For the foreseeable future there won’t be a resurgence of the private mortgage industry
Home prices have been increasing, mortgage rates are at all time low, and the cost of ownership is below the cost of renting in some market places. So, why isn’t private banking lending money to borrowers? After the federal government took over Fannie Mae/Freddie Mac and then greatly expanded the scope of FHA there were reassurance that private lending would be reintroduced into the mortgage industry. Currently, federal government insures or guarantees 95% of all newly originated mortgages. Wouldn’t this be a good time for private lending and private mortgage insurance to get back into the market. Here are some news articles that indicates this will not occur any time soon.
FHA has a large market share and very high fees. Only five years ago it had a small market and very reasonable fees. Originally, FHA only insured low cost housing for first time homeowners. It offers insurance to lenders that underwrite only 3.5% downpayment loans. Basically, it reduces the risk for lender for low downpayment loans. Now, it insures up to $729,000 loans in Orange County (hardly a starter home) and a another home purchased by the borrower every 5 years. This news article, points to the expansion of the scope of business for FHA.
By JOE GOSE Published: November 27, 2012
Now, thanks to a recent Federal Housing Administration rule change aimed at supporting mixed-use properties, condos are getting more serious consideration in the $200 million development, known as Ponce City Market.
“We continue to assess the right mix of what those units should be,” said Katharine Kelley, director of Jamestown’s development and construction division. “But the new F.H.A. ruling strengthens the attractiveness of condos as an option, because it increases the field of potential condo buyers.”
Enacted in September, the rule change opens the door to government-insured mortgages for condos in mixed-use buildings with commercial footprints of up to 35 percent, up from the previous 25 percent limit. Exceptions may be granted for projects in which as much as half of the space is commercial. Developers hope this, along with other F.H.A. changes, will help revive condo sales just as the overall housing market is improving.
This doesn’t sound like the pull back of a government program or reduced FHA market share in the lending industry. In fact, it sounds like larger expansion into (1) mix use projects and (2) from first time homes to trade up homes or larger middle income homes.
Larry Roberts just posted analysis on the cost of FHA insurance. The current cost of insurance is a 50% effective increase in the cost of interest rates for the borrower. Even with this huge additional cost of an mortgage private mortgage insurers still maintain a small market share in offering insurance to borrowers. These high insurance rates aren’t sparking competition.
Fannie Mae and Freddie Mac
Fannie and Freddie guarantee loans for less riskier borrowers that put 20% downpayments when they purchase homes. They are government sponsored entities that helped to pioneer the 30 year fixed loan, which allowed more people to purchase homes by lowering the downpayment requirement and standardizing the lending industry. Before Fannie and Freddie most home loans by banks required at 50% down and had balloon payments. Now Fannie and Freddie sell these standard loans to investors in what is called the Secondary Mortgage Market. In 2008, the federal took Fannie and Freddie the a large bailout with the eventual goal that they would be privately owned entities again. However, it looks like that goal has also been pushed back.
Paul Miller with FBR Capital Markets suggests in a new report that the “ability to repay rule” and the qualified-mortgage rule are almost ensuring the long-term survival and “dominance” of the 30-year, fixed-rate mortgage and the end of products that surfaced during the housing bubble.
And with that being the case, private capital may likely find less room to flourish. Fewer mortgage products mean fewer mortgage players. Miller estimates the Dodd-Frank rules will, therefore, give preference to loans securitized by Fannie Mae and Freddie Mac.
“This preference, the guarantee on principal and interest on Fannie Mae and Freddie Mac securities, and the removal of subprime product features should make the return of meaningful private securitization extremely unlikely, in our opinion,” he wrote. “These changes should also prevent new entrants from eroding underwriting standards in an attempt to increase market share.”
The private mortgage industry faces the vast competition from Fannie and Freddie. It’s not just the guarantee backed the US government it is disappearance of the private mortgage market post 2008. It’s difficult to rebuilt an industry that barely exist. Fannie and Freddie charges a fee called the G-fee for this federal guarantee, but it’s not large enough to spur competition from private mortgage backed securities. However, now there is an taxing interest in the G-fee.
In 2011 the US passed a tax attached to the G-fee, if you obtain a Fannie or Freddie loan in 2012 you are paying this new tax. Now, the US sees mortgages as a growing revenue potential for taxes.
The latest proposal would extend those g-fee hikes, which are set to expire on Oct. 1, 2021, to October of 2022. The House Rules Committee adopted the amendment for inclusion in the bill’s full text Thursday, with the House expected to consider the legislation on Friday.
“Fannie and Freddie’s guarantee fees are supposed to be used to help offset the risk inherent in providing mortgages, and any increases to those fees should be used for that purpose,” the MBA’s Stevens said in a public statement. “Dipping back into the housing piggybank to pay for unrelated policy items on the backs of America’s homebuyers sends the wrong message at a time when the housing market is starting to show signs of recovery.”
Stevens is asking Congress to reconsider using g-fees for any purpose unrelated to the fees’ role in the agency housing market.
Ironically, if the Congress increases the G-fee taxes too fast, the Private Mortgage Back Securities market might make a comeback. Until this happens the advantage will be Fannie and Freddie’s court.
Finally, it should be mentioned who invests and purchase these mortgages that are sold on the secondary market by Fannie and Freddie. Since the beginning of the recession mortgages in extremely large scales have been purchased by Federal Reserve. The enormous purchasing power, due to it’s unlimited ability to print money, has poured money into secondary market. It has increased the market price of the mortgages securities and therefore reduced yield (mortgage rate) on new mortgages. Private lenders are reluctant to loan money for 30 years when the potential return is less than 3%. Historically, CDs have a higher interest with much less risk.