Greatest Impediment to Mortgage Development? Lack of latest homes.

WASHINGTON – It is common knowledge that mortgage lenders need to focus on new areas of growth as rising interest rates end the refinancing boom. However, the interest rate environment may not be the biggest hurdle.

So far, lenders have been able to bypass the ongoing shortage in US real estate supply, which was partly due to low interest rates. However, many fear that the low inventory levels will soon put a strain on the industry and force financial institutions to compete even more intensely for the new mortgage business.

According to Freddie Mac, US residential supply was nearly four million homes below aggregate demand at the end of 2020, a 52% higher deficit than in 2018. Redfins Tracker said Monday the total number of U.S. homes for sales was down year-over-year before the same percentage, a total of 634,817 homes.

The low housing supply appears to be relatively backward for Congress and financial services regulators for the time being, but many experts agree that the rising interest rate environment could give a new impetus to a new federal policy to expand housing.

"Even regulators get the message," said Ed Gorman, chief community development officer for the National Community Reinvestment Coalition. "You get the unmistakable message from communities and bankers that we really need to look at inventory."

A report by Freddie Mac earlier this month highlighted how the supply of starter homes in particular has declined over several decades. In the 1980s, the average annual supply of new entry-level homes fell by 100,000 units to 314,000. In the 1990s it fell again to 207,000 new entry-level units per year, in the 2000s to 150,000 and in the 2010s to 55,000.

"In five decades, entry-level construction fell from 418,000 units per year in the late 1970s to 65,000 in 2020," said the report by Sam Khater, Freddie Mac's vice president and chief economist for economic and housing research.

The inadequate supply of housing has fueled a highly competitive real estate market, which Gorman claims to have experienced firsthand when he recently put his home up for sale. The offers were all above the asking price and more than one had no funding options, meaning the offer did not depend on the borrower being able to secure a loan.

"This is a problem that has lasted well over a decade and that will take us considerable time to resolve," he said.

For lenders, the lack of available homes means fewer mortgage loans. Although most lenders have benefited from the refinancing boom that resulted from the sharp cut in mortgage rates last year, interest rates are expected to rise in 2021 and refi requests are already 20% lower than last year.

The Mortgage Bankers Association reported a rebound in refi activity earlier this month as mortgage rates fell, but most industry watchers expect a slowdown.

"At some point you are going to hit a cap, so the utility is really the root of the problem," said Pete Mills, senior vice president of housing policy for the MBA. "We need more living space."

While lenders are likely to be more affected by the mortgage rate environment than home sales, to the extent they are under pressure on the buy side, that is due to the lack of supply, said Shea Pallante, president of Sprout Mortgage, an unskilled lender Lender mortgage loan.

"If some lenders are affected by the buying deal, it is because of how low the inventory is," he said. "The number of buyers compared to the number of sellers is completely out."

The refinancing boom was essentially a band-aid to the lenders' supply problem, Gorman added.

“I think it's going to be hard to find someone in the mortgage industry who doesn't see what's going on in the market and wonders how it's going to affect them now, in six months, a year, and beyond. because the refinancing boom will run out, ”he said.

The shortage of stock can be attributed to a number of factors: rising timber costs, labor shortages, burdensome local zoning restrictions and the slow recovery of the housing industry from the 2008 financial crisis.

However, it has proven difficult for policy makers to address the roots of the problem.

"From a political point of view, I don't know how to get people to sell more houses and how to build houses faster," said Pallante.

In particular, tackling local zoning restrictions – such as the size of a house or the functions required – has proven difficult at the federal level.

"The challenge is that often the most effective solutions are state and local government solutions," said Mills. "In some cases, like in a state like California, there are many regional interstate groups, such as air quality management districts, and many conflicting overlays that create significant barriers to new build."

Policy makers have discussed additional funding mechanisms to drive affordable housing construction. For example, a proposal tabled at last Congress would have used part of the guarantee fees collected by Fannie Mae and Freddie Mac to put more money into the Housing Trust Fund. The fund provides the states with resources to build, maintain and operate affordable housing for households with extremely low incomes.

In March, the Federal Housing Finance Agency announced that it would authorize Fannie and Freddie to pay out just over $ 1 billion to both the Housing Trust Fund and the Capital Magnet Fund.

"The record hike in house prices over the past year has exacerbated the lack of affordable housing. To increase the availability of affordable housing in our communities, FHFA continues to support the Housing Trust Fund and the Capital Magnet Fund," said Director Mark Calabria.

President Joe Biden has included a $ 5 billion plan in his infrastructure package that provides grants to local governments in return for easing zoning restrictions.

This could be especially helpful for low-income communities in need of grants to fund new infrastructure like roads or schools, said Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders.

"This is a plan that, as part of a broader strategy to stabilize and revitalize these neighborhoods, would significantly renovate about half a million homes facing these neighborhoods over a 10-year period," he said.

The Biden government believes the housing supply could get in the way of its goals of bridging the wealth gap, Gorman said.

"Your infrastructure plan clearly signals an understanding of the need for the federal government to encourage local governments to change their zoning to become less restrictive," he said.

Sens. Amy Klobuchar, D-Minn., Rob Portman, R-Ohio, and Tim Kaine, D-Va., Have also passed legislation to create a $ 300 million fund through the Department of Housing and Urban Development, Providing grants to support Local and state governments are dismantling barriers to housing.

Separately, Senator Elizabeth Warren, D-Mass., And other Democratic lawmakers in the House and Senate have proposed bill to build and renovate nearly 3 million homes over the next decade and $ 10 billion in one Grant program invests Incentivizing communities to lift excessively burdensome zoning restrictions.

With housing becoming more expensive for younger, lower-income and minority homebuyers, it's possible that lawmakers will find it hard to ignore the supply shortage, experts say.

"I think as the housing affordability crisis deepens, you will find that policy alone is compelling policy makers to address the issue," said Jerry Howard, CEO of the National Association of Home Builders, in an April 19 issue of Arch Mortgage InsuranceCast.

It's likely that lenders will also push harder for solutions, Gorman added.

"Traditionally, people who fund don't necessarily see themselves as responsible in any sense for the underlying product they fund," he said. "They benefit from it, but they don't think they need to be actively involved on the production side of housing."

Still, Gorman said he was "surprised if mortgage lenders didn't see the need to be more robust".

"I've just seen some appreciation in the last six months of the problem that I didn't see a year or more ago," he said. "I think it's starting to take hold, but I think we're still a long way from it."

The shortage of inventory has not yet hampered lenders. But the ability to offer more credit could be good for business regardless, Roberts said.

"Lenders cannot loan loans to homes that do not exist," he said.

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