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Incorporating Rental Housing Into Future Mortgage Market
Thisrnis the second of a two-part summary of the Center for AmericanrnProgress (CAP)/National Council of LaRaza paper titled Makingrnthe Mortgage Market Work for American’s Families (read part 1 HERE). Inrnthe first installment we summarized CAP’s take on the current marketrnchallenges and the need for increased access and affordability andrnits analysis of the secondary market’s role in promoting them. PartrnTwo will look at the connection of rental-housing to the secondaryrnmarket and CAP’s suggestions for a Market Access Fund and a suggestedrnmodel for evaluating the secondary market. </p
RentalrnHousing’s Connection to the Secondary Mortgage Market. </p
Approximatelyrnone-third of Americans live in rental housing and nearly 50 percent of low-income renters and extremely low-income renters arernminorities. As we restructure the mortgage finance system we mustrnmake sure that it directs capital to rental housing, especiallyrnaffordable housing located in communities with access to goodrnschools, jobs, and transportation.</p
Therncost of rental housing is an increasing burden, especially for thosernwith the least income. The Center for Housing Policy found that morernthan one in four renter households spent more than half their incomernon housing and in most places rents are rising faster than income.</p
Rentalrnhousing needs access to capital both for construction, to finance itrnwhen complete, and for periodic renovation. The government sponsoredrnenterprises (GSEs) and the Federal Housing Administration (FHA) haverna long history of supporting access and affordability in thernrental-housing area and especially sustained it during the housingrncrisis. Even as private capital has returned to the multifamilyrnmarket it has mostly focused on higher-end properties in thernstrongest urban and suburban markets, leaving government channels tornfinance older, less expensive properties and those in secondary andrntertiary markets. For this reason, all discussions regarding thernfuture of housing finance must include consideration of multifamilyrnas well as single family financing. </p
Whateverrnsolutions emerges as a structure on the single-family side likelyrnwill drive the outcome for multifamily finance simply because thernformer business is so much larger. Government should encouragernwhatever secondary market entities that emerge to devote a portion ofrntheir activities to rental housing, ideally with the goal of creatingrnprofitable, self-sustaining business lines. </p
MarketrnAccess Fund (MAF)
</p
Tornthis end, CAP proposes establishing a Market Access Fund, or MAF, tornpromote broader access to mortgage credit and to support the types ofrninnovations that have proved successful in the past. Overrnthe years many potential homeowners who were once thought to bernunacceptable risks have become successful homeowners through not onlyrncareful underwriting and targeted loan programs but because ofrnlimited amounts of credit enhancement or risk capital such asrnprovided through FHA, the VA, and USDA’s Rural Housing Services.</p<pDuring their most effective years the GSEs did this using their ownrnrisk capital and setting standards for their lends; banks alsornparticipated, guided by Community Reinvestment Act (CRA)rnrequirements. Because many of the proposals for a revamped housingrnfinance system require the majority of the credit risk be borne byrnprivate capital which is not subject to CRA or GSE housing goals, thernstructure to support this innovation will probably not growrnorganically. For this reason it is critical to create a capacity forrnsuch credit enhancement such as MAF.</p
ThernMAF could be capitalized through a small assessment on allrnsecuritized mortgages (with or without a government guarantee). Thernmonies would be used to support the development and testing ofrninnovative, affordable products and services for approximately one torntwo million households annually.</p
ThernMAF would:</p<ul<li
Providerngrants and loans for research, development, and pilot testing ofrninnovations in prepurchase preparation, product, underwriting, andrnservicing that expands the market for sustainable homeownership andrnunsubsidized affordable rental.</p</li</ul<pExamples</bwould be innovative automated underwriting systems, housingrncounseling, non-fee ownership structures such as community land trustrnand restricted deed sales which reduce the immediate entry price forrnhomeownership while retaining permanent affordability. Otherrnexamples of innovation would be low-down-payment mortgages where arnportion of every payment would go to a savings account to provide arncushion for repair/maintenance and economic distress </p<ul<li
Providernlimited credit enhancement and other support such as financing forrnrehab and energy retrofits of small rental properties.</p</li</ul
ThernMAF would also capitalize the Capital Magnet Fund, which enablesrnCommunity Development Financial Institutions (CDFI) and nonprofitrnhousing developers to attract private capital and take affordablernhousing and community development activity to greater scale andrnimpact. The Fund was established by Congress shortly before the GSEsrnwere placed in conservatorship and consequently has only received onernround of funding. That 2010 infusion did result in funding ofrnseveral successful projects. </p
MAFrnwould also capitalize the National Housing Trust Fund, a HUDrnadministered state block-grant program to increase and preserve thernsupply of rental housing for extremely low-income families. ThisrnCongressionally authorized fund was never funded. </p
StrategicrnPlans and Evaluation</p
Inrnaddition to providing targeted funding to expand the range ofrnborrowers served by the housing-finance system, the system needs arnmechanism to ensure against market “creaming” (lenders focusing resources first on the ‘cream of the crop’ borrowers) . As in the case of ourrncurrent housing-finance system, there must be a market regulatorrnresponsible for monitoring the use of the taxpayer guarantee,rnensuring the public benefit is not abused or unfairly rationed. Thernregulator of the Secondary Market Entities (SME) would be in the bestrnposition to ensure that the benefits of a taxpayer-funded guaranteernis available to all qualified borrowers. </p
Whilernthe accountability mechanism will ultimately adapt to the newrnhousing-finance structure, CAP suggests one possible model with threernkey components; overall market assessments, rigorous oversight andrnevaluation, and individualized strategic plans.</p
Steprn1. Conduct overall market assessment: The regulator would providernthe public with an annual assessment of the housing market,rnidentifying priority and unmet needs and areas that are underservedrnby the market such a senior or rural housing. Next the regulatorrnwould assess the potential causes of those gaps and offer insightsrnand recommendations for closing them.</p
Steprn2: Oversee and Evaluate SME Performance. The regulator wouldrnevaluate the extent to which the SMEs meet the housing needsrnidentified in Step 1 and comply with fair housing and other laws. Other performance indicators would include the SMEs’ ability to reachrnunderserved communities, how effectively they assist borrowers tornsucceed as homeowners and whether the SME was appropriately deployingrnMAF money to support quality counseling, product innovation, andrnunderwriting . Finally the regulator would ensure the SMErnloss-mitigation activities were effectively assisting borrowers tornavoid foreclosure. The regulator would conduct a safety andrnsoundness assessment to ensure that loans financed by the SME arernaffordable, responsible and sustainable and would have the authorityrnto take remedial actions to address any problems. </p
Steprn3: Build Individualized Strategic Plans. Each SME would design arnstrategic plan that would, in part, flow from the regulatorsrnassessment. It would use the planning process to identify specificrnhousing and credit needs they intend to address, suggest innovativernpartnerships with other lending institutions, community organizationsrnand public agencies and involve community stakeholders in thernplanning process and subsequent activities. </p
Thisrncontinuous cycle of assessment, plans, and evaluations would create arnrigorous but flexible accountability mechanism that would promoternresponsible lending and increased borrower support services. Itrncould also initiate a dialogue among stakeholders regarding how bestrnto address housing and credit needs. </p
Thernreports concludes that owning a home provides economic and socialrnstability for the middle class, builds wealth that can be leveragedrnand transferred across generations and encourages residents tornmaintain their properties and invest in their communities. Affordable rental housing protects families against poverty, givesrnthem more resources to meet other needs and can even provide anrnopportunity to save for a downpayment.</p
Thernsecondary market plays a key rose in ensuring access for home buyersrnand for providers of affordable rental hosing. As we proceed withrnthe national conversation about reforming the secondary market we canrntalk about its structure, the role of private capital, and how tornminimize taxpayer risk but we must also address questions of accessrnand affordability. If we keep all of these factors in mind we canrndesign a secondary market that treats everyone equally and supportsrnthe type of broad, accessible, and affordable mortgage market thatrnwill best support American’s families and its economy.
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About the Author
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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