Perspectives on America, ‘Short Takes on Wealth – 111
The American Job Market
This is Jeff Bennett for the Preparedness Podcast, with another installment of Perspectives on America, ‘Short Takes on Wealth – 111.’
Today’s topic, “FHA and the American Job Market”
In episode 109 of Short Takes, we discussed at length, a period of 17 days in 2010, of Real Estate Headlines, and how they might affect you, as a homeowner. Today, we will address, the changes on FHA loans and how they will affect borrowers and sellers, and how the current employment situation in America, is going to make things much tougher for Americans in the near future, and possibly for some time to come.
First of all…
Seller concessions
What are they? Contributions that sellers kick in to help defray a buyer’s costs. They can include closing costs, inspections, appraisals and free upgrades.
What’s changing? The FHA proposes slashing allowable seller concessions in half, capping them at 3 percent of the home price instead of the current 6 percent.
Why? FHA analyses show a strong correlation between high seller concessions and high default rates, possibly because the concessions can lead to inflated home prices. The theory is that some sellers might make concessions only to add the cost to the price.
What does this mean to me? This buyer’s perk will soon become less generous. The proposal does not ban concessions above 3 percent. But concessions exceeding 3 percent would result in a dollar-for-dollar reduction in the home’s sales price and reduce the amount of the allowable loan.
Credit scores
What are they? Three-digit numbers that help lenders determine how likely a person is to pay back a loan in a timely manner. The FHA uses the most common scoring formula, called FICO, with scores ranging from 300 to 850. The higher the number, the better the rating.
What’s changing? This year, the FHA plans to impose a minimum credit score requirement: 500. Borrowers with credit scores below 580 would have to make a down payment of at least 10 percent instead of the usual 3.5 percent minimum.
Why? Low-scoring borrowers default at a higher rate than more creditworthy ones. As of January, the percentage of FHA borrowers who were seriously delinquent was three times as high for borrowers with scores below 580 than for those with scores above 580.
What does this mean to me? Lenders are already imposing tougher credit score requirements on FHA borrowers than the agency is proposing, which could explain why only 1 percent of borrowers with FHA-insured single-family home loans have scores below 580.
Underwriting
What is it? Lenders must document information about the property (such as its value) and the borrower (such as income, debt, credit score) to assess whether the person is likely to repay the loan. Most lenders typically feed that information into an automated underwriting system for approval.
What’s changing? High-risk borrowers whose loans were flagged by the automated system could soon be subjected to a more in-depth manual review by the lender’s underwriting staff.
Why? The agency is trying to reduce its exposure to risk by limiting the discretion lenders have in approving loans.
What does it mean to me? Borrowers whose loans are manually underwritten would be required to have cash reserves equal to at least one monthly mortgage payment. Borrowers with credit scores below 620 would be more closely scrutinized. For instance, their overall debt would not be allowed to exceed 43 percent of their income.
Short refinancing
What is it? A new program that allows borrowers current on their mortgage payments to refinance into an FHA loan if they are underwater, meaning they owe more on their mortgage than their home is worth.
What’s changing? Borrowers who have no equity in their homes would be allowed to refinance into an FHA loan. The FHA would allow refinancing of the first mortgage only. If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15 percent once the first loan is refinanced.
Why? Many people are vulnerable to foreclosure because their home values have plummeted, making them unable to refinance or sell their properties if they lose their jobs or face a financial setback. This programs aims to help them.
What does it mean for me? Refinancing in this manner will probably hurt your credit, and qualifying won’t be easy. The lender or investor who owns your existing mortgage must voluntarily reduce the amount owed on that loan by at least 10 percent. Also, you generally must have about 31 percent or more of your pretax income available for the new monthly payment for all mortgages on the property.
July 31, 2010 – Washington Post
NOTES on the Above: So in retrospect, an industry (which is now requiring that all mortgage brokers provide their fingerprints), is penalizing potential buyers, for the ultra-loose lending practices, which they – the lending industry itself – foisted upon the American public in the first place. THEY dropped the standards so low – that almost anyone who could walk and chew gum at the same time – would be put into a home, whether they could actually afford to pay for it or not. “No money down! Good Credit, bad credit, or no credit at all. Heck, Mr. & Mrs. Jones, the values on these homes are increasing so fast, because, well – they are just flying off the shelves… and by the time your new home is ready for you – it will have increased in value by 30%, so we’ll just tap into that future equity, in order to meet the minimal requirements of OUR lender. There’s nothing to it… just sign here.”
Thank you Mr. Clinton, for promising that, “Every citizen deserves to experience the American dream of home ownership, no matter what his or her economic station is.”
HEADLINE: Few in U.S. move for new jobs, fueling fear the economy might get stuck, too
PALM COAST, FLA. — The recession is claiming yet another victim: Americans’ near-constitutional right to pick up and move to a better job.
Labor mobility has nearly ground to a halt in the past two years, and policymakers are increasingly worried that the slowdown is not just a symptom of the nation’s economic struggles but also a barrier to overcoming them.
With many people locked in homes by underwater mortgages, only 1.6 percent of Americans moved between states in a one-year period that ended in March 2009 — a labor stagnation not seen in half a century. Though household mobility has gradually declined for more than two decades, the recent sharp downturn has caused economists to worry that it could harm the already struggling recovery.
“In the past, people tended to move to where the jobs are,” said Assistant Treasury Secretary Alan B. Krueger, who oversees economic policy for the department. “Now it is necessary to have more of a strategy to move the jobs — and create new jobs — in areas where the people are.”
The labor migration rate is down sharply since the start of the economic downturn in 2007 and is just half the rate of a decade earlier, according to William H. Frey, a Brookings Institution demographer who has analyzed Internal Revenue Service and census data.
“Overall, interstate migration has reached its lowest point since World War II,” Frey said.
In Palm Coast, civil engineer James Tiffany took a job in 2006 and quickly bought a home to capitalize on the boom that transformed this once sleepy retirement community into one of the nation’s fastest-growing cities.
But as boom turned to bust, Tiffany was thrown out of work, and the city became known less for its explosive growth than its alarming level of joblessness. The area’s unemployment rate is 15.4 percent, the nation’s 11th highest, and many of the jobs that once powered the local economy are probably gone for good.
That has left a large share of the area’s jobless much like Tiffany: with skills that are no longer in demand here but saddled with mortgages that prevent them from leaving. “I’m sort of in a pickle,” Tiffany said with an amused smile before resuming his job search at a computer terminal in the city’s One-Stop Employment Center. “I’m stuck in a home that I can’t get out of if I wanted to.”
Mobility a sign of strength
Tiffany’s predicament is becoming increasingly common as more jobless Americans remain out of work for ever longer periods of time, prompting concern that the nation’s long-term unemployment problem could persist well into the future. Analysts have long viewed a mobile workforce as a signature strength of the American economy. The willingness of U.S. workers to move to opportunity has helped the country recover quickly from past economic shocks. It also has helped keep the unemployment rate relatively low, at least in comparison with Europe, which has much less labor mobility. Dramatic examples include the great migration of American blacks from the South to the industrial North over several decades of the past century, the later move of workers from the Rust Belt to the Sun Belt and the rush of workers to the Alaska oil pipeline in the 1970s.
Now the United States and Europe have similar unemployment rates, and economists worry that decreasing labor mobility is a growing factor in keeping the nation mired in its worst employment situation since the Great Depression. The last time U.S. unemployment rates approached double digits, in the early 1980s, most of the layoffs were temporary. But now the vast majority of the 8 million jobs lost since the start of the recession in 2007 appear permanent. Nearly half of the nation’s 14.6 million jobless workers have been unemployed for longer than six months.
Many economists believe that a significant number of workers will have to move before the employment picture substantially improves.
But workers have proved unwilling — or unable — to relocate. The biggest factor seems to be the large number of unemployed homeowners who have little or no home equity. Between 2006 and 2009, the number of renters who moved out of state decreased by 13.6 percent, according to census statistics, while interstate migration among homeowners has plummeted by 25.5 percent.
That problem is compounded by the sheer scope of the unemployment problem, which has left few areas in the country untouched. Many Sun Belt cities, long magnets for job seekers from economically depressed areas, have joined long-suffering Rust Belt areas as places with the highest unemployment rates. The Las Vegas metropolitan area has a 14.5 percent unemployment rate, higher than the rate in Flint, Mich. In Riverside, Calif., the jobless rate is 14.4 percent, higher than the rate in the Detroit area. And in Charlotte, unemployment is 10.9 percent, the same as Lima, Ohio.
“There are not a lot of opportunities to move. That is a huge factor in terms of less mobility,” said Fernando Ferreira, a professor at the University of Pennsylvania’s Wharton School who has written about the effect of the housing meltdown on mobility. “And the lack of mobility definitely hurts the efficiency of the labor market.”
Mortgages limit options
Only a few regions in the country have not experienced large spikes in joblessness during the recession. Among them are the Dakotas, Iowa and parts of Texas, where there was no housing bubble to burst.
Until recently, the economy in Palm Coast was built largely on breakneck housing growth, which helped double the population to about 100,000 over the past decade and drew people such as the 32-year-old Tiffany to town. He and his wife, a physical therapist, moved here from New Smyrna Beach, Fla., about 50 miles away.
When Tiffany arrived, the company he worked for had a backlog of jobs that made his civil engineering degree seem like a passport to lifetime employment. His days were filled designing drainage ponds and utility systems for the developments that were sprouting all over the city, which is the hub of Flagler County. Now the company has shed all but a handful of its workers, leaving just a skeleton staff and leaving Tiffany in a desperate search for a job.
“I’m looking around,” he said, adding that few places are even accepting applications. “But I can’t even give a résumé away.”
And Tiffany can’t move, because of the big financial hit that would involve. He purchased his house for $230,000. Now, he says, he could probably sell it for $175,000. “If I sold my home, I would be out more than $50,000,” Tiffany said. “I can’t do that.”
The slowdown caught local officials by surprise. The huge county courthouse in Palm Coast is largely vacant. Next door, the new county office building was also built for growth that suddenly ended, and the school system occupies much of the extra space.
Meanwhile, leaders are thinking hard about how best to revive the economy, something that was not necessary for a long time as the city’s miles of hiking trails and easy access to the beach seemed to sell itself. “We have to identify assets, and that will help us brand ourselves as unique,” said County Commission member Milissa Holland.
When magazine marketing and fulfillment company Palm Coast Data threatened to leave two years ago, Palm Coast officials vacated their city hall and leased it to the company to keep its more than 1,000 jobs in town. The city is expanding its open-access fiber-optic network to help lure business. Palm Coast also recently landed Galtronics Telemetry, an Israel-based maker of advanced antennas that has a design and marketing center in Palm Coast.
Officials are proud of those moves, but they know the new jobs are unlikely to be a good match for the construction workers, real estate agents and mortgage brokers who make up the largest share of Palm Coast’s unemployed.
“You can bring in all the electronics jobs you want,” said Mayor Jon Netts. “But the guy who is skilled as a framer, or a roofer or drywall installer, that is not going to help him.”
July 30, 2010 – Washington Post
With Recovery Slowing, the Jobs Outlook Dims
By CATHERINE RAMPELL
There is no more disputing it: the economic recovery in the United States has indeed slowed.
The nation’s economy has been growing for a year, with few new jobs to show for it. Now, with the government reporting a growth rate of just 2.4 percent in the second quarter and federal stimulus measures fading, the jobs outlook appears even more discouraging.
“Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession,” said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. “It’s still positive growth — rather than contraction — but it’s going to be very, very protracted.”
A Commerce Department report on Friday showed that economic growth slipped sharply in the latest quarter from a much brisker pace earlier, an annual rate of 5 percent at the end of 2009 and 3.7 percent in the first quarter of 2010. Consumer spending, however, was weaker than initially indicated earlier in the recovery.
Many economists are forecasting a further slowdown in the second half of the year, perhaps to an annual rate as low as 1.5 percent. That is largely because businesses have refilled the stockroom shelves that were whittled down during the financial crisis, and there will not be much need for additional orders.
Additionally, the fiscal stimulus measures that have propped up growth are expiring. Proposals for individual programs like another expansion of unemployment benefits have been beaten back each time they have come up in Congress.
“We need 2.5 percent growth just to keep the unemployment rate where it is,” said Christina Romer, chairwoman of the president’s Council of Economic Advisers. “If you want to get it down quickly, you need substantially stronger growth than that. That’s what I’ve been saying for the last several quarters, and that’s why I’ve been hoping that we’ll please pass the jobs measures just sitting on the floor of Congress.”
The approaching midterm elections, however, may harden the political standoff after Congress returns from its August recess. As a result, pressure will probably increase on the Federal Reserve to use its available tools to prevent a double-dip recession. Recent reports from Fed policy makers suggest the central bank has become increasingly worried about where the economy is headed.
American businesses, if not American households, seem to be hanging on.
The crucial driver of growth in the second quarter was business investment in such things as office buildings and equipment and software. Such activity rocketed up at an annual rate of 17 percent in the second quarter, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years.
“We’re seeing a sort of handover from consumer spending to capital spending,” said John Ryding, chief economist at RDQ Economics. “The consumer also looks to have saved more than we thought before, which means they’re perhaps further on the road to financial adjustment than we thought they were previously.”
Consumer spending, which is usually a leading indicator of a recovery and which accounts for most economic activity in the United States, has been leveling off. It grew at an annual rate of 1.6 percent in the second quarter after a 1.9 percent rate in the previous quarter.
Personal savings was estimated at 6.2 percent of disposable income last quarter, significantly higher than the 4 percent that had been estimated earlier.
A separate report released on Friday by the University of Michigan and Thomson Reuters showed that consumer confidence tumbled in July.
The fact that businesses seem to be investing more in equipment than in hiring may be a reason consumers have been reluctant, or perhaps unable, to pick up the pace of their spending.
“There are limits on the degree to which you can substitute capital for labor,” Mr. Ryding said. “But you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.”
The government painted a portrait of a deeper recession when it also released revised data for the last three years on Friday. Over all, 2009 and 2008 were slightly worse than previously reported, but the first quarter of 2010 was better.
As the global economy recovers, America’s trade has picked up. But imports once again grew faster than exports. Imports grew at an annual rate of 28.8 percent, the biggest jump in a quarter-century, compared with a 10.3 percent gain in exports.
Government spending shot up more than many anticipated, at an annual growth rate of 4.4 percent after a decline of 1.6 percent in the first quarter. Public spending was broad-based, with even state and local expenditures increasing for the first time in a year. Local governments may have taken advantage of warmer weather to use more of their federal stimulus money.
“You could see this in the monthly number for state and local construction spending,” said Nigel Gault, chief United States economist at IHS Global Insight. “Construction slows down during winter months, so stimulus may not have been doing as much earlier this year.”
Other policy initiatives, like the homebuyer’s tax credit, also appear to have lifted demand. Consumers rushing to take advantage of the credit as it was nearing its expiration pushed up spending on housing and related property investments by an annual pace of 27.9 percent in the second quarter. Such spending had fallen 12.3 percent the previous period.
“This will almost certainly reverse hard next quarter,” Jay Feldman, director of economics at Credit Suisse Securities, wrote in a note to clients.
July 30, 2010 – New York Times
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Join us again for another installment of Perspectives on America, ‘Short Takes on Wealth.’
Until then, I am Jeffrey Bennett.
