What We’ve Gotten Out Of It Is A Run-Up In Housing Prices

A Christmas topic starting with the Wall Street Journal. “Adrianna Boshears’s dream of homeownership seemed within reach for the first time in 2021. She and her husband were finally saving money, thanks to pandemic stimulus checks and a larger-than-usual tax refund. A real-estate agent suggested they work to boost their low credit scores before applying for a mortgage. But as their savings dwindled, the 41-year-old mom started pulling out the plastic to pay for groceries and utilities. By October, the kitchen cabinets in her Fresno, Calif., apartment were bare. All five cards were maxed out. Their balances now exceed $10,000. Adrianna’s credit score has fallen to 569. There are no more dreams of buying a house. ‘I make more money than I did back then, and I’m struggling more now,’ she said.”

“In the East Bay area of Northern California, Jennifer Lee’s 14-table Break Your Fast restaurant survived the pandemic in part thanks to two federal loans totaling $115,000. The 34-year-old kept serving omlettes and eggs Benedict, paying down debt from a previous expansion. One of Lee’s loans was forgiven and she deferred payments on the other loan, which had a balance of $80,000, until 2022. That is when prices started jumping for her weekly 1,000 eggs, 15 pounds of bacon and 200 pounds of potatoes. She increasingly put those supplies on credit cards, piling up debt of about $45,000, while paying $600 a month on her loan. ‘The irony, after everything that happened, is that this [loan] is what’s kicking my ass right now,’ she said. ‘The only way I can really see myself getting out of debt is to sell. Despite the restaurant being such a big part of my life, it’s just not a life I can sustain.'”

“Stimulus checks and a one-year forbearance on Eduardo Narvaez’s federally backed mortgage helped him build credit and support his mother after she lost work as a housekeeper in the pandemic. ‘She’s helped me my whole life,’ said Narvaez, who had a $15-an-hour light manufacturing job. ‘It was my turn to do it.’ But as Narvaez started his own family outside of Jackson, Miss., he racked up thousands in debt that he struggled to manage. Now, three of his credit cards are frozen in a repayment plan obtained through a debt counselor. Narvaez reserves a fourth card for emergencies. The limit: just $1,000. ‘The last few months, I’ve been more stressed about it,’ the 36-year-old said. On top of it all, he lost his job in November.”

The Colorado Springs Independent. “In May, the city’s urban planning manager said 2,000 new housing units would open over the next 18 months in the 1 square mile that makes up downtown. As I approached my office, the awkward growing pains of downtown were hard to ignore. The city’s core is at an inflection point — the old is making way for the new. Who gets to stay? Who gets pushed out?”

“Austin Wilson-Bradley, director of economic development with Downtown Partnership, reported more than 23 downtown-business closures this year, including The Well food court, Bell Brothers Brewing, Wild Goose Meeting House, Munchies 719 and The Perk. It’s not just downtown; restaurants have been closing across Colorado Springs. December has been a bloodbath, with seemingly daily closure announcements. A select few are lucky to pay a reasonable rent agreed upon in a years-old lease; the truly fortunate own their property. But in most cases, restaurant owners are beholden to landlords who, as Eva Zhang generously put it, follow the market, raising rents to maximize profit. China Town Restaurant is just one of many restaurants forced out by economic demands they cannot afford.”

“‘As leases start to expire, you’re coming into new fiscal years. These are decisions that will affect your taxes. This is when you start to see a heavy increase in that decision-making,’ said Colorado Springs chef Brother Luck . ‘You can’t find enough revenue to justify paying for all these expenses, and you can’t hike your menu prices any higher. How much are you actually going to pay for a burger before you’re like, ‘That’s absurd’? We’re past that right now.'”

Go Banking Rates. “The first Trump Administration tried (and ultimately failed) to privatize Fannie Mae and Freddie Mac, the government-sponsored enterprises that back conforming mortgage loans in the U.S. Many pundits wonder if the incoming second Trump Administration will take a second stab at privatization. Reed Letson, the owner of Elevation Mortgage, sees fully private loan corporations putting stricter loan guidelines in place. ‘The guidelines would be tightened up, which would cause obtaining a mortgage approval increasingly difficult. Loan officers and underwriters would have to learn the new changes to the lending guidelines which will make the approval process longer and tougher.'”

“If it becomes harder for borrowers with lower or less credit history to buy a home, fewer buyers can enter the market. And what happens when demand diminishes? ‘Less access to mortgage loans among lower-income and weaker-credit borrowers would shrink the pool of buyers,’ observes Letson. ‘That could put downward pressure on home prices as competition would decrease.’ Of course, better housing affordability isn’t all bad news for buyers. ‘On the flip side, those who do qualify would be able to negotiate better terms on the purchase of their home. Inventory would increase, resulting in price drops and extended days on the market,’ he added.”

From Bisnow. “President-elect Donald Trump’s return to the White House has reignited speculation about the privatization of Fannie Mae and Freddie Mac. Economists, bankers and brokers are keenly interested to see whether the federal government’s guarantee on mortgage-backed securities will survive any reform. A product of the Global Financial Crisis, the government’s support of the sector has become its defining feature and a facet of the system that would have widespread impacts on multifamily lending if dropped. Since the mortgage market collapse and subsequent Great Recession, Fannie Mae and Freddie Mac have been under federal oversight. The government sets the rules, but it also guarantees that the mortgage-backed securities being sold will never default in a process called conservatorship.”

“Fannie Mae and Freddie Mac are by far the most active participants in the $11T mortgage-backed securities market, with $310B in average daily trading volume as of November, according to trader-broker trade organization Sifma. The elimination of a federal guarantee would not only push down the value of the securities offered by the agencies but also likely lead their credit to deteriorate and their debt costs to rise, said Stuart Boesky, CEO of New York-based multifamily lender Pembrook Capital Management. The agencies are also amid an expanding investigation meant to root out fraud in its books that Fannie Mae said in third-quarter reporting was the greatest risk factor facing the agency. It has suspended dealmaking with several mortgage brokers as it scrutinizes its balance sheet.”

“‘If they have the same capital level and it was privatized today, they would gap out so wide that it would be prohibitive,’ Boesky said, using a term that refers to a wide and rapid swing in valuation.”

From Reason. “If you have a mortgage on your home, the odds are that it’s backed by one of two congressionally chartered, government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Defenders of the GSEs say they’re important for boosting homeownership generally and sustaining the standard 30-year fixed-rate mortgage specifically. Critics argue they serve mostly to make the financial system riskier and more statist. One such critic is Mark Calabria, the former head of the Federal Housing Finance Agency that has acted as conservator of the GSEs since 2008. In an interview with Reason’s Christian Britschgi, he argues that Fannie and Freddie do little to expand homeownership.”

“Q: Supporters of Fannie Mae and Freddie Mac argue that they’re essential for sustaining the 30-year, fixed-rate mortgage—a product a lot of people like. Do you agree with that? A: Let’s start by reminding ourselves what is special about the 30-year fixed-rate mortgage. Obviously the most special part is, it’s fixed for 30 years. The risky part of that—from the lender’s perspective—is interest rate risk. The important point here is Fannie and Freddie don’t protect against interest rate risk; they protect against credit risk. What they are guaranteeing you against is that the borrower won’t repay. The actual provision of a 30-year duration has nothing to do with what Fannie and Freddie provide. Fixed-rate financing is not unheard of in the rest of the world. It actually happens quite often.”

“Q: What do you make of the broader claim that Fannie and Freddie make mortgages more affordable and therefore increase homeownership rates? A: Fannie and Freddie were rounding errors in the mortgage market till about 1980. These were just small enterprises that did not have a big impact on the mortgage market. And the homeownership rate has been steady since the 1960s. What Fannie and Freddie provide is not a homeownership subsidy but a home debt subsidy. And we have seen this repeatedly, whether it’s the mortgage introduction, whether it’s mortgage credit subsidies—these things work through the demand channel, not the supply channel. To the extent that it is increasing the mortgage market, it’s increasing mortgage demand, which if you’re not doing anything about supply is only going to run up prices.”

“Many of the products that Fannie and Freddie do provide are provided by others. If you look at incomes above the Fannie and Freddie conforming loan limit [higher-value mortgages that the GSEs do not secure], the Jumbo market, homeownership rates are higher there. Of course, homeownership is correlated with income, so it’s not surprising. But if the argument was that Fannie and Freddie are needed for homeownership, then why are homeownership rates higher outside of the Fannie/Freddie-dominated part of the market than they are within the Fannie/Freddie-dominated part of the market?”

“Q: What’s the affirmative case for getting rid of Fannie and Freddie, then? Could they be safely gotten rid of? A: The primary effect of Fannie and Freddie has been more leverage on the part of financial institutions and the part of households, and then more interconnectedness. We have stuffed large amounts of our financial system with Fannie and Freddie debt. Were Fannie made to fail, then Fidelity might likely fail. So we’ve created all this interconnectedness in the financial system that I think leaves our financial system much more vulnerable. Mostly what we’ve gotten out of it is a run-up in housing prices without any real impact on homeownership rates.”

“What would the world look like without Fannie and Freddie? We’d look like Canada. We’d have five or six big banks that did most of the mortgage lending. To be sure, Canada has mortgage subsidies as well. But no other country has this degree of subsidization. I’ve often said you could get rid of Fannie and Freddie and America would still lead the world in mortgage socialism.”