This week, federal regulators announced that home mortgage borrowers would no longer need a 20 percent down payment - opening the door to Fannie Mae and Freddie Mac guaranteeing loans with down payments as little as 3 percent. I’ve heard from many of you, asking if we’re repeating the same mistakes that led to the last housing bubble and asking what NMHC is doing in response.
Quite honestly, it’s too early to read the tea leaves. There’s no question that multifamily housing performs best when the single family sector also is healthy, and the latter is still struggling to gain traction. I also don’t need to remind you of the negative affect the Great Recession had on our industry, despite multifamily not being part of the problem. So although these latest policy announcements affect single family mortgages, there’s a lot at stake for us, too, in making sure the entire housing market is healthy.
It’s also important to understand the motivation behind these latest policies We heard it firsthand when we met with Administration officials, including NEC Director Jeffrey Zients, at our Fall Board meeting last month. In short, they are looking for policies that will spur job growth, and since housing has led the nation out of every recession before this, they are simply reverting to the old playbook. In fact, the subtext of our meeting was “since you are the only sector that is actually creating jobs, what can we do to support you?”
While it’s disappointing that they are reverting to outdated policies that fail to recognize the changing demographic, lifestyle and economic factors at play, we should also recognize that these new steps are unlikely to move the needle much in terms of the homeownership rate. To begin with, FHA already offers 3.5% downpayment loans; hence they are essentially shifting demand from FHA to the GSEs.
But beyond that, it overlooks the fact that restricted credit supply is only half the explanation for the historically low mortgage levels. Demand is also low. As The New York Times points out, “...an aging population, stagnant wages and a wariness of taking on new debt have all reduced demand for mortgages.”
In sum, “The reality is that this is as much a demand-driven drought as it is a credit-driven drought.”
Long-term, the outlook is strong for our industry. The 21 million people still waiting to form households bodes well for the apartment industry. Today’s younger generation saw people burned by homeownership, while at the same time rediscovering the benefits of urban living and a maintenance-free lifestyle. More and more immigrants are moving to our cities, who will primarily rent. (Read Mark Obrinsky’s recent take on demographic trends).
That said, this is clearly misguided policy. Research shows that loans with low downpayments have the highest default rates. According to one study in 2007, high LTV borrowers with otherwise qualified mortgages (meaning not subprime) had a 40% chance of ending up in delinquency. As they conclude, remember this the “next time anybody claims that you can have a safe mortgage with a low downpayment.... Because the fact is that you can’t.”
We’ll continue to educate policymakers that the pursuit of economic growth on the backs of middle- and lower-income families who can’t sustain homeownership is doing a disservice to those families and the economy overall.
Ultimately, it’s about finding the right balance. As The Washington Post notes, homeownership rates leveled off around 64 percent in 1980, staying constant until the bubble years. The current rate sits at 64.7 percent. Perhaps we’ve already found the correct equilibrium.