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October 2019 Market Update


FED CUTS SHORT TERM RATES IN SEPTEMBER – TRUMP NOT HAPPY


In September the Federal Reserve cut the Fed Funds Rates a second time, in just two months, by a quarter of a percentage point due to growing concerns over a slowing economy and threat of a pending recession.


President Donald Trump reacted to the cut by tweeting: “Jay Powell and the Federal Reserve Fail Again. No 'guts,’ no sense, no vision!” On Monday, Trump had pressed on Twitter for a bigger cut, saying: “Jay Powell & the Fed don’t have a clue” and “Big Interest Rate Drop, Stimulus!”


Reaction from the President is unprecedented, as Presidents of the past have largely refrained from criticizing or influencing actions by the Federal Reserve. President Trump has been encouraging the Fed to cut interest rates to 0%, or even negative; as seen in some foreign countries. For the first time in history, tweets are moving interest rates.


In a series of tweets, Trump said that “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” adding that “the USA should always be paying the lowest rate.”


Trump continued to criticize his handpicked Fed chair, Jerome Powell, saying “it is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing.”


He concluded by calling Powell, whom he nominated to head the central bank in 2017, and his Fed colleagues “Boneheads.” – usatoday.com


The Fed appears to be cautious and doesn’t want to exhaust all its ammunition for economic stimulus at once, if the country slides into a recession. The single greatest stimulus was already executed with Tax Reform, which mostly benefited corporations, and has already fallen flat with regards to stimulating the U.S. economy. The Fed rate currently sits at near historic lows of 1.75% to 2.0%.


If the U.S. economy does in fact take a sharp downward trajectory, the Fed may have limited resources to inject stimulus into the markets.


QM PATCH TO EXPIRE


With the re-election of President Trump, it appears that the QM Patch will expire in January of 2021.


The Ability to Repay Rule, created by Dodd-Frank regulation, stated that to be considered a Qualified Mortgage, one in which could be purchased by government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, borrowers would have to have a debt to income ratio no greater than 43% (based on gross income).


The expiration of the QM Patch will have a profound impact on the housing market. Nearly 50% of mortgage transactions have a debt to income ratio in excess of 43%. Consequentially, those mortgages would be originated at a considerably higher cost as well as higher down payments due to the lack of the “implied” government guarantee afforded by mortgages purchased by Fannie, Freddie and the U.S. government. This would prevent many borrowers from qualifying due to the increase cost to purchase a home, especially when homes are already pressing the limits of affordability.


“Expiration of the Patch without a defined plan to continue to serve these borrowers will have dramatic negative consequences for the housing market, resulting in more expensive or unavailable credit," the MBA explained in a letter to the CFPB.


The expiration of the QM Patch will greatly limit the exposure the U.S. government, and ultimately the U.S. taxpayer if the economy took as steep turn downward, and mortgage defaults rose. Currently Fannie and Freddie can approve loans up to a 50% debt to income ratio with an automated underwriting approval; which is based on gross income, an is arguably high risk.


A recent study published by the Urban Institute pointed out that the QM patch “disproportionally serves minority and low-income borrowers, who would not qualify for a loan without its less restrictive standards.” The counter argument is, should the government expand guidelines to meet the needs of low-income borrowers that are stretched to the limits of their finances in order to purchase a home, despite the risk it places on the homeowner and U.S. government. Is housing a right, or earned; and who is responsible for the risk?


All indications are that with a Trump re-election, the QM Patch will expire. Currently the White House, FHFA (Federal Housing Finance Agency), HUD and the CFPB are proponents of the expiration of the QM Patch. A big step in the current administrations goal to unwind the GSEs.


THE PLAN FOR THE GOVERNEMNT TO EXIT HOUSING


Time is ticking for the two government agencies, Fannie Mae and Freddie Mac, who are responsible for half of the U.S. mortgages today. The Trump administration released its plan to lift the government control over Fannie Mae and Freddie Mac, which have been under conservatorship for the last 11 years. If executed, Fannie and Freddie would be turned back into private, publicly traded companies, and would compete for business with Wall Street.

“President Trump’s housing plan will make mortgages more expensive and harder to get. I’m urging the president: Make it easier for working people to buy or rent their homes, not harder,” said Sen. Sherrod Brown (D-Ohio), the ranking Democrat on the Senate Banking Committee.


Fannie Mae and Freddie Mac represent the last major unresolved business from the financial crisis, and Mnuchin has called them a top priority for more than two years. Under the plan, they would be turned back into private companies but would be required to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.


On Monday, September 30th, the Treasury and the Federal Housing Finance Agency (FHFA) announced that the GSEs would be able to retain up to $45 Billion in capital in preparation for the end of conservatorship. The capital would help the Agencies have the capital to operate and compete in a private market. This would end the era of the Treasury sweeping all profits from Fannie and Freddie. A strong move toward privatization.


“The enterprises are leveraged nearly 1,000-to-one, ensuring they would fail during an economic downturn – exposing taxpayers once again,” FHFA Director Mark Calabria said.


“This letter agreement between Treasury and FHFA, which allows the enterprises to retain capital of up to $45 billion combined, is an important milestone on the path to reform.”


“FHFA commits to working with Treasury in the coming months to amend the share agreements and further advance broader housing finance reform,” Calabria said. “The reform goals include limiting the government’s role in housing finance, increasing marketplace competition, focusing on affordable housing and sustainable homeownership. The status quo is not an option. Now is the time to act.”


Since the government took Fannie and Freddie into conservatorship due to the Great Recession, Fannie received $119.8 billion in taxpayer bailouts, and Freddie received $71.6 billion. Since the bailouts, the GSEs have paid back over $300 billion to the Treasury Department. – Washington Post


The move to remove the GSEs from conservatorship is a monumental task, with known and unknown implications. One outcome would be an increase in the cost to consumers. Without the government’s “implied” guarantee, the cost of a mortgage would increase. The only reason a 30-year fixed mortgage today can be originated at today at 4.0% or less, is because investors will purchase mortgage backed securities, for a thirty year term, with very low yields, due to the “implied” guarantee that the U.S. government will prevent loses. Mortgage back securities trade very similar to U.S. treasury bonds and are perceived to have similar risks. In fact, there is a strong likelihood that a 30-year fixed mortgage would largely be a product of the past, as the cost associated with such product would be too high. Like most countries that do not have a “socialized” mortgage market (i.e. Fannie and Freddie), adjustable rate mortgages are more affordable than fixed; if fixed are even offered.


Fannie Mae was created in 1938, as part of Franklin D. Roosevelts New Deal to bring liquidity into the housing market after the Great Depression. In 1970 Freddie Mac was created to compete with Fannie Mae. Since their inception, the GSEs have been instrumental to the U.S. housing marketing. Due to the implied guarantee, the GSEs were bailout out during the Great Recession, but so was much a Wall Street, that did not have an “implied” guarantee. Despite common belief, the GSEs had very little to do with the cause of the Great Recession.


The greatest housing reform is underway in America today, and the public is not paying attention. Under the current administration, the U.S. housing market is about to go through epic changes. One of the greatest, and most successful government programs, which was critical in pulling this country out of the Great Depression, and creating one of the greatest sources of wealth for the citizens of this country, is coming to a end.


HOME PRICES CONTINUE TO CLIMB


In the lasted report from Case-Shiller Home Price Index, home prices in July saw an annual increase of 3.2%.


“Year-over-year home prices continued to gain, but at ever more modest rates,” says Philip Murphy, managing director and global head of index governance at S&P Dow Jones Indices.


“Charlotte surpassed Tampa to join the top three cities, and Seattle may be turning around from its recent negative streak of YOY price changes, improving from -1.3% in June to -0.06% in July.” – housingwire.com


Phoenix lead the gains posting a 5.8% increase year over year. Las Vegas coming in second at 4.6%.



 (Chart: CoreLogic)


NOT SO AFFORDABLE HOUSING


A new study from ATTOM Data Solutions, reported that the average wage earner (i.e. middle class) cannot afford to purchase a home in 74% of all U.S. markets.


“Buying a home continues to be a rough road to navigate for the average wage earner in the United States. Prices are going up substantially faster than earnings in 2019 without any immediate end in sight, which continues to make home ownership difficult or impossible for a majority of single-income households and even for many families with two incomes,” said Todd Teta, chief product officer of ATTOM. – housingwire.com


GENEVA FINANCIAL, LLC NOW LICENSED IN 43 STATES


Alabama, Arkansas, Arizona, California, Colorado, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Minnesota, Montana, Nebraska, New Hampshire, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington


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