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While the U.S. mortgage finance system was at the center of the recent financial crisis, it remains largely untouched by legislative reforms. At the center of these conversations are Fannie Mae and Freddie Mac—both of which were placed into federal conservatorship in September 2008. Now, nearly nine years later, the fate of these two government-sponsored enterprises (GSEs) and the prospect of related changes to the mortgage finance system are once again a focus of policy discussion. In this post, we summarize the main themes of a recent New York Fed workshop where policymakers, academics, and practitioners gathered to consider the future structure of the U.S. housing finance system.
Quantitative easing (QE)—the Federal Reserve’s effort to provide policy accommodation lowering long-term interest rates at a time when the federal funds rate was near its lower bound—has generated a great deal of research, both about its impact and about the frictions that might limit that impact. For example, this recent study finds that weak competition in local mortgage markets limited the pass-through from QE to mortgage rates for borrowers, and another study suggests that QE expanded banks’ mortgage lending while crowding out their commercial lending. In this post, we look into a different friction—whether banks’ limited risk-taking capacity after the crisis led them to favor refinance mortgages over new mortgage originations.
The homeownership rate—the percentage of households that own rather than rent the homes that they live in—has fallen sharply since mid-2005. In fact, in the second quarter of 2016 the homeownership rate fell to 62.9 percent, its lowest level since 1965. In this blog post, we look at underlying demographic trends to gain a deeper understanding of the large increase in the homeownership rate from 1995 to 2005 and the subsequent large decline. Although there is reason to believe that the homeownership rate may begin to rise again in the not-too-distant future, it is unlikely to fully recover to its previous peak levels. This is a disconcerting finding for those who view homeownership as an integral part of the American Dream and a key component of income security during retirement.
The homeownership rate peaked at 69 percent in late 2004. By the summer of 2016, it had dropped below 63 percent—exactly where it was when the government started reporting these data back in 1965. The housing bust played a central role in this decline. We capture this effect through what we call the homeownership gap—the difference between the official homeownership rate and the “effective” rate where only homeowners with positive equity in their house are counted. The effective rate takes into account that a borrower does not in an economic sense own the house if the mortgage debt is greater than the house’s value. In this post, we show that between 2005 and 2012, the effective rate fell well below, and put downward pressure on, the official rate. We also demonstrate that the increase in house prices and the exit of millions of homeowners through foreclosure has largely eliminated the gap between the official and effective homeownership rates.
Andreas Fuster, Eilidh Geddes, and Andrew Haughwout
In yesterday’s post, we discussed the extreme swings that household leverage has taken since 2005, using combined loan-to-value (CLTV) ratios for housing as our metric. We also explored the risks that current household leverage presents in the event of a significant downturn in prices. Today we reverse the perspective, and consider housing equity—the value of housing net of all debt for which it serves as collateral. For the majority of households, housing equity is the principal form of wealth, other than human capital, and it thus represents an important form of potential collateral for borrowing. In that sense, housing equity is an opportunity in the same way that housing leverage is a risk. It turns out that aggregate housing equity at the end of 2015 was very close, in nominal terms, to its pre-crisis (2005) level. But housing wealth has moved to a different group of people—made up of people who are older and have higher credit scores than a decade ago. In today’s post, we look at the evolution of housing equity and its owners.
The Federal Reserve Bank of New York’s 2016 SCE Housing Survey indicates that home price growth expectations have declined somewhat relative to last year, but the majority of households still view housing as a good financial investment. Mortgage rate expectations have also declined since last year’s survey, and renters now perceive that it has become somewhat less difficult to get a mortgage if they wanted to buy a home.
Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
Today, the New York Fed released the Quarterly Report on Household Debt and Credit for the first quarter of 2016. Overall debt saw one of its larger increases since deleveraging ended, while delinquency rates for the United States continued to improve and remain at very low levels. Although the overall picture of Americans’ liabilities has continued to improve since the financial crisis, we wondered what the variation looks like at local levels. One advantage of our Consumer Credit Panel (CCP), which is based on Equifax credit data, is that we can examine geographic variation in debt and delinquency rates. Here, we use the CCP to examine the borrowing and delinquency in oil-producing geographies in the United States, where the economic trends since the Great Recession have been very different from those in the rest of the country.
U.S. Bank Holding Companies (BHCs) currently control about 3,000 subsidiaries that provide community housing services—such as building low-income housing units, maintaining shelters, and providing housing services to the elderly and disabled. This aspect of U.S. BHC activity is intriguing because it departs from the traditional deposit-taking and loan-making operations typically associated with banks. But perhaps most importantly, the sheer number of these subsidiaries makes one think about the organizational complexity of U.S. BHCs. This is an issue that has generated much discussion in recent years. In this post we describe the emergence and growth of community housing subsidiaries and discuss to what extent they contribute to the complexity of their parent organizations.
The Big Short has been making a big splash this year, racking up five Academy Award nominations and taking home the Oscar for best adapted screenplay. The movie provides a very entertaining way to gain an understanding about some of the underpinnings of the financial crisis, particularly through a few memorable cutaway scenes—such as when actress Margot Robbie explains mortgage-backed securities (MBS) from a bubble bath, chef Anthony Bourdain compares collateralized debt obligations (CDOs) to seafood stew, and singer Selena Gomez explains synthetic CDOs using the analogy of “side bets” made by people watching a casino blackjack game.
Meta Brown, Donghoon Lee, Joelle Scally, Katherine Strair, and Wilbert van der Klaauw
The U.S. population is aging and so are its debts. In this post, we use the New York Fed Consumer Credit Panel, which is based on Equifax credit data, to look at how debt is changing as baby boomers reach retirement age and millennials find their footing. We find that aggregate debt balances held by younger borrowers have declined modestly from 2003 to 2015, with a debt portfolio reallocation away from credit card, auto, and mortgage debt, toward student debt. Debt held by borrowers between the ages of 50 and 80, however, increased by roughly 60 percent over the same time period. This shifting of debt from younger to older borrowers is of obvious relevance to markets fueled by consumer credit. It is also relevant from a loan performance perspective as consumer debt payments are being made by older debtors than ever before.
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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