HousingWire

The challenges and opportunities that lie ahead

By John Stocchetti

As home prices rise and high interest rates persist, many Americans are delaying purchasing a home, believing they cannot afford it or that now is a bad time to buy. However, waiting is not an option for homebuyers in pivotal chapters of their lives—whether starting a family or setting the stage for long-term financial stability.

Why many would forego homeownership during a challenging mortgage market is easy to understand. Mortgage rates have remained stubbornly high, and as of June 2024, Fannie Mae forecasts the average 30-year fixed mortgage rate will fall to only 6.7% by the fourth quarter of 2024. To make matters worse, there is a limited inventory of homes on the market, as many current homeowners hold rates well below 6% and don’t want to be saddled with higher rates.

Despite the challenging environment, homeownership is still obtainable, even for low-income or disadvantaged individuals and families. Unfortunately, many Americans do not know about the resources available to them.  

There are many government program offerings designed to support low-income borrowers and underserved communities available through banks and credit unions, including:

•  Federal Housing Administration (FHA): FHA provides mortgage insurance on loans made by FHA-approved lenders. This insurance protects lenders against losses. If a property owner defaults on their mortgage, the FHA will pay a claim to the lenders. Since lenders take on less risk, they can offer more mortgages to homebuyers. FHA also provides loans for first-time homebuyers, incorporating a 3.5% downpayment, competitive interest rates, and flexible credit guidelines.
• Veterans Affairs (VA) home loans: These loans help Veterans, service members, and their survivors buy, build, improve, or refinance a home with better terms than a traditional loan from a private bank, mortgage company, or credit union. Nearly 90% of VA-backed loans are made with no down payment.
• U.S. Department of Agriculture (USDA): The USDA‘s Rural Housing Service offers loans, grants, and loan guarantees for single- and multifamily housing in rural areas. 

Aside from government and banking assistance programs, potential homebuyers can also look to government-sponsored enterprises (GSEs) like Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. GSEs play a significant role in providing financial services and ensuring future borrowers can obtain affordable mortgages, as they provide money to lenders through advances or through the purchasing of mortgage loans in the secondary mortgage market.

The secondary mortgage market enhances liquidity for lenders. It creates a steady stream of money that financial institutions can use to create more mortgages without adding extra stress to their balance sheets. The secondary mortgage market provides billions of dollars in overall funding, making more credit available to borrowers nationwide to promote stable housing financing.

In practice, the secondary market helps smaller banks and credit unions access a significant liquidity source to better compete with larger institutions. Community financial institutions can originate fixed-rate mortgage loans that are attractive to homebuyers and sell them in the secondary market, thereby reducing the lending institutions’ risk of carrying long-term loans on their balance sheets. This results in a win-win situation for lenders and homebuyers, which means increased access to mortgage loans, lower interest rates, and access to diverse mortgage loan products.

As we wait for interest and mortgage rates to cool down, new homebuyers must know about and have access to government programs and the secondary mortgage market through their Community financial institutions. This could make all the difference for millions of Americans, enabling them to purchase their next family home and obtain an essential part of the American Dream. 

John Stocchetti, EVP and Mortgage Partnership Finance Program Group Head at Federal Home Loan Bank of Chicago has been with the Bank since 2006. Prior to his current role, Stocchetti was Executive Vice President and Group Head, Products and Operations, where he led several initiatives to upgrade, re-organize and re-engineer the Bank’s operations and technology. Prior to joining the Bank, Stocchetti held positions with various organizations, including Chief Financial Officer at Ritchie Capital Management, LLC, a multi-strategy hedge fund, adjunct professor at the Illinois Institute of Technology and global head of interest rate derivatives operations at NationsBank-CRT. Stocchetti holds a Master of Business Administration from the University of Chicago and earned a Bachelor of Science in economics from the University of Illinois at Chicago.