News that the mortgage industry slipped back into profitability in the second quarter — this according to the Mortgage Bankers Association — makes many lenders look forward to even better times in 2024. The outlook on interest rates is mostly bullish, although former Treasury Secretary Lawrence Summers says that the 50 basis point interest rate cut last month by the Federal Open Market Committee was "a mistake."
Aside from the surge in home prices thanks to the Fed, the next big issue for the mortgage lenders is the November election between Vice President Kamala Harris and former President Donald Trump. With the former, the industry gets four more years of progressive policy chaos, which contributed to that 40% increase in home prices. With the latter, the industry faces indifference and a lack of focus on key issues.
Progressive policies meant to help
"Absent a severe recession, this policy is all but certain to lead to higher home prices," argues Ed Pinto of American Enterprise Institute
"Over four years the increase in home prices would total $175 billion, more than the $100 billion cost of the program," says Pinto. "The price increase would show up in higher revenue for sellers, thus acting as a wealth transfer to them."
More than giving away billions of taxpayer funds, a Harris Administration would mean four more years of unworkable progressive policies at both HUD and the GSEs, Fannie Mae and Freddie Mac. As this writer noted
A Trump victory in November means that the world of residential housing will largely be ignored if Trump I is any indicator. But a lack of focus on residential housing by the White House is not necessarily a good thing. In March of 2020, when President Trump declared a national emergency due to the Covid pandemic, the government allowed borrowers to suspend loan payments simply by asking. But what then? Nobody asked.
"HUD announced that foreclosures and evictions are suspended for single-family homeowners with FHA-insured mortgages for the next 60 days,"
For a couple of months, leaders in the mortgage industry waited in vain for a plan from the Trump White House. Residential mortgage servicers faced a couple of very tough weeks after the declaration of emergency by Trump in 2020. Hushed meetings were held in Washington as a wall of payments on mortgage backed securities approached the industry.
Mortgage servicers have a contractual duty to advance interest, principal, taxes and insurance for the borrower in forbearance, an eventuality that could have forced the whole industry into bankruptcy. The banks could only finance so much of the hundreds of billions of dollars required to avoid default on trillions worth of government guaranteed residential mortgages and securities.
By June of 2020, however, divine intervention occurred. The Fed saved the day with a tidal wave of loan originations. Massive prepayments for new loans created a surfeit of liquidity that floated Covid forbearance. Nothing further was done by President Trump or President Joe Biden to assist the process of Covid loan forbearance until two years later, when Sandra Thompson was nominated as Director of the Federal Housing Finance Agency.
Thompson changed the terms of reimbursement for conventional issuers, allowing servicers to seek reimbursement of funds advanced after the fourth month. This alleviated the crushing cash flow requirement created by Covid with respect to conventional loans, but the government loan market and Ginnie Mae MBS were still left without a liquidity backstop for a national emergency. HUD has since created an ingenious work around for partial claims, but that's about it.
For both Trump and Harris, the Fed's low interest rate policies generated a lot of excess cash flow for the mortgage industry and forced home prices up dramatically, making it appear that lending on one-to-four family loans had no credit costs. When home prices decline, however, the cost of many of the Covid era policies made permanent by Biden-Harris will soar.
Of course, neither Trump nor Biden-Harris gave any thought to the dire situation facing commercial landlords as federal and also state moratoria on mortgage and rent payments went into effect. The fact that President Trump failed to make any provision for commercial developers is interesting since he works in that business.
Progressives generally assume that rich folks like commercial property developers have piles of cash secreted away in the sock drawers and closets. But what the progressives fail to appreciate is that many owners of multifamily dwellings are small local businesses with few reserves for national emergencies.
Terrible credit problems facing smaller multifamily developments trace their origins back to Covid. Because most of the residential loan market is government insured, it was possible for the industry to finance much of the liquidity needed during Covid. With commercial and multifamily properties, however, the private owner was forced to survive by cutting staff, maintenance and other expenses.
The net-loss rate on delinquency in bank-owned multifamily properties is almost 100% of the loan amount, as shown in the chart below. In prime one-to-four family mortgages owned by banks, the net loss rate is actually negative because of strong home prices.
Given the choice between Kamala Harris and Donald Trump, a clear-cut decision is difficult. The policies pursued by Biden-Harris are nonsensical, such as the bizarre idea to use two credit scores for loan decisions. Punitive pricing for prime loans at the GSEs' cash window is likewise a source of friction with lenders on a far longer list of issues.
The list of open issues in the Ginnie Mae market is even longer, with the problematic risk-based capital scheme and liquidity facilities for the next emergency at the top of the list. Ginnie Mae has still not indicated whether the RBC "rule," such as it is, will actually take effect on Jan. 1, 2025.
A second term for President Trump, on the other hand, means that the residential mortgage industry will probably get ignored again. Being ignored has certain benefits, especially compared with the socialism that seems the central theme in Biden-Harris, but Trump cannot be counted upon for informed follow-through.
We suspect that the mounting crisis in commercial and multifamily real estate is going to eventually force greater focus and action in Washington on housing, regardless of who is in the White House.
