Ask the Economist: Why the Low Homeownership Rate Despite Signs of Recovery?

Sean Becketti has been the Chief Economist with Freddie Mac since June 2015. His extensive experience in the private sector, government, and academia includes positions with Flagstar Bank (SVP and head of modeling analytics) and senior executive roles with Washington Mutual and Wells Fargo, where he led research functions focused on mortgage markets and capital markets. This is his second tour of duty with Freddie Mac; in his previous tenure, from 1996 to 2001, he served in several senior financial and analytical roles. Earlier in his career, he served as senior economist with the Federal Reserve Bank of Kansas City and as an assistant professor of economics at UCLA. Dr. Becketti recently spoke with DS News about his role with Freddie Mac and America's homeownership rate.

What has been your top priority since joining Freddie Mac as the Chief Economist?

Freddie Mac has had the advantage of having two very long-termed Chief Economists. Bob Van Order was there for years and years, and he was a thought leader in the industry. Frank Nothaft was here after him for quite a few years, and he really had a well-known presence in the industry and was very well-respected. I certainly want to maintain that reputation for quality and industry integration. I'll be adding a few things to the position that weren't as much a part of the chief economist role in the past. In particular, we're in an era now of such rapid evolution in the industry, both on the private side and the GSE part of the industry. Regulation is changing rapidly. Our role is being redefined every year a bit by our conservator (FHFA), and we're certainly aware that at some point Congress and the administration will start to form a consensus about how they see the mortgage industry moving forward.

I think the Chief Economist role will start to emphasize how Freddie Mac enhances its role in that evolving space in a way that is consistent with the goals of the conservatorship. It highlights more of the significant business initiatives that Freddie Mac is carrying out that actually make for a better mortgage industry. We have several of those initiatives that are underway that maybe 10 years ago wouldn't have been highlighted as much. Certainly, the headline initiative that is very different from anything we did before is the credit risk transfer deals that we've been doing through our capital markets organization. We're selling off a lot of the credit risk of our mortgage securities to private investors and taking the taxpayer off the hook. I think we've been the industry leader on that front. We've been very creative and very successful in rolling that out.

Some of the initiatives that we're starting to ramp up center on improving our performance on providing affordability to borrowers. For the last seven or eight years, it's been a pretty rugged environment for borrowers compared to what they were used to. It's been particularly hard on borrowers who are in need of some sort of affordable homeownership or rental housing. We're focusing a lot on that area as well.

In terms of our partners in the industry, our customers, we have a big emphasis on improving the technology that's used to submit loans to us – to ensure the quality of loans during the underwriting process and to have more stability and predictability about that. It's more of an insider/technical issue, but it's crucial to our customers. In the past, the Chief Economist's office didn't get very involved in talking about those issues, but I think we'll probably get more involved in that. Not to take away from our traditional role of talking about the housing sector and the economy, but in addition to what we've done.

There have been lots of positive metrics pointing toward housing recovery in the last year, but the homeownership rate remains at its lowest point in decades. Why do you think this is?

We talk about this every day. It's important to put that statement into a little bit of context. The homeowership rate hit historical highs during the run-up to the crisis. There is certainly a line of reasoning to suggest that wasn't sustainable and it may not have been an appropriate target, but it has been a target of public policy. In order to achieve that rate of homeownership, there were certain practices in mortgage finance that we probably don't want to repeat going forward.

That said, it's still quite a low homeownership rate. There are a couple of benign reasons for that and then a couple of reasons that are more troubling. The benign reasons are more demographic. The group of millennials that are coming into traditional first-time homeownership age are not becoming homeowners at the same rate of previous generations. Some of that has to do with some of the hangover from the last recession. Their entry into the job market was slower. Their prospects were not as bright as previous generations early in their career. They are overcoming a heavier student debt load. There are some obstacles there that will probably work out over time, and of course, everyone in the industry is speculating, "When will the millennials start to look more like previous generations?" None of us really know the answer to that timing question, but it's something that we look at the incoming data every month for clues.

As far as the less benign reasons, there is a shortage of affordable rental housing, and that's driven rents up and made it harder for people to accumulate savings needed for a downpayment. This is happening in an environment where the credit box that most lenders are offering is much tighter than it has been historically. We've improved our underwriting guidelines to emphasize prudent lending, but if you compare our guidelines to what lenders are delivering, lenders are being more conservative than the GSEs are asking them to be. Part of that has nothing to do with the GSEs, but with the rapidly changing regulatory environment that banks and other mortgage lenders are facing, it's very challenging keeping up with the constant changes. There are also new regulators – the CFPB is something that didn't exist before the crisis. It's a new party at the table and banks are trying to figure out how they're going to deal with that. You see the evidence of that in the change in participation in mortgage lending. The top mortgage lenders – Wells Fargo, Chase, Citi – their share of the mortgage origination market has declined for the first time in years, and the smaller lenders are starting to pick up the slack. That really reflects a strategic decision by the largest lenders in light of the changing regulatory environment. Until that regulatory environment matures, and there's more certainty and more clarity about who will be doing which part of this businesses, there will probably be a lower than desirable homeownership rate even as the other transitory factors work their way through the system.