House Financial Services Subcommittee Issues Testimony From Center for Monetary & Financial Alternatives VP Michel
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Introduction
Chairman Davidson, Ranking Member Cleaver, and Members of the Committee, thank you for the opportunity to testify at today's hearing. My name is
It is always convenient to blame "
Yet, research demonstrates that institutional investors play a very small role in the single family housing market - both in absolute terms and relative to large multifamily housing companies and other single family home investors.2 A
1
2 For a list of the largest multifamily companies, see "The Top 15 Multifamily Property Managers of 2021," Multifamily.loans,
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...increased "by 4.04 percentage points."3 The authors claim that "despite the rise that began after 2010, in 2014 their shares remained small: The average share of large institutions as buyers was 1.47 percent."4
Additional research by the
Despite the small share, the evidence also suggests that "institutional investors contribute to the improvement of the local housing market by reducing vacancy rates as they shorten the amount of time distressed properties stay in REO [real estate owned foreclosure]," and that "institutional investors help lower local unemployment rates by increasing local construction employment."7 Citing other research, the
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4 Lambie-Hanson, et al., pp. 10-11.
5
6 "Institutional Investors Outbid Individual Homebuyers,"
7 Lambie-Hanson, et al., p. 1. Separately, an
8 Jerusalem Demsas, "Wall Street Isn't To Blame For The Chaotic Housing Market," Vox,
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Goodman also cites evidence that "institutional operators owned just 300,000 single-family units in 2019," approximately 2 percent of the roughly 15 million one-unit detached singlefamily rental homes in
In contrast, the federal government is heavily involved in the single-family home market, particularly in ways that increase demand by making it easier to obtain home mortgages. Given that housing markets are consistently supply constrained, there is little doubt that federal housing finance policies contribute greatly to higher home prices.12 Unfortunately, there appears to be no appetite in
The
Federal intervention has increasingly become the norm in housing markets since the 1930s, and the perceived success of these policies has helped perpetuate and expand that involvement.
...
9 Demsas, "Wall Street Isn't To Blame For The Chaotic Housing Market."
10
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12 For a discussion of how supply constraints affect housing affordability, see
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...(
Most federal intervention in housing finance boosts demand, typically by making it easier to obtain a home mortgage. Federal policies encourage borrowing by supporting the operations of
Prior to the 2008 financial crisis the federal government controlled a dominant share of the
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16 For the fiscal year ending
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...from 16.49 percent to 32.6 percent.17 From 2009 to 2020, Fannie and Freddie's annual share of the total MBS market averaged 70 percent. Including
Yet, the evidence suggests that the expansive federal role has done little to expand homeownership. Even though robust mortgage financing exists in virtually every developed nation, without the high degree of government involvement found in
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18 These figures include both single-family and multi-family MBS.
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20 These figures represent the combined ownership rate for people who own their home outright and those who own a mortgage, for both
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22 Broadly, federal housing policies have caused more than their share of economic turmoil. See
23 This 43 percent figure refers to the S&P/Case-Shiller
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...from the bottom of a housing cycle is worrisome, especially since empirical evidence links large increases in housing prices to banking crises.25
Other research, when examining asset price booms and busts in the
Owning one's own home is commonly viewed as part of the American Dream, and policymakers - as well as special interest groups - regularly promote building wealth through buying a home. They also tout beneficial "spillover effects" from homeownership, such as increased engagement in civic institutions, greater political participation, and positive educational outcomes for children. However, much of the evidence for causal spillover effects - that is, the notion that owning a home causes people to change their behavior in beneficial ways - is weak, and the size of such spillover effects, where they do exist, does not appear to justify the historical level of government involvement.29 Furthermore, other research has...
25
26
27 See
28 "Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single- and Multi-Family Mortgage Markets," Testimony Before the
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...suggested that homeownership is associated with negative spillover effects, such as higher unemployment due to an incentive against relocating.30 Finally, although home equity frequently represents a large portion of many Americans' wealth, purchasing a home is a risky investment that often depends entirely on home price appreciation, an attribute fundamentally in conflict with housing becoming more affordable.42
Price Appreciation and Ownership Rates: A Closer Look
While government intervention in housing has steadily increased, the overall rate of
...Mortgage Interest Deduction,"
30 See
31 For at least the past 20 years, home prices have exhibited similar volatility to equity markets.
32 Between 1940 and 1960 the
33
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There is, of course, much more to the home ownership story than just the national rate. For instance, the
Overemphasis on Rates and Demand Rather Than Supply
Even if positive spillover effects from home ownership clearly outweighed the negative ones, it would not automatically follow that the federal government should undertake a policy of actively encouraging people--especially those with low wealth or volatile income--to finance home purchases. The fact that the federal government encourages home financing through low-equity long-term debt further strengthens this argument. Such mortgages are risky for both borrowers and lenders, and the ability to consistently repay a mortgage--or consistently pay rent in a timely manner--is dependent on broad economic and social factors.
Those broad factors, including education quality and regulatory barriers that hamper employment and opportunity, ultimately determine the ownership and rental rates in the economy, and it is a mistake to assume that any ownership rate is the "correct" one. Policies that simply target the ownership rate are destined to fail precisely because they do nothing to change the underlying economic factors that govern the long-term ability to successfully finance large dollar purchases.
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...out at 65.4 percent after the COVID-19 pandemic shutdowns (in the first quarter of 2022), the rate stood at 66 percent in the third quarter of 2023.
34 These figures were provided to the author by the AEI Housing Center.
35 According to Census data, the
36 See
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In 1994,
These demand-side policies have been particularly problematic because, compared to increasing the supply of housing, it is rather easy to boost demand. Housing supply is always relatively constricted in the sense that available land (in locations that people most desire to live) is a prerequisite for large scale home building, and because a new home (or apartment building) takes at least several months to construct. In many areas, state and local regulatory restrictions have contributed heavily to supply constraints in housing markets, often by limiting the amount of land that can be used for particular types of housing.39 Inducing demand in supply-constrained markets can only serve to put upward pressure on prices, and housing markets are no exception. Thus, federal housing finance policies have typically made it more expensive (everything else constant) to either buy or rent a dwelling. Nonetheless, inducing demand is precisely what federal policies have done for decades, and there appears to be no desire in
Further Interference with Housing Markets Will Increase Risky Debt and Prices
Recent moves by the Biden administration, as well as multiple congressional proposals, demonstrate a clear commitment to implementing the same types of failed housing policies that have consistently expanded government intervention in housing markets at a great cost to millions of Americans. For instance, the
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38 These figures refer to Total Mortgages Held or Securitized by
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...of
Separately, the FHFA amended the Enterprise Regulatory Capital Framework (ERCF) enacted in 2020.43 The ERCF framework was designed to strengthen the enterprises and protect taxpayers and was among the most meaningful housing finance reforms since 2008. Yet, the administration lowered the enterprises' prescribed leverage buffer amount (PLBA) and the floor on the risk weight assigned to any retained credit risk transfer (CRT) exposures. Just as with weakening the PSPA provisions, it makes zero sense to lower the GSEs' capital requirements, especially when home prices have risen so much.
Aside from the potential effect on home prices, rolling back these reforms will weaken the enterprises' capital position and force taxpayers to back more high-risk loans, thus increasing the risk of future bailouts. Of course, reducing the capital requirements is precisely what various special interest groups have been calling for since the FHFA originally proposed the ERCF. For instance, the cottage CRT industry, ironically a group that consists mostly of large investors and
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From a safety and soundness standpoint, the idea that CRTs eliminate the enterprises' risk is pure fantasy - they increase the enterprises' financial obligations and their value to either the enterprises or taxpayers is highly questionable.44 Similarly, it makes little sense to lower the existing leverage buffer, a mechanism that serves as a part of a backstop to the enterprises' risk-based capital requirements. In addition to the tier 1 leverage ratio, the GSEs were originally required to maintain a fixed buffer of at least 2.5 percent tier 1 capital to adjusted total assets.45 Lowering this amount-or any of the risk-based requirements-cannot legitimately be described as improving the enterprises' safety and soundness because it does the exact opposite. If anything, the original rule should have required higher capital ratios, so that the enterprises' requirements were more in line with those of the Global Systemically Important Banks (GSIBs).
Nonetheless, the administration replaced the fixed buffer with "a dynamic leverage buffer determined annually and tied to the stability capital buffer," a change that the FHFA estimates will reduce the enterprises' leverage buffers by about two-thirds.46 Perhaps worse, the administration appears to be setting up an even larger reduction in capital. The new proposal asked for comments on whether "the prudential risk weight floor of 20 percent on single-family and multifamily mortgage exposures [is] appropriately calibrated,"47 a signal that the administration wants to lower the enterprises' overall capital requirements.
Harmful Programs Included in Reconciliation Package
Aside from these risky housing finance provisions, advocates are trying to implement multiple housing policies that will make housing less affordable. For instance, on
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45 The original ERCF required the GSEs to maintain a leverage ratio of tier 1 capital to adjusted total assets of at least 2.5 percent, as well as a fixed tier 1 capital prescribed leverage buffer amount (PLBA) of at least 1.5 percent of adjusted total assets. The final rule replaced the GSE's fixed leverage buffer (the PLBA, equal to 1.5 percent of a GSE's adjusted total assets) with a "dynamic leverage buffer equal to 50 percent of the Enterprise's stability capital buffer." See
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47
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...requirements) earn up to 1.2 times their area median income.48 There is no doubt that it is difficult to save a large downpayment for a mortgage, but it does not follow that the federal government should provide even a portion of those funds. Among other problems, subsidizing downpayments puts upward pressure on home prices, making it more expensive for everyone who buys a home and for those who rent.49
Unsurprisingly, downpayment assistance programs have a miserable track record in
Separate from loans in that failed FHA program, delinquencies of single-family FHA loans with downpayment assistance are consistently higher than FHA loans without such assistance.52 In fact, there is evidence that borrowers who provide even small downpayments from their own savings display lower default rates than those who receive downpayments from an outside source, possibly suggesting that the act of saving the money is an important signal of underlying attributes.53
48 See Downpayment Toward Equity Act of 2023, H.R.4231. This bill is similar to a policy that
49 In
50 Legislative Proposals To Determine The Future Role Of FHA, RHS, and GNMA In The Single- And Multi-Family Mortgage Markets, Hearing Before
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52 The monthly FHA Single-Family Loan Performance Trends Report is available online as far back as 2013, and it shows similarly above average delinquencies throughout the years. For one example, see
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Small Changes Would Go a
In the wake of the COVID-19 pandemic,
All the average American has to show for decades of failed federal housing policies is excessive debt, high housing costs, volatile home prices, overregulation, distorted markets, and a trail of federal bailouts. The
Rather than focus on broad underlying economic and social problems that make it difficult to sustainably earn higher income and build wealth, federal policies have consistently increased housing demand by making it easier to obtain home mortgages. There appears to be no momentum in
* Limit federal mortgage insurance.
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* Limit GSE activity.
Without reversing course, federal policies will further expand government intervention in housing markets at a great cost to millions of Americans. They will put even more upward pressure on prices and rental rates, waste taxpayers' money, and ultimately make housing less affordable. Ideally, the federal government would end policies that favor ownership over renting and stop intervening in housing markets.
Thank you for the opportunity to provide this information. I welcome any questions that you may have.
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Original text here: https://docs.house.gov/meetings/BA/BA04/20231206/116635/HHRG-118-BA04-Wstate-MichelN-20231206.pdf
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