A Housing Financial Update


Since many people living on Hilton Head Island or in Bluffton are homeowners, I thought it might be time to do an update on the state of housing finance. It has now been almost a decade since the peak of the housing bubble and the excesses in mortgage lending practices that ultimately ended with the advent of the “Financial Crisis.”  Interestingly, the “Great Recession” was born of a lack of liquidity in the residential lending market that ultimately snowballed through the entire global financial system.

Let’s start by providing a quick review of the facts that led to the collapse of the global financial markets. It is important to recognize that the expansion of mortgage credit originated with the honorable goal of increasing the rate of homeownership. Homeownership and wealth generation are highly correlated, and families that enjoy homeownership tend to be more stable, according to the Joint Center for Housing at Harvard. In an effort to expand homeownership opportunities, mortgage lenders, at the encouragement of at least three administrations and Congress, looked for ways to expand the mortgage credit envelope by increasing maximum loan-to-value ratios and developing alternative credit options. This expansion of credit criteria led to an expanded demand for single-family properties, a predictable increase in home prices and a self-generated spiral that ultimately ended poorly.

As a result of the bursting of the “housing bubble,” our housing finance system has undergone significant changes, like the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as changes due to natural market forces.   Some of the “natural market forces” include the bankruptcy of Wall Street investment banks, the conservatorship of Fannie Mae and Freddie Mac, and the demise of the private-issue residential mortgage-backed securities (MBS) market.  Today, well over 95 percent of all new mortgage originations end up either in Ginnie Mae or agency-issued MBS, which carry an explicit federal government guaranty.

Housing3Global investors have lost confidence in privately issued and guaranteed securities as a result of the significant losses experienced in the financial crisis. Since 2009, the number of private MBS issued through Wall Street investment banks can be counted on one hand, and government-guaranteed loans must now conform to the “qualified mortgage” criteria as defined by the Consumer Finance Protection Bureau, or the CFPB.

As we look to the new Trump administration and its approach to mortgage finance, as local homeowners we have skin in the game. The availability of both qualified mortgage and non-qualified mortgage loans is essential to maintaining liquidity in the mortgage markets and the stability of home prices in our local market. We need a viable government-backed mortgage alternative like Ginnie Mae, Fannie Mae and Freddie Mac, and a private securities market that can provide greater than $1 trillion in mortgage credit annually.

Ginnie Mae has proven to be a very efficient issuer of MBS and needs to be retained in its role of providing liquidity for the FHA and VA loans that effectively serve both first-time homebuyers and veterans. These federal programs have done a great job of serving niche homebuyers through various economic cycles.

On the other hand, both Fannie Mae and Freddie Mac have become “wards of the state,” and their futures are tied to the political winds of Congress. As homeowners, we need the products and services provided by these previously shareholder-owned companies. Since 2012, when the Obama administration placed them in conservatorship under the control of the Federal Housing Finance Agency (FHFA), these two companies have returned to profitability, repaid the U.S. Treasury 100 percent of the funds they were advanced, plus a profit, and in the fourth quarter of 2016 jointly generated over $10 billion in profits. Fannie and Freddie need to be recapitalized and returned to private ownership. With a strong regulator and without the political interference we saw in the 1990s, these are proven businesses that serve the important role of providing liquidity to our mortgage markets.

With the oversight of the FHFA, the CFPB and other financial institution regulators, we have a mortgage finance system that doesn’t need to be reinvented. As in many cases in Washington, we need to retain what works and not try to make political points by trying to reinvent the wheel.

Elihu Spencer is a local amateur economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.