Housing Policy for a Nation in Crisis

Editor's note: This piece originally appeared in the August 2020 issue of MReport, out now.

This year will be remembered for many things when it’s time to pen the history books, and that’s true on the housing front as well. With leadership changes at the Federal Housing Administration (FHA), the Supreme Court ruling on important topics such as TCPA and the constitutionality of the CFPB, the GSEs’ ongoing move toward privatization, and a presidential election only a few short months away, it would have been quite a noteworthy year for the industry even before the global impact of the COVID-19 pandemic swept through.

Leaders within the mortgage industry, the government, and related sectors are facing an ongoing economic crisis on top of an ongoing health crisis, facing a nation swept by job losses, an uncertain future, and many homeowners actively seeking forbearance or at least concerned about being able to continue making their housing payments.

With the future presenting more questions than answers, MReport spoke to economists and subject-matter experts from Realtor.com, SitusAMC, the Urban Institute, and more to discuss how shifting policies, changing homebuyer outlook, and the results of the November elections will change the face of the industry landscape.

Charting a Course Through Murky Waters

The rise and spread of the coronavirus pandemic caused the housing and mortgage industries—and the global economy, for that matter—to grind to a screeching halt.

As of July 7, 2020, Black Knight reported there were 4.14 million homeowners in forbearance plans, which represents 7.8% of all active mortgages, and which was up from the prior week’s 6.8%.

According to Black Knight, 6% of all GSE-backed loans and 11.6% of loans backed by the Federal Housing Administration and the VA are currently in forbearance plans. An additional 8.2% of loans in private-label securities (PLS) are also in forbearance.

Additionally, Fitch Ratings reported that mortgage loan delinquencies recorded the largest increase in two years—with delinquencies rising for all loan types.

Nonprime loans experienced the greatest annual increase in delinquencies in June, rising 21.8%. Black Knight reported in June that the national delinquency rate rose by 90.22%, with more than 1.6 million new delinquencies since March.

Edward Golding, Executive Director of MIT Golub Center for Finance and Policy, told MReport that forbearance programs initiated by the $2.2 trillion CARES Act were key but admitted “we made the same mistakes we made in 2008.”

“We should allow easier [refinances], regardless of forbearance or employment status,” Golding said.

The Federal Reserve stepped in as the pandemic spread, lowering the benchmark interest to nearly zero—between 0% and .25%. Average 30-year fixed-rate mortgages have fallen to historic lows, with the average rate falling to 3.02% as of July 9, according to Freddie Mac.

The Fed also announced plans to continue purchasing mortgagebacked securities at its current pace until it feels the economy has recovered.

Danielle Hale, Chief Economist, Realtor.com, said recent actions by the Fed helped provide liquidity to the mortgage market.

“This is helping to keep rates low amid a time of incredible market uncertainty and make it worthwhile for buyers to stay active in their pursuit of homes,” she said.

Hale added that the CARES Act is working to prevent temporary hardships from becoming “long-term problems” for homeowners with the creation of mortgage forbearance plans.

“Many of the Fed’s programs were adapted from programs rolled out during the last economic crisis,” Hale added. “To the extent that these policies are effective at helping the nation’s homeowners get through this pandemic, they may be a template for dealing with future crises.”

Tim Rood, Head of Industry Relations, SitusAMC, said policymakers in housing finance have had to pivot from managing one of the strongest housing and credit markets in recent years to dealing with the unprecedented impact of COVID-19.

“Due to the collateral damage from the pandemic and mandated quarantines, the focus of policymakers has largely shifted from housing reform plans published last September to loss mitigation and foreclosure prevention,” Rood said.

Rood, though, added the Fed continues to “aggressively” make a market for Agency RMBS and U.S. Treasuries, causing interest rates to fall to record lows.

“Record low interest rates are fueling a surge in home and mortgage demand, which has managed to keep the housing market buoyant during a historically large economic collapse in quarterly GDP and unemployment rates above 10%,” Rood added.

He added that he does expect there to be pressure at the federal, state, and local levels to increase moratoriums and provide additional forbearance and modification options for homeowners.

Ed Pinto, Director, Senior Fellow, AEI Housing Center, said that while there are some smaller impacts—the tightening credit availability—the market is, overall, performing well during this time of financial strain. However, he said the real question is where sufficient housing will come from in order to support demand.

“Supply was tight before we entered the COVID-19 crisis,” Pinto said. “But even at that point, there might’ve been three or four months’ supply, and if that supply goes down to two months, that is going to generate higher prices. You can’t go from two months to zero.”

Pinto added he expects to see demand slow in response to insufficient inventory, and he expects home prices to continue their ascent.

Interestingly, Pinto said he supports the government’s decision to not set up a specialized facility for the mortgage banking industry, although it was strongly requested.

“[The government] focused on Fannie Mae, Freddie Mac, and in particular the FHA and Ginnie Mae, to develop policies and procedures that were specific to those particular programs,” Pinto said. “Back in March, the hue and cry were that unless the Fed did this and Treasury did that, that was the end of the world. But here we are in July, and it hasn’t happened.”

What did happen was that Ginnie Mae implemented the Pass-Through Assistance Program, which forwarded funds to servicers who faced a liquidity shortfall due to the pandemic. Ginnie Mae called the program a “last resort” option.

“The payments are being advanced to investors, and things are still in flux, but we continue moving forward, step by step, without having taken the big plunge into some new, large program that housing lobby was proposing,” Pinto continued.

The Supreme Court Steps In

The Supreme Court, meanwhile, has had a busy summer, both releasing rulings and announcing its intent to weigh in on several other important industry-related cases.

During the end of June, the high court ruled that the structure of the CFPB was unconstitutional but found that it should be able to operate under new rules.

“The CFPB’s single-Director configuration is also incompatible with the structure of the Constitution, which—with the sole exception of the Presidency— scrupulously avoids concentrating power in the hands of any single individual,” the ruling stated.

Additionally, the court said that the CFPB’s director “must be removable by the President at will.”

In response, the Bureau announced Thomas Pahl as the new Deputy Director of the CFPB.

A few days later, the Supreme Court invalidated a 2016 amendment from the Telephone Consumer Protection Act and ruled that Congress “impermissibly favored debt-collection speech over political speech—violating the First Amendment.”

The court’s judgment on the Bureau has also brought into the questions the structure of the FHFA—which operates under a similar single-director structure.

While the Supreme Court announced in July that would hear arguments about the constitutionality of the FHFA, Golding said he expects the basic structure of the agency to remain the same.

Rood said while the Bureau was created with a structure designed to insulate it from political influence, the five-year term of a director made it so that a sitting President could only terminate a director for cause and may not be able to name their own replacement director of the Bureau.

"Advocates of the law wanted the director to be exempt from oversight—by Congress or the President. As a result, the CFPB Director position was referred to by a D.C. Circuit court panel as ‘ … the single most powerful official in the entire United States Government other than the President, at least when measured in terms of unilateral power,’” Rood said.

Rood added that de-politicizing the agency, replacing the Director with a bipartisan multimember commission, and making the agency more accountable to Presidential and Congressional oversight will go a long way towards building a more balanced and predictable regulatory environment for the mortgage industry.

“However, if the current structure, as modified by the [Supreme Court] ruling, of a single Director who can be fired by the President stays, it will certainly result in a more politically motivated institution where policies can change wildly and rapidly depending on what party holds the Presidency,” Rood said.

He said the last six months of the director’s reign has the potential to become a “lame duck” period where little will get done. An example of this, Rood said, is the proposed rulemaking by CFPB Director Kathleen Kraninger regarding QM and non-QM.

“Given the 2021 implementation timeline of those proposed changes, a new administration could now replace the Director and come up with a completely new set of rules. Therefore, the industry will likely be frozen on these topics until after the presidential election,” Rood said.

Rood said, given the similarities of the single-family director structure to the CFPB, “it’s hard to imagine a scenario where the structure isn’t deemed to be unconstitutional.”

“If the FHFA’s single-director structure is overturned, then a Biden administration could replace Director Calabria about three and a half years earlier than the end of his five-year term,” Rood continued. “Calabria has been laser-focused on fulfilling his statutory requirement to get the GSEs out of conservatorship if they can fulfill the requirements of the recently published capital framework.”

He observed that Democratic Presidential candidate Joe Biden could theoretically replace FHFA Director Dr. Mark A. Calabria with someone who would use the GSEs as instruments of public policy to help implement his plan for housing.

Pinto said that, while he agreed with the conclusion, he would have thrown out the entire CFPB statute based on the single-director provision.

However, he noted that the presiding President should have the ability to appoint or announce a replacement, subject to confirmation by the Senate, for a policy position such as the Director of the CFPB.

And for how this could impact the FHFA, he said the bigger question is when the Supreme Court will render a decision, which he noted could be in either spring or summer 2021.

If Biden were to be elected, Pinto agreed that he could theoretically go to Calabria and ask for his resignation and, if he refuses, could relieve him of his duties.

“I think that’s easier to do, given the Supreme Court case in the CFPB.” Pinto said.

A Noteworthy November

Speaking of Biden, the former Vice President made waves earlier this year during an interview with Vanity Fair when he called for mortgage and rent forgiveness—across the board— during the COVID-19 pandemic.

“There should be rent forgiveness and there should be mortgage forgiveness now in the middle of this crisis. Forgiveness. Not paid later, forgiveness,” he said during an interview on Good Luck America, Snapchat’s daily political show. “It’s critically important to people who are in the lower-income strata.”

During the interview, Biden said nobody should be paying more than 30% of their income for rent.

Golding argued that Biden’s notion of all foreclosures and evictions needing to be eliminated during this pandemic could be a necessary step.

“That goal can be accomplished in a variety of ways and the details can be worked out,” Golding said.

Plans to cancel rent and mortgages for the duration of the pandemic have been presented by other lawmakers as well. According to an article by Forbes, Democrat Rep. Alexandria Ocasio-Cortez (D-NY) has backed similar initiatives, including one sponsored by Rep. Ilham Omar (D-Minnesota)—the Rent and Mortgage Cancellation Act—that would cancel all rent and mortgage payments for the duration of the pandemic.

“The coronavirus crisis is more than just a public health crisis—it’s an economic crisis. Minnesotans are losing jobs, getting their hours reduced, and struggling just to put food on the table. We must take major action to protect the health and economic security of the most vulnerable, including the millions of Americans currently at risk of housing instability and homelessness,” said Rep. Omar in a release. “Congress has a responsibility to step in to stabilize both local communities and the housing market during this time of uncertainty and crisis. In 2008, we bailed out Wall Street. This time, it’s time to bail out the American people who are suffering.”

The measure proposed by Omar and Ocasio-Cortez would set up federal relief funds for landlords and lenders to recoup the cost of the lost mortgage and rent payments if they agree to abide by a set of renter protections for five years.

Hale said businesses, consumers, and borrowers are pursuing normalcy when possible despite the coronavirus’ disruptive nature. She suggests that Biden’s proposal, if well intentioned, could have unintended consequences.

“A complete, across-the-board mortgage and rent forgiveness plan seems to be a blunt approach that would have much larger costs than a more targeted assistance program,” Hale said. “More targeted assistance also seems more appropriate given the disproportionate effects of the pandemic on lower socioeconomic status groups.”

Rood said that the idea of rent and mortgage “jubilees” is appealing to many politicians and at-risk households, but they come with “meaningful consequences.”

“Mortgage investors are likely to raise their risk premiums and significantly shrink their credit appetites to all but the most pristine credit if they are forced to absorb losses from mortgage forgiveness policies. Similarly, rent forgiveness policies that are financed by landlords are likely to result in the reduced stock of rental housing and reduced investments in upkeep and maintenance of existing rental properties,” Rood said.

Rood added, “The domino effects are already being felt as some are pushing for payment holidays for the owners of rental properties and other commercial real estate dwellings across the board. Most notably, Oregon recently passed House Bill 4204, which effectively creates a stand-still agreement for any borrower that had a previously performing property pre–COVID-19. These forbearances and moratoriums are just pushing the financial risk through the system from homeowners and renters to property owners and lenders.”

Rood added that there are other potential solutions out there, such as expanding the Section 8 housing voucher program to include all that qualify, versus the current lottery system.

“Such a change would go a long way to helping most vulnerable to economic shocks,” he said.

Pinto said forgiving mortgages and rents during this pandemic would be a “huge hit” to the GSEs, the VA, and private lenders and banks. He noted there is roughly $10 trillion in outstanding mortgages, and assuming you forgive 8% of loans, that could translate into a loss of $100 billion.

“I know Washington throws money like $100 billion around like water, but $100 billion is a lot of money,” Pinto said.

Rood said he is becoming increasingly concerned about the lawmakers’ embrace of the Modern Monetary Theory (MMT).

In the past, debt bubbles were managed using one of three methods—grow your way out, default your way out, or inflate your way out of the bubble.

“Deficit spending for things other than for fiscal stimulus or infrastructure investment is a relatively new phenomenon, but we have taken to it like a duck to water,” Rood said. “We certainly cannot be uncharitable during these unprecedented times, but we also have to look critically at the long-term impact of extended (beyond the CARES Act duration) foreclosure and eviction moratoriums, extended forbearances, distorted credit reporting, and the potential risk of a ‘zombie housing market’ that no longer supports fundamental laws of supply and demand.”

Rood encourages policymakers to start a dialogue with real estate investors and explore where they could be leveraged to partner with struggling homeowners to keep them in their homes.

“Real estate investors could buy distressed homes and rent them back to struggling households, or investors could enter into equity-sharing contracts with homeowners to cash out some of their equity while preserving the opportunity to buy it back in the future,” he said. “The government can assist with vouchers or emergency aid to struggling households to assist with their debt service and improve the risk calculus from prospective sources of private capital.”

Regarding the Trump administration’s work in housing Rood said the FHA had a lot of work to do to repair its relationship with the mortgage industry following the 2016 Presidential Election.

“Few would argue that the FHA was in dire need of structural reform in 2016,” Rood said. “The FHA was struggling under outdated technology, underdeveloped risk-management functions, a backlog of interpretive guidance to be published, and a workforce that was at or near retirement age (24% at retirement age in 2018 and forecasted to go to 45% by 2023).”

Rood added that one of the primary restraints to the FHA’s progress was that it was operating without a confirmed Commissioner for almost four years until Brian D. Montgomery was finally confirmed and approved.

“Over the last two years, FHA has put together a worldclass leadership team, de-risked the program by modifying the annual certifications made by lenders, entered into a Memo of Understanding with the Department of Justice to deweaponize the False Claims Act, secured $80 million of funding to invest in IT modernization, and has published as many Mortgagee Letters in the last two years as it did in the combined four years that preceded them,” Rood said.

The FHA’s leadership, according to Rood, has demonstrated an “intense commitment” to being better business partners to its lender partners. He added: “Those accomplishments have also been augmented with a doubling of cash reserves which will further insulate taxpayers from credit losses.”

Golding, however, said issues with the FHA and HUD go back decades—not just four years. He added that the departments need to fund housing vouchers at levels that meet market needs, as just one in five families who would qualify for vouchers are able to get them.

Golding added that the Fair Housing Act of 1968 needs to be “vigorously enforced to eliminate segregation.”

Pinto said it took a while for the current administration to gets its people in place, especially within the FHA.

“There was a lot of pushback in the Senate. A minority of the Senate was holding up a lot of appointments, and continue to hold up appointments,” he said, noting the delay in approving Brian D. Montgomery as first the Housing Commissioner and then more recently as Deputy Secretary of HUD.

The Next Step for the GSEs

President Donald Trump and Steven Mnuchin, Secretary of the Department of the Treasury, unveiled the administration’s plan to privatize Fannie Mae and Freddie Mac in September 2019.

The department’s Treasury Housing Reform Plan consists of a series of recommended legislative administrative reforms aimed to “protect American taxpayers against future bailouts,” preserve the 30-year-fixed-rate mortgage, and help guide Americans toward the path to homeownership.

“The Trump administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” Mnuchin said in a release at the time. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”

Fannie Mae and Freddie Mac suffered significant losses due to their structural flaws and lack of sufficient oversight during the financial crisis of 2008. The GSEs received more than $190 billion from the Treasury Department.

President Trump issued a Presidential Memorandum on March 27, 2019, directing Mnuchin to develop a plan to address the “last unfinished business of the financial crisis.”

Michael Fontaine, COO and CFO, Plaza Home Mortgage, was among those who noted the plan released by the Treasury Department was lacking something—details.

“There’s no details behind that,” Fontaine told MReport in a prior interview. He said the plan will keep the GSEs in place in some form to not disrupt the housing market. Fontaine said there is a lot of concept and “high-level” ideas, but no details on how to execute them.

One of the plans that lacked details, according to Fontaine, was the possibility of eliminating the QM patch for GSEs for loans over 43% DTI. However, if there is no alternative, Fontaine said, it could limit access to credit for a lot of consumers, as the GSE handles many loans over 43% DTI.

Golding said the GSEs exiting conservatorship is an “important step if we are going to get innovation in the mortgage market.”

“Proposed capital levels are way too high for the risk and will result in a massive transfer of wealth from the taxpayers to investors,” he said.

Golding added that it would be better to set capital level at 2%— more than is needed—and then charge an FDIC like insurance premium on the GSEs of 10-15 bps. “This can be accomplished without legislation. However, to allow for new competitors will need a simple legislative fix to allow FHFA to charter new GSEs,” he said.

Rood said the COVID-19 crisis has “clearly reshuffled” priorities for the FHFA regarding GSE reform and has delayed the exit of Fannie Mae and Freddie Mac from conservatorship indefinitely.

Rood said that while he doesn’t doubt that Treasury Department’s plan was developed in earnest, he fears lawmakers remain conflicted about the fate of the GSEs given their implementation in public policy during COVID-19.

“[The FHFA is] also keeping down costs both for borrowers in the form of lower interest rates and seller/servicers. Once out of conservatorship, the cost of mortgage credit and the availability of mortgage credit is most certainly going to worsen,” Rood said. “Aligning lawmakers’ priorities of keeping borrowing costs low and home values high with Director Calabria’s objectives to de-risk the enterprises and get them out of conservatorship will be fascinating to watch.”

He added that Congress has struggled for more than a decade with restructuring the GSEs—and doesn’t see a resolution soon.

“The political will to radically reform these organizations through legislation simply does not exist on Capitol Hill as there is much to lose and little to gain,” he said.

Pinto said there are “many hurdles” along the path toward freeing the GSEs from conservatorship. There are actually two components of these issues: first, the exit from conservatorship, and second, the recapitalization of the GSEs.

“There’s a lot of statutory and regulatory provisions that have to be met with. There is the repayment of the taxpayers, whatever ends up having to be done there for the senior preferred stock. There’s the repayment of the taxpayers for the guarantee that’s been in place since 2008,” he said.

An added concern is the current COVID-19 crisis, with Pinto saying that is the “big question mark” on what the impact will be on the GSEs.