.
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Jan. 14, 2011 -- Executive Editor George Chamberlin speaks with Mark Riedy, executive director of the Burnham-Moores Center for Real Estate, about the state of San Diego's commercial real estate market.