Rebuilding Housing Finance: The Next Steps

Housing Finance Landscape and Reform Proposals

• Post-Crisis Market Metrics and Trends

  • U.S. homeownership rates have declined from a peak of nearly 70% to approximately 64%.
  • The share of U.S. mortgage finance backed by taxpayers (via FHA, VA, Fannie Mae, and Freddie Mac) rose to 90% post-crisis and currently stands at 75% to 80%.
  • 20 million American families spend more than half their income on rent, while another 20 million are disconnected from economic opportunities due to location.
  • Approximately 2 million Low-Income Housing Tax Credit (LIHTC) units are at risk over the next 20 years as they fall off compliance periods.
  • Single-family rental housing stock has grown from 11 million units pre-crisis to over 15 million units today.

• Legislative Innovation: The Delaney-Carney-Himes Framework

  • Proposed legislation seeks to balance government liquidity provision with private market risk pricing.
  • The structure envisions a "first-loss" layer of approximately 5% private capital, below the government guarantee layer.
  • The government would guarantee the remaining 95% of the capital stack for conforming mortgages.
  • A novel requirement mandates that the government sell off at least 10% of its guarantee exposure pari passu (on identical terms) to private investors on a regular basis.
  • This mechanism is designed to force the government to use market pricing signals derived from private investors to set the price of its guarantee.
  • The structure aims to allow the government to provide permanent capacity while incentivizing private capital to eventually assume full market risk.

• Capital Markets and GSE Risk Transfer

  • Private capital has been injected into the GSE risk-transfer market through three primary vehicles: outright sales of non-performing loans, pool insurance, and credit risk-sharing bonds.
  • Since 2013, GSEs have issued approximately $16 billion in credit risk-sharing notes.
  • Pricing trends for senior tranches in these structures have decreased from ~425 basis points to approximately 350 basis points over swaps.
  • Subordinate tranches are currently funding around 1,000 basis points.
  • FHFA recently finalized new, stringent capital requirements for mortgage insurers to ensure their solvency during future downturns.
  • Investor composition includes money managers, insurance companies, banks, and REITs in senior tranches, with hedge funds dominating subordinate tranches.

• Affordability and Market Structure Challenges

  • Real median wages have stagnated or dropped to levels below 2007 figures, exacerbating stress in the rental sector.
  • Single-family rental financing has become institutionalized, with Invitation Homes financing over $9 billion in the last two years through private securitization.
  • Institutional investors currently own only about 1% of the single-family housing stock, leaving ample room for growth in professional ownership.
  • A 55-unit luxury affordable condo in New York received 88,000 applications in one instance, highlighting the severe supply-demand imbalance.
  • Multifamily starts account for nearly 400,000 units annually, with cap rates remaining low due to high liquidity in the market.

• Demographic Shifts Driving Future Demand

  • The proportion of people living alone has increased from 7% in 1940 to over 25% today, necessitating housing stock adaptation.
  • 70% of new housing demand in the current decade and 88% from 2020 to 2030 are projected to be driven by minority populations.
  • Minority households face significant wealth gaps; for example, average African-American net household wealth is approximately $11,000, compared to significantly higher figures for white households.
  • The Baby Boomer cohort (74 million people retiring in the next 10 years) is driving demand for senior housing, currently at a rate of 20,000 units annually versus a peak demand estimate of 40,000.
  • 21% of Americans over age 74 currently live in senior housing or assisted living facilities, a ratio expected to grow as the population ages.

• Policy Critiques and Subsidy Realities

  • Current federal housing spending totals approximately $200 billion annually, but spending is heavily skewed toward homeownership via tax expenditures rather than rental subsidies.
  • The mortgage interest deduction results in nearly twice as much spending as the entire HUD budget.
  • The ratio of median income between homeowners and renters is 11 to 1, indicating significant disparity in subsidy impact.
  • Critics argue current subsidies often encourage leverage and larger homes rather than true equity ownership.
  • The GSE conservatorships have not been ended, and the FHFA has been criticized for failing to deliver the fundamental regulatory changes expected by both political factions.

• Forward-Looking Statements and Strategic Directions

  • Panelists suggest the U.S. homeownership rate may find a new steady state below 64%, reflecting historical norms prior to the push for universal homeownership.
  • There is a consensus that government policy should shift focus from subsidizing broad homeownership to targeted affordable housing subsidies.
  • Private capital is viewed as insufficient to provide low and affordable mortgage rates at scale without a government backstop, as the top 25 banks have less market capitalization ($3.4T) than the GSE risk insured ($4.5T).
  • Future reform is expected to be incremental, moving from Option 3 (heavy government) to Option 1 (private) over a 20-to-30-year horizon to avoid market disruption.
  • Single-family rental is positioned as a complementary asset class offering financial flexibility and mobility for Millennials, rather than a replacement for homeownership.
  • Investment opportunities are identified in senior housing, urban multifamily, and the securitization of loans for smaller, non-institutional single-family landlords.