Housing Finance at a Glance: Monthly Chartbooks
The September 2016 edition of At A Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing market data, includes updated figures describing the size of the mortgage market, first-time homebuyer share, negative household equity, and revised and more accurate FICO and LTV measures for new purchase mortgage originations.
September 2016 Introduction
Government’s role in the mortgage market is shrinking. How could we achieve more?
The mortgage market has witnessed a decent return of private capital in recent years. For the first half of 2016, the GSEs share of total first lien originations was approximately 42 percent, with FHA/VA comprising around 23 percent and bank portfolios the remaining 35 percent. In other words, seven out of ten mortgages today are being made via government backed channels. While that number is still high compared to the five out of ten during the pre-bubble era, it is significantly lower than the 2008 level, when the GSEs, FHA and VA combined were behind nearly 9 out of 10 new mortgages (page 8, bottom chart). Clearly, we have made great progress in bringing back private capital. But what more could be done to further reduce the government’s role?
The bottom chart on page 8, which shows the first lien origination share for each channel, can be quite instructive in answering that question. The first insight from this chart is that the vast majority of reduction in government’s role has come from the GSE channel.
The GSEs’ share of first lien originations peaked at 65 percent in 2008 but stood at roughly 42 percent in Q2 2016, a welcome reduction of 23 percentage points. Over the same period the share of bank portfolio lending, the predominant source of private capital currently, has increased from 15 to 35 percent, or by 20 percentage points. The GSEs have been able to reduce their footprint mainly because current g-fees are too high relative to the credit risk. And given this positive risk-reward, banks have been finding it more profitable to hold on to higher quality mortgages than sell them to GSEs or to other investors (and forgo the profits).
But the exact opposite has happened within the FHA/VA channel. FHA/VA’s combined share of first lien originations has actually increased since 2008, from 19 percent to 23 percent today. Why? Mainly because private-label securities investors, who were the predominant provider of credit to less creditworthy borrowers pre-crisis, completely fled the market in 2008 and remain nearly absent even today. While there has been a very small amount of non-QM lending – in some cases backed by private-equity firms or hedge funds – for the vast majority of low- and moderate-income borrowers, FHA is the only source of credit currently. And with no signs of a material revival of the PLS market, there is no reason to expect a reduction in FHA’s role either. Although the Treasury Department has taken some early steps to revive the PLS market, lot more work is needed before investors will come back to this market in any measurable way.
There are only two ways to further reduce government’s role: we can either expect further shrinkage in the GSEs’ market share, or PLS market stakeholders can speed up efforts to give this market a new life. Achieving further reduction in the GSEs’ role, on top of the existing 23 percentage point pull back would not only run into the problem of diminishing returns, but would also hurt the mortgage market by tightening credit even more at a time when we should be expanding it. On the other hand, intensifying efforts to revive the PLS market offers much greater promise. This approach would not only offer greater potential for further reducing government’s role, but would also help drive a much needed expansion the credit box at the lower end of the credit spectrum.