These Key Issues affect the 75 million homeowners and aspiring homeowners of America.
The Mortgage Credit Crisis
CREDIT & FINANCE
The Mortgage Bankers Association just reported that “credit availability reached its lowest level since 2014”. It’s going in the wrong direction, but it’s going to get a LOT WORSE because of new government policy soon to be implemented.
The Single Family Housing Shortage Crisis
It’s a full-blown crisis. It’s been growing into a crisis since 2010 but policy makers seem to have had their eyes closed about it for more than 10 years. This might open their eyes….this crisis won’t get fixed without intervention!
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.
Owner-Occupant Housing Inventory Crisis
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 homes for first-time or 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, which 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. The other major contributing factor to today’s housing inventory crisis is a lack of available existing homes for owner occupants. Existing homes for sale have declined for 21 consecutive months and likely will continue to do so as interest rates rise. Today’s would-be homeowners are being pushed out to 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 to bid on a vacant property when it comes onto the market. 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 or the Federal Housing Administration (FHA). Without it, the current transfer of wealth (most of which comes from owning a home) from typical American owner-occupants (Main Street) is being transferred to investors (Wall Street).
Access to Credit
More modern and predictive credit scoring models are available in the marketplace, but are prohibited from use by Fannie Mae, Freddie Mac and the Federal Housing Administration (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 their more modern methodologies of credit scoring analysis, more than 30 million people would become “scoreable” who are not so today. In addition, there would be a few million people who would be “mortgage eligible” immediately. If VantageScore is accurate that there were approximately 8 BILLION uses of VantageScore in the credit markets last year, and NONE in mortgage finance (because Fannie, Freddie and the 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.
Reduction in Fannie Mae and Freddie Mac Fees
Last year, 25 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 (the Government Sponsored Enterprises, or GSEs) that are passed on as increased costs to homebuyers. These are fees that Fannie Mae and Freddie Mac layer on top of the mortgage interest rate that 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 mortgage market reforms ushered under the Dodd-Frank Wall Street Reform Act and Consumer Protection Act. As a result, millions of consumers are “boxed out” of homeownership opportunity because of these excessive fees. The Federal Housing Administration (FHA), which competes with the GSEs, has reduced its fees for the same type of risks even though its insured loans do not perform nearly as well as loans purchased by Fannie Mae and Freddie Mac.
There is little correlation between the risk posed by the mortgage borrower and the excessive fees charged by Fannie Mae and Freddie Mac. Millions of potential homeowners are negatively impacted, and it is imperative that they be lowered to rational and actuarially sound levels.
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. MI is the primary driver in incentivizing mortgage lenders to lend money to consumers who have less than a 20% down payment. The MI industry paid out more than $50 billion in claims during the foreclosure crisis and weathered the storm of the wave-upon-wave of defaults. It was $50 billion that taxpayers did NOT have to pay. In nearly every measurable way, MI performed better than Fannie Mae and Freddie Mac and with fewer resources. As a result, AHA believes 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 the 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, Fannie Mae and Freddie Mac from the first 50% of loss if the borrower defaults and the home is sold for less than is owned. One study suggests that borrowers costs would be lowered if the private mortgage insurance industry assumed this risk rather than Fannie Mae and Freddie Mac.
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 air ports, AHA asks 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 - America desperately needs it.
Tax Reform and the Mortgage Interest Deduction
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. It is the demonstrative housing policy emphasizing individual homeownership in America that benefits communities, lowers crime, increases education, facilitates new business formation, and supports essential public services. Any “signal” in the tax reform debate to materially alter the Mortgage Interest Deduction or reduce incentives for tax itemization would have vast 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.
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, homeowners whose 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 building home equity is erased overnight by souring property values attributable to the blighted property next door or down the street. To help protect value for remaining homeowners, industry and government entities that control vacant and abandoned properties need to step up their efforts to dispose of the properties so they do not hang in a zombie state forever and deteriorate to the point where they never could be a place to call home. Secondly, as long as the property remains vacant, it needs to be safely and attractively secured with materials such as polycarbonate or clearboard, not plywood. Fannie Mae, Freddie Mack, the Veterans Administration, the state of Ohio, and a number of other communities around the country already have taken steps to encourage the use of clearboard; however, more could be done. States, financial institutions, and federal government agencies that control these properties need to be convinced to use all available tools to preserve vacant houses for future homeowners.
Right-Sizing Government Regulation of Mortgage Lending
In the lead up to the Great Recession, consumers of America often were victimized by predatory and abusive lending practices. New laws and regulations to protect consumers from these unscrupulous practices were, and continue to be, necessary. However, regulation for regulation’s 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 review of 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.
Wide Availability and Affordability of the 30-Year Fixed Mortgage
The development (primarily in America) of the Secondary Mortgage Market allowed for the creation of the 30-year fixed rate mortgage. This mortgage instrument is the preferred method of financing for most homeowners, and is essential to allow homeowners to budget and plan on a weekly, monthly and annual basis. If policymakers are not careful in how they construct the future of Fannie Mae, Freddie Mac and the Federal Housing Administration (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 1960s and 1970s, which was primarily reduced to adjustable short-term mortgages. Potential homeowners could lose 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 at prices that are affordable to everyone.
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 the role of the Federal Housing Administration (FHA) and the permanent role of Fannie Mae and Freddie Mac (Government Sponsored Enterprises or GSEs). 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 mortgage finance industries that today impede homeownership at all levels.