Discussing GSE reform, mortgage performance, possible change to the credit score used to get a mortgage, economic growth, household formation and more!
Why We Need an Explicit Guarantee for Housing Finance
Snippet from a must read by David Stevens, MBA President and CEO at American Banker:
Many calling for the recapitalization and release of Fannie Mae and Freddie Mac would do so without an explicit government guarantee. This would decimate the ability of community banks and smaller lenders to participate in secondary mortgage market and likely drive many of them out of the mortgage business.
Let’s rewind for a moment. What is the key public policy objective regarding Fannie Mae and Freddie Mac? To create a stable secondary mortgage market that will provide sustainable, low-cost credit to qualified borrowers, avoid taxpayer-funded bailouts and efficiently utilize private capital.
It has been a long time since the housing market crashed but reforming housing finance is still sorely needed. Well, sorely needed IF done correctly…
Wall Street and the big banks will work to make GSE reform benefit them. We must hope that things work out for the benefit of the average American that wants to buy or sell a home.
Just read that key public policy objective again and think what would happen if the GSEs are changed or eliminated. Lots of good people with good credit would find it harder and much more expensive to buy a home.
I hate to see American taxpayers on the hook for the shenanigans of Wall Street again.
Mortgage Performance in Q4 2017
Performance of first-lien mortgages remained largely unchanged during the fourth quarter of 2017 compared with a year earlier.
The OCC Mortgage Metrics Report, Fourth Quarter 2017, showed 94.5 percent of mortgages included in the report were current and performing at the end of the quarter, compared to 94.7 percent a year earlier.
The report also showed that foreclosure activity has increased from the previous quarter. Reporting servicers initiated 34,519 new foreclosures during the fourth quarter of 2017, a 0.7 percent increase from the previous quarter and a 24.1 percent decrease from a year earlier.
Pretty impressive and encouraging!
One Credit Score to Rule Them All
Congress wants to accelerate a shake-up of one firm’s dominance over the credit scores used to vet many U.S. mortgages.
Lawmakers approved a provision as part of the bank-deregulation bill that cleared the Senate on Wednesday. It would require mortgage-finance companies Fannie Mae and Freddie Mac to consider credit scores beyond Fair Isaac Corp.’s FICO score for determining a mortgage applicant’s creditworthiness. Fannie and Freddie backed nearly half of all U.S. mortgage dollars originated in 2017, according to Inside Mortgage Finance.
Would it be a good thing to see mortgage lenders use something besides the FICO score? Would this lead to more people being able to buy homes?
Would it mean that we could see a people that are not truly ready for the financial responsibility of a mortgage being approved? Something to think about since we do not want a repeat of the housing market crash!
How Well Does Financial Regulation Work?
We find very similar patterns in many other economies around the globe. In total, there are 4.2 episodes of scandals and 2.4 episodes of regulation in any given year from 1800 to 1969, but this number jumps to 32.5 for scandals and 14.6 for regulations over the 1970 to 2015 period. Thus, frequent scandals and extensive regulation are a relatively recent phenomenon. Notably, both corporate scandals and regulation are highly correlated with economic development.
At the same time, we find no evidence that regulations can effectively curb future corporate misconduct. Rather, today’s regulations are a strong predictor of future fraudulent behavior because firms are quick to adapt to the new rules and move their activities to unregulated areas, because regulators rely on explicitly laid-out rules to be able to identify and prosecute corporate wrongdoing, or because the new regulations have unintended consequences. Further analysis reveals systematic differences in the lead-lag relations of scandals and regulation over time and across countries.
Overall, our analysis of 200 years of corporate scandals and regulation provides evidence of strong time-series patterns. Scandals lead regulatory action, but the relation also goes in the other direction: Corporate scandals follow past attempts at regulatory reform. This finding prompts the question of how to break this cycle of scandals followed by bouts of regulatory activism, followed by new scandals, while keeping the long-term effects on the economy in mind. While we cannot answer this question, our results cast doubt on the historical effectiveness of regulatory action from a public interest view.
Very interesting and something to consider when thinking about GSE or housing finance reform. Government rules and regulations are like hot sauce: too much will hurt but the right amount makes things better!
Is The U.S. Economy Really Growing?
Since the financial crisis of 2008, government spending, not the private economy has generated growth. Said differently, without deficit spending we would be in the midst of a ten year recession.
Most people are aware that GDP growth has been lower than expected in the aftermath of the Global Financial Crisis of 2008 (GFC). For example, real GDP growth for the past decade has been closer to 1.5% than the 3% experienced in the 50 years prior to 2008. As a result of the combination of slow economic growth and deficit spending, most people are also aware that the debt/GDP ratio has been rising.
The staggering deficit scares me and I really do not think digging deeper is the answer. Government spending in economic downturns can be helpful IF done correctly.
Sadly, I am not sure we will ever see government spending done correctly…
Housing and Household Formation
Freddie Mac looked at household formation and the housing market in their latest Market Insight. Some of the highlights:
According to the U.S. Census Bureau, there were nearly 45 million young adults aged 25 to 34 in the United States in 2016, over four million more than those aged 35 to 44. That large population should be fueling the housing market, but the headship rate – the percentage of those heading a household – amongst young adults aged 25 to 34 in 2016 is down 3.6 percentage points since 2000.
If these young adults had formed households at the rate of the young adults in 2000, then the U.S. would have had 1.6 million additional households in 2016.
Our research indicates that the two biggest factors explaining the decline in household formation rates for young adults are housing costs and labor market outcomes.
From 2000 to 2016, real median house prices increased by 29 percent, but young adult per capita real incomes only rose one percent.
In terms of labor market conditions, the labor force participation rate for young adults has seen a pretty substantial decline in recent years, particularly for men.
The changes that have caused the reduced number of household formations is apparent in this chart:
But as with most things, money is the main reason that we have seen a reduced number of households:
Freddie goes on to say we could see 20 million more households in the next decade. They said that 28% of the decline in young household formation is due to housing costs.
Which drives home the reason that we need more affordable housing and to ensure that any changes to housing finance will not make it too costly for first time home buyers to get a mortgage!
While mortgage rates are STILL low from a historical perspective, it could be that some people should consider buying a home now. Because homes ARE very affordable TODAY…
How Affordable Are Homes Today?
Nationally, homes are just about the most affordable they’ve been in the last 40 years. In 2016, the median household could afford a home 1.5 times more expensive than the median home price. In 1980, the median household could only afford about 3/4 of the median home price.
At the same time, income growth has been outpaced by home price growth. Adjusting for inflation, incomes have grown 27% between 1980 and 2016, while home prices have grown 62%.
Despite relatively stagnant incomes, affordability has grown due to the sharp drop in mortgage rates over the last 30 years – from a high of over 16% in the 1980s to under 4% by 2016.
I know this will blow some people’s minds but we are still in the midst of a great time to buy a home! Just remember that as home prices and mortgage rates increase, the affordability of homes will decrease!
Will We See More Homes Soon?
From First American:
As we analyze today’s housing starts data, it’s important to also consider the impact of construction labor on the velocity of new home construction. The employment situation report, released earlier this month, reported an increase of nearly 7,000 residential construction jobs between January 2018 and February 2018. In fact, February was the best month for residential construction labor growth since August 2008. The number of residential construction jobs is now 3.8 percent higher than a year ago. The growth in residential construction jobs supports further improvement in the pace of home building because building a home does not readily lend itself to outsourcing and automation.
It’s very hard to increase housing starts without increasing residential construction employment and productivity.
Is this wishful thinking? I do not feel that way and long time readers know I share the latest data on construction employment regularly.
So it is very likely we could see more homes for sale soon. Where these homes will be built and the price range is very important since the number of entry level homes is limited in many areas of the US.
That is it for today! For long time readers, you probably noticed that different look to the blog. Hoping to make some improvements that make readers stay longer and poke about more.
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