April 1, 2021 – Perhaps nowhere is a “K-shaped” recovery as apparent as in the housing market. Those who could comfortably afford homeownership prior to the COVID-19 pandemic have benefited from significant house price appreciation. But for the millions of Americans who were already cost-burdened, mainly renters, the pandemic has pushed many close to eviction or foreclosure. This bifurcated recovery has led congressional Democrats and housing advocates to call for a new “national housing policy.”
Even before COVID-19, many Americans struggled with housing affordability. Some 46% of renter households were cost-burdened in 2019, meaning they spent at least 30% of their income on rent. For renters earning less than $25,000 annually, that figure was more than 80%. The gap in Black and white homeownership rates is a whopping 31%—the highest in decades.
The pandemic has highlighted, and also deepened, inequalities in the housing market. A recent report from the Consumer Financial Protection Bureau (CFPB) showed that as of December 2020, 8.8 million renter households were behind on their rent while 2.1 million mortgage borrowers were at least three months behind. The government’s response—a combination of widespread forbearance, eviction bans, and foreclosure bans—has allowed many people to remain in their homes for now. But some individuals may be unable to afford their housing payments once those protections end. Of course, these struggles are at the same time that record-low inventory and interest rates allowed average house prices to appreciate by roughly 12% year-over-year.
A recent paper from the Harvard Joint Center for Housing Studies calls for a “comprehensive re-envisioning of national housing policy.” Another paper by two influential housing advocates makes the case for a significant expansion of Fannie Mae (FNMA) and Freddie Mac’s (FMCC) role in promoting affordable housing. That report, written by Mike Calhoun, president of the Center for Responsible Lending, and Lewis Ranieri, of Salomon Brothers fame, attracted recent publicity for the authors’ respect both among Democrats and among industry.
Calhoun and Ranieri call for “extended forbearance” to help homeowners avoid foreclosure. Policymakers have taken note, and both the US Department of Housing and Urban Development and the Federal Housing Finance Agency (FHFA) have extended the availability of forbearance from 12 months to 18 months. But in the longer term, the authors call for the government-sponsored enterprises (GSEs) to accept more low-down-payment loans, remove credit overlays, and expand their purchases of low-balance loans. They also argue that Fannie and Freddie should increase housing supply, for example, by providing more financing to renovate homes and stopping sales of delinquent loans to buy-and-hold investment firms.
Some of these proposals may start to gain traction once FHFA Director Mark Calabria is replaced, which we expect to happen by this summer following a pending US Supreme Court decision. The push for greater housing affordability also could have implications for the role of Fannie and Freddie. Calhoun and Ranieri, for example, argue that the GSEs should be treated as utilities going forward, as it would allow policymakers to require the GSEs to focus on affordability over profits.
Representative Maxine Waters (D-CA), chairwoman of the House Financial Services Committee, summed up Democrats’ views back in December when she argued that President Biden’s housing focus should be on ensuring “homeowners and renters are getting the support that they need during this crisis, as well as to promote affordable housing in the recovery.” While it is unclear that housing finance “reform” will be a priority for President Biden, that is, proactively moving the GSEs out of conservatorship, we believe calls for a national housing strategy, focused on affordability, will be a significant focus. The Calhoun-Ranieri paper is a good blueprint for how a future FHFA director may approach the issue.
– Thomas Dee, CFA, Head of Financial Services
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