How housing is financed has changed significantly in the seven years since the mortgage crisis, from tighter regulation and increased oversight to shifts in housing needs and our country’s cultural dynamics. What role do banks, local not-for-profits, and individuals play in the ever evolving mortgage and housing markets? Two crucial issues, recognizing the impact of non-economic factors and the importance of uncommon capital markets, are discussed below.
Mortgage finance reform cannot be limited to a revised economic framework
As 2015 opens with the promise of a resurgent mortgage market driven by lower rates and more accommodative policies, successful and sustainable solutions to how we fund housing in America must address three critical non-economic factors.
1) Cultural diversity
Accommodations must be made to the significant changes in the cultural dynamics of our country. This includes recognition of broader ethnic diversity and the priorities of both established and emerging sectors of our population. Mortgage products and the processes employed must be diverse and sufficiently flexible to be responsive to personal needs and interests driven by cultural preferences, geographic locations, and personal objectives.
2) Employment structures
We must recognize notable shifts in employer and employee behavior, most notably income variability, loyalty of employment, and the structure of financial and other benefits associated with employment. Key financial metrics must be fully aligned with the changes in workplace compensation structures, benefits programs, and employee/employer relationships that affect the commitment to long-term occupational stability.
3) Disciplined execution
Incorporation of a comprehensive program of self-regulation is key, supplemented by timely and thorough third party oversight throughout the mortgage financing process. Lenders and servicers must be held accountable for delivering mortgage finance solutions that address the varying needs of the population, while remaining highly disciplined. This discipline must stand the test of rigorous oversight by independent third parties equipped to drive consistency throughout the process.
Home ownership remains a critical component of the American fabric, not only because of its economic contributions, but because of the cultural and occupational stability it influences. Focusing on the critical noneconomic factors will enable a more sustainable solution that supports home ownership across our diverse nation.
Affordable housing finance depends on uncommon capital markets
Across the US, local efforts are emerging to address the lasting effect of the housing finance crisis on neighborhoods and accessibility to affordable housing. The challenges are significant, and until there is greater clarity on the future of the government sponsored enterprises (GSEs), improvement in wages for lower and middle-class Americans, and a fundamental understanding of what defines affordable housing for today’s population, uncommon capital markets will be key to developing sustainable solutions.
Opportunity for investment
These uncommon capital markets depend on coordinated efforts of public and private organizations to be more responsive to the cultural and financial challenges present in providing acceptable single- and multifamily housing, especially in blighted areas within larger cities. Many of these efforts will be directed at the population segments having the lowest levels of household income and those not qualifying for government sponsored programs, yet demonstrating the ability to satisfy payment requirements, whether as an owner or a tenant. One such program, Bridge to Success, has provided access to housing to low-income homebuyers in Minneapolis and St. Paul, Minnesota. It is a multifaceted structure co-sponsored by municipalities and non-profit housing organizations, and invested in principally by banks and accredited investors.
Because the more traditional capital markets structures (e.g., securitization) have not yet returned to this space, and are not likely to do so in the foreseeable future, the opportunity is now for non-profit housing agencies, housing-focused foundations, and motivated investors, including regional and community financial institutions, to take the lead in changing the framework of affordable housing finance in America.
Basel III capital standards
Also playing into this emerging strategy of grass roots housing finance is how bank investments in these structures might be treated under the Basel III capital standards. Clearly these standards are intended to more effectively align capital requirements with the risk profile of a bank’s balance sheet and operations. Close study of these standards indicate that there is ample opportunity for banks to make such investments without an undue capital burden. Accordingly, those banks that take a serious view of the responsibility to the housing industry should be carefully evaluating their role in these solutions.
The need to provide sufficient and affordable housing to those who can afford it will not wait for the long-term resolution of the GSEs or the return of an active mortgage securitization market. It is now time to rally around locally focused and funded, and possibly uncommon, programs that will make a difference.