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NAHB Works to Address Undue Tightening of Mortgage Credit
Responding to recent deterioration in the nation’s financial markets, NAHB has scheduled meetings in Washington, D.C. and New York with key government officials and leaders in the investment community to pursue a course of action that will add liquidity to the mortgage markets, stabilize housing and reduce downside risks that could push a fundamentally healthy U.S. economy into recession.
NAHB continues to forecast moderate but slowing growth for the U.S. economy, some increase in unemployment and further improvement on the inflation front, but “financial market conditions currently pose considerable downside risks” to that outlook, David Seiders, the association’s chief economist, cautioned last week.
Financial markets turned turbulent in the latter days of July and the first half of this month as the result of fresh revelations of credit quality problems in U.S. residential mortgage and mortgage-backed securities markets, Seiders said in his Aug. 15 “Eye on the Economy” report. “The infection quickly spread to a wide range of markets and to other parts of the globe amidst a worldwide fight toward credit quality.”
The availability of financing has tightened significantly this summer for mortgages to buyers with less than a prime credit history. While the conventional conforming prime market — comprised of mortgages limited to $417,000 and serviced by Fannie Mae and Freddie Mac — is holding up well, the jumbo loan market has now contracted significantly, with major implications for prospective home buyers in high-priced markets.
The drive toward credit quality “froze up various securities markets around the world as risk became difficult (or impossible) to price, particularly on mortgage-backed securities without government backing, causing credit demands to shift toward depository institutions,” Seiders said. “Interbank loan rates shot up in the process, prompting the Federal Reserve and some foreign central banks (including the European Central Bank) to inject large amounts of reserves into banking systems in order to maintain established policy rate targets.”
Restoring Order in the Financial Markets
Disorder in the financial markets came to a head last week, prompting the Federal Reserve to step in and temporarily reduce its primary discount rate by 50 basis points, to 5.75%.
NAHB applauded that action and also commended “the Fed’s move to allow the provision of term financing for as long as 30 days, renewable by the borrower, and to accept home mortgages and related assets as collateral for discount window loans to banks. Such changes reflect the Federal Reserve Board’s willingness to act quickly to help restore orderly conditions in financial markets, provide depositories with greater assurance about the cost and availability of funding, and help ease liquidity concerns that are affecting the mortgage market.”
NAHB has strongly encouraged the Fed to continue to monitor market conditions closely “to determine whether further action is necessary,” including a cut in the target federal funds rate before the next scheduled meeting of the Federal Open Market Committee (FOMC) on Sept. 18.
Seiders now says that he expects to see a quarter-point cut in the federal funds rate, which is now 5.25%, at the Sept. 18 FOMC meeting, “and an earlier cut is not out of the question.” This would represent a significant shift in Fed policy since the last FOMC meeting on Aug. 7.
On Aug. 13, NAHB, along with the Mortgage Bankers Association and the National Association of Realtors®, wrote to James Lockhart, director of the Office of Federal Housing Enterprise Oversight, asking him to temporarily increase the caps on the investment portfolios of Fannie Mae and Freddie Mac to help inject needed liquidity and stability into the mortgage market.
To gain a better understanding of the problems that have beset the mortgage markets and steps that will help restore them, NAHB recently conducted a teleconference with Lew Ranieri, co-chair of the NAHB Mortgage Roundtable and father of the current method for financing mortgages through the world-wide capital market.
NAHB's efforts to alleviate the mortgage credit crunch are continuing in the weeks ahead with the following agenda:
- NAHB President Brian Catalde and CEOs from the association’s High Production Builders’ Council will be meeting with Federal Reserve Board Chairman Ben S. Bernanke on Sept. 5 to discuss the state of the nation’s housing industry.
- NAHB representatives will be meeting on Aug. 21 with Robert Steel, the undersecretary of the U.S. Treasury's Office of Domestic Finance, to discuss the current situation.
- Meetings have been scheduled in New York City this week with rating agencies that downgraded the mortgage-backed instruments that precipitated the turmoil on Wall Street and that investors around the world use to judge the risk of mortgage investments. NAHB will also be meeting in New York with investment banks that direct funds to the market in order to learn their views on how problems in the mortgage market can be resolved.
- Meetings between NAHB and the CEOs of Fannie Mae and Freddie Mac will be held during the week of Sept. 3.
Overreaction on Jumbo Mortgages
An immediate challenge for the housing industry is reversing the tightening of credit standards for prime jumbo mortgages, which have been performing well.
The correction of many of the excesses of the housing boom in subprime lending — such as qualifying borrowers with undocumented incomes — will contribute to the long-term health of housing, but the current clampdown on jumbo mortgages is an overreaction that could unfairly prevent credit-worthy borrowers from being able to buy homes.
Lenders of mortgages over $417,000 are now in general looking for borrowers with near-perfect credit who are able to make 20% downpayments. Borrowers who succeed in qualifying for these loans are also being charged a premium in points and higher interest rates.
Tighter mortgage lending standards have had a pronounced impact on housing, and Seiders said that he now expects homes sales to “trail downward” through the balance of this year, with better times coming into view during the second half of 2008.
Along with its efforts to restore the health of mortgage lending, NAHB is in the process of gathering information geared to helping its members overcome some of the difficult challenges of selling homes in today’s marketplace.
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