Tag Archives: home construction

What Is at Stake with the FHA?

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The Hill published my column, The Future of American Home Ownership Under President Trump. It reads, 

One of the Trump Administration’s first official actions was to reverse the Federal Housing Administration (FHA) mortgage insurance premium cut that was announced in the last days of President Obama’s term.  This is a pretty obscure action for Trump to lead with in his first week in office, so it is worth understanding what is at stake with the FHA and what it may tell about the future of homeownership in the United States. 

The FHA has roots that stretch back to the Great Depression.  It was created to provide liquidity in a mortgage market that was frozen over and to encourage consumer-friendly practices in the Wild West mortgage and home construction markets of the early 20th century.  It was a big success on both fronts

After the Great Depression, the federal government deployed the FHA to achieve a variety of other social goals, such as supporting civilian mobilization during World War II, helping veterans returning from the War, stabilizing urban housing markets during the 1960s, and expanding minority homeownership rates during the 1990s. It achieved success with some of these goals and had a terrible record with others, leading to high rates of default for some FHA programs.

In the last few years, there have been calls to significantly restrict the FHA’s activities because of some of its more recent failures. Trump’s policy decisions for the FHA will have a big impact on the nation’s homeownership rate, which is at its lowest in over 50 years. This is because the FHA is heavily relied upon by first-time homebuyers.

We do not yet have a good sense of how President Trump views the FHA because he had very little to say about housing policy during his campaign. And his choices to lead the Department of Housing and Urban Development, Ben Carson, and the Treasury Department, Steven Mnuchin, had little to add on this subject during their Senate confirmation hearings.

The 2016 Republican Party Platform does, however, offer a sense of where we might be headed: “The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials.”

This vague language refers to two concrete policies that have their roots in actions taken by the FHA during the Bush and Obama administrations. The reference to the support given to “high-income individuals” refers to the fact that Congress significantly raised FHA loan limits starting in 2008, so that the FHA could provide liquidity to a wider swath of the mortgage market. The GOP is right to question whether that the FHA still needs to provide insurance for $500,000 and more mortgages now that the market has stabilized.

The GOP’s statement that taxpayers “should not be financially exposed by risks taken by FHA officials” refers to the fact that the FHA had a lot of losses as a result of the financial crisis. These losses resulted in the FHA failing to meet its statutorily-required minimum capital ratio starting in 2009. In response to these losses, the FHA increased the mortgage insurance premiums it charged to borrowers.

While the FHA has been meeting its minimum capital ratio for the last couple of years, premiums have remained high compared to their pre-crisis levels. Thus, the GOP’s position appears to back off from support for homeownership, which has been a bipartisan goal for nearly 100 years.

The FHA should keep its premiums high enough to meet its capital requirements, but should otherwise promote homeownership with the lowest premiums it can responsibly charge. At the same time, FHA underwriting should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. That way the FHA can extend credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts by taxpayers.

This is the most responsible way for the Trump administration to rebuild sustainable homeownership for a large swath of Americans as we recover from the brutal and compounding effects of the subprime crisis, financial crisis and foreclosure crisis.

State of the Nation’s Housing Finance

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The Joint Center for Housing Studies of Harvard University has released the 2014 edition of The State of the Nation’s Housing. As to the nation’s housing finance system, the report finds that

The government still had an outsized footprint in the mortgage market in 2013, purchasing or guaranteeing 80.3 percent of all mortgages originated. The FHA/VA share of first liens, at 19.7 percent, was well above the average 6.1 percent share in 2002–03, let alone the 3.2 percent share at the market peak in 2005–06. Origination shares of Fannie Mae and Freddie Mac were also higher than before the mortgage market crisis, but less so than that of FHA. According to the Urban Institute’s Housing Finance Policy Center, the GSEs purchased or guaranteed 61 percent of originations in 2012 and 2013, up from 49 percent in 2002 and 2003.

Portfolio lending, however, has begun to bounce back, rising 8 percentage points from post-crisis lows and accounting for 19 percent of originations last year. While improving, this share is far from the nearly 30 percent a decade earlier. In contrast, private-label securitizations have been stuck below 1 percent of originations since 2008. Continued healing in the housing market and further clarity in the regulatory environment should set the stage for further increases in private market activity. (11)

As usual, this report is chock full of good information about the single-family and multi-family sectors. I did find that some of its characterizations of the housing market were lacking. For instance, the report states

Many factors have played a role in the sluggish recovery of the home purchase loan market in recent years, including falling household incomes and uncertainty about the direction of the economy and home prices. But the limited availability of mortgage credit for borrowers with less than stellar credit has also contributed. According to information from CoreLogic, home purchase lending to borrowers with credit scores below 620 all but ended after 2009. Since then, access to credit among borrowers with scores in the 620–659 range has become increasingly constrained, with their share of loans falling by 6 percentage points. At the same time, the share of home purchase loans to borrowers with scores above 740 rose by 8 percentage points.

Meanwhile, the government sponsored enterprises (GSEs) have also concentrated both their purchase and refinancing activity on applicants with higher credit scores. At Fannie Mae, only 15 percent of loans acquired in 2013 were to borrowers with credit scores below 700—a dramatic drop from the 35 percent share averaged in 2001–04. Moreover, just 2 percent of originations were to borrowers with credit scores below 620. The percentage of Freddie Mac lending to this group has remained negligible.

Yet another drag on the mortgage market recovery is the high cost of credit. For borrowers who are able to access credit, loan costs have increased steadily. To start, interest rates climbed from 3.35 percent at the end of 2012 to 4.46 percent at the end of 2013. This increase was tempered somewhat by a slight retreat in early 2014. In addition, the GSEs and FHA raised the fees required to insure their loans after the mortgage market meltdown, and many of these charges remain in place or have risen. The average guarantee fee charged by Fannie Mae and Freddie Mac jumped from 22 basis points in 2009 to 38 basis points in 2012. In 2008, the GSEs also introduced loan level price adjustments (LLPAs) or additional upfront fees paid by lenders based on loan-to-value (LTV) ratios, credit scores, and other risk factors. LLPAs total up to 3.25 percent of the loan value for riskier borrowers and are paid for through higher interest rates on their loans. (20)

Implicit in this analysis is the view that lending should return in some way to its pre-bust levels. But, in fact, much of the boom lending was unsustainable for many borrowers. The analysis fails to identify the importance of promoting sustainable homeownership and instead relies on one dimensional metrics like credit denials for those with low credit scores. Until we are confident that borrowers with those scores can sustain homeownership in large numbers, we should not be so quick to bemoan credit constraints for people with a history of losing their homes to foreclosure.

The Center’s analysis also takes a simplistic view about guarantee fees.  The relevant metric is not the absolute size of the g-fee. Rather, the issue should be whether the g-fee level achieves its goals. At a minimum, those goals include appropriately measuring the risk of having to make good on the guarantee.

Finally, the Center demonstrates symptoms of historical amnesia when it characterizes an interest rate of 4.46% as “high.” This is an incredibly low rate of interest and one would expect that rates would rise as we exit from the bust years.

I have made the point before that the Center’s work seems to reflect the views of its funders. The funders of this report (not identified in the report by the way) include the National Association of Home Builders; National Association of Realtors; National Housing Conference; National Multifamily Housing Council; and a whole host of lenders, builders and companies in related fields that make up the Center’s Policy Advisory Board. These organizations benefit from a growing housing sector. This report seems to reflect an unthinking pro-growth perspective. It would have benefited from a parallel focus on sustainable homeownership.