Affordable Housing

In their recent article for Reverse Mortgage Daily, Gate House Founding Partners Brian Montgomery, Keith Becker and Dror Oppenheimer discuss the implications of the first positive capital ratio for the HECM program in six years.

The Gate House team, who worked together at the Federal Housing Administration managing the HECM program, provided their unique perspective and explained that important policy changes, and most certainly strong home price appreciation, have contributed to the substantial improvement in the HECM capital ratio.

Nevertheless, they argued, the results do not “provide a reason for complacency or assurance of future (positive) results” and therefore continued vigilance to ensure the program “is not continuously subsidized by the premiums … in the forward book, will be vital for the HECM program to continue to serve its mission.”

Montgomery is the only person to have served as FHA Commissioner twice under three presidents. Becker served as the Deputy Assistant Secretary and Chief Risk Officer for FHA. Oppenheimer served as a Senior Advisor to the Commissioner of FHA.

As the market was expecting, the Fed raised interest rates another quarter point Wednesday afternoon, bringing the federal-funds rate to a range between 5.25% and 5.5%, a 22 year high.  There will be eight weeks until the next Fed meeting.

Chairman Jay Powell said there is “uncertainty in the next meeting let alone next year.”  Powell also said he believed they “have a shot” at a soft landing in the economy — the ability to achieve inflation reduction without high levels of job loss as has occurred in many past instances of tightening. We’ve been hearing this from some (not all) Wall Street economists more recently, but during the press conference Powell also revealed the independent staff at the Fed is now no longer forecasting a recession, given recent strength in the economy.

Asked directly about the housing market and the prospect of getting supply and demand back into balance, Powell said, citing the constraint of existing homes, “I think we have a ways to go to get back to balance” given that existing homeowners with low rate mortgages see “too much value in their mortgage,” keeping supply tight and continuing to pressure prices.  On the other hand, Powell said, even in this rate environment there are a significant number of new buyers. “Hopefully,” Powell said, “more supply comes online” and “we are still living with through aftermath of the pandemic.”

The Mortgage Bankers Association (MBA) said high mortgage rates and low existing inventory led to another annual increase in new home purchases in June. Mortgage applications for new home purchases jumped 26.1% in June from the same period last year, according to the MBA’s builder application survey. Compared with the prior month, applications dropped by 5%, MBA said.

Housing Wire reported that construction of single-family homes specifically designed as rentals is booming. However, there are several states bucking that trend due to regulatory constraints that make investment less attractive.

The shift in commercial real estate since the pandemic — decreased office occupancy and retail activity coupled with higher interest rates — has put the CRE sector under continued strain. That stress has caused banks and other lenders to tighten their standards for new loans and scrutinize existing ones. Reuters reports that big banks are increasing loan loss reserves for commercial real estate although their exposure is relatively low. “While regional banks carry the greatest exposure to the (CRE sector,” Reuter said, “second quarter earnings show that a number of big banks have prepared for potential defaults, primarily on office loans.”

Mortgage and housing trade groups meanwhile this week objected to the Financial Stability Oversight Council (FSOC) proposal to designate nonbank servicers and others as systemically-important financial institutions. MBA said in a letter response that FSOC’s proposed interpretive guidance and a revised analytical framework “signal a renewed effort by the Biden Administration and federal financial services regulators to target non-bank financial companies – including non-bank mortgage servicers – for SIFI designation and subject them to Federal Reserve prudential oversight.”

MBA also reported that Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) may vote Thursday on the interagency proposed changes to capital requirements for banks with assets of $100 billion or more, which may include an increase in residential mortgage capital requirements for large depository banks. “This is disconcerting,” MBA said, “as large increases in capital standards will likely lead to a shift in where mid-sized and regional banks will focus their core businesses and reduce credit availability for all types of lending, including for single-family, multifamily, and commercial real estate.”

With U.S. 30-year fixed mortgage rates touching an average of 6.81% this week, the highest yet for 2023 according to Freddie Mac’s mortgage market survey, and despite tightening credit and signs consumers are already pulling back, low unemployment is creating the likelihood consumers can and will continue to spend over the next two quarters, keeping the prospect of a soft landing alive. That said, corporate earnings in the coming weeks will give us a better indication of whether that more optimistic narrative will be disrupted by multifaceted pressures and risks presented by persistent core inflation, higher interest rates, smaller bank liquidity concerns, and commercial office space contraction.

Citing the low unemployment figures and relatively strong job openings, UBS says they believe the US consumer can continue to spend through 2023, citing household DTI at 40 year lows, many households with debt fixed at low rate mortgages, and household wealth doubling in last decade, creating $10 trillion in wealth. With home prices up 40% from pre-Covid levels, UBS said even though savings is down recently it will likely remain positive through 2023 and into 2024, assisted by real wage growth (though also trending down) and the fact that lower income wages have been growing faster than higher income — all complicating the Fed’s job but nevertheless offering a less painful storyline for the rest of the year.

MBA Chief Economist Mike Fratantoni still forecasts a slowing economy over the next two quarters with a recovery in early 2024, nevertheless he expects the Fed will tighten again later this month: “The June employment report reinforces that forecast,” Fratantoni said. “While job growth and wage growth are trending down, both are still well above the pace that would be consistent with the Federal Reserve’s inflation target. We now expect that the FOMC will raise the federal funds target another 25 basis points at its July meeting.”

Goldman Sachs’ chief US economist believes the rebalancing of the labor market, with declining job openings and increased labor supply (closing a large gap that has existed between demand for labor and diminished workforce participation) without increasing unemployment is healthy for the economy and means less inflationary wage pressure.

Although core inflation has remained stubbornly high, near term inflation expectations and business inflation expectations have both moderated. Alleviation of the worst of pandemic supply chain shortages is also helping to bring down inflation, and relief in commodity prices are not believed to have passed through yet, Goldman Sachs said.  An increased supply of rental units in housing, notably, has also not worked its way into inflation numbers either. Shelter is the largest category in inflation by weighting, and the Goldman Sachs team believes it will soon take an estimated 2-2.5% off the CPI, forecasting inflation to  be down to the high 3s by end of year, the low to mid 2s next year, before achieving the Fed target 2% by 2025.

Gate House Vice Chairman Hunter Kurtz joined @ConsultQuadel President and  @Forbes_Books contributor Katie Goar for her podcast series “Change Makers with Katie Goar, Finding the right solutions for the affordable housing community” to share his insights on affordable housing through the lens of his experience in public housing and community development. Based on his experience as former HUD Public & Indian Housing Assistant Secretary, his career serving in other significant roles at HUD and Michigan state government in Detroit, and his current work with Gate House Strategies, in Part 1 of the series, Hunter discusses his career path in affordable housing, specific challenges and solutions to solving current supply constraints in affordable housing including through programs like “Faircloth to RAD” (the Rental Assistance Demonstration program), the importance of graduating renters on public assistance into market rate units, combatting veteran homelessness through programs like the HUD-VASH program, and what it will take generally to improve the shortage of affordable housing in America.

In Part 2 of the series, Hunter discusses the work of Gate House’s new subsidiary, Gate House Digital, including our colleague Dain Ehring’s perspective on the emergence of Artificial Intelligence in mortgage lending, the receipt of the “Sammies Award” by his former HUD colleague’s for their mutual work preventing homelessness of foster youth aging out of the program, his work with public housing authorities and the success of PHAs during the height of the Covid pandemic, and being part of “the rebirth of a great American city,” Detroit, where he resides today.

Happy Friday. After completing a remarkable first two weeks for Gate House Strategies, I wanted to take this opportunity to thank everyone with whom we’ve had the pleasure of engaging and many others who have been in touch.

Already, the firm has forged meaningful partnerships with longtime colleagues in the housing market and beyond, rekindled relationships that we believe will help the industry resolve critical and timely policy challenges (some age-old and others arising out of the pandemic), and been contacted by numerous others whose unique goals and enterprises portend well for future relationships with our firm.

We are hard at work discovering paths forward, finding new avenues for success – merging the unique expertise and perspective within the industry with our knowledge, experience, and relationships, forming coalitions of key allies, and leveraging it all to achieve results.

Now while that’s a mouthful after just two-and-a-half weeks, as we tried to convey at the launch we are on a mission to assist our clients’ efforts to build, to innovate, and to grow — to add to the long tradition and commitment to a strong and vibrant financial services and housing market that serves the interest of all Americans.

A few days after announcing this venture, I was on a plane to Jacksonville, FL to attend the Mortgage Bankers Association of Georgia (MBAG) annual conference, the first in-person event I have attended in over 14 months and one rescheduled twice last year (and I suspect the same for the other attendees).

Suffice it to say we were all incredibly excited to come together once again like real, non-virtual people, to see one another, and to begin to share ideas again amidst a sure sign that things are starting to get back to normal.   The excitement was palpable and it warmed the heart to see close friends and colleagues see each other face-to-face for the first time in many, many months.

The next morning, Rob Chrisman and I conducted a panel together, and we could feel the readiness to look ahead and to build upon what was an extraordinary year in housing.  Just before we walked on stage Rob turned to me and whispered, “I have the hiccups!”

Perhaps it was the perfect metaphor for involuntary, seemingly inexplicable contractions of the COVID-19 era that require creative, innovative solutions in front of a live audience.

Without missing a beat, our moderator (upon hearing a hiccup) declared she had a sure-fire cure that never fails.  She rose up and walked over to Rob imploring him to stand up and raise his arms high above his head.  She asked for a glass of water but saw one on the podium (Note: it was mine from the previous session which I did sip from (sorry Rob)).  The moderator then held the glass and told Rob to tilt his head back and keep drinking but to wave his hands when he had enough.  I immediately thought of waterboarding but Rob kept chugging before giving the audience his version of “jazz hands.”  And it worked much to the audiences laughter!

We had a great session and can’t wait to do it again soon. (And thank you, Rob, for the shout-out on your unmatched-in-influence blog about Gate House as “the new kid on the block.”)

But getting back to business, we are hearing from a lot of people, new and old, who are seeing the challenges we are seeing and who are looking for the best solutions, working to position themselves to both take advantage of new opportunities this year has in store and looking beyond the pandemic to strategies that will achieve the mission.

Again, we are looking forward to it all and can’t wait to help our partners navigate this journey ahead.

–Brian Montgomery, Chairman and Founding Partner, Gate House Strategies

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Few issues are more salient to the challenges our country faces today than the shortage of decent, safe, affordable housing.

As became abundantly clear during the COVID-19 pandemic, our homes are the foundation of much of our lives, they have a profound effect on our health and well-being, and impact our education and productivity, as well as our ability to take advantage of opportunities in a free country.

As the coronavirus forced Americans to use their homes as safe havens, offices, and classrooms, it also put increased pressure on public and private housing markets that were already undersupplied and putting greater numbers of vulnerable citizens at risk.

And as the nation focuses on fairness and equity throughout our society and economy, it is evident that housing is integral to that fabric of American life, and, ultimately, the belief that everyone has a stake in its success.

Both in response to COVID-19 and in the Administration’s focus on infrastructure, we are seeing an unprecedented increase in funding for affordable housing.

The latest round of COVID-19 funding included over $46 billion for rental assistance, funds that will help individuals and families either get back on their feet or simply maintain life without the stress of whether there will be a roof overhead.

There is another staggering $200 billion being proposed in Washington through increase in the budget and infrastructure.

All of this is presenting tremendous possibilities, providing potential new funding sources for communities, developers, and public housing authorities. The increase in the Capital Fund for public housing authorities, for example, presents both private public sector partners with enormous opportunities over the next few years to improve the current affordable housing stock and to expand it as well.

These opportunities are coupled with enormous challenges to get it right in order to make a lasting impact on the lives of millions of people. We are already hearing the frustrations with trying to deploy this kind of money in a short period of time. The Consumer Financial Protection Bureau and the Federal Trade Commission gave notice to the largest landlords this week that the rules and tenant rights will need to be followed.

We have new and more administrative hurdles to spending this funding quickly and wisely. Stakeholders are going to need assistance to ensure they are following the rules and deploying the funds in an effective and efficient manner, a manner that not only helps the people intended to be helped but also ensure funds are spent in a timely fashion.

The timing of deploying funds will determine the ability of individuals, families, and communities to more fully recover and achieve goals that will impact their lives for many years.

-Hunter Kurtz, Vice Chairman and Founding Partner, Gate House Strategies