The year ahead is shaping up to be one of great change in housing with uncertainty lurking around every corner. Brian Montgomery, industry expert and veteran of both the Bush and Obama Administrations, gives his insight on what to expect.
During the depths of the housing crash while writing a similar year-ahead piece, I borrowed a line from the noted science fiction writer Ursula LeGuin, who years ago opined, “the only thing that makes life possible is permanent, intolerable uncertainty – not knowing what comes next.” A very wide swath of the housing industry is witness to Ms. LeGuin’s observation every workday, although as we look toward 2015, I think it appropriate to partially modify the idea to suggest that we are about to embark on a new stage of “tolerable” uncertainty.
One uncertainty became very clear November 4 when the Republican juggernaut swamped the moribund Democrats, giving the GOP control of the Senate while also expanding the Republican lead in the House to its highest level since 1946. Notably, this will be the first time Republicans have controlled both chambers in almost a decade. What that might mean for housing finance reform is unclear, as a House bill pushed by Rep. Jeb Hensarling (R-Texas) never got out of committee, and a somewhat bi-partisan Senate bill stalled out.
That said, the “tolerable uncertainty” of the housing market and all it encompasses remains with us for the foreseeable future. Given the difficulty of predicting anything coming out of Washington these days, I’m going out on a limb to speculate about what the shift could mean for some of our favorite housing finance policy topics . . . from GSE reform to the future of the FHA.
GSE Reform
On the oft-mentioned topic of GSE Reform, the conventional wisdom would be nothing happens legislatively for two years. FHFA Director Mel Watt has previously signaled his desire to leave the legislative action to Congress but could continue to make administrative changes, including developing a 95 percent to 97 percent LTV loan product in an effort to help bolster more lending to working-class families.
I have previously opined that the next president could have within his or her electoral mandate the “need for a level playing field for working families wanting to buy their first home” or words to that effect. The president-elect will demand some level of change to the current housing finance system and ask for a bill within six months. And I suspect he or she will get one. Unfortunately for all of us, I’m forced to predict that the next president will need to step up and lean into this issue, because it is doubtful there will be movement over the next two years.
External events, including lawsuits stemming from revisions to the conservatorship agreements between Treasury and the GSEs, have given rise to groups like Investors Unite, who are fighting what has been the permanent suspension of their rights as shareholders. That might cause a movement toward some level of reform either through legislation, legal, or administrative action. Yet one could offer that the interests of these investors conflict with those of the American taxpayer, who both bankrolled and benefited from the GSEs during the crisis by covering the companies’ losses to ensure ongoing liquidity to the marketplace.
While I don’t normally think of Vladimir Lenin and GSE reform, his quote from 100 years ago could apply to our current state of housing finance: “There are decades where nothing happens; and there are weeks where decades happen.”
In short, external events and political mass may collide and somehow create momentum for GSE reform and in the blink of an eye, what heretofore had only been abstract theory becomes reality. However, given the dynamics at play, it seems much more likely to assume that the current GSE state remains and many more American people grow increasingly outraged at their inability to realize the so-called American Dream.
Homeownership Rates
Despite mortgage rates at near-record lows and house prices at affordable levels in many markets, the percentage of first-time homebuyers fell to 33 percent in 2014, which is the lowest percentage in almost 30 years, according to the National Association of Realtors. In most years, the percentage of first-time buyers is around 40 percent of home sales.
The overall homeownership rate in America has fallen to its lowest level since 1995. According to the U.S. Census Bureau, the overall homeownership rate in the third quarter of 2014 stood at 64.4 percent, down from just over 69 percent. The homeownership rate for minorities was notably lower, with African-Americans at 42.9 percent and Hispanics at 45.6 percent.
Will 2015 present an opportunity to restore homeownership to at least pre-crisis levels, particularly for diverse communities who suffered a greater proportion of foreclosures? The opportunity certainly exists to make some gains in 2015, particularly if policymakers and industry leaders can find common ground to improve access to credit for those most in need. However, I am skeptical that this administration can make the case for homeownership without acknowledging that their policies have caused some degree of market contraction. Absent any honest assessment of the role of the government in stifling market recovery, I don’t see significant change until the next presidential election.
Further, demographics affect the trends, with an ever-aging boomer population and the enormous millennial gang descending upon the market. Is the decrease in homeownership a reflection of these 80 million or so millennials who are overburdened by student loan debt and a challenging employment market, simply not being able to or willing to make a commitment to homeownership? Or is it a result of tightened credit policy, often further constricted by lenders as they insulate themselves and their shareholders from repurchase risk by enforcing overlays to program credit policies?
Might it be that potential homebuyers find it difficult to compete with institutional, international, and local investors on the acquisition of property? Most likely some combination of the above, plus the emotional scars of observing parents and others suffer through the hardship of delinquency, foreclosure, and loss of their dreams have caused these young households to choose to rent or stay in an extended family household situation.
Homeownership Opportunities for Minorities
Immense opportunity exists to better serve our diverse populations, particularly the rapidly growing Hispanic segment. Household formations in the Hispanic community are expected to grow considerably in the next decade and beyond. If we take into consideration potential immigration reform, millions of additional households may become eligible for financing. The potential positive impact to the housing market and our communities is significant.
Affordability will be a central consideration for these and other households in America. The Federal Reserve’s decision to end QE3 (Quantitative Easing) was expected and supported by many. After all, how long can the Fed artificially support the marketplace? While no surprise, the market must anticipate an increase in interest rates. While many suggest that an increase in rates will help to drive down home prices, the overall effect on access to credit for first-time homebuyers and minority homebuyers is unclear, particularly those most in need of low down-payment financing.
Regulatory Environment
Let’s turn to regulation of the housing industry and the fallout resulting from the crisis. Granted, additional oversight was appropriate and some level of punishment warranted.
That said, further government action needs to be tempered. The aggressive legal and enforcement actions are now creating an environment where lenders are extremely cautious for fear of future fines and liability. At this stage, there is a need to balance the pursuit of bad acts and provide a path for good actors to take more risk with an opportunity to cure mistakes. Such balance is increasingly challenging for lenders in an environment where any error at any point in the loan origination process carries the potential threat of government litigation and civil money penalties to the tune of tens of millions of dollars.
There is no doubt the pendulum has swung too far and lenders are overburdened with compliance risk associated with the origination and servicing of mortgage loans, followed by the looming risk of repurchase. The costs and time associated with the origination of a mortgage loan have skyrocketed and these costs are being passed along to the mortgagor. This again plays into the affordability factor.
Of note, mortgage servicers have taken a tremendous beating in recent years – both financially and in reputation. Billions upon billions of dollars have been settled between servicers and various government entities; scrutiny and settlement negotiations continue today, in particular for some non-bank servicers. However, policymakers and regulators must realize that there is a point at which industry leaders and their shareholders will say “enough is enough, we cannot continue to put our institutions at risk.”
Again on the topic of enforcement, with Attorney General Holder’s departure, will a new attorney general continue to aggressively pursue lenders and servicers for their past transgressions? The conventional view is the status quo will continue, as most of these cases originate with a handful of U.S. Attorney offices, in particular New York and Colorado. There is little reason to believe the HUD OIG will pump the brakes, except to the degree they are resource-constrained. Our firm continues to be made aware of smaller FHA lenders who are dealing with False Claims Act allegations.
Conversations between government and industry leaders suggest some relief on repurchase risk going forward. Time will tell. Industry leaders must feel confident that they are protecting their companies and their shareholders before they will again fully embrace the origination of mortgage loans for inclusion in Ginnie Mae, Fannie Mae, and Freddie Mac securities.
One step forward is seen in the creation of a single security, making Fannie Mae and Freddie Mac mortgage-backed securities completely fungible to ensure the maximum amount of liquidity in the market. This change will instill confidence in investors while streamlining the process for lenders delivering mortgages to the secondary market. Whatever the future for Fannie Mae and Freddie Mac, a common security in the marketplace is a win-win.
Private Mortgage Insurers
As the conventional conforming market evolves, it is important to examine the role of private mortgage insurance. The Federal Housing Finance Agency has sought comment on a proposed rule to establish Private Mortgage Insurer Eligibility Requirements, with the final guidance expected late in 2014 or early 2015.
The requirements will prescribe the standards by which private mortgage insurers are deemed eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. Implementation of these standards will ensure the financial strength of participants in the private mortgage insurance industry and provide important risk protection to lenders and the GSEs. In comments to the FHFA, the industry has raised a valid concern: The final rule should not result in a considerable increase in total cost to the borrower. First-time homebuyers, low-to-moderate income borrowers, and underserved communities rely on access to low down payment financing secured by private mortgage insurance.
I predict that this policy dialogue will end well, with FHFA and the GSEs listening closely to the comments from the industry. The final set of rules will be appropriately stringent, yet allow the mortgage insurance companies to price their products at affordable levels.
Federal Housing Administration
Mortgage loan programs offered through the Federal Housing Administration are essential to meeting the needs of America in 2015 and beyond. From both ends of the spectrum, FHA has served, and continues to serve, the needs of homeowners in America – from first-time homeowners to seniors seeking to age in places facilitated by a Home Equity Conversion Mortgage (HECM).
The recent release of the annual review of the FHA Mutual Mortgage Insurance Fund indicated some much-needed improvement in the performance of the Fund.
For one, the MMI Fund is now positive, having improved by approximately $21 billion over the past two years. According to FHA, the fund now stands at $4.8 billion in economic value with a capital ratio of 0.41 percent. While not yet at the congressionally-prescribed rate of 2 percent, the 0.41 percent capital ratio is much improved from last year. Overall FHA delinquency rates have fallen, as have the losses on the sale of FHA REO.
Looking toward 2015, as FHA works with the Office of Management and Budget to finalize the
The year 2016 proposed administration’s budget, this latest annual review and its positive trajectory might be a step toward the lowering of FHA insurance premiums. It appears FHA signaled that with the release of the annual review when it stated, “With Fund [MMI] on the right track, FHA is sharpening its focus on facilitating access for creditworthy families.”
More and more seniors recognize the value of a reverse mortgage and have improved their quality of life through the influx of monthly household income received through an HECM. Steps undertaken by the FHA leadership to better educate seniors on their responsibility to remain current on real estate taxes and homeowners insurance are big steps forward toward solidifying a sustainable program.
I predict that for FHA, the overall business and operations will begin to stabilize in 2015 in spite of a decrease in overall volume as the market returns to a normalized state. The agency has done well throughout the crisis in spite of being overworked and resource-constrained. The leadership and staff of FHA are to be commended for their perseverance and fortitude. To me, the future looks bright for the agency.
So as we inch closer to 2015, what else might the new year mean for housing? The key word is “variables” and there are plenty as noted above, and the outcome is anyone’s best guess. That said, expect other housing topics to be on the front burner for the housing industry, stakeholders, legislators, and even homebuyers into 2015 and possibly beyond. I predict that the following subjects will be hotly debated and discussed over the course of the year:
CFPB – The House has passed bills that would turn its control over to a five-member Senate-confirmed panel rather than a single director as well as subject the Bureau to the appropriations process – hardly draconian measures. Can we expect the debate about the walled-off Bureau to intensify with Republicans controlling both the House and Senate?
Home Mortgage Disclosure Act (HMDA) data – With the expanding reporting of HMDA data, does the government have the ability to protect the data from hackers? And will lenders who are already concerned about data breaches be shielded from liability if they provide the data and the government has a breach?
Tax deductibility – Will the home mortgage interest deduction and MI tax deductibility be eliminated altogether or pared down?
Credit scoring – Will the current systems used by the GSEs be modified? And should certain debts like medical bills be excluded from the DTI calculation or not included in the credit score calculation if delinquent?
GSEs’ Loan Level Price Adjustments and FHA annual mortgage premiums – Is it time to reduce both of them?
TILA/RESPA – What will the implementation of CFPB’s new TILA-RESPA Integrated Disclosure (TRID) Rule in August 2015 mean for mortgage lenders who bear ultimate risk for the accuracy of the forms? Will large lenders with deeper compliance pockets find smooth sailing when the rule goes into effect? What about smaller, regional lenders? Some noted RESPA experts have opined that every closing post-August 2015 will be a potential lawsuit, so will smaller lenders be able to ensure near-perfection across the new disclosure forms?
Despite our state of “tolerable uncertainty,” one thing is for certain – homeownership matters in America. It matters to your neighbor next door, it matters to your co-worker across the hall, it matters to the millions who devote their life’s work to serving the industry, and it matters to policymakers in Washington, D.C. and across America. It has been a rough seven years, but I for one am hopeful that 2015 is a year where we can continue to make progress toward a more robust and sustainable housing market that is open to more creditworthy prospective homebuyers.
This select print feature originally appeared in the December 2014 issue of DS News magazine.