- Federal Housing Finance Agency released its annual Guarantee Fee Report, which tracks the upward trend in single family guarantee fees charged by Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act of 2008 requires FHFA to submit a report to Congress annually on guarantee fees. Guarantee fees are intended to cover the costs Fannie Mae and Freddie Mac incur for guaranteeing the payment of principal and interest on single-family loans they purchase from mortgage lenders. These costs include projected credit losses from borrower defaults over the life of the loans, administrative costs, and a return on capital.
- The U.S. Department of Housing and Urban Development in conjunction with Vanderbilt University released the Family Options Study in which presents the short-term impacts of the interventions in five domains related to family well-being: (1) housing stability, (2) family preservation, (3) adult well-being,(4) child well-being, and (5) self-sufficiency.
Tag Archives: mortgage finance
The Silent Housing Crisis
J. Ronald Terwilliger
The J. Ronald Terwilliger Foundation for Housing America’s Families, a new entity, has issued its first white paper on the Silent Housing Crisis: A Snapshot of Current and Future Conditions. The paper covers some of the same ground as another recent Urban Institute report that I had recently blogged about (and, indeed, it is informed by the work of those UI researchers, as can be seen in the endnotes), but it raises some interesting issues of its own.
The white paper opens with a quotation from President Truman’s Statement upon signing the Housing Act of 1949, which
establishes as a national objective the achievement as soon as feasible of a decent home and a suitable living environment for every American family, and sets forth the policies to be followed in advancing toward that goal. These policies are thoroughly consistent with American ideals and traditions. They recognize and preserve local responsibility, and the primary role of private enterprise, in meeting the Nation’s housing needs. But they also recognize clearly the necessity for appropriate Federal aid to supplement the resources of communities and private enterprise. (3)
The white paper argues that the United States
is unprepared for the tremendous challenges that a rapidly expanding renter population will pose to the already strained housing system. Absent a comprehensive and sustained policy response, it is likely that rental cost burdens will only grow in intensity and scope, undermining the stability and dampening the hopes of millions of American families. These conditions, in turn, will exacerbate income inequality, diminish the prospects of social mobility for countless individuals, make us less competitive in the global marketplace, and ultimately hinder America’s economic growth. (6)
While the white paper has a lot to offer in diagnosing problems in the American housing sector, I was surprised to find that it failed to discuss the role of restrictive zoning in increasing the cost of housing, particularly in the vibrant communities that are the main engines of job creation. Any serious effort to address the lack of decent and affordable housing has to tackle the problem of restrictive zoning.
The Terwilliger Foundation was founded in 2014 and “seeks to recalibrate federal housing policy so that it more effectively addresses our nation’s critical affordable housing challenges and meets the housing needs of future generations. The Foundation will offer a set of practical suggestions for tax, spending, and mortgage finance reform that is responsive to the ongoing crisis in housing and the profound demographic changes now transforming America. ” (2) It is good to have another voice in the mix on these important issues. The foundation’s namesake is the Chairman of Terwilliger Pappas Multifamily Properties and is the Chairman Emeritus of Trammell Crow Residential Company, the largest multifamily developer in the U.S. for many years.
Life Post-Fannie, Post-Freddie
The Congressional Budget Office has released a report, Transitioning to Alternative Structures for Housing Finance. This report
examines various mechanisms that policymakers could use to attract more private capital to the secondary mortgage market. The report also addresses how those mechanisms could be combined in different ways to help the market make the transition to a new structure during the coming decade. CBO analyzed transition paths to four alternative structures that involve choices about whether the government would continue to guarantee payment on mortgages and MBSs and, if so, what form and prices those guarantees would have. Under those different structures, the government’s activities would range from providing full or partial guarantees for a large share of the mortgage market to playing a minimal role in a largely private market (except perhaps during a financial crisis). Any transition to a new type of secondary market would also require decisions about what to do with the existing operations, guarantee obligations, and investment holdings of Fannie Mae and Freddie Mac. (1, footnotes omitted)
The report has three key findings:
1. A transition to a new structure for housing finance that emphasized private capital could reduce costs and risks to taxpayers. One drawback to such a transition is that mortgages could become somewhat less available and more expensive to borrowers. Thus, over the longer term, it could also result in a modest shift of the economy’s resources away from housing toward other activities.
2. Although the transition to a new structure could significantly decrease the number of borrowers who received mortgages backed by Fannie Mae or Freddie Mac, additional private capital would replace most of the lost funding. Borrowers would probably not face significant increases in interest rates because the two GSEs’ current pricing is not too far below market pricing. Consequently, a gradual transition would probably exert only modest downward pressure on house prices.
3. Because policymakers have already raised the guarantee fees charged by Fannie Mae and Freddie Mac close to those that CBO estimates would be charged by private insurers, the budgetary costs of the two GSEs’ activities over the next 10 years are expected to be small. As a result, the budgetary savings would also be small under any of the transition paths to a more private system that CBO considered. Thus, the choice between the different market structures probably rests primarily on considerations other than budgetary costs. (2)
I have been a long-time advocate for attracting more private capital to the secondary mortgage market, so I welcome this report. Given the public statements of the Obama Administration and the composition of the new Congress, there appears to be an opportunity to move in that direction. A bipartisan reform plan for the housing finance system will need to provide for a lender of last resort; appropriate consumer protection; and assistance for households that are underserved by the private market. There seems to be bipartisan will to reform this system, so we just need to chart a way to achieve it. This report leads us down the right path.
What Should the 21st Century Mortgage Market Look Like?
Treasury is requesting Public Input on Development of Responsible Private Label Securities (PLS) Market. Comments are due on August 8, 2014. The request for information wants input on the following questions:
1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?
2. What are the key obstacles to the growth of the PLS market? How would you address these obstacles? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?
3. How should new issue PLS support safe and sound market practices?
4. What are the costs and benefits of various methods of investor protection? In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances?
5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?
6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?
7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?
8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?
These are all important questions that go way beyond Treasury’s portfolio and touch on those of the FHFA, the FHA and the CFPB to name a few. Nonetheless, it is important that Treasury is framing the issue so broadly because it gets to the 10 Trillion Dollar Question: Who Should Be Providing Mortgage Credit to American Households?
Some clearly believe that the federal government is the only entity that can do so in a stable way and certainly history is on their side. Since the Great Depression,when the Home Owners Loan Corporation, the Federal Housing Administration and Fannie Mae were created, the federal government has had a central role in the housing finance market.
Others (including me) believe that private capital can, and should, take a bigger role in the provision of mortgage finance. There is some question as to how much capacity private capital has, given the size of the residential mortgage market (more than ten trillion dollars). But there is no doubt that it can do more than the measly ten percent share or so of new mortgages that it has been originating in recent years.
Treasury should think big here and ask — what do we want our mortgage finance to look like for the next eight or nine decades? Our last system lasted for that long, so our next one might too. The issue cannot be decided by empirical means alone. There is an ideological component to it. I am in favor of a system in which private capital (albeit heavily-regulated private capital) should be put at risk for a large swath of residential mortgages and the taxpayer should only be on the hook for major liquidity crises.
I also favor a significant role for government through the FHA which would still create a market for first-time homebuyers and low- and moderate-income borrowers. But otherwise, we would look to private capital to price risk and fund mortgages to the extent that it can do so. Round out the system with strong consumer protection regulation from the CFPB, and you have a system that may last through the end of the 21st century.
Comments are due August 8th, so make your views known too!
Social Security Numbers for Mortgages
McCormick and Calahan have posted Common Ground: The Need for a Universal Mortgage Loan Identifier, a Department of the Treasury Office Financial Research Working Paper (#0012). They argue that
The U.S. mortgage finance system is a critical part of our nation’s financial system, representing 70 percent of U.S. household liabilities. It is also highly complex, with many finance channels, participants, and regulators. The data produced by this system reflect that complexity; unfortunately, no single identifier exists to link the major loan‐level mortgage datasets. The establishment of a single, cradle‐to‐grave, universal mortgage identifier that cannot be linked to individuals using publicly‐available data would significantly benefit regulators and researchers by enabling better integration of the fragmented data produced by the U.S. mortgage finance system. Such an identifier could additionally serve as the foundation of a system that could benefit private market participants, as long as such a system protected individual privacy. (1)
This is a very important initiative, although the privacy concerns are very important to address. Regulators have been many steps behind the private sector in tracking developments in the mortgage markets and a cradle-to-grave identifier, like a Social Security Number for an individual, will help them (and private sector analysts for that matter) to track patterns among borrowers and loan products.
The authors identify a number of serious privacy concerns:
a mortgage identifier would have to be designed to prevent market participants from re‐identifying individuals. No links from public documents to mortgage identifiers should be allowed. Otherwise the identifier could be used to identify individuals, rendering all datasets containing the identifier personally‐identifiable information. Such a designation would create concerns about the use of individual data in the private sector and trigger burdensome requirements for government researchers using the data. (3)
Researchers have proven resourceful at mashing up data sets to identify supposedly anonymous individuals, so the privacy protections that are ultimately implemented would need to be airtight. That being said, there is a lot of value in working toward the goal of a universal identifier.
