Written By: Joel Palmer, Op-Ed Writer
The lack of housing supply available for prospective homeowners is well documented. Existing homes are being put on the market, and new homes are not being built to the extent they have been in the past.
This has slowed activity for mortgage underwriters and processors, already seeing few refinance applications due to rising interest rates.
Fannie Mae hopes to ease some of the supply issues. According to a recent report by Bloomberg, Fannie is considering an initiative to make it easier for prospective homeowners to get Fannie-backed loans on new construction.
If approved by the Federal Housing Finance Agency, the program would enable lenders to sell loans to Fannie Mae on the first day of construction. According to Bloomberg, “Fannie would put the loan into mortgage-backed securities along with traditional mortgages, potentially making the loans easier to get and cheaper than they otherwise would be.”
Currently, lenders have to wait until home construction is finished before they can sell to Fannie. That forces lenders to keep the debt on their books during the construction process, when a number of problems could arise.
In addition to its current treatment of construction loans, Fannie offers its HomeStyle Renovation mortgage program. It permits borrowers to include financing for home improvementsin a purchase or re-finance transaction of an existing home. Buyers can finance improvements up to 50 percent of the as-completed appraised value of the property with a first mortgage, rather than a second mortgage, home equity line of credit, or other, more costly financing method.
Freddie Mac likewise has a construction conversion and renovation mortgage program.
The hope for the new Fannie Mae program is that by making construction loans cheaper, it will spur new building and increase the housing supply.
According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, building permits issued nationwide in September were 4.5 percent lower than in August and 4.3 percent below the previous year’s total. While housing completions were up slightly from the previous month, housing starts were down 4.7 percent.
But one of the major obstacles to increased building won’t be cured by more accessible loans. That obstacle is a lack of construction workers to build new homes.
Since the financial crisis in 2007, the construction industry shed about 2 million jobs, and many of those affected found work in other industries.
Employment in the industry has picked up some, with 13,000 new jobs added in residential construction in October, according to Associated Builders and Contractors. However, the number of people employed in construction is far below its peak in 2006.
One more issue to consider is whether the increasing availability of Fannie Mae construction loans increases demand for home construction beyond the industry’s ability to keep pace.
If the industry doesn’t add workers fast enough to keep up with demand, building costs could conceivably increase to the point where it offsets the savings on borrowing.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.