Tag Archives: Housing Finance Policy Center

Mortgage Credit Conditions Easing

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Home of Easy Credit

The Urban Institute’s Housing Finance Policy Center has released its July Housing Finance at a Glance. It opens,

Our latest update to HFPC’s Credit Availability Index (HCAI) shows early signs that the overly tight mortgage lending standards of the post-crisis period may finally be starting to ease. This HCAI update shows improvements for both GSE and FHA/VA channels. Between Q3 2013 and Q1 2015, the expected mortgage default rate increased from 1.8 to 2.1 percent (17 percent increase) for GSE originations, and from 9.6 to 10.8 percent (a 13 percent increase) for FHA/VA originations. The expected default rate for portfolio loans and PLS channels has remained largely flat at 2.6 percent over this period.

Long overdue, these improvements are largely a result of efforts to clarify put-back standards and conduct early due diligence. While the FHA has lagged the GSEs in these efforts, it has made some progress. Still, more needs to be done, especially to mitigate uncertain lender litigation risk arising out of FHA’s False Claims Act.

These improvements notwithstanding, there is still significant room to safely expand the credit box. Even if the mortgage market had taken twice the default risk it took in Q1 2015, that level would have still been below the level of default risk of the early 2000s. (3)

This excellent chartbook contains many very interesting graphs. I recommend that you look at the National Housing Affordability Over Time graph in particular. It shows that housing “prices are still very affordable by historical standards, despite increases over the last three years.” (16)

Homeowners Heading to Pottersville?

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Lionel_Barrymore_as_Mr._Potter

Mr. Potter from It’s A Wonderful Life

The Urban Institute has issued a report, Headship and Homeownership: What Does The Future Hold? The report opens,

Homeownership rates averaged around 64 percent until about 1990, when they began to climb dramatically, reaching 67.3 percent in 2006. The housing crisis that began in 2007 and the ensuing recession, from which the US economy is recovering slowly, resulted in a fall in the homeownership rate to 63.6 percent, according to the latest ACS numbers. Such a trajectory has generated important questions about the future of homeownership at all ages. The issues with young adults seem particularly acute. Will young adults want to own houses? Even if they do, will they be able to afford homeownership? The answers to these questions are still unclear, especially because millennials are not just slower to start their own households and purchase homes: they also are more likely to live in their parents’ homes than any generation in recent history. The rapidly changing racial and ethnic composition of the population also has profound implications for household formation and homeownership.

In this report, we dive deeply into the pace of household formation and homeownership attainment—nationally and by age groups and race/ethnicity over the past quarter-century—and project future trends. Considering the great uncertainty about household formation and homeownership, single-point forecasts of homeownership rates and housing demand could seriously mislead policymakers and obscure the potential implications of their decisions. Instead, we offer plausible competing scenarios for household formation and homeownership that generate a range of future national housing demand projections. (1)

I am not in a position to evaluate how well the report projects future trends, but some of its conclusions are worth considering together:

  • the homeownership rate will decline from 65.1 percent in 2010 to 61.3 percent in 2030; (46)
  • the rapid growth of the renter population will create significant demand for new rental housing construction and encourage shifting of owner-occupied dwellings to rentals; (47)
  • very tight credit availability standards will retard homeownership attainment and may exacerbate the growing shortage in rental housing; (48) and
  • the erosion of black homeownership needs to be addressed by more than mortgage policy. (48)

Taken together, these conclusions all point to a backsliding in the housing market: the American Dream disappearing for millions of Americans, particularly African Americans, who will end up living in overcrowded Pottersvilles straight out of It’s A Wonderful Life. Just like George Bailey, we have choices to make before that nightmare becomes a reality. But before we decide anything too hastily, we should consider the fundamental goals of housing policy.

I have argued that a “fundamental goal of housing policy is to assist Americans to live in a safe, well-maintained and affordable housing unit.” I am less convinced than most housing scholars that homeownership, given the state of today’s economy, is such a sure road to stable housing and financial well-being. So, instead of blindly focusing on increasing the homeownership rate, I would focus on increasing opportunities for sustainable homeownership. I believe the report’s authors would agree with this, but I think that housing scholars in general need to focus on policies that keep households in their housing, given how much income instability they now face.

Housing Finance Reform at the AALS

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The Financial Institutions and Consumer Financial Services Section and the Real Estate Transactions section of the American Association of Law Schools hosted a joint program at the AALS annual meeting on The Future of the Federal Housing Finance System. I moderated the session, along with Cornell’s Bob Hockett.
Former Representative Brad Miller (D-N.C.) keynoted.  Until recently he was a Senior Fellow, at the Center for American Progress and is now a Senior Fellow at the Roosevelt Institute. He was followed by four more great speakers:
The program overview was as follows:
The fate of Fannie Mae and Freddie Mac are subject to the vagaries of politics, regulation,public opinion, the economy, and not least of all the numerous cases that were filed in 2013 against various government entities arising from the placement of the two companies into conservatorship. All of these vagaries occur, moreover, against a backdrop of surprising public and political ignorance of the history and functions of the GSEs and their place in the broader American financial and housing economies. This panel will take the long view to identify how the American housing finance market should be structured, given all of these constraints. Invited speakers include academics, government officials and researchers affiliated to think tanks. They will discuss the various bills that have been proposed to reform that market including Corker-Warner and Johnson-Crapo. They will also address regulatory efforts by the Federal Housing Finance Agency to shape the federal housing finance system in the absence of Congressional reform.
During the presentations, I felt a bit of awe for the collective knowledge of the speakers.  The program also emphasized for me how much there always is to learn about a topic as complex as housing finance.
Laurie Goodman was kind enough to let me post her PowerPoint slides from the program. If you are looking for a good overview of the current state of housing finance reform, you will want to take a look at them.
I was a bit depressed by the slide titled, “Why GSE reform is unlikely before 2017:”
1. There is no sense of urgency: GSEs are profitable, current system is functioning.
2. Higher legislative priorities.
3. No easy answers as to what a new housing finance system should look like.
4. Bipartisan action requires compromise, and some believe they have more to lose than to gain by compromising in this arena.
While the slide depressed me, I think it offers a pretty realistic assessment of where we are. I hope Congress and the Obama Administration prove me wrong.

Accurately Measuring Mortgage Availability

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The Urban Institute’s Housing Finance Policy Center has posted a research report, Measuring Mortgage Credit Availability Using Ex-Ante Probability of Default. This report tackles an important subject:

How to strike a balance between credit availability and risk to achieve a sustainable housing market is a much-debated topic today, but these discussions are not grounded in good measurements of credit availability and risk. We address this problem below with a new index that measures credit availability and risk simultaneously

The first section of the paper discusses the limitations of the existing measures. The second section describes our development of the new index, which distills borrower credit profiles, loan products and terms, and macro economic conditions into a measurement of the weighted average probability of default for mortgages originated at a given time. The third section illustrates the value of this measure by empirically exploring the varying risk appetites of the market as a whole, and of market segments, which directly aids evidence-based policymaking on how to open the tight credit box. The final section discusses the limitations of this new index. (1)
The report concludes,
Measuring a concept as complicated and varied as credit access is no easy task. Yet this is an important time to ensure that it is being measured accurately. As we seek to reform the housing finance system, Congress, the housing finance industry, advocacy groups, policymakers, and even the general public need to clearly understand how well the market is providing access to mortgage credit for borrowers. (18)
I say amen to that. There is a slim chance that housing finance reform may be back on the table in Washington, given the midterm election results. We need as much good data we can get in order to structure a system based on solid principles rather than on the views of special interests that typically dominate this debate.
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Housing Finance at A Glance

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The Urban Institute’s Housing Finance Policy Center really does give a a nice overview of the American housing finance system in its monthly chartbook, Housing Finance at A Glance. I list below a few of the charts that I found particularly informative, but I recommend that you take a look at the whole chartbook if you want to get a good sense of what it has to offer:

  • First Lien Origination Volume and Share (reflecting market share of Bank portfolio; PLS securitization; FHA/VA securitization; an GSE securitization)
  • Mortgage Origination Product Type (by Fixed-rate 30-year mortgage; Fixed-rate 15-year mortgage; Adjustable-rate mortgage; Other)
  • Securitization Volume and Composition (by Agency and Non-Agency Share of Residential MBS Issuance)
  • National Housing Affordability Over Time
  • Mortgage Insurance Activity (by VA, FHA, Total private primary MI)

As with the blind men and the elephant, It is hard for individuals to get their  hands around the entirety of the housing finance system. This chartbook makes you feel like you got a glimpse of it though, at least a fleeting one.

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.