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Capital Economics expects the housing crisis to end this year, according to a report released Tuesday. One of the reasons: loosening credit.

The analytics firm notes the average credit score required to attain a mortgage loan is 700. While this is higher than scores required prior to the crisis, it is constant with requirements one year ago.

Additionally, a Fed Senior Loan Officer Survey found credit requirements in the fourth quarter were consistent with the past three quarters.

However, other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability.

Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.

Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes “the clearest sign yet of an improvement in mortgage credit conditions.”

In contrast to a low of 74 percent reached in mid-2010, banks are now lending at 82 percent LTV.

While credit conditions may have loosened slightly, some potential homebuyers are still struggling with credit requirements. In fact, Capital Economics points out that in November 8 percent of contract cancellations were the result of a potential buyer not qualifying for a loan.

Additionally, Capital Economics says “any improvement in credit conditions won’t be significant enough to generation actual house price gains,” and potential ramifications from the euro-zone pose a threat to future credit availability.

Delavaco Properties LP plans to spend as much as $30 million this year and $40 million in 2012 to buy bank-owned houses and condominiums in foreclosure-ridden South Florida. The private-equity fund will pay cash.

As lenders tighten mortgage standards and consumers stay on the sidelines amid a five-year slide in home prices, all-cash purchases are surging. The deals are done mostly by investors who can get properties for less than buyers needing loans, fix them up and resell or rent them.

“If there weren’t vultures out there, you’d have a city of dead carcasses,” Robert Theocles, an independent consultant for Fort Lauderdale, Florida-based Delavaco, said in a telephone interview. “It’s like the circle of life.”

A record 33 percent of existing-home sales were made to cash buyers in February, when an annualized 4.88 million properties changed hands, the National Association of Realtors reported March 21. That compares with 15 percent of the 4.82 million annualized sales when the Chicago-based trade group started monthly tracking of such purchases in October 2008.

In Florida’s Broward County, where Theocles is based, deals with no mortgages made up 69 percent of sales in February, according to Southeast Florida Multiple Listing Service data.

The national sales data don’t count homes bought in foreclosure auctions on courthouse steps, which are almost all cash-only transactions. The “lion’s share” of all-cash purchases are by investors, according to Walter Molony, a spokesman for the Realtors association, though the group doesn’t keep specific numbers.
Big Cash Cities

About half of all purchases were done with cash in the Miami, Las Vegas and Phoenix areas, where prices have plunged and bank-owned properties abound because of high foreclosure rates, said Oliver Chang, a housing-market analyst with Morgan Stanley (MS), the New York-based investment bank.

Cash sales in those cities — as well as in Chicago, Cleveland, Los Angeles, New York, Seattle, San Francisco and Washington — rose to 199,557 homes last year compared with 138,888 in 2004, according to a March 21 report co-written by Chang. Short sales, where the bank accepts less than the principal on a loan, and foreclosures accounted for 59 percent of last year’s cash sales, up from 10 percent in 2004, Morgan Stanley reported.

Cash buyers paid an average $81.83 per square foot for foreclosed properties in the 10 cities last year, 36 percent less than distressed properties bought with a mortgage, the report said.
Flippers’ Advantage

“It’s almost like an arbitrage,” Chang said in a telephone interview from San Francisco, referring to the investment strategy that seeks to exploit price differences between related securities. “You buy the house at a discount with cash. Then you flip it almost immediately to the first-time homebuyer who’s using a mortgage, simply because they were not able to buy at the foreclosure sale.”

Lenders reject mortgage applications for foreclosed properties because the homes lack utilities, appraisals are below agreed-upon prices or deals take too long to close, said Thomas Popik, research director for Campbell Communications Inc. in Washington, which conducts national monthly surveys of 3,000 real estate brokers.

“The proportion of cash deals could hit 40 percent by the end of this year,” Popik said in a telephone interview from his office in Nashua, New Hampshire.
Turnkey Deals

One emerging trend is turnkey transactions, where cash buyers repair foreclosed homes and manage them as rental properties for other investors, said Elmer Diaz, former president of the National Real Estate Investors Association in Covington, Kentucky. Diaz said he works with four groups raising money to acquire properties in Fort Collins, Colorado; Sarasota, Florida; South Bend, Indiana; and Houston. The groups manage a combined 200 housing units, adding about 10 a month, he said.

“We find the deal, do the rehab, find a tenant and manage the property for the turnkey investor,” Diaz said in a telephone interview from Sarasota. “Most of our investing is for the cash flow, not appreciation.”

Not all cash deals are done by property flippers. About 55 percent of international buyers paid cash for their U.S. homes, according to an April 2010 report by the Realtors group. International buyers, including recent immigrants and temporary visa holders, accounted for about 7 percent of $907 billion in U.S. home sales for the 12-month period ended last March 31.
Empty Nesters

Empty nesters, or couples with children who have gone out on their own, often pay cash when they move to a smaller house, said Sam Khater, chief economist for CoreLogic Inc. (CLGX), a real estate information company based in Santa Ana, California. Vacation-home buyers use cash because it’s hard to get a mortgage on a second home, while wealthy buyers often don’t need a loan, he said.

“You’re seeing an increase in cash deals at both ends of the price distribution curve,” Khater said in a telephone interview from Vienna, Virginia. “You’re seeing it in the hardest hit areas, where investors are coming in and picking up low-priced properties. And you’re seeing higher cash activity at the upper end as well.”

New-home sales fell to an annual pace of 250,000 in February, an all-time low in records dating to 1963, the Commerce Department reported March 23. Existing-home sales dropped to a 4.88 million annualized pace in February, down 2.8 percent from a year earlier, the National Association of Realtors said March 21, while the median price of existing homes fell to $156,100, the lowest since February 2002.
Record Affordability

Housing affordability is at an all-time high, according to records dating to 1970 from the Realtors group. Average monthly payments, based on home prices and mortgage interest rates, dropped to 13.1 percent of the median family income in January, the most recent month available, from 23.2 percent in 2006 at the peak of the housing bubble.

Lenders, who fueled the housing bubble with lax mortgage underwriting, are now too restrictive, said Molony, the Realtors spokesman.

“Lenders have only been willing to lend to the cream of the crop in terms of credit scores,” he said in a telephone interview from Washington. “As a result you’re seeing a depressed level of traditional buyers.”

FICO credit scores for loans insured by the Federal Housing Administration, a government program that extends credit to borrowers with down payments as small as 3.5 percent, rose to an average of 703 in February, up 10 points from a year earlier, on the scale of 300 to 850. FICO scores, developed by Fair Isaac Corp. (FICO), for FHA loans averaged 647 in February 2008. They climbed after the FHA imposed minimum scores for the first time in October and banks added stricter credit overlays.
Mortgage Bankers’ View

The weighted average FICO score for a home purchased with a Fannie Mae mortgage was 762 last year, up from 716 in 2006, the Washington-based mortgage finance company reported Feb. 24. Fannie Mae loans, which usually require a 20 percent down payment, had an average 68 percent loan-to-value at origination.

“It’s not surprising that the cash share has gone up if you couple both the number of distressed sales that are going on and the fact that, even outside of a foreclosure auction, mortgage credit is tightening,” said Michael Fratantoni, vice president of research at the Mortgage Bankers Association, a Washington-based trade group.
Rental Demand

The growth in all-cash deals occurs amid rising demand for rental housing as more homeowners go into foreclosure, Fratantoni said. The U.S. homeownership rate fell to 66.5 percent at the end of last year from a high of 69.2 percent in December 2004, according to a Jan. 31 Census Bureau report.

Mortgage financing to buy homes to rent is also shrinking, Fratantoni said. Residential-mortgage originations are expected to fall to $1.03 trillion this year from $1.57 trillion in 2010, his association said in a March 15 forecast. Investors submitted 6 percent of mortgage purchase applications in February, down from a 2007 average of about 10 percent, Fratantoni said. That’s a drop to about $6 billion in February from a monthly average of about $20 billion in 2007.

“What financing options will be available to investors in single-family properties who intend to rent them out?” Fratantoni said in a telephone interview. “That really has been cut back substantially.”

Delavaco, which hired Theocles as a consultant, financed about $400 million in deals last year, mostly in international oil and energy projects, said Andrew DeFrancesco, founder and chairman of the fund. Delavaco raises money from institutional and high net-worth investors in Canada and the U.S.
Delavaco Deals

The fund started buying homes in January 2010, acquiring about 70 foreclosed properties in Broward, Dade and Palm Beach counties with cash offers to get discounts, DeFrancesco said. While there’s still risk in Florida real estate, the downside is less than drilling for oil in the Ukraine or other places Delavaco has invested in energy projects, he said.

“Every time I drive by that house I know it’s there,” DeFrancesco said in a telephone interview. “I know the property and I know what county it’s in and I know it has a tangible value to it.”

The plan is to hold the properties between five and seven years, enough time for the market to absorb the glut of foreclosures and for resale values to rise, said Dallas Wharton, Delavaco’s chief operating officer.

In January, Delavaco paid about $32,000 for a bank-owned four-bedroom home in Pompano Beach, Florida, that had sold at the top of the market in 2006 for $285,000, Theocles said. Delavaco spent $11,000 to replace the interior sheetrock, plumbing and appliances. The house rents for $1,250 a month, and annual property taxes and insurance cost about $2,500, he said.

“We are the people that are going in, cleaning things up, renting the properties out to make nice homes for people,” Theocles said. “At the end of the day they’re worth a lot more.”

A Miami home last month. If Freddie Mac and Fannie Mae were closed, homeownership in America could change greatly. (Joe Raedle/Getty Images)

How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

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Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.

“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”

Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.

“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans — a cost that would be passed on to the borrower.

Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.

Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.

“I myself am eager to see whether there needs to be a guarantee,” said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.

Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”

Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.

They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.

And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.

Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.

“There needs to be a systematic way of preventing” fragmentation, said Professor Wachter. “That’s what we need a bulwark against. Because if there isn’t, it will occur.”

The government seems least likely to maintain a final set of benefits — leniencies in loan terms that taxpayers effectively have subsidized for borrowers.

Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.

A quirkier example is the ability to “lock in” an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies’ absence, borrowers seeking rate locks may need to pay for them.

WASHINGTON – The Obama administration wants to shrink the government’s role in the mortgage system — a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board.

The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis.

Exactly how far the government’s role in mortgages would be reduced was left to Congress to decide, but all three options the administration presented would create a housing finance system that relies far more on private money.

“It’s clear the administration wants the private sector to take a more prominent role in the mortgage rates, and in order for that to happen, mortgage rates have to go up,” said Thomas Lawler, a housing economist in Virginia.

Abolishing Fannie and Freddie would rewrite 70 years of federal housing policy, from Fannie’s creation as part of the New Deal to President George W. Bush’s drive for an “ownership society” in the 2000s. It would transform how homes are bought and redefine who can afford them.

Treasury Secretary Timothy Geithner said the plan would probably not happen for at least five years and would proceed “very carefully.” In the meantime, he said the companies would have the cash they need to meet their existing obligations.

“We think there’s very broad consensus on the Hill and in the broader private market that there needs to be a transition to a much smaller role for the government,” he said.

Ever since the housing market went bust and the country fell into a financial crisis, pressure has been building for the government to do away with Fannie and Freddie and reduce taxpayer exposure to risk.

Fannie and Freddie own or guarantee about half of all mortgages in the United States. Along with other federal agencies, they played some part in almost 90 percent of new mortgages over the past year.

The two agencies buy mortgage loans from primary lenders, pool them, and sell them with a guarantee that investors will be paid even if borrowers default. The idea is to give people a chance to buy homes at affordable interest rates.

But the two nearly collapsed in 2008, after the subprime mortgage market collapsed and defaults and foreclosures piled up. So far, they have cost taxpayers almost $150 billion and could cost up to $259 billion, the FHFA says.

The first option proposed by the administration would give the government no role beyond helping poorer and middle-class borrowers through agencies like the Federal Housing Administration, which provides insurance on mortgage loans.

The second and third options would give the government a role as an insurer of mortgages, and each would prompt mortgage companies to pass along fees to borrowers.

Under one, the government would step in to guarantee private mortgages during a severe economic downturn, such as another housing slump, but would provide limited support during normal times.

The third option would be more complex. The government would insure a targeted range of mortgage investments that already are guaranteed by private insurers — serving as a “reinsurance” broker to those financing companies. In the event the private insurers couldn’t pay the owners of the mortgage investments, the government insurance would pay.

The third option would leave the government with the largest role and probably have the smallest impact on mortgage rates. While lenders would have to pay fees, which would ordinarily drive rates higher, the government guarantees would also make mortgages a safer investment. That would attract more private money and hold rates down.

“Compared to the way things operated in the past, credit would be a little less easy to obtain, and the terms would be a little less attractive,” said Nigel Gault, chief U.S. economist with IHS Global Insight.

This option would face sharp opposition from lawmakers. They fear that private lenders would inevitably take on too much risk if they had the government as a backstop. Democrats and consumer groups said they feared mortgage rates would soar if the housing finance system were left mainly to the private market, and that fewer people could afford traditional 30-year, fixed-rate mortgages. Mortgage rates today are rising but are still some of the lowest ever recorded. The national average for a 30-year, fixed loan is about 5 percent.

The changes would be felt by nearly everyone who applies for a mortgage, from first-time homebuyers to middle-aged buyers trading up for a bigger house to older buyers scaling back to a smaller home, said Joseph Murin, a former president of Ginnie Mae, the government-owned corporation that guarantees bonds backed by home mortgages.

Gault said there is an upside to making housing a less attractive investment: People who can’t afford houses would be less likely to buy them, and might rent instead. Bankers would presumably lend more carefully.

Removing those buyers from the market could cause home prices to fall, however — which would help first-time buyers but hurt those who already own homes.

By sending Congress three proposals instead of a single recommendation, the administration sidesteps a politically delicate task that the new financial overhaul law left undone.

It also put pressure on Republicans in Congress, who have blamed Fannie and Freddie for the financial crisis but have yet to offer a viable plan for reforming them. Democrats control the Senate, so any new policy would have to be approved by a split Congress.

Republicans praised the White House for at least starting a serious discussion.

Conservative Rep. Jeb Hensarling, R-Texas, criticized the report for lacking detail but said it moved the debate “from if to when and how we wind down any taxpayer commitments to Fannie and Freddie.” Hensarling had pushed legislation last year to sharply reduce the government’s role in the housing market.

“If the White House is truly signaling they are ready to do something, it could probably happen in a matter of months,” he said in an interview.

The administration can take some steps immediately without Congress’ approval. It could require bigger down payments for loans that get federal guarantees, bar Fannie and Freddie from buying mortgages that are too big, or increase the fees they charge.

Those steps would make a government-backed mortgage more expensive and draw more private money into the market.

“When the administration stops talking task forces and begins to flesh this out, you’ll see significant private capital injected into the mortgage market,” said Karen Shaw Petrou, who advises banks on government policy for Federal Financial Analytics.

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Associated Press Writer Alan Fram contributed to this report.