220 Week 3 F /For WIZARD KIM

20 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

The New Housing and Mortgage Market DOUGLAS DUNCAN

DOUGLAS DUNCAN is chief economist and a senior vice president at Fannie Mae in Washington, DC. douglas_g_duncan@fanniemae. com

O ne hears various individuals ask whether the housing and mortgage markets are back to “normal,” or perhaps they con-

jecture that the markets are, in fact, back to “normal.” Of course, that question implies an understanding of what constitutes “normal.” Others suggest there is a “new normal,” which indicates a view that what was, is no longer, and that the market has somehow permanently changed. We will explore that dichotomy of views in this brief article.

Our primary interests in this article are in the production and delivery of and investment in mortgage-related assets as well as exploring what has changed and what the future looks like in this market. Because the number and volume of those assets are deriv- ative of the underlying real estate, we will also brief ly describe the U.S. demographic profile that will drive demand for places to live. People live in residences that they own or rent and both are f inanced, so we will comment on both types of property and what brings people to live in one or the other. Finally, we will offer a perspective on what this means for mortgage asset volumes.

The next subject we will comment upon is the organization of firms that make mortgage loans to consumers in the primary market. A number of post-crisis economic and policy forces have been acting on these f irms and changing the opportunities and

constraints they face. The environment has altered the product set they offer. We offer a view of how the demographic factors and the implied potential mortgage-related asset volumes might look going forward and how they are likely to impact the number and type of firms operating in the primary market.

The number and nature of firms oper- ating in the secondary market have changed significantly, as well. From a policy perspec- tive, however, this is the area of least progress. Irrespective of the lack of legislated change, there are changes taking place in the sec- ondary market under the direction of the conservator.1 The primary market has seen a shift of volume between traditional f irm types, but the secondary market awaits poten- tially greater structural change. This change includes the mix of investors who ultimately hold the mortgage assets as well as the types of assets available to be held.

Much of the change to be discussed is a result of the policy reaction to the housing recession. The policy changes were both monetary and fiscal. The drivers of change also include what might be called the evo- lutionary aspects of any market, perhaps enabled in this case by technologic advance- ment. We will not discuss the causes of the recession but rather focus on the changes wrought by the policy response to it. Not all changes have been determined as of this writing, and institutions and markets are still

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reacting to the initial set of policy adjustments and the ongoing changes driven by technology.

A host of questions can be asked in considering the combined effect of the changes in each of these subject areas. What volume of mortgage assets will be pro- duced? Who will produce them? What will their origins be? What form will they take? Who will hold them? What type of returns will be expected? This article is too brief to answer all these questions exhaustively or perhaps even many of them. It will suggest, however, a number of things researchers should explore and that policymakers, market participants, or observers should take into account as they assess the opportunities and risks.

DEMOGRAPHICS DRIVE HOUSING AND MORTGAGE DESTINY

Traditional housing and mortgage drivers are reemerging post-crisis; population, household formation, and lifecycle included. People have always lived in a struc- ture built upon land somewhere in proximity to where they worked, and it will always be thus. Some rent and some own.2 The determinants of which choice a household

makes include stage of life, personal preference, financial capacity and performance, tax considerations, supply of property by type, and relative cost, among others. Being married and having a child are strongly correlated with becoming a home owner. Steady employment and earn- ings growth combined with good credit management are general preconditions for qualifying for mortgage credit. Some people who are able to own choose to rent. So, what are the demographic prospects?

The U.S. demographic profile suggests significant growth for housing and mortgage assets as the genera- tion reaching adulthood in the early 2000s, the Millen- nials, age, as seen in Exhibit 1. Millennials are greater in number than Baby Boomers; see Exhibit 2.3 Survey data indicate over 90% of Millennials have a desire to own. Homeownership varies significantly by age, with the group of 30- to 34-year-olds being prime first-time homebuyers and the homeownership rate peaking when households are in their mid-60s.

Currently, the 30–34 group’s homeownership rate lags prior cohorts, very likely as a result of the weakness of the economic recovery because their real incomes are still well below that of the preceding cohort at the same age a decade earlier (see Exhibit 3).

E X H I B I T 1 Millennials Are a Large Wave of Potential Home Owners

Source: U.S. Census Bureau: Decennial Census.

22 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

Many Millennials who are forming house- holds are renting single-family homes, which suggests they will align their housing tenure with their expressed interest when they are financially capable.4 Inability to get a mortgage is only the fourth-ranked reason for renting now.5 There is a clear financial conservatism among younger households, driven partly by their observations of the effects of the severe recession and partly by the slow pace of employment and income growth in the recovery. Among Millennials, those age 25–34 have always said that the lifestyle benefits are the best reason to buy a home rather than the financial benefits, but there is some indication that lifestyle benefits have been trending down while finan- cial benefits have been trending up. This trend is paired with expectations of price appreciation becoming more aligned with long-term trends, as illustrated in Exhibit 5.6

Baby Boomers are not driving demand for rentals at this point, but they are so numerous that many are, nevertheless, renters.7 Boomers express a desire to age in place and are remod- eling their existing homes contrary to expecta- tions that they would sell their current home and move to a smaller place after the children exit.8 It remains to be seen how long this stays true as they age. Disability increases sixfold in the age range of 65–74 and for those 75 and over. Second- home purchases have risen, and speculation is that eventually these households will sell their current primary home and move their residence to the smaller second home.

The bottom line on demographics for the short and intermediate term is that Millennials will supplant Baby Boomers as the largest age cohort. Baby Boomers are aging in place, meaning there will need to be maintenance of existing structures in addition to increasing the housing stock. The balance between owning and renting as tenure choice has returned to a long-term relationship.

THE SUPPLY RESPONSE LAGS

Single-family (1–4 units in the building) rentals account for 53% of all renter-occupied units, up from 51% prior to the recession. The remainder of rentals are 31% in buildings with

E X H I B I T 3 Millennials Have Lower Household Incomes than GenXers Had at the Same Age

E X H I B I T 2 Millennials Are the Largest Generation in History

Source: U.S. Census Bureau: Decennial Census—Population Estimates, and Popu- lation Projections.

Sources: U.S. Census Bureau, 2000 Census, and 2013 American Community Survey.

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5–49 units, 11% in buildings with 50 units or more, and 5% in manufactured homes and other less common types of structures.9

The presence of institutional investors in the single-family rental business is an unusual feature of the

current housing market born from the large excess supply revealed by the crisis and the subsequent large price decline. It is unknown what the ultimate implications are of institu- tional investors’ participation, but the market segment seems to have staying power at least into the intermediate term. Technolog y seems to be having an inf luence in reducing costs of managing geographically dispersed properties.

As seen in Exhibit 6, the number of multifamily starts per 1,000 households has expanded at a good clip, running at about its pre-crisis levels, in response to very strong rental demand. Despite a positive overall supply response, affordability in rental housing remains a concern because much of the new construction is in Class A properties that require higher rents. There is potential for over-building of Class A properties in some local submarkets existing simultaneously with a lack of Class B and Class C properties with more affordable rents.

The supply of single-family homes for sale is lag- ging and causing real house price appreciation in the presence of rising demand as employment and income grow. Construction is running at a pace well below

E X H I B I T 4 Millennials Have Always Seen Lifestyle Benefits as the Best Reason to Buy a House

Source: Fannie Mae National Housing Survey.

E X H I B I T 5 Average 12-Month Home Price Change Expectations Have Declined from Their Recent Peak

Source: Fannie Mae National Housing Survey.

24 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

long-term levels (see Exhibit 7). As in the rental market, supply is particularly lagging in the lower price home categories (see Exhibit 8).10 This is evident in the pace of price appreciation by house price tier nationally as well as in selected markets (see Exhibits 9 and 10).

The cause of the weak response in single-family construction is not completely understood. Contrib-

uting factors include the lack of skilled workers; reduced availability of acquisition, development, and construction (ADC) credit; reduced supply of developed lots; and high cost of developing lots, which puts prof itable home building at price points that don’t fit traditional “affordable” income levels.

Home price growth and rent growth vary by locality. On the national level, we can gauge their relative growth rates by looking at the price-to-rent ratio. Since around mid- 2012, home price appreciation has outpaced rent growth, which is ref lected in the increase in the price-to-rent ratio (see Exhibit 11).11 Income growth trailing home price appreciation hurts home purchase affordability, and strong rent growth also makes it harder for households to accumulate the down payments required to pur- chase a home. As noted earlier, single-family construction for sale-to-own properties still lags the level suggested by demographics, and it would seem that, in the absence of a recession, it will take approximately three years to achieve that level.12, 13

THE PRIMARY MORTGAGE MARKET SHIFTS

One demographic factor already starting to have an impact on the real estate and mort- gage finance business is consumer attitudes about the application of technology to the search pro- cess. Survey data show that consumers who had deployed online shopping practices are strongly interested in shifting that to mobile technology applications.14 This demand is showing up in the financial technology (FinTech) investments being made around the globe.15 Several competi- tors have emerged in the real estate listing and search business, and many more are building tools in the consumer finance space. There is an

interesting dichotomy at present in the mortgage com- ponent in that, while consumers are focused on search and comparison capability improvement for both real estate and its f inancing, existing lenders cite process efficiency as the basis for their technology investment, as seen in Exhibit 12.

Source: U.S Census Bureau.

E X H I B I T 7 Single-Family Housing Supply Still behind the Curve

Source: U.S Census Bureau

E X H I B I T 6 Multifamily Construction Picks Up the Pace Post-Crisis

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Mortgage lenders face a series of challenges, particularly on the single-family-home side of the business. These challenges include adopting technology tools to meet changes in consumer behavior as well as a changed regulatory envi- ronment that has increased the costs of compli- ance and the end of a policy-induced refinance driven market. As illustrated in Exhibit 13, data from the Mortgage Bankers Association show a clear increase in the compliance component of operations costs in both loan production and servicing subsequent to the passage of the Dodd– Frank Act and the related regulatory changes.

The expectation is that if mortgage volume falls, there will be firms exiting the business because the base operating cost has raised the minimum size at which a firm can successfully operate.

Thus, the recession, housing, and mortgage market downturn, and related financial market crisis led initially to consolidation in the industry, but as the legislative and regulatory response took shape, the industry has migrated toward a decon- solidation. Mergers and consolidation among large depository institutions increased the market shares of banks initially. As capital rules shifted, legal set- tlement costs accumulated and regulatory burden increased, as Exhibit 14 shows, volumes started to shift toward smaller non-depository lenders.

This migration has taken place in the pres- ence of a shift in product type and purpose. Mon- etary policy has been focused, in part, on lowering nominal interest rates for the purpose of allowing households to refinance their existing mortgages and improve household financial stability. Addi- tionally, the low rates brought buyers, particularly at higher income levels, into the market to put a f loor under falling house prices and preserve any wealth effect related to housing equity wealth.

Monetary policy supported very high levels of refinance volumes as did the distressed housing policy initiatives, Home Affordable Modification Program (HAMP), and Home Affordable Refi- nance Program (HARP). See Exhibit 15.16

Although the modification programs have reset provisions that will allow for loan rates to rise if market rates rise, there are caps on the adjust- ment that should keep rates at low levels histori- cally. As these programs were progressing and now

Note: Tier 1: 0–75% of median; Tier 2: 75% –100% of median; Tier 3: 100% –125% of median; Tier 4: 125% + of median. Source: CoreLogic.

E X H I B I T 8 Lack of More Affordable Properties

E X H I B I T 9 Continuing to See Faster Home Price Appreciation among Moderately Priced Homes

Note: Tier 1: 0–75% of median; Tier 2: 75% –100% of median; Tier 3: 100% –125% of median; Tier 4: 125% + of median. Source: CoreLogic.

26 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

approach their end, the underlying home purchase mortgage volumes have picked up, although not enough to offset the decline in refinance activity.

In addition, the product mix between government, Federal Housing Administration (FHA) and Veterans Administration (VA), and conventional, all non-government loans, changed. The changes were driven by several factors, including relative prices of mortgages in the two components of the market as FHA reduced its up-front insurance premium. There have also been changes in the mix of borrowers, particularly the entry into the market of large numbers of military veterans from the first and second Gulf Wars, thus growing the VA component of government loans. Because there are no hard limits on loan size for VA loans, quali- fied borrowers can refinance from one VA loan to another VA loan or purchase and finance a move-up home as well.17 Mean- while, the FHA appears to be seeing some volume increases from borrowers who lost a home previously and are returning to the market through the FHA’s less-stringent loan qualification standards.

Stabilized and subsequently rising home prices meant the staunching of declines and, ultimately, restoration of increases in housing equity wealth. The number of households that owe more on their home than it is currently worth has fallen steadily, and the number of house- holds that have housing equity wealth available has been increasing. The expectation is that having low f ixed- rate, f irst-lien mortgages in a market expecting rate increases will enhance the prospects for home equity loan prod- ucts, but increased conservatism among owning households regarding the sta- bility of that equity may imply lower take-up rates for move-up buying and equity products. For households with significant housing equity but low levels of non-housing equity wealth to draw

E X H I B I T 1 0 Most Metro Areas See Faster Price Appreciation for More Modest Homes

Source: S&P/Case-Shiller.

Sources: U.S. Bureau of Labor Statistics, FHFA.

E X H I B I T 1 1 Home Prices Rising Faster than Rents

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Sources: Fannie Mae Mortgage Lender Sentiment Survey, National Housing Survey.

E X H I B I T 1 2 Lender and Borrower Mobile Priorities Differ

Source: Mortgage Bankers Association: Quarterly Mortgage Bankers Performance Report, Servicing Operations Study and Forum.

E X H I B I T 1 3 Compliance and Servicing Costs Have Grown Since the Dodd–Frank Act

28 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

on, however, the potential for growth in the reverse mortgage product line seems strong.

The level of single-family mortgage debt out- standing has only recently begun to rise after a sig- nificant period of moderate decline due to foreclosures and household deleveraging; see Exhibit 16.18 Although mortgage origination volumes were high for sev- eral years, the refinancing volume that composed the majority of production for several years simply ref lected churn in the portfolio and, in fact, enhanced the poten- tial for shortening the maturity of loans and accelerated extinguishment of the debt altogether.

Foreclosure levels have fallen back to pre-crisis levels in most states, although the states that have judi- cial foreclosure laws are still experiencing elevated but declining levels of distressed loans. This has been aided by the rise in home prices, which has reduced the number of home owners who owe more on their home than it is currently worth.19

The apartment loan market has seen steady volume growth post-crisis as overall employment has recovered and builders have expanded production to meet the rise in apartment demand accompanying the increase in household formation. Multifamily annual loan volume has risen steadily as construction has increased, reaching

$199 billion in 2015 after falling to a reces- sion low of $49 billion in 2009. The largest single sources of funding have been the gov- ernment-sponsored enterprises (GSEs), as Fannie Mae financed $42 billion and Freddie Mac financed $47 billion in 2015. The FHA has also been a key funding source, providing $18.5 billion in 2015.

Overall, the primary market is set to see growth in home purchase mortgages and declining refinance activity as mort- gage interest rates level off or rise from cur- rent levels. Costs of doing that business have risen, and while technological improvements may produce some compliance efficiencies, the cost increase suggests that the minimum profitable loan size will be somewhat higher in the future. As many borrowers have locked in low fixed-rate funds, the growth of equity suggests home equity or home equity lines of credit may see some growth. Within aging households that have housing equity but low income, the use of reverse mortgages is likely

to rise. Multifamily debt growth will likely slow over the midterm, with some potential for a decline in loan per- formance as overbuilding in some segments and in local markets is a possibility.

THE SECONDARY MORTGAGE MARKET ALSO SHIFTS

The secondary market for whole loans and mort- gage-related securitized products has seen both institu- tional structural change and investor changes, although the extent to which one could argue the transformation is cyclical will play out against the backdrop of these changes. Key components of the institutional structural changes are the disappearance of private-label mortgage security (PLS) issuers and associated securities, the rise of Ginnie Mae from a volume perspective relative to the two GSEs, the issuance of credit risk transfer (CRT) securities by the GSEs, and a shift in how depository institutions manage whole loan portfolios. See Exhibit 17.

Key components of the investor changes, in addition to increased whole loan retention at depository institutions, have been the mandatory declines in the GSE portfolio holdings, the increase in the U.S. Federal Reserve port- folio holdings, the support of private investors for the CRT

Sources: Inside Mortgage Finance, Fannie Mae, Freddie Mac, Ginnie Mae, HMDA, Mar- ketrac, SNL Financial.

E X H I B I T 1 4 Total Originations—Institution Type Share Shifts to Smaller Independent Lenders

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Source: Treasury Department.

E X H I B I T 1 5 High Levels of Refinancing and Modifications through HARP and HAMP

30 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

securities issued by the GSEs, and the return to health of the private mortgage insurance companies as risk-sharing entities in the GSE market space (see Exhibit 18).

Private-label mortgage security issuance has been negligible as legacy securities amortize, with unfavor- able market conditions leading to a reduction in supply and liquidity. Concurrently, many investors remain on the sidelines as unresolved issues in this sector prevent an accurate pricing of the risk–return tradeoff, and thus, overall demand has weakened.

At the same time, the market share of Ginnie Mae increased dramatically, although total MBS issu- ance declined post-2007 compared with the 2002–2007 time period. The decline in issuance in 2008 was during the most intense period of the crisis, and the subsequent rise in issuance from 2009–2013 was the period of most significant direct policy interventions through specific mortgage programs at the Federal level and of central bank interventions to drive rates down and support house price stability. The period from 2014 through

E X H I B I T 1 6 Mortgage Debt Outstanding and Originations

Sources: U.S. Federal Reserve, Fannie Mae estimates.

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2015 represents the slowdown from the monetary policy support for refinancing and the increasing strength of the home purchase market.

Portfolio whole loan holdings have risen largely as a result of income and wealth dynamics post-crisis. High-income households saw increasingly rapid

growth rate for incomes and faster wealth accumulation as a result of monetary and fiscal policies leading depository institu- tions with wealth management motives to incorporate mortgage-related debt instru- ments in their cross-sell product offerings. This component of the investor base may be nearing capacit y, and commercial banks as a group have a long history of holding whole loan mortgage-related assets in a narrow band as a share of total outstanding mortgage debt.20

CRT securities are a market innova- tion of recent vintage. They are intended as a vehicle to reduce risk for the GSEs by sharing it with private investors, thus reducing the potential taxpayer contingent liabilities inherent in the conservatorship status of the GSEs. This market is small but growing as the market considers the attributes and performance of the instru- ments (see Exhibit 19). The securities have not performed across a full economic cycle, so the data on cyclical performance are yet to be acquired, and therefore, pricing is immature in that sense.

Throughout, the multifamily compo- nent of the commercial mortgage-backed secur it y (CM BS ) market per for med steadily. Total issuance followed the pat- tern of consumers moving to homeown- ership for the decade through 2005 and then, post-crisis, the shift to rebalance between homeownership and renting. Volumes have risen steadily post-crisis, reaching more than $210 billion in 2015. Expectations for 2016 are that it will be the strongest year on record and with per- haps another two or three years of growth before leveling off.21 One component of the issuance, the rollover of maturing loans held by nonbanks, should accelerate

through the 2016–2017 period before roughly f lat- tening out for the early 2020s, as shown in Exhibit 20. Somewhere in that time period, there is a possibility of a recession, given that during 2016, the economy will be in the fourth longest economic expansion since World War II.

Source: Inside MBS and ABS.

E X H I B I T 1 8 Agency MBS Investor Breakdown Shows Federal Reserve Dominance

E X H I B I T 1 7 Mortgage-Related Securities Issuance Has Trended Down

Sources: Fannie Mae, NYSE, Inside Mortgage Finance.

32 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

considerations are 1) the decisions of the Federal Reserve regarding the conduct of monetary policy, including both the “normalization” of interest rates and the effects of its decisions regarding its hold- ings of mortgage-related securities, and 2) the reform of the secondary market insti- tutional structure, including the GSEs.

The current mortgage-related assets component of the Fed’s portfolio is larger than the combined decline in the portfo- lios of the GSEs to date. This is impor- tant for at least two reasons. First, the GSE portfolios are still in decline and will be capped at a maximum of $250 billion in 2018.22 Therefore, under policy scenarios involving the run-off of the Fed’s port- folio, the GSEs will not be an acquiring investor. Thus, it raises questions regarding who will be the investors that are likely to take the Fed’s place. Second, given that the Fed purchased MBS for monetary policy objectives rather than economic returns, it is unknown how the Fed’s exit would change private investors’ views on MBS volume and spreads. These unknown variables will affect mortgage rates to bor- rowers in the primary market as well as the subsequent quantity of credit demand.

The Federal Reserve is also gradu- ally moving toward a more “normal” posture for monetary policy, having insti- tuted its first Federal funds rate increase in nine years in December 2015. This casts U.S. monetary policy in juxtaposition to global central banks that have instituted negative short-term nominal interest rates policies. The implications of negative rates over any timeframe are unknown, being an historical anomaly. While the U.S. central bank is resistant to this policy choice, it must be considered by domestic

and global market participants as it will, by definition, alter the information contained in market prices.

Questions also surround the secondary market institutional structure. While the conservatorship of the GSEs continues, there are potential market structural shifts under construction in addition to the credit risk

POLICY CONSIDERATIONS DRIVE THE NEW IN THE MARKET

Finally, there are a number of policy considerations to take into account for their potential impacts on volume, composition, rates, and spreads of mortgage-related assets in the near and far future. The two most important

Note: The 2015 originations estimate is subject to HMDA revisions.

Source: Fannie Mae.

E X H I B I T 1 9 Credit Risk Share of Originations

Source: Mortgage Bankers Association.

E X H I B I T 2 0 Non-Bank Multifamily Loan Maturities by Investor Type

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transfer initiatives. Changes in Federal Reserve policy will have an impact on the performance of the CRT market, which the GSEs now support. Presumably, the potential reform will consider the existence of the CRT market and the implications of any reform regarding the potential for stranding that market component. The addi- tional mechanisms under construction are the Common Securitization Platform and the Single Security structure. A great deal has been written about the nature and poten- tial of these innovations, and we will not address them directly here. We would note, however, that they do hold the potential for changing the competitive structure of the secondary market with implications for the nature of mortgage-related assets and, correspondingly, the rates and spreads inherent in the new instruments.

This in turn raises the question of the ultimate fate of the conservatorship and secondary market reform. There is no suggestion that reform is in the offing in the near term. Of course, the Fall 2016 elections may alter that perspective, but that is beyond the scope of this article.

ADDING IT ALL UP

Homeownership still has cachet, but it has to be affordable to credit-qualified and interested households. The U.S. demographic prof ile suggests there will be more rather than fewer home owners in the future. Builders need to catch up at the lower price points of both houses and apartments, which will slow the pace of both price and rent increases. The balance between ownership and rentals is back to a normal relationship, given the demographic profile. If the supply increase occurs and both rents and prices grow more slowly, we may see a change in the appetite of institutional inves- tors for geographically dispersed single-family rentals. However, creative use of technology to maintain returns may keep them in the game longer than expected.

Some cyclical shifts in single-family primary mort- gage market lender shares are typical, but regulatory changes may have induced a structural shift as well. That shift is due not only to the banking reform legislation changing capital rules for depository institutions but also to significant changes on mortgage process regula- tion and compliance costs for non-depositories. These changes suggest that the minimum size of firm to be prof itable has risen, so a long-term reduction in the number of firms may be in store.

The secondary market has significant unresolved policy questions, particularly as regards the GSEs. Their capital levels are minimal, and their portfolios are shrinking and will be capped. The whole loan holdings of depositories are at or near their long-term historical share. The central bank portfolio has absorbed all the volume released by the GSEs plus more. When the Fed decides to shrink its portfolio, the question will be who becomes the marginal investor and at what yield. The private-label market has yet to recover, which leaves without resolution the elements of the mortgage market that do not qualify for government, GSE, or bank port- folio whole loans.

ENDNOTES

The author would like to thank the anonymous reviewers, Eric Brescia, Orawin Velz, Anton Haidorfer, Pat- rick Simmons, Hristina Toshkova, Kim Betancourt, Michael Vangeloff, Stephen Gilbert, and Manhong Feng for their comments and assistance on this article.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, esti- mates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

1Plans for the Common Securitization Platform and the Single Security as directed by the Federal Housing Finance Agency are under development, but extended discussion is beyond the scope of this article.

2According to the U.S. Census Bureau, the fourth quarter U.S. homeownership rate was 63.8%.

3Each cohort increases over time because immigration exceeds deaths plus emigration.

4See slide 20 of “Profile of Today’s Renter,” research, Freddie Mac, October 2015. Available at http://www.fred- diemac.com/multifamily/pdf/MF_Q3_Q4%202015_Con- sumer_Omnibus_Results.pdf .

5See slide 9 of “Millennials Look to Income Improve- ments as Key to Unlocking Homeownership,” Topic Analysis, Fannie Mae National Housing Survey, August 2015. Available

34 THE “NEW” HOUSING AND MORTGAGE MARKET SPRING 2016

at http://www.fanniemae.com/resources/file/research/hous- ingsurvey/pdf/082115-topicanalysis.pdf.

6Long-run real house price appreciation has averaged roughly 0.5% annually.

7See “Housing Myths, Debunked: Millennials, Not Baby Boomers, Are the Driving Force behind the Recent Surge in Apartment Demand,” FM Commentary, Fannie Mae, March 10, 2016. Available at http://www.fanniemae.com/portal/ about-us/media/commentary/030116-simmons.html.

8See Exhibit 1 in “Baby Boomer Downsizing Revisited: Boomers Are Not Leaving Their Single-Family Homes for Apartments,” Fannie Mae Housing Insights, Vol. 5, No. 2 (August 19, 2015). Available at http://fanniemae.com/resources/file/ research/datanotes/pdf/housing-insights-082015.pdf.

9Data from the Census A mer ican Com munit y Survey.

10Most of the aftereffects of the foreclosure crisis are past, but one of the local market policy responses seems to have been tougher development restrictions, which may have raised the price of a profitable entry-level home.

11The price-to-rent ratio is calculated by dividing the Federal Housing Finance Agency (FHFA) purchase-only house price index by the Owners’ Equivalent Rent com- ponent of the Consumer Price Index. The ratio attempts to capture the price-to-earnings ratio for housing by comparing home prices with the earnings, as proxied by the current yearly rent that the house could earn if it were rented.

12In addition to the rising risk of a recession as the expansion matures, there are regional risks, including oil price decline-induced downturns, the possible tech bubble in San Francisco, as well as the aforementioned potential of local multifamily overbuilding.

13The three-year period is derived from updated Fannie Mae calculations based off of the methodology explained in “Transitioning to ‘Normal’: What Does a Healthy Housing Market Look Like and How Far Off Is It?” FM Commentary, Fannie Mae, March 14, 2013. Avail- able at http://www. fanniemae.com/portal/about-us/media/ commentary/031413-hughes-cromwick.html.

14Fannie Mae National Housing Survey 15The term FinTech refers to the investments being

made in startup firms driven by newly available technology tools or technology enablement of new business forms for conducting traditional f inancial actions by consumers (or business to business).

16More than 3.3 million borrowers to date have used HARP to refinance, and 2.4 million borrowers have had trial or permanent modifications occur under HAMP.

17The FHA has a maximum insurable loan limit spe- cific to a given market area, as do the government-sponsored enterprises (GSEs).

18According to the Federal Reserve’s Flow of Funds, total f irst-lien residential mortgage debt outstanding bot- tomed in Q1 2014.

19According to data from the third quarter of CoreL- ogic’s Homeowner Equity Report, the number of negative equity properties is 4.1 million, a decrease of 20.7% year over year. The Mortgage Bankers Association National Delin- quency Survey found that the percentage of loans on which foreclosure actions were started during the fourth quarter of 2015 was 0.36%. The peak foreclosure rate was 1.47% in the second quarter of 2009.

20Since the early 1990s, the share of commercial bank single-family whole loan holdings as a percentage of single-family mortgage debt outstanding has held remark- ably steady at roughly 20%. Looking over the past 50 years, the time series has trended within an approximate band of 12% –22%.

21Fannie Mae estimate. 22The $250 billion cap represents total assets for both

Fannie Mae and Freddie Mac, including legacy assets and delinquent loans purchased from MBS trusts.

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