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Changing demographics, homebuyer tastes cloud affordable housing policy

Standard & Poor’s: GSE role is stalling housing finance reform

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The housing choices that younger adults make will have a profound effect on the type and profitability of affordable housing developments, said a number of credit analysts and industry experts at Standard & Poor's Ratings Services' Affordable Housing Hot Topics forum.

In addition, potential changes to the structure of government-sponsored entities Fannie Mae and Freddie Mac could force affordable housing providers to, once again, change their strategies.

Standard & Poor's analysts Lawrence Witte and Mikiyon Alexander, who provided the information, say that changing demographics and homebuyer tastes cloud affordable housing policy, and that the choices that the millenials — 20- to 34-year-olds — make regarding housing will profoundly affect future housing trends. The restructuring of GSEs and other guarantors could also influence future housing trends, they said.

Prices are near the historic average of 260% of average household income, but this is much lower than in 2006 when prices were 400% of average household income.

Standard & Poor's U.S. Chief Economist Beth Ann Bovino said that the probability of another U.S. recession in the next 12 months is between 10% and 15%, a significant reduction from a 25% probability in 2012.

Housing is one of the factors behind the improved economic outlook.

In 2012, the housing market contributed to economic growth in the U.S. for the first time since 2005.

The economy and consumer sentiment, combined, are important to potential first-time homebuyers.

"Consumer sentiment is 75 according to the University of Michigan Survey [a monthly consumer sentiment index], up from below 60 in 2009," Bovino said. "Lower unemployment improves consumer sentiment, so if unemployment falls below 6%, consumer sentiment could surpass 90."

John Burns, CEO of John Burns Real Estate Consulting, cited challenges for first-time homebuyers.

"They need confidence that they're not going to lose their jobs. I don't know how we overcome that except with time and more economic growth. They also have debt. The entry-level buyer is really struggling with a lot of things," he said.

The public and private programs that guarantee the debt supporting these types of projects are core to the efforts of housing finance agencies (HFAs) to help provide and promote affordable housing. Looming over the housing market is the future of Fannie Mae and Freddie Mac, a topic that has particular resonance with municipal issuers and others that finance affordable housing.

Sharif Mahdavian, managing director in U.S. RMBS at Standard & Poor's, provided a scope of the importance of Fannie Mae and Freddie Mac.

"The GSE market in general has dominated mortgage lending in the past few years, certainly since 2008. And even before the crisis, the GSEs played a huge role in mortgage lending. It was only until 2005 and 2006 that the non-agency private market had a larger securitization volume than what was guaranteed by the GSEs. Since the crisis, that has completely reversed,” he said. “The agencies are guaranteeing in excess of $1.5 trillion annually versus a non-agency securitization market that is extremely small, about $13 billion in 2013."

The two GSEs have paid back in dividends more than they drew on the U.S. Treasury during the financial crisis, said Devi Aurora, senior director in financial institutions at Standard & Poor's.

Garth Rieman, director of housing advocacy and strategic initiatives for the National Council of State Housing Agencies, described the benefits Fannie Mae and Freddie Mac provide for affordable housing.

"They provide liquidity; they provide standardization. They provide capital at a price that would otherwise not be available,” he said. “One of the products that HFAs are using the most right now is the single-family product that Fannie Mae calls HFA Preferred. It gives HFAs an opportunity to participate in Fannie Mae's mortgage-backed securities program by enabling HFAs to have an alternative execution to the traditional tax-exempt bond model that isn't working as efficiently now as in the past."

However, Aurora said that the gains Fannie Mae and Freddie Mac have made were not likely to occur again.

"Last year there were a few repurchase-related settlements that we think are probably past the high-water mark. As they wind down their mortgage portfolios, which tend to be higher yielding, it's probably going to crimp revenues going forward. Finally, they're going to have to keep expenses fairly high because they have to contribute toward building up a mortgage infrastructure, a common securitization platform."

The lack of clarity on the role of the GSEs in affordable housing has stalled housing finance reform.

Rieman added, "There were disagreements about how aggressive that bill was in serving underserved markets and in providing benefits to affordable housing sectors, as well as concerns about whether the model would deliver as affordable a mortgage product as the current system has," Rieman said. "Because of that, we don't think the bill is going to go any further than the banking committee."

HFAs, REITs and homebuilders have recovered to varying degrees in the midst of a funding landscape transformed from 2008 and prior.

Whether Americans return to prior living patterns remains to be seen, but a large demographic shift toward youth could overcome several factors that are leading to uncertainty, and this could bolster housing volume and prices, supporting the larger economy.

Should rental housing remain as prominent as it is, or gain even more favor, financiers of affordable housing will need to tailor their products to meet the needs of their target population.

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