Mortgage

Part 1: Is American housing policy back to historic crossroads?

It’s time to revisit some key assumptions

We’re not quite halfway through 2017 yet, and already it’s safe to say that as far as the housing and mortgage world is concerned, this has been a year unlike any we’ve seen in a while. The long-awaited purchase market we haven’t truly seen in over a decade or more has finally arrived. 

In turn, although refinance activity is showing more resilience than any economist could have foreseen, it’s no longer the driving force in the mortgage mix. The aggressive regulation-by-enforcement atmosphere that enveloped the industry for the past three to four years has seemingly been suspended. 

In fact, many critical elements of housing policy such as GSE reform or the very existence of the CFPB are seemingly stalled in some kind of state of suspended animation. With the current administration making it clear that housing policy is not at the top of the agenda, this may continue for some time.

A crossroads in American housing policy?

In fact, the sense I get from the mortgage and real estate industry today is one of uncertainty. The administration’s openly stated opposition to regulatory overreach is, to this point, just that:  statements in opposition. However, this has been enough to create a kind of chilling effect, to some degree—at least where new regulation seems to be concerned. Similarly, although GSE reform has made its way to the surface of Congressional discussion at times, it is certainly not dominating the headlines or the agenda.

All the while, lenders and service providers alike are making hay as the sun shines. Origination volume is down a bit, but there is still plenty of opportunity for those hustling to make inroads with purchase mortgages. It is against this backdrop that I suggest now is the perfect time for the American people and its government to ask a few introspective questions about our housing policy. 

Before we begin tearing down (or building up) the GSEs; before we clear the books of old regulations or fill them with new rules…it’s time for us to revisit the American Dream. It’s time to challenge some basic assumptions, assumptions that haven’t been challenged in 50 years or longer. In fact, I fully believe it is time for us to ask ourselves whether homeownership is for every American and how large of a role should the government have in promoting it.

Questions we need to be asking…and debating

We’re all familiar with “The American Dream”: the ideal that through hard work, sacrifice and calculated risk-taking, any American can achieve success.  Somewhere along the line, that dream became equated with homeownership (especially in the post-World War II era).

During a time when America seemed to be on top of the world, government policy was to encourage a high rate of homeownership as a sign of our overall prosperity. This policy was embodied in the creation of the GSEs, and later, entities such as Ginnie Mae. An entire cabinet position was devoted to the encouragement and facilitation of homeownership (HUD). America’s federal government was officially in business as a facilitator for homebuyers, by way of the mortgage.

The “dream” wasn’t really widely questioned as policy until the subprime meltdown and subsequent Great Recession of the late 2000s. Many attributed the collapse of huge financial institutions to unmitigated risk taking—in part, credited to mortgage lenders extending mortgage credit to unworthy or high risk borrowers. Suddenly, the same government that had promoted high homeownership levels for decades was questioning why everyone from the GSEs down to the mortgage brokers had extended mortgages to riskier borrowers. 

Five to 10 years later, that dichotomy hasn’t really been resolved. From Congress to our industry, the talk wavers between “smart” lending and “loosening credit” for homebuyers.  As a result, we’re not entirely sure of the proper role for the GSEs or similar government-created entities.  Where is the line between lender risk and credit availability/home affordability?  It’s a crucial question, and there’s certainly no “right” or bright-line answer.  But it needs to be discussed, debated and, to some degree, resolved. It’s at the core of American housing policy, a building block to the American economy itself. 

Why now?

The apparent pause (or deceleration of) in the financial reform onslaught of the past three to four years makes this a natural time to reevaluate (whether it be to confirm or refresh) our national priorities when it comes to housing.  Industry participants, from lenders to service providers, have been running from point to point almost continuously during this period, scrambling to get compliant before the imposed deadlines. 

However, this “pause” won’t last forever—not even close. The sentiment in Congress today remains one that favors the protection of the taxpayer from future bailouts, such as those that saved the GSEs in 2008. This has resulted in a policy position favoring higher mortgage insurance premiums—to the detriment of higher risk consumers. The PATH (Protecting American Taxpayers and Homeowners) Act, proposed in its latest iteration by Chairman of the House Financial Services Committee Jeb Hensarling, R-Texas, would again raise minimum down payments for many and limit multiple FHA programs.  Congress, it would seem, is not far from driving a stake in favor of a policy, which distances the government’s role in “The American Dream.”

Pending legislation isn’t the only reason to press a national debate on housing policy. As we have seen repeatedly in recent years, the American real estate and housing market is no longer truly isolated from the world. Between massive securitization and the vastly increased presence of global investors, our mortgage and housing industry is truly part of the international economy. We’ve seen events abroad (e.g. BREXIT) affect our industry…and the happenings in our industry impact the world. This will continue to happen…regardless of housing policy.

Another “elephant in the room” is the mortgage industry’s growing dependence upon the refinance transaction, once a niche product. We can argue as to whether this is the cause or result of currency and interest rate manipulation by the Federal Reserve (read: Quantitative Easing), but whatever our conclusion to that end, the fact remains that, when refinance demand drops, our industry is less liquid.  This is another very real issue, the resolution of which will be greatly affected by how we go forward with housing policy.

Let’s not forget that the market itself will drive our discussion on housing policy.  No matter how illegal immigration is dealt with at the federal level, America will still very likely see exponential increases in the “New American” population.  Will they rent?  Will they build multi-family structures?  Will lenders create new lending products to serve them?  What of the mystical Millennial, who has yet to truly dive into the first-time homebuyer waters?  Will they demand 15-year mortgages or shun them altogether in fear of debt, choosing to rent instead?  We’re also seeing real transformation in the mortgage process itself, and this only begins with the coming of the digital mortgage.  It’s likely we’ll see mortgages become less expensive to originate and more transparent for purposes of QC and compliance, perhaps encouraging greater investment from private investors.   All of these factors will affect, and be affected by, a clearer housing policy.

Finally, let’s not underestimate the potential impact of tax reform. It’s not entirely clear at this point whether or not the sacred mortgage interest rate deduction will survive a simplification or not. But, should it come to pass, it could—in combination with the Millennial hesitance to borrow and the rise in demand for rental housing—have a very real voice in the debate on housing policy.

All of this is not (yet!) to suggest my opinion on federal policy itself. I’ll discuss that in the second installment of this article, and I’ll also share the opinions of two very prominent industry leaders. What I’m advocating here is the beginning of a larger discussion at the policy level. The housing and mortgage industry, I believe, is being driven by several historic trends into a period of significant transformation.  We cannot afford to enter such a metamorphosis without at least reviewing our national policy—one which was built decades ago under vastly different circumstances. It’s time to begin the debate. 

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