Global: Critical Housing Finance Challenges for Policymakers
Introduction:
The overarching goal of the What Works Collaborative is to build knowledge and share solutions with policymakers at the U.S. Department of Housing Finance and Urban Development (HUD) and other federal agencies. During the first phase of the Collaborative, more than two dozen independent research projects were completed on a wide range of current housing and urban development issues. The Collaborative has now turned its attention to fleshing out longer-term policy challenges and identifying research needed to formulate policy to address these challenges.
This paper is one of five developed by the Collaborative on different aspects of housing and urban policy. The goal of the paper is to surface critical unanswered questions for policy research and to conceptualize a research agenda to help guide new research initiatives that hold the most promise for moving both policy and practice forward.
Challenges and Barriers:
Mortgage lending to underserved groups faces a range of challenges on both the demand and supply sides. Most of these are long-standing issues, but changes wrought by the housing crisis have in many cases compounded these existing challenges. Among the key challenges and barriers affecting efforts to extend financing for homeownership are:
homeownership affordability;
risk assessment,
mitigation, and pricing by lenders;
consumer choice related to complex financial products;
mitigating risks after purchase through loan servicing and loss mitigation approaches;
and discrimination in mortgage markets.
Affordability:
A fundamental barrier in lending to underserved groups is the high cost of owner-occupied housing relative to income and wealth among these households. A series of reports by the Census Bureau since the early 1990s has examined the share of renter households that could afford to buy housing at different price levels given their income, debt, and savings.
Risk assessment, mitigation and pricing by lenders:
By several measures, underwriting standards have been substantially tightened in response to the collapse of the housing market. The clearest indicator is given by responses to the Federal Reserve Survey of Senior Loan Officers, which found that on net surveyed lenders tightened their residential mortgage standards each quarter from the end of 2006 through mid-2010. Since then, there have only been two quarters when lenders on net reported loosening credit standards, and even then those loosening credit only slightly exceeded those tightening credit.
Consumer choice related to complex housing finance products:
As the above discussion highlights, even before the foreclosure crisis began, there were concerns about consumers’ ability to successfully navigate an increasingly complex mortgage market with both wider choices of loan products and wider variations in pricing. While the stresses to the housing finance system exposed deep flaws and have altered consumers’ understanding of and attitudes toward housing finance at least temporarily, underlying aspects of how consumers tend to make financing decisions may or may not have been permanently changed. These include focusing on initial monthly payments more than interest rates and loan terms, discounting the impact of potential payment reset risks, and looking past home price determinations to monthly payments.
Debt and equity for assisted housing finance:
An obvious area of public intervention is to support financing for assisted housing, and specifically for long-term fixed-rate financing. Locking in fixed costs of capital for a longer term provides valuable financial security for rental properties, shielding them from fluctuations in interest rates and the need to periodically refinance in what may be unfavorable market conditions. Long-term financing is particularly important for LIHTC properties that need financing terms that match required affordability periods and minimize additional financial risks in these tightly underwritten deals.
Lack of systematic information on property ownership and housing finance:
An overarching issue for rental housing is the general lack of information on the characteristics of property owners, their interests and objectives in owning rental property, their property management practices, and their demand for and uses of financing. The main source of information of this type has come from the Residential Finance Survey, which has been conducted as a follow-up survey to the decennial census since 1950, and so only available every 10 years.
Existing Public and Private Programs:
FHA mortgage insurance:
Through its multifamily mortgage insurance programs, the FHA is a critical source of long-term fixed-rate financing through the program for new construction/substantial rehabilitation and the 223(f) refinancing program. During the housing boom, FHA’s multifamily lending volumes were a fairly small share of the overall market as long processing times amid other factors led borrowers to other sources of funding.
State housing finance agencies:
State housing finance agencies play an important role in providing financing for affordable multifamily housing developments through administration of the LIHTC program and multifamily loans financed through tax-exempt bonds that provide both a below–market interest rate and a 4 percent tax credit for developments where a portion of the units are set aside for low-income renters. HFAs have partnered with FHA and the GSEs in various risk-sharing arrangements to help expand their ability to provide affordable multifamily financing.
Conclusion:
At present, most new lending for multifamily housing is coming through the GSEs and FHA. While these channels may be able to serve most segments of the market well for the time being, other segments not well served by these sources may be struggling to obtain financing. In general, information on the sources and characteristics of credit for rental housing of different types is hard to come by, with the most comprehensive information from the Residential Finance Survey now 10 years old. While a new Rental Housing Finance Survey (RHFS) is in the planning stages, any information that will come from this effort will not materialize for several years.
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