Mortgage Q&A: First-time buyers lose to investors

I read a very interesting article about home sales last week in my local newspaper. Frankly, I was taken aback by the gloomy picture it painted. Here’s a summary.

Sales of existing homes rose in January after the worst year in more than 10 years. A modest rise of 2.7 percent from December may appear to be good news, but the devil is in the details. First-time homebuyers accounted for just 29 percent in national sales. According to the National Association of Realtors, 40 percent is a healthier number.

The median sales price fell to its lowest level in about nine years. I guess the so-called experts who boasted that “property values always rise” were wrong.

With property values at such low levels and interest rates remaining at historically low levels, where are all the first-time homebuyers? The answer is easy. They can’t get mortgages. The overtightening of lending standards in response to the mortgage meltdown is as senseless as the easy mortgage money available a few years ago that caused this mess.

How then, could home sales increase from December to January? Cash-rich investors who don’t need a mortgage are bargain-hunting.

Consider the following alarming statistics:

• All-cash transactions accounted for an astounding 32 percent of home sales in January. That’s double the rate of 16 percent two years ago. In certain areas, such as Miami and Las Vegas, 50 percent of sales were all-cash deals.
• Thirty-seven percent of all home sales were on foreclosed homes. In the hardest-hit areas, the number is almost unbelievable: In Arizona and Nevada, 72 percent of all home sales involved a foreclosed home or a home at risk of foreclosure. I almost fell out of my chair when I read that.
• The median down payment rose to 22 percent last year, according to Zillow.com. In 2006, the median down payment was just 4 percent.
• The final statistic is up for debate. The National Association of Realtors reports that home sales in 2010 fell to 4.90 million, the lowest level in 13 years. If that doesn’t sound bad, Corelogic, a real estate data firm, says the NAR’s number is overstated. It reports the number as just 3.30 million.

Meanwhile, we have the Dodd-Frank Consumer Protection Act, which was signed into law in July. A certain section of it applies to consumer protection involving mortgages. I’m certainly in favor of consumer protection and have largely made this column one of consumer advocacy since 1996. The law is a myriad of complex and murky rules governing mortgage programs and who may originate them. I think the credit crunch is largely because of this law. It’s an overreaction, plain and simple.

Here’s the ironic part, folks. Sen. Christopher J. Dodd and Rep. Barney Frank were by far the most vocal advocates of increasing homeownership in America. They wholeheartedly supported all aspects of subprime lending, including loosening the underwriting standards of mortgage giants Fannie Mae and Freddie Mac despite warnings from many in the industry that such policies were a mistake. If you recall, Fannie and Freddie are bust and have been bailed out by the American taxpayer.

Now these guys are in charge of fixing the problem they created. It sounds to me like the fox guarding the henhouse.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.