Federal Housing Finance Agency (FHFA) Director Melvin H. Watt told an audience of Realtors® today that after some difficult years in housing a much needed conversation about homeownership has finally begun. The conversation is about both access to and demand for homeownership which is one of the primary ways that Americans have accumulated personal wealth and is a means for many families to gain stability and invest in their communities.
Watt, speaking to a National Association of Realtors® (NAR) conference in New Orleans said that conversations on the access side always start with the availability of credit and there is a widespread concern that the credit markets have swung from reckless spending to the opposite extreme where only those with the most pristine credit can get a loan. This is evidenced by the diminished overall market for purchase mortgages and the higher average credit scores required by lenders across the entire market and within Fannie Mae and Freddie Mac's guarantee businesses.
Watt said his agency, both as regulator of the Federal Home Loan Banks and the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae as well as their conservator is at the heart of this conversation. "No one wants to return to the excesses and abuses of the past and FHFA is taking steps to ensure that this does not occur. But the message we have tried to send is that we need to find a way back to responsible lending to creditworthy borrowers across all market segments."
To put the access to credit conversation in context, he said, there are now all kinds of mortgage lending protections in place that could well have prevented the earlier abusive lending boom. The Dodd-Frank Wall Street Reform and Consumer Protection Act gives borrowers meaningful protections against the kind of mortgages with risky features that resulted in high default rates and helped fuel the housing crisis. Lenders are now required to determine if a borrower has the ability to repay the mortgage which prevents the no-doc lending that led to wide-spread losses, and provides critical protection to the borrower, contributes to the stability of the housing market and is fundamental to safe and sound lending.
Recent reforms also restrict other risky mortgage products and practices such as subprime teaser rates, prepayment penalties, and incentives for loan originators to put qualified borrowers into unnecessarily expensive loans. Dodd-Frank's Qualified Mortgage standard requires loans to be fully amortizing, meaning no negatively amortizing or interest only loans; puts restrictions on points and fees, and limits loan terms to 30 years. The GSEs must limit their mortgage purchases to loans that meet these Qualified Mortgage requirements.
Watt said these reforms establish a solid new foundation for the housing market to responsibly provide access to credit for creditworthy borrowers however the current constrained credit environment has resulted in relatively few borrowers buying houses and benefitting from these protections and improvements.
Both because of an overall cautious approach to lending and because of uncertainty about GSE loan repurchase requirements lenders have focused on refinancing and lending to borrowers with higher credit scores in recent years, often using higher credit score thresholds than those required by the GSEs and locking many potential homebuyers out of the market.
On the demand side of home ownership there are also a number of troubling headwinds. Increasingly, millennials - young people between 25 and 34 years of age - are choosing to remain renters. They indicate they hope to own in the future, just not now. Many are getting married and having children later in life than their parents did, many continue to face economic hardships because they entered the job market during the Great Recession and student loan debt is impacting many as well. There are many nuances to the last issue Watt said. Higher education may lead to increased future income for many in this group and, therefore, ultimately increase their ability to become successful homeowners but many individuals with student loans are struggling with high debt levels and impaired ability to save for a down payment - both of which make it more difficult to qualify for a mortgage.
Other groups are also facing challenges in accumulating enough money to make a large down payment and cover closing costs, a particular problem in communities of color. Average household wealth in general is significantly lower in these communities and they also experienced record losses of wealth during the housing crisis. The impact of this wealth disparity is likely to have a growing impact on the future housing market since people of color are projected to account for approximately 70 percent of the increase in number of households over the next decade.
Demand is also limited by persons who lost jobs or say incomes diminish during the recession and then lost their homes as well. The damage done to the credit of many will constrain their ability to return to homeownership. There also appears to be a hard-to-measure psychological impact on many who watched their friends or loved ones lose their homes or suffer financial hardship in the housing crisis and which may deter them from entering the homeownership market.
There is no lack of rational explanations for why demand for homeownership is down, Watt said, and while it won't happen overnight, "It is my hope that many creditworthy individuals and families who are currently renters - but have the ability to pay a mortgage and become homeowners - will have the opportunity to pursue homeownership and will decide to do so."
The recent reforms and the responsible lending practices that are emerging from them will provide predictable mortgages that borrowers can afford and have the ability to repay. Coupled with home prices that remain low in many locations and low interest rates "now is a great time for realtors to be actively encouraging their customers who can afford it to become homeowners," the director said.