While President-elect Donald Trump has been largely silent on housing and housing finance issues, the perspective of someone with a business background could actually be helpful in confronting two of the biggest issues in housing finance today: the supply shortage and credit availability.
There is an acute shortage of housing, both for owners and for renters: New supply, as measured by new single family completions plus new multifamily completions plus new manufactured homes minus obsolescence, translates into a 430,000 unit per year shortfall for the roughly 1.1 million new households that will be formed. This severe shortage will put continued upward pressure on both rents and home prices. This will increase the already acute affordability issues, particularly for renters. Forty-nine percent of renter households are already cost burdened (paying over 30 percent of their income on rent) and 26 percent of renter households are severely cost burdened (paying over 50 percent of their income on rent)—and the numbers have been climbing.
With his business background, Trump will presumably understand that supply issues need to be addressed. The tools for addressing these at the Federal level are limited, as supply constraints are heavily at the local level, including zoning restrictions and building codes. However, at the Federal level actions can be taken like targeting transportation funding in exchange for higher density near transportation hubs and recognizing the positive impact of density on environmental concerns, including clean water. It may also be time to think about Federal actions that would allow an override of local zoning laws if a clear public benefit can be established.
Mortgage credit availability is an issue we have repeatedly written about. We have shown that the market is taking less than half the credit risk it was taking during 2001, a period of reasonable credit standards. And we have shown that this tight credit has resulted in close to one million missing loans per year since 2009. There are many reasons for this including the fact that lenders often put overlays on top of the FHA and GSE credit boxes, due to fears about put-backs due to reps and warrants, the high and uncertain costs of servicing non-performing loans, and fears about being sued for treble damages under the False Claims Act. The FHFA and the GSEs have gone a long way toward making lenders comfortable that they are only responsible for manufacturing defects, not subsequent performance. By contrast, the FHA (whose flexibility has been limited by the Justice Department) has not taken the necessary steps to give lenders comfort; the False Claims Act is the single largest deterrent for lenders to eliminate overlays.
Trump should understand the need to clarify the rules under which the False Claims Act should be invoked. Fortunately, the perfect tool with which to do that is already in place. The FHA has established a defect taxonomy in which errors are classified into four severity buckets. The only item left to do is to tie this to remediation, for the less severe errors, in which the loan would have been made on the same terms and the cost of remediation low. Fraud, the most severe error, would trigger automatic indemnification. If only the most severe, or two most severe, buckets of errors were subject to the False Claims Act, lenders would have substantially more certainly, allowing them to eliminate some of the credit overlays they have imposed on FHA lending.
In short, if he channels his experience as a businessman, President-elect Trump should understand both the supply and credit availability issues facing the housing market and take steps to address each.