President Obama made an appearance in Phoenix Thursday morning to discuss housing. Mike Orr, Director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business, will discuss the president’s remarks and the local housing market.
Ted Simons: Good evening, and welcome to "Arizona Horizon," I'm Ted Simons. President Barack Obama was in Phoenix today to talk about the recovering housing market. The President spoke at Central High School and announced a cut in mortgage insurance premiums on FHA loans. The President emphasized the move is intended to help serious home buyers who can afford to buy a home.
Barack Obama: I want to be clear. If you're looking to take advantage of these lower rates, that's great. On the other hand, don't buy something you can't afford. [Applause] You're going to be out of luck. These rates are for responsible buyers. We're not going down the road again of financing folks buying things they can't afford. We're going to be cracking down on that. We've put in place tough rules on Wall Street and created a consumer financial protection bureau. And we're really policing irresponsible lenders luring folks into buying stuff they can't afford. The bottom line, we don't think there's anything wrong with pursuing a profit. The days of making bad bets on the backs of taxpayer money and getting bailed out afterward, we're not going back to that. [Applause] We've worked too hard and everything we've done to heal the housing market we want to preserve. But we do want to make sure the housing market is strong and that responsible homeowners can get a good deal.
Ted Simons: Here now to talk about the President's plan and how it could impact the local housing market is Mike Orr, director of the Center for Real Estate Theory and Practice at ASU's W.P. Carey School of Business. Good to see you again.
Mike Orr: Good evening.
Ted Simons: What exactly did the President propose?
Mike Orr: Well, the main thing is this reduction in mortgage insurance. If you go back five years it was down at 0.5%, it's actually increased a lot over the last few years as FHA wanted to insure themselves against bad debt. It's risen to 1.35 and Obama was talking about taking it back down to 0.85.
Ted Simons: Cutting mortgage insurance could affect a couple hundred thousand folks?
Mike Orr: The White House estimate is about 250,000 extra buyers for the whole country, of course.
Ted Simons: Right, right.
Mike Orr: I think this is a step in the right direction, but it's not a huge thing. It's not going to make a dramatic difference to the market.
Ted Simons: As far as this particular deal, is this first-time buyers only? Existing homeowners can refinance? How does that work?
Mike Orr: For people who take out FHA loans. It doesn't have to be a first time home buyer. Most loans go out to people making a purchase loan rather than a re-fi but there's nothing stopping anybody from applying. If you've got a good rate at the moment, do you want to go to the bother just to lower your mortgage insurance? It may not be worthwhile.
Ted Simons: A typical buyer saves $900?
Mike Orr: A year, yes. It'll help, it'll make buying a home a little more attractive. And $250,000 extra for the next few years is about a 1.5% increase in volume. It's something but not something you'd notice.
Ted Simons: Okay. I know the President's doing this and the concern out there is still that creditworthy borrower. Are they still being shut out? If so, why.
Mike Orr: They are still shut out from conventional loans. FHA loans are easier to qualify for.
Ted Simons: Define FHA loan.
Mike Orr: The loan is written by a commercial bank but insured by the government if it followed certain guidelines. If you fail to pay it, the bank's bailed out by the government because this house goes back to you and HUD has to sell it to get the money. It's foreclosed the same way. But it's basically designed to make things affordable for people who are lower incomes but creditworthy. It's very popular with first-time home buyers.
Ted Simons: And creditworthy borrowers have been shut out. Why?
Mike Orr: Everybody is nervous about lending to people with poor credit because of what happened in 2007, 2008, and 2009. We've swung from credit being loose to very, very tight and now gradually back to the middle position where the right people get loans, the wrong people don't.
Ted Simons: The President said it's not something to be abused.
Mike Orr: We're not going back to the bad situation. Even the lenders themselves are pushing it a little bit back towards the middle position.
Ted Simons: Is there a move to try to cut red tape for qualified buyers?
Mike Orr: I'd like there to be one. It's talked about all the time. If you go through loan applications you find you have to do a lot of work a lot of documentation, much of which you probably think is unnecessary. If that can be reduced that would help everybody, I think.
Ted Simons: I think most people realize those restrictions are in place because of the bad loans in the past. Something like this, is there a risk that we're going start to see bad loans?
Mike Orr: I think memories are too long to go back to the bad old days. We've still got a little too much carefulness. You could no longer get away with telling lots of lies on your mortgage application, no evidence to back it up. Now you've got evidence to back it up. Now you need a second or a third copy to prove it. It's so much effort to get the loan that you think, this is too hard, I'm going to give up and come back next year.
Ted Simons: You must really want the house, also.
Mike Orr: Or you really need that re-fi. The banks are going doing as much business as they would like, mortgage applications are at a pretty low level.
Ted Simons: We've talked about this before. First-time buyers out there, they are just not buying for a variety of reasons. The millennials especially are not getting into the housing market. Does something like this help?
Mike Orr: It helps but it's not a breakthrough moment. Because the President said it the seems really significant. I think everybody thinks it's a good idea. But it's not going to make a big noticeable difference. I'm expecting more demand this year than last year. The millennials are all a year older, a little closer to having kids, deciding to put some roots down. Plus, we have all of those people who got foreclosed in 2008 coming out of their penalty box phase and applying for a conventional loan.
Ted Simons: Certainly not many signs in the ground right now.
Mike Orr: There's not much supply. I'm quite glad the President didn't come up with a bigger scheme. If we boosted demand it could overwhelm supply, and we'd have another dramatic increase in pricing, bidding wars and all those things we had to put up with three years ago.
Ted Simons: Good have you here, thanks for joining us.
Mike Orr: Always a pleasure, thank you.
Mike Orr:Director, Center for Real Estate Theory and Practice at ASU's W. P. Carey School of Business;
