Tag Archives: Federal Housing Administration

State of the Union’s Rental Housing

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The Joint Center for Housing Studies of Harvard University released its report, America’s Rental Housing: Evolving Markets and Needs. The report notes that

Rental housing has always provided a broad choice of homes for people at all phases of life. The recent economic turmoil underscored the many advantages of renting and raised the barriers to homeownership, sparking a surge in demand that has buoyed rental markets across the country. But significant erosion in renter incomes over the past decade has pushed the number of households paying excessive shares of income for housing to record levels. Assistance efforts have failed to keep pace with this escalating need, undermining the nation’s longstanding goal of ensuring decent and affordable housing for all. (1)

The report provides an excellent overview of the current state of the rental housing stock and households. Of particular interest to readers of this blog is how the report addresses the federal government’s role in the housing finance system. The report notes that

During the downturn, most credit sources dried up as property performance deteriorated and the risk of delinquencies mounted. Much as in the owner-occupied market, though, lending activity continued through government-backed channels, with Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) playing an important countercyclical role.

But as the health of the multifamily market improved, private lending revived. According to the Mortgage Bankers Association, banks and thrifts greatly expanded their multifamily lending in 2012, nearly matching the volume for Fannie and Freddie. Given fundamentally sound market conditions, multifamily lending activity should continue to increase. The experience of the last several years, however, clearly testifies to the importance of a government presence in a market that provides homes for millions of Americans, particularly during periods of economic stress. (5)

 The report, to my mind, reflects a complacence about the federal role in housing finance:

Although some have called for winding down Fannie’s and Freddie’s multifamily activities and putting an end to federal backstops beyond FHA, most propose replacing the implicit guarantees of Fannie Mae and Freddie Mac with explicit guarantees for which the federal government would charge a fee. Proposals for a federal backstop differ, however, in whether they require a cap on the average per unit loan size or include an affordability requirement to ensure that credit is available to multifamily properties with lower rents or subsidies. While the details are clearly significant, what is most important is that reform efforts do not lose sight of the critical federal role in ensuring the availability of multifamily financing to help maintain rental affordability, as well as in supporting the market more broadly during economic downturns. (8)

The report gives very little attention to what the federal housing finance system should look like going forward, other than implying that change should be incremental:

To foster further increases in private participation, the Federal Housing Finance Agency (FHFA—the regulator and conservator of the GSEs) has signaled its intent to set a ceiling on the amount of multifamily lending that the GSEs can back in 2013. While the caps are fairly high—$30 billion for Fannie Mae and $26 billion for Freddie Mac—FHFA intends to further reduce GSE lending volumes over the next several years either by lowering these limits or by such actions as restricting loan products, requiring stricter underwriting, or increasing loan pricing. With lending by depository institutions and life insurance companies increasing, the market may well be able to adjust to these restrictions. The bigger question, however, is how the financial reforms now under debate will redefine the government’s role in backstopping the multifamily market. Recent experience clearly demonstrates the importance of federal support for multifamily lending when financial crises drive private lenders out of the market. (27)

I would have preferred to see a positive vision from the Center for how the federal government should go about ensuring liquidity in the market during future crises and how it should support an increase in the affordable housing stock. Perhaps that is asking too much of such a broad report, although the fact that Fannie and Freddie are members of the Center’s Policy Advisory Board which provided funding for the report may have played a role as well. [I might add that I found it odd that the members of the Policy Advisory Board were not listed in the report.]

I do not want to end on a negative note about such a helpful report. I would note that it takes seriously some controversial ideas about increasing the supply of affordable housing.  The report advocates for the reduction of regulatory constraints on affordable rental housing construction. I interpret this as a version of the Glaeser and Gyourko critique of the impact of restrictive local land use regimes on housing affordability. As progressives like NYC’s new Mayor know, restrictive zoning and affordable housing construction are at cross purposes from each other.

A New History of Mortgage Banking — Part Two!

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I know, I know, you can’t get enough of this stuff. Yesterday, I noted a couple of highlights from Mortgage Banking in the United States 1870-1940. The last part of the report carefully documents how various players in the urban mortgage market saw their market and their market shares change dramatically as a result, in large part, of the new federal housing finance regime introduced in the 1930s:

All that was required for a historic surge in homebuilding and homeownership was a housing finance system. Local institutional portfolio lenders, now buttressed by deposit insurance and, in the case of S&Ls, the FHLB’s lending facilities, took up most of the business. But the inter-regional flow of credit that arbitraged imbalances across local markets was dominated by life insurance companies and their mortgage banking correspondents. Through 1952, most of these loans were insured under the FHA program, and for good reason — that program had worked well for these intermediaries in the late 1930s. The federally insured and guaranteed home mortgage loan business for life insurance companies and, later in the decade, mutual savings banks preoccupied mortgage bankers until the unusual conditions that fostered the expansion finally ran out in the 1960s. (2)

All of this historical detail brings home a key point for us today. The technical choices we make in structuring the federal housing finance system will alter the incentives of all of the current players. As we watch to see how the Qualified Mortgage, Qualified Residential Mortgage and Ability-to-Repay rules play out when they go into effect next year, we should know that they are likely to shape the mortgage market for decades to come. We already know that some mortgage products will be common and some rare because of these rules. But we should also be aware that some types of originators will be winners and some will be losers because of these rules, although it is too early (at least for me) to tell which will be which. And such an impact may shape the nature mortgage market as much as the types of products that eventually win out when the rules are fully understood by the industry.

A New History of Mortgage Banking

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Yes, I know, a dry subject for most. But for some nerds, there are lots of insights in Mortgage Banking in the United States 1870-1940. The author, Kenneth Snowden, highlights this finding, which gives more credit to the Federal Farm Loan Bank system for the development of the modern mortgage market than do many other histories of the industry:

The Federal Farm Loan Bank system and the FHA mortgage insurance programs that restructured both the farm and urban mortgage banking sectors shared three common features:

+     They each encouraged the widespread adoption of long-term, amortized mortgage loans.

+     They each created mechanisms to stimulate the inter-regional transfer of mortgage credit and the convergence of mortgage rates and lending terms across regions.

+     They each established federal chartering systems for privately financed European-style mortgage banks to create active secondary markets for long-term, amortized loans. (2)

This history provides a lot more detail than one finds in standard histories of the American mortgage market, including much about the early history of securitization. Writers in this area (myself included) tend to think that securitization was birthed in the 1970s, but Snowden documents some proto-securitizations in the early 20th Century. I will come back to this report in a later blog post, but I highly recommend it to serious students of the mortgage markets.

Reiss on New Mortgage Rules

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The Redding Record Searchlight interviewed me in Experts Worry New Loan Standards, Lending Limits Could Hurt Housing Market. It reads in part,

New mortgage qualification rules and lower FHA lending limits that take effect next year threaten to slow the housing market’s recovery.

*     *     *

David Reiss, a law professor at Brooklyn Law School in New York, said there is nothing wrong with tying the price of a loan to the risk.

“There is some talk that if it’s not a Qualified Mortgage loan, the cost for the creditor or lender will be higher and the cost will be passed on to the homeowner. That will probably be true,” Reiss said.

But Lawrence of Silverado Mortgage said just because one in five loans written today wouldn’t pass Qualifying Mortgage muster doesn’t necessarily suggest the loan would not be approved and closed under the new standards.

“Making a minor adjustment such as using a different interest rate and closing cost combination may allow a loan to meet the standard that it wouldn’t otherwise,” Lawrence said.

Lawrence knows there will be some loans for which an alternative can be found to resolve a Qualifying Mortgage issue.

“But I think most buyers start with getting pre-qualified before they find the home they’re interested in purchasing,” Lawrence said.

FHA’s Net Cost of $15 Billion

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The Congressional Budget Office posted FHA’s Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? In response to the question, “Has FHA’s Guarantee Program for Single-Family Mortgages Produced Net Savings to Taxpayers,” the CBO responds,

No. Collectively, the single-family mortgage guarantees made by FHA between 1992 and 2012 have had a net federal budgetary cost of about $15 billion, according to the most recent estimates by FHA. In contrast, FHA’s initial estimates of the budgetary impact of those guarantees sum to savings of $45 billion . . .. That swing of $60 billion from savings to cost primarily reflects higher-than-expected defaults by borrowers and lower-than-expected recoveries when the houses of defaulted borrowers have been sold—especially for loans made over the 2004-2009 period. (1)

The document contains a chart of estimates of the budgetary impact of the FHA’s single-family mortgage guarantees by year. It shows that the 2008 vintage was particularly bad, accounting for over $15 billion in losses by itself (the other years’ savings and costs would thus net out).

There are some disturbing aspects of this finding and some that are not. First, the disturbing ones. The FHA has not been transparent about its potential for losses and bailouts (see here for instance). Second, its own financial projections have been overly optimistic.

That being said, the mere fact that the FHA is expected to have losses is not in itself an indictment of the government’s strategy of using the FHA to provide liquidity to the mortgage markets during the financial crisis. If only this were done forthrightly . . . but perhaps that is too much to ask in the midst of the crisis itself.

Mortgage Reform Schooling on 30 Year Term

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S&P has posted U.S. Mortgage Finance Reform Efforts and the Potential Credit Implications to school us on the current state of affairs in Congress. It provides a useful lesson on three major mortgage reform bills introduced in Congress this year.  They are the Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner); Protecting American Taxpayers and Homeowners ACT of 2013 (PATH); and the FHA Solvency Act.

Given the current mood in D.C., S&P somewhat optimistically states that there “seems to be a bipartisan commitment to encourage private capital support for the U.S. housing market while winding down Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that hold dominant positions in the mortgage market.” (1) S&P uses this report as an opportunity to “comment on the potential credit implications of these mortgage finance reform efforts on several market sectors.” (1)

In this post, I focus on, and criticize, S&P’s analysis of the appropriate role of the 30 year fixed-rate mortgage. S&P states that

The 30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S. And while some market players have looked at current rates on jumbo mortgages (those that exceed conforming-loan limits) and suggested that the private market could support mortgage interest rates below 5%, we think this view is distorted. Jumbo mortgage rates carrying the lowest interest rates, for the most part, are limited to a narrow set of borrowers who have FICO credit scores above 750 and equity of roughly 30% in their homes. We don’t believe that these same rates would be available to average prime borrowers, such as those with credit scores of 725 and 25% equity in a property. (3)

While I think that S&P is probably right about the limited usefulness of comparing current jumbo loans to a broad swath of conforming loans, I see no support in their analysis for the assertion that the “30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S.” First, a 30-year FRM typically carries a higher interest rate than an ARM of any length. Second, a typical American household only stays in a home for about seven years. Thus, a 30-year FRM provides an expensive insurance policy against increases in interest rates that most Americans do not end up needing.

While we may end up providing governmental support for the 30-year FRM because of its longstanding popularity, S&P’s mortgage reform school should be based on facts, not fancy.

Reiss on the FHA and Low Downpayment Mortgages

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I will be speaking at the Cleveland Fed’s 2013 Policy Summit on Housing, Human Capital, and Inequality on Thursday, September 19 from 2:40PM-4:10PM.  My panel is on

Affordable Housing, Mortgage Underwriting, and Default: The Case of the FHA

In the past few years FHA’s market share has increased substantially, as have its default and foreclosure rates. Recently, the White House announced that the FHA may have to make a capital call to Treasury for the first time in its history, prompting much debate over the future of the organization. In this session, a panel of experts will discuss the FHA’s financial situation, its role in providing affordable housing, and explore potential policy responses.

Moderator:

Emre Ergungor, Senior Research Economist, Federal Reserve Bank of Cleveland

Speakers:

Edward J. Pinto, Resident Fellow, American Enterprise Institute, How the FHA Hurts Working-Class Families

David Reiss, Professor, Brooklyn Law School, How Low is Too Low? The Federal Housing Administration and the Low Downpayment Loan

Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York
Interpreting the Recent Developments in Housing Markets

My summary and implications are below and those for the other speakers can be found at the link above.

Summary and Findings
The Federal Housing Administration (FHA) has been a flexible tool of government since it was created during the Great Depression. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety additional social goals. It achieved success with some of its goals and had a terrible record with others. Today’s FHA is suffering from many of the same unrealistic underwriting assumptions that have done in so many subprime lenders as well as Fannie and Freddie. The FHA has come under attack for its poor execution of some of its additional mandates and leading commentators have called for the federal government to stop undertaking them. This article takes the long view and demonstrates that the FHA also has a history of successfully undertaking new programs. It also identifies operational failures that should be noted to prevent them from occurring if the FHA were to undertake similar ones in the future. The article first sets forth the dominant critique of the FHA and a history of its constantly changing role. It then addresses the dominant critique of the FHA and evaluates its priorities in the context of legitimate housing policy objectives. It concludes that the FHA has focused on an unthinking “more is better” approach to housing, but that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market.

Implications for Policy and Practice
Leading commentators on the FHA do not fully appreciate the extent to which down payment requirements alone drive the success and failure of new FHA initiatives. Central to any analysis of the FHA’s role is an understanding of its policies relating down payment size. Much of the FHA’s performance is driven by its down payment requirements, which have trended ever downward so that homeowners were able to get loans for 100% of the value of the house in recent times. As is obvious to all, the larger the down payment, the safer the loan. What appears to have been less obvious is that very small down payments are unacceptably risky. Given that the FHA insures 100% of the losses on its mortgages, the down payment requirement is a key driver of its performance. From an underwriting perspective, 20% is clearly desirable as the risk of default is very low even in a down market. But from an opportunity perspective, a 20% down payment requirement would keep large swaths of potential first-time homeowners from entering the market. If down payments are set too high, than an important social goal may be left by the wayside. So it is important that the public discourse weighs the costs and benefits of setting a fixed down payment requirement versus taking a risk layering approach to down payments. In either case, the FHA must balance the goal of safe underwriting with the goal of making homeownership available to households who could maintain it for the long term.