MReport September 2018

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82 | TH E M R EP O RT SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T The Housing Question Troubles Young Adults Falling incomes cannot compete with rising housing costs. F or all the speculation as to why millennials are not buying into the housing market, Freddie Mac says the answer is basic— housing costs are rising faster than incomes. And they've been doing so since the beginning of the century. Freddie Mac's report looked at economic and demographic trends from 2000 to 2016 to identify the causes behind the 8 percent decrease in homeownership rate among adults under age 35 since the rate's peak in 2004. Homeownership rates dropped steeply after the crash in 2008, and overall, around 700,000 young adults did not buy a home between 2000 and 2016 due to increases in inflation-adjusted home prices and rents, according to the report. While half the reason, Freddie Mac found, was higher rents and home prices, the other half was a mix of socioeconomic factors like lower marriage and fertility rates among younger adults, as well as student-loan debt—which accounted for 13 percent of the reason behind low ownership rates among the young. "Historically, low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years," said Sam Khater, Chief Economist at Freddie Mac. "Unfortunately, home-price and rent growth above incomes—driv - en primarily by a severe shortage of housing supply—have been too high of a hurdle for many would- be buyers to clear." Khater said that while rising home values continue to build housing wealth for most home - owners, weaker affordability conditions have led to "a missed opportunity for the interested young buyers who are unfortu- nately priced out of the market." The issue doesn't look to be disappearing anytime soon. By 2025, the report speculated, more adults between 25 and 34 will buy homes, but rates will still be below the 2004 average. "Demographics, housing preferences, and economic conditions will all play a role in the direction of homeownership in coming years," Khater said. "If economic conditions improve, and incomes and entry-level housing supply increase in a meaningful way, homeownership rates for today and tomorrow's young adults could exceed our current projections." Those projections put rates be - tween 56 and 60 percent by 2025. "Unfortunately, home-price and rent growth above incomes—driven primarily by a severe shortage of housing supply—have been too high of a hurdle for many would-be buyers to clear." — Sam Khater, Chief Economist, Freddie Mac Fannie Mae Expands Mortgage Insurance Options for Lenders The GSE is looking to streamline processes for lenders. F annie Mae recently intro- duced another insurance product to help lenders satisfy its charter require- ment for high-LTV loans. The government-sponsored enter- prises' (GSEs') charter requires it to ensure appropriate credit enhancement of loans that have a loan-to-value (LTV) ratio greater than 80 percent when it is acquired by Fannie Mae. "Fannie Mae's Enterprise-Paid Mortgage Insurance (EPMI) offering provides our lender customers with another option for obtaining mortgage insurance that satisfies Fannie Mae's charter requirement for high- LTV loans," Robert Schaefer, VP, Credit Enhancement Strategy and Management at Fannie Mae, wrote on the GSE's blog. "Initially, we are offering EPMI on a limited pilot basis, as an execution option that is available to participating lenders and borrowers." Schaefer wrote that the new lender option would enable Fannie Mae to streamline the op - erational requirements of "partici- pating lender customers, increase the certainty of coverage for our credit investor partners, and better manage Fannie Mae's counterpar- ty risk." He said the new product applies many of the same con- cepts developed in Fannie's Credit Insurance Risk Transfer (CIRT) structure and represented another innovation for transferring credit risk from Fannie Mae to the pri - vate market while diversifying the providers of the credit protection for its single-family business. The EPMI enables lenders to deliver a loan with an LTV greater than 80 percent to Fannie Mae without the lender-acquired mortgage insurance in return for an additional loan-level price adjustment fee paid by the lender to Fannie Mae. The GSE said that loans under this option would be covered under a forward insurance arrangement secured by Fannie from an approved insurance provider. "The process for settling EPMI claims is streamlined by Fannie and is similar to the process for settling claims under its CIRT transactions. If a loan defaults, claims are paid after the property disposition when the actual loss on the loan is known," Schaefer said. According to Fannie Mae, the product offers a more-streamlined process for lenders in the following ways: • Fannie Mae is responsible for acquiring the insurance, filing claims, and performing monthly reporting. • Loan quality and eligibility are determined by Fannie Mae, not a combination of Fannie Mae and MI guidelines. • Participating servicers look to one set of servicing guidelines for their loss mitigation offerings, liquidation decisions, and related approvals. • Because the operational processes required under EPMI are similar to those required for CIRT, Fannie Mae can leverage the simplified process and infrastructure that already supports CIRT transactions. • When Fannie Mae files a claim under EPMI, it submits a single data report to the insurance provider. • The claim is settled after property disposition when the actual loss on the loan is known.

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