Fed, UP!

America is fed up.? The housing supply chain, in its entirety - is broken. Only the Feds are “up” in this game. The rest of “U.S.”?? Down. And fed up.

Despite what anyone tells you - there is no single problem nor, single solution that will “fix” America’s current housing “crisis”. In large part because the homeownership supply chain is a long, lengthy complicated chain of interconnected suppliers that share an overabundance of both inter and intra dependencies.? Like a bad remodeling job - “fixing” just one part of the supply chain, inevitably breaks another.?

You see, a house's manufacturing is just one “segment” of the business.? The manufacturing of a mortgage loan is another. As is, the manufacturing of mortgage-backed securities.? These business segments are largely the core functions of the housing ecosystem.? Orbiting around these core functions is a robust network of ancillary and associated industries/businesses that enable and empower the housing supply chain to produce.? Within the housing finance ecosystem, this includes a myriad of players i.e.; Investors, Securitizers, Originators, Property Appraisers, Realtors, Property Inspectors, Insurers, State and Local Governments, Regulators, FinTechs, etc…...? The list goes on (and on) in more granularity, ending and beginning with the American consumer. Yes, they too - are a part of the supply chain.

After all, it is consumers who provide both organic demand - and supply.?

• The most obvious is the existing 82 million units of single-family residential housing inventory held by Americans representing the balance of the country’s inventory supply. Acquired at a historically low cost of ownership in recent years, resulting in additional housing-related supply - home equity. The highest on record at an estimated $16.9 trillion in the first quarter of 2024, with $11 trillion available for leverage while maintaining a 20% equity cushion.

• Less obvious is the supply of tax dollars that fuel the government-sponsored enterprises, FNMA and FHLMC which control 65% of the mortgage-backed securities supply. And by default, the housing finance marketplace supply as well. There is much conjecture as to the the true cost of the bail-out provided by taxpayers.? Most figures hover just shy of $200 Billion.?

• Perhaps most important - but widely overlooked - is the indirect support consumers provide that fuels the Federal Reserve's investment operations. The Federal Reserve is not funded by congressional appropriations. It is a non-profit.? Its operations are financed primarily from the interest earned on the securities it owns—securities acquired in the course of the Federal Reserve's open market operations. This includes both US Treasuries - and mortgage-backed securities which American consumers finance through the purchase of homes and bonds.??

The Federal Reserve performs several functions. Best known for its control of the money supply. It places an annual order with the Bureau of Engraving and Printing (BEP) to produce new banknotes. Once the cash is in its control, it performs several functions, including overnight lending to banks.? In this capacity, it controls the federal funds rate, which is essentially the rate for a short-term loan for the federal cash loaned to banks on an overnight basis.? This affects short-term loans, such as credit card rates, and the rates on new home equity loans and lines of credit.?

The Fed also buys and sells debt securities such as US Treasuries (aka “savings bonds”) and mortgage-backed securities (aka “MBS”) in the financial marketplace. This helps support the flow of credit, which is what has an overarching impact on mortgage rates. The Fed does not set mortgage rates. But heavily influences them. Fixed-rate mortgage rates track to the 10-year Treasury, which is set by the Fed. When ten-year Treasury rates go down….so do, mortgage rates. Mortgage-backed securities provide liquidity to the housing finance ecosystem - and keep the whole thing running. Simply stated.? Low US Treasury rates + low fixed rate mortgage rates + high mortgage-backed securities prices = GOOD.??

In the years leading up to the current rate environment and subsequent housing crisis, the Federal Reserve set a stimulative economic policy known as Quantitative Easing (aka “QE”). Largely in response to the economic devastation that occurred as a result of the Great Financial Crisis (“GFC”).?

During this period of “QE” (2010-2022), to stimulate the economy, the Fed drove mortgage interest rates to their lowest level ever - approximately 2.5%.?

During this same period between 2010 and 2022, the Federal Reserve (“the Fed”), largely in response to low investor confidence in the global MBS marketplace bought most of the MBS securities produced by Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA).?

In restaurant speak - it is the same thing as being both the restaurant owner and customer simultaneously. One can set the prices for meals as high or low as they desire - controlling the profit margin, food quality, staffing - and menu. Then, order anything they want…..at the prices they set. ?

The Fed recently held about $4.5 Trillion of MBS assets on its books. It currently holds approximately $2.6 trillion. In response to rising inflation, in 2022, the Fed implemented a policy of "Quantitative Squeezing" - squeezing out opportunities for homeownership by ceasing their purchases of MBS, selling what they had on the open market.? During this same period from 2022 to 2024, the Fed raised interest rates eleven times. Eleven.??

The result??

• A rate-locked housing market with 12 million first-lien mortgages in the US with rates under 4% - estimated to be 65% of all outstanding mortgages in the US.?

• A historically low number of single-family homes for sale. The historical average (1985-2020) was +/- 2.5 million units. Today, it stands at approximately 1 million.?

• Twice as many real estate agents than homes available for sale in the US. The current agent count is estimated at 2 million, with 1.5 million serving as members to NAR.?

• Growing concentrations of institutional investors in the single-family home market. Exacerbating an already competitive environment in both inventory and home prices for owner-occupants. Current estimates are unavailable.?

• Unprecedented numbers of institutional and private cash buyers, exacerbate an increasingly competitive marketplace for both consumers and housing finance industry professionals, with cash purchases accounting for approximately 41.1% of all purchases made last year.

A hail-mary of lower rates simply is not enough to get things moving - at least not sustainably, nor materially. ? Without a liquidity solution, the mortgage markets are dead. Few are buying MBS - including the Fed.?

In my opinion, a fair amount of de-regulation should and will need to occur to attract Wall Street and other, global would-be MBS purchasers back into the US MBS marketplace. Accompanied by higher mortgage loan quality manufacturing and lower costs.? All are within reach.? There is a tremendous amount of business being left on the table.? As a result of the Federal Government's concentrated risk, fewer American borrowers are being served in the mortgage market. There is a huge amount of unrealized opportunity for appropriately risk-priced MBS and the mortgage origination activity that fuels it.??

As long as the US Government enjoys the benefit of profit sweeps of the Agencies - Fannie and Freddie it will continue to drag its feet in releasing them from conservatorship and returning them to private enterprise. It will also hold up any de-regulation in the mortgage marketplace that will erode its market share…………. Until this captive business arrangement can be re-negotiated on behalf of the American people - the only way out - is back in.?

Simply stated.? The Fed needs to reconstitute its MBS purchase program, agreeing to purchase a specified pool of mortgages made by lenders and sold to FNMA and FHLMC, or insured by FHA.? Placed into Specified Ginnie Pools exclusively made only to existing homeowners who will not list their homes for sale because they simply won't trade up from a 2.5% mortgage to the current 7.5% mortgage rates.

Specified pool loans could be made to the existing homeowners to buy their next home at a rate matching their current rate. With caveat.

• Existing homeowners would only be eligible for this Specified Pool of?Mortgages IF they sold their existing home to an owner-occupant homeowner. NO Investor purchases.
• Impose a maximum sale price to ensure affordability for first-time owner-occupant buyers ($500,000).?

• Loan limitations for those mortgages originated via the Specified Pool of Mortgage Money set to the FNMA /FHLMC conforming loan limit.

• The new purchaser of these homes would have to qualify using existing mortgage rate programs....unless the Fed wanted to stand up a Specified Pool of Mortgages for them as well.

As stated previously.? There is no single problem - nor a single solution that will fix the current housing crisis.? A holistic, concerted effort is required.? However, some measures can be taken in parallel to a plan construction that would be stimulative - and help to ease the rate lock being experienced by the country - and the industry.?

Consider:? If 4 million current homeowners took advantage of this program, assuming the average new loan size for them would be +/- $400K, the Fed would have to add another $1.6 Trillion of these specified loans on their balance sheet.? This would take them back to the 2022 levels. While the Fed would earn less interest income from this new specified pool loan, the economy would grow exponentially as homeownership could grow by as much as another 4 million new owner-occupants. Subsequently mobilizing up to 8 million borrowers.???

If you’re not at the table.? You are on the menu.

Americans are hungry - and no longer patiently waiting.

Fed, UP!

Sources and credits:?

Artwork:

https://www.amazon.com/gp/video/detail/B00MRHF9LE/ref=atv_dp_share_cu_r

Data Sources:

https://www.bankrate.com/mortgages/federal-reserve-and-mortgage-rates/

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1001.pdf

https://www.attomdata.com/news/most-recent/q1-2024-home-sales-report/#:~:text=Nationwide%2C%20all%2Dcash%20purchases%20accounted,first%20quarter%20of%20last%20year.

https://www.aei.org/op-eds/taxpayers-are-the-gses-true-stockholders/

National Alliance to End Homelessness Invisible People Keeping Current Matters Eviction Lab U.S. Interagency Council on Homelessness (USICH) Interagency Veterans Advisory Council America's Homeowner Alliance Mortgage Bankers Association National Association of Home Builders International Brotherhood of Teamsters AFL-CIO AFL-CIO Housing Investment Trust National Fraternal Order of Police National Association of Insurance Commissioners (NAIC) American Land Title Association NAHREP - National Association of Hispanic Real Estate Professionals? Flanders Fields Gerald Howard Samuel P. Royer #SOB WE all need #mo?? and more #liquidity