John M. Lee: Changing Finance Market

With all the foreclosures and distressed sales over the past few years, our federal government has been trying to come up with solutions to help stabilize our housing market. They have implemented programs like TARP funds to bail out the banks, HAFA to assist in the short sale process, and tax credits to stimulate sales.

While these efforts have met some success, and the real estate market is better because of them, they have not solved all the problems yet, as evidenced by the fact that many people are still under water in their mortgages and many banks are still in financial trouble.

I was involved in a briefing with HUD and the White House last month outlining what will be coming up for discussion and debate in 2011.

Their joint recommendation is to phase out government sponsored enterprises (GSE), meaning Fannie Mae and Freddie Mac. These two entities have been the largest purchasers of mortgages and ensured a liquid lending environment for real estate. They are organized as for-profit organizations with government guarantees. During this downturn in the real estate cycle, they had to be bailed out by the government, which means the taxpayers.

The concept of for-profit corporations operating with government guarantees just does not work because it creates a situation where the companies can take greater risks in attempts to make more profits. They do not have to be as concerned with major losses because the government is always standing by at the ready to bail them out.

Thus, the time to phase GSE's out is here. However, there is still a significant role for government in insuring capital stability in the mortgage market. With this plan, the government is trying to shift much of the risk to the private sector. However, the private market has been incapable and unwilling to step in during the toughest of times to meet the demands of the lending industry.

Our government realizes this and I think the solution will come in the form of a government supported non-profit entity with the purpose of monitoring the mortgage industry and establishing policies to insure an orderly and transparent marketplace.

Other current outstanding proposals include reducing the conforming loan limit from $729,500 to $625,500 in high-cost areas and increasing the FHA loan down payment to a minimum of 10 percent, instead of the current 3.5 percent. The net effects of these changes will make it more difficult for buyers to purchase homes, which will reduce the number of buyers in the marketplace, resulting in reduced sales activity and reduced prices.

Another proposal receiving a lot of attention nationally is the elimination of the mortgage interest deduction, which would reduce the amount that can be deducted for income tax purposes. Our government has always advocated the concept of achieving the American Dream of home ownership and has provided incentives in the form of tax deductions on mortgage interest and property taxes on income taxes. But, with the budget deficit, they are looking at all kinds of ways to balance the budget and, unfortunately, this is something that has been put on the table.

What does all this mean to our local market? Unfortunately, all of the proposed changes have a negative impact on our real estate market. Being in a high cost area, we in California dominate the jumbo loan market and need liquidity and assurance in our mortgage market more than the rest of the nation. With the proposed changes, the private sector will shift some of the costs back to the consumers in the form of higher interest rates, making qualifying for loans even more difficult than it already is. If these proposals pass, it will further impede the still fragile housing market recovery.

These issues will all be hotly debated throughout 2011. I will be traveling to our nation's capitol this month and in May to exchange ideas with our legislators and to see what we can do to further our dream of home ownership, while balancing it with the interest of running an efficient government. Stay tuned!

John M. Lee is currently serving as a state director for the California Association of Realtors and specializes in the Richmond and Sunset markets. If you have any real estate questions, call him at (415) 447-6231 or send an e-mail to johnlee@isellsf.com.