Guest post by Tom Adams: Obama homeownership push or mortgage market share battle?
This is a guest post by Tom Adams, who spent over 20 years in the securitization business and now works as an attorney and consultant and expert witness on MBS, CDO and securitization related issues.
Good news for would-be home buyers – the Obama Administration heard your concerns and has a new tool to help make homes more affordable!
Are they going to increase wages? Or reduce the price of homes? No, they’re going to attack mortgage rates for Federal Housing Administration (FHA) borrowers. Of course, mortgage rates are already at close to all time lows, having declined significantly over the past year to about 3.7% on conventional 30 year fixed rate loans. The Administration’s main tool for doing this is to cut the insurance fee charged by the Federal Housing Authority on new mortgages by 0.50%, from 1.35% to 0.85% (on top of the interest rate charged to borrowers).
This fee is paid by borrowers into a fund that the FHA uses to protect itself against losses in case borrowers that it has insured later default. In theory, this move was somewhat controversial because the FHA’s fund had incurred higher than expected losses during the crisis and the FHA had to ask Congress for money to shore up the fund not that long ago. Around the same time, the FHA raised this insurance premium to additionally replenish the fund.
If it’s already really cheap to borrow money, is another 0.5% reduction going to make that big a difference? Probably not, because historically low interest rates haven’t been the obstacle to buying a house. I expect the number of net, new home buyers produced as a result of this change will be considerably lower than the Administration is projection (“millions of homeowners,” according to Obama’s statement today).
Rather, would-be homeowners don’t have the income to support buying the houses listed for sale in their markets – which is another way of saying that, for average Americans homes are too expensive for them to afford (or wages are too uncertain for them to want to buy).
Also note that the new lower fee is primarily aimed at new home purchasers. In order for existing FHA borrowers to get the new lower premium they would have to refinance into a new loan, which means they’d have to incur new closing costs. The new closing costs would probably eat up most of the savings for a year or more. Presumably, this would discourage many existing borrowers from refinancing for the lower premium, which helps the FHA by allowing it to retain the old, higher premium on the borrowers who don’t refinance.
This highlights one of those fundamental conundrums in the housing market. Existing homeowners and home sellers want home prices to go up. Representatives of this group are great at lobbying and have convinced many people (including, by all appearances, this Administration) that rising home prices are a good thing for America. On the other hand, potential home buyers would rather not have home prices going up – because that makes buying much harder. For whatever reason, this group has about zero lobbying juice.
Making credit cheaper is a small tool the Administration has via this reduced premium, so they used it, I guess. But it’s an action that has consequences, including potentially running the risk of not having enough in the fund down the road if losses increase (not a risk I’m especially worried about – the Urban Institute did a fine analysis of why the lower fee is probably sufficient – but it’s a reasonable concern). In addition, it is somewhat disheartening that the Administration still seems to believe that the solution to consumer issues is to have the consumers take on more debt.
The most significant impact of this change is that it will make FHA loans more competitive with Fannie Mae and Freddie Mac loans. You may recall that Mel Watt, the man in charge of the Federal Housing Finance Agency (FHFA), which manages Fannie and Freddie, made a big announcement recently that the GSE’s would offer 97% loan-to-value (LTV) ratio loans to qualified borrowers. Previously, that type of LTV had been mostly the territory of the FHA.
So, effectively, this is just a form of catch-up for the FHA. The various government housing agencies are competing for market share among the same limited universe of qualifying borrowers by trying to get them to take on bigger mortgages than they would qualify for previously. For the average would-be buyer of the average house, the new, lower FHA fee would be worth about $900 a year, equivalent to about a $75 reduction in monthly payment.
It’s hard to believe that anyone in the Administration believes that this will do much for making homes more affordable for Americans. Perhaps it is a measure, however, of how seriously the Administration is taking the issue of housing affordability. There are big issues in housing and the economy that need to be taken seriously – like resolution of Fannie and Freddie, home prices that still remain beyond the reach of many Americans, stagnant wages, on-going foreclosure and mortgage servicing problems – but the Administration seems content to tinker around the edges and try to sell it as important reform.
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I don’t really believe the government or the administration can do anything to influence homeownership rates short of martial law. It’s just not that simple to convince someone to rent or buy when they don’t want to. I know that I rent whenever I expect to stay somewhere short-term, and buy when I expect to stay long-term. Cheaper mortgage rates don’t really affect that equation, and why should it? Landlords pass on interest rate savings to tenants, unless your housing market is dysfunctional to the point of not being a free market.
For evidence, I point to Canada, where 97% LTV loans are unheard of, 30-year fixed rate mortgages are not offered in the market, and there are no mortgage interest tax deductions. Despite all this lack of effort compared to the US, our homeownership rates are pretty much exactly the same as the United States. The concept of 97% LTV in particular just boggles my mind. The absolute minimum allowed in Canada is a 5% down payment. You can theoretically do crazy shit like put the 5% on a credit card but you have to work hard to screw yourself that bad.
Speaking of tax deductinos, you mentioned in an earlier post (not a guest post) that the mortgage interest tax deduction artificially raises housing prices, and worse, preferentially subsidizes rich homebuyers at the expense of poor homebuyers. I agree that interventions like this can raise or influence housing prices, but they seem to have little effect on homeownership rates.
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Yes, it’s strange that government policy continues to favor “owning” over renting, despite the seemingly clear lesson of the crisis that too many borrowers were put into homes they couldn’t afford. It’s stranger still that government policy is to try to push home prices up, thus making them less affordable. Seems like evidence of a poor understanding of, or lack of interest in, housing market issues.
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Perhaps the preference for owning over renting has to do with the history of the US. Unlike, say, in Latin America or Europe, land owners made up a relatively high percentage of British colonial populations. Being an owner instead of a renter makes a difference in the power relationships in society. With the gutting of the middle class, home ownership may not make as much sense as renting, but that fact is not necessarily a good thing.
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It’s possible. But it’s also possible that the housing industry is just very good at lobbying and marketing. Ownership seems like a good American ideal, so long as you don’t think too hard about it – like the fact that renters effectively subsidize the mortgage interest deduction, or that owning, via low downpayment loans can do more harm than good.
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Yes the gov could do has something.
It could subsidize low income homebuyers.
It could institute a job guarantee program ( like Bill Mitchell suggests) which would improve the economy and help raise incomes.
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I don’t like this policy proposal one bit. First, I don’t understand why the federal government should give a crap about whether people buy or rent their homes.
More to the point, if I think back to the causes of 2008, certainly one (of many) was loan default rates that were unexpectedly high and these default rates were partly caused by exactly this kind of relaxation of lending standards. Should we not assume that the marginal homebuyer induced into the market by this program will have a higher expected default rate than the current average? Now that the crisis has passed, why would we want to repeat exactly the kind of policy that contributed to it?
I would also repeal the mortgage interest tax deduction. Though of course I claim it every year, I’d rather be a hypocrite than a sucker.
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There is a big difference between this kind of relaxation of lending standards and the massive fraudulent lending practices that spawned the housing bubble leading up to the financial crisis.
Not that it’s a good idea, but it is not predatory lending, either.
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@ Trevor, the short answer to your first point is politics. There is a constituency that views renters as undeserving dirtbags. Although this is hardly a fair characterization of most renters–certainly not every homeowner shares this view either–there is nonetheless a constituency that believes this nonsense. Consequently, policy gets shaped to favor home ownership and instead of giving renters some basic rights, the response seems to be to encourage more home ownership–as if somehow owning a home automatically makes you better than renting.
Unless the gap between wages and home prices narrows from what it is right now, increased homeownership is simply not going to happen, no matter how loose the lending standards are. Depending on what happens in coming years, renting may very well become the new normal for most people, which could conceivably force a political shift in housing policy.
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Hi, First time poster, short time reader. Not real good at Math at all. Seems to me that home buying money goes three places. The home seller, the insurance fund, and the lender. If less goes to the insurance fund then more can go to the home seller and lender. The home sellers are predominantly disconnected individuals, often selling under pressure due to job loss, sickness, etc. I do not know nearly as many people who are up sizing like 1995 -2005. So my guess is that $75/ month will allow a higher mortgage interest rate without removing buyers from the market, or higher fees and charges rolled into the mortgage, ultimately helping our financial industry profit a little more.
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