Lew Sichelman
When lawmakers come back to Washington early next year to tackle the country’s housing crisis, they will argue over various proposals to fix affordability, high mortgage rates and the lack of inventory. They will debate ideas such as gifting $25,000 to first-time homebuyers, cutting regulation costs and releasing millions of acres of federal land.
But Mark Milam, a mortgage banker and loan originator in Atlanta, said those proposals are like “swallowing an aspirin next year for a headache you have now.”
Demand is not the problem, nor is it a lack of homebuilders, he wrote in a LinkedIn essay this summer. (An updated version of the piece was also posted on HousingWire this fall.)
“As an owner of a mortgage company and a 20-year housing veteran,” he wrote, “I can tell you there’s no shortage of people who want to buy, just as there is no shortage of builders who want to build.”
Milam has a three-point plan to address the housing crisis. It won’t cost the government one red cent; in fact, it may increase Uncle Sam’s revenue and perhaps even help cut the deficit. The trouble is, it isn’t particularly sexy, it can’t be reduced to sound bites and it isn’t easy to explain.
Free Up Investor-Owned Units
Like a voice in the wilderness, Milam doesn’t know how to get his plan before the powers that be in Washington. He tickled my interest when we ran into each other at an industry conference in Denver. His plan sounded plausible, so I told him I’d give it some ink.
The first plank of his plan involves the lack of inventory. While the number of houses for sale has been ticking up recently, there still aren’t enough to go around, and definitely not enough to outpace demand and reduce prices.
To boost inventory, Milam would temporarily halve the capital gains tax on the sale of investment properties. This one step, he believes, would untether millions of houses held by small-time investors.
According to BankRate, investors own more than 20 million single-family properties in the U.S.
“That’s a lot of front doors,” Milam wrote, and most of them are owned not by Wall Street hedge-fund types, but by smaller “mom-and-pop” operations.
These individual investors have owned their rentals for years, but are now getting a little long in the tooth. Many would presumably like to cash in and enjoy their later years free of any landlord obligations.
So, Milam asks, what if the capital gains tax on the sale of investment properties was cut in half – even just for six months? During that window, if you would normally pay 20 percent based on your tax bracket, you’d pay just 10 percent, for example.
Milam calls this “a huge win-win-win” for the country, investors and homebuyers. The country would receive tax revenue it wouldn’t otherwise, investors would save big money upon selling highly appreciated assets, and homebuyers would have more properties to choose from, likely bringing prices down across the board.
Add a Prepayment Penalty
Next, Milam would address lender profits. Currently, lenders lose money on the mortgages they write until the loans are on the books for roughly six months. But today’s buyers are impatient, jumping at the chance to refinance as soon as rates tumble even a tad. Consequently, lenders price their loans higher to compensate for the possible loss in revenue.
Milam said he’s sent packing more than one client who was planning to refinance as soon as possible because he would have ended up losing money on the deal.
“Guess what?” he wrote. “Lenders aren’t in business to lose.”
To prevent that, Milam would add a prepayment penalty – he calls it a “premium recapture” – that would fine a borrower for paying off their loan within, say, 12 months after closing. With that in place, he believes lenders would price their products lower, thereby increasing affordability for everyone.
Cut LLPAs
Finally, Milam would attack loan-level price adjustments. Fannie Mae and Freddie Mac, under the oversight of the Federal Housing Finance Agency, require lenders to include these fees in their loans to account for risk. There’s a whole slew of variables involved – the down payment amount, the length of the loan, the borrower’s credit history, etc.
“In the 20 years I’ve been lending,” wrote Milam, these price adjustments have “expanded, worsened, expanded more and worsened more. They are cash cows for Fannie Mae and Freddie Mac.”
Here’s an example: Under the current regulations, a borrower with a credit score of 740 and a 20 percent down payment – not a risky bet, as borrowers go – is hit with a 0.875 percent price adjustment. If that charge were removed, the borrower’s overall mortgage rate would drop by 0.875 percent, cutting the monthly payment on a $400,000 loan by more than $200 a month.
“Instant help with affordability,” said Milam. Investors won’t make as much money per loan, but they’ll make it up on volume because more people will be able to afford financing.
Milam conceded his proposals may be drastic, but he contends that they would “have an immediate, positive impact on affordability.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
