Still sputtering despite the gradual economic recovery, the U.S. housing market's continued recovery appears dependent upon the return of consumer and investor confidence in concert with balanced government policy that provides the appropriate level of support without crowding out private investment or raising borrowing costs.
Bad weather has slowed the housing market's recovery in some areas, and the effects of market dislocations including the overhang of property foreclosures and persistent unemployment, will impact residential real estate markets for several years. The sector has also contended with other uncertainties.
In April, the Federal Reserve ended its program to purchase mortgage-backed securities-a role assumed after the government takeovers of Fannie Mae and Freddie Mac and the related loss of confidence in their securities. Also in April, the first-time homebuyer tax credit expired, removing a powerful incentive for many prospective purchasers.
Regulatory reform before Congress likely will require institutions that sell nonconforming mortgage loans to retain at least 5% of credit risk in the resulting mortgage-backed securities issued (the so-called "skin in the game" rule). This is designed to increase incentives for issuers to be conscious of the risk in their securitized mortgage pools.
Fannie and Freddie have renewed their determination to enforce loan repurchase obligations, which requires lenders to buy back loans that failed to meet the GSEs' eligibility requirements.
The long-term consequences of these events are uncertain for credit unions and the larger economy. Some observers suggest the availability of nonconforming mortgages, largely super jumbo mortgages (greater than $729,750), will decline for the near term and possibly longer. There is a fear of a second credit crunch for credit unions and other lenders unable to rely on their portfolio capacity, the GSEs or FHA-insured loans for liquidity on nonconforming mortgages, forcing them to compete for capital in the public securities markets. However, given the more limited size of the nonconforming mortgage market, it is unlikely, even in a worst-case scenario, to result in the type of credit freeze that helped trigger the 2008-2009 recession.
Credit unions are also in a better position than many lenders to originate mortgages under the proposed regulations, having generally adopted stricter underwriting practices that conform to GSE standards, as well as the more personalized, retail origination approach. Even before the recession, most credit unions knew their homebuyers and did not rely on a brokered loan-gathering strategy. Consequently, they have not been penalized by the GSE loan-repurchase enforcement. Credit unions also are not likely to be significantly affected by the skin in the game rule, as it will likely not apply to loans sold to Fannie or Freddie-investors to which credit unions typically sell their mortgages.
Although credit unions need to be watchful of initiatives that diminish capital availability and their concomitant ability to serve members, the model of providing products that are in members' best interest, rather than investors', is more powerful today than ever. Credit unions must ensure they have access to tools that reduce portfolio exposure to interest-rate volatility through secondary market mortgage sales. More than 63% of credit unions' first mortgage portfolios are currently held in fixed-rate instruments with maturities of 15 years or longer. These investments could pose dangerous levels of interest-rate risk if not properly managed.
Fortunately, there are signs that the private sector is assuming a larger role in reviving and reinvigorating capital markets through the emergence of renewed confidence. The ultimate return of a robust secondary-investor market will inject liquidity into all sectors of the housing market, reduce competition for capital, ensure availability of loan products to all consumers and enable credit unions to lower their portfolio exposure through continued sale of mortgages for securitization.
As noted, credit unions generally do not directly participate in the securitization arena. However, they are dependent upon a vibrant and healthy MBS market for the replenishment of their own liquidity and risk management.
The national housing picture still contains unpredictable variables, such as unemployment, although most economists agree we've weathered the worst. But the return of private investors is key to the industry's recovery. There are promising signs that suggest after an unprecedented period of retreat, investors are again looking to the U.S. housing market as a source of reliable returns. Credit unions and their members will be the beneficiaries.
Alan Bahr is director of secondary markets and national accounts for CMG Mortgage Insurance Co. He can be reached at 415-284-2543 or firstname.lastname@example.org