In April 2009, shortly after becoming Treasury secretary, Tim Geithner answered a question on how to address the economic challenges facing our country with the following:
"One of the big mistakes governments make in crises is they step on the brakes too early, or they ease up on the accelerator too early, at the first sign of progress. It’s very important that we not make that mistake."
Unfortunately, there is growing evidence that Washington is making that same mistake with respect to the housing and mortgage markets. At a time when there is widespread concern about access to credit and tens of thousands of creditworthy families are still unable to obtain mortgage financing, policymakers have been diverting their attention much too early to reducing the government‘s role in the housing market.
As we start 2014, policymakers face a fundamental choice: Which goal is more important to them—helping lower- and middle-income families to buy their first homes or trying to "reduce the government's footprint" in the mortgage market? The only tangible result of the strategy to shrink the government role has been to make it more expensive for families who rely on government financing to purchase homes.
To put the current purchase market activity in context, there were only 2.4 million owner-occupied originations in 2012 according to the latest Home Mortgage Disclosure Act data. In 2000, before the housing bubble, there were 4.4 million of these transactions. The 2012 volume is over 100,000 purchase loans below the 2009 level. The Mortgage Bankers Association of America weekly application survey shows it only got worse in 2013 and continues to worsen as purchase applications fell to a 19-year low in late February.
Fortunately, the gap between these anemic purchase mortgage numbers and the rebounding housing market is being filled by a record number of cash transactions. According to two different data sources (RealtyTrac and Black Knight), there has been a sharp increase in cash transactions in 2013 rising to over 40% of all purchase transactions in December. As one mortgage banker recently said to me, "cash is my biggest competitor."
The cash phenomenon has apparently lulled some in Washington into a false sense of security about the strength of the mortgage market. While there is certainly nothing wrong with investors or the wealthy paying cash for homes, it does not provide the foundation on which to build a healthy housing market for our country.
Not surprising, families who rely on government financing the most have been the hardest hit by the weak purchase market. According to then-Federal Reserve Board Gov. Elizabeth Duke’s speech in May 2013, purchase originations for homebuyers with credit scores between 620 and 680 have declined 90% since 2007 and, probably even more significant, have dropped over 50% since 2001.
There is one piece of good news. The Consumer Financial Protection Bureau’s new rules appear to be having minimal impact on homebuyer eligibility. In fact, when asked which is having a greater negative effect on access to credit—the CFPB’s rules or Fannie/Freddie loan level price adjustments, guaranty fees and Federal Housing Administration premiums, mortgage lenders, large and small, overwhelmingly tell me that the fees and premiums are a much bigger impediment to the purchase mortgage market recovery.
Now some would say that the problems facing the purchase market are far more complicated than increased fees and premiums and they certainly are.
However, it is also true that policymakers implemented these increases to encourage the return of private capital to the mortgage market. Instead of achieving their intended goal of "crowding in the private sector," these surcharges are only either making homeownership more costly for the lower- and middle-income families who can least afford them or pricing other families out of the mortgage market.
There are some encouraging signs that policymakers share this concern as Mel Watt, the new director at the Federal Housing Finance Agency, stopped the latest round of guaranty fee increases and the administration's FY 2015 budget, which projects that the FHA Fund will reach its 2% capital ratio next year, also proposes a pilot program that offers lower premiums. However, more needs to be done.
Now that Fannie Mae and Freddie Mac have repaid the government all of their borrowed funds and have excellent delinquency rates, FHFA could rollback LLPAs and guaranty fee increases. And the FHA premium needs to be restructured and lowered. The emphasis on the collection of annual premiums since October 2010 has resulted in an 80 basis point increase (or an additional $100 per month on the FHA median purchase loan amount of $151,000).
The increases in annual premium have effectively lowered FHA's debt-to-income ratios about 3% for many homebuyers. Add in the spike in rates last spring and it should not surprise anyone that the FHA purchase has declined another 15% in the last six months compared to the year earlier according to the administration’s housing scorecard.
The Community Home Lenders Association, a group of regional mortgage bankers, is on the right track with its proposal to lower the FHA annual premium from 1.35% to 0.75%, increase the upfront premium from 1.75% to 3% and drop the life of loan premium requirement. These changes would accomplish two key objectives—keep FHA on the path to financial solvency by collecting more premium upfront and slowing down the excessive runoff of quality loans that has been occurring since June 2013 and also expand homeownership opportunities for many eligible homebuyers.
So what is Washington going to do—take steps to help lower- and middle-income families become homeowners or chase the illusory goal of trying to attract private capital that is penalizing low- and middle-income homebuyers? Policymakers need to apply former Secretary Geithner’s advice on the economy to the housing market and "put the foot back on the accelerator." Otherwise, our economy will sputter and homeownership will remain out of reach for too many creditworthy families.
Brian Chappelle is a founding partner of Potomac Partners, Washington.