The 2016 election season has been divisive and fractious for many reasons. Job creation, foreign policy, and economics are weighing heavily on voters’ minds across the political spectrum. With the presidency, supreme court justice nominations, along with 34 Senate and all 435 House seats hanging in the balance, how will this election season shape the US economy? In terms of this industry, what will the election’s impact on the housing market?
One thing is certain: a new White House administration will likely bring sweeping changes that start on Capitol Hill, and soon affect us on state and local levels, whether we made it to the polls and cast our diligent vote or not.
For example, right now, there are some proposed policy changes that could have a big impact on the secondary loan market concerning note investing. Whether you’re a Democrat, a Republican, an independent, or politics isn’t a part of your language, these are prospective changes you should know about if you’re involved — or plan to become involved — in the secondary loan market as an investor.
Four Points of Impact
In terms of how the election will have an impact on housing market and secondary loan investors, we see several potential factors that could affect our market for better or worse, but there are four factors that stand out from the rest because of how closely intertwined they are with our industry: The Dodd-Frank Wall Street Reform Act, the strength of the housing market, loan interest rates, and risk of uncertainty for markets, the last of which is especially pertinent if incumbents aren’t running.
Dodd-Frank Wall Street Reform Act
President Obama signed the Dodd-Frank Wall Street Reform Act — known as “Dodd-Frank” for short — into federal law on July 21, 2010. The act took effect as the nation’s housing market was reeling from home foreclosures that job losses and unaffordable home loans set in motion. While this legislation hasn’t been as much of a controversial flashpoint on the campaign trail, both major presidential candidates do have differing views on Dodd-Frank’s efficacy and legality. How voters decide on Nov. 8th will determine how this election will have an impact on the housing market and many of the industry’s key players.
Effect on Creditors
Provisions of Dodd-Frank impact the financing practices of mortgage lenders, known as “creditors” in the language of the legislation. The act defines two types of creditors: ones who extend consumer credit more than five times a year and ones who don’t. Creditors that exceed the five-time limit must make a “reasonable effort” to determine borrowers have the ability to repay the loan based on eight statutory criteria:
- Current or anticipated income or assets
- Current employment status
- Monthly payment on the covered transaction
- Monthly payment on simultaneous loan(s)
- Monthly payment for mortgage-associated obligations
- Current debt obligations, alimony, and child support
- Monthly debt-to-income ratio or residual income
- Credit history
Creditors not exceeding the five-time limit needn’t make these considerations before extending consumer credit, but they’re
subject to other applicable rules and regulations of Dodd-Frank.
Effect on Mortgage Originators
Consumer creditors and mortgage originators are different parties under Dodd-Frank. Mortgage originators are defined as individuals, estates, or trusts that provide mortgage financing and are not subject to the eight statutory criteria for creditors when originating mortgages. However, if a mortgage originator provides financing for more than three properties in a 12-month period, the financing must meet five criteria:
- Originator didn’t construct home to which financing is applied
- Loan is amortized, with no balloon mortgage
- Under different requirements than a creditor, originator must make a reasonable effort to determine borrowers have the ability to repay the loan
- The loan is fixed rate or adjustable after 5+ years, subject to annual and lifetime caps.
- Loan meets other criteria set by the Federal Reserve Board.
Like creditors, mortgage originators are primarily impacted by Dodd-Frank if they’re in the business of originating mortgages to earn significant income, but they are subject to other applicable rules and regulations of the act.
Effect on Mortgage Note Investors
If the five-time creditor financing limit or three-time mortgage originator financing limit were lowered by the new White House, or additional stipulations were added to the sets of statutory criteria above, fewer seller financed mortgages could be originated, and ones that are originated could have terms and conditions not considered “prime” by current standards. This could mean mortgage note investors would compete more fiercely for notes that are less valuable — a lose-lose situation.
However, there’s a good reason to think this won’t happen: Home foreclosure rates are down significantly from what they were just a year ago. There is also a reason to think it could possibly happen: Interest rates will rise in late 2016 or early 2017.
Strength of the Housing Market
Compared to 2008 and 2012, professionals and investors are slightly more optimistic about this election’s impact on the housing market and potential foreclosures. We mentioned that home foreclosures are down this year from last year. As reported by The Title Report, “RealtyTrac released its Midyear 2016 U.S. Foreclosure Market Report showing a total of 533,813 U.S. properties with foreclosure filings — default notices, scheduled auctions, or bank repossessions — in the first six months of 2016, down 20 percent from the previous six months, and down 11 percent from the first six months of 2015.”
Leading up to 2015, home foreclosure filings in the U.S. had been on a downward trend since 2011. Here are the statistics, with years followed by the number of foreclosure filings.
- 2011 – 3,920,418
- 2012 – 2,300,000
- 2013 – 1,369,405
- 2014 – 1,117,426
Imagine that the number of foreclosure filings for 2016 ends up being double what it was at midyear, coming in at 1,067,626 at year’s end. It would be the lowest number of filings since 2005 — two years before most scholars say The Great Recession began — when foreclosure filings totaled 801,563.
If there’s one thing The Great Recession has done to the housing market in political terms, it has framed the market as a firmly bipartisan talking point and established it as one of the major measuring sticks for the domestic economic plans of the next administration. A housing market that continues to grow stronger through home ownership appears to be something we can look forward to in 2017.
Effect on Seller Financing
Generally speaking, a strong housing market means more than high rates for home sales and home loan retention; it also entails robust real estate prices. This is the type of housing market that “creditors” and “mortgage originators” of Dodd-Frank nomenclature would like to see. It’s also a bear market for mortgage note investors. So, how will this year’s election impact the housing market and by extension, seller financing?
Mortgage qualifications may be relaxed in a strong real estate market, but home prices aren’t. In fact, they tend to be higher, which increases the need for seller financed mortgages. Right now, a prospective homebuyer may have good credit and not much debt to pay, but can he bring the required down payment to the table? Furthermore, what’s his timeframe for buying? If he needs a house before winter, a seller financer could give him fewer hoops to jump through.
Even if you’re a creditor or a mortgage originator that does enough deals annually to abide by Dodd-Frank statutory criteria for financing, now is a good time to be in markets that generate secondary loans.
Loan Interest Rates
Higher loan interest rates usually don’t bode well for timely loan repayment. However, if higher interest rates increase mortgage defaults, and lenders tighten loan requirements, it may not be a great time for homebuyers, but it’s a lucrative scenario for seller financers.
To add some perspective, it’s worth noting that — even though interest rates are poised to rise as of the time of this writing — they’re currently low and are likely to be considered attractive even after the Federal Reserve implements the hike. However, almost any kind of percentage raise is enough to push some prospective home buyers out of bank loan territory and into the land of seller financed mortgages.
At the same time, we’re also likely to see some parties actually purchase a home because interest rates rise. These buyers would be mostly high net worth individuals and institutions that hold interest-sensitive income instruments such as mutual funds and large, short-term CDs that are frequently rolled. It’s speculative, though, until we finally see what the Fed does.
How Much Will Interest Rise?
As reported by Yahoo! News from The Fiscal Times, “As things stand now, the futures market has priced in a near 70 percent chance the Fed raises rates before the end of the year. While an increase from 0.50 percent to 0.75 percent may not seem like a big deal, it’s coming at a time of extreme sensitivity to changes in long-term interest rates.”
Lots of factors are in play. Currently, the ones with the biggest punch are an OPEC-driven spike in crude oil prices, which has many financial experts predicting higher inflation; moves by the Bank of Japan to raise interest rates long-term in order to “ease the burden on savers, banks, and corporate pensions plans”; and rumors that Central European Bank may taper its bond-buying program in the near future.
As we did with foreclosure filings, let’s use history as a guide to get a ballpark idea of what could the Fed’s new target interest rate could be in late 2016 or early 2017. Right now, the target rate is 0.25% – 0.50%. Here’s the activity in the rate since 2011:
- 2011 – 0.00% – 0.25%
- 2012 – 0.00% – 0.25%
- 2013 – 0.00% – 0.25%
- 2014 – 0.00% – 0.25%
- 2015 – 0.00% – 0.25%
Except for the recent maximum target rate of 0.50%, the Fed’s target interest rate has been the epitome of stagnation for several years. When it comes to these interest rates, it’s tough to be a futurologist who has a great deal of certainty, other than to say that, since 1990, a fluctuation of about 0.25% is roughly the norm. Big changes are brought about over years. But, in certain markets, a change of major significance needn’t necessarily be a big one.
Risk of Uncertainty for Markets
When it comes to markets, our national economy is like a spiderweb; prick one part of it and the whole thing quivers. For mortgage note and business note investors, the real estate market and the market that can impact it the most dramatically in the shortest period of time — the stock market — are always of primary concern.
In a first quarter 2016 report, The Street notes that “Real estate has been on a good run, the stock market, not as much… But real estate’s recent momentum does not seem likely to wane anytime soon. Even if stock markets go into another tailspin similar to the one that occurred in late 2015, the industry should have enough momentum to benefit investors throughout 2016 — if not beyond.”
If the stock market tanked and the fallout snared the real estate market; for investors in the secondary real estate loan market, it would be like a strong earthquake hitting a city made of brick. Plummeting property prices would decrease the need for seller financing, and probably widespread income loss from staff cuts — and the revenue loss the cuts indicated — would make real estate investments temporarily unpopular to all but the most well-heeled investors.
Based on current indicators on the election’s impact on the housing market, this grim vision shouldn’t come to pass. However, when you speak honestly about the risk of uncertainty for markets, there’s always some doom and gloom involved, as well as silver linings on which we cast our educated hopes.
Regardless of where they stand politically, the next presidential administration and crop of lawmakers will require real note investors, home buyers, and lenders to face changes in the housing market. To fully understand this election’s impact on the housing market, consult a financial advisor who specializes in your area of need. You can’t escape the changes, but you can adapt to them more smoothly with the help of professional advice.
Who We Are
Amerinote Xchange is an investment company specializing in acquiring and managing mortgage notes, loan portfolios, business notes, and other debt instruments. To inquire about our services, please call us today at (800) 698-3650, or email us through our contact form. We look forward to speaking with you!