America's Housing Rules Are Changing

The Real Estate Espresso Podcast

America’s Housing Rules Are Changing

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America’s Housing Rules Are Changing

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

The housing market is going to change again. Now, I don’t mean the actual market. I’m talking about the rules and initiatives from the U.S. federal government, and the person to watch is Bill Pulte, our current Director of the Federal Housing Finance Authority. This agency oversees lending agencies like Fannie Mae and Freddie Mac.

Now, if the last name sounds familiar, it’s because Bill is the grandson of William Pulte, founder of the Pulte Group, the third largest homebuilder in the U.S. Prior to joining the administration, Bill sat on the board of Pulte Group. He also founded Pulte Capital Partners, an investment firm focused on building and housing-related businesses. Bill comes from a family that has deep roots in residential housing, and he clearly understands the business of housing.

Last week, Donald Trump posted that Fannie Mae and Freddie Mac were going to now have $200 billion in cash. He was instructing his representatives to buy $200 billion in mortgage bonds to drive mortgage rates and monthly payments down. Now, Bill Pulte later clarified on Twitter that Fannie Mae and Freddie Mac are the entities that will conduct the purchases, responding to Trump with a “We are on it, Mr. President.”

Pulte, as the FHFA Director and chairman of both Fannie Mae and Freddie Mac, has said the two government-sponsored enterprises will have ample liquidity to carry out the $200 billion plan. The plan involves Fannie Mae and Freddie Mac adding to their portfolios of mortgage‑backed securities, which is intended to support MBS prices and push the primary mortgage rates lower by reducing the spread.

Fannie Mae and Freddie Mac are currently capped at holding $225 billion each in mortgage‑backed securities, but as of November they only held a combined $247 billion, indicating the capacity exists within or near current limits to expand the holdings. The objective is to make home ownership more affordable by narrowing the mortgage spreads and allowing interest rates and monthly payments for new borrowers to come down.

The current spread between the 10‑year Treasury and the mortgage rate is about 1.95%. Historically, the spread between these two benchmarks typically ranges anywhere from 1.5 to 2% in a stable economic environment. The recent narrowing to 1.95% from about two and a quarter suggests the market is beginning to normalize after a period of extreme volatility.

Government intervention, meaning the specific $200 billion purchase, is currently acting as a ceiling on how high mortgage rates can drift relative to the benchmark Treasury. While the average spread is 1.95%, borrowers with excellent credit, meaning a FICO score of 740 or better, might see an effective rate as low as 1.85% above the 10‑year Treasury, resulting in mortgage rates closer to 6.05%.

Now, some analysts believe that Fannie Mae and Freddie Mac, through their bond purchases, could lower mortgage rates by somewhere between 0.2 and a quarter percentage point. This is only one of about 50 possible initiatives that are currently under review within FHFA. The expectation is that there’s going to be a flurry of new announcements to help the housing market by the time the World Economic Forum starts in Davos in a couple of weeks. That timing is according to sources that I’m following.

Now, I’m not entirely sure what the heck the World Economic Forum has to do with domestic housing, but that’s what I’m hearing nonetheless. Now, one of my observations is that the White House is writing their playbook out in the open, with a lot of consultation happening before the announcements. Again, Bill Pulte is the guy to watch.

It’s clear that the 50‑year amortization idea that was floated only a few weeks ago is probably not going to get implemented. So, for the next few weeks, we can anticipate changing rules. That means nobody who’s paying attention should make decisions until the new rules are clear. But then, investors are also accustomed to working in a relatively stable environment where the rules don’t change every year, or every month, or every week.

One thing the White House needs to do to unlock investment is to eliminate the chaos associated with the ever‑changing rules. Now, across a wide range of issues, we can already see from polling results that if the midterm elections were held today, the Republicans would get crushed in the Congress and probably lose control of the Senate. Although the Senate outcome is less of a sure thing, a lot can happen in nine months and political memories can be short.

If the White House does become isolated from the legislative branch after the midterm elections, we can foresee two years of an embattled government with more impeachment proceedings and the falling likelihood of the White House policies being fully implemented for the long term if they’re strictly executive orders and not part of the legislative process.

Now, my sources are telling me there is a new government spending bill that is being drafted that is likely to be forthcoming this quarter in the lead‑up to the midterm elections. So buckle up, folks. The rules are changing.

In the meantime, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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