Believe it or not, the housing and lending industry is now the unlikely and unwilling sponsor of the payroll tax extension. Bitter pill though it may be to swallow, the painful truth is that Congress lacked the spine and the creativity to stay in session long enough to fund and resolve it any other way. In the FHFA press release dated December 29, it was announced that there were 58 other tax code benefits that Congress failed to renew. These credits include, but are not limited, to tax deductions on Private Mortgage Insurance (including FHA), discontinuation of credits for energy efficient homes, to name a few. All of which would have directly and positively impacted the continued, if slow, comeback of the housing and lending industry. But, this being an election cycle, the clamoring about the payroll tax could not be ignored. So, in true Washington form, the bill HR 3765 Title IV  had to be signed in-a-hurry, regardless of which existing program was being cannibalized in doing so. In fact, it went straight from the house to the President bypassing the Senate altogether. In this case, the easy target was social security, already a victim of severe abuse, and already in need of replenishment. So, as we have come to expect from Congress, they rushed to their holiday recess (not to be confused with their monthly recess, fall recess, summer recess, and general random recesses that occur at the most inopportune times), while we were all spending our disposable income, doing our part to improve the economy, and looking the other way, focusing our fragile hopes on a New year, potentially more prosperous than 2011.

It is diabolical in its own right: the only way to pass the bill without Republican alarm and subsequent rejection (raising taxes), was to raise interest rates, further placing the burden on the consumer, and our one last hope: the housing market.

In an environment in which Loan Officers or Lenders are likely to be blamed for higher rates, the mortgage industry needs to backpedal and explain why mortgage rates are becoming 1/8^th to1/2 of a percent higher than they were a week ago. And in a time when housing was starting to show some signs of improvements, hiking mortgage rates will only decrease the current affordability rates for the average home buyer currently enjoys. We all know that home prices are at 2002 levels and interest rates are at record lows. The HUGE elephant in the room remains the ridiculously strict guidelines that are not allowing the majority of US consumers to achieve the American dream.  This latest blockade only serves to stall the economy further, and threatens to undo any progress achieved since 2007, particularly with the unthinkable removal of tax-deductable private mortgage insurance, an issue so frightening that it merits its own post. Stay tuned…

So, that all being said, this far into the aftermath of the crisis (are we there yet?) one can hardly be shocked by the ripple effect of each regulation, and its subsequent mutation as it manifests itself in the economy.  However, the epidemic that erupted this week could potentially be the worst and most damaging of all. For those who doubted that crisis-imposed regulations would actually have the reverse effect of what they were intended for, this is your wakeup call.

All across the country this week, loans that had actually cleared the hurdles described above, granted to borrowers that had been vetted through a grueling process that questioned their very patriotism, were stopped after the moving trucks arrived. The banks were unable to fund the loans, as their ‘wholesale’ supply, endowed by the still-existing oligarchy Bank of America, were choked off.  How could this happen? Bank of America, who provided liquid funds for almost 75% of all loans originated in the United States, announced earlier in the year their plans to shut down their “correspondent” channels to small and medium private lenders, instead to concentrate on their own retail operations. In other words, Bank of America’s money can only be acquired through Bank of America branches. Their theory is that borrowers will want Bank of America lines and products most, being so large and recognizable, and will thus sacrifice the much better rates that smaller private banks and brokers can offer readily. Not such a safe bet for Bank of America. Didn’t the lesson of the ATM fee revolt resonate upstairs? Haven’t they seen cities occupied by enraged victims of the banking industry? Denial is what got us into this mess in the first place Social media has served as a great conduit in expressing the ire of the consumer, and the line in the sand has been drawn. No consumer cares if their loan is brand name or generic. They are not willing to pay junk fees for a fancy label.

All is not lost. Thankfully, many medium private lenders had the foresight to be prepared for this inevitable fallout. Smaller lenders may not fair so well. They are faced with significant challenges since they relied primarily on the Big Four to replenish their funding warehouse lines. While Bank of America and Friends turn a blind eye to the harsh realities of the 21^st century, private lenders are getting their own Fannie, Freddie, and HUD credentials so they can get replenished directly from government entities and (horrors!) Wall Street.

Final diagnosis of the banking repercussion du jour: the simple laws of supply and demand apply. As liquidity dries up, rates will rise due to scarcity of funds, thus causing a deeper slowdown of the overall housing market (higher rates, higher payments), refinances and purchases alike. However, with improved liquidity (hopefully something we will all live to see) the opposite applies. Lower rates, lower payments.

As we approach yet another election year, many would-be heroes will paint their vision of utopia to covetous voters. Let’s hope they have the sense to abandon the notion of prematurely privatizing Fannie and Freddie,  and in the process investors’ confidence of mortgage-backed securities will be restored, keeping interest rates at current levels, maintaining affordability, and essentially keeping the American dream alive.

last couple of years, this is without a doubt a big one. Although It will not affect all markets, the high end real estate markets, like San Diego and other major cities, could be hurt significantly.

There is no certainty that these changes will happen but if they do it is my opinion that following will occur:

1. If Fannie Mae stops buying the High Balance Conforming loans in the secondary markets the control of interest rates will shift to the private sector, lenders will be able to set their own fees and terms and there will be no controlling entity to keep Wall Street’s greed in check. In other words, higher rates are a certainty. Most likely high 5% to mid 6% rates.
2. With the hike in rates the purchase power of the first time home owner will decrease significantly. For example, today you can get a $650,000 loan @ 4.75% for a payment of $3,391 per month. If the limit is lowered and Wall Street sets the interest rate for the same loan at 5.75% the new payment would be $3,897 per month. If this happens, a buyer would need an average pay raise of 12% to qualify for the same loan.
3. There is a direct effect on the real estate market as well. If you are a buyer, and you had been qualified for a higher loan amount, now you have to set your limits on a lower priced home. In essence, it will cost you more to own the same home.
4. If you are a seller, chances are that your home will sit on the market longer before a more affluent buyer shows up at your door steps.