Mel Watt, the recently appointed Director of the Federal Housing Finance Agency (FHFA), outlined the strategic plans for Fannie Mae and Freddie Mac during a recent speech at the Brookings Institution. Chief among his stated goals was ensuring continued credit availability, especially for single-family housing. Consequently, he announced the FHFA would reverse course on loan amount limits, keeping the current limits in place instead of reducing them as proposed. He also said Fannie and Freddie would relax the payment history requirement for borrowers by allowing two delinquent payments in the first 36 months after a loan is acquired.
Taken together, these steps should promote liquidity in the single-family mortgage market and have a generally positive impact on the overall housing market in the near-term. However, many conservatives are worried that Watt’s relaxation of credit standards might inflate a new housing bubble. Mark Calabria of the Cato Institute wryly tweeted: “I think FHFA’s Mel Watt has pulled off the impossible, making Tim Geithner look like a responsible financial regulator by comparison.” Clearly, the FHFA conservatorship of Fannie Mae and Freddie Mac will be a factor in the 2016 elections. Stay tuned.
The April Consumer Price Index data revealed a slightly increasing split in the food and energy components vs. the rest of the CPI. The monthly change was 0.3% (2.0% year-to-year) overall, compared to 0.2% and 1.8% respectively less food and energy. Gasoline rose 2.3% after a March decline, and food continued to rise at a 0.4% clip.
This is no surprise to consumers, who have been hit by significant rises in beef and milk prices, as well as certain other staples. Perhaps this explains part of the collective unease about the economy, with a record Dow Jones juxtaposed with a perceived weak economy at the consumer scale. The gap between Wall Street and Main Street seems to be growing.
Housing starts rose by 13.2% in April – unfortunately, this was driven almost entirely by multi-family starts, reversing promising March numbers in single-family housing.
Combined with the stalling of the NAHB Housing Index (released last Thursday), this indicates a split, with the housing market improving overall but the critically important single-family market being left behind. Those are the numbers that concern policymakers at the Fed.
- FHFA policy is heading toward looser credit and potentially riskier loan activity. This is good news for consumers who have been on the edge of credit acceptability, as they may now qualify for loans they could not have obtained six months ago. It may also be good for homeowners in general, as enhanced mortgage liquidity tends to boost overall housing values. The bad news -- of possibly reigniting a housing bubble and ushering in a new wave of foreclosures -- won’t be felt for several years, if such a bubble does materialize at all. Only time will tell.
- CPI numbers show overall inflation is relatively low, but energy and food prices are significantly higher, suggesting a harsher effect on the average consumer than the overall CPI numbers would imply.
- Housing numbers show that single-family homes are lagging behind, making the Fed likely to continue stimulus efforts if there is no improvement by the time bond-buying efforts are scheduled to cease. Combined with the FHFA’s continuing easing of mortgage credit standards, the housing market is likely to tick up over the next 12 months, creating a positive ripple effect through the broader economy.