Government Housing Policy Failure
There have been so many recent examples of government failure on housing policy in America. Historically, the private sector figures out a way to deal with these failures with an “onward and upward” attitude. But it’s getting harder. We’ll give you some examples.
For more than 25 years, the two government agencies – Fannie Mae and Freddie Mac have required the use of a nearly antique credit scoring model as the exclusively accepted model to score consumers for a mortgage loan. It’s important, because Fannie and Freddie use these scores to decide what kind of mortgage rate and fees to charge aspiring homeowners. The problem is – they are demanding the use of a model that is constructed on consumer data and characteristics that were assimilated prior to 1999. Things have changed – but the use of this model hasn’t. And it allows Fannie and Freddie to use the benchmark to charge many consumers excess fees called Loan Level Price Adjustments. It’s pretty easy to surmise that with more modern credit scoring models, many people might be able to escape these punishing fees or get a lower rate. It gets more egregious. There is a competing credit scoring model used by many lenders for credit card, auto, student loans and other extensions of credit. In fact, we read that over 2,000 lenders – when given a free market choice to decide which model to use – have selected the use of the more modern credit scoring model. Except they can’t use the more modern model in the mortgage sector because the government policy won’t let them. On top of that, the more modern scoring model reports it can provide a credit score to nearly 40 million people who can’t get a score through the legacy model required by Fannie and Freddie. And of those 40 million consumers, they report that nearly 10 million would have a credit score of 620 or above and might be eligible for mortgage finance now or soon. There is pressure on Fannie and Freddie to allow competition in credit score model development, and if it happens, it will have taken 25 years or more to break through the government sanctioned monopoly.
Let’s move on to another example. The National Association of Homebuilders (NAHB) reports that builders are nearly 5 million units behind the need generated by the new household formation in America over the past 10 years. Why? Primarily because government policy has put a stranglehold on builders that simply can’t be overcome. NAHB recently reported that the average Regulatory and Compliance cost for the average builder to build the average home on America has risen to $84,000 per house. Yes – PER HOUSE! How in the world can affordable homes be built if the builder knows they are going to experience $84,000 of Regulatory and Compliance cost before they put the shovel in the ground? They can’t. When you add the cost of the land – the infrastructure [streets / water / sewer / etc.] and the cost of lumber – the other materials – labor costs – and more – builders can’t possibly build affordable single family homes.
Let’s keep going – add the skyrocketing cost of lumber mostly as a result of government imposed tariffs on Canada and the eyebrow raising environmental rules prohibiting the harvest of trees in the US and you add fuel to the fire. But there is more.
During the Financial Crisis of 2006-2011 the Banking Regulators put hefty restrictions on banks that loaned money to homebuilders for acquisition of land – development of projects – and construction of homes. These so called “ADC” constrictions were devastating to builders. Most homebuilding projects of any size take 5-7 years from start to finish. These restrictions we so onerous that builders couldn’t pay the cost of capital / reserves / and meet the leverage restrictions imposed on them by the government regulators, and it cost America dearly in trying to keep up with demand. Recently, the regulators relaxed the requirements, but they only reconstituted the requirements that were in place before the Financial Crisis. If the government cared about meeting the pent up demand and the shortfall of the past ten years, they would relax the requirements even further to stimulate homebuilding. But – that hasn’t happened and we just keep falling further and further behind.
The shortage of supply has caused a rampant increase in the cost of homes, both new and existing. It’s simply demand far outpacing supply. The NAHB just published their “priced out” index. It shows that 75.1 million households in America can no longer afford to buy a median priced new single family home. That’s 60% of American Households. That is government failure at its best!
But there’s more. In January, the Treasury Department and the Regulator of Fannie Mae and Freddie Mac (the Federal Housing Finance Agency [FHFA]) issued a new decree stating that Fannie Mae and Freddie Mac could only have 6% of the mortgages they buy come from consumers with two of the three following characteristics:
If you have a credit score of 680 or less // if you have a debt to income ratio of 45% or greater // or if you have less than 10% down payment. Sadly – and the government must know this - first time homebuyers FREQUENTLY hit all three of those benchmarks!
Yes – we stated it correctly – 6% of the volume of mortgages is the max from these type borrowers. Not 60%....6%.
Most times in the past when there were gnarly restrictions like these imposed in the conventional mortgage arena – the accommodation window would just open wider at the government mortgage program – FHA. But recent delinquency numbers just reported by FHA indicate that about 17% of FHA loans are delinquent and nearly 12% of them are seriously delinquent. With these kind of performance indicators, the likelihood of FHA expanding its window of accommodation seems highly unlikely.
And that’s not all. Recently, while we’re still dealing with the COVID 19 pandemic, seemingly out of nowhere, two government controlled agencies - Fannie Mae and Freddie Mac - instituted a whopping new penalty on any homeowner wishing to refinance their loan to use their equity for nearly any reason. In many cases during this pandemic, homeowners needed to use the equity in their home to survive – to help elderly parents – to help pay for college tuition for their kids – to keep their homes in good repair - or other critical reasons. But – because these government agencies decided to impose these new fees, many homeowners have had to reconsider their choices. Essentially, it’s a government agency telling homeowners that a portion of the hard earned homeowner equity now belongs to the government. Just because the government can and does set the rules. It’s grossly unfair – but what is an individual homeowner to do?
If we don’t reverse these terrible government housing policy decisions, we’re going to end up with a society of “Involuntary Renters”. And massive new rental demand will lead to rent saturation… and then a cry for broad rent subsidies. Who do you think will pay for those – yep, you guessed correctly – homeowners!
The only thing that will make Members of Congress and other Policy Makers pay attention is the voice of existing and aspiring homeowners. Because you vote! And you pay most of the taxes in America as well. We built the America’s Homeowner Alliance to offer you a voice in Washington. If you’re an existing or aspiring homeowner and you haven’t yet joined – please join now! Your lifetime membership will be FREE.
We need you to help give us the strength to change these mounting bad government housing policy decisions.
America is recovering from the pandemic and the resulting economic fallout. But we won’t recover from these really bad trends unless we bond together and take action. We’ve simply got to get more aggressive – and bold – and demanding. Give us a chance to deliver policy makers a crisp message…”meet the needs of the aspiring and existing homeowners in America – or we’ll find policy makers who will”.