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November 8th, 2010 11:36 AM by David W. Welch
The federal government, central bank (The Fed), and the secondary mortgage market (GSE's, Government Supported Entities) have an important role in helping to get the real estate industry back on track. While I am no fan of the big banks, big government or big bailouts, I do believe that the federal governmental entities played a big role in the real estate led recession and the continued challenges in the real estate market. I have said many times before that the fed's have three policy tools at their disposal to help guide the real estate market: fiscal policy, monetary policy and lending policy. Leading to the big run up in real estate prices, fiscal policy and monetary policy were quite loose. Taxes were kept low with a fairly large deficit, and interest rates were being kept quite low by The Fed for an extended period. Where we got into trouble is lending policies established by Freddie Mac, Fannie Mae and FHA were also quite loose.
Some people would like to blame the banks for making the loans when price increases became obviously unsustainable, but frankly if Freddie, Fannie or FHA said it would buy the loan you can understand why the bank made the loan. That is what they do for a living, and if Bank A did not make the loan Bank B would. Banks that made fraudulant loans are a different story, and they should be held accountable for their actions. However, banks that made loans that met the secondary market guidelines really did nothing wrong. There are people who want to blame the Realtors for selling the homes, but if we did not sell them the owners would have sold the homes themselves. The vast majority of loans I am certain were not fraudulent, but legitimate loans made within the established guidelines. Now we are on the other side of this situation, and fiscal policy and monetary policy are debated in the news daily. Both have been extremely loose, yet the housing market has not improved as much as most would like.
Lending policy is the key. Now with prices so low, and inventory still running high is when lending policy needs to be loosened. There are essentially no loans available for foreign purchasers here in Florida, neither is there any financing for investors purchasing condos. FHA is raising the downpayment for lower credit scores and has increased the monthly mortgage insurance premium significantly increasing the cost of an FHA loan. These loans have become the major financing vehicle for home purchases here in Orlando. When things were fast and loose five years ago is when the GSE's should have tightened lending policies, not now.
David Welch Real Estate Optimist, Orlando Real Estate