Cooling Or Collapsing?

Author Who Detailed Plight Of Fannie Mae, Freddie Mac Says Government Must Fill Gap
For Minorities, Middle Class To Access Mortgages.

The question: With the mortgage forbearance program winding down and housing inventory hitting a 40-year low, where is the housing market headed amid dynamics of the COVID-19 pandemic?

Fortune reported that more than nine million homeowners were in the mortgage forbearance program at the height of the pandemic. After the economy posted one of the fastest recoveries in history, the Mortgage Bankers Association said there were still about 1.7 million borrowers enrolled in the program that allowed them to pause their payments.  With the forbearance program now lapsed, Fortune predicts a major shake-up headed for the housing market due to all of these borrowers being phased out.  When you consider that housing inventory is at a 40 year low, with just over 600,000 homes for sale right now on realtor.com, Fortune warns that even if a small percentage of these 1.7 million struggling borrowers opt to sell—rather than returning to their monthly payments—it could cause a shock in the housing market.

Shades of 2008? When the U.S. housing market collapsed in the Great Recession in 2008, Congress created the Federal Housing Finance Agency (FHFA) to regulate the mortgage industry. The FHFA placed Fannie Mae and Freddie Mac into a conservatorship, which led to Fannie and Freddie sending large payments to the U.S. Treasury.

 “This isn’t a crisis of oversupply like in 2008,” says Tim Pagliara of founder, chairman, and chief investment officer of CapWealth and the ForbesBooks author of Another Big Lie: How The Government Stole Billions From The American Dream Of Home Ownership. And Got Caught! “It is a crisis due to shortage. We are short 6.8 million single-family housing units while we have static demand for 1 million-plus new homes every year.

“Because of delays in the recapitalization of Fannie Mae and Freddie Mac of their release from conservatorship, the availability of credit has been constricted. As a result, minority home ownership has not kept pace. Black home ownership is at a 50-year low,” says Pagliara.

A ProBuilder article cites NAR data showing that in August 2019, 30% of mortgage loans were backed by the FHA, VA, or USDA.  Compared to August 2021, the share of government-backed loans had dropped to just 23%.  Furthermore, a record 73% of all new mortgage debt in the first quarter of 2021 went to buyers with credit scores of 760 or above, according to data from the New York Federal Reserve. According to the Urban Institute, first-time homebuyers with FHA loans have an average credit score of 676.

Pagliara points out the foreclosure crisis following the ‘08 housing crash was largely due to the fact that millions of homeowners were underwater – i.e., their remaining mortgage balance was greater than their home’s value. Real estate and mortgage experts today say homeowners now are generally likely to have more home equity than those in ‘08.

But will a large sector of would-be buyers be left out without the government giving Fannie Mae and Freddie Mac more help?  “Fannie Mae and Freddie Mac need capital so they can serve their mission of providing long-term fixed-interest housing for the underserved and the middle class,” Pagliara says. “They are the bedrock of the American middle class, the strongest engines of economic equality this country has ever invented.”

Pagliara’s takeaways about the housing market:

  • Budget constraints are going to force the Biden administration to be creative.  “By finishing the recapitalization of Fannie and Freddie and the release of their conservatorship, the government can generate over $50 billion in proceeds, which can be placed in a housing trust to assist communities and first-time homebuyers,” Pagliara said.

  • As the Federal Reserve System tapers, Pagliara says economic activity will need to accelerate – especially the housing market. “A strong housing market has a multiplier effect on many things throughout the economy,” Pagliara says. “Everything from paint to appliance sales benefit.”

  • Big real estate investors and asset management firms are factors driving up home prices and making home ownership less accessible to average Americans. “One result,” Pagliara says, “is too many renters who should be owning. If you can rent a home in a neighborhood where people own, you should be able to purchase that home.”

Download this article from Building Savvy magazine