According to U.S. Census data, over 2 million people between the ages of 20 and 35 either moved in with a roommate or took shelter with family since 2005. With the addition of 874,000 jobs since last December researchers suggest that these people are ready to venture back out on their own, contributing to a surge in demand for apartments and other rental property.

The government has even shifted its party line from the 'American Dream of Homeownership' to the 'American Need for Sustainable Housing.' Even the GSE's Fannie Mae and Freddie Mac are offering competitive terms for many multifamily housing projects creating credit and liquidity for the rental market.

Further consider the huge volume of involuntary foreclosures and the displaced homeowners they create, a steady number of people walking away from their mortgages because they owe far more than their

These consumers won't be reentering the residential purchase market anytime soon either, since restoring damage to ones credit bureaus often takes years to complete... so, a stronger economy with improving unemployment numbers would likely further bolster the rental sector before any meaningful impact is felt in the residential market.

Qualifying to buy a home remains increasingly difficult due to stringent underwriting guidelines and homeownership offers diminishing value even for well qualified borrowers. With no end in sight for flat or depreciating residential property values, the proposed end to certain tax benefits for homeownership, an improving quality of rental inventory and the low-maintenance convenience factors of renting an apartment make the choice a far more attractive option to buying for most consumers.

Almost every tangible and intangible indicator, from economic to psychological, point to a robust rental market going forward. America is clearly becoming a renter nation with potentially 10 million new applicants entering the market. So lock in your rental rates now before they begin to increase to meet the growing (and growing) demand.


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Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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• First, ignore the experts' general advice.
• Second, use the information in this article when vetting a mortgage professional and determine if they truly understand how today's market works.
• Third, get qualified and all required documentation in to your trusted mortgage professional in a (very) timely fashion so that you are in position to lock a rate and move to close when the time is right.
• Finally, discuss your very individual situation as it pertains to the risks of floating and locking. With über-tight underwriting standards, a quick rise in rates may increase your payment enough to disqualify you. The phrase 'penny wise and pound foolish' fits here, so don't be too greedy and risk sabotaging your qualification.

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I often hear people wonder aloud why banks won't loosen underwriting standards on home mortgages. I'm beginning to wonder the same thing. That's because I think it is time for lenders to start issuing mortgages to non-prime borrowers again, though not on the same shaky terms that triggered the housing crisis of 2008, of course.

First, the reason why lenders are hesitant to relax loan requirements: The heart of the matter is: Mortgage rates and their profitability margins are so low, it just isn't worth the risk to lend to anyone who is anything but a AAA+ credit-worthy consumer.

Furthermore, it takes an implicit guarantee from Fannie Mae or Freddie Mac, on top of that sterling rating, to make mortgage lending even semi-palatable for a bank or investor.

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Non-prime borrowers will call for different underwriting standards. I'm not talking about going back to the days of no income, no asset, no job requirements; I suggest going back to more logical and flexible underwriting criteria. A heavy emphasis must still be kept on the substantive components of mortgage qualification: Credit, income and assets.

Despite the robo-signing paperwork mess, there will continue to be abundance of foreclosed inventory flowing into the market -- that desperately needs buyers who desperately need credit -- or the property will continue to rot a hole into the housing market and U.S. economy for many years to come.

We learned a lot from the housing boom and subsequent bust. No one is suggesting that we go back to the period of 2003 to 2007. Increased awareness and transparency on many levels likely will prevent that.

I recommend that lenders increase rates and yields to match the risk of the underlying borrower and security. A bold move like that will get investor liquidity and credit flowing back into a market that is choking itself out.

For more insights on mortgages and credit see these AOL Real Estate guides:

• Mortgage Jargon in Simple Terms
• How to Get a Low Mortgage Rate
• How to Get Pre-Approved for a Mortgage
• How Much Home Can I Afford?

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Despite all of the sensational headlines calling for a national foreclosure freeze, the best solution to the fiasco is more centralized than many politicians would have you believe. After all, only one small industry is at the center of the robo-signing foreclosure conundrum that's currently gripping the housing market: Property title companies. Make title companies right, and the problem will fade away.

A quick recap: Recent reports suggest that the Mortgage Electronic Registration Systems (MERS), a computerized database that contains all current property title information, had some procedural flaws when recording and establishing the accurate chain of title on some properties. Since 1997, MERS has registered over 65 million properties.

Some attorneys and elected officials allege MERS (and the banks they represent) bypassed local recording requirements and prohibited borrowers from knowing who really owned their mortgage. Because of this procedural defect in establishing a proper chain of title, any subsequent actions like foreclosure would be initiated using "fraudulent" documents and thus should be thrown out -- hence the calls for a foreclosure freeze.

I believe this is all, in a word, hogwash.

Essential How-To Guides on AOL Real Estate: Home Buying, Selling, Renting, Moving and Home Improvement

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In my previous article I outlined some of the now historical flaws in the housing finance system as discussed by certain panelists at the recent Future of Housing Finance Conference in Washington, specifically the misalignment of objectives within Fannie Mae and Freddie Mac, which led to their systemic failure.

Now I'd like to look forward and imagine some possible scenarios for housing's future, based on some of the proposals put forth during the conference:


Greater transparency and access to information. Don't know what that means specifically, but it sounds great. I hope it has something to do with demanding better information when considering which mortgages to securitize and rate appropriately. I'm no hedge fund manager, but even I know that you need more than a loan amount and a ZIP code to independently and accurately determine the risk of a residential mortgage-backed security.

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At yesterday's Conference on the Future of Housing Finance in Washington, each panelist was asked what they would change and what would they preserve regarding the government's ongoing role in the housing sector? Their prepared responses offered the expected spectrum, from lip service to real substance. But all agreed that the current models for Fannie Mae and Freddie Mac are not doing the job.

The conference revolved around the (continued) level of government involvement in housing and finance, specifically as it pertains to Fannie Mae and Freddie Mac (the GSEs).

The argument for either more or less government involvement was lost on me, since the government -- via Fannie Mae and Freddie Mac -- are currently responsible for implicitly guaranteeing somewhere north of 90 percent of all mortgages today.

So it's a matter of gradually less and/or different levels of government involvement, done thoughtfully and over time. In other words, the GSEs aren't going anywhere, as they still represent stability to a fragile economy.

While what they turn out to look like is open to much more debate and speculation, they must either be part of the government or privately controlled. Either can be successful but one path must be chosen. The current hybrid model causes too many misaligned objectives.

But before we move forward, we must look back. While history may not repeat itself, it sure does rhyme ... or something like that:

The "Implicit Guarantee" by Fannie Mae and Freddie Mac

According to Lou Ranieri, the godfather of mortgage finance, this commitment to what equates to free insurance was the critical flaw to the entire system. Wall Street exploited it magnificently, knowing that investors the world over would almost infinitely buy any security guaranteed by the U.S. government. This flaw could be corrected by explicitly outlining the very detailed terms of any such guarantee by the GSEs, going forward.

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This explicit guarantee should apply to the actual security or mortgage rather than the entity, with minimal risk to the taxpayer -- and for a fee. This fee would be used to subsidize against any potential losses and not for profit. Mark Morial of the Urban League added that any such government guarantees should be studied for impact to underwriting and ultimately the flow of credit, further noting that those who provide such guarantees will have great control and influence.

The Profit Motive

Ranieri astutely offered that the flashpoint where the GSEs stopped acting like themselves was in 2002, when the non-agency, residential-backed-securities market started to engineer a subprime class of loan. These loans were more profitable to investors and caused the GSEs to lose market share. Well, that's not good if you're a publicly traded company. That's when the GSEs began participating in exactly what they were created to prevent: unchecked growth, motivated by profit rather than prudence. This fallacy of morals primed the ultimate in systemic failure.

The FHA served the subprime marketplace very well for a long time, using tried-and-true methods. We need to get back to these fundamentals and the FHA should lead the way again. (Related, but for another article at another time, is the ban on "yield spread premiums.")

"Productization"

S.A. Ibrahim, CEO of Radian Group, noted that mortgages were created for the creditworthy who could not really afford the house they were buying. As the former CEO of GreenPoint Mortgage, he should know. As a former mortgage broker who originated loans for GreenPoint, I know that they stepped well outside of their own loose underwriting guidelines for a slight bump in price (or profit) on the front side of the life of the loan, while passing the elevated risk down the back side. Ibrahim also insightfully pointed out that piggyback loans, a combination of first and second mortgages, allowed many borrowers to get around downpayment requirements -- another common practice of GreenPoint. Investors blindly bought the mortgages in first position, as if the consumer actually had some skin in the game -- again, passing unchecked risk into the market.

The engineering of mortgage products became more and more exotic to fuel the demand of investors and consumers alike, and GreenPoint was an architect that served as a conduit to such products under the guise of innovation. While future innovations in this sector are vital, they cannot be to the detriment of a system that properly assigns risk. Rewards for any such innovations should stretch the life of the mortgage to better align objectives.

Without a solid understanding of the mistakes that were made, we're doomed to repeat them. I've identified three such mistakes that these panelists-turned-policy-influencers thought enough of to bring to this administration as fundamentally essential for change. In subsequent articles, I'll dive into some future-looking recommendations from the panel, such as: availability and cost of credit; assisting the under-served borrower; firming up the multifamily and rental market; as well as the potential for an expanded role of the private sector in the housing finance arena.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Want to learn more about home buying and home finance? If so, you won't want to miss
our online discussion with industry experts,
"What Works Now: Smart Moves When Buying a Home,"
created by AOL Real Estate in participation with Bank of America Home Loans.
Watch it now on AOL Real Estate.

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Back in April 2010, the Treasury and HUD issued a myriad of questions for the public to comment on regarding the future of the housing finance system. They received over 300 responses from everyone from members of the public to specialized think tanks. Now they are taking action: On Tuesday morning, the Obama administration is staging the Conference on the Future of Housing Finance at the Treasury Department.

A reasonably diverse list of panelists covering multiple sectors -- including bankers, economists, investors, mortgage insurers, market researchers and (reportedly) consumer advocates -- will converge in a forum-like setting to "broaden our perspectives on a number of key issues in a transparent way to make certain that all of the best ideas are on the table," according to Jeffrey A. Goldstein, undersecretary of the Treasury for Domestic Finance.

The conference will be moderated by Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan.

Panelists include:

Barbara J. Desoer, president of Bank of America Home Loans, which serves nearly 20 percent of all mortgages in the U.S.

Ingrid Gould Ellen, professor of Urban Planning and Public Policy at New York University's Wagner Graduate School of Public Service and Co-Director of the Furman Center for Real Estate and Urban Policy. Professor Ellen will likely represent the importance of continued credit and financial qualification availability for racially integrated neighborhoods.

Bill Gross, co-founder and co-chief investment officer of PIMCO. Gross manages the worlds largest mutual fund: PIMCO, or the Pacific Investment Management Company. Any policy changes in the housing finance sector, and the bonds that fuel its function, is of great interest to PIMCO and Mr. Gross, who are true market movers due to their sheer size and buying power.

Mike Heid, co-president of Wells Fargo Home Mortgage. Likely brought on to discuss the effectiveness of the Home Affordable Modification Program (HAMP), where Wells has modified over 240,000 mortgages in the first seven months of the year.

S.A. Ibrahim, chief executive officer of Radian Group Inc. Radian is a global credit risk management company that 'connects lenders, homebuyers, investors and loan servicers using a suite of private mortgage insurance and related risk management products and services.' Formerly the CEO of GreenPoint Financial, one of the leading Alt-A lenders in the country during the housing boom, Ibrahim has also served as council to many Boards including Fannie Mae and the Mortgage Bankers Association.

Marc H. Morial, president and chief executive officer of the National Urban League. Mr. Morial sees the losses due to the recent recession disproportionately tilted towards African Americans. As head of the National Urban League, Morial has been instrumental in efforts to 'outline plans to get African Americans back to work, insured, better educated and prepared to be major players in the industries that will fuel the economy and their future.'

Alex Pollock, resident fellow at the American Enterprise Institute (AEI). AEI is an officially nonpartisan but a traditionally conservative think tank whose stated mission is to: 'defend the principles and improve the institutions of American freedom and democratic capitalism, limited government, private enterprise, individual liberty and responsibility, vigilant and effective defense and foreign policies, political accountability, and open debate.' Many AEI scholars are credited with shaping President George W. Bush's public policy.

Lewis Ranieri, chairman of Ranieri and Company, Inc. Considered the godfather of mortgage finance, credited with creating what we know now as mortgage-backed securities. In 2004 Businessweek anointed Mr. Ranieri as one of the greatest innovators of the past 75 years. However, in 2008 he was labeled one of the "five goats who contributed to the financial crisis" by Nobel Prize laureate Robert Mundell.

Ellen Seidman, executive vice president for Mission and Strategy, at ShoreBank Corporation, and Chair of the Board of Directors at the Center for Financial Services Innovation (CFSI). Next to Marc Morial, Ellen Seidman is the panelist that stands to most represent the Consumer at the Conference. From CFSI's mission statement- "to transform the U.S. financial services marketplace to help under-banked consumers achieve financial prosperity." The under-banked, according to CFSI, are those who "do not have access to the products and services that could put them on the road to prosperity."

Michael A. Stegman, director of Policy and Housing for the Program on Human and Community Development of the John D. and Catherine T. MacArthur Foundation. Stegman has served as a consultant to Fannie Mae, HUD, the Treasury Department and the U.S. General Accounting Office. He has written extensively on housing and urban policy, community development, financial services for the poor, and asset development policies.

Susan Wachter, Richard B. Worley professor of Financial Management, professor of Real Estate, Finance and City and Regional Planning at the University of Pennsylvania's Wharton School. Wachter is a real estate economist who has served leadership roles with HUD, the National Association of Homebuilders and the Blue Ribbon Committee on Housing Finance. She is also the author of: Rebuilding Urban Places After Disaster: Lessons from Hurricane Katrina.

Mark Zandi, chief economist of Moody's Analytics. Moody's, among other rating agencies, has frequently been blamed for their role in the housing-markets implosion with their loose rating practices when it came to Mortgage Backed Securities (MBS). Investors bet on and bought what they thought were AAA-rated securities that turned out to be anything but.

The main discussion topics will include housing finance reform as it pertains to the broader financial markets and broader housing policy goals. A series

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of smaller breakout sessions will identify key players going forward in both the private and government sectors, address credit access and affordability, different methods with which housing can be funded, private market incentives and how to manage the processes of proposed transitions. The pending reformation of Fannie Mae and Freddie Mac will surely will get addressed at some point on some level.

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Alan Greenspan's prognostic opinion over the weekend on NBC's "Meet the Press" that a further drop in home prices could lead to a second or double-dip recession was a rather duh moment in the news of domestic economics.

With a battered and emotionally fragile economy, any negative headline news, like a further decrease in home values, will suppress investor and consumer confidence ... and so goes the economy.

Emotions aside, the future of the housing market looks to be one that dredges a saw-toothed bottom for quite sometime, so if Mr. Greenspan is right ... double-dip recession, the U.S. economy cometh. It's time to prepare everyone's expectations that the housing market isn't set for growth and mitigate the factors that foster such decrease in values.

High unemployment, a perpetual replenishing of shadow inventory, and increasingly stringent mortgage-underwriting standards will suppress any meaningful growth in the housing market for years to come. Addressing these issues are the key to averting the second coming of recession-dom, which I'm not convinced ever ceased in the first place. A series of patchwork fixes don't make for a long-term solution. (See: homebuyer tax credit and massive-yet-unsustainable federal spending.)

As unemployment remains in the 9 percent to 10 percent range, mortgage defaults and the subsequent foreclosures will continue adding to lending institutions' already inflated distressed-property inventories. Defaults due to unemployment transcend loan types; prime borrowers in a 30-year-fixed program, with excellent credit, income and assets (at the time they took out the loan), are going into default right along with those painted exotic and subprime.

This "shadow inventory" -- the ominous name for the non-performing and decaying foreclosed properties that banks are holding on their books, and are yet to be released back into the market -- threatens to suppress prices as an overage of supply permeates the marketplace. There is still an enormous amount of shadow inventory from the Free Mortgage Party or refi boom (circa 2002-2007) that needs to be flushed from the system, in addition to the influx of new inventory due to high unemployment.

Mortgage rates can drop to 0.5 percent, but if only a tiny pool of consumers qualify for a mortgage the underlying rate doesn't matter much. Mortgage underwriting standards are a lynchpin to spurring a housing recovery; currently they are almost as tight as they were loose during the refi boom. Lenders used to find a way to get any deal done; today they look for any way to kill a deal. We can't go back to the days of NINJA (No Income, No Job, No Asset) loans, however some loosening in the underwriting department of lenders must evolve if we hope to push demand and prices upward.

All things considered, bearish is my stance on the housing market and the overall economy as we continue into a lost decade of growth, be it double-dip recession or whatever economic semantics you use to label this period.

Finally, let's say someone waves their magic wand. Unemployment drops, income rises, people start qualifying for homes -- housing prices rise. With trillions of new greenbacks in circulation and a staggering deficit, we're now staring at hyperinflation, rising interest rates and the accompanying misery which that shall bring. To be an economist? Oy vey.


More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

************************************************

Want to learn more about home buying and home finance? If so, you won't want to miss
our online discussion with industry experts,
"What Works Now: Smart Moves When Buying a Home,"
created by AOL Real Estate in participation with Bank of America Home Loans.
Watch it now on AOL Real Estate.

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How do you find a good real estate agent and verify that they are a good fit for your personal situation?

Referral? Yard signs? Newspaper or magazine? Google?

• How many homes the agent has sold like mine in regard to style, price range, days on market and relative to the immediate area my home is located. (Hyperlocal experience).
• How many photos and open houses the agent averages per home listed. (Basic marketing efforts)
• How many homes the broker has sold in the past 2 years. (Recent experience).
• What the agent's average sales price was vs. the initial listing price. (Local market economics expertise)

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The real estate market and the overall real estate industry are in dire need of new business and cost strategies to positively shift consumer confidence and affordability factors enough to stimulate and sustain growth within this pillar of the overall U.S. economy.

With the expiration of the homebuyer tax credit, new home sales have collapsed. Mortgage underwriting standards are an increasingly small and faster moving target to hit. Rates can drop to 2 percent, but if only a tiny pool of consumers qualify for a mortgage, the cheap money doesn't do much good. Currently, 5-year adjustable-rate mortgages for the most qualified buyers are in the mid-3 percent range and 30-year-fixed-rate programs are in the mid-4 percent range ... which just sounds extraordinary as I type it out.

It doesn't help that mortgage professionals are not trusted by the general public, period, as they've been painted as financial molesters by the media and most everyone else, fairly or not.

What needs to change?

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Federal Reserve Chairman Ben Bernanke has been cautious yet deliberate with his words as he's outlined the direction the Fed likely will take over the next few years. Bernanke believes that stimulus funding and similar programs need to stop so that we can start addressing America's "unsustainable" debt levels.

So how will this affect home buyers?

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It was former Treasury secretary Henry "Hank" Paulson's turn in front of the Financial Crisis Inquiry Commission yesterdayn-- and, boy, does this guy sound like the voice of reason we've all been looking for.

His testimony was compelling, on-point, and chock-full of tremendous insight. Some snippets:

• "Reforms are unquestionably required'
• "Better disclosure is necessary."
• "The regulatory system is archaic and outmoded."
• "Credit Rating Agencies were a dangerous crutch."
• "Liquidity is important."

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As Tuesday's hearings in Washington regarding Goldman Sachs droned on, it remained unclear who was at the bottom of the Wall Street firm's supposed skulduggery. On April 16, the SEC brought a lawsuit against Goldman Sachs alleging securities fraud for what amounted to the firm betting against the very securities it was selling to its investors, egregiously misleading them along the way.

The suit is formally against Goldman -- with its young banker Fabrice "Fabulous Fab" Tourre front and center. But it was John Paulson (pictured at left), the very smart manager and namesake of hedge fund Paulson & Co., who created the concept of the sophisticated, complex and ethically challenged "synthetic" securities that were unavailable to ordinary investors and are about to dictate historic financial reform on Wall Street and beyond.

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Is it possible that the biggest institutions on Wall Street shorted the U.S. housing market, causing it and the global economy to melt down in orders of magnitude larger than what could have been? It appears to be so....

A magnetar, by definition, sucks everything in and spits even more out. The Chicago-based hedge fund Magnetar Capital did the same thing with the financial instruments that powered the housing/refi boom -- Collateralized Debt Obligations (CDO) and Credit Default Swaps (CDS) -- to a rather sinister degree, creating an investment strategy called the Magnetar Trade.

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In my last post, I began to lay the groundwork for the argument as to why the mortgage (and real estate) markets need radical transparency to restore consumer and investor confidence. I described my experiences working in the industries and my resulting opinions -- most specifically about a little-known fee called the yield spread premium (YSP).

YSP was often used as an under-the-table rebate given to a mortgage broker and in exchange the borrower received a higher interest rate.

A few commenters challenged the idea that YSPs had much of anything to do with the housing demise (along with my relative acumen ... but I digress). My contention is that YSPs were an enabling factor, a root cause if you will.

YSPs provide an incentive for brokers (and bankers) to steer consumers into more expensive loans, IF NOT PROPERLY DISCLOSED.

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During Times of Universal Deceit, Telling The Truth is a Revolutionary Act - George Orwell

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