It is no secret that the homebuilding industry has suffered since the global economic crisis. Before the crisis, there was over two million home starts a year but the figure plummeted to below half a million in less than three years. Even today, there are slightly over one million home starts per annum, about half of the pre-crisis peak.
Fannie Mae is known for helping borrowers buy homes, but it is considering a number of pilot programs that would increase the affordability of property. The first proposal is to provide prospective homeowners with a loan to build their homes. At present, the notion is very much in the formative stages and has yet to receive approval from the Federal Housing Finance Agency (FHFA). However, if it goes ahead, the initiative could make it simpler and cheaper to benefit from a home construction loan.
What Will The First Pilot Program Do?
At present, if you wish to build a home, you have to hire a builder and get a construction loan. Once the house has been built, you have to obtain a traditional mortgage to repay the construction loan. While lenders can write a mortgage and sell it to Fannie Mae, they can’t do so until the property is finished. As a result, lenders must keep the loans and the associated risks on their books for several months.
Under the new proposal, Fannie Mae will purchase these loans from lenders on the first day of construction. The lender can then put the loan in a pool with traditional mortgages for sale on the secondary market. You would not have to make any repayments until the house is move-in ready. In theory, the new program would ensure a new mortgage would be easier to get and cheaper.
The Supply Problem
According to Jon Lawless who works as vice president of product development and affordable housing for Fannie Mae, the ultimate goal is to improve the level of supply. In a number of cities across the United States, the price of homes has increased beyond the pre-crisis level. As a result, would-be homeowners are priced out of the market. One would think this process would have led to a surge in new homes built, but policymakers have failed their constituents.
Another major problem is the loss of potential starter homes in the last few years. A prime example is the practice of purchasing thousands of foreclosed homes and placing them in the rental market. While companies such as Blackstone Group LP have made a fortune in the process, homeowners have lost potential properties. Then there is the small matter of vacant homes being left to rot in what is a shocking waste.
Although the homebuilding industry offered some welcome news regarding new properties being built in October, the pace of construction is far below what it was a decade ago; yet demand continues to increase. According to CoreLogic, there is only two and a half months worth of homes available on the market for entry-level buyers if we use the sales figures for September 2017.
Are There Any Problems?
Aside from the fact that the FHFA has yet to approve the pilot scheme, there is the fact that it may not do much to address the supply versus demand conundrum. Even the CEO of Fannie Mae, Timothy J. Mayopoulos, acknowledged that the program probably wouldn’t make a great deal of difference to inventories. He said that while Fannie Mae wants to do everything it can within its power, it doesn’t actually build houses.
According to Edward Pinto of the American Enterprise Institute, Fannie Mae and other government-backed programs may not possess the tools to fix the housing supply problem. Pinto asserted that it is easier to say you’re going to help increase supply than it is to get it done.
While the first Fannie Mae proposal could have a positive impact on some lives, it is clear that the housing shortage supply can’t be solved by any single initiative. According to Doug Duncan, Chief Economist of Fannie Mae, affordability, existing inventory and sales challenges are becoming more complex due to issues such as building material price increases, lack of lots and a shortage of reliable and skilled labor. As such, this, and perhaps all of Fannie Mae’s proposed initiatives, will still fall short of addressing the issue.
Nonetheless, the news could be seen as a boon for anyone searching for an affordable home. At present, lenders are forced to assume more risk than they would like so they pass on the cost to consumers. With the new loan for construction, it would be easier to gain approval for a mortgage and easier to afford the repayments. If nothing else, it could ensure housing becomes affordable for several thousand families who would otherwise be priced out.