Statement of
Michael Fratantoni, Ph.D.
Chief Economist and Senior Vice President,
Research and Industry Technology
On Behalf of the Mortgage Bankers Association
U.S. House of Representatives
Financial Services Committee
Subcommittee on Housing and Insurance
“The Characteristics and Challenges of Today’s
Homebuyers”
Wednesday, March 20, 2024
2:00 P.M.
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Chairman Davidson, Ranking Member Cleaver, and members of the subcommittee, thank you
for the opportunity to testify on behalf of the Mortgage Bankers Association (MBA)
1
. My name is
Mike Fratantoni, and I am the Chief Economist and Senior Vice President of Research and
Industry Technology at the MBA.
In my remarks today, I will review current market data on various aspects of the mortgage
market, focusing on the buyers, the products, the sources of financing, and the obstacles that
homebuyers and lenders face. I will also examine some of the current trends in the rental
housing market, including that for single-family rentals (SFR).
Overview of the mortgage market
Let me start by highlighting just how large the single-family residential market is: $45 trillion in
real estate owned by households. $13 trillion in mortgage debt outstanding. $32 trillion in home
equity. In terms of new origination of mortgages, there was a record volume of originations of
almost $4.5 trillion in 2021. In contrast to that figure, we are forecasting about $2.0 trillion in
originations for 2024 – up from $1.6 trillion in 2023.
Source: MBA estimates and forecast, February 2024
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The Mortgage Bankers Association (MBA) is the national association representing the real
estate finance industry, an industry that employs more than 300,000 people in virtually every
community in the country. Headquartered in Washington, D.C., the association works to ensure
the continued strength of the nation's residential and commercial real estate markets, to expand
homeownership, and to extend access to affordable housing to all Americans. MBA promotes
fair and ethical lending practices and fosters professional excellence among real estate finance
employees through a wide range of educational programs and a variety of publications. Its
membership includes all elements of real estate finance: independent mortgage banks,
mortgage brokers, commercial banks, thrifts, REITs, Wall Street conduits, life insurance
companies, credit unions, and others in the mortgage lending field.
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
These mortgages exist to fund the purchase of homes or to refinance existing loans. The broad
availability of mortgage credit supports a U.S. homeownership rate that in recent years has
hovered around 65%. Given the link between homeownership and wealth building for middle-
American households, it is important to note that there is still a wide gap between the
homeownership rates across different racial and ethnic groups.
Source: MBA analysis of American Community Survey data
Of the $13 trillion of mortgage debt outstanding, roughly $9 trillion of all mortgage debt is
securitized through the Department of Housing and Urban Development’s (HUD) Government
National Mortgage Association (Ginnie Mae), and the housing Government Sponsored
Enterprises, Fannie Mae and Freddie Mac (the GSEs). Most of the remaining $4 trillion of
mortgage debt is held on bank portfolios as whole loans, with some held as whole loans by
other types of investors.
While right before the Great Financial Crisis (GFC) as much as half of securitized volume was
private label, with banks and broker dealers the issuers, the Private Label Securities (PLS)
sector is much smaller in today’s market, comprising $80 billion or so of the $1.6 trillion
originations in 2023. About $30 billion of this volume in 2023 was for non-QM lending, i.e.,
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
loans with somewhat more flexible underwriting primarily intended for self-employed borrowers
or others with more complex financial or employment patterns.
In the U.S., the predominance of the freely prepayable 30-year fixed-rate mortgage (FRM) as
the product of choice for most homebuyers and refinance borrowers has led to the current
infrastructure where the majority of new loans are securitized rather than held on portfolios.
Typically, more than 80% of mortgages used to purchase a home are 30-year FRMs, while
many refinance borrowers opt for shorter-term, 10-, 15-, or 20-year FRMs. Most of the
remaining loans are hybrid adjustable-rate mortgages (ARM), with initial fixed-rate periods of 5,
7, or 10 years, and then more frequent rate adjustments.
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According to MBA’s Weekly
Application Survey data, the ARM share ranged from 7 to a little over 8 percent of applications
in the last two years. This contrasts to an ARM share of only about 3 percent of applications
during the refinance wave in 2020-2021.
Given the inherent interest rate risk in holding FRMs, long-term, freely prepayable mortgages
are not a good asset-to-liability match for banks, most of whom fund themselves primarily with
deposits. ARMs do tend to be a better match. Many banks will sell their FRMs but hold their
ARMs.
Investors of various types, including insurance companies, pension funds, and other fixed
income investors, have an appetite for longer-term assets. Ginnie Mae and the housing GSEs
perform vital functions as intermediaries and/or guarantors of these FRMs, issuing or
guaranteeing mortgage-backed securities (MBS) created from pools of largely fixed-rate loans.
This $9 trillion agency MBS market is one the largest, most liquid fixed income markets in the
world.
Limitations on the loan size and characteristics of loans that can be pooled into agency MBS
pools mean that there is a need for many remaining non-agency eligible mortgages to be held
on balance sheets or to be issued as PLS. Ginnie Mae MBS, backed by Federal Housing
Administration (FHA), Veterans Affairs (VA), and Rural Housing Service (RHS) loans, have an
explicit full faith and credit guarantee. This enables investors to have complete confidence in
the credit worthiness of these securities, while receiving a yield well above that on U.S. Treasury
bonds of a similar duration. Uniform mortgage-backed securities (UMBS), or MBS backed by
Fannie Mae or Freddie Mac, are viewed by global investors as only somewhat less safe given
their strong support from the U.S. government.
The broad and diversified investor base for Ginnie Mae MBS leads to a very liquid market.
Practically, that means that the secondary market for FHA, VA, and RHS loans is always open.
Mortgage rates may move up and down, but low-to-moderate (LMI) first-time home buyers
(FTHB), Veterans, and rural homebuyers will be able to access credit and buy homes.
Deep, liquid capital markets, like those for agency MBS, provide for the availability of mortgage
credit at almost all times. Importantly, I would note that during the GFC and the global
pandemic the Federal Reserve did step in with extraordinary measures to ensure that these
markets remained liquid.
2
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Contrast this with the ebb and flow of bank portfolio demand for mortgages, driven by the
quantity of deposits in the banking system and the relative returns of mortgage to other potential
portfolio investments.
The abundant liquidity of agency MBS is directly valued and priced accordingly by investors.
Those investors can get in and out of positions in the sizes they need and are willing to give up
some yield in return for that liquidity. That is directly reflected in better mortgage rates offered to
borrowers, and hence increased affordability for homebuyers and homeowners who are
refinancing, as they will be getting loans that will be securitized into these markets.
Profile of homebuyers today
Homebuyers can purchase properties with cash or by using mortgage financing. For existing
homes, roughly 28% of borrowers purchased with cash in 2023. I would note that given the
extremely competitive sellers’ market in recent years, at least some buyers were “cash” buyers
in order to win the property, who later used a cash-out refinance or a home equity loan to
restore their liquidity. For new homes, more than 8% were cash buyers.
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Home Mortgage Disclosure Act (HMDA) data from 2022 show that for those homebuyers who
used mortgage financing, 70% took out conventional conforming loans (typically securitized
through the housing GSEs), 14% used FHA loans, 9% VA, 1% RHS, and 6% used conventional
jumbo loans.
MBA Weekly Application Survey data typically show about 90% of applications are for buyers
who intended to occupy their properties as primary residences, while the remaining 10% are for
second home or investor properties.
Over time, roughly half of financed home purchases, i.e., purchase mortgages, are for first-time
home buyers. As these first timers tend to be buying less expensive properties, they account for
a smaller share of the dollar value of these mortgages compared to the unit count.
3
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: MBA analysis of National Mortgage Database data, FHFA
Many first-time homebuyers rely on the government housing finance programs for their loans.
In particular, FHA supported affordable mortgage financing for more than 478,000 first-time
homebuyers in Fiscal Year 2023, representing more than 82 percent of its forward mortgage
purchase endorsements.
First-time buyers purchasing entry level properties often have relatively low average loan sizes.
A challenge for lenders is that there are substantial fixed costs in loan origination and servicing,
and hence it can be more costly to focus on the entry level market. MBA recently conducted a
comprehensive analysis examining the relationship between a lender’s average loan size and
their revenues and costs.
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The findings concluded that loan originators with the highest loan
balances experienced the highest of highs for net production profits in 2021 (a strong market)
and the lowest of lows in 2022 (a weak market). On the other hand, while companies with the
lowest loan balances performed the worst in 2021, in 2022 they mitigated net production losses
to a greater extent than lenders with higher average loan balances.
Cost barriers and regulatory barriers are thought to be the primary reasons for the dearth in
small-dollar lending—an essential way for the mortgage industry to facilitate access to
affordable, lower-valued homes. The cost barrier argument suggests that the revenues garnered
through originating and servicing lower balance loans do not justify the costs. MBA’s analysis
suggests that the relationship between loan balance and profitability is more nuanced and may
change over the course of market cycles. For example, and as alluded to previously, in a weak
origination market, as in 2022, lenders with lower average loan sizes were able to mitigate
production losses to a greater extent than lenders with larger average loan size. Additionally, in
4
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
a period of high loan prepayment, as in 2020, servicers with higher loan balances posted lower
net servicing financial income than servicers with lower loan balance loans.
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Different lenders with varying business models tend to focus on distinct types of lending. In
recent years, a growing share of mortgage originations and mortgage servicing have been
conducted by independent mortgage banks (IMBs), while market shares for banks and credit
unions have been decreasing. More specifically, IMBs have grown to account for the vast
majority of originations of government loans, while banks as a group have retained the majority
of conventional jumbo loans.
Source: MBA analysis of 2022 HMDA data
5
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Data from MBA’s Peer Group Roundtable program show that while IMBs tend to focus primarily
on government and conventional loans to first-time homebuyers, banks have concentrated more
on ARMs and jumbo loans for their retail banking clients that they intend to hold on their
portfolios.
Source: PGR: MBA and STRATMOR Peer Group Roundtable Program; 2022 data
Source: MBA’s Weekly Application Survey
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
As evident by the changing relative pricing between conforming and jumbo 30-year loans, bank
appetite for holding mortgages on their portfolios has varied widely over time. Changes in the
pace of deposit growth and the level of GSE guarantee fees have been among the primary
drivers of these changes.
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Mortgage rates reached record lows below 3% for 30-year fixed-rate mortgages in late 2020
through early 2021 during the pandemic. In 2022, to combat inflation, the Federal Reserve
briskly raised short-term rates and 30-year mortgage rates more than doubled in response.
Over the same time period, given a lack of housing supply and brisk demand, home prices
increased 39% over the 2020-2022 timeframe. The net impact was a dramatic reduction in
affordability, as shown in MBA’s Purchase Application Payments Index, the ratio of median
principal and interest (P+I) payments from our Weekly Applications Survey to typical weekly
earnings measured by the Census Bureau. Median P+I payments increased more than $900
over this time period.
One manifestation of this declining affordability has been increasing debt to income (DTI) ratios
on new originations. Homebuyers, particularly first-time buyers who do not have the ability to
make larger downpayments, have been more willing to accept a higher payment burden. For
FHA borrowers in particular, this is posing a noticeable increase in risk, and we are seeing FHA
delinquencies increase in recent quarters. In Q4 2023, the delinquency rate on FHA mortgages
increased to 10.8%, the highest rate since 2021 (when borrowers were recovering from the
pandemic driven spike in delinquencies).
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Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: MBA analysis of FHA data
With these challenges to affordability, along with increasing consumer debt levels, another sign
of stress in the market is a modest decrease in average credit scores in FHA and GSE new
originations. While we expect a slowdown in the economy this year and an increase in
unemployment, we do not anticipate more than a gradual increase in delinquency rates because
of these stresses. However, a sharper slowdown in the economy could be problematic in this
regard.
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: FHA
Source: Fannie Mae
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
The rental market
Roughly two-thirds of households own their home in this country, and another one-third are
renters. Data compiled by Harvard’s Joint Center for Housing Studies shows clearly how
housing burdens vary across renters and homeowners at different income levels. The Joint
Center characterizes households that pay less than 30% of their income towards housing as
“not burdened”, those that pay 30-50% of their income as “moderately burdened”, and those
that pay more than 50% of their income as “severely burdened.” Renters tend to have lower
incomes, and at each income level tend to have a higher proportion of households that are
moderately or severely burdened.
For some households renting occurs during a phase of their lives where they are establishing
their careers, increasing their earnings capacity, and perhaps before they start their families.
However, for many households, who might live in higher cost markets, or who may not see their
incomes grow substantially over time, renting may be a more permanent status. We know from
multiple data sources that renter households tend to have lower incomes and substantially lower
net worth than owner households.
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By various measures, rents in the aggregate grew substantially since the beginning of the
pandemic. However, asking rents on vacant units have leveled out recently as we are seeing a
large influx of new multifamily housing supply ready to hit the market. In fact, with close to 1
million apartment units currently under construction, the highest level since the early 1970s, we
7
15 10 5 0 5 10 15 20 25 30 35 40 45 50
2022
2019
2016
2013
2010
2007
2004
2001
2022
2019
2016
2013
2010
2007
2004
2001
2022
2019
2016
2013
2010
2007
2004
2001
2022
2019
2016
2013
2010
2007
2004
2001
2022
2019
2016
2013
2010
2007
2004
2001
Severely Burdened
Moderately Burdened
Not Burdened
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
expect a slowdown in multifamily construction over the next few years as this incremental
supply is absorbed by the market. Construction activity has not been uniform, with relatively
more taking place in some areas (Sunbelt markets) and relatively less in others (Midwest).
For renters, this leveling off in rents is likely to be a welcome respite. However, for property
owners, it is a somewhat tougher time given the decline in rent growth at the same time as
interest and other property management expenses have increased.
Source: MBA analysis of BLS, Census, and RealPage data
What Type of Structure Do Renters Live In?
Structure Type
Households
Percent
Residents
Percent
Single-Family
14,205,402
31%
40,426,498
39%
2 to 4 Units
7,891,588
17%
17,592,199
17%
5 or More Units
21,278,969
47%
40,017,878
39%
Mobile Homes
1,777,914
4%
4,675,897
5%
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Other
67,971
0%
121,307
0%
Total
45,221,844
100%
102,833,779
100%
Source: NMHC analysis of 2022 ACS data
While many think of high-rise apartment buildings (in particular) when considering the rental
housing market, in fact, the majority of renters in the country live in 1–4-unit properties. The
single-family rental (SFR) market has always been an important part of the rental housing
picture. It has garnered increased attention in recent years as some institutional investors have
entered this market which has traditionally been dominated by small (“mom and pop”) investors.
Following the GFC, with foreclosure inventories at record levels, home prices dropping in much
of the country, and housing demand quite low, some institutional investors saw an opportunity to
buy homes in bulk, with a goal to potentially sell as home prices rebounded. Since that time,
some of these investors have continued to purchase or hold onto these homes with a view to
earn from them as income investments, similar to how other investors would invest equity in the
multifamily market.
Taken together at the national level institutional investors hold a relatively small share of all
single-family homes in the country. However, understandably given the economies for the
business of concentrating their holdings in certain pockets within certain metro areas, these
investors do hold a higher share of investment properties in some areas including Dallas,
Houston, Atlanta, and Phoenix.
8
Another aspect of this market is that some institutional investors are now purchasing newly
constructed homes directly from builders, a “Single-family built-for-rent” (SFBFR) market.
NAHB estimates that SFBFR purchases in 2023 accounted for roughly 8% of single-family
housing starts.
9
8
9
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Supply challenges
The biggest challenge in today’s housing market is the lack of housing inventory. While the
demographic fundamentals of the market continue to support strong housing demand for the
next several years, the market is millions of units short of that needed to support this demand.
Source: MBA analysis of Census Bureau data
The U.S population currently has about 50 million individuals between the ages of 30 and 40.
This large Millennial cohort is in the ages where household formation is at its peak, and we are
seeing roughly 1.5 million households formed each year. It is important to note that this is also
the age range at which the homeownership rate jumps higher, from 38% for those under 35, to
63% for those 35-44. We expect that this demographic demand will continue to support the
housing market.
It is important to note that Baby Boomers are reaching the age at which we would expect their
housing demand to begin to decline. We expect that Boomer households will net supply about
250 thousand housing units per year over the next decade, a welcome addition to housing
inventory.
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10
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: MBA analysis of Census Bureau data
This strong demand has run into a structural undersupply in the housing market. While this
country built 16-18 million housing units of all types per decade from 1970-2009, following the
GFC, in the next decade, only 11 million units were built. With the interruption from the
pandemic, we are also running short of the needed supply thus far this decade. While
estimates of the needed supply vary widely, it is clear that we are millions of units behind at this
point. And even though we expect to see a large delivery of multifamily units over the next few
years, this will not resolve the broader lack of inventory that we see across the country.
The recent trend in mortgage rates has exacerbated this supply shortfall. With the record low
mortgage rates during the pandemic, many homeowners refinanced and locked in much lower
housing payments. While this certainly has helped them strengthen their balance sheets, this
“lock in” effect has also made them less interested in selling their current homes, as it would
necessitate them taking on a new mortgage at a much higher rate.
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
While existing home inventory is quite constrained, with about 1 million homes for sale
nationwide, about 3.5 months’ supply at the current sales pace, builders have certainly picked
up their pace of construction, and new homes now account for roughly one-third of homes on
the market. This compares to a more typical 10% share of total home inventory historically.
Source: MBA analysis of Census Bureau and NAR data
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Regulatory and other challenges
Post GFC, the mortgage market has changed significantly with respect to the types of
companies originating and servicing loans, with a pronounced shift away from depositories,
particularly large banks, towards non-depositories/IMBs. While many of the consumer-facing
mortgage regulations that were part of the Dodd-Frank Act apply equally across lender types,
additional regulation, notably including capital requirements, have played a significant role in
this shift, as the mortgage business has become much less attractive for many banks.
11
Source: MBA analysis of HMDA data
11
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: MBA’s National Delinquency Survey
MBA is concerned that the recent Basel III “Endgame” proposal would only accelerate this trend.
In particular, MBA’s comment letter highlighted the overly conservative risk weights on mortgage
loans (particularly for low downpayment loans favored by first-time homebuyers, and the lack of
benefit for loans with mortgage insurance), the punitive treatment of mortgage servicing rights
(MSRs), and the burdensome treatment of warehouse lending as being particularly negative for
the mortgage market.
12
Warehouse lending involves the use of short-term revolving credit
facilities extended by financial institutions to mortgage loan originators for the funding of
mortgage loans.
The Basel Endgame proposal would increase capital requirements on all three types of
mortgage activity by banks – low downpayment loans held on balance sheet (e.g., Community
Reinvestment Act loans), mortgage servicing, and warehouse lending – and poses a significant
risk to the stability of the housing finance market if it is not modified across all of these
dimensions.
Increasing Cost of Property Insurance
With the rising incidence of severe storms and wildfires
13
, coupled with rising replacement costs
for structures and increasing legal costs in some jurisdictions, property insurance premiums
have jumped for many prospective and current homeowners. For prospective homebuyers, this
increase in the cost of insurance can impede their ability to qualify for a mortgage. For current
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13
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
homeowners, who had thought they had locked in a relatively fixed mortgage payment over
time, the jump in insurance premiums can lead to real stress.
Moreover, certain insurance carriers have also limited their participation in some states given
the increases in risk and costs. Although these increases in premia and reductions in availability
of insurance have been concentrated in certain markets at this point, the concerns regarding
property insurance continue to build for our lender members in the residential, multifamily, and
commercial sectors – and for all their customers. MBA certainly appreciates focus on this issue
by a range of policymakers, including (but not limited to) this subcommittee, HUD, the Treasury
Department, and FHFA.
Testimony of Michael Fratantoni, Ph.D., for the MBA
House Financial Services Committee
Subcommittee on Housing & Insurance
March 20, 2024
Source: National Mortgage News, Guaranteed Rate
Concluding thoughts
The U.S. housing and mortgage markets are large, complex, and multi-faceted. Keeping these
markets healthy and dynamic remains an important consideration for the strength of the broader
economy. Whether families currently rent, are hoping to purchase their first home, or are current
owners working to maintain their investment, there are numerous challenges to affordability and
sustainability within today’s individual housing markets across our country.
Thank you again for the opportunity to walk through these latest market trends with you. I look
forward to your questions.
