February 2011

Changes at Fannie Mae, Freddie Mac could transform mortgage landscape

Fixed 30-year mortgage rates in the 5% range? Minimum down payments below 5%? Jumbo-sized home loans for high-cost markets at regular interest rates? Kiss them goodbye — possibly sooner than you might guess.

 Take a snapshot of today's mortgage market conditions and frame it. It's highly likely you'll never see anything like these favorable combinations of rates and terms again. That's the inescapable conclusion emerging from the Obama administration's white paper on possible remedies for the two ailing giants of housing finance — Fannie Mae and Freddie Mac — along with events underway in the national economy.
The administration's long-delayed housing report, released Feb. 11, drew a mix of catcalls and mild applause. Apartment developers praised the report's emphasis on expanding opportunities for people to rent their housing as opposed to the idea that homeownership is something for everybody.

 Big banks and their allies in Congress welcomed the prospect that Fannie Mae and Freddie Mac — which together account for about 60% of the mortgage market but have cost taxpayers a net $150 billion in bailout money in the last three years — will be heading into oblivion. Consumer and real estate industry groups lamented the phase-out of Fannie and Freddie, both of which supplied steady streams of mortgage money for decades, their recent crashes notwithstanding.

 The report offered not only options for Congress to consider in winding down the two companies but also recommendations on more immediate transition measures to achieve a smaller federal footprint in the mortgage market. Some of these transitional steps require no congressional approval, and therefore are likely to affect borrowers and home buyers in the months ahead. Factor these changes into your timing for any loan application or purchase you're contemplating this year:

 •Higher insurance fees on Federal Housing Administration mortgages — another quarter of a percentage point on annual premiums. That's vitally important to consumers with moderate incomes and assets, especially in the African American and Hispanic communities where FHA loans are the dominant route to homeownership. The report also hints at a possible increase in minimum down payments for FHA loans — currently just 3.5% — but provided no specifics. Congressional approval would be required for any change.

 •Significant reductions in maximum loan amounts later this year for both FHA and conventional loans eligible for purchase by Fannie Mae or Freddie Mac, unless Congress votes to retain the current statutory $729,750 limit for high-cost areas before its expiration Oct. 1. Loans above each local market's limit — whatever the reduced ceiling turns out to be — will be considered jumbos and will come with higher interest rates from private lenders.

 •Raising the fees Fannie Mae and Freddie Mac charge lenders to guarantee pools of their mortgages for resale to bond investors. Lenders will automatically pass those on to borrowers as a cost of doing business. The report also calls for raising down payment requirements at Fannie and Freddie to 10%.

 •Retaining the controversial and costly add-on fees charged by Fannie Mae and Freddie Mac that can increase the expense of obtaining even a moderate-size mortgage by thousands of dollars. These add-ons extend to applicants with FICO credit scores of 800 and above who are making substantial down payments. The white paper actually applauded the imposition of these fees, calling them one of several first steps on the path to weaning consumers off reliance on Fannie and Freddie for mortgage money.

 The administration not only wants to wind down the two companies over the coming several years but also to severely reduce the size of the FHA's role — cutting its market share from around 30% today to as low as 10%. Where will the buyers who depend upon the FHA for affordable financing turn when that sharp cut has been accomplished? That's not clear.

 The white paper makes an oblique reference to a major issue bubbling on the back burner that could also push rates up: Regulators are debating what should be a "qualified residential mortgage" under the terms of last year's financial reform legislation. Loans that aren't qualified — in terms of down payment size and other criteria — will require extra investments by lenders when they pool them into bonds; that in turn could raise rates for nonqualified mortgages as much as 3 percentage points.

 One proposal is to make 20% to 30% down payments the minimum to meet the qualified test. Under the worst-case scenario, you'll be charged significantly higher rates if you have only enough for a small down payment.

Bottom line: Get ready to pay more for mortgages, no matter what happens to Fannie Mae and Freddie Mac.

Distributed by Washington Post Writers Group.

Copyright © 2011, Los Angeles Times

Wells Fargo Says Credit Score of 500 OK

In a long-awaited shift, Wells Fargo is providing FHA mortgages to borrowers with credit scores as low as 500. The move comes after the National Association of Realtors® and FHA Commissioner David Stevens, among others late last year, criticized the country’s major banks for requiring credit scores as high as 650 in some cases before making loans. At NAR’s annual conference last year in New Orleans, Stevens said banks’ credit policies were out of sync with the FHA and artificially restraining home sales by as much as 20 percent. Under its new policy, Wells Fargo will accept borrowers with credit scores of 500 to 579 if those borrowers can make a down payment of at least 10 percent; gifted funds or other down payment assistance is not allowed. For borrowers with credit scores of 580 to 599, borrowers must put down 5 percent, with the same restriction on gifts and assistance funds. Borrowers with credit scores of 600 or higher can make a 3.5 percent down payment. The new policy took effect Jan. 15.

Home Price Stabilization Seen in Most Metro Areas during Fourth Quarter, Sales Up

Interesting Article From Crain’s! More to worry about for the future

At Ford Motor Co.’s plant on the South Side, the new Explorers rolling off the assembly line were redesigned with boomers in mind. A sport-utility vehicle, with seats higher than a car’s, will appeal to drivers who have had hip or knee replacements. It’s now built on a car frame, not a truck chassis, to ride more smoothly. Inside, the four-wheel drive selector is a simple knob with pictograms of mud, snow or desert instead of a button for “four-wheel drive low.”

“As you get older, you’re not willing to put up with as much,” says Amy Marentic, a Ford marketing manager in Dearborn, Mich. “Delivering a high level of ride and handling will make boomers much more accepting of it.”

Automakers face an uphill climb. Sales last year were 30% below peak levels, and the demographic trend doesn’t bode well for the industry. Spending on vehicles drops by one-third for those over 65, according to Bureau of Labor Statistics data.

“Boomers have been the lifeblood of the auto industry,” says Joe Barker, head of forecasting for IHS Global Insight in Northville, Mich. “As they get older, we expect them to scale back their auto purchases.”

Consumer-products companies also are adapting to the needs of aging boomers. Northfield-based Kraft Foods Inc. has been redesigning containers for coffee and dressings, making them easier to grip and open. (See sidebar, Page 11.)

But Kraft also is looking to emerging overseas markets for new customers to offset expected declines in the United States. Consumers over 65 spend 22% less on food overall and 12% less on groceries, including dairy products, according to the Bureau of Labor Statistics’ consumer spending survey.

DINING DOWN

Restaurants likely will take the biggest retail hit, as spending on dining out drops 36% after consumers turn 65. When seniors do eat out, they gravitate toward less expensive restaurants. The trend favors Oak Brook-based McDonald’s Corp. more than Chicago-based Morton’s Restaurant Group Inc., which operates high-end steakhouses around the country. Morton’s says it’s been working to broaden its appeal to younger customers with concepts such as dining in its bars.

Other retailers also will feel the impact. Spending on everything from clothing to dishwashers declines, particularly after age 75.

“Overall retail sales are probably going to drop or stagnate,” says John Melaniphy, president of Melaniphy & Associates Inc., a Chicago-based retail consultant.

By 65, boomers are likely to spend one-third less on clothing, which could hurt mall owners such as Chicago-based General Growth Properties Inc. Purchases of appliances drop even more, by 43%, which will pose a challenge for Hoffman Estates-based Sears, where appliances account for about 15% of its roughly $43 billion in annual sales.

Two things that could soften the blow for Sears is its repair business and a large base of Hispanic customers, analysts say. Sears declines to comment, and General Growth executives were unavailable last week.

Slowing growth in sectors like automotive and housing will ripple through to manufacturers that supply those industries. Glenview-based Illinois Tool Works, for example, derives 30% of its $15.9 billion annual revenue from automakers and construction companies.

An ITW representative notes the company gets half its revenue from overseas, where many markets don’t face the demographic dilemma that will dampen economic growth in the U.S.

REAL ESTATE’S FUTURE

No business will feel the impact of an aging population more than real estate. Several Chicago companies are looking to cash in on boomers’ need for housing and nursing care as they grow older. The supply of housing for senior citizens will have to grow 60% in the next two decades to keep up with demand, according to a forecast by the Washington, D.C.-based American Seniors Housing Assn.

After he left Motorola Inc. as CEO in 2003, Christopher Galvin, himself a baby boomer, began investing in real estate. Two areas that caught his eye were senior housing and medical-office buildings. Today, they account for half of Harrison Street Real Estate Capital LLC’s $2.3-billion portfolio.

“You’ve got an aging population that’s living longer, and they’ll have health issues,” says Christopher Merrill, co-founder of Harrison Street. “We saw great upside, as well as protection in a downturn.”

Chicago-based Ventas Inc. owns 187 skilled nursing facilities and 241 senior-housing facilities. It’s bulking up as the Boomers age. In October, it bought 118 properties from Louisville-based Atria Senior Living Group for $3.1 billion, making it the nation’s largest owner of senior housing communities. “We’re continuing to pursue acquisitions,” a spokesman says.

Vi, owned by Chicago’s billionaire Pritzker family and formerly called Classic Residence by Hyatt, focuses on high-end retirement communities with 19 properties nationwide.

“We anticipate the most significant period of growth, for the sector, will be between 2021 and 2039 when boomers reach 75-plus,” says Meg Ostrom, vice-president of sales and marketing at Vi.

Mr. Zell’s Chicago-based Equity Lifestyle Properties Inc., which operates RV parks and manufactured-home communities that cater to retirees, has been expanding as the population has grown older. It has doubled since 2004, to more than 300 communities, mostly in Sun Belt states. It is banking on boomers, who are the fastest-growing segment of the RV market, the company says.

Seniors also will change the traditional housing market as they look to sell larger homes in the suburbs and move to smaller, low-maintenance homes, condominiums or apartments. Many will leave the area for warmer climes.

But boomers selling homes will add to the existing glut of unsold properties and put more pressure on Chicago-area home prices, which have declined 29% from their 2006 peak.

“You’ll probably see a flat to continuing decline in housing prices,” says King Harris, who oversees housing research for Metropolis 2020, a Chicago-based civic group focused on regional growth issues. “I wouldn’t be an optimist.”

Selling pressure will be greatest in areas with higher proportions of soon-to-be-retiring boomers. Many of those are smaller wealthy enclaves — from Mettawa and Northfield in the northern suburbs, to Oak Brook and Burr Ridge in the west, and Olympia Fields and Palos Heights to the south.

The share of 55- to 64-year-olds in these communities ranges from 16% to 20% of total population. The median for the Chicago area is 11%.

When Frank Becvar was looking to move his family’s South Side funeral home a decade ago, Crestwood was an obvious choice.

Many longtime customers had left the Back of the Yards and Gage Park neighborhoods over the years for Crestwood and other southern suburbs. Remarkably, Crestwood didn’t have a funeral home, and its demographics appealed to Mr. Becvar, whose grandfather started the family funeral home in 1907 near 47th and Honore streets.

Crestwood is now the oldest Chicago suburb, with 29% of residents over 65, compared with a median of 11% for the region.

“A funeral home really doesn’t look for younger people,” says Mr. Becvar, a 64-year-old baby boomer himself.

The city of Chicago, because it’s the first stop for immigrants and poorer residents who tend to have larger families, skews younger, with 9% of its population over 65.

The youngest communities are farthest out, where young families trade long commutes for lower home prices, or in towns that already have seen gentrification. Some of the lowest rates of 55- to 64-year-olds are in East Dundee at 4% and North Chicago at 5%. Elgin, Aurora and Joliet also skew younger than the median.

Those who might want to sell are facing a weak market that has a long way to go before it recovers the ground lost in recent years. The number of single-family homes sold in Cook County last year was just one-fourth of the total in 2007, says Jim Shilling, a professor in DePaul University’s real estate department.

Signs of the looming housing-supply problem can be seen in elementary-school enrollments in Glenview and Orland Park, where about 20% of owner-occupied homes belong to people who will turn 65 in the next decade. In Glenview, some older residents who can’t sell their homes have begun renting them to young families with school-age children, contributing to an increase in enrollment that has puzzled school administrators.

In Orland Park, elementary enrollment is dropping as older homeowners hold onto their homes in a weak real estate market, reducing the normal housing churn that usually keeps headcount stable, Village Manager Paul Grimes says. “If they can’t sell their homes, they aren’t leaving,” he says. “We’re seeing that.”

Any recovery in housing depends on a rebound in jobs, Mr. Shilling says. “Whether Generation Yers want the houses that boomers are vacating, that will be driven by whether their incomes and jobs go up.”

The glut of unsold homes, exacerbated by a wave of retirees putting houses on the market, means the home-building industry will remain moribund for several years, predicts Mr. Harris of Metropolis 2020.

“We’re foreclosing 50,000 to 60,000 (homes) a year for the next two or three years,” he says. “Any new construction is out of the question.”

When construction comes back, builders will have to change their product offerings to match the desire of an older population for smaller homes.

“The number of McMansions people build is going to decline substantially,” says Perry Bigelow, owner of Aurora-based builder Bigelow Homes.

When the market does recover, Mr. Bigelow will begin building at the Reserves in Aurora, which will feature smaller, less-expensive homes on smaller lots and be aimed at aging boomers and younger buyers.

“Those are the only two buses on the road,” he says of the two groups. “Both still want a yard, but neither wants a lot of grass to cut.”

Builders will have to figure out how to make money on smaller, often less-expensive homes, favoring larger companies with greater scale. While costs also go down with square footage, builders will need higher volumes or higher density to maintain revenue. Already, some builders are working with municipalities to approve higher-density developments.

The aging of the boomers will hit the workplace hard, draining local companies of talent and valuable experience. About one-fourth of the 64,143 people who work for the state of Illinois will turn 65 in the next decade alone, though many will be eligible for retirement before then.

Some industries will be hit even harder. Two-thirds of the 4,800 pilots at Continental Airlines, which is merging with Chicago-based United Airlines, are boomers. Thirty percent of the pilot force will reach the new mandatory retirement age of 65 in the next decade. United declines to comment.

Employers will struggle to replace veterans and train new workers. Although younger employees are generally less expensive than the retirees they replace, the void created by the sudden exit of boomers could push up labor costs as employers bid against each other for a shrinking pool of qualified replacements, says Ms. Koropeckyj of Moody’s.

“We’re going to see some shortages in specific kinds of work — just look at companies that are losing 20% to 30% of their experienced workers in management positions over the next five years,” says Mr. Blankenhorn of the metropolitan planning agency. “How do you replace that?”

As boomers retire, they will also put pressure on government finances. Pension demands already are strangling state and local budgets. The increase in retirees will tighten the noose by shrinking revenues. Income taxes, the state’s primary revenue source, decline with incomes. Making matters worse, Illinois is one of three states that exempt retirement income from tax.

“It’s a double whammy,” says Richard Dye, a state budget expert and professor at the University of Illinois at Chicago’s Institute of Government and Public Affairs.

‘YOU’RE GOING TO SEE TAXES GO UP’

According to Illinois comptroller data from 2008, retirement exemptions shielded about $35 billion in income from taxation, costing the state about $1 billion. That figure is expected to climb steadily as boomers retire.

So far, proposals to tax retirement income have failed in the Legislature. “No one’s really thinking about it yet,” Mr. Dye says. “They’re too worried about the (deficit) problem they have right now.”

Seniors also enjoy partial exemptions on property taxes, the lifeblood of schools, park districts and other local public agencies, which are under increasing financial pressure. To maintain basic services, many are likely to raise property taxes on homeowners who don’t qualify for the tax breaks seniors get.

“If more state and local money is going to meet pension obligations, schools deteriorate and attractiveness of the communities goes down,” Mr. Harris says. “So you’re going to see taxes go up.”

Sales tax collections will suffer as an older population cuts spending. Seniors not only spend less overall but shift more of their purchasing to medicines and medical devices, which are exempt from sales taxes.

Demand for government-funded services, such as public transit and nursing-home care, will increase. The federal government picks up most of the tab for medical care for the elderly through Medicare. But much of the bill for nursing-home care ultimately lands on Medicaid, which is funded in part by the states.

While poor kids and parents outnumber seniors in Medicaid by 14 to 1, the average annual cost for a senior is $10,072 in Illinois, compared with $1,721 for younger enrollees, according to state figures. Illinois’ spending on long-term care for seniors is projected to soar to $2.8 billion in 2027 from $1.8 billion in 2008, according to a study for the insurance industry by consulting firm Strategic Affairs Forecasting LLC in Silver Spring, Md.

“Twenty years from now, the first boomer turning 65 now will turn 85,” Brookings’ Mr. Frey says. “That’s what we need to be really concerned about.”

Perfecto Perales, from left, senior director of packaging research at Kraft Foods Inc., tests Miracle Whip jars with Shaina Rosenaur, John Albers and Meatta Kemokai in Glenview. Making containers easier to grip and open is a priority. “Forty percent of adults over 65 will have arthritis,” Mr. Perales says. | Photo: Stephen J. Serio

Kraft, other firms rushing to keep up with boomers

Inside a Kraft Foods Inc. research lab in Glenview, workers wearing gloves stiffened with rods to simulate the effects of arthritis are helping redesign Miracle Whip and Maxwell House coffee jars for older consumers.

Glass has been replaced by plastic, which is lighter and easier to mold into forms less likely to slip from the hand. A ring of foam around a plastic lid makes the jar easier to open. Others have wide mouths and lids that flip open instead of caps that unscrew.

“Forty percent of adults over 65 will have arthritis,” says Perfecto Perales, Kraft’s senior director for packaging research.

Next will be the look of the packaging. Blurry goggles help researchers experience the vision problems that come with age. There will be fewer, larger words and logos, with high-contrast colors to make them easier for older eyes to distinguish on the shelf in stores and at home.

Kraft and other consumer-products companies can’t afford to lose aging customers. People over 65 will account for 20% of the U.S. population by 2030, up from 13% today, according to Census Bureau projections.

Keeping up with boomers as they grow old is even more critical for Chicago-based Wilson Sporting Goods Co. The country’s largest generation is aging out of golf’s sweet spot: The bulk of money spent on the game comes from players 45 to 65. To hang onto them, Wilson is making new products like lightweight irons, with a mix of steel and graphite, that help compensate for some of the effects of aging.

The trick, however, is in the marketing, says Tim Calkins, a professor of marketing at Northwestern University’s Kellogg School of Management: “Companies want to be relevant to people as they age, but they don’t want their brands portrayed as older.”

Wilson learned that lesson the hard way five years ago when a line of clubs labeled “senior flex” didn’t do well. Newer versions are called “RL” for regular light.

“The challenge with the senior player is they want the benefits but don’t like to be called out as senior or hear about slow swing speeds,” says Tim Clarke, general manager of Wilson’s golf business.

The bigger problem for Wilson comes later, when the boomers are not just older but gone from the marketplace altogether.

“Twenty years out is a critical timeframe,” Mr. Clarke says. “With the boomer exit, if we don’t get backfill, we’ll have an industry in serious challenge.”

© 2011 by Crain Communications Inc.

American Attitudes About Home Ownership

According to a NATIONAL ASSOCIATION OF REALTORS® survey of 3,793 adults conducted by Harris Interactive and released in January 2011, home owners and renters agree that home ownership benefits individuals and families, strengthens our communities, and is integral to our nation’s economy.

• The vast majority of both home owners and renters say that owning a home is a smart decision over the long term. Even in today’s challenging economy, 95% of owners and 72% of renters believe that over a period of several years, it makes more sense to own a home.

• Home owners are much more likely to be satisfied with the quality of their family and community life than renters. While more than half of owners (56%) are “very” or “extremely” satisfied with the overall quality of their family life, only about one-third (36%) of renters report the same levels of satisfaction. Also, 43% of home owners are “very” or “extremely” satisfied with their community life, compared with 30% of renters.

• An overwhelming majority of home owners are happy with their decision to own a home. A full 93% of owners surveyed would buy again.

• Most renters aspire to home ownership. The majority of renters (63%) say they are at least somewhat likely to purchase a home at some point in the future. Among them, young adults (18- to 24-years-old) have the strongest aspirations for home ownership.

The survey also confirmed that home owners and renters continue to have concerns about the economy:

• In today’s market, many aspiring home owners face worries about job security and credit worthiness. Among renters who are “very” or “extremely” likely to buy a home in the future, three out of five consider confidence in job security or creditworthiness to be an obstacle.

• Home owners and renters both believe that the mortgage interest deduction should not be targeted for change. 74% of owners and 62% of renters say it’s “extremely” or “very” important that the MID remain in place.

Given the strong public support of and aspirations for owning a home, we need to keep in place policies that support and encourage responsible, sustainable home ownership.

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