America’s affordability crisis is worsening. Its reasons are manifold, whether a product of the “k-shaped” recovery that has left 28% of renters owing back rent on their homes, or rapid house price appreciation driven by demand for new homes that rapidly outpaces supply. But what can the US mortgage industry do in the face of these challenges to help to create the affordability so many Americans need?
At the MBA’s recent CREF21 conference, a panel of mortgage experts broke down the affordability question and offered a few concrete solutions. Tony Love, SVP of affordable housing and FHA lending at Bellwether Enterprise Real Estate Capital, facilitated a wide-ranging discussion with John Gilmore, managing director of real estate finance at Walker & Dunlop LLC, Sarah Garland, director of debt and structured finance at CBRE capital markets, and D. Edward Greene, managing director of affordable housing finance at Lument. They all emphasized the unique challenge this country faces and offered a few novel routes to improving the overall picture. “The problem is really bad and it’s growing,” said Garland. “And there’s no unified approach on how to address it all, either. There are lots of successful programs out there but I think we, as a group, need to come together and figure out how we’re going to tackle this growing shortage.” Garland paid particular attention to gentrifying cities and urban cores where there’s a huge need for affordable housing. She emphasized the knock-on effects for those economies as workers are priced out of their homes and forced to live further and further from their jobs. The other panelists highlighted how acutely this affordability crisis is being felt in rental housing. As the conversation turned to solutions, Gilmore highlighted how effective the low-income housing tax credit program (LIHTC) has been in delivering housing through a private-public partnership. While he believes the program needs to be reworked a little bit to reflect changing conditions since its initial introduction, he explained that it’s one of the more efficient delivery vehicles for new and more well-maintained affordable housing stock. “We need to figure out ways to continue to expand it,” he said. Ongoing costs and maintenance issues have been a longstanding problem in affordable housing. D. Edward Greene highlighted to the panel how the industry has addressed these challenges. The agencies, in the past 10 years, have come out with programs that serve to lower costs beyond the standard bank credit enhancement. Now, he believes agencies must come up with workforce housing products. The outsized impact of the COVID-19 pandemic on working-class families, in Greene’s opinion, calls out for programs that serve these people. “I think the lenders are responding through innovation. I read almost daily about a new pilot program that has been tested, and I applaud them for doing that,” Greene said. “However, it seems like that the crisis is outpacing that.” In discussing necessary solutions, the panel highlighted the need for more unified action across the industry. While many different solutions have been pioneered in different areas, the scale of the issue requires a clearer unified definition and singular approach. Clear definitions of low and middle income, for example, should be built with a knowledge of the frequency with which middle-income earners fall through the cracks. For Graham, this might take more direct government involvement, either with an expansion of the tax credit program or action by municipalities lowering building fees that can be onerous for an affordable housing development. She and the other panelists emphasized that any government effort could help to marshall the significant amounts of private and investor capital ready to invest in affordable housing. Major corporations like Google and Amazon are setting up affordable housing funds, while ESG-rated mortgage backed securities are generating demand on public markets. Tony Love, who moderated the discussion, drove home one final point that should get lenders, governments, and individual mortgage pros invested in delivering affordable housing for more Americans. “As we focus on repairing the economy, it seems to me that housing is one of those segments of the economy that can really act as a stimulus,” Love said. “There was a recent study that showed for every dollar that the public invested in affordable housing, the investment returned a 24-time multiplier, between direct and indirect impact on the on the regional economy. I think that’s one of the things that policymakers are probably going to be looking at, when they’re starting to focus in on this infrastructure initiative. Hopefully, affordable housing will be part of that.”
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We’re approaching the one-year anniversary of mortgage forbearance programs and while many American borrowers have gotten off the program for one reason or another, a frustrating number of homeowners remain. A little less than 5.5% of homeowners are still missing mortgage payments, representing a group of homeowners who have not gotten back on their feet since the initial COVID-related lockdowns in spring of 2020.
This group of borrowers represents a significant policy challenge, as well as a potential risk to the country’s current hot housing market and ongoing rapid house price appreciation. According to Matt Tully (pictured), VP of agency affairs and compliance at Sagent Lending Technologies, these borrowers and the wider industry can take some hope in the Biden administration’s promise to address the issue. However, there are still a number of challenges ahead and individual mortgage pros may play a crucial role in the months to come. “There certainly are risks for these borrowers,” Tully said. “If we [extend] the foreclosure moratorium but don’t do anything about forbearance, then the borrower ends up in this kind of no man’s land, post-forbearance, pre-foreclosure. We’re saying servicers can’t take these homes back, but we’re not clear on what the borrower’s status is. That has all sorts of implications for investors like the GSEs and Ginnie Mae, and that has implications for the individual borrower’s credit report.” Tully believes that the range of people impacted by a scenario like this means policymakers will have to act. That could include extending forbearance for these borrowers as vaccines are rolled out and harder-hit sectors of the economy are able to recover. While any sudden end of forbearance could pose some serious risks to the overall shape of the housing market, Tully emphasized that this is not a situation like in 2008. These borrowers did not enter into homeownership in a fundamentally weak place, rather they have been put in a tough spot by circumstances outside their control. Moreover, the broad strength and rapid house price appreciation we’ve seen across so many housing markets should mean that they can use the paper equity accrued in their home to prevent a short sale situation. A challenge that Tully also foresees is the simple habit of mortgage payment. While he noted we haven’t seen people using forbearance to live ‘rent-free’ simply because their neighbors are, he is concerned about how these borrowers get back on their feet. Rehabilitating this many borrowers, according to Tully, is something the US has never done before. He believes that the immediate fix to the problem is a continuance of forbearance past the initial 12-month period. Beyond that, it’s up to the key investors and players in this space like Fannie, Freddie, Ginnie, the FHA and the VA to work on what can be done to modify or restructure these loans. This is an area where Tully believes, too, that individual mortgage professionals can play an absolutely crucial role. “For mortgage professionals, it’s really the question of ‘how can you take advantage of some of these macro factors to the benefit of the borrower?’” Tully said. “You can tell them, ‘let’s modify your rate, you’ll have to start making your payment again, but your rate is going to be a lot lower than it otherwise would and I don’t necessarily have to subsidize you or do anything too crazy.’ I think that’s where it evolved to and that will be a discussion really between servicers and the investors in the space to find out if we have the ability to go in and renegotiate some of these mortgages to address the terms.” Next month is shaping up to be an “inflection point” for the nation’s housing market as almost a quarter of active forbearance plans come to an end, according to a recent Black Knight report.
Data from the analytics firm revealed that more than 600,000 seriously delinquent borrowers will reach the end of their allotted forbearance periods at the end of March, representing roughly 24% of the approximately 2.7 million homeowners who remain in active forbearance plans in mid-January. And according to Ben Graboske, president of data & analytics at Black Knight, a slowdown in forbearance improvement may present “new challenges to recovery for seriously delinquent homeowners.” “When nearly a quarter of all forbearance plans come to an end on March 31, at the current rate of improvement there would still be approximately 1.5 million more such serious delinquencies than before the pandemic,” said Graboske. “With that rate of improvement slowing in recent weeks, current trends suggest more than 2.5 million homeowners would still in forbearance at that point. While early in the pandemic roughly half of homeowners in forbearance continued to make their monthly mortgage payments, that number has steadily declined. Today, it's about 12%, which suggests the people who are taking the full forbearance period afforded to them may well be experiencing prolonged financial distress and face extended challenges as they return to making payments.” According to report, the data “clearly shows the industry-wide need for post-forbearance waterfalls to determine borrower need and readiness while foreclosure moratoriums are still in place.” “By efficiently addressing lower-risk borrowers as they exit forbearance, focus can then shift to those more in need,” Black Knight said. “Robust portfolio monitoring, borrower outreach, loss mitigation, and regulatory compliance will only become more important as the year progresses and the industry comes to terms with the size and scope of the post-forbearance problem.” Bank of America (BoA) announced Wednesday that it would triple its $15 billion commitment in affordable housing over the next five years.
In 2019, the second-biggest US lender launched the Bank of America Community Homeownership Commitment – a $5 billion initiative that aims to help 20,000 low- and moderate-income homebuyers through affordable loans and over $180 million in down payment and closing cost grants. The company said that it surpassed this commitment, and in doing so has supported nearly 21,000 individuals and families in purchasing a home. “Homeownership is an incredibly powerful force, helping families to build wealth over time and strengthening our communities. It can be challenging to save enough to buy a home, so it’s no surprise that we’ve seen an overwhelmingly positive response to our programs. We are excited about our goal of helping an even greater number of home buyers to prepare for homeownership now and in the future,” said D. Steve Boland, president of retail at Bank of America. The new $15 billion investment intends to reach 60,000 new homebuyers and includes down payment and closing cost grants which offers lender credit of up to $7,500. When used together, the grants can provide customers around $14,000 to help with their home purchases. BoA claims that half of its home loans are to low- and moderate-income or multicultural families and communities. But according to data from Inside Mortgage Finance, jumbo loans for wealthy borrowers make up more than two-thirds of the bank’s $237 billion mortgage portfolio as of September. As the purchase market heats up and buying a house gets more competitive, many borrowers may be asking why they’re going through the stress, anxiety and headaches of the homebuying process. Single family rental developments have taken off, and it might be easier or even more financially sensible to rent in the suburbs rather than buy. While the emotional resonance of property ownership and the American Dream are certainly compelling, sometimes you need to make the brass-tacks case that buying a home makes more financial sense than renting.
To see if such a case might be made, Odeta Kushi (pictured), deputy chief economist at First American, looked at 50 housing markets across America to see if renting or buying made more financial sense. In all but two of those markets (San Jose and San Francisco), owning made more sense than renting. Even in locations where house price appreciation meant the monthly cost of ownership was slightly higher than renting, a key element of ownership made it the better financial option: equity appreciation. “We started this study looking at median monthly mortgage payments in our top 50 markets compared to the median rent. When we did that, we found it was cheaper to rent rather than own in 32 markets,” Kushi said. “But when we did that we thought, wait, owning is very different from renting because you get the benefit of equity, the benefit of house price appreciation. When we accounted for house price appreciation in that monthly cost of owning, we found that it was more financially prudent to own rather than rent in 48 out of the top 50 markets in the USA.” While the two outliers were both in extremely expensive markets around Silicon Valley, Kushi explained that Phoenix, Arizona, was the market where it made the most sense to own rather than rent. While Kushi accepts a future rise in mortgage rates could cool off some of the demand currently driving the pace of house price appreciation, she also noted that house price appreciation tends to be “downside sticky.” Sellers, she noted, would often rather withdraw from the market than sell at lower prices in the housing market, keeping supply tight and appreciation up. Moreover, with rates and housing supply as low as they currently are, we can still count on broadly strong house price appreciation even if rates do tick up somewhat. For mortgage professionals looking to communicate this information to prospective borrowers, Kushi offered a straightforward takeaway: the house is paying you. Borrowers buying in markets experiencing rapid house price appreciation can enjoy measurable growth over time. Moreover, another study by First American found that housing is one of the biggest drivers of wealth creation in the United States. For a new borrower, especially a first-time borrower, buying a home with an eye to appreciation means buying into this wealth creation. Kushi emphasized that this financial case for ownership needs to be folded into the wider lifestyle questions around why a borrower wants to buy a home. Mortgage professionals should offer this information as a value add, one that supports the borrower’s wider hopes and dreams. “I think the takeaway from this study is that borrowers will also get the equity benefits from buying that home,” Kushi said. “But keep that in mind - they’re making this lifestyle decision. It’s something that that has been on the docket for a lot of millennials to do once they get married and have kids. They’re making that [lifestyle] decision, but also, in a lot of these markets, they’re gaining the equity and the wealth creation from that home. Homeownership has really been essential to the American dream, largely because it is a vehicle for wealth creation. I think that that’s something that mortgage professionals can use this study to show.” |
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