ALBUQUERQUE — Although New Mexican homeowners have remained relatively insulated from the U.S. housing bust, experts say we are not immune from national housing and economic woes.



The recently passed Housing and Economic Recovery Act could bring benefits for first-time home buyers and those looking to refinance as well as the opportunity to transfer adjustable mortgage rate loans into standard fixed 30-year loans. It also increases the bond authority of the state Mortgage Finance Authority, which officials are hopeful will funnel money into regional affordable housing efforts.



Although New Mexico was generally shielded from the subprime mortgage crisis, relief measures will benefit the region’s slumping housing market. High construction costs, cautious lenders and slowing job growth are contributing to New Mexico’s sluggish activity. Meanwhile, some experts are refraining from calling recent federal action a bailout of the industry in light of tight restrictions for monetary dispersement within the act. As a result, the government’s decision to back Fannie Mae and Freddie Mac shines light on our economic reliance on foreign investment and the country’s collective dilemma of debt.



How does New Mexico benefit?



The Economic and Housing Recovery Act is a complex piece of legislation, says Michael Sivage, a builder and vice-chairman for the state Mortgage Finance Authority. He notes that regulators are still working out all the details for implementation.



The state MFA has been going through the legislation daily and sifting through the measures that will most dramatically affect the state.



One of the major provisions under the act is a one-time, $4 billion emergency neighborhood stabilization fund. This would enable local governments to work with non-profits in acquiring and rehabilitating foreclosed homes and making them available to low- and moderate-income families at 120 percent of the area median income.

 

"New Mexico may get about $20 million from this provision," says Erin Quinn, senior policy and program adviser for the MFA. A big chunk of that allocation would go to Albuquerque because of its rate of foreclosure. "The distribution of the funds is being modeled after the Community Development Block grant," says Quinn, "which is a HUD formula grant program by which 70 percent goes to the state and 30 percent goes to local governments."



Another provision in the act is that for the first time, the MFA will be able to offer its products for refinancing. However, Quinn states that the bulk of loans will still be going to first-time buyers. The guidelines on the refinancing will be strict, she says.



A $7,500 federal tax credit will also be made available to first-time home buyers. "It’s designed to get those that are on the fence, into the market," says Sivage. Although this is one of the most lauded features of the recovery act, it is also one of the least understood. The $7,500 works as an interest-free loan and must be repaid over a 15-year period. The credit is available for homes purchased on or after April 9, 2008, and before July 1, 2009.

 

A "first-time home buyer" is defined by the law as anyone who has not owned a principle residence within three years of the purchase. This tax credit cannot be used in conjunction with first-time buyer programs associated with the MFA.



The FHA will now be able to transfer adjustable mortgage rate loans into fixed, 30-year mortgage loans upon agreement by the lender. Although generous by title, this provision comes with very stringent guidelines for lenders and borrowers. According to the Hope for Home Owners Act of 2008, which is a provision of the larger recovery act:

 

The new mortgages offered by FHA-approved lenders will refinance distressed loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure. In exchange, homeowners will share future appreciation with FHA… Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure. Borrowers will share their new equity and future appreciation equally with FHA. Borrowers will pay for the FHA insurance.

 

Currently lenders are being very cautious because of the subprime crisis. This provision is intended to restore more confidence in order for the market to pick up.

 

Quinn states that the biggest beneficiaries of this particular provision are those with adjustable-rate mortgage loans who have been steadfast in their repayment.

 

The recovery act also includes a one-time tax-exempt bond cap of $11 billion. This will greatly increase the state’s ability to issue tax-exempt bonds to finance programs for sub-prime refinancing, first-time buyer mortgage assistance as well as programs for multi-family rental housing. Quinn says that New Mexico may see about $110 million of that money through 2010. The increase in cap is only available for a limited time but it will nearly double the MFA’s ability to issue bonds. "This is a very good resource as long as there is a market for tax-exempt bonds," says Quinn.

 

 

With the passing of the act the FHA has prohibited seller-funded downpayment assistance programs.(pdf) Entities with a vested economic interest in the sale of a home cannot offer downpayment assistance. Critics of these programs, which include companies such as Ameridream and Nehemiah, state that companies that offer 100 percent financing often times know that the buyer will have to foreclose within the first couple of years. Sivage states that anything that allows low-income buyers to get into the market is a good thing and believes the loss of these programs may hurt the housing situation rather than help it.

 

One of the last provisions mentioned by the MFA was the creation of a housing trust fund. Fannie Mae and Freddie Mac will be mandated to contribute to the fund which will most likely go towards affordable housing rentals. The minimum state allocation would be $3 million.

How did we get here?

 

President Bush’s recent remarks about Wall Street being drunk and suffering from a hangover may have been uncouth but experts say that assessment isn’t that far off the mark.



"It started by individuals and companies making capital investments in real estate," says Sivage, "then universally individuals and companies started flipping houses for profit and that created a frenzy of investors and speculators in the market."



Quinn says that the price appreciation in some markets was in part due to record low interest rates. "Individuals and companies were under the assumption that they could borrow more and that’s when the competition between lenders really increased." She says that within that market environment, many lenders felt compelled to offer loans requiring little to no financial documentation. It was then that Wall Street starting putting together exotic lending packages which resulted in the boom of subprime and adjustable rate mortgages.



"The underlying belief was that as long as the home appreciated then the buyer could buy out before the rate change," says Sivage. He says that there was a universal feeling amongst speculators that the demand was greater than the supply and that housing still had room to grow. "In actuality the demand was unsustainable, inflated and to a certain degree, false," says Sivage.



"It was an investors game," says Quinn, "a lot of this appreciation was artificial because of the rate of turnover in the real estate market."



Although hindsight is now crystal clear within the real estate market as to what happened, financial analysts and experts had been predicting this for some time. Dean Baker, co-director for the Center for Economic and Policy Research stated on Bill Moyer’s Journal recently that:

 

Well, basically we adopted this policy of anything goes, so that if Wall Street business could dole it and they could make money on it, we let them get away with it. You know, the fact that subprime mortgages had more than doubled as a share of the economy, that should have been, you know, just an alarm bell sounding off to everyone. And this was, you know, I’m an economist. I see this data. But, you know, this is widely known. But yet, people are just looking the other way. And we knew people were being taken advantage of. We knew it was going to end very badly.

 

Indeed, prominent economists have been talking about the housing bubble for years. Chris Thornberg, a senior economist at UCLA Anderson Forecast was warning the public in 2005. Likewise, Paul Krugman was raising a voice of concern more than three years ago.

 

Baker went on to say:

 

It’s really incredible. And even as, you know, things are going down in flames, there’s still no interest in holding them accountable. So you have the CEO of Fanny Mae gets over $40 million, CEO of Freddie Mac got $19.6 million in a single year. Both companies are essentially bankrupt. I mean, there’s been this charade, like, oh, it’s just bad press, and, you know, shorting their money. You know, they’re basically bankrupt. If anyone doubted that, well, just take away the government support and see how long they hold up. You know, they’re basically bankrupt companies. And the people who ran them into the ground are still sitting there, collecting millions of dollars. And it’s just kind of mind boggling.

 

One of the most significant systematic provisions within the recovery act was the U.S. government decision to buy the debt of the Government Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac and offer them equity. "That was absolutely needed because what people generally don’t realize is that the government is not obligated to back them," says Sivage "Up until now the main backers of their securities has been foreign investment."

 

According to a report last year by the Brooking’s Institution:

 

Foreigners now hold well over $14 trillion of U.S. assets, more than a 100 percent of U.S. gross domestic product. Foreigners, mainly foreign central banks and government investment funds, hold more than $2.5 trillion in U.S. Treasury securities alone.

 

The recovery act strengthens regulation and oversight over Fannie Mae and Freddi Mac and puts in place an independent, financial regulator to oversee their operations. According to a government summary of the act, "The legislation endows this regulator with broad new authority, equivalent to the authority of other federal financial regulators, to ensure the safe and sound operations of the GSEs."

Projections

 

The future outlook for the housing market in New Mexico rests on job growth and the strength of the national economy.



While New Mexico job growth and the housing market have slowed, New Mexico as a whole is doing better than much of the nation.



"Homeowners in New Mexico should be fine as long as you’re not in an adjustable-rate mortgage or you don’t have to sell your home," says Quinn.



"I tell builders that they need to put profits on the back burner and focus on riding out this wave," says Sivage. "The bottom line is that the economy has to be strong. If there’s no job growth, then there will be no demand."