The end of the home ownership “dream” | FT Alphaville

The end of the home ownership “dream”

Government reports don’t normally make for interesting eulogies, but this one is an exception.

The Treasury-HUD report to Congress on the future of the US housing market is out and generating qualified praise (though little surprise).

“Reforming America’s Housing Finance Market is well worth reading in full. It marks the end of an era for the ostensible goal of successive US governments: for more and more Americans to be homeowners.

As expected, it gives Congress three options for the winding down of the GSEs:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital

It also recommends that the FHFA, which currently regulates the two GSEs, take steps to crowd-in private capital as they are wound down — increasing guarantee fee pricing and down payment requirements, for example. There’s a cheeky nod, too, to covered bonds (H/T Felix Salmon).

As to how these options translate into changes to house prices and mortgage payments, we recommend this report from Moody’s Analytics and Dean Baker’s quirky response, which runs back-of-the-envelope numbers and concludes:

the hybrid model [roughly option 3 above] will mean slightly lower monthly mortgage payments, but this benefit is likely to be offset by higher property taxes. The higher house prices in the hybrid model will mean that it will be more difficult for first-time buyers to come up with a downpayment. And, the wealth effect associated with the higher house prices in the hybrid model will mean lower savings and less growth.

We could also point out that financial intermediaries (e.g. Goldman Sachs and J.P. Morgan) would stand to make more money on housing in a hybrid model, but there is no reason to get into such details.

Um, we see quite a lot of reasons — one for the future.

That’s the long-term housing plan, then — but what of the near-term? Slate’s Bethany McLean reminded us on Thursday about the important squabble to define the vanilla Qualified Residential Mortgage (QRM).

As FT Alphaville explained back in June, Dodd-Frank exempts banks from risk retention requirements (i.e. holding on to 5 per cent of the underlying asset as “skin in the game”) on RMBS if their mortgages meet the “qualified” definition. This, in effect, institutionalises the process of deeming what is and what is not a qualified loan.

We cautiously concluded mandatory risk retention was a good idea — but are waiting for its application to make a final call.

The problem? There is no definition yet. Cue frenzied lobbying.

FBR Capital Markets, In a note published on February 1, outlined three possible scenarios:

1. “Status quo”

2. “Middle-ground”, with a 10 per cent down payment requirement

3. “Conversion”, with a 20 per cent down payment requirement

The down payment is not the only issue at stake, but it’s a good proxy for the parameters of the debate. Current betting according to the note and the Slate report is for a narrow (i.e. high down payment request) QRM definition.

Which is why those offering high LTV mortgages and mortgage insurers are spooked. As FBR recognises: “The conversion scenario would effectively put an end to the federal mandated use of mortgage insurance.” Even a 10 per cent down payment requirement would “essentially wipe out half of the MI’s future business” since 50 per cent of insurers’ loans are between 90 and 95 per cent LTV.

A narrow QRM definition would also, of course, raise borrowing costs for those taking out high LTV  mortgages. The Slate report refers to JP Morgan Chase research that claims risk retention requirements could increase rates by up to three percentage points.

This could retard a housing market recovery and increase the number of loans that end of getting backed by the FHA.

Which kind of goes against the grain of Friday’s Treasury report.

And may suggest that we haven’t seen this chart’s nadir quite yet:

Related links:
One size does not fit all in ABS risk, Fed says – FT Alphaville
Strange meddling
– FT Alphaville
The plain vanilla mortgage LIVES!
– FT Alphaville
On the Treasury Department’s GSE Report, Privatization and Hybrid Models.
– Rortybomb