AHA Key Issues for 2018
- Wide Availability and Affordability of The 30-Year Fixed-Rate Mortgage: The Secondary Mortgage Market in the United States supports the availability of the 30-year fixed-rate mortgage. This mortgage instrument is the preferred method of financing for most homeowners and is essential to allow budgeting and planning for homeowners on a weekly, monthly and annual basis. Its features form the cornerstone for wealth accumulation that US homeowners have enjoyed for generations. If policymakers are not mindful of these advantages l in how they construct the future of Fannie Mae, Freddie Mac and the FHA, the 30-year fixed-rate mortgage could become rare. If that happens, lenders could be required to carry most mortgages on their balance sheets and in turn, might have to revert to earlier lending practices, primarily offering only adjustable rate or short-term mortgages which significantly increase risks to homeowners. This in turn makes homeownership less accessible and less sustainable. The AHA will work to ensure access for homeowners to a 30-year fixed-rate mortgage at prices that are affordable to everyone.
- Access to Credit (Updated Credit Scoring Models): More modern and predictive credit scoring models are available in the marketplace, but are prohibited from use by Fannie Mae, Freddie Mac and the FHA. VantageScore is one such model that takes into account newer and more specific pieces of information that reflect the way we live our lives now, rather than the way we did back in the 1990s. Its modeling experts indicate that just by using these more modern methodologies of credit scoring analysis, more than 20 million people would become “scoreable” who are not so today. In addition, there would likely be a several million people who would be “mortgage eligible” immediately. According to VantageScore there were approximately 8 BILLION uses of VantageScore in the credit markets last year, and NONE in mortgage finance (because Fannie and Freddie and FHA have not approved their use). Something needs to be done to mandate their use. The “roadblock” by Fannie, Freddie and FHA has resulted in a loss of homeownership opportunities for millions of creditworthy Americans.
o It should be noted that FICO was the monopoly credit scoring model used that, in part, resulted in the Financial Crisis.
- Owner-Occupant Housing Inventory Crisis: Existing homes for sale have declined for 31 consecutive months and will likely continue to do so as interest rates rise. According to a study by the National Association of Home Builders (NAHB), there is roughly $84,000 of regulatory cost in the average newly-constructed home. If this study is correct, there frankly won’t be affordable or available new construction for the first-time for low-to-moderate income consumers. The NAHB estimates it could take 3-5 years to fully develop raw land to usable inventory and that we are roughly 3.2 million units short of meeting the statistically “normal” household formation needs of the past few years. The crisis is upon us. More should be done to relax the restrictions that bank regulators have imposed on homebuilders who borrow money to construct new homes that were reactionary efforts to cool off the over-heated market in the period leading up to the Great Recession. The market has since cooled, and sensible lending rules are necessary to allow homebuilders to get back to work building America’s homes and mitigating this owner-occupant housing inventory crisis.
o The lack of new construction is only one part of the inventory crisis.
o The other major contributing factor is a lack of available existing homes for would-be owner occupants. Today’s would-be homeowners are being pushed out of the market by eager, all-cash buyers, many of which are investors looking to rent out the home. More should be done to ensure that families who want to purchase and occupy the house are given a fair and meaningful chance at a bid to buy a vacant property when it comes onto the market before it is offered to institutional investors (often at significant discounts). As a result, America needs an extended “first look” program for all single family bank-owned property or property otherwise owned or controlled by Fannie Mae, Freddie Mac and FHA. Without it, the current transfer of wealth (most of which comes from owning a home) from the typical American owner-occupants (Main Street) is being transferred to Investors (Wall Street).
- Construction Stimulus for First-Time Homebuyer Properties: Media reports a forthcoming “Stimulus Package” to jumpstart America. While the package may emphasize improvements to roads, bridges and airports . . . we ask Congress to please carve out a sufficient amount of stimulus for construction of first time-homebuyer eligible properties (at least 25% of the stimulus). Whether that comes in the form of a tax benefit for the purchaser of new construction homes – or in the form of a tax incentive for builders to build affordable housing – or both – this measure is desperately needed now.
- National Housing Policy and GSE Resolution: The nation needs a national housing policy to inform decisions regarding tax reform, regulations and resource allocation. This should include defining the role of FHA and the permanent role of the GSEs. The strong lobbying voices of Wall Street as well as the old GSE model of “private profit at tax payer expense” need to be balanced with the needs of America’s homeowners and communities. Adopting a simple policy such as “protecting and promoting sustainable homeownership for all segments of America” would be a huge step forward and help to resolve current critical issues regarding the role of government in housing finance as well as constrained credit guidelines and the regulatory burden on both the home building and the mortgage finance industries that today impede homeownership at all levels.
- Saving Neighborhoods from Community Blight: Many Americans are still feeling the effects of the foreclosure crisis. While the sad and unfortunate loss of a home is traumatic for a family, the homeowners who are left behind when their neighbor’s home has become vacant and abandoned often suffer in a much different way. Their once vibrant block is now susceptible to crime and often becomes an eyesore with boarded windows and doors. Their home value is reduced and a once obtainable dream of equity in their home is erased overnight by the souring property value attributable to the blighted property next door or down the street. To help protect the value of the remaining homeowners, the industry and government entities that control vacant and abandoned properties need to step up their efforts to disposition the properties so they do not hang on in a zombie state forever and deteriorate to the point where they could never be a place to call home for a new family. Secondly, as long as the property remains vacant, it needs to be safely and attractively secured with material other than plywood, such a polycarbonate or clearboard. The GSEs, Veterans Administration, Ohio State and a number of other communities around the country have already taken steps in the right direction to encourage the use of clearboard; however, more could be done. State laws, financial institutions’, and federal government agencies are all in control of these properties and need to be pushed to use all available tools to preserve the houses for future homeowners.
- Tax Reform and Mortgage Interest Deduction: Recent tax reforms will impact the individual homeowner or aspiring homeowner of America making homeownership more affordable for some and less so for others. The Mortgage Interest Deduction has been part of the fabric of America for over 100 years. Today, it allows people who itemize their taxes each year to deduct the interest they pay on their mortgage. This was almost eliminated in the most recent tax reform debate and although persevered, was capped at a level that impacts a significant portion of the market. It is demonstrative that housing policy emphasizing individual homeownership in America helps benefit communities, lower crime rates, increases education levels, facilitates new business formation, and supports essential public services. Any “signal” to further alter the Mortgage Interest Deduction, or reduce incentives for tax itemization, that result in the de-emphasis of homeownership will have vast adverse consequences. Emphasizing more renting at the expense of homeownership will not fuel the economic stimulus necessary in America. The Mortgage Interest Deduction should be kept intact for most of America. Much of the same is true for the Mortgage Insurance Deduction. Tax increases often come into play when funding discussions for the general budget as well as other special legislative changes. We must remain vigilant to ensure that homeowners do not become the ATM for funding unrelated measures.
o After the Tax Reform package was passed in December 2016, Congress decided to take up two more critical issues that they either purposely left out of the tax changes – or they simply overlooked these two issues. They are – the Mortgage Insurance Deduction and the Debt Relief on Property Disposition (Short Sales, etc.). Unfortunately, Congress has not acted on these two critical issues and consumers will be forced to file their 2017 Income Tax forms without knowing the eventual outcome of these two important issues. If Congress finally does act to affirmatively reinstate these two, there could be a sizeable number of people who may have to amend or refile their 2017 Taxes.
- Reduction in Fees at Fannie Mae and Freddie Mac: Last year, 35 Trade Associations wrote to Federal Housing Finance Authority (FHFA) Director Mel Watt pleading with him to reduce Guaranty Fees and Loan Level Price Adjustments imposed by Fannie Mae and Freddie Mac and passed on as increased cost to homebuyers. These are fees that Fannie Mae and Freddie Mac layer on top of the mortgage interest rate most borrowers pay. In theory, these fees are intended to fund the “government backstop” of the mortgage market to ensure that mortgage investors get paid even if homeowners fail to make their mortgage payments. However, after going broke during the foreclosure crisis, the GSEs have gone too far in resetting these fees. The fees have gone up nearly every year since 2010, while the risk on loans they have purchased has gone down, thanks to important reforms in the mortgage market ushered under the Dodd-Frank Wall Street Reform and Consumer Protection Act that essentially made predatory lending illegal. Nonetheless, the GSEs fees continue to layer upon the interest rates and as a result, millions of consumers are “boxed out” of homeownership opportunity because of these excessive fees. In fact, a competing government program at HUD known as the “Federal Housing Administration” (FHA) has reduced its fees for the same type of risks even though the mortgage loans FHA insures do not perform nearly as well as the loans purchased by Fannie Mae and Freddie Mac.
o There is little correlation between the risk posed by the mortgage borrower and the excessive fees charged by Fannie and Freddie. Millions of potential homebuyers are negatively impacted by these excessive fees and it is imperative that they are lowered to rational and actuarially sound levels.
- Right-sizing Government Regulation of Mortgage Lending: In the lead up to the Great Recession, there were too many documented predatory and abusive lending practices on consumers of America. New laws and regulations to protect consumers from these unscrupulous practices was and continues to be necessary. However, regulations for regulation’ sake serves the best interest of no one and impedes the ability of regular, working Americans from being able to obtain affordable mortgage financing for their home. A look back at the proliferation of rules promulgated over the past decade is a worthy task, as long as the rights and interests of homeowners and aspiring homeowners are placed first.
- Reducing Reliance on the Government Backstop: Today, private mortgage insurance (MI) has been used by mortgage lenders of all sizes to mitigate the negative consequences of borrowers’ defaulting on their mortgages. It is the primary driver in incentivizing a mortgage lender to lend money to consumers who have less than a 20% down payment. The MI industry paid out more than $50 billion of claims during the crisis and weathered the storm of the wave upon wave of defaults. It was $50 billion that the taxpayers (and Fannie Mae and Freddie Mac) did NOT have to pay. In nearly any and every measurable way, MI performed better than the GSEs and with less resources. As a result, we think the MI industry should be permitted to shoulder more of the burden than it does today. It is ready, willing and able, if only Fannie Mae and Freddie Mac would accept lower risk on loans by using more MI. The way to accomplish this is through implementation of a concept known as “Deeper Cover” MI which would cover about half of the value of a mortgage loan by insulating the mortgage lender and Fannie Mae and Freddie Mac from the first 50% of loss if the borrower defaults and the home is sold for less than is owed. One study suggests this would likely lower the cost to borrowers if Private MIs took on the risk rather than Fannie Mae and Freddie Mac.
- Lower the “Arbitrary” Capital Rule for the GSEs
Many studies have concluded that through the past Great Recession Economic Crisis – that as bad as it was – Fannie and Freddie would have likely survived if they would have operated with approximately 5% capital. That would be over 10 times the capital they retained on their mortgage loans (roughly 45 basis points of capital was required). After taking over Fannie and Freddie in 2008, it appears Congress imposed a 10% capital requirement on Fannie and Freddie which seems exceedingly oppressive knowing that the loans they bought that resulted in most of the crisis have been eliminated or curtailed through the QM rule or Ability to Repay standards. A 10% capital requirement is punitive and excessive and results in a “Tax” on homeownership that is unjustifiable. We are asking for transparency in the Capital Models by FHFA relative to the risk on loans bought or guaranteed by the GSEs to determine the correct capital requirement so that consumers are not overcharged relative to their risk profile.