Bonus Episode: Divergence to Convergence

Episode Summary

Executive Summary: The episode centers on housing affordability, mortgage-market structure, and Mark Calabria’s account of managing pandemic-era mortgage distress at FHFA. The hosts and Calabria debate supply constraints, rent pressures, tax-credit housing subsidies, and the role of the Fed and Federal Home Loan Banks, emphasizing that local supply reform, not just federal subsidies, is key to improving affordability.

Main Topics: Housing market divergence and possible 2024 convergence (Priority: 5/5): The conversation opens with a broad read on housing: Florida, California, Boise, and other markets have moved differently, but Calabria expects more convergence in 2024 as inventory rises and pandemic-era distortions fade. Affordability, supply constraints, and the limits of demand subsidies (Priority: 5/5): A major theme is that housing affordability is driven by inelastic supply, zoning, labor constraints, and locked-in low mortgage rates. Calabria argues that boosting demand through subsidies can worsen prices when supply is constrained. Critique of LIHTC and preference for flexible housing aid (Priority: 4/5): Calabria criticizes the Low-Income Housing Tax Credit as an inefficient subsidy that often raises land prices, benefits intermediaries, and misses many renters in small properties. He favors more flexible tools like vouchers and HUD’s HOME program. Pandemic mortgage forbearance and FHFA crisis management (Priority: 5/5): Calabria explains how FHFA designed a rapid, incentive-compatible forbearance system to bridge borrowers through temporary liquidity shocks during COVID, avoiding the more cumbersome post-2008 response. Nonbank mortgage servicer risk and liquidity backstops (Priority: 4/5): The hosts press Calabria on the fragility of nonbank servicers. He argues the system could handle isolated failures but not a wave of failures, and that the Fed/Treasury—not FHFA—would have needed to create liquidity support. Federal Home Loan Banks and the role of countercyclical liquidity (Priority: 4/5): Calabria defends the Federal Home Loan Banks as stress-liquidity providers for smaller institutions, argues they performed as intended in March 2020, and says reform should focus on making them more countercyclical and less concentrated in large banks.

Key Arguments: Housing price trends are local: some markets are already correcting while others remain tight, so national averages hide important divergences. Supply is highly inelastic in many places; therefore even modest demand changes can produce large price swings. Low mortgage rates locked in by existing owners suppress resale inventory and distort market functioning. LIHTC often substitutes for private investment and captures subsidies through higher land prices rather than expanding affordable units efficiently. Voucher-style assistance and flexible programs like HOME can address housing need more effectively than tax-code subsidies. During COVID, FHFA’s forbearance design prioritized speed and simplicity because the problem was largely a temporary liquidity shock, not a solvency crisis for many borrowers. Nonbank servicers are structurally fragile because they rely on thin capital, outside vendors, and warehouse lines; the system can absorb some failures but not a systemic wave. The Fed’s mortgage-market interventions should have ended earlier in 2020 because continued MBS purchases overstimulated housing demand. Federal Home Loan Banks are meant to provide liquidity in stress periods, especially to small institutions; reform should preserve that role while reducing moral hazard and concentration.

Data Points: Average coupon on existing mortgage: 3.5% - Used to illustrate the lock-in effect keeping homeowners from selling and limiting inventory. Current mortgage rate: 7% - Contrasted with the existing mortgage coupon to show affordability pressure and the lock-in gap. Median price of a new home vs. existing home: Equal - Calabria notes this rarely happens and reflects builders targeting lower-end buyers. Share of renters in properties under five units: Over 50% - Used to argue LIHTC misses a large portion of the rental market. Median tax credit property size: About 40 units - Supports the claim that LIHTC is poorly matched to the typical renter. Apartment construction held in pipeline: About 1 million units - Hosts describe delayed multifamily supply finally reaching the market after pandemic bottlenecks. Mortgage forbearance peak in Fannie/Freddie book: About 6.7% - Calabria says this was close to his median expectation in May 2020. Initial estimate for peak forbearance: Around 6% - His March 2020 projection for the Fannie/Freddie book. Upper bound of Calabria’s internal 90% confidence interval: 15% - Shows the range he thought plausible absent a far worse shock. Servicers tracked by FHFA: 346 non-bank mortgage servicers - The team reviewed balance sheets and monitored stress among Fannie/Freddie counterparties. Largest servicers directly monitored: Top 30 - FHFA contacted the largest nonbank servicers during the pandemic. Borrowers who kept paying despite forbearance: About one-fifth - Calabria says many used forbearance as an option rather than a necessity. Time to refinance eligibility reduced after forbearance: From 12 months to 3 months - An incentive to exit forbearance quickly if borrowers resumed payment. Total assistance relative to prior crises: About 25% of GDP more - Calabria argues pandemic-era support was vastly larger than in earlier downturns. Federal Home Loan Bank advances increase in March 2020: 30% - Cited as evidence the system provided liquidity before Fed/Treasury action. Bank decline since Dodd-Frank: A third of banks disappeared - Calabria links consolidation to weaker acquisition, development, and construction lending.

Pivotal Quotes: "You know, I think 2023 is kind of a year of multiple lines of divergence." — Mark Zandi: Opening housing-market framing: different regions and property types were moving in different directions. "And so, you know, I really think about like, okay, you're injecting a subsidy into a supply chain." — Mark Calabria: Explaining his criticism of LIHTC and why subsidies often get capitalized into land prices. "A, I think the system can handle the failure of one, two, three large non-bank services. Can the system handle the failure of 20?" — Mark Calabria: Summarizing his view of nonbank-servicer risk and why systemic scale matters.

Implications: For listeners and industry, the message is that housing affordability is mainly a supply-and-market-structure problem, not just a financing problem. Expect more pressure for zoning reform, better-targeted aid, and stronger liquidity architecture for housing finance.