Even part-time workers need full-time living spaces.
This month the U.S. Department of the Treasury released a plan to reform the American housing finance system. The Treasury Housing Reform Plan includes nearly 50 recommended legislative and administrative reforms to define a more limited government role within the housing finance system. The reforms are also aimed at preventing taxpayers from catching the bill for future bailouts and promoting increased competition in the housing finance system.
The word from the White House is that executing this proposed plan is “the last unfinished business” from the government takeover of mortgage giants Fannie Mae and Freddie Mac in 2008. Fannie and Freddie don’t actually issue loans themselves; they buy loans from lenders to be packaged into securities that are sold to investors. They also guarantee to return the money if the loan defaults. There are representations and warrants that the lender attests to, such as fraud or loan info integrity, to get their money back so they can lend again. They get matched up with financial entities (such as hedge funds) that wouldn’t be active in home loans without Fannie and Freddie’s help.
This system helps preserve the U.S.’s popular concept of a 30-year fixed-rate mortgage (which is rather uncommon around the world), but it also calls for an unlikely amount of help from the government in order to work. This structure calls for the government to be there and protect Fannie and Freddie when times get dark or troublesome.
It finally happened in 2008 amid the swirl of the subprime mortgage crisis: Both government-sponsored enterprises suffered major losses due to flaws in their structure and a lack of regulatory oversight. The Treasury Department ended up writing them a check for more than $190 billion as help for them to right the ship. The director of the Federal Housing Finance Agency at that time placed the two organizations into a conservatorship, which is a legal relationship in which one entity manages the affairs. Now a new administration returns to the scene in order to tweak knobs and close business.
As the housing finance sector transforms, the world’s workforce is doing so in parallel. Fewer and fewer people are holding conventional, full-time W-2 employment, instead pursuing freelancing, 1099 work or other gig-style jobs. As such, the construct of an “ordinary work life” is changing, and mortgages need to reflect that.
Here’s what the latest housing finance reforms mean to part-timers, gig workers and freelancers of all stripes.
The new housing finance reform bill makes room for people needing credit validation beyond the traditional sources.
In the wake of the housing bailout, the tone was clear: The government has better things to do than shoulder piles of debt for people who may or may not be able to pay it back. In comparison with full-timers who receive salaries and health insurance, gig economy workers earn bumpy, uneven income in order to make ends meet. While freelancers generally enjoy far more self-directed time than if they took conventional office work, they don’t gain much of a financial edge that makes them necessarily appealing for a loan.
Piecemeal income makes it uniquely difficult for freelancers to establish the credit line necessary to buy a house after the bailout. Lenders love to see stable, steady income because it gives them a safe and predictable person to loan money to. The qualified mortgage (QM), for example, is a category of loans with features that make it more affordable to the borrower. The lender has to make a good-faith determination that you’ll successfully repay your mortgage before you take it out — the “ability to repay” rule. Receiving a qualified mortgage means the lender and borrower both followed all the rules, and the lender made a calculated bet that it would be paid back.
Rigid guidelines might make it difficult for freelancers to secure home financing, but there are still options available.
If you’re a freelancer or are working from home to build your own business, you’re not necessarily going to get a loan as easily as if you worked on a conventional, full-time basis. With the QM loan, on one side of the spectrum, lenders document a borrower’s income, employment status, credit, debts and assets. Non-QM loans don’t meet any of these standards. This ends up making them highly accessible to all kinds of people, whether they work in the gig economy or not.
Non-QM loans could easily expand to include those doing odd jobs or inconsistent work to serve all kinds of people with all kinds of different finances — such as people with consulting gigs, those working locally for companies located overseas or young students beginning their careers without U.S. credit scores. These people have reliable income but don’t have familiar W-2s to express it because the terms of their work are different. Non-QM lenders have more flexibility to work with borrowers considered too risky by other lenders.
Keep calm and carry on.
Buying your first house is nearly a rite of passage within America. It’s a major transition that is often accompanied by phrases like “putting down roots.” Freelancers may have a higher bar to clear in order to be greenlit for the loans that enable them to own their own place instead of rent or crash with friends or family, but homeownership is too central to how the American economy operates for working people to be locked out of it.
This generally puts the call out to Wall Street and other private enterprise to create newer, more functional finance products that bridge the gap between those who make a living on their side hustle and getting their first mortgage. With freelancers experiencing added inconvenience (or disqualification) from government help while more people enter the gig economy, this burgeoning population won’t have to look hard for other more accessible avenues that will get them loans for owning houses.
Just don’t be surprised if those avenues lead away from the government.