For most states, the pipeline for construction of single-family homes specifically designed as rentals is booming. However, not all states are jumping on the trend. Market conditions in 10 states are such that this kind of construction isn’t a priority. In fact, these states are seeing no additional construction of single-family homes for rent, according to reporting at Axios.
On a per-capita basis, Arizona is the state with the most built-for-rent housing in the construction pipeline with 2,011 units planned or under construction per one million inhabitants, according to data from the National Rental Home Council (NRHC). Coming in at a “distant second” is North Carolina with 1,071; while Texas is in third place with 856. The nationwide average sits at 345.
No single family rental construction in 10 states
However, despite data from Zillow that illustrates that to meet the housing supply needs of the nation, the United States needs 4.3 million more homes, there are 10 states that aren’t constructing built-for-rent housing, the reporting explains. Among them are Oregon, Massachusetts and West Virginia, where there is no built-to-rent construction of single-family homes “ongoing or planned at all,” based on NRHC data.
Why are these states lagging, some of the reticence likely has to do with a lack of favorable market conditions for construction, according to David Howard, NRHC’s CEO.
“Portland and, more broadly, the state of Oregon have many of the kind of drivers that housing developers are looking for when they enter a market,” Howard told Axios. But that enthusiasm could be diminished in a state like Oregon due to its limits on annual rent increases.
Banning rent increases in Oregon
Last month, the state banned rent increases higher than 10% in years of high inflation, and the law went into effect on July 6. The bill was drafted in response to complaints from the state’s renters, as some areas saw increases of as much as 14.7% in 2022.
“The debate highlighted the high rate of rental ownership in the state Capitol, where passive income from owning property makes it possible for lawmakers to afford to be in Salem for months each year on their $35,000 legislative salary,” according to reporting at the Oregon Capital Chronicle. “Portland Rep. Thuy Tran, [also a] landlord, was one of only two Democrats who voted against the measure.”
Measures such as rental increase bans put builders on edge, Howard explained to Axios.
“Say what you will about the legitimacy of various rent control and rent cap regimes […] it’s something that causes developers to pause in their consideration of whether they want to enter a market,” he said. “I think developers have gravitated toward other markets where there perhaps is more certainty.”
Friday, April 7, marked a day for celebration. After four years of Congress hiking Veterans Administration (VA) so-called “Bluewater Navy” mortgage loan fees as an offset to pay for other critical veterans’ benefits, Congress has finally let those excessive VA mortgage loan fees expire.
This good news for homebuyers comes on top of FHA action in late February to cut the annual premium on FHA loans by 30 basis points, from 0.85% to 0.55%, saving most families around $800 starting last March 20. And it follows actions over the last year by FHFA to cut Fannie Mae and Freddie Mac LLPA fees for certain first-time homebuyers.
What does the VA loan fee reduction mean for veterans and active-duty families using their no-down-payment mortgage, an “earned benefit” thanks to their uniformed service to the nation? It means that first-time buyers using VA loans will see guarantee fees fall 15 basis points, from 2.30% to 2.15%, and other buyers will see a 30-basis point improvement, from 3.60% to 3.30%. For these families, savings will range from $600 to $1,200 saved starting this week.
The expiration of the higher VA mortgage fees was not a sure thing and should not be taken for granted going forward. Last November, the Community Home Lenders of America (CHLA) wrote a Letter to top members of Congress asking Congress to let these fees expire.
Why was CHLA concerned? Because just one year earlier in November 2021, Congress, in their perpetual hunt for “offsets” to pay for other federal spending, hiked fees on Fannie Mae and Freddie Mac loans by $21 billion over 10 years to help pay for part of the cost of the totally unrelated $1 billion infrastructure bill. And technical budget offset concerns played a big role in delaying FHA’s action in cutting FHA premiums.
Meanwhile, Congress and the president are gearing up for a fight over spending cuts in connection with an increase in the debt limit. Any revenue source that has been used in the past could be a target. But at least for now, veteran homebuyers and homeowners are the clear winners.
Charging fees higher than needed for insurance purposes has prevented some qualified families on the margin from being able to escape rents that have been rising faster than incomes. Given that the VA (and FHA) loan programs serve a higher proportion-of first-time buyers and lower-FICO score buyers than conventional loans, reducing these costs helps redress wealth inequities over time.
To be clear: these loan fee reductions are not some giveaway to families that ought not buy a home — the reductions redress the issue of artificially high fees keeping qualifying families from buying a home. CHLA supports actuarially-based insurance fees to ensure programs remain solvent and proper insurance pricing that balances both risk and opportunity. Mortgage loan fees should not be higher than needed to safely run government-backed lending.
So, a thank you to FHA for making FHA mortgage loans more affordable, a thank you to FHFA for making GSE mortgage loans more affordable, and a thank you to Republicans and Democrats in Congress for making VA mortgage loans more affordable.
The year is yet young, but this mortgage news for young families has so far been positive. CHLA stands ready to work with Washington stakeholders to keep the good news coming.
Rob Zimmer is Director of External Affairs for the Community Home Lenders of America (CHLA).
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Rob Zimmer at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
(The Center Square) – Gas prices and mortgage rates continue to rise as polling shows Americans remain worried about the economy.
Gas prices hit an average of $3.85 per gallon of regular gas nationally Tuesday, up from $3.58 a month ago. Incumbent presidents usually take criticism for gas price increases, and President Joe Biden is no exception, taking fire for his work to discourage domestic oil and gas leasing and pipeline development.
“Joe Biden wants us to believe that we are helpless victims incapable of controlling our own destiny, and that OPEC or ‘corporate greed’ determine oil and gas prices, but all he needs to do is reverse his radical green policies, allow the fossil fuel industry to operate, and we’d see prices drop to Trump era levels as domestic production increases,” Daniel Turner, executive director at the energy workers advocacy group, Power the Future, told The Center Square. “Such actions could even secure his re-election, but Biden could never admit American fossil fuels are good and necessary, even at his own political peril.”
Meanwhile, average mortgage prices last week hit 7.09%, the highest in two decades. This time last year, the average rate was about 5.13.
“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” Sam Khater, Freddie Mac’s Chief Economist, said in the group’s rate announcement. “The last time the 30-year fixed-rate mortgage exceeded seven percent was last November. Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales.”
Mortgage rates have been steadily pushed up as the Federal Reserve hikes rate to combat elevated inflation, which soared earlier in the Biden administration before tapering off in recent months. The U.S. Bureau of Labor Statistics’ Producer Price Index, a key marker of inflation, has increased nearly 17% since President Joe Biden took office while wages have failed to keep up.
Meanwhile, polling shows Americans are still concerned about economic issues. The Center Square Voters’ Voices Poll, conducted in conjunction with Noble Predictive Insights, found that inflation and the economy are still top concerns for Americans.
That poll of 2,500 registered voters found inflation and price increases were the most commonly cited concern for Republicans and Independent voters and comes in second for Democrats only to climate change.
That concern has become a political headache for Biden, who has seen his approval rating dip underwater as he continues to take fire for higher prices.
Republicans were quick to blast Biden over the weekend as buying a house became even more expensive.
“Homeownership in America is now a lot less affordable as mortgage rates have reached the highest level in over 20 years,” Rep. Elise Stefanik, R-N.Y., wrote on social media. “This is what [Bidenomics] looks like.”
Biden, though, has defended his work on the economy, pointing to the relatively low unemployment rate, the slowing of inflation, and the rebound from COVID-era lockdowns.
“The Inflation Reduction Act is delivering for the American people,” Biden wrote on social media Sunday. “It’s lowering costs for families, restoring fairness to the tax code, creating good-paying jobs here in America, addressing the existential threat of the climate crisis, and more.”
Today, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) said they reached an agreement on housing finance reform.
The pair is putting “finishing touches” on a piece of legislature they plan to release in a matter of days, which they plan to markup (debate and amend) in coming weeks.
It’s based on the Corker-Warner Housing Finance Reform and Taxpayer Protection Act (S. 1217) released back on June 25, 2013.
Sponsors of that bill include five Republicans and five Democrats from the Senate Banking Committee, giving it some added strength as a bipartisan effort.
What Are the Goals of Housing Finance Reform?
They’ve got a lot of goals, but I’ll focus on the more noteworthy ones and do my best to avoid the technical stuff.
Their legislation will pretty much rely on S. 1217 for the base text and keep its overall architecture.
– Wind down and eliminate Fannie Mae and Freddie Mac
First and foremost, they want to do away with the “status quo” in which Fannie Mae and Freddie Mac rule the mortgage market, despite being in government conservatorship.
The pair was taken over by the U.S. Treasury in September 2008, but continue to purchase and guarantee mortgages that meet their underwriting guidelines.
Ironically, they gained an even larger market share of newly-originated mortgages after the government takeover, which makes it quite clear the move was only a Band-Aid solution at best.
The bill would wipe them off the face of the Earth within five years, a tall order to be sure.
– Create a new mortgage securitization platform
– As part of the Fannie/Freddie wind down, they’ll need a new securitization platform, known in the bill as the Federal Mortgage Insurance Corporation (FMIC), which is modeled in part after the FDIC.
It would function in a similar way to the current secondary mortgage market, though it would require 10% private capital to absorb losses and create a mortgage insurance fund to protect taxpayers from future bailouts.
A mutual cooperative would also be established to ensure institutions of all sizes (community banks and credit unions) would have direct access to the secondary market.
– Require 5% down payments on nearly all new mortgages
Here’s a biggie. The proposal would require five percent down payments on all mortgages that run through the FMIC, except for first-time home buyers, who could put down just 3.5%, the FHA’s current minimum.
The Qualified Mortgage rule pretty much already did away with 3% down mortgages, so this isn’t all that noteworthy.
Additionally, it would keep the current conforming loan limits intact, meaning the high-cost limits would be a permanent fixture.
– Preserve the 30-year fixed mortgage
The legislation would also keep the 30-year fixed-rate mortgage alive despite a lot of people wanting to see it go the way of the dodo.
The bill would preserve long-term fixed mortgages and keep them prepayable without penalty, and based on some earlier predictions, rates would only be 25 to 40 basis points higher.
– Eliminate affordable housing goals
Lastly, they want to do away with affordable housing goals, which some blame for the mortgage crisis to begin with.
Instead, they want to collect a 10-basis point FMIC user fee (which I’m sure won’t be passed on to consumers) for housing-related funds to ensure there is sufficient housing available.
For the record, shares of Fannie Mae and Freddie Mac plunged on the news today, falling about 30% each and even more after hours.
A new survey from Gallup revealed that Americans are increasingly bullish on housing as a long-term investment.
Earlier this month, the polling company conducted phone interviews with over a 1,000 participants to determine the most attractive investment option out there.
Unsurprisingly, real estate was the most favored investment, with 30% of respondents naming it their top choice among four other options.
It was followed closely by gold and stocks/mutual funds, both of which snagged 24% of the vote.
It dropped off pretty badly from there, with just 14% favoring savings accounts/CDs as their preferred long-term investment strategy, and only six percent going with bonds.
Gold Used to Be King
Back in 2011, real estate wasn’t yet all the rage. In fact, a lot of Americans were ditching their homes, sometimes voluntarily (aka strategically) to avoid taking a huge financial loss.
During that time, the safe haven that is gold was the top investment according to Gallup, with a 34% share.
Of course, during that time gold prices were skyrocketing and everything else was taking a bath, so it made sense to select “gold” as a solid investment strategy.
Since then, gold prices have come down and both stocks and real estate values have climbed steadily. As a result, gold has fallen out of favor with investors.
Before the housing crisis, savings accounts/CDs were the most popular investment choice for Americans, largely because the yields were so high.
Today, savers are lucky to get a 1% return on these types of accounts, which explains their recent falling out of favor.
Interestingly, as savers lose, homeowners win because low-yielding savings accounts translate to low mortgage rates. That’s been the trend for several years now, though it could finally drift the other way.
The Rich Favor Real Estate the Most
Breaking down the nation’s love for real estate, those making $75,000 or more felt real estate was the best bet as a long-term investment.
In that category, 38% indicated that real estate was the top investment strategy, followed by stocks/mutual funds at 30%.
In the $30,000 to $74,999 income bracket, real estate and gold grabbed an even 26% of the responses, with stocks/mutual funds a close third at 25%.
Finally, in the less than $30,000 income cohort, gold was tops with a 31% share, followed by real estate at 28% and stocks/mutual funds at just 13%.
This could relate to the fact that most upper-income Americans actually own their homes and realize all the associated benefits.
For obvious reasons, lower-income Americans are less likely to own homes, which drove their responses elsewhere.
If we break things down by age, those 30 to 49 years are the most bullish on housing, with 34% selecting real estate as the best long-term investment.
The youth seem to be taking a more balanced approach, with real estate only a top choice for a quarter of participants, the lowest of all age groups.
Still, every single age group listed real estate as their top choice.
If we look at political leanings, Independents love housing the most (33%), followed by Republicans (30%) and then Democrats (27%). In fact, Democrats favor stocks/mutual funds over real estate.
Take this survey with a grain of salt though…it always seems to lag what’s really going on. By the time the real estate market implodes again, it will probably be at an all-time survey high. Go figure.
I’ve seen a number of articles lately predicting that mortgage rates will rise in 2021, a couple even from other HousingWire contributors. The rationale for these predictions have been erudite, multifactorial and complex. I am, on the other hand, a simple man. Most days I don’t even wear shoes. When I think about the direction of mortgage rates there is only one factor I consider – and that is economic growth.
Over the years I have professed that the rate of economic growth pretty much explains the whole lasagna so that should be the entire focus. When the economy gets better, bond yields rise and mortgage rates follow. When the economy slows, bond yields drop and mortgage rates follow. I expect mortgage rates in 2021 to stick to the same pattern.
The trick is to find a respectable range within each economic cycle. I started to incorporate bond yield forecasts for my yearly prediction articles and every year since 2015 I had said the same range. The 10-year yield would range between 1.60%-3%. In 2020, that range broke but continued a long-term downtrend in yields which started in 1981.
Before the 10-year yield broke below 1% this year, I wrote this year that if the U.S. went into a recession the 10-year would trade between -0.21% – 0.62%. On the morning of March 9, the 10-year traded at 0.34%. Since that low point the 10-year yield has been above 0.62% for most of the time during the COVID recession. This has been a consistent strong indicator for me, that, despite all the drama in various sectors, the bond market expected the economy to improve.
When the COVID recession hit the U.S., I proposed an economic model to track the progress of the economy. I called this model the AB Model for America is Back. The last variable that needs to be realized for this model to predict that the American economy is growing again is for the 10-year yield to break over 1% and stay in the range of 1.33% to 1.60%
Time is running out for this last variable to be checked off in 2020, but it remains within the realm of possibility. Here are the factors that can either drive yields to break above 1% this year or prevent this from happening.
1. COVID infection rates
Presently, the number of COVID-19 cases in the U.S. is rising again. If this trend continues, as I expect it will as we go into the winter months, we will reach new daily highs in the number of cases. The risk to the economy is that if new cases lead to such high levels of hospitalization rates, the government will be forced with much harder restriction nationally to combat the spread of the virus. Without that, the risk to the economy isn’t as great as some might think now.
Our country has learned how to continue to consume goods and services even with a virus that is infecting and killing Americans every day, the ups and downs of infection rates haven’t impacted the bond market or economic data too much recently.
Take the recent retail sales data as a case in point. Following the drastic dip at the beginning of the crisis, retail sales have now gone above the pre-COVID numbers. We need to credit the disaster relief package for some of these gains. Secondly, the fear of COVID-19 has faded away from American behavior, which means we went from hoarding toilet paper to buying homes, cars, driving more and purchasing more stuff on-line.
But, even with disaster relief, it’s impossible for the U.S. economy to run anywhere near full capacity with this virus still active in our society. Even though we have seen V-shaped recovery data in multiple sectors, certain parts of the economy are still at best treading water. Energy prices for one, prove this on a daily basis.
Eventually we will have a vaccine and multiple effective treatments to fight the virus and these will be the missing links to get our economy back to its traditional slow and steady growth like we had in the previous expansion — the longest economic and job expansion in history.
2. The election and more disaster relief
The disaster relief aid distributed to distressed Americans this year actually did what it was intended to do. Due to the fiscal aid, real disposable income and the personal savings rate have increased this year to levels above those of pre-COVID times. Even though the effects of the initial boost from the $1,200 check and enhanced unemployment benefits are fading as our politicians continue to argue about what to do next, personal savings and disposable income remain higher than 2019 levels.
If we had not implemented the massive fiscal disaster relief, and monetary actions from the Federal Reserve, I believe the bond market would still be in the recessionary range of – 0.21% – 0.62%. In my opinion, we need to continue distributing disaster relief to the economically distressed until the unemployment picture dramatically improves. I don’t expect the U.S. to run near full economic capacity until either the treatment for COVID improves to the point that only a very small percentage of cases require hospitalization and/or an effective vaccine becomes widely available.
I have to wonder why Republicans have been so resolute in their refusal to give President Trump months ago the trillions of dollars needed to juice the economy going into the election. Taking the uncertain state of the disaster relief away would have been a much-needed feather in Trump’s cap. After all, when it comes to winning elections, “it’s the economy stupid.”
I suspect that certain Republicans simply don’t believe Trump can win this election and they don’t want to pass anything that could help the economy during a Biden presidency. Also, Democrats have a 1.8 trillion disaster relief bill offered from Republicans ready to go, and trying to play your political hand too much just means a lack of disaster relief right away.
I know some would say that some Senate Republicans won’t accept the $1.8 trillion disaster relief package that the president wants now. However, I believe President Trump would get them back in line if the Democrats accepted the $1.8 trillion disaster relief package that the White House has offered. Maybe there’s a quiet agreement among politicians that something will get done before the election that is not known to the public. I know a deadline has been issued by the Democrats to get something done this week, so hopefully something gets done. For me, politics is the same always, Poly, Ticks. I regret my cynicism, but can’t shake it either.
In any case, the bond market, and thus mortgage rates in 2021, could rise if we get a sweep for either party. If Biden wins the presidency and the Democrats get the Senate, we can expect a lot more fiscal disaster relief will be forthcoming. If President Trump wins the presidency and the Republicans hold the Senate, I likewise expect a disaster relief package will be passed right away to support the president and the American people.
However, if Biden wins the presidency and the Republicans hold the Senate, then we can expect the Republicans to reprise their favorite “We are broke” song and dance – and hold back additional disaster relief as much and for as long as they can. This third scenario would be a factor in keeping bond market yields from rising. However, I believe a proven, effective COVID-19 vaccine and treatment can offset a smaller-than-anticipated disaster relief package.
GDP growth will be comparatively high in Q3 because we are working from the mother of all low bars. It will be what happens in Q4 of 2020 and the first three quarters of next year that will guide the bond market. Don’t expect the 10-year yield over 2% or mortgage rates over 4% in 2021 until we get a vaccine, approved treatments and more disaster relief. Remember, we have near 17 trillion in negative yields around the world as the world is dealing with the economic ramifications of COVID-19. As we can see with the recent jobs report, we have a lot of work to do here in America to get us back to the employment level before COVID-19.
To say that we have a lot of drama events that are about to occur from now to the end of the year would be an understatement between the election, rising COVID-19 cases and the dispute on more disaster relief. It’s a lot on the plate for the last 11 weeks of the year. Plus, the family talks at Thanksgiving this year! Even if it’s a zoom event, there might be a lot of intense family discussions.
Just remember, the bond market will get ahead of consistent economic growth, even if it’s between 1% -2.5%. We want to see higher bond yields and higher mortgage rates as that would indicate the last few economic sectors damaged by COVID-19 are healing. Once we can get the 10-year yield above 1%, then I can check my last variable in the America is Back economic model.
However, don’t forget: higher or lower mortgage rates in 2021 will be about the level of economic growth, positive or negative. What I discussed above are some factors that can play into that for the rest of the year.
Federal Reserve Chair Janet Yellen finished up speaking in Washington, D.C. today. Starting on Tuesday, she appeared before congress for her semiannual testimony on monetary policy.
Day 1 was before the Senate banking Committee, and Day 2 was before the House Financial Services Committee.
Click here to get today’s latest mortgage rates (Aug. 14, 2023).
Whenever the Fed Chair makes public statements, financial market participants keenly watch for any forward guidance. This time around, her testimony was under particular scrutiny as hope for three rate hikes hung in the balance after the Fed’s cautious tone at their February meeting.
Yesterday: Yellen Keeps March in Play
Senate Banking Committee
Janet Yellen began the day by reading her prepared statement. Most of the statement was a fluffy recap of events, since Yellen last testified in June, however, toward the end is where the Fed Chair began to get into monetary policy:
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
This was without a doubt the biggest moment of the prepared remarks, and was the closest that Yellen would get to stating that the March meeting is firmly on the table. The phrase stating it would be “unwise” to wait too long to raise the federal funds rate immediately got picked up on by reporters and investors alike, and it was taken to mean that March is still a contender for a rate hike.
Today: No Further Rate Hike Discussion
House Financial Services Committee
Janet Yellen made clear where she currently stands on monetary policy yesterday, so today’s events weren’t being watched with the same amount as fervor as yesterday’s. Instead of needling questions from lawmakers about the timing of the next rate hike, the day mostly consisted of house Republicans claiming that the U.S. economy is not in great shape and house Democrats and Janet Yellen arguing that it is. It was a back and forth debate that was at times more impassioned than yesterday’s testimony.
Market Response
The markets responded on Tuesday with an instant surge in Treasury yields, as investors moved out of safer investments and into riskier assets like stocks. The yield on the U.S. 10-year Treasury note shot up 4.5 basis points to about 2.48%. It came down a few points before the day’s close. However, this morning’s inflation data sent stocks and Treasury yields higher again, and nothing in Janet Yellen’s testimony really had an effect on things.
Click here to get today’s latest mortgage rates (Aug. 14, 2023).
The Fed Fund futures, which reflects the market’s views on when the next rate hike will take place, did show a rise in optimism for March after Yellen’s comments. It’s currently showing a 26.6% chance of a rate hike. That’s up from Tuesday’s reading of 17.7%. After the Fed’s February FOMC statement was released, the probability had been as low as 8%. Of course, a 26.6% is a far cry from a sure thing. Unless the economy really starts to pick up, it seems that March will get a pass.
Bottom Line
Janet Yellen made it clear to the markets that if inflation and labor data points to a strong U.S. economy, the Fed will have to seriously consider raising the federal funds rate. However, as it currently stands financial market participants don’t think that will happen in March.
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
Last Month: Markets think Mnuchin wants privatization
Earlier last month, Donald Trump’s pick for Treasury Secretary Steven Mnuchin stated that getting Fannie and Freddie out of government control is “on the top 10 list of things that we’re going to get done.” He went further, stating:
“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.”
Treasury and mortgage markets went into a bit of a tizzy when they heard that, and both Fannie and Freddie’s stocks shot up over 40%.
Now: Mnuchin backtracks
Mnuchin had his confirmation hearing before the U.S. Senate Finance Committee a few days ago, during which he was asked about these statements. In a somewhat surprising turn of events, Mnuchin backtracked a little and stated that it was not his intent to come off in support of “recap and release” (i.e. the recapitalization of Freddie and Fannie and the release of control back to shareholders).
He went on, saying that:
“I start with the standpoint [that] the status quo is not acceptable, of just leaving them [Freddie and Fannie] there. I believe we need housing reform, and we need to make sure that, whatever the outcome is, one, we don’t put the taxpayers at risk and two, we don’t eliminate capital from the housing market.”
Understandably, stock prices for both companies fell about 10% after the news broke. But while Mnuchin may have retreated a bit during his confirmation, he still maintained that change is coming. It’s unsure what exactly that change will look like, especially if Mnuchin is trying to get both sides of the aisle on board.
Still, right now is a good time to take a look at some of the issues around housing reform and how it might affect home buyers.
How the mortgage market works right now
The secondary market
A quick primer: It come as a surprise at first, but mortgage lenders don’t earn a profit from the interest on the mortgages they lend out. Instead, they sell the mortgages out to buyers on the secondary market.
It makes sense when you realize that it can take up to 30 years for some mortgages to be paid off. Businesses need cash in order to operate effectively, and having to wait 30 years for a full return on an investment would stagnate their cash flow and ultimately be unfeasible. After all, they need money right now to be able to loan out money to other clients.
Hence, the secondary mortgage market was born.
There, we have multiple entities all competing for primary market loans, which they then package up into mortgage-backed-securities (MBS) (think a mutual fund filled with mortgages). Packaging multiple (sometimes hundreds) of mortgages into a security decreases the threat of default that would be more prevalent if it were just one mortgage. After all, if your only investment defaults, you’re out of luck, but if one out of five hundred defaults, it’s not that bad.
Fannie and Freddie Mac as GSEs
There are a number of different entities buying mortgages on the secondary market, but by far the two largest purchasers are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Both of these organizations have been Government Sponsored Enterprises since their inception, and have been under conservatorship since the financial crisis in 2008. As such, they operate under a mandate to purchase loans from mortgage lenders across all economic conditions in order to ensure lenders have enough liquidity.
Currently, with the government’s implied support, securities bought and packaged from Fannie and Freddie have the government’s stamp of approval. They’ve met the underwriting requirements of the FHFA, and investors like that.
One way to think about the situation is that the United States government essentially acted as a co-signer for riskier borrowers. That is basically the big difference between Fannie and Freddie and the other entities on the secondary mortgage market. They have no such co-signer, and are therefore unable to purchase some of the riskier mortgages.
Privatization of Fannie and Freddie
Even when everyone thought that Steven Mnuchin wanted to privatize Freddie and Fannie, it wasn’t as if he would have been able to walk into his office on his first day as Treasury Secretary and make it happen with a few simple phone calls.
In fact, thanks to legislation passed in 2015, the federal government cannot end conservatorship without the approval of Congress until after 2017. It also might have been extremely challenging for Mnuchin to get not just Democrats to sign off on a privatization bill, but Republicans who want to completely abolish (not just privatize) the two mortgage giants.
Even after 2017, when there will be more leeway for Mnuchin to affect change, he would still have do deal with several issues in order to make privatization happen.
So what will Mnuchin do?
Mnuchin stated on Thursday that he is not in favor of recap and release, but he did say that Freddie and Fannie cannot be left alone.
The main question that lawmakers will have to answer over the next four years is how much government involvement in the mortgage industry there should be. Mnuchin and the rest of the Trump administration seem to be leaning toward decreasing government’s presence in the secondary market, but there’s no easy way to go about that.
Housing reform is a contentious issue among Republicans and Democrats, making it difficult to find a solution that everyone agrees on. However, the fact that Mnuchin is eager and willing to go after bipartisan reform is hope that some sort of change will take place.
Of course, Mnuchin has yet to be nominated, and took some serious heat on Thursday from Democrats about his days at OneWest Bank. It’s possible that they block his confirmation, and Mnuchin’s housing reform would become a moot point, but that path seems unlikely.
Bottom Line
Treasury secretary nominee Steven Mnuchin seems set on changing the way Fannie and Freddie Mac operate, but it’s unclear how exactly he will seek to change things. It’s important for homeowners to keep an eye out to see if a) he gets confirmed and b) what kind of bipartisan legislation he will try to get passed.
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
Buying a home is never easy. It’s expensive, confusing and loaded with paperwork under the best circumstances. It’s even harder these days when the average price of a home is over $400,000 in the U.S., and higher interest rates are making homes that much more expensive.
That’s why it’s so curious that federal regulators might write rules to make homebuying even tougher, however unintentionally, for lower- and middle-income families with modest credit.
Currently, banks must look at three different credit reports from the major credit bureaus (Equifax, Experian and TransUnion) when a consumer applies for a conventional mortgage. It’s what’s known as a “tri-merge” requirement, and it makes sure every homebuyer has three opportunities to prove their creditworthiness and put their best foot forward.
One writer for Rocket Mortgage said it’s “the most comprehensive look at their borrowers’ credit history,” and that’s a good thing. But last year, the Federal Housing Finance Agency (FHFA) proposed to move away from the “tri-merge” system and require only two credit reports, not three — or what’s known as a “bi-merge” system.
That change barely got noticed at all until members of the House Financial Services Committee — Democrats and Republicans — started raising concerns at an FHFA oversight hearing in May. Congressman David Scott, Democrat of Georgia, had this to say: “My concern is that by removing one of the reports from a lender’s review, FHFA is potentially leaving out predictive and positive credit history … this action could have serious implications for consumers planning to purchase a home.”
FHFA no doubt has its reasons. In truth, a bi-merge might be just fine for consumers with perfect credit. But for low- to moderate-income borrowers, it could be a big deal.
Let’s face it: Sometimes, bills get overlooked. Imagine a consumer with a recent bill in collections. If that collection shows up on one of their three credit reports — and it happens to be the one their bank pulls for a loan — the consumer only has one more opportunity in a bi-merge system to demonstrate their creditworthiness instead of two.
The opposite scenario plays out for rent. Not all landlords send a history of on-time rental payments to a credit bureau, which means renters don’t always get (literal) credit for paying their rent on time.
But what if a consumer lives somewhere that does share those on-time payments with a credit bureau? Under a bi-merge system, homebuyers only get credit for the rental payments if the bank where they’re seeking a loan uses the credit report that lists those rental payments. If they pull one of the other two, that homebuyer could be out of luck.
The same is true if a potential homebuyer has a credit card through a local bank. If that bank only shares data with one of the three credit bureaus — instead of all three, like some bigger banks — the consumer may appear “credit invisible” when they go to get a mortgage at a competing bank if the bi-merge report used for that mortgage doesn’t include the “right” credit report.
That’s unfair to the consumer and reduces the incentive to use a small or community bank — good institutions that know the people they serve and play an indispensable role in suburban and rural areas.
Finally, there’s the question of equity. We all know who gets left out when financial opportunities narrow; consumers from historically disadvantaged communities are more likely to have modest credit.
Those potential homebuyers should have every opportunity to represent themselves wholly and completely when they apply for a loan. That’s exactly what the tri-merge represents, and it’s exactly why it should stay in place.
Something that’s simple and straightforward today becomes a roll of the dice in a bi-merge system. That means fewer choices for borrowers who want to shop around and a higher likelihood of missing out on the loan.
Here’s the good news: FHFA’s director, Sandra Thompson, is a smart leader with good intentions. The bi-merge idea is a simple oversight from an office working daily to support homebuyers, including those in disadvantaged communities.
Even better news: There’s still time to turn it back. That’s exactly what FHFA should do.
In America’s current healthcare system, in most cases, you’re better off with the crowd. Usually, that crowd is your employer or a government pool like Medicare or Medicaid. But sometimes, due to choices you make, or circumstances you can’t control, you end up on your own, with full responsibility for your healthcare expenses. Here are some circumstances under which you might end up needing to seek affordable individual health insurance:
You lose (or quit) your job.
You have insurance through your spouse or partner, and they lose or quit their job.
Your employer or your spouse’s stops offering insurance for you or your family.
You change jobs, and your new employer has a waiting period before you become eligible for coverage.
You take early retirement.
In some other circumstances, you may have the option to participate in group medical insurance, but it’s not in your financial interest to do so.
You are young and healthy, but your employer group has a lot of older, sicker people in it, and your employer makes you bear much of the premium cost for either yourself or your dependents. Keep in mind that if you find yourself in this situation and you opt for your own insurance, you help yourself, but also make it harder for your employer and your co-workers to afford coverage.
The group plan you are eligible to participate in doesn’t meet your needs. For example, it does not cover doctors or hospitals where you live, or it does not cover particular health condition that you have or are at risk for, or the plan offers richer benefits than you want to pay for.
In any event, if you are shopping for individual health insurance, you need to keep in mind several important things.
Initial considerations First of all, if you’re choosing to voluntarily switch from group to individual coverage, you need to carefully consider what you’re giving up: government protection from discrimination by insurance companies.
In the group insurance market, the government prohibits discrimination against people by age or health condition. Your employer can’t legally charge you more in premium, deny you coverage, or offer you a reduced benefit plan because you’re sick. In the individual market, insurance companies put you through a process called, “underwriting,” which means they’ll only offer you coverage if they think they’ll get more from you in premium than they’ll pay in claims.
You can look at it as a gamble — the insurance company is betting that you’ll stay healthy (if it’s not a good bet they’ll deny you coverage); you’re betting that you’ll get sick and need healthcare. Underwriting helps them detect if you’re trying to “game the system,” by looking for insurance while you’re expecting big medical bills.
The side effect of this is that older or less healthy individuals end up paying higher premiums, and can even have trouble obtaining any coverage at all. So the game is very different if you’re a 50-year-old female who smokes and suffers from diabetes (you can pretty much forget about getting commercial insurance) than if you’re a 25-year-old male with no previous health problems (companies will be lining up to offer you coverage).
This is one of the wonders of America’s healthcare system — those who need coverage the most are least able to obtain it. It’s also the Achilles heel of presidential candidate John McCain’s health reform proposal — his plans would drive more people into the individual insurance market without adequately addressing this issue. (The Democrats’ plans have problems of their own.)
Shopping for insurance But right now, you’re not trying to solve the nation’s health care crisis, you’re just trying to take care of yourself. Here are some things to consider as you shop.
How much risk can you accept? If you can handle a higher deductible, you will save on premiums, and if you stay healthy, you get to keep the money.
How much premium can you afford? In individual health, you have to keep paying the premium, or you are no longer covered.
How able are you to save? If you have trouble saving, you will want a lower deductible, or you’ll need to have an emergency fund so that a surprise medical bill doesn’t put you in financial trouble.
How important is choosing your provider? If you want more choice of providers (doctors and hospitals) and treatments, you’ll want to make sure your doctors are in the insurance plan’s network. If saving on premium is the most important, you may want to consider an HMO. HMOs can provide excellent care at a low cost—they often do a better job at coordinating care than other carriers. But if you disagree with the HMO’s decisions about your treatment plan, you might end up unable to get the treatment you want. (There’s also some risk of that with other carriers).
Is having coverage for alternative or complimentary medicine (such as massage, chiropractic and acupuncture) important you you? Is it covered? Subject to what limitations? If coverage for these services is optional in your state, it may be cheaper for you to save for them yourself.
What’s the reputation of the insurance company? Any insurance company is going to have some unhappy customers, but you do want to look for a reputable carrier.
Tax implications. If you’re considering a lower-premium plan with a higher deductible, make sure that it’s a Qualified High Deductible Health Plan. With such a plan, you can open a Health Savings Account, where you can save pre-tax money on the condition that, when you withdraw it, you use it to pay for medical expenses. These medical expenses can be used for expenses that apply to deductible, or even for expenses simply not covered by your insurance plan. Depending on your tax situation, this can give you substantial savings.
Discounts. Insurance companies typically get discounts from providers through a Preferred Provider arrangement. This benefits you because you won’t end up stuck with the bill if your doctor’s charge is over what the insurer considers reasonable. The downside is reduced provider choice. Large insurers, or those who give strong financial incentives for you to see a limited group of health providers typically get the best discounts.
Utilization patterns. Insurance companies have learned from experience that people with higher deductibles and co-pays use fewer health services. Getting less medical care can be good, because unnecessary treatments don’t help, and might harm your health. It can also be bad if you avoid getting treatment or preventive care that you need to stay healthy. If you choose a higher deductible, or a plan without preventive care benefits, make sure you budget enough money to get care for any chronic conditions you have (you don’t want them to get worse!) and get regular checkups to make sure any new conditions are detected early, when they can be treated effectively.
Maternity care. If maternity care is optional in your state, the only people who buy it are likely expecting an imminent pregnancy, and rates are set accordingly. You may be better off just paying cash for maternity care.
Other riders. Your agent will likely offer you accident riders and other forms of supplemental coverage. These can have low premiums, but they’re low risk to the insurance company as well.
Finally, look for limits on the plan. Many plans offer lifetime maximums of $2 million or more. Other limitations can include mental health care, chemical dependency, chiropractic care, physical therapy and diagnostic care. Beware of plans that limits your benefit to only a few hundred dollars a year. For example, I had some friends who signed up with a high deductible plan to save on premiums, but discovered too late that their plan had a $300 annual limit on benefits for diagnostic care. Once that limit was met, they were on there own. You can’t buy much diagnostic care in today’s healthcare environment for $300.
What if you cannot find coverage? Now that you’ve done all this work, you still could find yourself in a situation where you can’t afford — or simply can’t purchase at any price — health insurance that meets your needs. You’re not alone. In 2006, 47 million Americans found themselves in a similar bind, and the number has only increased since then as costs have risen and employers have reduced coverage. You still might be able to find help. Here are some options for you to consider:
If you have a low income or are disabled, look for government assistance. Medicaid benefits may be available. Even if you have a moderate income, Medicaid or SCHIP coverage may be available for your children, as a lot of attention has gone to the needs of the uninsured.
If you have health conditions that make you an unattractive risk to commercial insurers, look into these options:
COBRA or continuation coverage from your last group health plan. It’s expensive, and it only lasts 18 months, but it’s better than no coverage if you face a significant health risk.
A state high risk pool or mandated basic plan. (Contact your state department of insurance for details.) Insurers aren’t going to line up to tell you about this, but your state may require them to accept you for a certain health plan. Again, premiums will be high, and benefits may be limited.
Look for work at a employer (preferably a large one with lots of young, healthy employees), who offers better health benefits.
If you’re disabled, see if you qualify for Medicare disability. Medicare isn’t just for the elderly, it’s also for people who are disabled.
Move to any other industrialized country, and you’re covered cradle to grave.
Move (or travel) to a developing country, where you still might not be afford insurance, but medical care can be much more affordable. Surgeries costing tens of thousands of dollars might be available for hundreds to thousands of dollars in Mexico or India (plus airfare), with excellent quality. If you’re nervous about the cultural and linguistic barriers, look at it this way. There’s a good chance your doctor here has a foreign accent too.
If you can’t get insurance at all, ask for a cash discount. Some providers will give you a discount similar to what insurance companies receive if you pay cash up front. Point out to the provider that they won’t have to haggle with the insurance company or wait for payment if they take your payment right away. Some providers will give good discounts if you ask. Others actually charge more if you don’t have commercial insurance.
Some services that you could fomerly only get in a doctor’s office are increasingly available at drug stores and Wal-Mart. Make the most of these services.
When you do visit the doctor, make the most of it, and ask lots of questions. Take notes, either during the visit or after. Ask the doctor how you can stay well, not just how to treat what’s wrong with you at the moment.
Manage chronic conditions. If you have asthma, heart disease, diabetes or another chronic condition, learn all you can about it. Manage it yourself, with advice from your physician. You’ll end up saving.
Take care of your health. Exercise. Eat healthy amounts of healthy food. If you smoke, stop. You’ll feel better, and you’ll probably spend less on health care.
Does this seem daunting? For more and more Americans, it is. Seem hopeless? For many people right now, it might be.
An archaic system The reasons for this state of affairs are complex. It’s based on a patchwork of systems that has grown up over time, and changing technology has made them obsolete. Long-term, more and more people are going to face this difficulty — not just poor people. Medicare is projected to run a deficit in 2018, and Medicaid coverage will need to drop unless more money is made available.
While this article has been focused on how to meet your current needs, perhaps my best advice is to write your elected officials and urge comprehensive change. To effectively solve our health care problem we need comprehensive reform, which must include cost controls (conspicuously lacking in the proposals from the Democratic presidential candidates) as well as coverage for everyone (conspicuously lacking from the Republicans’ proposals).
In the meantime, the best you can do is to research your options, and make the best choices you can.