A HEAVY SHOE

After a seemingly endless cascade of dismal economic reports, there is only one shoe left to drop on the battered housing market.  Unfortunately, it’s “a pretty heavy shoe,” according to Nicholas Retinas, director of Harvard’s Joint Center for Housing Studies.

That shoe is the possibility of steep job losses, which could further delay a housing recovery that is, at best, a distant spec on the economic horizon.  The Joint Center’s annual report on the “State of the Nation’s Housing” offers little hope of near-term relief, even if the developing downturn turns out to be shorter and less severe than some economists are predicting. 

Declines in housing starts, sales of new and existing homes, and housing prices across the country have produced “the most severe decline” since the World War II era, according to the report.  Spiraling foreclosures are adding to already bloated housing inventories, while economic concerns and falling home values are undermining consumer confidence. As a result, the report notes, the housing market, which is affected by the economic downturn is also contributing to it.  Near record foreclosure rates “will continue to exert extreme downward pressure on prices, especially in low income and minority areas, where riskier subprime loans are most heavily concentrated,” the report says.  The Fed’s aggressive rate-cutting has helped only on the margins, those efforts largely offset by tighter underwriting standards that are making it more difficult for many prospective buyers to obtain financing and “making the prospects for a meaningful reduction in affordability problems…dim.” 

The report is more optimistic about the medium-to longer-term outlook, buoyed by immigration trends that will create 14.4 million new households between 2010 and 2020.  But in the near term, the report cautions, the market won’t begin to recover until housing inventories are reduced, and that will require “some combination of the following:  Housing starts fall even further, prices decline enough to bring out new bargain-seeking buyers, interest rates drop enough to improve affordability, job growth improves, consumer confidence returns, and mortgage credit again becomes more widely available.”

Demand will rebound “at some point,” Retsinas said in a press release accompanying release of the annual housing report, but “historically,” he said, housing market recoveries begin, “only after the economy has entered a recession   and a combination of falling mortgage interest rates and house prices have improved housing affordability.”  Those conditions don’t exist currently, Retsinas said, and “it’s difficult to judge how far away…we may be.”  For the short term, the inescapable conclusion is:  If you’re looking for the bottom of the housing market, we haven’t seen it yet.   

AID DELAYED

Ignoring a Presidential veto threat and leapfrogging a series of procedural hurdles, a sweeping housing rescue bill appears to be on a track to win Senate approval -- eventually.  A skirmish over an unrelated amendment delayed the final vote until after the July 4^th recess, but an earlier vote to limit debate passed with a veto-proof 83-9 majority, reflecting the decisive bipartisan support the measure is expected to receive when it finally reaches the Senate floor. 

Senate approval of the measure, expected to be one of the first orders of business when Congress reconvenes the week of July 8^th, will clear the way for negotiations to resolve differences between the Senate bill and a similar measure approved previously by the House. 

        Those differences (generally viewed as significant but not insurmountable), the veto threat, concerns about the bill’s costs and continuing complaints that it provides an ill-advised  “bail-out” to irresponsible borrowers and lenders, all represent potential obstacles the legislation’s supporters must overcome.  But none are likely to prove strong enough, singly or in combination, to offset the political tail winds driving Congressional efforts to aid struggling homeowners and stabilize the flailing housing market. 

        The legislation has a dual focus:  Reforming the regulatory structure for the Government Services Enterprises (GSEs) –primarily Fannie Mae and Freddie Mac – and creating a mechanism for aiding homeowner facing foreclosure at a rate currently estimated at   8,000 filings per day.

Like the House version, the Senate bill authorizes the Federal Housing Administration to refinance up to $300 billion in underwater loans, contingent on the ability of borrowers to qualify for the restructured mortgages and on the willingness of lenders (or investors holding the mortgages) to write down the principal balance to approximately 85 percent of the current value of the property.  An analysis by the Government Accountability office concluded that the measure could help as many as 400,000 households avoid foreclosure.   Other key provisions of the legislation would:

·         Provide $14.5 billion in housing-related tax breaks

·         Create a temporary, repayable tax credit of up to $8,000 for first-time buyers who purchase an unoccupied home within the next year.

·         Allocate an additional $150 million to fund housing counseling programs.

·         Establish a $1,000 property tax deduction for couples who do not itemize their taxes

·         Provide $4 billion in Community Development Block Grants to allow communities to purchase and renovate foreclosed and abandoned homes.

Although President Bush has threatened repeatedly to veto the measure, recent Administration statements have become increasingly conciliatory, reflecting the pressure on legislators to do something to address the continuing fallout from the subprime crisis.  “They’re getting heat from their constituents and from local and state officials” struggling with the social and economic impacts of foreclosures on neighborhoods and communities, John Nassar with the Center for Responsible Lending, told Associated Press.  “So it’s not OK just to say, ‘We’ll let the market correct itself.’”   

Differences between the House and Senate bills must still be resolved and critics of the measure have not given up on the possibility of derailing it.  But support for the legislation is strong, and frustration over the failure to pass it before the July 4^th recess was tangible on both sides of the aisle. 

“There is nothing as important to this country as this bill at this moment,” Dodd said on the Senate floor.  Delaying action, he told reporters later, could be dangerous.  The July 4^th break, he noted, will be followed quickly by the longer August recess, with the November elections looming quickly after that.  With that schedule, Dodd said, “it’s hard to get anything done, so we have to be careful here…. [If delayed too long] the thing will collapse, and if it does,” he warned, “we might be talking about waiting for next year.”  � 

DO AS THEY SAY

Portfolio managers you encounter at a dinner party will almost certainly praise their funds highly and encourage you to invest in them; but odds are, they aren’t putting any of their own money there.   A recent study by Morningstar, Inc. found that nearly half of the 6000 funds in its data base reported no investments by their managers.  That ratio was even worse for foreign stock funds, where 61 percent reported no manager investments.   

Critics say this is roughly the equivalent of chefs who won’t eat the food they prepare or (even worse) mechanics who won’t fly on planes they repair.  “The number of managers showing no faith in their process is staggering,” Russell Kimmel, director of fund research   for Morningstar and the report’s author, said. 

There are some legitimate reasons why managers might spurn their own funds, Kimmel conceded – actually, only two acceptable excuses, in his view:

·         Managers overseeing a single-state fund who live in a different state would be excused, because they wouldn’t benefit from the tax advantages.

·         Managers who are citizens of another country might be barred by that nation’s laws from investing in a U.S.-based fund.

But apart from those exceptions, Kimmel wrote, “I can’t think of why anyone should invest in a fund that its own manager doesn’t invest in.”

        The study did not identify a definitive correlation between management participation in a fund and its performance.  But it did find that the funds rated most highly by Morningstar, with low fees, strong performance and “good stewardship,” reported an average manger investment of $354,000 - -about seven times the average for Morningstar’s lowest-rated fund.
 

        “True, higher investment levels aren’t a guarantee of success or an ethical manager,” Kimmel acknowledged, “but at least they show that managers believe in the funds and they pay some of the costs and taxes the rest of the shareholders do.”    

RESPA REFORM —ONE MORE TIME

Here we go around the RESPA reform bush once again.  HUD’s two previous reform proposals attracted several thousand comments, most of them opposing the plan.  The agency’s latest proposal – the third attempt in the past six years — attracted more than 3,000 submissions, and the comments sound awfully familiar. 

        Although some of the details in the new plan differ from earlier versions, the centerpiece remains a revamped Good Faith Estimate (GFE), expanded now from one page to four, detailing the terms and costs of the loan and explaining key features, such as the rate lock period, prepayment penalties, if any, and compensation paid to mortgage brokers. HUD’s goal is also the same: Create a simplified disclosure framework that will help consumers compare mortgages products and reduce their borrowing costs.  The subprime crisis has highlighted the need for change, HUD contends, and increased the urgency of achieving it.

In the thousands of comment letters HUD received, you won’t find any contesting the need for clearer consumer disclosures, but you will find hundreds complaining that HUD’s proposal falls short of that goal — a concern expressed by both credit union trade groups.  Increasing the GFE to four pages “moves in the wrong direction,” the Credit Union National Association (CUNA) argues in its letter to HUD, contending that the revised disclosures “will not   benefit borrowers, who, we feel, will be confused, overwhelmed, and possibly intimidated by the additional information,” the letter says. 

The National Association of Federal Credit Unions (NAFCU) “strongly opposes” the RESPA proposal for the same reasons:  The revised GFE is “far too long and detailed [and will] create confusion rather than provide simple information borrowers can readily understand,” the organization says in its comment letter.  NAFCU suggests that HUD provide only essential, basic loan information in the GFE, putting the more detailed explanations and examples in a “special information booklet” for borrowers. 

Other financial industry trade groups are particularly concerned about the “closing script” the rule would require closing agents to read before the final documents are signed, to ensure that borrowers understand the structure and costs of the loan they are obtaining.  That process would make closings longer (and more expensive), critics say, and would provide critical information too late in the process to do much more than confuse consumers.   

The treatment of the yield spread premiums lenders pay to mortgage brokers, a lightning rod for criticism in earlier RESPA reform proposals, is playing the same role in this one.  Taking a somewhat different approach this time, HUD doesn’t exactly require up-front disclosure of the brokers’ compensation; instead, the proposal requires that the YSP be classified as a borrower credit on the GFE.  This requirement would primarily affect mortgage brokers, who object most strenuously to it.  It’s not the compensation disclosure per se that bothers brokers, the National Association of Mortgage Brokers insists, but rather the implication in the proposal and in HUD’s comments about it that brokers are responsible for many of the abuses the RESPA proposal targets.

        “No other mortgage originator, indeed, no other participants in mortgage markets, are singled out for such impugning,” the NAMB complains in its comment letter.  Classifying the YSP as a borrower credit also creates a competitive disadvantage for brokers, the trade group argues, by imposing “asymmetrical disclosure obligations among originators receiving comparable compensation.”  This disparate treatment of compensation also “perpetuates the basic inequity” between broker- and lender-initiated transactions, an “arbitrary distinction,” that NAMB says is unjustified by   market practices and represents “a fatal flaw” in the RESPA proposal.

Consumer groups think HUD is justified in singling out mortgage brokers and YSPs for special treatment because of their link to the subprime “fiasco.”  But better disclosure of the payments won’t address the underlying problems, a coalition led by the National Consumer Law Center (NCLC), contends.  “The problem is not that brokers are paid out of the interest rate,” the group says in its comment letter.  Rather, “the problem is that brokers are paid both out of the interest rate and out of [the consumer’s] pocket.  YSPs cannot be adequately disclosed,” the NCLC letter insists.  “They must be substantively regulated.”  � 

BEHIND THE RETIREMENT EIGHT-BALL

Although American workers are acutely aware that the retirement system is changing around them, few are adjusting their retirement planning strategies in response.  That’s according to the 17^th annual Retirement Confidence Survey, conducted by the Employee Benefit Research Institute and Matthew Greenwald & Associates, the most recent in a long line of studies finding that American workers are not doing enough to prepare for the comfortable retirement they expect to have.  Among the highlights:

• Pension-plan changes have rattled American workers; nearly half the respondents said they were less confident about the benefits they will receive from traditional pension plans.  But among workers who have already seen their benefits reduced, nearly two in five said they have not done anything in response.

• Despite steady declines in employer-funded pension plans, and indications that the trend will continue, 41 percent of the respondents said they or their spouse currently have a defined benefit pension plan and 62 percent said they expect to receive income from such plans in retirement.  “Both numbers suggest unrealistic beliefs,” the survey’s authors suggest.

• Nearly half the workers who say they are saving for retirement say they have amassed savings (excluding their primary residence and any defined benefit plans) of less than $25,000. The majority (nearly 70 percent) of workers who have not been saving for retirement say their assets total less than $10,000.

Despite the evidence that workers are not laying an adequate financial foundation for their retirement, 72 percent of the survey respondents said they were either very confident or somewhat confident that they will have the retirement resources they need.  Still, changes in the retirement structure over the past five years have taken a toll, the survey found, leaving 45 percent of respondents either a little less confident or much less confident about the amount of money they will receive from a traditional employer-sponsored pension plan.  Only 16 percent said they were “much more” or “a little more” confident today than they were five years ago about receiving money from those plans. 

If this survey, taken late last year, were repeated today, retirement confidence levels would probably be even lower.  Recent reports indicate that more consumers are borrowing from their retirement funds to cope with current financial pressures.  Some of the nation’s largest administrators of corporate 401(k) plans are reporting double-digit increases in the number of employees tapping their funds to cover escalating mortgage payments and the rising cost of gas and other consumer expenses.  Confirming that trend, a survey of nearly 2 million 401(k) recipients conducted by Hewitt Associates, a global human resources firm, found that 22.3 percent borrowed from their plans last year.

    “The country hasn’t seen a serious recession since 1980, but people are struggling now,” Alicia Munnell, director of the center for Retirement Research at Boston College, told Investment News.  “With rising prices, it’s tough,” she added. “The withdrawals and loans are a sign of how pressed people feel.”