These Key Issues Affect the 75 Million Homeowners of America and Aspiring Homeowners
- Available Inventory
- Mortgage Interest Deduction
- The Low Downpayment Mortgage
- Availability of The 30-Year Fixed-Rate Mortgage
- Higher Cost and Less Available Mortgage Financing
- Government Dominance of Mortgage Credit
- Lack of New Home Construction Lending
- Home Values
- Mortgage Insurance Deduction
Available Inventory a New Issue in Homeownership
Inventory available for first time homebuyers is at a decades-low. This has resulted from a number of factors. New construction has been down over the past eight years due to a number of difficult factors coinciding with the financial crisis of 2008 — 2012. And while builders are working to recover, increased costs related to regulatory requirements at the federal, state and local levels have made development of smaller, less expense units prohibitive. According to a study released by the National Association of Homebuilders (NAHB), this regulatory cost is up over 29% since 2011. In addition, of the 15 million single-family units that have gone through the default/foreclosure process over the past eight years, many have been acquired by institutional and individual investors to serve as rental units. Finally, as a result of limited or no equity and/or having low interest rate mortgages, re-sale offers have been dampened. This is especially true in the bottom third of the market.
The net result of all of these factors is that it has been very difficult for first time homebuyers to enter the market. Limited inventory has driven up prices in many markets — often resulting in multiple offers being made on desirable properties with cash offers preempting potential buyers with a mortgage approval contingency in the contract. Combine these factors with numerous constraints on the availability of mortgage credit and the adverse effect of rising rents and increasing student debt levels on the ability of new buyers to accumulate down payment funds, and we find the market at 50 year lows in the homeownership rates. There has been a disproportionately adverse effect of these factors on minority communities.
The major message here is that there will be no one “magic solution” to solve this complex problem. Even a major new program aimed at economic stimulation for first time homebuyers will not be sufficient to address the increased costs of regulation or the constraints on inventory. A comprehensive and integrated approach will be needed to reverse these trends and to provide sustainable homeownership for all segments of America.
Mortgage Interest Deduction
We are in the 100th year Anniversary of the Mortgage Interest Deduction. It has been considered sacrosanct by homeowners and communities – viewed by them as an ingrained policy to inspire homeownership. However, it is now under fire by policymakers in Washington DC and throughout America. In the past, policymakers embraced the Mortgage Interest Deduction as a key tool to enhance homeownership in America, and all of its associated social and cultural benefits. Some trade groups have predicted that if the Mortgage Interest Deduction were to be repealed or materially constricted, property values across America would decline by as much as 25%. Some economists have stated that might in fact be a “good thing” for homeowners. The facts show otherwise. According to the Federal Reserve Board, homeowners lost nearly $7 trillion of aggregate value in their homes from the peak in 2007. Mortgage interest rates are at (or near) their all-time record lows. Affordability and record low interest rates place the dream of homeownership within reach for millions of American households, yet homeownership rates have dropped in every category across America through 2011. Of filers with itemized Mortgage Interest Deductions, 64.7 percent have incomes below $100,000, and 91.4 percent have incomes below $200,000. There are currently policy proposals to reduce, cap, or in some cases, entirely eliminate, the Mortgage Interest Deduction. Doing any of the above is against the AHA mission to protect and promote sustainable homeownership for all segments of America. As the voice of the approximate 75 million homeowners, we will defend this valued policy.
The Low Downpayment Mortgage
Political and budget conflicts have put the low downpayment Mortgage programs supported by FHA, Fannie Mae, Freddie Mac, and others in a precarious position. In 2008, crisis conditions led to the federal government’s takeover of Fannie Mae and Freddie Mac (Conservatorship), and led to the FHA’s first time ever request for replenishment funding from the federal government. As a result, policymakers are considering increasing downpayment requirements on mortgage loans sold to these agencies in the name of improving their solvency. In this time of uncertainty and fragile economic conditions, making it more difficult for credit-worthy consumers to achieve the goal of sustainable homeownership by increasing the minimum downpayment does not protect or promote sustainable homeownership opportunity for the constituencies who most need the support. A policy change such as this will ensure a widening gap between the “haves and the have-nots.” America has an outstanding track record (decades long) of sustainable homeownership, prudently using low downpayment mortgages to lift millions of families into middle class. The AHA will work on behalf of the 75 million existing homeowners and future homeowners to retain the low downpayment mortgage in order to protect and promote sustainable homeownership for all segments of America.
Availability of The 30-Year Fixed-Rate Mortgage
The development (primarily by America) of the Secondary Mortgage Market allowed for the creation of the 30-year fixed-rate mortgage. That 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. If policymakers are not careful in how they construct the future of Fannie Mae, Freddie Mac and 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 the lending practices of the 1960’s and early 1970’s, primarily reduced to adjustable short-term mortgages. Homeowners could have rare access to a 30-year fixed rate mortgage increasing the volatility of financing and making homeownership less sustainable. The AHA will work to ensure access for homeowners to a 30-year fixed-rate mortgage.
Higher Cost and Less Available Mortgage Financing
The housing crisis brought about some necessary regulatory changes, but also a chronic degree of credit tightening that has constricted access to homeownership for many and raised costs for all. There are scores of examples of excess credit tightening and increased costs, again limiting access to worthy sustainable homeowners. This constriction of credit generally comes in three forms: 1.) Increased fees, guidelines and scrutiny by Fannie Mae, Freddie Mac, FHA, and lenders of America on homeowners relative to today’s risks. 2.) Increased regulatory scrutiny and regulatory uncertainty which results in lenders and/or investors tightening (or constricting) credit. 3.) Increased reputation risk on lenders and industry participants resulting in materially tighter credit policies. Homeowners currently bear the weight of this constriction of credit through reduced access or increased costs. The AHA will sort through the myriad of issues relative to credit availability and cost and act as the ombudsman on behalf of the 75 million homeowners and those aspiring homeowners to ensure credit policies protect and promote sustainable homeownership for all segments of America.
Government Dominance of Mortgage Credit
As of 2012, the federal government – through FHA, Fannie Mae and Freddie Mac – provided access to over 90% of mortgage finance. That trend must be reversed to ensure homeowners have access to private, free market sources of capital. As of today, the FHA mortgage programs encroach into primary market private capital financing by setting their loan limits above those generally characterized as “conventional financing” limits. This government intervention forces private capital away from housing finance because private capital cannot compete with the government cost of capital. After all, private capital must provide a reasonable return on investment, yet the government has no such requirement.
If left to government and political forces, there will be times the government leans favorably toward homeownership and times it leans away. That’s politics, and that leaves the opportunity of homeownership subject to political whims. But we cannot ensure the availability of sustainable sources of housing finance if private sources of capital are periodically or perpetually “boxed out” by government programs. Private capital will rarely flow to products, services, or sectors of the economy where there is constant threat of government encroachment into primary (free market) functions and businesses. Rational use of government resources is a good thing to support free market private enterprise in a counter-cyclical manner. But the federal government owning or controlling 90% or more of any market allows the government to “pick the winners and losers.” The American families’ opportunity to sustainably own their home should not be subject to those political whims. If private sources of capital are periodically or perpetually “boxed out” by government programs, mortgage availability will be left to government and political forces; homeownership, the right to private property, is too precious to be left up to politics.
AHA will work to ensure there is a proper role for government – and a bigger role for the private free market to ensure a constant flow of capital to support homeownership. AHA will ensure policymakers construct sensible and modest use of government programs thereby encouraging availability and access to free market private capital to fulfill the sustainable homeownership needs of America.
Lack of New Home Construction Lending
Policies and regulations have precipitously shrunk the availability of acquisition, development and construction (ADC) financing to meet the future home building needs of America. Population growth through birth and immigration has remained unabated. To keep up with new household formation, our nation needs to create roughly 1.6 million housing units annually. Builders and developers have faced an extremely tight credit market since 2009, with most lending institutions being forced to discontinue making loans for the purpose of acquiring, developing and constructing new housing because of regulatory and market pressures. Many builders and developers have been asked to contribute considerably more cash and reserves to projects (either existing or new), making the cost too prohibitive to undertake new projects or complete existing ones. As a result, many projects could not be completed nor started. That’s why Homebuilders have only constructed about 500,000 housing units rather than the 1.6 million per year needed to keep up with population growth.
AHA will work to ensure there is a proper balance of risk mitigating requirements to safeguard the lenders that provide ADC Financing to Homebuilders, enabling them to keep pace with the housing needs of America’s ever growing population. We will contribute to the process to ensure policymakers construct sensible and safe oversights thereby encouraging adequate availability of capital to fulfill the sustainable homeownership needs of America.
Many Americans have experienced a major reduction in the value and equity in their home. Government and business policies must not further erode value—but in fact, should help repair the value. In addition to the previous six issues at stake, other current and proposed policies could deliver additional negative blows to home values – America and its homeowners cannot afford this. These policies include down payment requirements for the Qualified Residential Mortgage as defined in the Dodd-Frank law, adding twenty six years for the median family to save for a down payment;
ever rising fees for mortgages making it more expensive for borrowers to get a mortgage (if they even can); and much higher capital requirements for banks under the Basel III Accord, making credit less available and more expensive.
AHA will work to ensure there is a proper balance of requirements to safeguard the availability of safe and judicious credit for home buying to protect the safety and soundness of the financial system, but also – and equally important – to ensure the business and regulatory policies promote sustainable homeownership and a healthy balance between supply and demand for housing in America. That balance is the key to ensuring a reasonable and sustainable value of America’s homes.
Mortgage Insurance Deduction
Mortgage insurance is a critical factor for many families seeking to become homeowners, as it allows borrowers to qualify for a mortgage with less than a 20% down payment and provides lenders and mortgage investors with the confidence they need to extend credit to these borrowers. Homeowners typically pay a monthly mortgage insurance premium for several years after they close on their home. Recognizing the value of mortgage insurance in the housing finance market, Congress enacted legislation in 2006 that allowed these homeowners to deduct some portion of their annual mortgage insurance premiums from their income taxes. Currently, the mortgage insurance deduction is limited to those with incomes under $110,000, assuring that the benefit of the deduction goes to those who need it the most. In 2010 alone, nearly 4.2 million families benefited from the mortgage insurance deduction, the majority of whom had incomes less than $60,000.
Unfortunately, the mortgage insurance deduction is only a temporary policy, creating uncertainty for taxpayers and will result in a tax increase for homeowners who claimed the deduction if the policy expires. AHA will work on behalf of 75 million homeowners and aspiring homeowners to make this important policy a permanent and reliable part of the tax code.